Consulting Agreement - Stearns Management Co. and Cheung Laboratories Inc.
STEARNS MANAGEMENT COMPANY
[LETTERHEAD]
May 28, 1996
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Messrs: Augustine Cheung, President
Charles C. Shelton, Executive Vice President
Letter of Agreement
Dear Messrs. Cheung and Shelton:
We have held meetings held at the offices of Cheung Laboratories, Inc.
(the "Company") on May 24th and have participated in several phone conversations
between May 25th and today's date to get acquainted with you and with the
Company and to discuss various alternative strategies by which the Company can
finance the implementation of its business plans. Pursuant to our verbal
agreement for us to undertake a consulting engagement for the Company reached
during our meetings and confirmed by Mr. Shelton's letter of today's date, you
have forwarded substantial additional information which we have reviewed in
detail.
Accordingly, this Letter Agreement is to confirm and document the prior
agreements reached whereby the Company, a Maryland corporation, seeks to secure
the advice and services of Stearns Management Company, an Illinois corporation,
("Stearns") to render financial advisory services to it regarding its near and
long-term business strategy particularly with regard to its need to secure
outside capital to sustain its anticipated growth. Stearns has agreed to render
such advice and services on the terms and conditions set forth below.
1. The Company hereby engages Stearns to render consulting advice
to the Company, on an exclusive basis, with regard to all
matters involving the solicitation of outside capital,
restructuring the Company in a manner most conducive to
solicitation and acceptance of such capital, and other matters
relative thereto including, but not limited to, the matters
outlined in paragraph hereof.
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2. Stearns will consult with the Company's management at their
request to study the Company's business plans and to provide
specific recommendations concerning financial and related
matters, including, but not limited to, the following:
A Changes in the capitalization of the Company;
B Changes in the Company's corporate structure;
C Redistribution of shareholdings of the Company's
stock;
D Obtaining working capital financing for the Company
initially
and on an on-going basis;
E Offerings of securities in private transactions;
F Offerings of securities in public transactions
including selection of financial public relations
alternatives, budgeting and implementation of
follow-on strategy;
G Selection of professionals as special consultants in
connection with such offerings;
H Alternative uses of corporate assets;
I Alternative marketing approaches for expansion;
J Selection of advisory personnel and/or additional
directors;
K Sale of stock by insiders pursuant to Rule 144 or
otherwise.
3. Stearns will recommend and, upon request of the Company, use
its best efforts to implement a plan(s) which will provide
capital to the Company from outside sources on a timely basis,
both privately and publicly, utilizing its knowledge and
contacts within the financial and investment banking
communities.
4. As part of its duties hereunder and material to its
recommendations to the Company, Stearns will undertake an
analysis of:
(a) The current valuation of similarly situated
public companies in an effort to assure the Company
of fair valuation upon marketing of its securities.
(b) The Company's short term sales and manufacturing
plans in order to determine the need for interim
capital and to assist the Company in selecting its
best strategy for maximizing the intrinsic worth of
its shares.
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5. Upon request of the Company, Stearns will undertake consulting
assignments on such other matters as the Company may deem
appropriate.
6. In order to induce Stearns to enter into this relationship
with the Company and to discount its normal fees for services,
the Company shall:
(a) Grant to such assignees as Stearns shall
designate to the Company a transferable Common Stock
Purchase Warrant (the "Warrant"), in the form
attached hereto as Exhibit 1, entitling such
assignees to purchase, for a five year period
commencing on the date hereof and renewable for an
additional five year period, the number of shares
which, when added to the existing common shares and
any securities convertible into or exercisable for
the purchase of (options, warrants and the like)
common shares, would represent, in aggregate, a five
percent (5%) interest in the equity of the Company as
of the completion of the next registered public
offering of common shares of the Company. Said
Warrant, when reduced to certificate form, shall
allow said assignees of Stearns, in aggregate, to
invest a total sum of money to be derived by
multiplying $0.41 per share by that number of shares
which shall constitute said five percent (5%)
interest (on a fully diluted basis as is more fully
covered in the Warrant) and the Warrant shall contain
certain anti-dilution features (see form of Warrant
attached as Exhibit 1) which shall protect all
assignees of Stearns from percentage or price
dilution until the Company's next public offering (a
defined term in the Warrant) shall have been
completed, whereupon, in subsequent issues of equity,
assignees of Stearns shall accept dilution of their
interest pro-rata with other holders of common shares
or securities convertible or exercisable into same.
