-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCZVPXYFJBqbhaAijtwo/O1f6CEt/EZ/6f2Hy6ipZb1CKvczbSm4cFn6tfStaZSx ITXqddqV+Lzg+MlKxGSinA== 0000950109-96-003997.txt : 19960625 0000950109-96-003997.hdr.sgml : 19960625 ACCESSION NUMBER: 0000950109-96-003997 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19960624 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDI JECT CORP /MN/ CENTRAL INDEX KEY: 0001016169 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411350192 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06661 FILM NUMBER: 96584491 BUSINESS ADDRESS: STREET 1: 1840 BERKSHIRE LANE CITY: PLYMOUTH STATE: MN ZIP: 55431 BUSINESS PHONE: 6125531102 MAIL ADDRESS: STREET 1: 1840 BERKSHIRE LANE CITY: PLYMOUTH STATE: MN ZIP: 55431 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on June 24, 1996 Registration No. 333-_______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _______________________ MEDI-JECT CORPORATION (Exact name of registrant as specified in its charter) _______________________
MINNESOTA 3841 41-1350192 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
1840 BERKSHIRE LANE MINNEAPOLIS, MINNESOTA 55441 (612) 553-1102 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) FRANKLIN PASS, M.D. MEDI-JECT CORPORATION 1840 BERKSHIRE LANE MINNEAPOLIS, MINNESOTA 55441 (612) 553-1102 (Name, address, including zip code, and telephone number, including area code, of agent for service) _______________________ Copies to: J. Andrew Herring Joel I. Papernik Amy E. Lange Squadron, Ellenoff, Plesent & Sheinfeld, LLP Dorsey & Whitney LLP 551 Fifth Avenue 220 South Sixth Street New York, New York 10176 Minneapolis, Minnesota 55402-1498 (212) 661-6500 (612) 340-2600 _______________________ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] _______________________
CALCULATION OF REGISTRATION FEE ========================================================================================================================= Proposed Proposed Title of each Proposed maximum maximum Amount of class of securities Amount to be offering price aggregate registration to be registered registered(1) per unit(2) offering price(2) fee - ------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value...... 2,530,000 shares $10.00 $25,300,000 $8,725 =========================================================================================================================
(1) Including 330,000 shares of Common Stock issuable upon exercise of an option which the Underwriters may purchase to cover over-allotments, if any. (2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457. _______________________ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== MEDI-JECT CORPORATION ___________________ CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS ---------------------------------- --------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................. Outside Front Cover Page; Inside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................................. Inside Front Cover Page; Additional Information; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges..................... Cover Page; Prospectus Summary; Risk Factors 4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds 5. Determination of Offering Price........................ Underwriting 6. Dilution............................................... Dilution 7. Selling Security Holders............................... Not Applicable 8. Plan of Distribution................................... Cover Page and Inside Front Cover Page; Underwriting; Outside Back Cover Page 9. Description of Securities to be Registered............. Dividend Policy; Capitalization; Description of Capital Stock; Shares Eligible for Future Sale 10. Interests of Named Experts and Counsel................. Legal Matters; Experts 11. Information with Respect to Registrant................. Cover Page and Inside Front Cover Page; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements; Outside Back Cover Page 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities......... Not Applicable
SUBJECT TO COMPLETION, DATED , 1996 2,200,000 SHARES [MEDI-JECT LOGO] COMMON STOCK All of the 2,200,000 shares of Common Stock offered hereby are being offered by Medi-Ject Corporation ("Medi-Ject" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "MEDJ." FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND "DILUTION" ON PAGE 16. ____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=========================================================================== UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) - --------------------------------------------------------------------------- Per Share................ $ $ $ - --------------------------------------------------------------------------- Total (3)................ $ $ $ ===========================================================================
(1) Excludes five-year warrants to purchase 220,000 shares of Common Stock at an exercise price equal to 120% of the initial public offering price, to be issued to the Representatives at closing for nominal consideration. The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses estimated to be $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 330,000 additional shares of Common Stock solely to cover over- allotments, if any, on the same terms and conditions as the shares offered hereby. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ____________________ The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made at the offices of Rodman & Renshaw, Inc., New York, New York, on or about , 1996. ____________________ RODMAN & RENSHAW, INC. R. J. STEICHEN & COMPANY The date of this Prospectus is , 1996 Inside Front Cover The Medi-Jector system is a hand-held, spring-powered device that injects drugs from a drug-containing front-end chamber through the skin without a needle as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. MEDI-JECTOR VI [Picture of Medi-Jector system.] MEDI-JECTOR VIB [Picture of Medi-Jector system.] PEN-LIKE MEDI-JECTOR [Artist's rendering of pen-like Medi-Jector system.] The picture above is an artist's rendering of the Company's future generation pen-like Medi-Jector system. Although this picture shows current plans for this system, the design has not yet been finalized. The actual system, when and if finally developed, could differ from the Company's current plans. There can be no assurance that this system will be commercially introduced, or that the resulting system will have an appearance similar to that depicted above. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE- COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Medi-Jector(R) is a registered trademark of the Company. This Prospectus also includes trade names, trademarks and registered trademarks of companies other than the Company. 2 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements and notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial and share information set forth in this Prospectus (i) has been adjusted to reflect the conversion of all outstanding Convertible Preferred Stock into Common Stock upon the effectiveness or the closing of this offering, (ii) reflects a 1-for-1.313 reverse stock split of the Common Stock to be effected on July 10, 1996, (iii) assumes an initial public offering price of $9.00 per share, the midpoint of the range set forth on the cover page of this Prospectus, and (iv) assumes no exercise of the Underwriters' over-allotment option. Unless the context requires otherwise, all references in this Prospectus to "Medi-Ject" or the "Company" refer to Medi-Ject Corporation. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the heading "Risk Factors," which investors should consider carefully. THE COMPANY Medi-Ject is a drug delivery company focused on developing, manufacturing and marketing needle-free injection systems for the self-administration of a wide range of parenteral (injectable) drugs. The Company's product, the Medi- Jector system, is a hand-held, spring-powered device that injects drugs from a drug-containing front-end chamber through the skin without a needle as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to pierce the skin with a hypodermic needle and therefore is perceived by many people to be less threatening than injection with a needle. Today's Medi-Jector systems are smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems. The Company believes that the key to widespread market acceptance of its needle-free injection systems depends upon continued improvements in these areas. The Company believes that needle-free injection systems will benefit individuals who require self-injection by (i) eliminating the need to pierce themselves with needles for each injection, which should lead to an increased willingness to comply with a prescribed injection regimen and consequently reduce health complications, (ii) providing the ability to inject themselves discreetly and (iii) eliminating the need for special disposal of used needles. In addition, healthcare industry providers and payors may benefit from the decrease in long-term costs of patient care which may result from improved patient compliance. Furthermore, pharmaceutical companies may benefit from an increased ability to differentiate their products in the marketplace and improved patient compliance, both of which may lead to increased sales and larger market share. The Company has entered into licensing and development agreements with multi-national pharmaceutical and medical device companies covering the design and manufacture of customized injection systems for specific drug therapies. In addition to agreements with pharmaceutical companies, including those with Ferring NV, JCR Pharmaceuticals Co., Ltd., Bio-Technology General Corporation, Schwarz Pharma AG and GeneMedicine, Inc., the Company has entered into a strategic alliance with Becton Dickinson and Company ("Becton Dickinson"). The goal of this alliance is the joint development and commercialization of new, less expensive and more user friendly injectors which embody proprietary, advanced technology. The Company will design and manufacture the injectors, and Becton Dickinson will design and manufacture the consumable components for the systems. Becton Dickinson has the right to market the injectors and the consumable components worldwide for use initially with insulin and potentially with other drugs. Medi-Ject and Becton Dickinson will collaborate on the development and manufacture of customized versions of the system and share revenues from sales of injectors and consumables to pharmaceutical companies and any revenue generated from licensing milestone payments, development fees and royalties. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin. In the United States, over 3.2 million people inject insulin for the treatment of diabetes, resulting in an estimated 2.3 billion injections annually, and the Company believes that the number of insulin injections will increase with time as the result of new diabetes management approaches which recommend more frequent use. Other parenteral drugs that are self-administered and may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headache, growth retardation, impotence, female infertility, AIDS and hepatitis. The Company also believes that more existing parenteral drugs will be self- administered in the future and that additional parenteral drugs that are under development will be deemed appropriate for self-administration. The Company's goal is to establish its needle-free injectors as the drug delivery method of choice for the self-administration of a wide range of parenteral drugs. The Company's strategic plan for accomplishing this goal consists of (i) developing improved proprietary injection systems, (ii) generating an income stream from consumable components, (iii) collaborating with pharmaceutical and medical device manufacturers to leverage off of their marketing capabilities and (iv) focusing on delivery systems for high-priced pharmaceuticals. The Company's offices are located at 1840 Berkshire Lane, Minneapolis, Minnesota 55441, and its telephone number is (612) 553-1102. The Company was incorporated in Minnesota in 1979. THE OFFERING Common Stock Offered by the Company..................... 2,200,000 shares Common Stock to be Outstanding After the Offering....... 6,925,633 shares (1) Use of Proceeds....................................... For capital expenditures, primarily the improvement of the Company's manufacturing and assembly capability; market development activities; research and development; and working capital and other general corporate purposes. Proposed Nasdaq National Market Symbol................. "MEDJ"
