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, 1998
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 000-14242
CELSION CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1256615
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 290-5390
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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(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
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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 December 24, 1998, 41,514,467 shares of the Registrant's Common
Stock were issued and outstanding. As of December 24, 1998, the aggregate market
value of voting stock held by non-affiliates of the Registrant was approximately
$7,338,926 based on the average of the closing bid and asked prices for the
Registrant's Common Stock as quoted on the over-the-counter market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K: None.
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PART I
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ITEM 1. BUSINESS
General
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Celsion Corporation (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 and to Celsion
Corporation on May 1, 1998. The Company is a biomedical research and development
company headquartered in Columbia, Maryland, dedicated to creating and marketing
medical treatment systems for cancer, benign prostatic hyperplasia ("BPH") and
other diseases using focused heat energy.
Thermotherapy (also known as hyperthermia), or heat therapy, is an
historically recognized successful method of treatment. In modern thermotherapy,
a controlled heat dose is targeted to treatment sites using microwave and/or
other energy for therapeutic benefits. Heat is a well-known treatment modality
for cancer. In 23 worldwide independent studies on 2,234 tumors, heat plus
radiation doubled the complete response rate of tumors (from 38% to 78%)
compared to radiation alone. Complete response rate is defined as the total
absence of a tumor for a minimum of two years. The same doubling of complete
response rate occurred with heat and chemotherapy. The past technical difficulty
has been delivering a controlled amount of heat to internal tumors without
burning surrounding healthy tissues. The Company has an exclusive license from
the Massachusetts Institute of Technology ("MIT") for adaptive phase array
("APA") technology which the Company believes will overcome this problem.
The Company will therefore be concentrating its business on the
development of two acquired technologies: (I) from MIT, APA targeting of
microwave energy, which the Company believes will have broad cancer and other
medical applications, and (ii) balloon catheter technology for enhanced
thermotherapy of BPH and other genitourinary tract conditions. While the balloon
catheter technology is related to the Company's previous BPH thermotherapy
devices, the Company believes the APA technology has the potential to serve as
the core technology for a broad array of medical devices.
MIT "Adaptive Phased Array" Technology
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- the Enabling Platform
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In mid 1996, the Company obtained an exclusive license to a patented
portfolio of MIT "adaptive phased array" technologies which were originally
developed for the Strategic Defense Initiative (Star Wars) plans of the
Department of Defense to track targets and to nullify the energy beam from enemy
jamming equipment. The APA technology allows microwave energy to be accurately
targeted deep within the body, resulting in heating a well defined target area
without damaging surrounding tissue. On October 24, 1997, the Company entered
into a revised exclusive license agreement with MIT covering the above mentioned
patents in the 1996 agreement as well as an additional patent pending technology
using the APA technology for activating thermo-sensitive liposomes.
The ability to selectively heat targeted internal areas of the human
body will act as a technological platform on which the Company intends to
capitalize, both in the near term and the long term. On September 17, 1997, the
Food and Drug Administration (the "FDA") granted the Company a Premarketing
Approval ("PMA") for its system of deep focused heat as a treatment modality to
be used in conjunction with radiation for the treatment of recurrent surface and
subsurface tumors. This approval was obtained as a supplement to an existing
approval for the Microfocus 1000, a thermotherapy device that the Company has
manufactured since 1989, albeit without the APA technology. This approval,
obtained without clinical trials, allows the Company to immediately begin
commercialization of the APA technology while concurrently pursuing expanded FDA
approvals.
There are numerous technologies that currently exist or are being
developed that can utilize the unique properties of the Company's heat delivery
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technology, as well as numerous other applications dependent on the heat
delivery technology that should evolve over time. Several of the leading
applications that have been identified include:
(1) Tumor Ablation-Using Heat Alone
In the spring of 1998, animal studies were completed at Massachusetts
General Hospital ("MGH") in Boston and Oxford University in the United Kingdom,
confirming the system's ability to focus heat deep within the body. In August,
1998, Hammersmith Hospital in London received approval from its ethics committee
to conduct human trials. At MGH's Center for Imaging and Pharmaceutical
Research, animal studies were conducted under the direction of Dr. Gerald Wolf.
The Company's treatment system was successfully demonstrated to completely
ablate tumors in animals using heat alone. In this modality, the tumor is heated
to 46(degree) - 48(degree) C (114(degree) - 118(degree) F) or hot enough to kill
all cancer cells in one eight minute treatment session.
The Company's system is used in stand-alone mode, without radiation or
chemotherapy. Following ablation of the tumor, a surgeon removes the dead tumor.
This method of treatment eliminates the risk of surgical removal acting as a
catalyst to produce new tumors. It also eliminates the need for destructive,
unpleasant and expensive chemotherapy and/or radiation treatments. Whenever
ablation is possible, the Company's system will be used without radiation or
chemotherapy. The Company needs to obtain a new indication of use (that is, the
ablation of breast tumors with heat alone) from the FDA for its already - PMA -
approved equipment. Dr. Gerald Wolf of MGH is submitting an application for
Investigational Device Exemption ("IDE") to the FDA and will oversee coming
clinical trials at MGH, at Hammersmith Hospital London, and Columbia HCA's JFK
Hospital in Palm Beach.
(2) Radiation Plus Deep Focused Heat - Doubles Complete Response
Rate
The combination of thermotherapy (hyperthermia) and radiation is a
significant market opportunity for the Company. Traditional radiation therapy is
an expensive, multi-treatment process that is physically debilitating to the
person receiving it, and has several inherent systemic limitations:
- S-phase cancer cells are resistant to radiation. (S phase cells
represent about 40 percent of the cell cycle; tumeric cells go
through a 24 hour cycle of S and G phases.) They are highly
susceptible to destruction by heat; and
- Poorly oxygenated (hypoxic) cancer cells are resistant to
radiation.
Thermotherapy is known to improve the chances of killing the cancer cells,
because
- S-phase cancer cells missed by radiation can be killed by
thermotherapy; and
- Thermotherapy increases the oxygenation of cancer cells making
them more susceptible to radiation.
The dual treatment modality of thermotherapy and radiation has already been
shown through 23 independent studies to double the complete response rates of
sub-surface and surface cancers when used in conjunction with radiation or
chemotherapy. To date, the problem with this dual treatment application has been
the inability of the thermotherapy treatment to focus deep within the body. As
stated earlier, the Company's APA technology provides a method through which
this can now be accomplished.
(3) Chemotherapy Plus Deep Focused Heat-Doubles Complete Response Rate
Traditional chemotherapy is limited in its ability to kill cancer cells for
two major reasons:
- Poor blood perfusion in the vicinity of tumor cells such that
chemotherapy delivered through the blood stream does not reach the
tumor; and
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- Tumor cell pressure prevents chemotherapy from penetrating tumor
cell membranes.
Thermotherapy improves the performance of chemotherapy in each of these areas
by:
- Increasing the blood flow in the vicinity of tumors in the
temperature range of 41(degree)C to 43(degree)C, thereby
increasing the delivery of drugs to the tumor site;
- Decreasing the blood flow within the tumor itself to the point
where the tumor is easily heated and killed at temperatures above
43(degree) C (tumor vascularity is not robust and does not expand
significantly when heated), compared to normal tissue for which
heat is easily removed and the tissue is protected; and
- Increasing the toxicity of the chemotherapy agent at 43(degree)C,
compared to the toxicity of the same agent at 37(degree)C.
Animal and clinical trials for the combined modalities of chemotherapy
and deep focused heat are planned to begin at leading hospitals in 1999.
(4) Heat Sensitive Liposomes (Thermalsomes(TM)) - Targeted and
Highly Effective Drug Delivery
One of the initial adjunct opportunities for this patented technology
relates to temperature sensitive liposomes (Thermalsomes(TM)) that are being
developed at Duke University. Thermalsomes(TM) are microscopic man-made lipid
particles (organic compounds including fats, fat-like compounds and steroids)
that can be engineered to encapsulate drugs, creating new pharmaceuticals with
enhanced efficacy, better safety or both. Toxicity of effective drugs can be
mitigated through Thermalsomes(TM) technology.
For application to the human body, the Thermalsomes(TM) are injected
into the blood stream. As the Thermalsomes(TM) circulate repeatedly within the
small arteries, arterioles, and capillaries, the drug contents of the
Thermalsomes(TM) are released in significantly higher levels in areas that have
been heated for 30 to 60 minutes, than in areas that do not receive heat. Hence,
the Thermalsome(TM) technology is enabled by the Company's thermotherapy
treatment modality. Together, these two treatment modalities are expected to
release toxins almost exclusively into the targeted area, rather than across the
entire circulatory system. This is a fundamental distinction between traditional
chemotherapy and Thermalsome(TM) induced, thermotherapy enhanced chemotherapy.
In addition to the increased efficacy, there is potential for great
improvement in the life process of chemotherapy patients. Chemotherapy is
essentially a poisoning of the body with toxins that attack cancerous cells more
readily than normal cells. The side effects include nausea, vomiting, and
exhaustion - all side effects of the body being poisoned. If the poisoning can
be limited to the tumeric area, and performed only once (due to the increased
efficacy) as is possible with the Thermalsome(TM) related treatments,
chemotherapy should cease to be the horrid, debilitating process that it is
today.
(5) Gene Therapy - Making Tumors Susceptible to Eradication
Another application of the APA technology relates to gene therapy. The
Company has been collaborating with a researcher who has developed heat
sensitive, genetic biological modifiers which suppress a tumor's resistance to
heat, radiation and chemotherapy damage. In clinical applications to management
of cancer, the biological modifiers can be attached to a heat shock promoter to
form a gene therapy construct. The construct can be delivered to deep seated
tumors. The action of focused heat will release and trigger the action of the
modifier, thus weakening the tumor's resistance to therapy and greatly enhancing
the effectiveness of the combination therapy approach using heat in conjunction
with radiation or chemotherapy. Recently, a patent application has been filed by
the researcher's institution and the Company has entered into negotiation for
the exclusive rights to license the technology for commercial use.
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Projected Deep Focused Heat Product Line
The Company has current plans to produce three specialized
thermotherapy products, each utilizing the APA technology for specific deep
seated tumors and one BPH product utilizing the balloon catheter technology
developed by MMTC, Inc. ("MMTC") and licensed to the Company.
Breast cancer treatment equipment. The Company's breast cancer
treatment line will be the first of the three deep-seated cancer treatment
product lines introduced into the market. According to the American Cancer
Society, breast cancer is the most prevalent cancer in the U.S. with over
183,000 new cases diagnosed each year. It has been suggested that this form of
cancer may eclipse cardiovascular disease as the leading cause of death for
American women. The Company's strategy for breast cancer treatment will focus on
ablation death of tumors.
Early stage breast cancer accounts for two thirds of the breast cancers
in the U.S. today. This form of breast cancer is presently treated via
mastectomy, the removal of the entire breast, or via lumpectomy, the removal of
the tumor and surrounding tissue. In lumpectomy, the area at the edge of the
removed tissue is examined for the existence of cancerous cells, and if any are
found, the procedure is repeated. Full breast radiation or chemotherapy usually
follows this procedure in order to destroy any cancer cells that may not have
been captured by the surgical procedure or that may have been spread during the
procedure.
The Company's breast cancer treatment system is intended for use prior
to lumpectomy to completely destroy the cancerous tissue, making the surgery
safer and reducing the size of the lumpectomy procedure. Initially, radiation
therapy or chemotherapy will follow the lumpectomy as is the current practice.
However, the Company expects, with FDA approval of the Company's breast cancer
treatment system, that neither radiation nor chemotherapy will be required for
use with the Company's system. The Company believes thermal ablation will offer
a safe and thorough treatment in stand-alone mode, eliminating the necessity for
radiation or chemotherapy and their debilitating side effects. This alteration
in standard practice requires additional clinical trials for FDA clearance.
The Company recently completed animal trials of its prototype clinical
breast cancer treatment system at MGH. The results verified that the Company's
APA technology accurately focused heat exactly where targeted, and that it is
possible to ablate tumors with the Company's equipment. Dr. Gerald Wolf of MGH
is submitting an application for IDE to the FDA to start Phase I human clinical
trials. Subject to FDA approval and funding availability, the Company
anticipates the clinical trials will begin in the first quarter of 1999. A
second prototype clinical breast cancer treatment system at Oxford University in
the United Kingdom was used to successfully conduct tests on large animals.
Hammersmith Hospital in London has received approval from its ethics committee
to start human clinical trials with the same breast cancer treatment system
tested in Oxford University. Subject to funding availability, it is anticipated
that the human clinical trials in Hammersmith Hospital will begin in the second
quarter of 1999.
Another potential application of the breast cancer treatment system is
preventing breast cancer with heat alone. Dr. Wolf and MGH have filed an
application with the United States Patent and Trademark Office to obtain a
patent to ablate the milk ducts and milk glands in women's breasts using the
Company's APA treatment system. Since approximately 95% or more of all breast
cancers originate in these areas, their ablation is expected to remove these
potential sources of breast tumors.
Prostate cancer treatment equipment. There are over 163,000 new cases
of prostate cancer diagnosed in the United States each year. Building on its
experience in BPH treatment, the Company is planning prostate cancer
thermotherapy equipment as the second of its APA product line. Although the
Company has developed several critical components of this equipment, hospital
research is not expected to begin prior to year 2000.
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Deep seated tumor treatment equipment. The third planned APA product
will be for thermotherapy of deep seated tumors, including liver, pancreas,
colon and lung cancers. It is expected that this equipment will also permit
treatment on other cancer sites including the head, neck and limbs.
MMTC Benign Prostatic Hyperplasia Technology
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- Major Treatment
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BPH Background
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
prevalence of BPH will continue to increase dramatically. By age 55, fifty
percent of all men, and by age 80, eighty percent of all men, will have BPH.
Like cancer, BPH historically has been treated by surgical intervention
or by drug therapy. 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 large number of patients who undergo
TURP encounter significant complications, which 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,
including hospital stay. 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 are surgical
procedures which employ concentrated radio frequency waves or laser radiation
instead of a surgical knife. There is minimal bleeding and damage to the urethra
associated with these procedures. However, the adverse side effects and costs
associated with surgery remain.
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 (60% of drug patients stop within the first
year) 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.
Thermotherapy or high heat treatment using microwaves is another new
alternative treatment approach. In May 1996, the FDA approved a microwave-based
BPH treatment device manufactured by EDAP Technomed, Inc. ("Technomed"), called
Prostatron. The FDA has recently approved another similar microwave treatment
device manufactured by Urologix, another thermotherapy company. However, due to
the high treatment temperatures used, there is no immediate objective and/or
subjective relief, and a large percentage of the treated patients will require a
post retention catheter due to the prostatic swelling caused by the intensity of
the heat used.
MMTC Technology--Combination of Heat and Compression
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On August 23, 1996, the Company acquired a patented compression
technology from MMTC, which has been incorporated into a device to be utilized
with the catheter used in the Company's existing Microfocus BPH system. The
device consists of a microwave antenna combined with a balloon dilation
("angioplasty") mechanism which expands to compress the walls of the urethra as
the prostate is heated. The combined use of balloon angioplasty and microwave
heating provides a dual modality treatment approach which, it is believed, will
provide significantly improved treatment benefits over the "heat alone" systems
currently available commercially. First, the heat and compression create a
natural strong-walled "stent" in the urethra, thus permitting immediate relief.
Second, the system's relatively low temperature (43(degree)C to 45(degree)C) is
sufficient to kill prostatic cells outside the urethra but not high enough to
cause swelling in the urethra as is often associated with competitive treatments
using high temperatures and no compression. The Company prototype clinical BPH
treatment system has been successfully used in animal research conduced at the
Montefiore Medical Center, under the direction of Dr. Arnold Melman, Chairman of
the Department of Urology. A natural "stent" was indeed observed after treatment
in the urethra of the animals. In June 1998, the Company received IDE approval
from the FDA for human clinical trials. The Phrase I clinical trial is currently
underway at Montefiore Medical Center under Dr. Melman's supervision.
On December 1, 1997, the Company entered into an amended License
agreement to give the Company rights to two additional patents of which one was
recently approved November 17, 1997. These additional patents related to an
innovative approach to monitor and control intra-prostatic temperatures using a
radiometer apparatus. The combination of these two patents and the one received
in 1996 is expected to enhance the safety and efficacy of the Company's BPH
system.
In 1995, only 17% of the total men suffering with BPH symptoms were
treated for the disease. The Company believes that this number will be greatly
increased with the introduction of the Company's BPH treatment device that
improves on the major drawbacks of the current treatment methods. These
drawbacks include issues such as extended procedure stays, required
catheterization and a worsening of conditions immediately after the procedure.
The Company believes that its new proprietary BPH device confronts each
one of these drawbacks and delivers a treatment that is performed on an
outpatient basis (1-2 hours), does not require post-treatment catheterization
and delivers immediate relief that permits urination as soon as the procedure is
completed.
The Company's original Microfocus BPH systems utilize 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 original systems do not
utilize MMTC's patented balloon catheter compression technology. The Company
does not have an IDE or PMA on the original BPH System and it is therefore not
currently available for commercial distribution in the United States. However,
the Microfocus BPH System is manufactured in Canada and is approved for export
from Canada. The original systems will be discontinued as the new balloon
catheter equipment becomes commercially available, subject to FDA approval.
Marketing Strategy
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The emphasis of the Company's marketing strategy for its new products
will be to maintain ongoing cash streams by selling disposable procedure kits
and by charging a per treatment fee. Hospitals, clinics, Health Maintenance
Organizations ("HMOs"), and pharmaceutical companies will acquire equipment at a
minimal cost and will pay for utilizing such equipment, together with necessary
disposable products -- on a per use basis. The Company intends to increase the
demand for its treatment by educating patients about the benefits of its
treatment via various means of media publicity, consistent with FDA regulation.
The Company will pursue, for long-term growth, along two discrete development
paths:
- It is anticipated that, in the near term - from two to four years,
the Company's treatment revenues will come from an exploitation of
its proprietary technology for BPH, and from its deep focused heat
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technology for breast cancer and deep-seated tumors. The Company
intends to generate initial sales through a combination of direct
marketing and development of marketing alliances. The Company has
begun discussions with a national HMO for the development of a
long-term joint research and marketing alliance. The Company is
currently considering other offers to establish a series of
value-added marketing alliances with certain manufacturers that
sell directly to the nation's hospital community.
- In the longer term - from four to six years, the Company intends
to generate new revenue streams from its current development work
with Duke University and Memorial Sloan Kettering in targeted drug
delivery systems and gene therapy. The Company has first options
to acquire Duke University patents covering heat sensitive
liposome targeted drug delivery technology. I t is anticipated
that treatment revenues will come from pharmaceutical
manufacturers, hospitals, and clinics employing these technologies
to deliver drug regimens or change genes throughout the body. Duke
has commenced development of this integrated, targeted drug
delivery system employing the Company's focused heat technology.
To market its liposome, heat sensitive drug delivery systems, the
Company is currently seeking alliances with pharmaceutical
companies, major hospitals, and HMOs. The Company's intended
marketing strategy will be to place its microwave equipment at
minimal cost, and to share revenues from drug delivery on a per
transaction basis. It is anticipated that there will also be
significant revenues from both the Company's targeted drug
delivery and gene therapy delivery to major drug companies.
Assuming FDA approval, the Company plans to launch its BPH treatment
system in late 1999 or earlier 2000. Pending FDA approvals, the Company's
focused heat breast cancer and deep tumor treatment systems could reach the
market in the years 2000 and 2001. Microwave liposome drug delivery treatments
could reach the market as early as 2002.
Patents and Proprietary Rights
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The Company owns no patents. Through the Company's license agreements
with MIT, MMTC and Haim Bitcher Cancer Institute ("HBCI"), the Company has
exclusive rights within defined fields of use to eight U.S. patents. Five of the
patents relate to the cancer equipment and three relate to the BPH equipment.
The patents expire at various times from May, 1999 to November, 2014. The
Company, in conjunction with the patent holders, has filed or intends to file
international applications for certain of the U.S. patents.
The Company also relies upon trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and others. There can be no assurance that
proprietary information agreements will not be breached, that the Company would
have adequate remedies for any such breach or that such agreements, even if
fully enforced, would be adequate to prevent third party use of the Company's
proprietary technology.
Third Party Reimbursement
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The Company believes that third party reimbursement will be essential
to commercial acceptance of the Deep Focused Heat Systems and Microfocus BPH
System procedures, and that overall cost effectiveness and physician advocacy
will be keys to obtaining such reimbursement. The Company believes that its
procedures 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
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.
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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 treat efficaciously 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.
Subject to regulatory approval for the Deep Focused Heat Systems to
treat cancer and the new Microfocus BPH System to treat BPH, it is anticipated
that physicians will submit insurance claims for reimbursement for the procedure
to third party payers, such as Medicare carriers, Medicaid carriers, 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 new Deep Focus Heat Systems and the new Microfocus BPH
System will be a significant factor in the Company's ability to commercialize
these 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.
Internationally, reimbursement approvals for procedure utilizing the
Company's new products will be sought on an individual country basis. Some
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.
Commercial Design and Manufacturing
-----------------------------------
The Company's existing BPH treatment devices were designed and
manufactured by the Company. The Company believes it is best suited to conduct
basic research and development, pursue a development idea through clinical
testing and regulatory approval and market the final product. The Company
intends to outsource the development of a commercial product from its
development stage product and the actual manufacture of the commercial product.
The Company has engaged Herbst Lazar Bell, Inc. to develop the commercial
versions of its future products. See "Certain Transactions". It is intended that
manufacture of future products will be contracted to manufacturers who are
currently being solicited for interest and cost estimates.
Competition
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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.
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The two major competitors of the Company 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 current 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.
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 and has a much larger presence in the
thermotherapy market than has the Company.
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. 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 places at a
treatment center. 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.
Thermotherapy For Prostatic Diseases
The Company believes there are as many as 10 companies in the USA and
as many as 15 companies worldwide that are planning to enter 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"), called
"Prostatron." In addition, Urologix and Dornier recently received FDA approval
on their BPH systems. These approvals 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. The Company's new BPH system has not been approved by the FDA for sale
in the United States. However, the Company has an IDE approval from the FDA to
conduct clinical trials which are currently being conducted at the Montefiore
Medical Center.
Large global companies such as Dornier, Olympus, and 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, 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 Prostatron system. The Prostatron unit is a high cost system
which sells for approximately U.S. $300,000. Other companies are marketing their
systems in the range of US $100,000 to $300,000. 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.
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
10
<PAGE>
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. An 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.
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 BPH 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. The Company believes that it is substantially in compliance
with FDA regulations governing the manufacturing and marketing of medical
devices. The Company has received a PMA from the FDA for its Microfocus 1000
cancer treatment equipment for surface and sub-surface tumors in conjunction
with radiation. The Company is seeking a new indication of use to enable this
equipment to be used for breast cancer ablation.