The warrants issuable upon execution of this
Agreement shall be fully vested in the hands of their
holders and shall not be cancelable regardless of the
termination, for any reason or for
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any cause, of this Agreement. Within three (3) months
from the date hereof, any and all Warrants issued in
accordance with this Agreement, shall be converted
into Warrants bearing the actual number of shares
into which each such Warrant certificate is
exercisable instead of the percentage of shares
currently defined in the Warrant to be issued
concurrently with the execution of this Agreement.
(b) Make the representation and warranties contained
in paragraphs and hereof. When made to Stearns
herein, all such representations, warranties and
indemnifications shall apply equally to Stearns
officers, directors, affiliates, heirs, successors
and assigns.
7. In consideration for the services rendered to the Company by
Stearns, Stearns shall charge the Company for services
rendered, commencing with the date of this Agreement, by its
personnel at the following per diem rates which represent a
substantial reduction from its normal charges:
An initial fee of $34,000 as additional inducement, together
with the issuance of a warrant to purchase 168,292 shares of
CLI Common Stocks on the same terms and conditions as may
hereafter be issued to investors in the contemplated Bridge
Financing undertaken shortly, and covering investigatory
efforts by Stearns to the date hereof.
The following fees and expense rates shall apply hereafter:
Per Diem
Warren C. Stearns $1500*
Others Cost plus 20%
Expenses Cost plus 20%
* Or $190.00/hr for partial days (primarily Chicago area). Per
diem rates shall apply regardless of the length of the working
day (providing the working day shall have been at least eight
(8) hours) and no charges
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shall be made for travel time unless same is during normal
working hours during the normal Monday-Friday work week.
Payment of fees and expenses may be delayed by the Company
pending first receipt of proceeds from outside financing;
thereafter, fees and expenses shall be billed monthly in
arrears and payable net, 10 days.
Statements from Stearns shall be submitted monthly to the
Company accompanied by receipts or other documentation as the
Company shall reasonably request.
8. Stearns shall have the right to rely on verbal instructions or
approvals of the Chief Executive, other designated officer, or
General Counsel to the Company with respect to initiating or
continuing to incur fees or expenses.
Similarly, the parties hereto have agreed that most of the
communication between the Company and Stearns shall be verbal
so as to minimize the amount of time actually billable by
Stearns to the Company. However, Stearns stands ready at any
time to communicate its reports, recommendations, or comments
on any matter in writing if requested to do so by the Company.
9. The Company acknowledges that all of the compensation due
Stearns as a result of its performance hereunder and all of
the inducements granted by the Company to Stearns to enter
into the relationship created hereby are accepted by Stearns
based on its continued reliance on the Company's
representations and warranties contained in this paragraph
and, upon execution of this Agreement, delivered hereby to
Stearns.
The Company represents that it has agreed in principle to
engage in one or more private securities offerings (more or
less, immediately) and to seek a next public offering of its
common stock at an early date (expected to be not later than
the end of 1997) to raise needed capital and, also, to aid in
liquefying existing investment. The Company also represents
and warrants to Stearns that:
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Except as already disclosed to Stearns, it is a
corporation in good standing, has correctly and
timely filed all reports and notices and has done all
such other things as it is required to do and to be
so filed by all the various state and federal laws,
rules, regulations and statutes to which the Company
is subject, is not in litigation or subjected to
threatened litigation, has good title to all of its
assets including but not limited to its patents
(whether owned or licensed), and is in compliance
with each and every contract or agreement which is
binding upon it.
It will engage competent securities counsel
reasonably acceptable to Stearns to prepare offering
material for each offering contemplated by this
agreement.
It will begin to substantially revise its Business
Plan, in an expeditious manner, along the lines and
in accordance with the suggestions made by Stearns
concurrent with the execution of this Agreement. As
well, it will furnish Stearns with adequate copies of
same as well as such further documentation as Stearns
may, from time to time, reasonably request.
It will prepare or cause to be prepare or cause to be
prepared a written, taped, and verbal "technical
presentation" and will use its best efforts to attend
meetings with security analysts to expose a variety
of financial institutions of its technical
achievements.
It will engage the services of an experienced
businessman to act as interim CEO who will be
competent to attend to the coordination of all
contemplated activities particularly attendant to the
preparation of the Company to financial institutions
and investment bankers.