______________ (1) Excludes 2,966,810 shares consisting of (i) 481,690 shares issuable upon exercise of outstanding options granted under the Company's 1993 Stock Option Plan and (ii) 2,485,120 shares issuable upon exercise of outstanding options and warrants granted to third parties. See "Description of Capital Stock." - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ ---------------------- 1993 1994 1995 1995 1996 ------- ---------- ----------- ---------------------- STATEMENT OF OPERATIONS DATA: Sales.............................. $1,058 $ 1,518 $ 1,654 $ 447 $ 444 Licensing and product development.. 125 470 921 95 325 ------ ------- ------- ------ ------ Revenues......................... 1,183 1,988 2,575 542 769 ------ ------- ------- ------ ------ Cost of sales...................... 409 631 1,049 231 292 Research and development........... 146 401 1,195 269 450 General and administrative......... 615 868 978 331 389 Sales and marketing................ 485 1,128 1,146 241 213 ------ ------- ------- ------ ------ Operating expenses............... 1,655 3,028 4,368 1,072 1,344 ------ ------- ------- ------ ------ Net operating loss................. (472) (1,040) (1,793) (530) (575) Net other income (expense)......... (28) (26) (89) (10) 22 ------ ------- ------- ------ ------ Net loss........................... $ (500) $(1,066) $(1,882) $ (540) $ (553) ====== ======= ======= ====== ======= Pro forma net loss per common share (1)........................ $ (0.36) $(0.09) ======= ====== Pro forma weighted average shares outstanding (1) common.... 5,180 6,353 AT MARCH 31, 1996 ---------------------------- ACTUAL AS ADJUSTED(2) ------ ---------------- BALANCE SHEET DATA: Cash and cash equivalents................................. $ 2,811 $ 20,801 Working capital........................................... 2,454 20,444 Total assets.............................................. 4,331 22,321 Accumulated deficit....................................... (9,855) (9,855) Total shareholders' equity (3)............................ 3,179 21,169
________________ (1) Computed on the basis described in Note 1 of Notes to Financial Statements. (2) Adjusted to reflect receipt by the Company of estimated net proceeds from the issuance of 2,200,000 shares at an assumed public offering price of $9.00 per share and the application of such proceeds. See "Use of Proceeds" and "Capitalization." (3) Reflects the conversion of all outstanding Convertible Preferred Stock into Common Stock, described in Note 13 of Notes to Financial Statements. - -------------------------------------------------------------------------------- 5 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution. In evaluating an investment in the Common Stock being offered hereby, investors should consider carefully, among other matters, the following risk factors, as well as the other information contained in this Prospectus. UNCERTAINTY OF MARKET ACCEPTANCE; LIMITED CURRENT MARKET FOR NEEDLE-FREE INJECTION SYSTEMS The Company's success will depend upon increasing market acceptance of its needle-free injection systems as an alternative to needle injections. During the approximately 15 years since their initial commercial introduction, the Company's needle-free injection systems have had only limited success competing with traditional needles and syringes because, the Company believes, of the size, cost and complexity of use and maintenance of the Company's injectors and the relatively small number of parenteral drugs that have been self- administered. In order to increase market acceptance, the Company believes that it must successfully develop improvements in the design and functionality of future needle-free injection systems that will reduce their cost and increase their appeal to users, thereby making these systems desirable despite their premium cost over traditional disposable needles and syringes. Projected improvements in functionality and design may not adequately address the actual or perceived complexity of using the Company's needle-free injection systems or adequately reduce their cost. In addition, the Company believes that its future success is dependent upon its ability to enter into additional collaborative agreements with drug and medical device manufacturers for the use of its needle- free injection systems with new and existing parenteral drugs. There can be no assurance that the Company will be successful in these efforts or that its needle-free injection systems will ever gain sufficient market acceptance to sustain profitable operations. See "Business--Strategy," "--Target Markets" and "--Products and Technology." HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has had a history of operating losses and, at March 31, 1996, had an accumulated shareholders' deficit of approximately $9.9 million. Net losses for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996 were $500,319, $1,066,462, $1,882,459 and $553,015, respectively. The Company expects to continue to incur net losses at least through 1997, as it introduces new and improved needle-free injection systems while undertaking research and development, regulatory approval and commercial introduction activities related to new uses for its needle-free injection systems. There can be no assurance that the Company will achieve or sustain profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH DEVELOPING IMPROVED SYSTEMS AND NEW USES The Company believes that its future success is in part dependent upon the development and commercial introduction of needle-free injection systems that incorporate improvements in design and functionality to reduce their cost and increase their appeal to users. In the United States, Japan and certain European countries, the Company's needle-free Medi-Jector system has been approved only for the injection of insulin and human growth hormone. The Company's future success depends to a significant degree on its ability to obtain regulatory approval for and commercialize the use of its needle-free injection systems for other parenteral drugs. However, the Company has not yet completed research and development work or obtained regulatory approval for such improved systems or for use with any drugs other than insulin and human growth hormone. There can be no assurance that any development work will ultimately be successful or that unforeseen difficulties will not occur in research and development, clinical testing, regulatory submissions and approval, product manufacturing and commercial scale up, marketing, or product distribution related to any such improved systems or new uses. Any such occurrence could materially delay the commercialization of such improved systems or new uses or prevent their market introduction entirely. See "--Government Regulations" and "Business." 