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.
The Company has sold products in approximately twenty selected
countries in Asia, Europe, and South America. Meeting 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.
11
<PAGE>
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,
the Company had not maintained product liability insurance. Recently, the
Company has secured product liability insurance in the amount of $5,000,000 and
directors and officers insurance in the amount of $3,000,000. There is no
assurance, however, that claims will be covered by such insurance and will not
exceed such insurance coverage limits.
Employees
---------
As of September 30, 1998, the Company had six full-time employees. 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 consists 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 a three year lease which will terminate on May 31, 2000.
Monthly rent is $5,779.91.
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, except as follows:
The Company was named as a defendant in a lawsuit filed by Eastwell
Management Services, Ltd. ("Eastwell") in the United States District Court for
the District of Maryland claiming, inter alia, breach of contract. On
December19, 1998, the U.S. District Court of Maryland found in favor of the
Company. In a related decision the U.S. District Court of Maryland also found in
favor of the Company regarding its countersuit, concluding that the Company is
entitled to $100,000 from Eastwell, which breached the original contract between
the two parties. The Company intends to pursue all legally possible avenues to
collect the $100,000 from Eastwell.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1998 the Company held its Annual Shareholders meeting.
Listed below are the names of the seven directors elected at the meeting and
their respective terms of office.
Name Term Expires
- ----- ------------
Spencer J. Volk 2001
Augustine Y. Cheung 2001
Warren C. Stearns* 1999
Walter B. Herbst 2000
Mel D. Soule* 2000
Max E. Link 2001
John Mon 1999
* Messrs. Stearns and Soule resigned from the Board of Directors of the Company
in July 1998. Listed below is the vote count related to the other matters
approved at the meeting:
12
<PAGE>
<TABLE>
<CAPTION>
Proposition For Against Abstain
----------- --- ------- -------
<S> <C> <C> <C>
To approve an amendment to the Company's by-laws 28,531,934 171,083 142,050
adopting a staggered board of directors.
To ratify the appointment of Stegman & Company as 32,186,822 5,425 152,768
auditors to examine the Company's accounts for the
fiscal year ending September
30, 1998.
To amend the Company's Articles of Incorporation to 31,672,167 466,873 205,975
increase the number of authorized shares to 100,000,000
shares.
To amend the Company's Articles of Incorporation to 32,016,210 112,147 216,658
change the Company's name to The Company Corporation
or variations thereof approved by the Directors.
To approve an omnibus stock option plan. 27,626,867 357,943 418,451
</TABLE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market.
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 1,298 holders of record of the
Common Stock as of December 8, 1998 The Company has never paid cash dividends on
its stock and does not expect to pay any cash dividends in the foreseeable
future.
<TABLE>
<CAPTION>
September 30
------------
Period 1997 1998
------ ---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter (Oct.1 to Dec. 31) 1.13 0.69 1.13 0.75
2nd Quarter (Jan. 1 to March 31) 0.81 0.56 1.03 0.69
3rd Quarter (April 1 to June 30) 0.94 0.48 0.90 0.36
4th Quarter (July 1 to Sept. 30) 1.31 0.63 0.52 0.21
</TABLE>
Issuance of Shares Without Registration
13
<PAGE>
During the fourth quarter of the fiscal year ended September 30, 1998,
the Company issued the following securities without registration under the
Securities Act of 1933, as amended (the "Securities Act"):
1. During the quarter, the Company issued 2,006,238 shares to 11
persons in satisfaction of previously outstanding debt and
contractual obligations totaling $650,271. The issuance was
made to a limited number of accredited investors. Messrs.
Spencer Volk, Augustine Cheung, and Herbst Lazar Bell, Inc.
were three of the investors. No commissions were paid with
respect to the conversions. The Company believes the issuance
was exempt from registration under the Securities Act pursuant
to Sections 4(2) or 4(6) of the Securities Act and Regulation
D promulgated thereunder.
2. During the quarter, the Company issued 580,000 shares to 7
accredited investors for cash consideration totaling $145,000.
The issuance was made to a limited number of accredited
investors. No commissions were paid with respect to the
issuance, but finders fees of $4,500 were paid to persons who
introduced the Company to certain investors. The Company
believes the issuance was exempt from registration under the
Securities Act pursuant to Section 4(2) or 4(6) of the
Securities Act and Regulation D promulgated thereunder.
3. During the quarter, the Company issued 73,866 shares to its
current and certain past directors as directors fees and
certain members on the Scientific Advisory Board for their
services. Such shares were valued at a total of $23,637. The
issuance was made to a limited number of accredited investors.
No commissions were paid with respect to the issuance. The
Company believes the issuance was exempt from registration
under the Securities Act pursuant to Sections 4(2) or 4(6) of
the Securities Act.
(Remainder of page intentionally left blank)
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data for the Company
for the years ended September 30, 1998, 1997, 1996, 1995, and 1994 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.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product Sales (Net) $1,025,651 $157,618 $74,006 $121,257 $174,182
Research and development contracts 60,742 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total revenues $1,086,393 $157,618 $74,006 $121,257 $174,182
Cost of product sales 494,946 67,350 64,406 46,734 136,500
---------- ---------- ---------- ---------- ----------
Gross profit on product sales 591,447 90,268 9,600 74,523 37,682
Other costs and expenses:
Research and development 202,569 18,546 94,012 185,974 1,534,872
Selling, general and administrative 704,295 1,386,854 1,321,361 2,283,245 2,515,822
Total operating expenses 906,864 1,405,400 1,415,373 2,469,219 4,050,694
Profit(Loss) from operations (315,417) (1,315,132) (1,405,773) (2,394,696) (4,013,012)
Other income (expense) 170,997 8,620 (442,192) (1) (471,631) (2) 11,870
Interest income (expense) (184,700) (90,805) (85,506) (185,562) (199,346)
Extraordinary Item - Gain on forgiveness
of debt 591,728
Net income (loss) 390,880 (1,397,317) (1,933,471) (3,051,889) (4,200,488)
Net Income (loss) per share $.02 ($.06) ($0.05) ($0.11) (0.12)
Weighted average shares outstanding 16,712,978 23,466,070 39,499,650 28,386,145 34,867,001
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (748,193) (1,101,136) (646,754) (2,645,908) (2,000,351)
Total Assets 955,456 9,710,742 (3) 9,321,600 (4) 823,209 330,738
Long-term debt, less current maturities 26,000 2,000 1,213,000 0 5,719
Redeemable Convertible Preferred Stock
Accumulated deficit (8,880,845) (10,278,162) (12,211,633) (15,263,522) (19,464,010)
Total stockholders' equity (deficit) (666,542) 8,128,768 6,755,874 (3) (2,460,646) (1,851,077)
</TABLE>
(1) Includes $17,009 gain on disposition of investment in Ardex
Equipment, L.L.C.
(2) Includes $438,803 loss on write off of Ardex Notes Receivable.
(3) Includes the Company's equity interest in Aestar Fine Chemical
Company valued at $8,000,000 on the Company's September 30,
1995 balance sheet.
(4) 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 effect 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
15
<PAGE>
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 the effectiveness
of its technology, 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 as the Company pursued its new
technologies. Because of the focus on research and development
of its new technologies, the Company is not concentrating on
sales of its original equipment at this time. Assuming
approval of the new technologies by the appropriate government
agencies, the Company expects revenue to increase. However,
there is no assurance sales will increase with the application
of new technologies being developed by the Company. The
Company has had increasing losses which have resulted in an
accumulated deficit of $19,464,010 as of September 30, 1998.
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 affect
future sales.
2. Acceptance of Products. Thermotherapy has not been widely
accepted by the medical community as an effective cancer
treatment. The Company believes that this is primarily due to
the inability to adequately focus heat prior to introduction
of the Company's APA technology. The Company believes the APA
technology allows microwave energy to be accurately targeted
deep within the body, resulting in heating a well defined
target area without damaging surrounding tissue. The medical
community may not embrace the advantages of APA-focused
thermotherapy without more extensive testing and clinical
experience than the Company could afford to conduct. It is
also possible that the technology will not be as effective in
practice as theory and testing in animals have indicated.
Similarly, the medical community has no experience with
balloon catheter treatment for BPH.
3. Limited Products. The Company currently has a limited number
of products. Failure to develop new products utilizing current
products and newly acquired technology would affect the
profitability of the Company. The development of new products
and application of new technology to existing products is
subject to uncertainty and delay.
4. Lack of a Proven Marketing Plan. The Company intends to market
its new products by concentrating on per-use revenue. Such
plan 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 system and PMA application for submission to the FDA. The Company
16
<PAGE>
believes these expenditures are essential for the commercialization of its
technologies. The Company has experienced significant operating losses and as of
September 30, 1998 had an accumulated deficit of $19,464,010. 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 into its thermotherapy
systems. The Company has not been able to successfully market its current
thermotherapy system because of its inability to provide heat treatment for
other than surface and sub- surface tumors. 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.
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, 1998 to Fiscal Year Ended
September 30, 1997
Product sales for the fiscal year ended September 30, 1998 ("fiscal
1998") were $174,182. These sales occurred due to re-orders of the Company's
original equipment. During the prior fiscal year, gross product sales, taking
returns and allowances into consideration, were $121,257. Increased revenues
from products are not expected until products incorporating the new technologies
are developed and approved by governmental regulatory agencies. Furthermore,
with respect to the APA-focused thermotherapy equipment, the Company believes it
must complete clinical studies to satisfy potential users.
Cost of sales increased to $136,500 in fiscal 1998 from $46,734 in
fiscal 1997. The Company does not believe that fluctuations in gross margin are
meaningful at the current low level of sales.
Research and development expense increased to $1,534,872 in fiscal 1998
from $185,974 in fiscal 1997. The Company expects to significantly increase its
expenditures for research and development to fund the development or enhancement
of products by incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased to $2,515,822 in
fiscal 1998 from $2,283,245 in fiscal 1997. Increased administrative expenses
reflect strengthening of the Company's management team and the resulting
increased salary levels. These expenses also reflect the increased use of
outside consultants and advisers to assist the Company in developing and
implementing its plans to utilize and commercialize its new technologies. 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.
17
<PAGE>
Interest expense increased to $199,346 in fiscal 1998 from $185,562 in
fiscal 1997. This primarily reflects the recognition of interest obligation in
the amount of approximately $130,000 incurred in the Company's past operations.
See "Liquidity and Capital Resources" below.
Comparison of Fiscal Year Ended September 30, 1997 to Fiscal Year Ended
September 30, 1996
Product sales for the fiscal year ended September 30, 1997 ("fiscal
1997") were $121,257. During the prior fiscal year, gross product sales were
$134,006, but net product sales after returns and allowances were $74,006.
Increased sales of products are not expected until products incorporating the
new technologies are developed and approved for sale by governmental regulatory
agencies. Furthermore, with respect to the APA- focused hyperthermia machines,
the Company believes it must complete clinical studies to satisfy potential
users.
Cost of sales decreased to $46,734 in fiscal 1997 from $64,406 in
fiscal 1996. This reflects the decrease in gross sales. The Company does not
believe that fluctuations in gross margin are meaningful at the current low
level of sales.
Research and development expense increased to $185,974 in fiscal 1997
from $94,012 in fiscal 1996. The Company expects to significantly increase its
expenditures for research and development to fund the development or enhancement
of products by incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased to $2,283,245 in
fiscal 1997 from $1,321,361 in fiscal 1996. Increased administrative expenses
reflect strengthening of the Company's management team and the resulting
increased salary levels. These expenses also reflect the increased use of
outside consultants and advisers to assist the Company in formulating its plans
to utilize its new technologies. 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.
During fiscal 1997, the Company wrote off as uncollectible the notes
receivable related to Ardex Equipment, LLC. As part of the Gao settlement, the
Company also lost the funds held under an investment contract. Together these
two items resulted in $478,803 of non-operating expense in fiscal 1997.
Interest expense increased to $185,562 in fiscal 1997 from $85,506 in
fiscal 1996. This primarily reflects an increase in short term debt incurred to
finance the Company's operations. See "Liquidity and Capital Resources" below.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $19,464,010 at September 30,
1998. The Company has funded its operations primarily through the sale of equity
securities. As of September 30, 1998, the Company had cash, cash equivalents and
short-term investments aggregating approximately $ 54,920. Current liabilities
on such date were $2,176,086. Net cash used in the Company's operating
activities was $ 2,112,529 for fiscal 1998.
The Company does not have any bank financing arrangements. As of
September 30, 1998, the Company's indebtedness consisted of a promissory note
payable to Yu Shai Lai in the principal amount of $36,041; a promissory note
payable to Lake Shu Loon in the principal amount of $10,000; a promissory note
payable to Charles Shelton in the principal amount of $50,000; a secured
promissory note payable to George T. Horton Trust (the "Horton Note") in the
principal amount of $220,000, the payment of which is secured by certain
equipment owned by the Company and was due by its terms on December 15, 1997;
and a promissory note payable to Spencer Volk in the amount of $50,000, which
was subsequently converted into 200,000 shares of the Company's Common Stock and
a Warrant to purchase 200,000 share of the Company's Common Stock (see "Certain
Relationships and Related Transactions"). At September 30, 1998, the outstanding
principal amount of the Horton Note was $18,000; as of the date hereof, the
outstanding principal amount of the Horton Note is $13,000. The holder's
remedies for non-payment include foreclosing on the collateral, increasing the
18
<PAGE>
interest rate to 17% per annum or converting the balance into common stock
having a market value of 200% of the note balance.
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 its financing depend upon 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 intends to spend over $3,500,000, subject to availability
of funding, with various educational and research institutions for research and
development in fiscal 1999. 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 is not currently known, but is
expected to run in the millions of dollars. The Company does not currently have
funds available to do such trials and clinical work. The Company is actively
seeking these funds through the sales of securities and other alternatives. If
the Company cannot fund such obligations, it will lose the data necessary to
develop and commercialize its products or even the rights to certain licensing
agreements. The Company may also lose any benefit it has previously received
from association with well known research institutions. 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.
Risk Factors
Unfunded Research Obligations
The Company engages third party research institutions and hospitals to
perform research and clinical trials for the Company. As of September 30, 1998,
the Company entered into agreements to fund a minimum of $900,000 of research
and clinical trials through March 30, 1999. The Company does not have the
capital to fund such obligations, nor does it have commitments for such capital.
The Company has recently engaged the investment banking firm of Josephberg Grosz
& Co., Inc. and certain other financial advisors to assist in raising capital.
Josephberg Grosz & Co., Inc. replaced Stearns Management Company, the Company's
former financial adviser. Mr. Warren C. Stearns, President of Stearns Management
Company, also resigned as a member of the Board of Directors of the Company.
There is no assurance that these funds will be raised and if they are not
raised, the clinical trials will likely be delayed or not completed. If the
Company cannot fund such obligations, it will lose the data necessary to develop
and commercialize its products. The Company may also lose any benefit it has
previously received from association with well known research institutions.
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<PAGE>
Additional research and development spending of $5.0 to $6.0 million is
planned for 1999 to complete breast cancer and BPH clinical trials. It will be
necessary to raise capital to conduct these trials and there is no assurance
that this will occur as revenues are not expected to begin until late 1999 at
the earliest, with early year 2000 being more likely. If the Company does not
obtain sufficient capital to fund its proposed research and trial schedule, the
Company may become in breach of its license agreements with MMTC and MIT and its
sponsored research agreements with Duke University. The Company's business plan
incorporating the planned 1998 and 1999 expenditures for research and
development, and clinical trials have been updated to include latest
developments. Phase I of the BPH clinical trials is currently being conducted at
the Montefiore Medical Center under the direction of Dr. Arnold Melman. The
Company has submitted an IDE application to the FDA to start the Phase I
clinical trials to use its new breast cancer treatment system to ablate breast
cancer tumors through heat alone. Subject to FDA approval, Phase I clinical
trials of such breast cancer treatment system will be conducted at the
Massachusetts General Hospital. All of the above research is dependent on the
raising of additional capital and there is no assurance that this will be
achieved.
In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company agreed to pay Duke
University for all direct and indirect costs incurred in the performance of the
research contemplated under such agreements not to exceed $625,062 and Duke
University agreed to grant to the Company an option (the "Option") to acquire an
exclusive, worldwide, royalty bearing license of Duke University's rights to any
invention, development, or discovery resulting from the subject research. As of
the date hereof, the Company has paid $75,000 of a total of $625,062 of the
required payments set forth in the research agreements. The Company and Duke
University have agreed, however, that Duke University shall suspend its research
until the Company is able to raise additional capital, the amount currently
payable by the Company to Duke University is approximately $110,000 based upon
Duke University's actual costs to date and that Duke University will not
consider the Company in default if such payment is made by January 31, 1999.
History of Losses; Accumulated Deficit; No Assurance of Revenue or Operating
Profit
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $19,464,010 and a shareholders'
deficit of $1,851,067 at September 30, 1998, including losses for the quarter
ended September 30, 1998 of $678,662. The Company anticipates reporting similar
losses for the quarter ended December 30, 1998. The Company has funded its
operations primarily through the sale of Company securities. Losses are expected
to continue until the product enhancements have been completed and approved by
the FDA or until the Company can implement its marketing plan. The Company has
experienced diminishing revenue from product sales in recent years. The Company
currently has limited revenue from product sales, and there can be no assurance
that it will be able to develop such revenue sources or that its operations will
become profitable, even if it is able to commercialize any products. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities which, together with projected general and
administrative expenses, are expected to result in substantial operating losses
in the future.
Early Stage of Product Development; Continuing Uncertainty of Technology
The Company's current commercialized products have not produced any
significant profit to date and the Company believes that without the enhancement
of its newly acquired technology, it is likely they will not produce profits in
the future. Progress with any of the Company's potential products will require
significant further research, development, testing and regulatory clearances and
will be subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibility that the
technologies used by the Company may be found to be ineffective or impractical;
that the products, if safe and effective, could fail to receive necessary
regulatory clearances or be difficult to market; that the proprietary rights of
third parties may preclude the Company from marketing the products; or that
third parties may market superior or equivalent products. There can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
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The field of hyperthermia is rapidly evolving, and it is expected to
continue to undergo significant and rapid technological changes. Rapid
technological development could result in actual and proposed products,
services, or processes becoming obsolete before the Company recovers a
significant portion of its related research, development and capital expenses.
Although to date the Company has engaged in substantial research and development
efforts, the Company does not expect to be able to commercialize any products
utilizing the new technology for a number of years, if at all. The Company is
unable to predict precisely when a product might be commercialized due to
uncertainties as to the time that will be required for, and the nature of,
additional research and development, human clinical trials to assess each
potential product and satisfying government regulatory requirements.
Need for Substantial Additional Funds
It is anticipated that additional financing of approximately
$10,000,000 will be needed for 1999. In addition, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, results of pre-clinical testing, relationships with
collaborators, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances, the FDA's
regulatory process, and other factors. The Company has recently engaged the
investment banking firm of Josephberg Grosz & Co., Inc. and certain other
financial advisors to assist in raising capital. The Company is dependent on
raising new capital to fund operations to commercialize its products and to
satisfy the commitments made by the Company for 1998 and 1999 as revenues are
not expected to begin until late 1999 at the earliest, with early year 2000
being more likely. Failure to meet commitments may result in a loss of licensed
technology. There is no assurance that adequate funds for these purposes,
whether obtained through the financial markets, collaborative or other
arrangements with corporate partners, or from other sources, will be available
when needed or on terms acceptable to the Company. Insufficient funds may cause
the loss of licenses on new technology and may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop or commercialize itself.
Dependence upon Key Personnel and Collaborators
The Company's success depends (I) on the continued contributions of its
executive officers, scientific and technical personnel, and consultants and (ii)
on the Company's ability to attract new personnel as the Company seeks to
implement its business strategy. During the Company's limited operating history,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. The competition for qualified personnel is intense,
and the loss of services of certain key personnel could adversely affect the
business of the Company. There are no employment agreements with any of current
management other than Mr. Spencer J. Volk, the Company's Chief Executive Officer
and President.
Competition
There are many companies and institutions that are conducting research
and development activities on thermotherapy technologies for both oncology and
prostate products that are similar to the efforts of the Company. The Company
believes that the interest in investigating the potential of thermotherapy
technologies will continue and may accelerate. Competitors engaged in all areas
of cancer and prostate treatment in the United States and other countries are
numerous and include, among others, major pharmaceutical and chemical companies,
specialized technology companies, universities, and other research institutions.
There can be no assurance that the Company's competitors will not succeed in
developing products or other technologies that are more effective than any which
have been or are being developed by the Company or which would render the
Company's technology and products obsolete and non-competitive.
Many of the Company's competitors have substantially greater financial,
technical, human, and other resources. In addition, many of these competitors
have significantly greater experience than the Company in undertaking
preclinical testing and human clinical trials of new products and obtaining FDA
and other regulatory approvals. Accordingly, certain of the Company's
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competitors may succeed in obtaining FDA approval for products more rapidly than
the Company. Furthermore, if the Company is permitted to commence commercial
sales of products, it will also be competing with respect to manufacturing
efficiency and marketing with companies having greater resources and experience
in these areas. The Company currently has limited experience in these areas.
Uncertain Ability to Protect Proprietary Technology
The Company's success will depend, in part, on its ability to maintain
license agreements on patented technology. No assurance can be given that any
patents issued to or licensed by the Company will not be successfully challenged
or circumvented by others, or that the rights granted will provide adequate
protection to the Company. The Company is aware of patent applications and
issued patents belonging to competitors and it is uncertain whether any of
these, or patent applications filed of which the Company may not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees, or cease certain activities. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce any patents issued to or licensed by the Company or determine the scope
and validity of others' claimed proprietary rights. The Company also relies on
trade secrets and confidential information that it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors.
Technological Change
Various modalities for the treatment of cancer are the subject of
extensive research and development. Many possible treatments which are being
researched may not be amenable to enhancement with the Company's technology, or
may not require thermotherapy for an effective cure. The development and
acceptance of any such treatment could make the Company's technology obsolete.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities, and to furnish a competitive advantage to larger companies
that compete with the Company. There can be no assurance that FDA or other
regulatory approval for any products developed by the Company will be granted on
a timely basis or at all. Any such delay in obtaining, or failure to obtain,
such approvals would adversely affect the marketing of any contemplated products
and the ability to earn product revenue. Further, regulation of manufacturing
facilities by state, local, and other authorities is subject to change. Any
additional regulation could result in limitations or restrictions on the
Company's ability to utilize any of its technologies, thereby adversely
affecting the Company's operations.