It will engage an accounting firm reasonably
acceptable to Stearns to prepare audited financial
statements reflecting the Company's financial history
for the last three (3) fiscal years. Said statements
shall be prepared in accordance with generally
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accepted accounting principles but shall capitalize,
to the extent possible, the Company's investment in
its patents, prototypes, research and development.
That there are no existing agreements with any party
which would act to mitigate or prohibit the Company
from performance of all actions contemplated by this
Agreement and that it has full authority to enter
into this Agreement. Additionally, that the Company
is unaware of any potential claim or payment for
services in the nature of a finder's fee or any other
arrangements, agreements, payments, issuances or
understandings that would operate to affect Stearns'
compensation (including the issuance of the Warrant)
hereunder.
It does, hereby, indemnify Stearns against any
liability whatsoever (including legal fees and
expenses) arising from claims made by others based
upon misstatements or omissions of material fact
whether in offering material prepared by the Company
or in statements made or alleged to be made by
employees, agents, or consultants to the Company
(other than Stearns). In this connection, Stearns
shall rely upon the Company's assurance, made herein,
that, upon notice, the Company shall promptly engage
competent counsel to defend Stearns or failing to do
so for a period of thirty (30) days after receipt of
notice, shall, immediately upon receipt, reimburse
Stearns for any fees or expenses Stearns, in its sole
discretion, deems necessary for its defense.
It shall cooperate fully with Stearns in its efforts
to secure outside capital for the Company and shall
not unreasonably delay approval or delivery of
information or documentation (including executed
documentation) necessary to conclude financing
originated by Stearns and approved by the Company.
It recognizes and confirms that, in advising the
Company and in fulfilling its engagement hereunder,
Stearns will use and rely on data, material and other
information furnished to Stearns by the
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Company. The Company acknowledges and agrees that in
performing its services under this Agreement, Stearns
may rely upon the data, material and other
information supplied by the Company without in each
and every case being obligated to independently
verify the accuracy, completeness or veracity of
same.
In the event of any dispute between the parties
hereto, at the sole option of Stearns, the Company
will submit same to arbitration in accordance with
the rules of the American Arbitration Association and
that the prevailing party in any such arbitration or
litigation, as the case may be, shall be paid its
reasonably attorneys' fees and expenses arising from
such proceeding by the other party.
10. The term of this Agreement is for a period of one (1) year
from the date hereof or for a period ending on the date on
which a Registration Statement covering a public offering of
the Company's securities is declared effective by the
Securities and Exchange Commission, whichever date lasts
occurs. Notwithstanding anything to the contrary in this
paragraph, this Agreement may be terminated by either party
to this Agreement at any time in its discretion, upon ten (10)
days written notice to the other party.
In the event that this Agreement is terminated by the Company
for any reason prior to the termination date provided in the
first sentence of this paragraph , the rights under the
Warrant or Warrants, of even date herewith, by and between the
Company and assignees of sterns shall continue in full force
and effect according to its terms. Additionally, in the event
the Company terminates this Agreement prior to the termination
date set forth in the first sentence of this paragraph , the
Company shall, immediately upon submission of a final
statement by Stearns, pay all the fees and expenses accrued to
Stearns through the date of termination.
In the event that this Agreement is terminated by Stearns, it
shall be terminated only by Stearns' declaration of a breach
on the Company's
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party of this Agreement (particularly pursuant to the
provisions of paragraph hereof) or because the Company has
elected to materially delay or change its financing strategy
in such a fashion that the financing(s) contemplated herein
are no longer feasible within the term frame originally
contemplated. In such event, the Company and Stearns agree to
work out some mutually agreeable means by which the Company's
obligations to Stearns may be paid without undue burden on
either party.
11. Stearns will execute and agrees hereby to abide by (to the
extent its provisions are not in conflict with the performance
of duties expected of Stearns to this Agreement) an "Agreement
For The Protection Of Confidential Information") with the
Company.
If the foregoing correctly documents the understandings and agreements
reached between us, please execute this letter agreement in the space provided
below and return a copy of it for our files.
Very truly yours, Read, Understood and Agree:
Stearns Management Company Cheung Laboratories, Inc.
By: /s/ ____________________ By: /s/_______________________
Warren C. Stearns Augustine Y. Cheung
President President
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