6 RISKS OF RELATIONSHIP WITH BECTON DICKINSON AND COMPANY The Company's ability to introduce improved and less expensive needle-free injection systems will depend in part on the success of its collaborative effort with Becton Dickinson to develop a smaller needle-free injector with a disposable, single-use front-end chamber. This effort is governed by the terms of a Development and License Agreement between the Company and Becton Dickinson (the "Becton Dickinson Agreement"), under which the Company is responsible for developing the injector body and Becton Dickinson is responsible for developing the front-end chamber for the system. Until January 1, 1999, Becton Dickinson may terminate the Becton Dickinson Agreement without cause by providing six months' written notice and after January 1, 1999, by providing 12 months' written notice. Since the Company expects that the majority of the funding for its development efforts on the new, smaller injector will be derived from payments to be made by Becton Dickinson under the Becton Dickinson Agreement and since responsibility for developing the front-end chamber lies with Becton Dickinson, any termination of the Becton Dickinson Agreement would adversely affect the timing and the likelihood of ultimate success of these development efforts. In addition, under the Becton Dickinson Agreement, Medi-Ject granted Becton Dickinson the exclusive, worldwide right to sell a proposed new injector for use with insulin and any other injector that is not designed or calibrated for use with a specific drug made by a specific drug company and that is intended to be distributed primarily through pharmacies for non-professional use. These exclusive rights will continue for a period of at least five years from the date of the United States Food and Drug Administration (the "FDA") marketing clearance of each such injector, and for a longer period if Becton Dickinson meets certain minimum sales goals set in the Becton Dickinson Agreement. During such period, the Company will not have the right to sell any such injector independently. In addition to the systems to be sold by Becton Dickinson, the Company and Becton Dickinson expect to enter into agreements with third-party pharmaceutical companies, including development, supply and license agreements, governing the development and commercial sale of needle-free injection systems for use only with such third-party pharmaceutical company's version of a specific drug. Furthermore, prior to developing a system for use with any specific drug, the Company and Becton Dickinson must mutually agree on whether or not such system will be of the type covered by Becton Dickinson's exclusive sales rights. There can be no assurance that any such agreements will be entered into or that the terms of any such agreements will be advantageous to the Company. See "Business--Collaborative Agreements" and "--Products and Technology." DEPENDENCE ON COLLABORATIVE RELATIONSHIPS The Company believes that the introduction and broad acceptance of its systems is in part dependent upon the success of its current and any future development and licensing arrangements with pharmaceutical and medical device companies covering the development, manufacture or use of the Medi-Jector system with specific parenteral drug therapies. The Company anticipates, consistent with past practice, that under these arrangements the pharmaceutical or medical device company will assist in the development of systems for such drug therapies and collect or sponsor the collection of the appropriate data for submission for regulatory approval of the use of the Medi-Jector system with the licensed drug therapy. The pharmaceutical or medical device company also will be responsible for distribution and marketing of the systems for these drug therapies either worldwide or in specific territories. There can be no assurance that the Company will be successful in executing additional agreements with pharmaceutical or medical device firms or that existing or future agreements will result in the sale of the Company's needle-free injection systems. As a result of these arrangements, the Company is dependent upon the development, data collection and marketing efforts of such pharmaceutical and medical device companies. The amount and timing of resources such pharmaceutical and medical device companies devote to these efforts are not within the control of the Company, and such pharmaceutical and medical device companies could make material decisions regarding these efforts that could adversely affect the Company's future financial condition and results of operations. In addition, factors that adversely impact the introduction and level of sales of any drug covered by such licensing arrangements, including competition within the pharmaceutical and medical device industries, the timing of FDA or other approvals and intellectual property litigation (such as that surrounding Bio- 7 Technology General Corporation's human growth hormone, which has delayed the introduction of the use of the Medi-Jector system with human growth hormone in the United States), will also negatively affect the Company's sales of Medi- Jector systems for those uses. See "Business--Target Markets," "--Collaborative Agreements," "--Products and