License Agreements for Patented Technology
The Company has entered into exclusive license agreements with
Massachusetts Institute of Technology (the "MIT Agreement") and MMTC, Inc. (the
"MMTC Agreement") for the use of certain patented technologies. The MIT
Agreement and the MMTC Agreement each contain license fee and royalty
requirements and other performance requirements which the Company must meet by
certain deadlines with respect to the use of the patented technologies. If the
Company were to breach the MIT Agreement or the MMTC Agreement, the Company
would lose its rights to the respective licensed technology and would not
receive compensation for its efforts in developing or exploiting the technology.
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In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company has agreed to pay
Duke University for all direct and indirect costs incurred in the performance of
the research contemplated under such agreements not to exceed $625,062 and Duke
University has agreed to grant to the Company an option (the "Option") to
acquire an exclusive, worldwide, royalty bearing license of Duke University's
rights to any invention, development, or discovery resulting from the subject
research. As of the date hereof, the Company has paid $75,000 of a total of
$625,062 of the required payments set forth in the research agreements. The
Company and Duke University have agreed, however, that Duke University shall
suspend its research until the Company is able to raise additional capital, the
amount currently payable by the Company to Duke University is approximately
$110,000 based upon Duke University's actual costs to date and that Duke
University will not consider the Company in default if such payment is made by
January 31, 1999.
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize thermotherapy products
successfully will depend in part on the extent to which reimbursement for the
costs of such products and related treatments will be available from government
health administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. There can be no assurance that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investment in developing new therapies. Government, private health insurers,
and other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products approved for marketing by the FDA. If adequate coverage and
reimbursement levels are not provided by government, private health insurers,
and third-party payors for uses of the Company's products, the market acceptance
of these products would be adversely affected.
Uncertainty Related to Health Care Reform Measures
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services to government
control and to make other changes to the health care system of the United
States. It is uncertain what legislative proposals will be adopted or what
actions federal, state, or private payors for health care goods and services may
take in response to any health care reform proposals or legislation. The Company
cannot predict the effect health care reforms may have on its business, and no
assurance can be given that any such reforms will not have a material adverse
effect on the Company.
Applicability and Adequacy of Product Liability Insurance Coverage
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, and marketing of human
therapeutic products. Recently, the Company has secured product liability
insurance in the amount of $5,000,000 and directors and officers insurance in
the amount of $3,000,000. There is no assurance, however, that claims will be
covered by such insurance and will not exceed such insurance coverage limits.
Limited Manufacturing Experience
The Company has only limited experience in producing its current
products (approximately 84 BPH systems and 31 cancer systems worldwide) and has
not produced any products utilizing the new technology. The Company's facilities
comply with FDA's Good Manufacturing Practices ("GMP"). The facilities of
certain of its contract manufacturers will need to comply with applicable
regulations including the GMP regulation and other regulations. Failure to
comply with applicable requirements and regulations by the Company's contract
manufacturers could delay or prohibit manufacturing of the new products system,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Any increase in production rates in
response to demand for the Company's products could adversely impact the ability
of the Company or its contract manufacturers to comply with such requirements.
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Contract Manufacturing; Dependence Upon Key Suppliers
The Company purchases components used in its products from various
suppliers. Delays would be caused if the supply of such components were
interrupted. These delays could be extended if substituted components require a
product redesign or regulatory approval. The current products are assembled by
contract manufacturers and it is anticipated that the new products will be
assembled primarily by a contract manufacturer. If for any reason the contract
manufacturer is unable or unwilling to manufacture the current and new products
for the Company in the future, the Company could incur significant delays in
obtaining a substitute contract manufacturer. The Company expects to be
dependent upon such manufacturers and subcontractors for the foreseeable future.
Therefore, failure to obtain components from such sources or delays associated
with any future components shortages, particularly as the Company makes the
transition to commercial production, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Volatility of Share Price
Market prices for securities of medical and high technology companies
have been volatile. Factors such as announcements of technological innovations
or new products by the Company or its competitors, government regulatory action,
litigation, patent or proprietary rights developments, and market conditions for
medical and high technology stocks in general could have a significant impact on
any future market for the Common Stock. The volatility of the Company's stock
may also be affected by the lack of stock analyst coverage of the Company and
the factors described at "-- NASDAQ Listing Requirements; Risks of Low-Priced
Stocks" below.
NASDAQ Listing Requirements; Risks of Low-Priced Stocks
The Company's Common Stock is currently traded in the over-the-counter
market.
The Company intends to have its Common Stock listed on NASDAQ or some
other national exchange upon meeting the applicable listing requirements. There
can be no assurance that the Company will meet the NASDAQ listing requirements
or the requirements of any other exchange. If the Company is unable to satisfy
NASDAQ's initial listing criteria in the future, its securities will continue to
be traded in the over-the-counter market in the so-called "pink sheets" or the
"Electronic Bulletin Board" of the National Association of Securities Dealers,
Inc. ("NASD"). As a consequence, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the price of the Company's
securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a penny
stock. Regulations generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include any equity security listed on NASDAQ and any equity
security issued by an issuer that has (I) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000, if such issuer has been in continuous operation for less
than three years.
If the Company's securities are not quoted on NASDAQ, or the Company
does not have $2,000,000 in net tangible assets, trading in the Company's
securities will continue to be covered by Rules 15g-1 through 15g-6 promulgated
under the Exchange Act for non-NASDAQ and non-exchange listed securities. Under
such rules, broker-dealers who recommend such securities to persons (other than
established customers and accredited investors) must make a special written
suitability determination that the penny stock is a suitable investment for the
purchaser and must receive other information from the purchaser.
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Market Overhang from Warrants and Outstanding Options; Registration Rights
As of September 30, 1998, the Company had outstanding commitments to
issue shares to management, and options and warrants to purchase, an aggregate
amount of approximately 13,053,983 shares of Common Stock, a significant portion
of which are exercisable at exercise prices substantially below the current
market price. In addition, this number does not reflect additional shares that
may be issued pursuant to anti-dilution provisions. To the extent that such
shares are issued, or such warrants or options are exercised, dilution to the
interests of the Company's stockholders may occur. In the event that the market
value of the Common Stock decreases significantly, the offering price in the
Company's private placements or public offerings may be similarly affected. If
this occurs, the number of shares issuable on exercise of certain options or
warrants may significantly increase, thereby increasing the dilutive effect on
other shareholders. Exercise of these options or warrants or even the potential
of their exercise may have an adverse effect on the trading price and market for
the Company's Common Stock. The holders of the options or warrants are likely to
exercise them at times when the market price of the shares of Common Stock
exceeds the exercise price of the options or warrants. Accordingly, the issuance
of shares of Common Stock upon exercise of the options or warrants may result in
dilution of the equity represented by the then-outstanding shares of Common
Stock held by other stockholders. Holders of the options or warrants can be
expected to exercise them at a time when the Company would in all likelihood be
able to obtain any needed capital on terms which are more favorable to the
Company than the exercise terms provided by such options or warrants.
Common Stock issued or to be issued pursuant to a substantial number of
the warrants and options have demand and/or piggyback registration rights.
Pursuant thereto, the Company was required to use good faith efforts to effect
the registration of such securities on or before July 10, 1998, although such
registration has not yet been effected. If such registration rights are
exercised on a substantial portion of the Common Stock, the trading price and
market for the Company's registered Common Stock may be adversely affected.
Year 2000 Compliance
As the year 2000 (Y2K) approaches, an issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. Failure to adequately address this issue could have potentially
serious repercussions. The Company believes that all of its current systems are
year 2000 compliant. In addition, the Company's older systems have been tested
and are expected to function normally beginning January 1, 2000 for several
reasons. First, the older systems' software, operations, and control systems are
not date driven; and second, the older systems are "stand alone" systems and,
therefore, are not connected to any other computer systems. The treatment record
and storage archives used by such systems are, however, date driven and the
Company is currently testing the data programs to determine the most efficient
method or upgrade to retrieve and store data. Finally, the Company is dependent
on various vendors and subcontractors and is in the process working with these
vendors and subcontractors to prepare for the year 2000. Although the Company
does not anticipate that the year 2000 issue will have a material impact on the
Company's ability to operate at current levels, there can be no assurance that
steps taken in preparation for the year 2000 will be sufficient to avoid any
adverse impact on the Company.
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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers, and sets forth the
position with the Company held by each:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Augustine Y. Cheung+ 51 Chairman of the Board of Directors, Chief Scientific Officer
Spencer J. Volk+ 64 President, Chief Executive Officer and Director
John Mon* 46 Secretary, Treasurer/General Manager and Director
Max E. Link+ 57 Director
Walter B. Herbst** 60 Director
Peter Gombrich ** (1) 59 Director
</TABLE>
* Term as director expires in 1999
** Term as director expires in 2000
+ Term as director expires in 2001
(1) Mr. Gombrich resigned as a member of the Board of Directors of the Company
on December 8, 1998.
The Board of Directors presently maintains an Audit Committee, a
Compensation Committee, and a Research and Development Oversight Committee.
Messrs. Warren C. Stearns and Mel D. Soule comprised the Audit Committee prior
to their resignation as a members of the Board of Directors of the Company in
July 1998. Mr. Peter Gombrich was appointed as a member of the Board of
Directors to replace Mr. Soule. The vacancies in the Board of Directors of the
Company created by Messrs. Stearns' and Gombrich's resignations has not been
filled as of the date of this report. The Audit Committee held no meetings
during fiscal year 1997 and three meetings to date in the fiscal year ended
September 30, 1998 ("fiscal year 1998"). Messrs. Volk and Herbst comprise the
current Compensation Committee. The Compensation Committee held two meetings
during fiscal year 1997 and four meetings in fiscal year 1998. Messrs. Cheung
and Herbst comprise the Research and Development Oversight Committee. The
Research and Development Oversight Committee was created in January 1998 and
held a number of informal meetings during fiscal year 1998.
Augustine Y. Cheung. Dr. Cheung has served as the Chairman of the Board
of Directors of the Company since 1982. Dr. Cheung was the founder of the
Company, was President of the Company from 1982 to 1986 and Chief Executive
Officer from 1982 to 1996. 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 the University of
Maryland. Dr. Cheung is the brother-in-law of John Mon.
Spencer J. Volk. Mr. Volk has been a director, President, and Chief
Executive Officer of the Company since May 22, 1997. From 1994 to 1996, Mr. Volk
was President and Chief Operating Officer of Sunbeam International. From 1991 to
1993, Mr. Volk was the President and Chief Executive Officer of the Liggett
Group, Inc. From 1989 to 1991, he was the President and Chief Operating Officer
of Church and Dwight (Arm and Hammer), and from 1984 to 1986, he was the
President and Chief Executive Officer of Tropicana Products, Inc. Prior to that,
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he spent thirteen years at Pepsico, ultimately as Senior Vice President for the
Western Hemisphere. Mr. Volk holds an Honors BA in Economics and Math from
Queens University in Ontario, Canada and a BA in Economics from Royal Military
College in Ontario, Canada.
John Mon. Mr. Mon has served as Treasurer/General Manager of the
Company since 1989, and Secretary and a director since June 1997. From 1986 to
1988, Mr. Mon was responsible for the FDA regulatory approval for the Microfocus
1000. From 1983 to 1986, he 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. Mon is the brother-in-law of
Dr. Cheung.
Walter B. Herbst. Mr. Herbst has been a director of the Company since
May 28, 1997. Mr. Herbst has been and currently is the Chairman of Herbst Lazar
Bell, Inc. ("HLB"), the engineering firm he founded in 1962. Mr. Herbst also
serves as a faculty fellow in industrial design at the Northwestern University
McCormick School of Engineering and Applied Sciences teaching materials and
process. Additionally, he serves on the faculty at Northwestern University's
Kellogg Graduate School teaching a course in product development. Mr. Herbst
holds a BFA in Industrial Design from the University of Illinois and a Master of
Management from the Kellogg Graduate School of Northwestern University.
Max E. Link. Dr. Link has been a director of the Company since
September 23, 1997. Dr. Link currently provides consulting and advisory services
to a number of pharmaceutical and biotechnology companies. From 1993 to 1994,
Dr. Link served as Chief Executive Officer of Corange, Ltd., a medical
diagnostics company acquired by Hoffman-LaRoche. From 1971 to 1993, Dr. Link
served in numerous positions with Sandoz Pharma AG culminating in his
appointment as Chairman of the Board of Directors in 1992. Dr. Link serves on
the Board of Directors of the following publicly held companies: Human Genome
Sciences; Alexion Pharmaceuticals; Cell Therapeutics; Access Pharmaceuticals;
Protein Design Laboratories; Osiris Therapeutics; Procept, Inc.; Discovery
Laboratories Inc. and Cytrx Corp. Dr. Link holds a Ph.D. in economics from the
University of St. Galen (Switzerland).
Peter Gombrich. Mr. Gombrich has been a director of the Company since
September 14, 1998. Mr. Gombrich was the founder of InPath, LLC and has over 30
years experience in the healthcare industry. In 1994, Mr. Gombrich founded
AccuMed International, Inc, and served as Chairman, President and Chief
Executive Officer until 1998. He was also the founder and Chief Executive
Officer of Clinicom, a bedside clinical information system company. In 1976, Mr.
Gombrich co-founded St. Jude Medical, Inc., a world renowned life support
medical device company. He was also the Senior Vice President of Medtronic, Inc.
Mr. Gombrich has a B.S. in Electrical Engineering from the University of
Colorado and an M.B.A. from the University of Denver. Mr. Gombrich resigned as a
member of the Board of Directors of the Company on December 8, 1998.
The Board of Directors conducted 9 meetings during the year ended
September 30, 1998. All members, except Mr. Gombrich, attended at least 75% of
the Board of Directors meetings held during their tenure in 1998. Mr. Gombrich
attened one of the two meetings of the Board of Directors held during his
tenure. Additional actions were taken by unanimous consent resolutions.
Scientific Advisory Board
The Company currently has a scientific advisory board ("SAB") comprised
of individuals listed below. The purpose of the SAB is to assist management of
the Company in identifying and developing technology trends and business
opportunities within the Company's industry. The SAB members operate as
consultants and not as officers or directors of the Company. The following
persons serve on the SAB:
Robert Barnett, M.D. Dr. Barnett currently the Surveyor for the
American College of Surgeons and is the former President of the Maryland chapter
of the American Cancer Society. Dr. Barnett consults with the Company on issues
relating to oncological surgeons.
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<PAGE>
Donald Beard. Mr. Beard is a retired businessman and is the former
senior program manager for the United States Department of Energy. Mr. Beard
consults with the Company in connection with technology and business development
matters.
Augustine Cheung, PhD. Dr. Cheung serves as the chairman of the SAB and
as the Company's Chief Scientific Officer. Dr. Cheung's background is set forth
above.
Michael Davidson, M.D. Dr. Davidson currently practices medicine and is
the Chief Executive Officer of The Chicago Center for Clinical Trials. Dr.
Davidson specializes in designing and implementing clinical trials. Dr. Davidson
consults with the Company in connection with establishing clinical trials and on
FDA regulatory matters.
Mark Dewhirst, PhD. Dr. Dewhirst currently serves as a Professor of
Radiology and Oncology and the Director of the Tumor Microcirculation
Laboratories in the Department of Radiation & Oncology at Duke University. Dr.
Dewhirst consults with the Company in connection with research on temperature
sensitive liposomes.
Donald Kapp, M.D., Ph.D. Dr. Kapp currently serves as Professor of
Radiation Oncology at Stanford University. Dr. Kapp consults with the Company in
connection with conducting clinical studies.
Gloria Li, PhD. Dr. Li currently serves as the Director of the
Radiation Biology Laboratory at Memorial Sloan-Kettering Hospital. Dr. Li
consults with the Company on heat shock and gene therapy.
Arnold Melman, M.D. Dr. Melman currently serves as the Chairman of the
Department of Urology at Albert Einstein College of Medicine. Dr. Melman
consults with the Company on clinical studies in urology and is the Company's
primary investigator on BPH.
David Needham, PhD. Dr. Needham currently serves as the Director of
Cell and Micro-carrier Research and an Associate Professor in the Duke
University Department of Mechanical Engineering and Materials Science. Dr.
Needham consults with the Company in connection with research on temperature
sensitive liposomes.
Thomas Ripley, PhD. Dr. Ripley currently serves as Director of
Operations, Grace Biomedical at W.R. Grace & Co. Dr. Ripley consults with the
Company on technology and business development.
Mel Soule. Mr. Soule serves as Co-Chairman of the SAB. From 1994
through 1997, Mr. Soule was the president and chief executive officer of Grace
Biomedical Division, a subsidiary of the W.R. Grace & Co. From 1993 through
1994, Mr. Soule was the director of commercial planning for the Washington
Research Center of W.R. Grace & Co. From 1992 to 1993, Mr. Soule was a senior
development manager for W.R. Grace & Co. Mr. Soule is currently a consultant to
several biomedical companies.
Mays Swicord, PhD. Dr. Swicord currently serves as Director of Research
at Motorola Corporation. Dr. Swicord consults with the Company on the biological
effects of microwave technology.
Claude Tihon, PhD. Dr. Tihon currently serves as the Chief Executive
Officer of Conti-Med, Inc. Dr. Tihon consults with the Company in connection
with urological devices and regulation.
All members of the SAB serve at the discretion of the Board of
Directors. Each member of the SAB, other than Mr. Swicord, received an option to
purchase 5,000 shares of the Common Stock of the Company at the time they were
appointed. The options are exercisable for a five year term at $.50 per share.
In addition, each member of the SAB will receive an option to purchase 3,000
shares of the Common Stock of the Company for each 12 months served by such
member on the SAB, exercisable at the market price of the Common Stock of the
Company's on the date of grant. Such options will be exercisable for a five year
term. During fiscal year 1998, each member of the SAB, other than Messrs. Cheung
28
<PAGE>
and Swicord, received an option to purchase 3,000 shares of the Common Stock of
the Company at $1.25 per share. In addition, members of the SAB are compensated
at the rate of $125 per hour or a total of $1,000 per day, together with
expenses, on consulting matters undertaken by the SAB.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
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, 1997, and September 30, 1998,
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:
Spencer J. Volk is the Chief Executive Officer and a director
of the Company. Mr. Volk acquired 167,114 shares of Common Stock of the
Company on September 23, 1998 and 2,000 shares of Common Stock of the
Company on September 30, 1998. Mr. Volk filed a Form 4 on or about
October 29, 1998. The Form 4 should have been filed on or before
October 10, 1998.
Walter B. Herbst is a director of the Company. Herbst Lazar,
Bell, Inc., of which Mr Herbst is the Chairman and Chief Executive
Officer, acquired 833,334 shares of Common Stock of the Company on
September 23, 1998. Mr. Herbst filed a Form 4 on or about October 28,
1998. The Form 4 should have been filed on or before October 10, 1998.
Mr. Peter Gombrich was appointed to be a director of the
Company as of September 14, 1997, and thereby became subject to Section
16(a) reporting requirements. Mr. Gombrich filed a Form 3 on or about
December 7, 1998. The Form 3 should have been filed on or before
September 24, 1998.
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 $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- Awards
----------------------
<CAPTION>
<S> <C> <C> <C>
Name and Principal Fiscal Other Annual Restricted Stock Stock Options All Other
Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) (#) Compensation ($)
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Augustine Y. 1998 $125,000 (1) $640 (2)
Cheung, Chairman 1997 $125,000 $2,120 (2)
of the Board of 1996 $125,000 $2,120 (2) 400,000 (3)
Directors
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
<S> <C> <C> <C>
Spencer J. Volk, 1998 $240,000 (4) $700,640 (2)(5)
President and Chief 1997 $96,923 (6) $281,995 (2)(5)
Executive Officer
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Verle D. Blaha, 1997 $177,100 (7) $1,182 (2)
Former President 1996 $81,000 $2,120 (2) 400,000 (8)
and Chief
Executive Officer
- -------------------- ------- --------------- ---------- ---------------- ---------------- ------------- ------------------
Warren C. Stearns, 1998 $195,297 (9) $961 (2)
Acting Chief 1997 $266,666 (9) $1,461 (2)
Financial Officer 1996 $66,753 (9)
==================== ======= =============== ========== ================ ================ ============= ==================
</TABLE>
(1) Dr. Cheung's annual salary is $125,000. Of the amount,
approximately $84,134 was paid in fiscal year 1998.
(2) In each of fiscal years 1996, 1997 and 1998, Dr. Cheung
received 2,000 shares of the Common Stock of the Company for
his services as a member of the Board of Directors of the
Company. Mr. Blaha received 2,000 shares of the Common Stock
of the Company for his service as a member of the Board of
Directors of the Company in fiscal year 1996 and 1,112 shares
for his services as a member of the Board of Directors of the
Company in fiscal year 1997. Mr. Volk received 701 shares of
the Common Stock of the Company for his service as a member of
the Board of Directors of the Company in fiscal year 1997 and
received 2,000 shares of the Common Stock of the Company for
his service as a member of the Board of Directors of the
Company in fiscal year 1998. Mr. Stearns received 1,375 shares
for his service as a member of the Board of Directors of the
Company in fiscal year 1997 and received 3,003 shares of the
Common Stock of the Company for his service as a member of the
Board of Directors of the Company in fiscal year 1998.
(3) In fiscal year 1996, Dr. Cheung received an option to purchase
400,000 shares of the Common Stock of the Company at $0.35 per
share as adjusted, exercisable on or before May 16, 2001.
(4) Mr. Volk's annual salary is $240,000. Of that amount,
approximately $87,692 was paid in fiscal year 1998.
(5) Mr. Volk received 500,000 shares of Common Stock of the
Company in fiscal year 1997 pursuant to his employment
agreement and has the right to receive up to 1,400,000
additional shares of the Common Stock of the Company if the
Company meets certain financing goals during his tenure and if
he is employed by the Company after one year. As of September
30, 1998, Mr. Volk received 1,000,000 shares of such amount.
(6) Mr. Volk became President and Chief Executive Officer of the
Company on May 22, 1997.
(7) Mr. Blaha resigned as the President and Chief Executive
Officer of the Company on April 23, 1997.
(8) The Company granted an option to purchase 400,000 shares of
the Common Stock of the Company, with an exercise price of
$.41 per share as adjusted, to New Opportunities, Ltd., a
company affiliated with Mr. Blaha.
(9) Amounts listed as annual compensation in fiscal year 1996 and
fiscal year 1997 for Mr. Stearns consist of fees paid to
Stearns Management Company ("SMC"). In fiscal year 1998, SMC
was paid approximately $95,297 in fees and for reimbursement
30
<PAGE>
expenses. In May 1997, Mr. Stearns resigned as the Acting
Chief Financial Officer of the Company. In July 1998, Mr.
Stearns resigned as a member of the Company's Board of
Directors. The Company and SMC have agreed that the remaining
fees and reimbursement for expenses the Company still owes to
SMC is $100,000. During fiscal year 1996, assignees of SMC
also received warrants with anti-dilution rights to purchase
4.6875% of the Common Stock of the Company.
During fiscal year 1998, there were no profit sharing plans for the
benefit of the Company's officers, directors, or employees. In fiscal year 1997,
the Company established a SARSEP pension plan for its employees. The Company
does not contribute any funds to the plan. In addition, the Company provides
health insurance coverage for its employees. At the annual meeting held on April
27, 1998, the stockholders approved an omnibus option plan. The Board of
Directors may recommend and adopt additional programs in the future for the
benefit of officers, directors, and employees.
Option Grants in Fiscal 1998 / Director Compensation
During fiscal 1998, no options were granted to the named executive
officers listed in the Summary Compensation Table. Each non-employee director
and each employee director receives a grant of 12,000 shares and 2,000 shares of
Common Stock of the Company respectively for the full year served or the pro
rata portion if less than one year. In addition, Mr. Herbst received an option
to purchase 50,000 shares of Common Stock of the Company at $0.50 per share
commencing October 1, 1998 through September 30, 2003 for his service on the
Board of Directors for the full fiscal 1998 year. Mr. Gombrich received an
option to purchase 50,000 shares of Common Stock of the Company at $0.50 per
share commencing October 1, 1998 through September 30, 2003 for becoming a
member of the Board of Directors. Mr. Link will receive an option to purchase
50,000 shares of Common Stock of the Company at $0.75 per share commencing
December 31, 1998 through December 30, 2003 for his service on the Board of
Directors for the full fiscal 1998 year.
Aggregated Option Exercises and Year-End Option Values in 1998
The following table summarizes for each of the named executive officers
of the Company the number of stock options, if any, exercised during 1998, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at September 30, 1998 and the aggregate dollar value of
in-the-money unexercised options, if any, held at September 30, 1998. 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, 1998 is the
difference between its exercise price and the fair market value of the
underlying stock on September 30, 1998, which was $0.32 per share based on the
closing price of the Common Stock of the Company on September 30, 1998. The
underlying options have not been and may never be exercised; and actual gains,
if any, on exercise will depend on the value of the Common Stock of the Company
on the actual date of exercise. There can be no assurance that these values will
be realized.
Aggregated Option Exercises in Fiscal 1998 and Year-End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
9/30/98 9/30/98
------- -------
Shares Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
($)
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Augustine Y. Cheung 0 $0 400,000 0 $28,000 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
Spencer J. Volk 0 $0 0 0 $0 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
John Mon 0 $0 600,000 0 $42,000 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
Warren C. Stearns 0 $0 2,499,630 0 $249,630 $0
- ---------------------- ----------------- ---------------- ------------- ---------------- ------------- ----------------
</TABLE>
31
<PAGE>
Long-Term Incentive Plan Awards in Fiscal Year 1998
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. See "Stock Option Plans".
Future Benefits or Pension Plan Disclosure in Fiscal Year 1998
The Company provides a SAR-SEP saving plan to which eligible employees
may make pretax payroll contribution up to 15 % of compensation. The Company
does not make contributions to the plan. At the annual meeting held on April 27,
1998, the stockholders approved an omnibus stock option plan. See "Stock Option
Plans". The Board of Directors may recommend and adopt additional programs in
the future for the benefit of officers, directors, and employees.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
On May 22, 1997, Spencer J. Volk became the President and Chief
Executive Officer of the Company. The Company and Mr. Volk have entered into an
employment agreement, dated May 11, 1997, with an initial annual salary of
$240,000, which will increase to $360,000 per annum upon the successful raising
of $5,000,000 through public or private offerings. In addition, Mr. Volk was
awarded 500,000 shares of Common Stock of the Company upon execution of the
employment agreement and may earn up to an additional 1,400,000 shares based on
the Company's ability to raise additional capital and Mr. Volk's continued
employment. Mr. Volk, as of September 30, 1998, received 1,000,000 of such
shares.
Additionally, Mr. Warren C. Stearns, a former officer and director of
the Company, received compensation through Stearns Management Company, which had
an exclusive advisory services arrangement with the Company.
Other than as set forth above, there are no employment contracts,
termination of employment or change in control arrangements.
Stock Option Plans
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. The plan commits up to 2,000,000 shares for option
grants to directors, employees and consultants. 280,000 of such shares have been
granted at the direction of Spencer J. Volk. The Company has committed to allow
Mr. Volk to nominate the recipients of options for 1,720,000 shares under the
plan.
Report of the Compensation Committee on Executive Compensation
The Company formed a Compensation Committee in June 1997, consisting of
Spencer J. Volk, an employee director, and Walter Herbst, a non-employee
director. The Committee is responsible for establishing and administering the
compensation policies applicable to the Company's officers and key personnel.
The committee's responsibilities include, establishing general compensation
policy and, except as prohibited by applicable law, taking any and all action
that the Board could take relating to the compensation of employees, directors
and other parties. The Committee also evaluates the performance of and makes
compensation recommendations for senior management.
Executive Compensation Philosophy
---------------------------------
The Company attempts to design executive compensation to achieve two
principal objectives. First, the program is intended to be fully competitive so
that the Company may attract, motivate and retain talented executives. Second,
the program is intended to create an alignment of interests between the
Company's executives and stockholders such that a significant portion of each
executive's compensation varies with business performance.
32
<PAGE>
The Committee's philosophy is to pay competitive annual salaries,
coupled with an incentive system that pays more than competitive total
compensation for superior performance reflected in increases in the Company's
stock price. The incentive system consists of annual compensation and stock
compensation.
Based on assessments by the Board and the Committee, the Committee
believes that the Company's compensation program for the Named Executive
Officers has the following characteristics that serve to align executive
interests with long-term stockholder interests:
a. Emphasizes "at risk" pay such as options and grants
of restricted stock;
b. Emphasizes long-term compensation such as options
restricted stock awards; and
c. Rewards financial results and promotion of Company
objectives rather than individual performance against
individual objectives.
Annual Salaries
---------------
Salary ranges and increases for executives, including the Chief
Executive Officer and the other named executive officers, are established
annually (unless subject to longer term contracts) based on competitive data.
Within those ranges, individual salaries vary based upon the individual's work
experience, performance, level of responsibility, impact on the business, tenure
and potential for advancement within the organization. Annual salaries for
newly-hired executives are determined at time of hire taking into account the
above factors other than tenure.
Long-Term Incentives
--------------------
The grant of restricted stock or options to key employees encourages equity
ownership and closely aligns management interests with the interests of
stockholders. The amount and nature of any option or restricted stock award is
determined by the Committee on a case by case basis, depending upon the
individual's perceived future benefit to the Company and the perceived need to
provide additional incentive to align performance with the objectives of the
shareholders.
Company Performance and Chief Executive Officer Compensation
------------------------------------------------------------
The compensation of Spencer Volk was established prior to organization
of the Compensation Committee. The Committee believes that Spencer Volk's
compensation package aligns his interests with those of the stockholders.
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 recognizes that the market price of stock is influenced by many
factors, only one of which is Company performance. The stock performance shown
on the graph is not necessarily indicative of future price performance.
33
<PAGE>
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Total Return Analysis
9/30/94 9/29/95 9/30/96 9/30/97 9/30/98
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Company $ 100 $ 473 $ 300 $ 309 $ 93
- ------------------------------------------------------------------------------------------------------------
Nasdaq Health $ 100 $ 106 $ 139 $ 139 $ 94
- ------------------------------------------------------------------------------------------------------------
Nasdaq Composite (US) $ 100 $ 137 $ 161 $ 221 $ 222
- ------------------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from Bloomberg Financial Markets
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
34
<PAGE>
The following table sets forth information regarding shares of voting securities
of the Company beneficially owned as of September 30, 1998 by: (I) each person
known by the Company to beneficially own 5% or more of the outstanding voting
securities; (ii) by each director, (iii) by each current executive officer and
(iv) by all current directors and executive officers as a group. As of September
30, 1998, there were 39,945,826 shares of Common Stock outstanding.
Name and Addresses of Officers, Amount of Percentage of
Directors and Principal Shareholders Common Shares Voting Securities(1)
- ------------------------------------------------------------------------------
Augustine Y. Cheung (2)(3)
10220-I Old Columbia Road 6,673,408 16.3%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
Spencer J. Volk (2)(4)
10220-I Old Columbia Road 1,913,717 4.7%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
John Mon (2)(5)
10220-I Old Columbia Road 769,212 1.9%
Columbia, MD 21046-1705
- ------------------------------------------------------------------------------
Walter B. Herbst (2)(6)
355 North Canal Street 1,135,586 2.8%
Chicago, IL 60606
- ------------------------------------------------------------------------------
Max E. Link (2)(7) **
Tobelhofstr. 30 62,038
8044 Zurich
Switzerland
- ------------------------------------------------------------------------------
Peter Gombrich (2)(8) 50,493 **
920 N. Franklin Street Suite 304
Chicago, IL 60610
- ------------------------------------------------------------------------------
Bei-Lan Tan
Ning Yeung Terrace 3,340,000 8.2%
78 Bonham Rd., Mid Level
Hong Kong, China
- ------------------------------------------------------------------------------
Executive Officers and Directors as a
group (6 individuals) 10,604,454 26.2%
==============================================================================
* Assumes exercise of all options held by listed security holders which
can be exercised within 60 days from September 30, 1998.
** Less than 1%.
(1) Except as noted, the above table does not give effect to an aggregate
of approximately 13,030,822 shares of Common Stock underlying
outstanding stock options and warrants, obligations to issue shares or
warrants that are contingent on future offerings. Outstanding warrants
and options entitle the holders thereof to no voting rights.
(2) Director or Executive Officer. Mr. Gombrich resigned as a member of the
Board of Directors of the Company on December 8, 1998.
35
<PAGE>
(3) Includes 400,000 shares underlying an option exercisable commencing May
16, 1995 through May 16, 2001 at $0.35 per share as adjusted.
(4) Includes 1,000,000 shares earned by Mr. Volk pursuant to his employment
agreement subsequent to the end of fiscal year 1997. Does not include
an additional 400,000 shares of Common Stock that have been committed
to and may be earned by Mr. Volk pursuant to his employment agreement
upon the occurrence of certain events.
(5) Includes 400,000 shares of Common Stock underlying an option to Mr. Mon
exercisable commencing May 16, 1996 through May 16, 2001 at $0.35 per
share as adjusted and 200,000 shares of Common Stock underlying an
option exercisable commencing April 1, 1997 through March 31, 2002 at
$0.41 per share as adjusted.
(6) Includes 35,000 shares of Common Stock underlying options exercisable
beginning June 16, 1997 and ending June 16, 2002 at a price of $.41 per
share, 15,000 shares of Common Stock underlying an option exercisable
commencing June 1, 1998 through August 31, 2003 at $.50 per share, and
50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share. Includes 20,000 shares of Common Stock underlying options to HLB
exercisable beginning October 31, 1997 and ending October 30, 2002 at a
price of $1.00 per share and 875,198 shares of Common Stock owned by
HLB. Mr. Herbst disclaims beneficial ownership of the stock option and
shares of Common Stock owned by HLB.
(7) Does not include 150,000 shares of Common Stock underlying an option
exercisable at $.75 per share which vest as to 50,000 shares of Common
Stock on December 31 of 1998, 1999 and 2000.
(8) Includes 50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share.
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, former Acting Chief
Financial Officer and a former member of the Board of Directors, is President of
SMC. Additionally, the George T. Horton Trust, which is a secured creditor of
the Company, is an equity owner of SMC. Pursuant to the Agreement, SMC had an
exclusive arrangement to render advisory services involving solicitation of
outside capital, restructuring the Company, business plans, marketing, selection
of advisory personnel, adding additional directors, and sale of stock by
insiders.
In exchange for such services, during the fiscal year 1997, SMC was
paid approximately $266,666 in fees and $38,824 for reimbursement of expenses.
In fiscal year 1996, the Company granted to assignees of SMC a warrant to
purchase, in the aggregate, a 4.6875% 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 as adjusted, contain
anti-dilution provisions and are exercisable for five years and renewable for an
additional five years. Mr. Stearns was paid a per diem expense of $1,500 per day
or $190 per hour and reimbursement for expenses at cost plus 20%. During fiscal
year 1998, SMC was paid approximately $95,297 in fees and for reimbursement
expenses, the Company and SMC have agreed that the remaining fees and
reimbursement for expenses that the Company still owes to SMC is $100,000.
Mr. Stearns resigned as the Company's Acting Chief Financial Officer in
May 1998 and as a member of the Board of Directors in July 1998. The Company
terminated its consulting agreement with Stearns Management Company effective
July 19, 1998 and engaged the investment banking firm of Josephberg Grosz & Co.,
Inc. to assist in raising capital.
36
<PAGE>
George T. Horton Trust Loan
The Company is obligated under a secured note to the George T. Horton
Trust in the original principal amount of $220,000, which bears interest at 1%
per month, and was payable December 15, 1997, and is secured by equipment and
software for APA technology. George T. Horton Trust is an equity owner of SMC,
the President of which, Warren C. Stearns, was also an officer and director of
the Company until his recent resignation. As of the date of this report, the
Company has paid $107,000 of the principal of this note and the note holder has
converted $100,000 of principal into Common Stock of the Company. The remaining
principal is $13,000 as of the date of this report. The remaining principal
accrues interest at the rate of 17% per annum or may be converted into Common
Stock of the Company at the rate of 200% of the loan balance.
Herbst Lazar Bell, Inc.
The Company has retained the engineering firm of Herbst LaZar Bell,
Inc., of Chicago to assist in the development of the commercial versions of its
future deep focused heat systems and BPH treatment system. Walter Herbst, a
director of the Company, is the founder and chief executive officer of HLB. HLB,
with a team of engineers specializing in systems engineering and industrial
design, will serve as the primary engineering resource for the Company. In
fiscal year 1998, HLB billed the Company $561,238 for the engineering and design
work it performed, HLB was paid $106,500 in cash and converted $250,000 owed to
it by the Company into 833,334 shares of the Common Stock of the Company.
Townhouse Lease
The Company leased from Augustine Cheung, Chairman of the Board, and
John Mon, an officer and director, on a month to month basis a townhouse near
its corporate offices in Columbia, Maryland for $900 per month, plus utilities.
The housing was used for visiting executives. The lease has been terminated as
of the date hereof.
Promissory Notes
From 1987 through 1998, the Company borrowed money from related
parties. The Company formalized such borrowing by executing promissory notes to
the following related parties:
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 principal amount of $78,750 due December 31, 1998.
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 principal amount of $42,669 due December 31, 1998.
An unsecured term note dated June 23, 1998 payable to Spencer
J. Volk, accruing interest at the rate of eight percent (8%) per annum,
in the principal amount of $50,000 due September 30, 1998. Mr. Volk has
extended the maturity date of the unsecured term note dated June 23,
1998 issued by the Company to him in the principal amount of $50,000.00
from September 30, 1998 to December 31, 1998. As of September 30, 1998,
the outstanding principal balance of such note is $50,000 .
.
A secured term note dated September 9, 1994 payable to Charles
C. Shelton, accruing interest at the rate of ten percent (10%) per
annum, in the principal amount of $50,000 payable as follows: beginning
October 1, 1994 and ending December 31, 1995 - interest only; beginning
January 1, 1996 and for 25 months thereafter - principal at the rate of
$2,000 per month, together with the monthly payment on interest on the
37
<PAGE>
unpaid balance of the note until paid in full; provided, however, that
such interest shall not be payable in the event that the principal
amount of the note is repaid by the Company on or before September 30,
1999. The outstanding principal balance of such note as of the date of
this report is approximately $50,000.
On September 23, 1998, Dr. Cheung converted (I) the unpaid principal
and accrued interest on the unsecured term note dated June 30, 1994 issued by
the Company to him in the principal amount of $42,669.00 into 5,800 shares of
the Common Stock at $0.30 per share and (ii) the unpaid principal and accrued
interest on the unsecured term note dated January 26, 1987 issued by the Company
to him in the principal amount of $78,750.00 into 254,200 shares of the Common
Stock at $0.30 per share.
On December 10, 1998, Mr. Volk converted the principal of the
unsecured term note dated June 23, 1998 issued by the Company to him in the
principal amount of $50,000 into 200,000 shares of Common Stock of the Company,
a warrant to purchase 100,000 shares of the Company's Comon Stock at $0.50 per
shares, and a warrant to purchase 100,000 shares of the Company's Comon Stock at
$1.00 per shares.
In addition, on September 23, 1998, Mr. Volk converted $50,134 of
unpaid expense reimbursements owed to him by the Company into 167,114 shares of
the Common Stock at $0.30 per share.
Redemption 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 $0.50 per share or
$10,000,000. The price was paid by paying $2,000,000 cash and property, and
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 into a
Redemption Agreement wherein the Company renounced any interest in Aestar and
Gao agreed that upon delivery by the Company of $2,200,000 to Gao, he would
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 an 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. Such shares were subsequently
canceled. The Company had the right and might have had the obligation to
repurchase the remaining 4,000,000 shares of the Company for $2,160,000 on or
before November 30, 1997.
In a related transaction, 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 Rescission 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 19.25%
interest in Ardex. In 1996, the Company received $50,000 distribution from
Ardex. On August 2, 1996, the Company and Ardex entered into a 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 was to be paid until
the principal became due. Principal was due upon the first of the following
events to occur: (I) completion of public or private offerings by Ardex in the
aggregate of $1,500,000 or more; (ii) 90 days following the year end in which
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 was 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 was to execute a promissory
38
<PAGE>
note for $15,000; Mr. Colino was to execute a note for $22,500; and Mr. Kohlman
was to execute a note for $12,000. These notes were to 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 no longer continuing with its efforts to obtain the
documents contemplated by the Rescission.
On September 30, 1998, the Company and Mr. Charles Shelton entered into
a settlement agreement pursuant to which Mr. Shelton waived his alleged option
to purchase 420,000 share of the Common Stock of the Company and his alleged
right to receive approximately $110,000 from the Company in exchange for 50,000
shares of Common Stock of the Company.
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
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
<PAGE>
CELSION CORPORATION
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998, 1997 AND 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celsion Corporation
Columbia, Maryland
We have audited the accompanying balance sheets of Celsion
Corporation as of September 30, 1998 and 1997, and the related statements of
operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended September 30, 1998. 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 Celsion
Corporation as of September 30, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1998 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.
Stegman & Co.
Baltimore, Maryland
November 18, 1998
F-1
<PAGE>
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
-------- --------
CURRENT ASSETS:
Cash $ 54,920 $267,353
Accounts receivable 1,812 5,891
Inventories 42,059 329,741
Prepaid expenses 76,944 8,207
Other current assets -- 26,755
-------- --------
Total current assets 175,735 637,947
-------- --------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 195,794 180,348
Laboratory and shop equipment 47,048 92,228
-------- --------
242,842 272,576
Less accumulated depreciation 212,029 213,885
-------- --------
Net value of property and equipment 30,813 58,691
-------- --------
OTHER ASSETS:
Patent licenses (net of accumulated amortization
of $ 65,760 and $53,379 in 1998 and 1997,
respectively) 124,190 126,571
-------- --------
TOTAL ASSETS $330,738 $823,209
======== ========
See accompanying notes.