Technology" and "--Marketing." DEPENDENCE ON THIRD-PARTY DEVELOPMENT EFFORTS The Company relies heavily on outside consultants for its technology development and engineering work, and the Company's ability to introduce new systems and improvements to its existing systems is dependent on their efforts. There can be no assurance that the Company's current consultants will produce the necessary work product in a timely fashion or at all, or that the Company could find suitable replacements if the services of such consultants were to become unavailable. "Business--Products and Technology." COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE In addition to competition from traditional hypodermic needles and syringes (including syringes with hidden and sheathed needles), the Company's needle-free injection systems also compete with other needle-free injection devices. Currently, competition in the needle-free injection market is limited to small companies with modest financial and other resources, but the barriers to entry are currently low and additional competitors may enter the needle-free injection systems market, including companies with substantially greater resources and experience than the Company. There can be no assurance that the Company will be able to compete effectively against its current or potential competitors in the needle-free injection market, or that such competitors will not succeed in developing or marketing products that will be more accepted in such market. Competition in this market could also force the Company to reduce the prices of its systems below currently planned levels, thereby adversely affecting the Company's revenues and future profitability. In general, injection is used only with drugs for which other drug delivery methods are not possible, in particular with biopharmaceutical proteins (such as insulin and human growth hormone) that cannot currently be delivered transdermally, orally or pulmonarily. Many companies, both large and small (including Becton Dickinson), are engaged in research and development efforts on novel techniques aimed at delivering such drugs without injection. The successful development and commercial introduction of such a non-injection technique would likely have a material adverse effect on the Company's business, financial condition, results of operations and general prospects. See "Business--Competition." LIMITED MANUFACTURING EXPERIENCE; RISKS ASSOCIATED WITH NEW MATERIALS, NEW ASSEMBLY PROCEDURES AND INCREASED PRODUCTION LEVELS The Company's past assembly, testing and manufacturing experience has related primarily to the assembly of products from machined stainless steel and composite plastic components in limited quantities. The Company's planned future needle-free injection systems necessitate significant changes and additions to the Company's manufacturing and assembly process to accommodate new plastic components and a new injection power source. These systems must be manufactured in compliance with regulatory requirements, in a timely manner and in sufficient quantities while maintaining quality and acceptable manufacturing costs. In addition, the Company's plans call for significantly increased levels of production and a shift to performing more manufacturing functions internally rather than relying on third-party suppliers, which will require the Company to expand beyond its current facilities. In the course of these changes and additions to its manufacturing and production methods, the Company may encounter difficulties, including problems involving yields, quality control and assurance, product reliability, manufacturing costs, existing and new equipment, component supplies and shortages of personnel, any of which could result in significant delays in production. There can be no assurance that the Company will be able successfully to plan for production and manufacture of the Company's future needle-free injection 8 systems. Any failure to do so would negatively impact the Company's business, financial condition and results of operations. See "Business--Manufacturing." GOVERNMENT REGULATIONS Government regulation in the United States and certain foreign countries is a significant factor in the Company's business. In the United States, the FDA has principal jurisdiction over products that are used for human injection. Certain clearances are required from the FDA before medical devices, such as the Company's needle-free injection systems and their use with new drug therapies, can be marketed. The FDA regulatory process in the United States may delay the marketing of new systems for lengthy periods and impose substantial additional costs. Moreover, FDA marketing clearance regulations depend heavily on administrative interpretation, and there can be no assurance that interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. There can be no assurance that the Company will be able to obtain clearance of any future Company systems or any expanded uses of current or future Company systems in a timely manner or at all. In addition, even if obtained, FDA clearances are subject to continual review, and if the FDA believes that the Company is not in compliance with applicable requirements, it can institute proceedings to detain or seize the Company's systems, require a recall, suspend production, distribution, marketing and sales, enjoin future violations and assess civil and criminal penalties against the Company, its directors, officers or employees. The FDA may also suspend or withdraw market approval for the Company's systems or require the Company to repair, replace or refund the cost of any system manufactured or distributed by the Company. The Company must also demonstrate compliance with current Good Manufacturing Practices regarding quality control and manufacturing procedures. Compliance with these requirements requires the Company to expend time, resources and effort in the areas of production and quality control for itself and for its contract manufacturers. If violations of the applicable regulations are noted during FDA inspections, the continued marketing of any systems manufactured by the Company may be halted or adversely affected. Sales of medical devices outside