F-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 1,034,767 $ 614,173
Notes payable - other 132,778 1,481,831
Notes payable - related parties 146,041 221,943
Accrued interest payable - related parties 150,020 245,784
Accrued interest payable - other 127,538 116,604
Accrued compensation 470,220 331,715
Accrued professional fees 100,000 256,301
Other accrued liabilities 13,639 15,504
Capital lease - current 1,083 --
------------ ------------
Total current liabilities 2,176,086 3,283,855
LONG-TERM LIABILITIES:
Capital lease - long-term 5,719 --
------------ ------------
Total liabilities 2,181,805 3,283,855
------------ ------------
STOCKHOLDERS' DEFICIT:
Capital stock - $.01 par value; 51,000,000 shares
authorized, 39,945,826 and 29,095,333 issued and
outstanding for 1998 and 1997, respectively 399,458 290,953
Additional paid-in capital 17,213,485 12,511,923
Accumulated deficit (19,464,010) (15,263,522)
------------ ------------
Total stockholders' deficit (1,851,067) (2,460,646)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 330,738 $ 823,209
============ ============
</TABLE>
F-3
<PAGE>
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Equipment sales and parts $ 174,182 $ 121,257 $ 134,006
Returns and allowances -- -- (60,000)
------------ ------------ ------------
Total revenues 174,182 121,257 74,006
COST OF SALES 136,500 46,734 64,406
------------ ------------ ------------
GROSS PROFIT 37,682 74,523 9,600
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 2,515,822 2,283,245 1,321,361
Research and development 1,534,872 185,974 94,012
------------ ------------ ------------
Total operating expenses 4,050,694 2,469,219 1,415,373
------------ ------------ ------------
LOSS FROM OPERATIONS (4,013,012) (2,394,696) (1,405,773)
LOSS ON COSMETICS DIVISION -- -- (471,000)
LOSS ON FUNDS HELD IN INVESTMENT
CONTRACT -- (40,000) --
LOSS ON WRITE-OFF OF ARDEX EQUIPMENT,
L.L.C. NOTES RECEIVABLE AND RELATED
ACCRUED INTEREST RECEIVABLE -- (438,803) --
OTHER INCOME 11,870 7,172 28,808
INTEREST EXPENSE (199,346) (185,562) (85,506)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,200,488) (3,051,889) (1,933,471)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (4,200,488) $ (3,051,889) $ (1,933,471)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.12) $ (.11) $ (.05)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 34,867,001 28,386,145 39,499,650
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at October 1, 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
Sale of common stock 1,409,902 14,099 668,901 -- 683,000
Issuance of 2,479,071 shares
of common stock as payment
of indebtedness and expenses 2,479,071 24,791 1,127,578 -- 1,152,369
Retirement of shares (16,000,000) (160,000) (7,840,000) -- (8,000,000)
Net loss -- -- -- (3,051,889) (3,051,889)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1997 29,095,333 290,953 12,511,923 (15,263,522) (2,460,646)
Sale of common stock 4,315,000 43,150 1,981,850 -- 2,025,000
Issuance of 6,535,493 shares of
common stock as payment
of indebtedness and expenses 6,535,493 65,355 2,719,712 -- 2,785,067
Net loss -- -- -- (4,200,488) (4,200,488)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 39,945,826 $ 399,458 $ 17,213,485 $(19,464,010) $ (1,851,067)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,200,488) $(3,051,889) $(1,933,471)
Noncash items included in net loss:
Funds held under investment contract used
for cosmetic division expenses -- 40,000 471,000
Depreciation and amortization 24,291 24,169 18,545
Bad debt expense -- 120,865 51,397
Loss on disposal of property and equipment 45,180 -- --
Gain on disposition of investment in Ardex
Equipment, L.L.C -- -- (17,009)
Write-off of obsolete inventory 287,682 -- --
Write-off of Ardex Equipment - note receivable
and accrued interest -- 438,803 --
Common stock issued for operating expenses 796,745 297,542 9,000
Net changes in:
Accounts receivable 4,079 (2,421) (68,631)
Inventories -- (58,789) 45,327
Accrued interest receivable - related parties -- (33,470) (5,333)
Prepaid expenses 5,430 (6,538) 6,000
Other current assets 10,085 -- (1,204)
Accounts payable and accrued interest payable 903,900 837,172 25,445
Accrued compensation 168,732 145,256 (166,039)
Accrued professional fees (156,300) 179,950 74,852
Other accrued liabilities (1,865) (85,401) 27,533
-------------- -------------- --------------
Net cash used in operating activities (2,112,529) (1,154,751) (1,462,588)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rescission of investment in Ardex Equipment, L.L.C -- -- 100,000
Purchases of patent licenses (10,000) -- (100,000)
Purchase of property and equipment (21,935) (3,807) (10,256)
Funds returned - investment contract -- -- 139,000
-------------- -------------- --------------
Net cash (used) provided by investing activities (31,935) (3,807) 128,744
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 50,000 615,000 1,205,000
Payment on notes payable - related parties (63,240) (24,020) (48,973)
Payment on notes payable - other (79,254) (95,000) (2,000)
Payment on capital lease obligation (475) -- --
Proceeds of stock issuances 2,025,000 683,000 419,510
-------------- -------------- --------------
Net cash provided by financing activities 1,932,031 1,178,980 1,573,537
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH (212,433) 20,422 239,693
CASH AT BEGINNING OF YEAR 267,353 246,931 7,238
-------------- -------------- --------------
CASH AT END OF YEAR $ 54,920 $ 267,353 $ 246,931
============== ============== ==============
</TABLE>
F-6
<PAGE>
Celsion Corporation
Statements of Cash Flows (Continued)
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ---------
<S> <C> <C> <C>
Schedule of noncash investing and financing transactions:
Acquisition and rescission of a 9.5% interest
in the Aestar Fine Chemical Company in
exchange for 16,000,000 shares of
common stock $ -- $ (8,000,000) $ --
=========== ============ =========
Conversion of accounts payable, debt and accrued
interest payable through issuance of common stock $ 1,988,322 $ 854,826 $ 132,067
=========== ============ =========
Equipment repossessed for internal use $ -- $ 30,000 $ --
=========== ============ =========
Acquisition of equipment:
Cost of equipment $ 7,277 $ -- $ --
Capital lease payable (7,277) -- --
----------- ------------ ---------
Cash down payment for equipment $ -- $ -- $ --
=========== ============ =========
Payment on notes payable:
Decrease in notes payable $ 16,670 $ -- $ 25,223
Offset of accounts receivable (16,670) -- (25,223)
----------- ------------ ---------
Net cash paid $ -- $ -- $ --
=========== ============ =========
Rescission of investment in Ardex Equipment,
L.L.C. in exchange for notes receivable $ -- $ -- $ 400,000
=========== ============ =========
Cash paid during the year for:
Interest $ 103,470 $ -- $ 45,000
=========== ============ =========
Income taxes $ -- $ -- $ --
=========== ============ =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS
Celsion Corporation (the "Company") is in the business of developing
thermotherapy products for medical applications.
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 and has used substantial
amounts of working capital in its operations. Further, at September 30, 1998,
current liabilities exceed current assets by $2,000,351. The continued operation
of the Company is dependent upon its ability to obtain funding necessary to
complete clinical trials of its products. Management continues to attempt to
obtain funding through both private and public offerings. The realization of the
majority of the Company's assets is dependent upon the success of these
offerings.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
The Company classifies highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is
provided over the estimated useful lives of the related assets of five years.
Major renewals and betterments are capitalized at cost and ordinary repairs and
maintenance are charged against operations as incurred.
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.
F-8
<PAGE>
Revenue Recognition
-------------------
Revenue is recognized when systems, products or components are
shipped and when consulting services are rendered. Deferred revenue is recorded
for 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 Loss Per Common Share
-------------------------
Basic and diluted net loss per common share was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.
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.
Financial Institutions
----------------------
For most financial instruments, including cash, accounts
payable and accruals, management believes that the carrying amount approximates
fair value, as the majority of these instruments are short-term in nature.
New Accounting Pronouncements
-----------------------------
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 was effective for the Company's year ended
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, and has provided 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 did not have a material impact on results of
operations or financial condition.
F-9
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128), which establishes new standards for computing and presenting earnings
per share. SFAS No. 128 is effective for the Company's September 30, 1998
financial statements, including restatement of interim periods; earlier
application was not permitted. The effect of the new standard did not have a
material impact on previously reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS No. 130), which establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 requires comprehensive
income and its components, as recognized under the accounting standards, to be
displayed in a financial statement with the same prominence as other financial
statements. The Company has adopted the standard, as required, in the fiscal
year ended September 30, 1998. The Company had no items of comprehensive income
for the three years ended September 30, 1998.
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131), also
issued in June 1997, establishes new standards for reporting information about
operating segments in annul and interim financial statements. The standard also
requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. This standard is effective for years beginning after
December 15, 1997. Adoption in interim financial statements is not required
until the year after initial adoption, however, comparative prior period
information is required. The Company is evaluating the standard and plans
adoption as required in 1999; adoption of this disclosure requirement will not
have a material impact on the Company's results of operations or financial
position.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
------ ------
Trade receivables $1,812 $4,431
Related party receivables:
Microfocus -- 1,460
------ ------
$1,812 $5,891
====== ======
5. INVENTORIES
Inventories are comprised of the following at September 30:
1998 1997
-------- --------
Materials $ 5,059 $235,748
Work-in-process -- 16,990
Finished products 37,000 77,003
-------- --------
$ 42,059 $329,741
======== ========
F-10
<PAGE>
During the year ended September 30, 1998, management completed a
thorough review of all its components inventory. Based on this review,
management wrote off as obsolete a substantial portion of its inventory. This
write off, totaling $287,682, is included in operating expenses for the year
ended September 30, 1998.
6. RELATED PARTY TRANSACTIONS
Notes Payable - Related Parties
-------------------------------
Notes payable to related parties as of September 30 are
comprised of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Term note payable to an officer and stockholder of
the Company, accruing interest at 10% per annum $ -- $ 28,650
Term notes payable to an officer and stockholder of
the Company, accruing interest at 12% per annum -- 68,750
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
Term notes payable to interested parties of the
Company accruing interest at 12% per annum 10,000 10,000
Term note payable to an officer and stockholder of
the Company accruing interest at 8% per annum 50,000 --
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
-------- --------
146,041 221,943
Less current portion 146,041 221,943
-------- --------
Long-term portion - due in 1998 $ -- $ --
======== ========
</TABLE>
Accrued interest payable on these notes amounted to $150,020 and
$245,784 at September 30, 1998 and 1997, respectively.
Stock Based Compensation Plan
-----------------------------
As part of the Company's employment agreement with the current
F-11
<PAGE>
chief executive officer (CEO), the Company has granted to the CEO 1,900,000
shares of the Company's capital stock which vests in certain milestones
throughout the term of employment. Ultimately all shares become fully vested,
provided that the CEO remains with the Company through the term of the contract.
The total amount charged to compensation expense for 1998 and 1997 under this
plan was $699,375 and $280,000, respectively.
7. NOTES PAYABLE - OTHER
Notes payable - other consist of the following as of September 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Senior secured convertible notes, resulting from private placement
offerings in July 1996 and June 1997, accruing interest at 8% per annum.
The notes are secured by the Company's common stock held by an executive
officer. The notes matured December 31,
1997. $ - $1,169,800
Term note with interest accruing at 24% per annum,
compounded monthly. The note matured April 30, 1996. 114,778 112,031
Term note with accrued interest payable each month
at 12% per annum. The note is secured by inventory
and property. The note matured December 18, 1997. 18,000 200,000
---------- ----------
$132,778 $1,481,831
========== ==========
</TABLE>
Accrued interest payable on these notes amounted to $127,538 and
$116,604 at September 30, 1998 and 1997, respectively.
8. RETIREMENT PLAN
The Company provides a SAR-SEP savings plan to which eligible
employees may make pretax payroll contributions up to 15% of compensation. The
Company does not make contributions to the plan.
9. 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 was 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. The
Company has subsequently rescinded this investment during the year ended
September 30, 1997.
10. 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 was carried at cost, adjusted for the
Company's proportionate share of Ardex's loss from the purchase date through
September 30, 1995. During 1996, the Company rescinded its investment in Ardex,
the effects of which are reflected in these financial statements.
F-12
<PAGE>
11. LOSS ON COSMETICS DIVISION
During 1995, the Company issued 20,000,000 shares of common stock to
an investor which enabled the investor to obtain a majority interest in the
Company by recapitalizing the Company through this investment of $2,000,000 in
cash and an $8,000,000 interest in a foreign corporation. In connection with
this recapitalization, the Company agreed to the initiation of the development
of a cosmetics division and to the investment of excess funds in an investment
contract. During the year ended September 30, 1996, this agreement was
rescission and the Company recognized a loss on the cosmetics division in the
amount of $471,000. Additionally as a result of the recision agreement, the
balance of the investment contract of $40,000 was written-off in the year ended
September 30, 1997.
12. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
1998 1997 1996
------ ------ ------
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.6 4.6 4.6
Valuation allowance (38.6) (38.6) (38.6)
------ ------ ------
.0% .0% .0%
====== ====== ======
As of September 30, 1998, the Company had net operating loss
carryforwards of approximately $18,000,000 for federal income tax purposes that
are available to offset future taxable income through the year 2018.
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
1998 1997
------------ ------------
Net operating loss carryforwards $6,952,000 $5,330,000
Valuation allowance (6,952,000) (5,330,000)
------------ ------------
$ - $ -
============ ============
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future taxable
income, such as intent and ability to sell assets and historical and projected
operating performance. At this time, the Company has established a valuation
reserve for all of its deferred tax assets. Such tax assets are available to be
recognized and benefit future periods.
F-13
<PAGE>
13. COMMON STOCK
During the year ended September 30, 1998, the Company issued
4,315,000 shares of common stock for $2,025,000, 5,274,961 shares were issued to
extinguish debt, and 1,260,532 shares were issued as payment for various
operating expenses.
During the year ended September 30, 1997, the Company issued
1,409,902 shares of common stock for $683,000, 1,317,143 shares were issued to
extinguish debt, and 1,161,828 shares were issued as payment for various
operating expenses. Additionally, the Company retired 16,000,000 shares of
common stock in connection with the rescission in its investment in Aestar.
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.
14. STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees, directors,
vendors and debt holders. Options are granted at market value at the date of the
grant and are immediately exercisable.
A summary of the Company's stock option activity and related
information for the years ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Options Price Options Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,565,000 $.38 3,050,000 $.34
Granted - .00 515,000 .61
Exercised (125,000) .45 - .00
Expired/canceled (695,000) .25 - .00
--------- ---------
Outstanding at end of year 2,745,000 $.41 3,565,000 $.38
========= ========= ========= =========
</TABLE>
Additionally, the Company has issued warrants to purchase the
Company's stock as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Warrants Price Warrants Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,276,818 $.35 2,218,035 $.29
Issued 4,582,165 .52 1,058,783 .48
--------- ---------
Outstanding at end of year 7,858,983 $.45 3,276,818 $.35
========= ========= ========= =========
</TABLE>
The following summarizes information about options and warrants at
September 30, 1998:
F-14
<PAGE>
<TABLE>
<CAPTION>
Options/
Options/Warrants Outstanding Warrants Exercisable
------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$0.22 - $3.00 10,603,982 3.77 years $.44 7,060,731 $.41
</TABLE>
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principles Board Opinion No.
25 and related interpretations. No compensation expense related to the granting
of stock options was recorded during the three years ended September 30, 1998.
The fair value of these equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997: risk-free interest rate of 5.75% and 6.5% for
1998 and 1997, respectively; expected volatility of 50%; expected option life of
3 to 5 years from vesting and an expected dividend yield of 0.0%. If the Company
had elected to recognize cost based on the fair value at the grant dates
consistent with the method of prescribed by SFAS No. 123, net loss and loss per
share would have been changed to the pro forma amounts as follows:
1998 1997 1996
------------ ------------ ------------
Net loss $(5,272,699) $(3,476,159) $(2,708,362)
Net loss per common share - basic (.12) (.12) (.07)
15. 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, 1998, 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.
16. OTHER BUSINESS VENTURES - 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. This agreement was terminated
during the year ended September 30, 1997.
F-15
<PAGE>
17. LEASE OBLIGATIONS
During the year ended September 30, 1997, the Company has entered
into a 3-year lease for their facilities in Columbia, Maryland. Future minimum
lease obligations are as follows:
1999 $ 69,131
2000 55,877
---------
$125,008
=========
Total amounts charged to rent expense for 1998, 1997 and 1996 were
$75,018, $64,594 and $55,982, respectively.
F-16
<PAGE>
(a)(2) No schedules are provided because of the absence of conditions under
which they are required.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended September 30, 1998.
(c) Exhibits.
The following documents are included as exhibits to this report:
39
<PAGE>
Exhibit Description
Number -----------
------
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company as filed on May 19,
1982 with the State of Maryland Department of Assignments and
Taxation, incorporated herein by reference to the exhibits to
the Company's Registration Statement on Form S-1, as amended,
originally filed with the Securities and Exchange Commission
on October 17, 1984, Registration No. 2- 93826-W.
- --------------------------------------------------------------------------------
3.1.1 Articles of Amendment and Restatement to the Articles of
Incorporation of the Company as filed on June 21, 1984 with
the State of Maryland Department of Assignments and Taxation,
incorporated herein by reference to Exhibit 3.1.1 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
3.1.2 Articles of Amendment to the Articles of Incorporation of the
Company as filed on December 14, 1994 with the State of
Maryland Department of Assignments and Taxation, incorporated
herein by reference to Exhibit 3.1.2 to the Annual Report on
Form 10-K of the Company for the year ended September 30,
1996.
- --------------------------------------------------------------------------------
3.1.3 Certificate of Amendment to Certificate of Incorporation as
filed on May 1, 1998 with the State of Maryland Department of
Assignment and Taxation, incorporated herein by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
- --------------------------------------------------------------------------------
3.2 By-laws, incorporated herein by reference to Exhibit 3.2 to
the Annual Report on Form 10- K of the Company for the year
ended September 30, 1996.
- --------------------------------------------------------------------------------
3.2.1 Amendment to the By-laws of the Company adopted December 9,
1994, incorporated herein by reference to Exhibit 3.2.1 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
3.2.2 Amendment to the By-laws of the Company adopted April 27,
1998, incorporated herein by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q of the Company for the quarter
ended March 30, 1998.
- --------------------------------------------------------------------------------
10.1 Patent License Agreement between the Company and Massachusetts
Institute of Technology dated June 1, 1996, incorporated
herein by reference to Exhibit 10.1 to the Annual Report on
Form 10-K of the Company for the year ended September 30, 1996
(Confidential Treatment Requested).
- --------------------------------------------------------------------------------
10.2 License Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference to Exhibit
10.2 to the Annual Report on Form 10-K of the Company for the
year ended September 30, 1996 (Confidential Treatment
Requested).
- --------------------------------------------------------------------------------
10.3 Letter Agreement between the Company and H.B.C.I., Inc., dated
September 17, 1996, incorporated herein by reference to
Exhibit 10.3 to the Annual Report on Form 10-K of the Company
for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.4 Letter Agreement between the Company and Herbst, Lazar, Bell,
Inc. dated October 4, 1996, incorporated herein by reference
to Exhibit 10.4 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.5 Sponsored Research Agreement dated March 26, 1998 between the
Company and Duke University*
- --------------------------------------------------------------------------------
10.6 Engagement Letter dated August 6, 1998 between the Company and
Josephberg Grosz & Co., Inc.*
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
10.7 Omnibus Stock Option Plan, incorporated herein by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
- --------------------------------------------------------------------------------
10.8 Letter of Intent between the Company and Mr. Sun Shou Yi,
representative of Mr. Gao Yu Wen, dated May 27, 1996 and
Redemption Agreement between the Company and Mr. Sun Shou Yi.,
representative of Mr. Gao Yu Wen, dated June 6, 1996,
incorporated herein by reference to Exhibit 10.8 to the Annual
Report on Form 10-K of the Company for the year ended
September 30, 1996.
- --------------------------------------------------------------------------------
10.9 Amendment among the Company, Sun Shou Yi, Ou Yang An, Gao Yu
Wen, dated October 23, 1996, incorporated herein by reference
to Exhibit 10.9 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
10.10 Unsecured Promissory Note, dated June 23, 1998, in the amount
of $50,000 and bearing interest at the rate of eight percent,
payable to Spencer J. Volk*
- --------------------------------------------------------------------------------
10.11 Form of Series 200 Warrant issued to certain employees,
directors, and consultants to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.12 Form of Series 250 Warrant Issued to DunnHughes Holding, Inc.
to Purchase Common Stock of the Company*
- --------------------------------------------------------------------------------
10.13 Form of Series 300 Warrant Issued to Nace Resources, Inc. and
George T. Horton Trust to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.14 Form of Series 400 Warrant Issued to Stearns Management
Company Assignees to Purchase Common Stock of the Company*
- --------------------------------------------------------------------------------
10.15 Form of Series 500 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended*
- --------------------------------------------------------------------------------
10.16 Form of Series 550 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended*
- --------------------------------------------------------------------------------
10.17 Form of Series 600 Warrant Issued to Certain Employees and
Directors on May 16, 1996 to Purchase Common Stock of the
Company*
- --------------------------------------------------------------------------------
10.18 Form of Series 700 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated September 10, 1998, as amended*
- --------------------------------------------------------------------------------
10.19 Form of Registration Rights Agreement pursuant to the Private
Placement Memorandum of the Company dated January 6, 1997, as
amended *
- --------------------------------------------------------------------------------
10.20 Form of Registration Rights Agreement pursuant to the Private
Placement Memorandum of the Company dated September 10, 1998,
as amended*
- --------------------------------------------------------------------------------
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 1996.
- --------------------------------------------------------------------------------
23.1 Consent of Stegman & Company, independent public accountants
of the Company*
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule*
- --------------------------------------------------------------------------------
- ------------------
* Filed herewith
41
<PAGE>
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.
CELSION CORPORATION
January 12, 1999 By:/s/ Spencer J. Volk
-----------------------------------
Spencer J. Volk
President
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Spencer. J. Volk Chief Executive Officer, January 12, 1998
- --------------------------------------------
Spencer J. Volk President and Director
/s/John Mon General Manager, Treasurer January 12, 1998
- --------------------------------------------
John Mon Director
/s/Augustine Y. Cheung Chairman, Director January 12, 1998
- --------------------------------------------
Dr. Augustine Y. Cheung
Director January __, 1998
- --------------------------------------------
Walter Herbst
Director January __, 1998
- --------------------------------------------
Max Link
</TABLE>
SPONSORED RESEARCH AGREEMENT (NON-CLINICAL)
This Agreement ("Agreement") is between Duke University ("Duke"), a
North Carolina non-profit corporation, located in Durham, North Carolina and
Cheung Laboratories, Inc. ("Sponsor"), a Maryland corporation having offices at
10220-I Old Columbia Road, Columbia, Maryland 21046.
WHEREAS, the research program contemplated by this Agreement is of
mutual interest and benefit to Duke and Sponsor, and will further the
instructional and research objectives of Duke in a manner consistent with its
status as a non-profit educational institution.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
STATEMENT OF WORK
Duke agrees to use its best effort to perform the research program
described in the "Statement of Work" ("Statement"), a copy of which is attached
to this Agreement as Exhibit "A".
ARTICLE 2
INDEPENDENT CONTRACTOR
Duke's relationship to Sponsor under this Agreement will be of an
independent contractor and not an agent, joint venturer or partner of Sponsor.
ARTICLE 3
PRINCIPAL INVESTIGATOR
The research will be supervised by David Needham, PhD ("Investigator")
at Duke. If, for any reason Investigator is unable to continue to serve as
Principal Investigator and a successor acceptable to both Duke and Sponsor is
not available, the Agreement will be terminated in accordance with Article 7
below.
ARTICLE 4
CONSIDERATION
In consideration of the foregoing, and as more specifically provided in
the budget included as Exhibit B, Sponsor will pay Duke for all direct and
indirect costs incurred in the performance of the research as set forth in the
Statement, a total not to exceed $184,336. Payment will be made to Duke by
Sponsor in advance, on the schedule set forth in Exhibit B.
483203.001(B&F) 1 01/11/99
<PAGE>
ARTICLE 5
PERIOD OF PERFORMANCE
The research will be conducted during a 1 year period commencing on
________, 19__ and concluding on or before ________________. This agreement will
be renewable for additional periods upon the mutual consent of the parties by a
new agreement or by amendment hereto expressed in writing. Either party may
terminate this Agreement on any anniversary date of this Agreement after the
first anniversary date by giving the other party at least sixty (60) days prior
written notice of such termination. In the case of such termination, Duke will
proceed in an orderly fashion to terminate any outstanding commitments and to
stop the work as soon as it is practicable to do so. All reasonable costs to
Duke associated with termination will be considered reimbursable costs,
including costs incurred prior to the notice of termination but which have not
yet been reimbursed, and commitments existing at the time the notice of
termination is received which cannot be cancelled.
ARTICLE 6
RESEARCH REPORTS
Duke will provide Sponsor with periodic progress reports on the
research. In addition, Duke will provide Sponsor with a final report on such
research within sixty (60) days of termination of this Agreement.
ARTICLE 7
TERMINATION
In the event that either party commits a breach or default in any of
the terms or conditions of this Agreement and that party fails to remedy that
default or breach within thirty (30) days after receipt of written notice of
that breach from the other party, the party giving notice may, at its option and
in addition to any other remedies it may have in law or in equity; terminate
this Agreement by sending written notice of termination to stop the work as soon
as it is practicable to do so. All costs to Duke associated with termination
will be considered reimbursable costs, including costs incurred prior to the
notice of termination but which have not yet been reimbursed, and commitments
existing at the time the notice of termination is received which cannot be
cancelled. This shall include all noncancellable contracts and fellowships or
postdoctoral associate appointments incurred prior to the effective date of
termination. After termination, any obligation of Sponsor for fellowships or
postdoctoral associates shall end no later than the first to occur of (i) the
end of Duke's academic year following termination. or (ii) the next anniversary
date on which Sponsor could have terminated this Agreement pursuant to Article
5. In no case will reimbursement under this Agreement exceed the total estimated
project costs specified in Exhibit B.
483203.001(B&F) 2 01/11/99
<PAGE>
ARTICLE 8
CONFIDENTIAL INFORMATION
"Confidential Information" ("Information") shall mean all information
provided by one party to the other and clearly identified as confidential by the
transmitting party at the time of disclosure. Specifically excepted from this
definition is all information: (a) known by the receiving party at the time of
disclosure; (b) publicly disclosed except by breach of this Agreement; (c)
rightfully received by the receiving party from a third party without an express
obligation of confidence; and (d) independently developed by the employees or
agents of either party without any knowledge of the confidential information
provided by the other party. The party receiving the Information agrees to hold
that Information in trust and confidence for the transmitting party, using the
same care and discretion that the receiving party uses with similar Information
which it considers confidential. The receiving party will not use Information
other than for the benefit of the two parties and relating to the Agreement and
except as may be provided for in Article 9 regarding publication herein, neither
party will disclose such information without authorization from the other party.
This provision shall remain in effect during the term of this Agreement and for
three (3) years thereafter.
ARTICLE 9
PUBLICATION AND OTHER USE
Duke shall be free to use the results of the subject research for its
own teaching, research, educational, clinical and publication purposes without
the payment of royalties or other fees. Duke agrees to submit to Sponsor for its
review, a copy of any proposed publication resulting from the subject research
at least sixty (60) days prior to the estimated date of publication, and if no
response is received within thirty (30) days of the date submitted to Sponsor,
it will be conclusively presumed that the publication may proceed without delay.
If Sponsor determines that the proposed publication contains patentable subject
matters which require protection, Sponsor may require the delay of the
publication for a period of time not to exceed sixty (60) days for the purpose
of allowing the pursuit of such protection.
ARTICLE 10
INVENTIONS
Any new invention, development, or discovery resulting from the subject
research ("Invention") shall be promptly disclosed in writing to Sponsor.
Sponsor is hereby granted, without option fee other than the consideration of
the research sponsored herein and the reimbursement of Duke for all patent
expenses incurred to the date of disclosure related to the Invention, an option
to acquire an exclusive, worldwide, royalty bearing license of Duke's rights to
any Invention, which option shall extend for ninety (90) days after Sponsor's
receipt of an Invention disclosure. If Sponsor notifies Duke in writing of its
exercise of the option within the option period, then the parties will proceed
483203.001(B&F) 3 01/11/99
<PAGE>
in good faith to negotiate a license agreement on commercially reasonable terms
within ninety (90) days after notification of exercise, and if Sponsor does not
exercise this option, or notifies Duke that it will not exercise this option, or
the parties fail to sign a license agreement within said ninety (90) day period,
then Sponsor shall no longer own any rights in the subject Invention.
ARTICLE 11
INDEMNITY AND INSURANCE
Sponsor agrees to indemnify, hold harmless and defend Duke, its
officers, employees, and agents against any and all claims, suits, losses,
damages, costs, fees, and expenses asserted by third parties, both government
and non-government, resulting from or arising out of this agreement; provided,
however, that Sponsor shall not be responsible for Duke's negligence or willful
misconduct. Sponsor shall maintain in force at its sole cost and expense, with
reputable insurance companies, insurance of a type and in an amount reasonably
sufficient to protect against liability hereunder. Duke shall have the right to
request the appropriate certificates of insurance from Sponsor for the purpose
of ascertaining the sufficiency of such coverage.
ARTICLE 12
USE OF A PARTY'S NAME
Neither party will, without the prior written consent of the other
party: (a) use in advertising, publicity or otherwise, the name of any employee
or agent, any trade-name, trademark, trade device, service mark, symbol, or any
abbreviation, contraction or simulation thereof owned by the other party, or (b)
represent, either directly or indirectly, that any product or service of the
other party is a product or service of the representing party or that it is made
in accordance with or utilizes the information or documents of the other party.
Notwithstanding the above, Sponsor shall have the right to state that it has
entered into this Agreement with Duke and to state or summarize the terms hereof
in its filings with the Securities and Exchange Commission and related
shareholder communications; provided that Sponsor shall submit the text of such
statements to Duke at least 48 hours prior to publication.
ARTICLE 13
NOTICE
Any notice or other communication required or permitted under this
Agreement will be in writing and will be deemed given as of the date it is: (a)
delivered by hand, or (b) mailed, postage prepaid, first class, certified mail,
return receipt requested, to the party at the address listed below or
subsequently specified in writing, or (c) sent, shipping prepaid, return receipt
requested, by national courier service, to the party at the address listed below
or subsequently specified in writing:
483203.001(B&F) 4 01/11/99
<PAGE>
As to Duke: Office of Grants and Contracts
107 Seeley G. Mudd Building
Duke University Medical Center - Box 3001
Durham, North Carolina 27710
cc: University Counsel
Duke University - 011 Allen Building
Durham, North Carolina 27708
As to Sponsor: Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, Maryland 21046
Attn: Augustine Cheung
This Agreement is for professional research services. Neither party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other party.
ARTICLE 14
ENTIRE AGREEMENT
This Agreement and all attached Exhibits contain the entire agreement
and understanding between the parties as to its subject matter. It merges all
prior discussions between the parties and neither party will be bound by
conditions, definitions, warranties, understandings, or representations
concerning such subject matter except as provided in this Agreement or as
specified on or subsequent to the effective date of this Agreement in a writing
signed by properly authorized representatives of the parties. This Agreement can
only be modified by written agreement duly signed by persons authorized to sign
agreements on behalf of both Sponsor and Duke.
ARTICLE 15
WAIVER
The failure of a party in any instance to insist upon the strict
performance of the terms of this Agreement will not be construed to be a waiver
or relinquishment of any of the terms of this Agreement, either at the time of
the party's failure to insist upon strict performance or at any time in the
future, and such terms will continue in full force and effect.
483203.001(B&F) 5 01/11/99
<PAGE>
ARTICLE 16
SEVERANCE
Each clause of this Agreement is a distinct and severable clause and if
any clause is deemed illegal, void or unenforceable, the validity, legality or
enforceability of any other clause or portion of this Agreement will not be
affected thereby.
ARTICLE 17
GOVERNING LAW
The construction and performance of this Agreement will be governed by
the laws of the State of North Carolina.
ARTICLE 18
TITLES
All titles and articles headings contained in this Agreement are
inserted only as a matter of convenience and reference. They do not define,
limit extend or describe the scope of this Agreement or the intent of any of its
provisions.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals.
DUKE UNIVERSITY
By: /s/ Ralph Hyderman
----------------------
Name:
Title:
Date Executed:______________________
Principal Investigator:
SPONSOR:
CHEUNG LABORATORIES, INC.
By: /s/Augustine Y. Cheung
--------------------------
Name:
Title:Chairman
483203.001(B&F) 6 01/11/99
<PAGE>
Date Executed: March 17, 1998
Exhibit "B"
Payment Schedule
================================== ===================
Payment Due Date Amount
---------------------------------- -------------------
January __, 1998 $25,000
---------------------------------- -------------------
April __, 1998 $53,112
---------------------------------- -------------------
July __, 1998 $53,112
---------------------------------- -------------------
October __, 1998 $53,112
---------------------------------- -------------------
Total $184,336
================================== ===================
483203.001(B&F) 7 01/11/99
<PAGE>
SPONSORED RESEARCH AGREEMENT (NON-CLINICAL)
This Agreement ("Agreement") is between Duke University ("Duke"), a
North Carolina non-profit corporation, located in Durham, North Carolina and
Cheung Laboratories, Inc. ("Sponsor"), a Maryland corporation having offices at
10220-I Old Columbia Road, Columbia, Maryland 21046.
WHEREAS, the research program contemplated by this Agreement is of
mutual interest and benefit to Duke and Sponsor, and will further the
instructional and research objectives of Duke in a manner consistent with its
status as a non-profit educational institution.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 4
STATEMENT OF WORK
Duke agrees to use its best effort to perform the research program
described in the "Statement of Work" ("Statement"), a copy of which is attached
to this Agreement as Exhibit "A".
ARTICLE 5
INDEPENDENT CONTRACTOR
Duke's relationship to Sponsor under this Agreement will be of an
independent contractor and not an agent, joint venturer or partner of Sponsor.
ARTICLE 6
PRINCIPAL INVESTIGATOR
The research will be supervised by Mark W. Dewhirst, DVM, PhD
("Investigator") at Duke. If, for any reason Investigator is unable to continue
to serve as Principal Investigator and a successor acceptable to both Duke and
Sponsor is not available, the Agreement will be terminated in accordance with
Article 7 below.
ARTICLE 4
CONSIDERATION
In consideration of the foregoing, and as more specifically provided in
the budget included as Exhibit B, Sponsor will pay Duke for all direct and
483203.001(B&F) 8 01/11/99
<PAGE>
indirect costs incurred in the performance of the research as set forth in the
Statement, a total not to exceed $440,726. Payment will be made to Duke by
Sponsor in advance, on the schedule set forth in Exhibit B.
ARTICLE 5
PERIOD OF PERFORMANCE
The research will be conducted during a 1 year period commencing on
February 1, 1998 and concluding on or before Janaury 31, 1999. This agreement
will be renewable for additional periods upon the mutual consent of the parties
by a new agreement or by amendment hereto expressed in writing. Either party may
terminate this Agreement on any anniversary date of this Agreement after the
first anniversary date by giving the other party at least sixty (60) days prior
written notice of such termination. In the case of such termination, Duke will
proceed in an orderly fashion to terminate any outstanding commitments and to
stop the work as soon as it is practicable to do so. All reasonable costs to
Duke associated with termination will be considered reimbursable costs,
including costs incurred prior to the notice of termination but which have not
yet been reimbursed, and commitments existing at the time the notice of
termination is received which cannot be cancelled.
ARTICLE 6
RESEARCH REPORTS
Duke will provide Sponsor with periodic progress reports on the
research. In addition, Duke will provide Sponsor with a final report on such
research within sixty (60) days of termination of this Agreement.
ARTICLE 7
TERMINATION
In the event that either party commits a breach or default in any of
the terms or conditions of this Agreement and that party fails to remedy that
default or breach within thirty (30) days after receipt of written notice of
that breach from the other party, the party giving notice may, at its option and
in addition to any other remedies it may have in law or in equity; terminate
this Agreement by sending written notice of termination to stop the work as soon
as it is practicable to do so. All costs to Duke associated with termination
will be considered reimbursable costs, including costs incurred prior to the
notice of termination but which have not yet been reimbursed, and commitments
existing at the time the notice of termination is received which cannot be
cancelled. This shall include all noncancellable contracts and fellowships or
postdoctoral associate appointments incurred prior to the effective date of
termination. After termination, any obligation of Sponsor for fellowships or
postdoctoral associates shall end no later than the first to occur of (i) the
end of Duke's academic year following termination. or (ii) the next anniversary
date on which Sponsor could have terminated this Agreement pursuant to Article
483203.001(B&F) 9 01/11/99
<PAGE>
5. In no case will reimbursement under this Agreement exceed the total estimated
project costs specified in Exhibit B.
ARTICLE 8
CONFIDENTIAL INFORMATION
"Confidential Information" ("Information") shall mean all information
provided by one party to the other and clearly identified as confidential by the
transmitting party at the time of disclosure. Specifically excepted from this
definition is all information: (a) known by the receiving party at the time of
disclosure; (b) publicly disclosed except by breach of this Agreement; (c)
rightfully received by the receiving party from a third party without an express
obligation of confidence; and (d) independently developed by the employees or
agents of either party without any knowledge of the confidential information
provided by the other party. The party receiving the Information agrees to hold
that Information in trust and confidence for the transmitting party, using the
same care and discretion that the receiving party uses with similar Information
which it considers confidential. The receiving party will not use Information
other than for the benefit of the two parties and relating to the Agreement and
except as may be provided for in Article 9 regarding publication herein, neither
party will disclose such information without authorization from the other party.
This provision shall remain in effect during the term of this Agreement and for
three (3) years thereafter.
ARTICLE 9
PUBLICATION AND OTHER USE
Duke shall be free to use the results of the subject research for its
own teaching, research, educational, clinical and publication purposes without
the payment of royalties or other fees. Duke agrees to submit to Sponsor for its
review, a copy of any proposed publication resulting from the subject research
at least sixty (60) days prior to the estimated date of publication, and if no
response is received within thirty (30) days of the date submitted to Sponsor,
it will be conclusively presumed that the publication may proceed without delay.
If Sponsor determines that the proposed publication contains patentable subject
matters which require protection, Sponsor may require the delay of the
publication for a period of time not to exceed sixty (60) days for the purpose
of allowing the pursuit of such protection.
ARTICLE 10
INVENTIONS
Any new invention, development, or discovery resulting from the subject
research ("Invention") shall be promptly disclosed in writing to Sponsor.
Sponsor is hereby granted, without option fee other than the consideration of
the research sponsored herein and the reimbursement of Duke for all patent
expenses incurred to the date of disclosure related to the Invention, an option
483203.001(B&F) 10 01/11/99
<PAGE>
to acquire an exclusive, worldwide, royalty bearing license of Duke's rights to
any Invention, which option shall extend for ninety (90) days after Sponsor's
receipt of an Invention disclosure. If Sponsor notifies Duke in writing of its
exercise of the option within the option period, then the parties will proceed
in good faith to negotiate a license agreement on commercially reasonable terms
within ninety (90) days after notification of exercise, and if Sponsor does not
exercise this option, or notifies Duke that it will not exercise this option, or
the parties fail to sign a license agreement within said ninety (90) day period,
then Sponsor shall no longer own any rights in the subject Invention.
ARTICLE 11
INDEMNITY AND INSURANCE
Sponsor agrees to indemnify, hold harmless and defend Duke, its
officers, employees, and agents against any and all claims, suits, losses,
damages, costs, fees, and expenses asserted by third parties, both government
and non-government, resulting from or arising out of this agreement; provided,
however, that Sponsor shall not be responsible for Duke's negligence or willful
misconduct. Sponsor shall maintain in force at its sole cost and expense, with
reputable insurance companies, insurance of a type and in an amount reasonably
sufficient to protect against liability hereunder. Duke shall have the right to
request the appropriate certificates of insurance from Sponsor for the purpose
of ascertaining the sufficiency of such coverage.
ARTICLE 12
USE OF A PARTY'S NAME
Neither party will, without the prior written consent of the other
party: (a) use in advertising, publicity or otherwise, the name of any employee
or agent, any trade-name, trademark, trade device, service mark, symbol, or any
abbreviation, contraction or simulation thereof owned by the other party, or (b)
represent, either directly or indirectly, that any product or service of the
other party is a product or service of the representing party or that it is made
in accordance with or utilizes the information or documents of the other party.
Notwithstanding the above, Sponsor shall have the right to state that it has
entered into this Agreement with Duke and to state or summarize the terms hereof
in its filings with the Securities and Exchange Commission and related
shareholder communications; provided that Sponsor shall submit the text of such
statements to Duke at least 48 hours prior to publication.
ARTICLE 13
NOTICE
Any notice or other communication required or permitted under this
Agreement will be in writing and will be deemed given as of the date it is: (a)
delivered by hand, or (b) mailed, postage prepaid, first class, certified mail,
return receipt requested, to the party at the address listed below or
483203.001(B&F) 11 01/11/99
<PAGE>
subsequently specified in writing, or (c) sent, shipping prepaid, return receipt
requested, by national courier service, to the party at the address listed below
or subsequently specified in writing:
As to Duke: Office of Grants and Contracts
107 Seeley G. Mudd Building
Duke University Medical Center - Box 3001
Durham, North Carolina 27710
cc: University Counsel
Duke University - 011 Allen Building
Durham, North Carolina 27708
As to Sponsor: Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, Maryland 21046
Attn: Augustine Cheung
This Agreement is for professional research services. Neither party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other party.
ARTICLE 14
ENTIRE AGREEMENT
This Agreement and all attached Exhibits contain the entire agreement
and understanding between the parties as to its subject matter. It merges all
prior discussions between the parties and neither party will be bound by
conditions, definitions, warranties, understandings, or representations
concerning such subject matter except as provided in this Agreement or as
specified on or subsequent to the effective date of this Agreement in a writing
signed by properly authorized representatives of the parties. This Agreement can
only be modified by written agreement duly signed by persons authorized to sign
agreements on behalf of both Sponsor and Duke.
ARTICLE 15
WAIVER
The failure of a party in any instance to insist upon the strict
performance of the terms of this Agreement will not be construed to be a waiver
or relinquishment of any of the terms of this Agreement, either at the time of
the party's failure to insist upon strict performance or at any time in the
future, and such terms will continue in full force and effect.
483203.001(B&F) 12 01/11/99
<PAGE>
ARTICLE 16
SEVERANCE
Each clause of this Agreement is a distinct and severable clause and if
any clause is deemed illegal, void or unenforceable, the validity, legality or
enforceability of any other clause or portion of this Agreement will not be
affected thereby.
ARTICLE 17
GOVERNING LAW
The construction and performance of this Agreement will be governed by
the laws of the State of North Carolina.
ARTICLE 18
TITLES
All titles and articles headings contained in this Agreement are
inserted only as a matter of convenience and reference. They do not define,
limit extend or describe the scope of this Agreement or the intent of any of its
provisions.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals.
DUKE UNIVERSITY
By: /s/Ralph Hyderman
---------------------
Name:
Title:
Date Executed:______________________
Principal Investigator:
SPONSOR:
CHEUNG LABORATORIES, INC.
By: /s/Augustine Y. Cheung
--------------------------
Name:
Title: Chairman
483203.001(B&F) 13 01/11/99
<PAGE>
Date Executed: March 17, 1998
Exhibit "B"
Payment Schedule
================================== ===================
Payment Due Date Amount
---------------------------------- -------------------
February __, 1998 $110,181
---------------------------------- -------------------
May __, 1998 $110,181
---------------------------------- -------------------
August __, 1998 $110,181
---------------------------------- -------------------
November __, 1998 $110,183
---------------------------------- -------------------
Total $440,726
================================== ===================
483203.001(B&F) 14 01/11/99
Josepnberg Grosz & Co. Inc.
Investment Bankers
810 Seventh Avenue * New York, NY 10019
(212) 974-9926 Fax (212) 397-5832
Dir: (212) 333-0825 e-mail: [email protected]
July 31,1998
Dr. Augustine Cheung, Chairman
Mr. Spencer Volk President, CEO
Celsion Corporation
10220-1 Old Columbia Road
Columbia MID 2 1046-1705
Gentleman:
I. The purpose of this letter is to set forth the terms of our agreement
(the "Agreement") with respect to the compensation which Josephberg Grosz & Co.,
Inc. or their designees ("JGC") are to receive for assisting and advising
Celsion Corporation or related entities, direct or indirect (the "Company"), in
obtaining a capital infusion of equity, debt, bridge financing, merger and
acquisitions, letter or line of credit, lease financing or other types of
financing transactions. (the "Financing") Financing does not include business
the Company is doing in the ordinary course of business such as but not limited
to obtaining licenses from institutions and marketing arrangements with
potential users of the Company's products or technology.
Financing does not include any transactions done with the following
parties or their contacts with whom the Company is or has been dealing:
1. Ryan, Lee & Company or another retail lead syndicator
2. K. Greenberg
3. LBC Capital Corporation
4. Sucsy, Fischer and Company
5. Gilford Securities
Our focus will be on providing Financing to the Company as follows:
$1,000,000 in the months of August and September and $8,000,000-$10,000,000 over
the next twelve months.
II. To assist the Company in obtaining Financing, the Company agrees to
engage JGC as its nonexclusive agent with respect to all Financing sources,
direct or indirect, (except as exempted from the definition) (the "Investor").
When such Financing from any Investor (other than a Financing in the nature of
one described in paragraphs III & IV below) is provided, JGC will be compensated
by the Company, in full, at the closing of the Financing, by receiving a total
fee of 10% (8% cash; 2% stock).
<PAGE>
Dr. Augustine Cheung
July 31, 1999
Page Two
The total gross dollar value received or to be received (including any form of
equity, bridge, stock, convertible securities or subordinated debt Financing) by
the Company pursuant to such financing up to $5,000,000 (i.e. $5,000,000
Financing provided; JG Capital, Inc. receives a cash fee of 8%, to be $400,000
and a fee of 2% in the form of common stock of the Company to JG Partners, L.P.
at the same valuation and price as the Investor). On any dollar amount in excess
of the first $5,000,000 provided, JGC will receive a total fee of 8% (6% cash,
2% stock). In addition, JGC will have the right to invest in the Company by
receiving, at the closing of the Financing, a five yew warrant Such warrant
shall give JGC or its designees the right, at anytime over a five year period,
to purchase securities on a cashless basis in the Company equal to 10% of the
total shares issued to the Investor at the same price, the same type securities
and the same rights as the Investor (i.e. $5,000,000 Financing provided, JGC's
designees receive warrants to purchase shares of the same type securities and at
the same price and valuation as the Investor at the time of Financing at anytime
over a five yew period). Any and all securities and/or warrants and securities
underlying such warrants to be received by JGC and its designees shall have
appropriate piggy-back and registration rights and in any case become free
trading under rule 144 holding period. For any Financing (except as exempted
from the definition) not introduced directly or indirectly by JGC to the
Company, JGC will receive from the Company, a total fee of 3% (1-1/2% cash;
1-1/2% stock) at the closing of the Financing. Notwithstanding the previous
sentence. JGC shall receive the 3% fee on any Investors that invest through LBC
Capital Corporation with JGC Investor.
III. For senior debt, credit facilities, guarantees; lease financing and
letter or line of credit Financing, JGC's cash fee, if such is provided by an
Investor introduced by JGC, directly or indirectly, shall be 3.0% of the total
dollar value received or made available to the Company.
IV. In the event the Company enters into a merger, acquisition or joint
venture with an Investor or entity introduced by JGC or entities or Investors
negotiated with on behalf of the Company by JGC, directly or indirectly, JGC
will be compensated by the Company, in full, at the closing thereof in
accordance with the 5/4/3 Formula, (i.e. by receiving a cash fee of 5% of the
first $1,000,000 of Value received by the Company or the Investor, whichever is
applicable, 4% of the second $1.000,000, and 3% of all Value received in excess
of $3,000,000). While not all inclusive, Value shall include total cash, notes,
debt, stock, consulting. non-compete, earn-out, sales and royalty agreements.
V. The fees in paragraphs II, III and IV above are totally independent of
one another and are based upon the type or types of transactions JGC arranges.