the United States are subject to United States export requirements and foreign regulatory requirements. Legal restrictions on the sale of imported medical devices vary from country to country. The time and requirements to obtain approval by a foreign country may differ substantially from those required for FDA approval. There can be no assurance that the Company will be able to obtain regulatory approvals or clearances for its products in foreign countries. See "Business--Government Regulation" and "--Manufacturing." FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company anticipates that the proceeds of this offering, together with cash on hand, interest expected to be earned thereon and anticipated revenues will be sufficient to finance the Company's operations at least through 1997, although there can be no assurance that additional capital will not be required sooner. In order to meet its needs beyond this period, the Company may be required to raise additional funds through public or private financings. Such financings may not be available when needed on terms acceptable to the Company or at all. Moreover, any additional equity financings may be dilutive to purchasers in this offering, and any debt financing may involve restrictive covenants. An inability to raise such funds when needed might require the Company to delay, scale back or eliminate some or all of its planned system enhancements, market expansion and research and development activities, and might require the Company to cease operations entirely. In such event, all expenditures to date as well as expenditures from the proceeds of this offering might not be recoverable. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 9 DEPENDENCE ON PROPRIETARY TECHNOLOGY RIGHTS The Company's success will depend in part on its ability to protect its proprietary rights and to operate without infringing on the proprietary rights of third parties. In appropriate circumstances, the Company may apply for patent protection for uses, processes, products and systems that it develops. The Company currently owns two United States patents and one United States design patent and has filed eight United States patent applications, one Taiwanese patent application and one Patent Cooperation Treaty application. There can be no assurance that any of the Company's current or future patent applications will result in issued patents, that the scope of any current or future patents will prevent competitors from introducing competitive products or that any of the Company's current or future patents would be held valid or enforceable if challenged. Patenting medical devices involves complex legal and factual questions and there is no consistent policy regarding the breadth of claims which issue pertaining to such technologies; the ultimate scope and validity of patents issued to the Company or to its competitors are thus unknown. In addition to patents, the Company intends to rely upon unpatented trade secrets and know-how and on the expertise of its employees. Although the Company believes that it has in the past taken, and intends in the future to take, appropriate steps to protect its unpatented proprietary rights, including requiring that all of its employees and any third parties granted access to the Company's proprietary technology enter into confidentiality agreements with the Company, there can be no assurance that these measures will be sufficient to protect the Company's rights against third parties. Likewise, there can be no assurance that others will not independently develop or otherwise acquire unpatented technologies or products similar or superior to those of the Company. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry and the Company may in the future be required to defend its intellectual property rights against infringement, duplication and discovery by third parties or to defend itself against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by consultants or under research or development agreements with pharmaceutical companies, or with respect to the ownership of technology developed by employees who were previously employed by other companies. Any such disputes or related litigation could result in substantial costs to, and a diversion of effort by, the Company. An adverse determination could subject the Company to significant liabilities to third parties, require the Company to seek licenses from or pay royalties to third parties or require the Company to develop appropriate alternative technology. There can be no assurance that any such licenses would be available on acceptable terms or at all, or that the Company could develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Products and Technology" and "--Patents." RISKS ASSOCIATED WITH THIRD-PARTY REIMBURSEMENT OF END USERS Sales of the Company's current and proposed systems in certain markets are dependent in part on the availability of adequate reimbursement from third-party healthcare payors. Currently, insurance companies and other third-party payors reimburse the cost of needle-free injectors on a case-by-case basis and may refuse reimbursement if they do not perceive benefits to their use in a particular case. Third-party payors are increasingly challenging the pricing of medical products and services, and there can be no assurance that such third- party payors will not in the future increasingly reject claims for coverage of the cost of needle-free injections. In addition, there can be no assurance that adequate levels of reimbursement will be available to enable the Company to achieve or maintain market acceptance of its systems or maintain price levels sufficient to realize profitable operations. Furthermore, there is a possibility of increased government control or influence over a broad range of healthcare expenditures in the future. Any such trend could negatively impact the market for the Company's needle-free injection systems. 