VI. In addition, upon obtaining such Financing (i.e., the fees in
paragraphs 11), JGC shall receive, at closing, a non-accountable 1% cash expense
reimbursement, (i.e,, $5,000,000 total ]Financing provided or made available,
JGC receives 1% to be $50,000). In addition, JGC shall be reimbursed for all
reasonable out-of-pocket travel expenses from the date of the execution of this
Agreement until its termination which have been approved by the Company in
advance.
<PAGE>
Dr. Augustine Cheung
July 31, 1998
Page Three
VII. Upon the execution of this Agreement, the Company agrees to pay JG
Capital, Inc. $8,000 in cash and 57,000 shares of stock to JG Partners.. L.P. in
the form of common stock of the Company.
VIII. This Agreement may be terminated or amended by the Company in its
sole discretion on two days notice on September 21, 1998 or anytime thereafter
with ten days prior written notice, Termination of this Agreement shall not
release the Company of its obligation to compensate JGC or its designees for its
services rendered if any Investor enters into a transaction with or provides
Financing to the Company as long as the transaction (transactions) or Financing
(Financings) was provided by such Investor within two years after termination of
this Agreement.
IX. It is understood and agreed that you shall have the right to accept
or reject in your judgement the terms of any Financing or transaction proposed
by any Financing Sources, Investors, strategic partners and/or corporations
presented to you. If such Financing is provided by the Investor to the Company
and accepted, the Company agrees to represent to the Investor prior to the
closing of the transaction or Financing that the fees due and payable to JGC as
they apply to this Agreement will be paid to JGC at the closing of the
transaction and/or Financing.
X. This Agreement shall be governed and construed in accordance with the
laws of the State of New York. In the event of any dispute between us regarding
the subject matter of this Agreement, such dispute shall be submitted to
arbitration before a single arbitrator in New York City in accordance with the
rules of the American Arbitration Association. Any decision or award shall be
final and binding upon the parties hereto. All legal fees and expenses shall be
paid to the prevailing party by the losing party.
XI. JGC represents that to its knowledge it is in full compliance with
all regulatory laws that govern its business and agrees to indemnify the Company
against any liabilities against the Company that arise out of a breach of this
representation.
Sincerely,
Josephberg Grosz & Co, Inc.
By: /s/ Richard A. Josephberg 8/5/98
----------------------------------
Richard A. Josephberg Date
Chairman
AGREED AND ACCEPTED:
Celsion Corporation
By: /s/ Spencer J. Volk 8/6/98
- ----------------------- ------
Name: Spencer J. Volk Date
Title: President & CEO
Columbia,
Maryland
June 23, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, Celsion Corporation, a Maryland corporation. (the
"Company") hereby promises to pay Spencer J. Volk, or registered assigns, (the
"Holder") the principal amount of Fifty Thouand Dollars ($50,000.00) (the
Principal Amount) on or before September 30, 1998, with accured interest.
Interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid Principal Amount shall accure at the rate of 8% per annum from the
date hereof.
Signed this 23rd day of June, 1998.
For the Company:
/s/John Mon
---------------------------
John Mon, General Manager
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.
Warrant Certificate No.:______
Date of Issue:
Void after 5:00 p.m, Eastern Time on .
WARRANT TO PURCHASE
_________ SHARES OF COMMON STOCK
CELSION CORPORATION
This is to certify that, for value received,
____________
or registered assigns ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from Celsion Corporation, a Maryland corporation
("Company"), at any time after ________ and not later than 5:00 p.m., Eastern
Time, on _____________,____________ shares of common stock, $0.01 par value, of
the Company ("Common Stock"), at the purchase price per share of $________. 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. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of 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."
<PAGE>
(a) Exercise of Warrant. This Warrant may be exercised in whole or
in part at any time or from time to time on or after the date hereof, but not
later than 5:00 p.m., Eastern Time, on the date set forth above. If such date is
a day on which banking institutions are authorized by law to close, then the
expiration date shall be on the next succeeding day which shall not be such a
day. This Warrant may be exercised by presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, with written
notice duly executed and accompanied by payment in cash or cash equivalent of
the Exercise Price for the number of shares specified in such notice, together
with all federal and state taxes applicable upon such exercise. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of the Company,
in proper form for exercise, the Holder shall be deemed to be the holder 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. The Form of Subscription Agreement,
attached hereto, has been executed by Holder and shall be confirmed as correct
at the time of exercise, or amended to reflect changes, and all other documents
reasonably requested.
(b) Reservation of Shares. The Company hereby agrees that at all
times 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.
(C) Fractional Shares. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(1) If the Common Stock is listed on a national
securities exchange, admitted to unlisted trading privileges on such
exchange or quoted on the Nasdaq National Market System or other
interdealer trading systems providing last sale information, the
current value shall be the last reported sale price of the Common Stock
on such exchange, Nasdaq/NMS or trading system on the last business day
prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day
on such exchange, Nasdaq/NMS or trading system; or
(2) 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 an interdealer
quotation system deemed reliable by the Company on the last business
day prior to the date of the exercise of this Warrant; provided that if
the Common Stock is quoted on more than one such system, the Company
shall utilize, in order of priority, Nasdaq, the NASD OTC Bulletin
2
<PAGE>
Board or the National Quotation Bureau, Inc.; or
(3) 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 value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company, such determination to be final and
binding on the Holder.
(d) Restrictions on Transfer. The securities represented hereby
and the shares to be issued on exercise have not been registered under federal
or state securities laws. They may not be sold or offered for sale in the
absence of effective registration under such securities laws, or an opinion of
counsel satisfactory to the Company that such registration is not required.
(e) Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to compliance with paragraph (d), this
Warrant is assignable. Any such assignment shall be made by surrender of this
Warrant to the Company or at the office of its stock transfer agent, if any,
with written notice of assignment duly executed and funds sufficient to pay any
transfer tax; whereupon the Company shall, without charge, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be cancelled. This Warrant may be divided or
combined with other Warrants which carry the same rights 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 term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged and the term "original issue date hereof" shall refer to
the date that the Company first issued a Warrant which was subsequently
transferred or exchanged for another. Upon receipt by the Company of evidence
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 tenor 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.
(f) Rights of the Holder. The Holder 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 are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein.
3
<PAGE>
(g) Anti-Dilution Provisions.
(1) Adjustment of Number of Shares. Anything in this
Section (g) to the contrary notwithstanding, in case the Company shall
at any time issue Common Stock or convertible securities by way of
dividend or other distribution on any stock of the Company or subdivide
or combine the outstanding shares of Common Stock, the Exercise Price
shall be proportionately decreased in the case of such issuance (on the
day following the date fixed for determining shareholders entitled to
receive such dividend or other distribution) or decreased in the case
of such subdivision or increased in the case of such combination (on
the date that such subdivision or combination shall become effective).
(2) No Adjustment for Small Amounts. Anything in this
Section (g) 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, 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.
(3) Number of Shares Adjusted. Upon any adjustment of
the Exercise Price other than pursuant to Section (g)(1), the holder 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.
(4) Common Stock Defined. Whenever reference is made
in this Section (g) to the issue or sale of shares of Common Stock, the
term "Common Stock" shall mean the common shares of the Company of the
class authorized as of the date hereof and any other class of stock
ranking on a parity with such Common Stock. However, subject to the
provisions of Section (j) 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.
(h) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section (g) 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 and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder. Such certificate
shall be conclusive as to the correctness of such adjustment.
(I) Notice to Warrant Holders. So long as this Warrant shall be
outstanding and unexercised (I) if the Company shall pay any dividend or make
4
<PAGE>
any distribution upon the Common Stock or (ii) 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 (iii) 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 voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least ten (10) days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
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 for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(j) 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 in which 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, the Company shall cause
effective provision to be made so that the holder shall have the right
thereafter, by 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 provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. The foregoing provisions of this Section (j) shall
similarly apply to successive reclassifications, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers,
sale 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 subsection (g)(1) hereof with the amount of the
consideration received upon the issue thereof being determined by the Board of
Directors of the Company, such determination to be final and binding on the
holder.
5
<PAGE>
(k) Applicable Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Maryland.
(l) Optional Waiver. Holder may waive by signed writing any rights
of Holder contained herein.
(m) IN ADDITION TO THE RESTRICTIONS ON TRANSFERABILITY DESCRIBED
HEREIN, THE SECURITIES ISSUABLE ON EXERCISE OF THIS WARRANT SHALL NOT BE SOLD,
PLEDGED, TRANSFERRED, HYPOTHECATED OR ASSIGNED WITHIN 7 DAYS BEFORE OR 180 DAYS
AFTER THE DATE OF EFFECTIVENESS OF A REGISTRATION STATEMENT FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH A PUBLIC OFFERING
OF THE COMPANY'S SECURITIES. THIS RESTRICTION IS IN ADDITION TO AND NOT IN LIEU
OF THE RESTRICTIONS CONTAINED HEREIN AND AS SUCH, THIS 180 DAY PERIOD MAY EXPIRE
PRIOR TO OR BEYOND THE RESTRICTIONS IMPOSED HEREIN. THIS RESTRICTION SHALL
OBLIGATE ALL SUCCESSORS IN INTEREST TO THE SHARES ISSUED ON EXERCISE.
CERTIFICATES REPRESENTING THE WARRANT STOCK SHALL BEAR A LEGEND EVIDENCING THIS
RESTRICTION.
THIS WARRANT CERTIFICATE, NUMBER ___________, is granted and sold as of the date
first above written.
CELSION CORPORATION
By:________________________
Attest:
- ----------------
Secretary
6
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PURCHASE FORM
Dated: ______________
Celsion Corporation
10220-I Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, General Manager
Attached herewith is Celsion Corporation'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 __________
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE SECURITIES ACT OF 1933 (THE
"ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT.
Warrant Certificate No.:_____
Date of Issue:____________
Void after 5:00 p.m, Columbia, Maryland Time on_________
Warrant to Purchase
__________Common Shares
WARRANT TO PURCHASE COMMON SHARES
CHEUNG LABORATORIES, INC.
This is to certify that, for value received,
DunnHughes Holdings, Inc.
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or registered assigns ("Holder"), is entitled to purchase subject to the
provisions of this Warrant, from Cheung Laboratories, Inc., a Maryland
corporation ("Company"), at any time after_________ and not later than 5:00
p.m., Columbia, Maryland Time, on__________, shares, $0.01 par value, of the
Company Common Stock ("Common Stock"), at the purchase price per share of $____.
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. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of 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."
(a) Exercise of Warrant. This Warrant may be exercised in whole or
in part at any time or from time to time on or after the date hereof, but not
later than 5:00 p.m., Columbia, Maryland Time, on the date set forth above. If
such date is a day on which banking institutions are authorized by law to close,
then the expiration date shall be on the next succeeding day which shall not be
such a day. This Warrant may be exercised by presentation and surrender hereof
to the Company or at the office of its stock transfer agent, if any, with
written notice duly executed and accompanied by payment in cash or cash
equivalent of the Exercise Price for the number of shares specified in such
notice, together with all federal and state taxes applicable upon such exercise.
If this Warrant should be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the right of the holder to purchase the balance of the shares
purchasable hereunder. Upon receipt by the Company of this Warrant at the office
or agency of the Company, in proper form for exercise, the Holder shall be
deemed to be the holder 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. The Form of
Subscription Agreement, attached hereto, shall be submitted at the time of
exercise and all other documents reasonably requested.
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(b) Reservation of Shares. The Company hereby agrees that at all
times 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.
(c) Restrictions on Transfer. The securities represented hereby
and the shares to be issued on exercise have not been registered under federal
or state securities laws. They may not be sold or offered for sale in the
absence of effective registration under such securities laws, or an opinion of
counsel satisfactory to the Company that such registration is not required.
(d) Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to compliance with paragraph (d), this
Warrant is assignable. Any such assignment shall be made by surrender of this
Warrant to the Company or at the office of its stock transfer agent, if any,
with written notice of assignment duly executed and funds sufficient to pay any
transfer tax; whereupon the Company shall, without charge, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants which carry the same rights 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 term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged and the term "original issue date hereof" shall refer to
the date that the Company first issued a Warrant which was subsequently
transferred or exchanged for another. Upon receipt by the Company of evidence
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 tenor 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.
(e) Rights of the Holder. The Holder 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 are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(f) 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 Option shall be proportionately increased.
Conversely, in case the outstanding shares of Stock of the Company shall be
combined into a smaller number of shares, 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 Option shall be
proportionately reduced.
(g) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section (f) 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
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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 and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder. Such certificate
shall be conclusive as to the correctness of such adjustment.
(h) Notice to Warrant Holders. So long as this Warrant shall be
outstanding and unexercised (i) if the Company shall pay any dividend or make
any distribution upon the Common Stock or (ii) 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 (iii) 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 voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least ten (10) days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
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 for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(i) 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 in which 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, the Company shall cause
effective provision to be made so that the holder shall have the right
thereafter, by 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 provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant.
(j) Piggy-back/Incidental Registration 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
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of the inclusion of Warrant Stock pursuant to this paragraph k, 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. Nothing in
this paragraph k 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 k 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:
(1) 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.
(2) 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.
(3) 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.
(k) Applicable Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Maryland.
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(l) Optional Waiver. Holder may waive by signed writing any rights
of Holder contained herein.
(m) IN ADDITION TO THE RESTRICTIONS ON TRANSFERABILITY DESCRIBED
HEREIN, THE SECURITIES ISSUABLE ON EXERCISE OF THIS WARRANT SHALL NOT BE SOLD,
PLEDGED, TRANSFERRED, HYPOTHECATED OR ASSIGNED WITHIN 7 DAYS BEFORE OR 180 DAYS
AFTER THE DATE OF EFFECTIVENESS OF A REGISTRATION STATEMENT FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH A PUBLIC OFFERING
OF THE COMPANY'S SECURITIES. THIS RESTRICTION IS IN ADDITION TO AND NOT IN LIEU
OF THE RESTRICTIONS CONTAINED HEREIN AND AS SUCH, THIS 180 DAY PERIOD MAY EXPIRE
PRIOR TO OR BEYOND THE RESTRICTIONS IMPOSED HEREIN. THIS RESTRICTION SHALL
OBLIGATE ALL SUCCESSORS IN INTEREST TO THE SHARES ISSUED ON EXERCISE.
CERTIFICATES REPRESENTING THE WARRANT STOCK SHALL BEAR A LEGEND EVIDENCING THIS
RESTRICTION.
Executed as of the date first above written.
CHEUNG LABORATORIES, INC.
By:__________________________
Augustine Cheung, Chairman
Attest:
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Secretary
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EXERCISE FORM
To be executed by the Holder
in Order to Exercise Warrants
The undersigned Holder hereby irrevocably elects to exercise __________ Warrants
represented by this Warrant Agreement, and to purchase the securities issuable
upon the exercise of such Warrants, and requests that certificates for such
securities shall be issued in the Holder's name and be delivered to
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[please print or type address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Agreement, that a new Warrant Agreement for the balance of such Warrants
be registered in the name of, and delivered to, the Holder at the address stated
above.
The undersigned acknowledges that the Warrant Shares issued on exercise will
be "restricted securities" and will bear appropriate restrictive legends.
Dated: _______________________________________________________
Signature of Holder
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Taxpayer ID Number
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Signature Guaranteed
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468410.001(B&F)
Serial Number________
Void after 5:00 p.m., Chicago Time, on ____________ (unless extended as
provided below)
Warrant to Purchase certain
Shares of Common Stock,
dated ____________
CERTIFICATE OF
WARRANT TO PURCHASE COMMON STOCK
OF
CHEUNG LABORATORIES, INC.
This Is To Certify That, FOR CASH AND OTHER VALUE RECEIVED,
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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 ("____________"), intend that the number of shares
issuable hereunder shall be ________, which represents ___________% of the
issued and outstanding Common Stock.
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".
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.
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(1) 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 _______, but not later than 5:00 p.m., Chicago Time, on
_________, or if ___________, 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.
(2) 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.
(3) 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 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
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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.
(4) 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.
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.
(5) 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
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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.
(6) 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 number of
shares otherwise then purchasable hereunder multiplied by the newly adjusted
Exercise Price pursuant to this adjustment.
(b) The __________ 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 __________% 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.
(7) 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
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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
__________, 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.
(8) 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.
(9) 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.
(10) 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
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<PAGE>
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, 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
_________ (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.
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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).
(11) 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."
(12) Demand Registration. If at any time, after the next public
offering of registered Common Shares of the Company (as previously covered and
defined herein) _________shall decide to sell or otherwise dispose of Warrant
Stock then owned or to be owned upon intended exercise of this Warrant by
_________, then _________ and only __________ 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)
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<PAGE>
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 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.
(13) 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) _________, and only _________ (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.
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<PAGE>
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.
(14) 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 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
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<PAGE>
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.
(15) 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 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
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<PAGE>
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.
(16) 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,
11
<PAGE>
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.
(17) 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 person or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action.
(18) 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.
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(19) 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.
(20) 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).
(21) 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.
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(22) 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.
(23) 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 ___________(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.
(24) 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.
(25) 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).
(26) 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.
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<PAGE>
(27) 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: __________) is granted and sold as of the date
first written above.
Cheung Laboratories, Inc.
By:___________________________
Augustine Cheung, Chairman
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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 __________
- --------------------
- --------------------
- --------------------
- --------------------
16
Serial Number __________
Void after 5:00 p.m., Chicago Time, on June 1, 2001 (unless extended as provided
below).
Warrant to Purchase
_________ Shares of
Common Stock as
adjusted herein, dated
May 28, 1996
CERTIFICATE OF
WARRANT TO PURCHASE COMMON STOCK
OF
CHEUNG LABORATORIES, INC.
This Is To Certify That, FOR CASH AND OTHER VALUE RECEIVED,
---------------
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 October 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 as adjusted herein. Total investment shall be defined as $___________.
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, and in support of the
foregoing, the Company, as of the date of this Warrant, the number of shares
issuable hereunder shall be ________, which represents ___________% ("Percentage
Interest") of the issued and outstanding Common Stock on a fully diluted basis.
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".
<PAGE>
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.
1. 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 the date first written above 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.
2. 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.
3. 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:
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange, the
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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.
4. 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 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.
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5. 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 ______and its affiliates.
6. 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).
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
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,
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shall be entitled to purchase shares sufficient so that Holder(s) shall maintain
the right to acquire the Percentage Interest of the Company's outstanding shares
(on a fully diluted basis), for the Total Investment (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.
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.
(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.
7. 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
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<PAGE>
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.
8. 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.
9. 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.
10. 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
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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, 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 4
(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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11. 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."
12. 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 ________, must simultaneously
give notice to _________), 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.
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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.
13. 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) ________, and only _________ (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.
14. 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;
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(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 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.
15. Incidental Registration. Other than as covering in paragraph 13
hereof, if at any time the Company subsequent to the next public offering of
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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 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
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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.
16. 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.
17. 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
12
<PAGE>
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.
18. 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.
19. 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.
13
<PAGE>
20. 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).
21. 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.
22. 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.
23. 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 _______ (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.
14
<PAGE>
24. 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.
25. 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).
26. 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.
27. 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.
15
<PAGE>
This Warrant (Serial Number: _________) is granted and sold on the date first
above written.
Cheung Laboratories, Inc.
By:___________________________
Augustine Cheung, President
Attest:
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Secretary
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<PAGE>
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 __________
- --------------------
- --------------------
- --------------------
- --------------------
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.
__________ ___, 199___
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. Stock
Purchase Price shall be the average price of the common stock of the public or
private offerings conducted subsequent to the offering set forth in the
Memorandum of the Company dated January 6, 1997 as supplemented June 12, 1997
and ending December 27, 1997 by the Company which raise, in the aggregate, not
less than $8,000,000 (hereafter collectively referred to as the "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 (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 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.
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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
<PAGE>
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 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.
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 4,000,000 shares of stock from
Mr. Gao pursuant to a Redemption Agreement, as amended, 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 Purchase Price,
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.
<PAGE>
(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.
3.2.2 For the purposes of this Section 3.2, the
following provisions shall also be applicable:
(a) 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.
(b) 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.
(c) 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.(c), or the rate at which any
Convertible Securities referred to in subsection 3.2.2.(c) 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
<PAGE>
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 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.
<PAGE>
3.4 Notices. If at any time:
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3.4.1 the Company shall declare any cash dividend
upon its Stock;
3.4.2 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;
3.4.3 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
3.4.4 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 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
<PAGE>
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 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.
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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 Holder of this Warrant shall have the
registration rights set forth in the Registration Rights Agreement of even date.
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
<PAGE>
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.
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 ________, ____.
CHEUNG LABORATORIES, INC.
By:_________________________________________
Signature
By:_________________________________________
Print Name
Title:_____________________
<PAGE>
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,
(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
<PAGE>
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 above 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.
413219.001(B&F)
Serial Number: _________
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.
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) _________ shares of fully paid
and nonassessable shares of the Company's $0.01 par value Common Stock (the
"Stock") of the Company. The Stock Purchase Price shall be the average price of
the common stock of the public or private offerings conducted subsequent to the
offering set forth in the Memorandum of the Company dated January 6, 1997 and
ending December 27, 1997 by the Company which raise, in the aggregate, not less
than $8,000,000 (hereafter collectively referred to as the "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 (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
<PAGE>
of the 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 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 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.
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.
2
<PAGE>
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), 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 Purchase Price,
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.
3.2.2 For the purposes of this Section 3.2, the
following provisions shall also be applicable:
(a) Cash Consideration. In the case of the
issuance or sale of additional Stock for cash, the
3
<PAGE>
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.
(b) 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.
(c) 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.(c), or the rate at which any
4
<PAGE>
Convertible Securities referred to in subsection 3.2.2.(c) 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 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
5
<PAGE>
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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3.4.1 the Company shall declare any cash dividend
upon its Stock;
3.4.2 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;
3.4.3 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
3.4.4 there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company
6
<PAGE>
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 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
7
<PAGE>
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 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.
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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
8
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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 Holder of this Warrant shall have the
registration rights set forth in the Registration Rights Agreement of even date.
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.
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.
9
<PAGE>
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 ________, ____.
CHEUNG LABORATORIES, INC.
By:_________________________________________
Signature
By:_________________________________________
Print Name
Title:______________________________________
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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 __________
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Serial Number [ ]
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Void after 5:00 p.m., New York Time, on May 15, 2001(unless extended as
provided below)
Option to Purchase certain
Shares of Common Stock,
dated May 16, 1996.
CERTIFICATE OF
OPTION TO PURCHASE COMMON STOCK
OF
CHEUNG LABORATORIES, INC.
This Is To Certify That, FOR VALUE RECEIVED, _______________________________,
his/her nominees, or assigns (hereinafter, the "Holder(s)") are entitled to
purchase, subject to the provisions of this Option (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"),
________________________________( )shares of restricted and legended common
stock of the Company ("Common Stock") at a purchase price (the "Stock Purchase
Price") equal to Thirty Five Cents ($00.35 U.S.)per share in such amounts and at
such times as are provided herein. 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 Option. This Option shall be exercisable in whole or in
part at any time after May 16, 1996 (the " Commencement Date"), unless extended
in accordance with Section 9, 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: Chairman of the Board of Directors (or at such other location as the
Company may advise Holder(s) in writing) of this Option 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 Option is being exercised determined in
accordance with the provisions hereof. Unless extended in accordance with
Section 9, this Option 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 Commencement Date. In the event that the Holder(s) does not
exercise this Option pursuant to the terms of this Option, then this Option
shall expire, be canceled, and be null and void.
This Option is subject to the following terms and conditions:
1. Exercise: Issuance of Certificates; Payment for Shares; Conversion
Right.
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1.1 Duration of Exercise of Option. This Option is exercisable
at the option of the Holder(s) at any time or from time to time after
the Commencement Date but not later than 5:00 P.M. (New York Time) on
the Expiration Date(unless extended in accordance with Section 9), 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 Option shall be and are deemed to be issued to Holder(s) as the
record owner of such shares at the close of business on the date on
which this Option 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(s) is entitled upon such exercise, shall be
delivered to Holder(s) by the Company or its transfer agent at the
Company's expense within a reasonable time after the rights represented
by this Option have been exercised. Each stock certificate so delivered
shall be in such denominations of Stock as may be requested by
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Holder(s) and shall be registered in the name of Holder(s) or such
other name as shall be designated by Holder(s). If, upon exercise of
this Option, fewer than all of the shares of Stock evidenced by this
Option are purchased prior to the Expiration Date of this Option, one
or more new options substantially in the form of, and on the terms in,
this Option will be issued for the remaining number of shares of Stock
not purchased upon exercise of this Option.
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 Option (the "Option 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 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.
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 Option 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 Option 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 Yu Wen) 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 Option 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 Commencement Date of this Option and prior to its
termination, shares of Common Stock at a consideration per share less
than $00.35, or convertible securities with conversion rate less than
$00.35 per share, or Warrants or Options with strike price less than
$00.35 per share, then, upon such sale or issuance, the Stock Purchase
Price shall be reduced to the lowest of the above.
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 Option, the Company shall
give written notice thereof, by first-class mail, postage prepaid,
addressed to the registered Holder(s) of this Option at the address of
such Holder(s) 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 Option, 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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3.4.1 the Company shall declare any cash dividend
upon its Stock;
3.4.2 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;
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<PAGE>
3.4.3 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
3.4.4 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(s) of this Option at the address of such Holder(s) 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(s) of the Option does not exercise this
Option prior to the occurrence of an event described above, except as
provided in Sections 3.1 and 3.5, the Holder(s) 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(s) chooses to exercise this Option within the
10-day period following receipt of the notice specified in clause (ii)
above, the Holder(s) 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(s) elects to deliver such a Promissory Note
to the Company, the Holder(s) will pledge to the Company all Stock
issued in connection with the exercise of this Option, 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 Option 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
Option immediately prior thereto. The provisions of this Section 3.5
shall similarly apply to successive Transactions.
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<PAGE>
4. Issue Tax. The issuance of certificates for shares of Stock upon the
exercise of the Option shall be made without charge to the Holder(s) of the
Option 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(s) of the Option being exercised.
5. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Option shall be construed as conferring upon the Holder(s)
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 Option or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Option shall have been exercised. No provisions hereof, in the
absence of affirmative action by the Holder(s) to purchase shares of Stock, and
no mere enumeration herein of the rights or privileges of the Holder(s) hereof,
shall give rise to any liability of such Holder(s) for the Stock Purchase Price
or as a stockholder of the Company whether such liability is asserted by the
Company or by its creditors.
6. Exchange, Assignment or Loss of Option. Subject to applicable
securities laws and the terms of the legend set forth in Section 7.2 hereof,
this Option 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 Option 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 Option 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 Option
certificate in the name of the assignee(s) named in such instrument of
assignment and this Option certificate shall promptly be canceled. This Option
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 Options are to be issued,
and signed by the Holder hereof. The terms "Option" and "Options" as used herein
include any Options issued in substitution for or replacement of this Option, or
into which this Option may be divided or exchanged.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Option, and, in the case of loss,
theft or destruction, of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Option, if mutilated, the Company will
execute and deliver a new Option of like tenure and date. Any such new Option
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Option 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 Option or any successor Option
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.
7. Restrictions on Transferability of Securities; Compliance with
Securities Act.
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7.1 Restrictions on Transferability. This Option or the Option
Stock or any other security issued or issuable upon exercise of this
Option 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 Option or such Option Stock may
legally be transferred pursuant to this Section 6 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 Section 7 with respect to any resale or other
disposition of such securities.
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7.2 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.
8. Registration Rights. The Holder(s) of this Option shall have the
registration rights set forth as follows:
8.1 Demand Registration. If at any time, after the Next
Public Offering of registered Common Shares of the Company the
Holder(s) shall decide to sell or otherwise dispose of Option Stock
then owned or to be owned upon intended exercise of this Option by the
Holder(s) , then the Holder(s) may give written notice to the Company
of the proposed disposition, specifying the number of shares of Option
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 Option Stock.
The Company shall within 10 days thereafter give written notice to the
other Holders of Option or Option 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)
Option Stock in such registration statement. The Company shall use its
best efforts to cause an appropriate registration statement (the
"Registration Statement") covering such Option 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 Option 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 Option 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 Option 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 Section 8.1 shall specify the Option 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.
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The Company shall not be obligated to file more than three Registration
Statements pursuant to the foregoing provisions of this Section 8.1.
The Company shall bear all of the Costs and Expenses of the first such
registration. The Selling Shareholder(s) shall bear the costs and
expenses of all further registrations pursuant to this Section 8.1. A
demand for registration under this Section 8.1 will not count as such
until the Registration Statement has become effective.
8.2 Shelf Registration By Original Holder. At any time
and from time to time during the term of this Option or its successors,
the original Holder(s), and only the original Holder(s) 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 Option or any part thereof, whether or not said
Option 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(s) shall
be responsible, if such demand is made by the Holder(s) 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(s) shall be determinable by securities counsel to the
Company and both the Company and the Holder(s) 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.
8.3 Incidental Registration. Other than as covering in
Section 8.2 hereof, if at any time 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 Option 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, to be so included. In the event of the inclusion of Option
Stock pursuant to this Section 8.3, 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 Option 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 Option Stock. Nothing in this Section 8.3 shall require the
registration of Option 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 Section 8 is to
be underwritten, then the Company's obligation to include Option 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
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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 Option 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)'
Option 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 Option Stock to be included shall be reduced
pro rata on the basis of the number of shares of Option 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 Option 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.
9. Renewal of Exercise Rights. If, while this Option or any portion
of it remains in effect, Holder(s) wish to extend their rights to exercise all
or a portion of this Option which would otherwise expire and be lost to them,
they may do so by paying to the Company Five Cents($00.05) per common share
pertaining to that portion of the Option which would otherwise expire (the
"Renewal Fee") and the Company shall extend that portion of the Option 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., New York Time, on May 15, 2006, and shall
issue a new Option, identical in every respect to this Option, except that such
new Option shall reflect the fact that Holder(s) shall have an additional five
(5) years to exercise their rights to purchase that portion of the Option Stock
for which they have paid a Renewal Fee. 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 Option. This
provision extends to this Option and all successor Option issuable hereunder.
10. Modification and Waiver. This Option 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.
11. Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder(s) 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
Option.
12. Fractional Shares. No fractional shares shall be issued upon
exercise of this Option. The Company shall, in lieu of issuing any fractional
share pay the Holder(s) 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.
13. Description Headings and Governing Law. The descriptive headings
7
<PAGE>
of the several sections and paragraphs of this Option are inserted for
convenience only and do not constitute a part of this Option. This Option 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.
14. Validity. If any term, provision, covenant or restriction of
this Option 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 Option 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
Option 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.
IN WITNESS WHEREOF, the Company has caused this Option(Serial
Number:_________) to be executed by its officer, thereunto duly authorized as of
this 16th day of May, 1996.
CHEUNG LABORATORIES, INC.
By:___________________________
Signature
By: Augustine Y. Cheung
-------------------
Print Name
Title: President and Chief Executive Officer
-------------------------------------
8
Form of Warrant
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.
Warrant Certificate No.: __________
Date of Issue: _____________
Void after 5:00 p.m. New York time on _________________.
CELSION CORPORATION
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 Celsion Corporation, a Maryland corporation (the
"Company"), (i) __________ fully paid and non-assessable shares of the Common
Stock, par value $0.01 per share, of the Company (the "Common Stock") at the
Exercise Price of $0.50 per share, and (ii) __________ fully paid and
non-assessable shares of the Common Stock at the Exercise Price of $1.00 per
share. The Warrant shall be exercisable at any time on and after the date hereof
but not later than 5:00 P.M. (New York time) on the third anniversary of the
date hereof (the "Expiration Date"), upon surrender to the Company at its
principle office at 10220-I Old Columbia Road, Columbia, MD 21046-1705,
Attention: Dr. Augustine Cheung, Chairman of the Board and Chief Executive
Officer (or at such other location as the Company may advise the Holder in
writing) of this Warrant properly endorsed with the Purchase Form attached
hereto duly filled in and signed and upon payment in cash or cashier's check of
the aggregate Exercise Price for the number of shares for which this Warrant is
being exercised determined in accordance with the provisions hereof. From and
after April 1, 1999, the Company, at its option, may redeem in whole or in part
this Warrant (i) for an amount equal to $0.01per share with respect to the
shares of Common Stock having an exercise price of $0.50 per share if the
adjusted price of the Common Stock rises to more than $1.00 per share, and (ii)
for an amount equal to $0.01per share with respect to the shares of Common Stock
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having an exercise price of $1.00 per share if the adjusted price of the Common
Stock rises to more than $2.00 per share. The Company must give at least thirty
(30) days notice of such redemption, during which period the holders of the
Warrants may exercise their Warrants in accordance with the terms thereof. The
Exercise Price and, in some cases, the number of shares purchasable hereunder
are subject to adjustment as provided in Section (g) 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. In
the event that the Holder does not exercise this Warrant pursuant to the terms
of this Warrant, then this Warrant shall expire, be canceled, and be null and
void.
(a) Exercise of Warrant. This Warrant may be exercised in whole or in
part at any time or from time to time on or after the date hereof, but not later
than 5:00 p.m. New York time, on the Expiration Date. If such date is a day on
which banking institutions are authorized by law to close, then the expiration
date shall be on the next succeeding day which shall not be such a day. This
Warrant may be exercised by presentation and surrender hereof to the Company or
at the office of its stock transfer agent, if any, with written notice duly
executed and accompanied by payment in cash or cash equivalent of the Exercise
Price for the number of shares specified in such notice, together with all
federal and state taxes applicable upon such exercise. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the right of the
holder to purchase the balance of the shares purchasable hereunder. Upon receipt
by the Company of this Warrant at the office or agency of the Company, in proper
form for exercise, the Holder shall be deemed to be the holder 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.
(b) Reservation of Shares. The Company hereby agrees that at all times
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.
(c) Fractional Shares. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(1) If the Common Stock is listed on a national securities
exchange, admitted to unlisted trading privileges on such exchange or
quoted on the Nasdaq National Market System or other interdealer
trading systems providing last sale information, the current value
shall be the last reported sale price of the Common Stock on such
exchange, Nasdaq/NMS or trading system on the last business day prior
to the date of exercise of this Warrant or if no such sale is made on
such day, the average closing bid and asked prices for such day on such
exchange, Nasdaq/NMS or trading system; or
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(2) 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 an interdealer quotation
system deemed reliable by the Company on the last business day prior to
the date of the exercise of this Warrant; provided that if the Common
Stock is quoted on more than one such system, the Company shall
utilize, in order of priority, Nasdaq, the NASD OTC Bulletin Board or
the National Quotation Bureau, Inc.; or
(3) 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 value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company, such determination to be final and
binding on the Holder.
(d) Restrictions on Transfer. The securities represented hereby and the
shares to be issued on exercise have not been registered under federal or state
securities laws. They may not be sold or offered for sale in the absence of
effective registration under such securities laws, or an opinion of counsel
satisfactory to the Company that such registration is not required.
(e) Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to compliance with Section (d) hereof, this
Warrant is assignable. Any such assignment shall be made by surrender of this
Warrant to the Company or at the office of its stock transfer agent, if any,
with written notice of assignment duly executed and funds sufficient to pay any
transfer tax; whereupon the Company shall, without charge, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants which carry the same rights 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 term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged and the term "original issue date hereof" shall refer to
the date that the Company first issued a Warrant which was subsequently
transferred or exchanged for another. Upon receipt by the Company of evidence
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 tenor 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.
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<PAGE>
(f) Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(g) Anti-Dilution Provisions.
------------------------
(1) Adjustment of Number of Shares. Anything in this Section
(g) to the contrary notwithstanding, in case the Company shall at any
time issue Common Stock by way of dividend or other distribution on any
stock of the Company or subdivide or combine the outstanding shares of
Common Stock, the Exercise Price shall be proportionately decreased in
the case of such issuance (on the day following the date fixed for
determining shareholders entitled to receive such dividend or other
distribution) or decreased in the case of such subdivision or increased
in the case of such combination (on the date that such subdivision or
combination shall become effective).
(2) No Adjustment for Small Amounts. Anything in this Section
(g) 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, 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.
(3) Number of Shares Adjusted. Upon any adjustment of the
Exercise Price other than pursuant to Section (g)(1) hereof, the holder
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.
(4) Common Stock Defined. Whenever reference is made in this
Section (g) to the issue or sale of shares of Common Stock, the term
"Common Stock" shall mean the common shares of the Company of the class
authorized as of the date hereof and any other class of stock ranking
on a parity with such Common Stock. However, subject to the provisions
of Section (j) 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.
(h) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section (g) hereof, the Company shall
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<PAGE>
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 and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder. Such certificate
shall be conclusive as to the correctness of such adjustment.
(i) Notice to Warrant Holders. So long as this Warrant shall be
outstanding and unexercised (i) if the Company shall pay any dividend or make
any distribution upon the Common Stock, or (ii) 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 (iii) 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 voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be effected, then, in any such case, the Company
shall cause to be delivered to the Holder, at least ten (10) days prior to the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) 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 for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(j) 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 in which 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, the Company shall cause
effective provision to be made so that the Holder shall have the right
thereafter, by 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 provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. The foregoing provisions of this Section (j) shall
similarly apply to successive reclassifications, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers,
sale 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
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<PAGE>
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 Subsection (g)(1) hereof with the amount of the
consideration received upon the issue thereof being determined by the Board of
Directors of the Company, such determination to be final and binding on the
holder.
(k) Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
(l) Optional Waiver. Holder may waive by signed writing any rights of
Holder contained herein.
(m) IN ADDITION TO THE RESTRICTIONS ON TRANSFERABILITY DESCRIBED
HEREIN, THE SECURITIES ISSUABLE ON EXERCISE OF THIS WARRANT SHALL NOT BE SOLD,
PLEDGED, TRANSFERRED, HYPOTHECATED OR ASSIGNED WITHIN 7 DAYS BEFORE OR 180 DAYS
AFTER THE DATE OF EFFECTIVENESS OF A REGISTRATION STATEMENT FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH A PUBLIC OFFERING
OF THE COMPANY'S SECURITIES. THIS RESTRICTION IS IN ADDITION TO AND NOT IN LIEU
OF THE RESTRICTIONS CONTAINED HEREIN AND AS SUCH, THIS 180 DAY PERIOD MAY EXPIRE
PRIOR TO OR BEYOND THE RESTRICTIONS IMPOSED HEREIN. THIS RESTRICTION SHALL
OBLIGATE ALL SUCCESSORS IN INTEREST TO THE SHARES ISSUED ON EXERCISE.
CERTIFICATES REPRESENTING THE WARRANT STOCK SHALL BEAR A LEGEND EVIDENCING THIS
RESTRICTION.
THIS WARRANT CERTIFICATE is granted and sold as of the date first above
written.
CELSION CORPORATION
By:________________________
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
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<PAGE>
PURCHASE FORM
Dated: ______________
Celsion Corporation
10220-I Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, Secretary
Dear Mr. Mon:
Attached hereto is Celsion Corporation's Warrant Certificate No.
__________, giving the Holder thereof the right to purchase (i) __________
shares of the Common Stock, par value $0.01 per share, of the Company (the
"Common Stock") at the Exercise Price of $0.50 per share, and (ii) __________
shares of the Common Stock at the Exercise Price of $1.00 per share..
I/We hereby notify you that I/we are exercising my/our right to
purchase __________ shares of the Common Stock at the Exercise Price of $0.50
per share and __________ shares of the Common Stock at the Exercise Price of
$1.00 per share (collectively, the "Shares") and have enclosed herewith my/our
check in the amount of $__________, representing the aggregate exercise price of
the 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 Certificate and, if applicable, send
me/us a Warrant Certificate, in partial substitution on identical terms, for the
remaining shares not being purchased pursuant to this notification.
Yours very truly,
---------------------------
Please type or print:
- ------------------------------------------
Name
- ------------------------------------------
Address
- ------------------------------------------
City State Zip Code
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 $1,505,000 in
face amount of Notes and associated Warrants as described in the Confidential
Offering Memorandum dated January 6, 1997 as amended June 12, 1997 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 hereby undertakes to register under the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Securities Act"), the Underlying Stock upon the first to
occur of (i) six months after the Company effects a registration, or (ii) July
10, 1998, on any applicable form, of newly issued common stock at any time while
the Investor holds the Notes, the Warrants, or 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
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provisions of Section 3(a), below and no 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 ("Public Offering"),
the Company shall use good faith 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 good faith
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 until the
third anniversary of the Closing of the Company's offering of
the Notes and Warrants, and subject to the terms of this
Agreement and excluding the Public Offering, 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 or successor forms) 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 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
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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 good faith efforts to:
(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). The Registration Statement shall be filed not later than
six months after the Closing of the Public Offering and the Company
will use good faith efforts to cause such Registration Statement to
become effective. The Company will use good faith efforts to 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
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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 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 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.
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(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, use good faith efforts to 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 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 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
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<PAGE>
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.
(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
C-6
6 shall be made by periodic payments of the amount thereof during 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 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
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<PAGE>
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.
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.
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<PAGE>
Dated this ____ day of __________ 19_____.
INVESTOR: CHEUNG LABORATORIES, INC.
__________________ By: _________________________________________
Signature
__________________ Title: ______________________________________
Printed Name
C-9
Form of Registration Rights Agreement
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made by
Celsion Corporation, a Maryland corporation (the "Company"), for the benefit of
the undersigned investor (the "Investor"; collectively, the "Investors"). This
Agreement shall become effective upon acceptance and closing in respect of the
related subscription for the Units being offered by the Company, each Unit
consisting of 40,000 shares of Common Stock of the Company, par value $0.01 per
share (the "Common Stock"), and a Warrant (the "Warrant") to purchase (i) 20,000
shares of the Common Stock at an Exercise Price of $0.50 per share, and (ii)
20,000 shares of the Common Stock at an Exercise Price of $1.00 per share.
R E C I T A L S
A. The Investor desires to purchase from the Company, and the Company
desires to issue and sell to the Investor, up to an aggregate of $1,000,000 of
Units, each Unit consisting of 40,000 shares of Common Stock and a Warrant to
purchase 40,000 shares of the Common Stock, as described in the Private
Placement Memorandum dated September 10, 1998, as amended November 12, 1998,
together with the Exhibits attached thereto (the "Offering Memorandum").
B. As partial inducement for the Investor to purchase the Securities,
the Company hereby undertakes to use its best effort to register under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "Securities Act"), the Securities upon the terms and subject to
the conditions set forth herein.
The Company and the Investor hereby agree as follows:
1. Definitions. For the 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 Common
Stock, including the Common Stock issued upon exercise of the Warrants,
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 Unit,
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<PAGE>
Common Stock or Warrant, 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 Investor 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. Piggyback Registration. (a) On an unlimited number of occasions
until December 31, 2000, 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) on an SEC form
(other than S-4 or S-8 or successor forms) 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 within twenty (20) days after delivery
of such written notice from the Company. Nothing contained in this Section 2
shall limit the ability of the Company to withdraw a Registration Statement it
has filed either before or after effectiveness.
(b) If the registration of which the Company gives notice pursuant to
Section 2(a) is for a registered public offering involving an underwriting, the
Company shall so advise the Holders of Registerable Securities as part of the
written notice given pursuant to Section 2(a) hereof. 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. 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.
(c) In the event the Underwriters' representative advises the Holders
of Registerable Securities seeking registration of Registerable Securities
pursuant to this Section 2 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
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<PAGE>
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 shall be
included in such 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 good faith efforts to:
(a) Prepare and file with the SEC a registration statement or
statements or similar documents (the "Registration Statement") with
respect to all Registerable Securities. The Company shall use good
faith efforts to keep such Registration Statement effective pursuant to
Rule 415 at all times until the earlier of (i) December 31, 2001, 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.
(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) December 31, 2001, 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) December
31, 2001, or (ii) the date on which all Investors can sell their
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<PAGE>
respective shares of Registerable Securities pursuant to Rule 144 of
the Securities Act without 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 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 by-laws 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 ninety (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
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<PAGE>
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 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, use good faith efforts to 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
-5-
<PAGE>
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 hereof,
including, without 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 counsel
for the Investors shall 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
-6-
<PAGE>
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.
(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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 assignees, of such
securities, provided, however, that 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; and 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 Celsion Corporation, 10220-I Old Columbia Road, Columbia, MD
21046-1705, Attention: Augustine Cheung, PhD., Chairman of the Board and Chief
Executive Office, and (ii) if to an Investor, at the address set forth under his
name in the associated 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) This 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. Notwithstanding the foregoing, a waiver or consent to
departure from the provisions hereof with respect to a matter which relates
-9-
<PAGE>
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 Registerable
Securities. This Agreement supersedes all prior agreements and understanding
between the parties with respect to such subject matters.
Dated: December 1, 1998
CELSION CORPORATION
By:_________________________________
Name: Augustine Y. Cheung
Title: Chairman of the Board
--------------------------------------
Name:
-10-
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in Form 10-K for fiscal year ended September
30, 1998 of our report dated November 18, 1998 relating to the financial
statements of Celsion Corporation.
Stegman & Company
December 28, 1998
Baltimore, Maryland
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