10 DEPENDENCE ON SINGLE SOURCE SUPPLIERS The systems currently sold by the Company contain a number of customized steel components manufactured by third-party suppliers, and the most recently introduced model Medi-Jector system contains certain plastic components the molds for which are located at the facilities of the Company's plastics suppliers. In addition, certain of the Company's planned systems will contain plastic disposable front-end chambers which Becton Dickinson has the exclusive right to manufacture for the Company under the Becton Dickinson Agreement. Regulatory requirements applicable to medical device manufacturing can make substitution of suppliers costly and time-consuming. In the event that the Company could not obtain adequate quantities of these components from its suppliers, there can be no assurance that the Company would be able to access alternative sources of such components within a reasonable period of time, on acceptable terms or at all. In particular, if the Company were required to change suppliers for its current plastic components, it would need either to move the necessary molds or to obtain new molds, either of which would entail significant delay. Similarly, if Becton Dickinson declined to supply the Company with disposable front-end chambers for its proposed systems, while the Company has the right to obtain a license to use Becton Dickinson's technology, it is unlikely that the Company could manufacture such components as inexpensively as Becton Dickinson. The unavailability of adequate quantities, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of components could have a material adverse effect on the Company's ability to manufacture and market its products. See "Business--Manufacturing." PRODUCT LIABILITY AND INSURANCE The Company faces an inherent business risk of exposure to product liability claims in the event that an end user is adversely affected by use or misuse of its systems, and the Company has in the past experienced such claims. The Company currently carries a product liability insurance policy with an aggregate limit of $5,000,000. As the result either of adverse claim experience or of medical device or insurance industry trends, however, the Company may in the future have difficulty in obtaining product liability insurance or be forced to pay very high premiums, and there can be no assurance that insurance coverage will continue to be available on commercially reasonable terms or at all. In addition, there can be no assurance that insurance will adequately cover any product liability claim against the Company. A successful product liability or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the Company's business, financial condition and operations. See "Business--Liability Insurance." NO PRIOR PUBLIC MARKET FOR COMMON STOCK Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market in the Common Stock will develop or be sustained upon completion of this offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the prices that will prevail in the public market. See "Underwriting." QUARTERLY FLUCTUATIONS IN OPERATING RESULTS The Company's operating results may vary significantly from quarter to quarter, in part because of changes in consumer buying patterns, aggressive competition, the timing of the recognition of licensing or development fee payments and the timing of, and costs related to, any future system or new drug use introductions. The Company's operating results for any particular quarter are not necessarily indicative of any future results. The uncertainties associated with the introduction of any new system or drug use and with general market trends may limit management's ability to forecast short-term results of operations accurately. Fluctuations caused by variations in quarterly operating results or the Company's failure to meet analysts' projections or public expectations as to results may adversely affect 11 the market price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." POSSIBLE STOCK PRICE VOLATILITY The trading prices of the Company's Common Stock could be subject to wide fluctuations in response to events or factors, many of which are beyond the Company's control. These could include, without limitation (i) quarter to quarter variations in the Company's operating results, (ii) announcements by the Company or its competitors regarding the results of regulatory approval filings, clinical trials or testing, (iii) developments or disputes concerning proprietary rights, (iv) technological innovations or new commercial products, (v) material changes in the Company's collaborative arrangements and (vi) general conditions in the medical technology industry. Moreover, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many medical technology and device companies and which have often been unrelated to the operating performance of such companies. RELIANCE ON KEY PERSONNEL The success of the Company is highly dependent, in part, on its ability to attract and retain highly qualified personnel, including senior management and scientific personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining key personnel in the future. Any failure to do so could adversely affect the Company. See "Business--Employees." CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS Upon completion of this offering, certain of the Company's officers, directors and principal shareholders will beneficially own in the aggregate approximately 6,078,841 shares of the Company's outstanding Common Stock (including shares subject to outstanding options and warrants). If these shareholders vote together as a group, they will be able to substantially influence the business and affairs of the Company, including the election of individuals to the Company's Board of Directors (the "Board of Directors"), and to otherwise affect the outcome of certain actions that require shareholder approval, including the adoption of amendments to the Company's articles of incorporation, and certain mergers, sales of assets and other business acquisitions or dispositions. Upon completion of this offering, the Company will have authorized 1,000,000 shares of undesignated preferred stock, $.01 par value, which may be issued by the Board of Directors on such terms, and with such rights, preferences and designations, as the Board of Directors may determine without further shareholder action. In addition, the Company is subject to certain provisions of the Minnesota Business Corporation Act that limit the voting rights of shares acquired in certain acquisitions and restrict certain business combinations. Some or all of the foregoing factors could have the effect of discouraging certain attempts to acquire the Company which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. See "Principal Shareholders," "Description of Capital Stock--Preferred Stock" and "--Anti- Takeover Provisions of the Minnesota Business Corporation Act." POSSIBLE ADVERSE MARKET EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE Sales of significant amounts of Common Stock in the public market or the perception that such sales will occur could adversely affect the market price of the Common Stock or the future ability of the Company to raise capital through an offering of its equity securities. Of the 6,925,633 shares of Common Stock to be outstanding upon completion of this offering, the 2,200,000 shares offered hereby will be eligible for immediate sale in the public market without restriction unless they are held by "affiliates" of the Company within the meaning of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The remaining 4,725,633 shares of Common Stock will be "restricted securities" 12 as that term is defined in Rule 144 under the Securities Act. Of these, an aggregate of 4,293,378 shares are owned by the Company's directors, officers and certain of its shareholders who, together with the Company, have agreed that they will not sell, directly or indirectly, any Common Stock without the prior consent of Rodman & Renshaw, Inc. for a period of 180 days from the date of this Prospectus. Of the shares not subject to this agreement, 125,008 shares will be eligible for immediate sale without restriction pursuant to Rule 144(k) on the effective date of this offering, 381 shares will be eligible for sale, subject to compliance with the volume limitations and other restrictions of Rule 144, 90 days after the effective date of this offering, and 306,866 shares will become eligible for sale under Rule 144 after the expiration of the two-year holding periods from the dates of acquisition, which end between December 29, 1996 and May 31, 1998. Beginning on the 181st day after the date of this Prospectus, when the agreements not to sell shares expire, an additional 929,757 of the shares may become eligible for sale without restriction pursuant to Rule 144(k), an additional 1,850,526 of the shares will become eligible for sale, subject to compliance with the volume limitations and other restrictions of Rule 144, and the remaining 1,513,059 shares will become eligible for sale under Rule 144 after the expiration of the two-year holding periods from the dates of acquisition, which end between December 29, 1996 and February 28, 1998. In addition, certain shareholders and holders of warrants and options, who in the aggregate beneficially own 5,049,440 shares of Common Stock, have the right, subject to certain conditions, to include their shares in future registration statements relating to the Company's securities and to cause the Company to register for public sale certain Common Stock owned by them. See "Shares Eligible for Future Sale" and "Underwriting." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in net tangible book value per share of $5.99. Investors may also experience additional dilution as a result of the exercise of outstanding stock options and warrants. See "Dilution." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,200,000 shares of Common Stock offered hereby are estimated to be approximately $18.0 million ($20.7 million if the Underwriters' over-allotment option is exercised in full), after deducting the underwriting discounts and estimated offering expenses and assuming an initial public offering price of $9.00 per share. The Company anticipates that the net proceeds of this offering will be used to fund approximately (i) $6 million of capital expenditures, primarily in connection with the improvement of the Company's manufacturing and assembly capability, (ii) $5 million of market development activities, including increased customer service and support for the marketing efforts of pharmaceutical and medical device companies with which the Company has collaborative arrangements and (iii) $5 million of research and development dedicated to the development of improved needle-free injector systems. The balance of the net proceeds will be used for working capital and other general corporate purposes. The Company may also use a portion of the net proceeds to acquire technologies, products or businesses compatible with the Company's existing business, although the Company has no current arrangements, commitments or understandings in this regard. These amounts are estimates, and the amount and timing of the expenditures for these purposes will depend upon numerous factors, including the status of the Company's product development efforts, the nature and timing of future licensing, development or other collaborative agreements, the timing of regulatory approvals, competition, manufacturing activities, market acceptance of the Company's products and other factors. The Company believes that the net proceeds from this offering, combined with cash on hand, interest expected to be earned thereon and anticipated revenues will be sufficient to meet its needs at least through 1997. Pending the use of the net proceeds, the Company plans to invest the funds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has not paid any dividends since its inception and for the foreseeable future intends to follow a policy of retaining all of its earnings, if any, to finance the development and continued expansion of its business. There can be no assurance that the Company will ever pay dividends. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. 14 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1996: (i) on a pro forma basis giving effect to the conversion of all outstanding shares of Convertible Preferred Stock into Common Stock; and (ii) on a pro forma as adjusted basis to reflect the issuance and sale of the 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the application of the estimated net proceeds therefrom.
AT MARCH 31, 1996 --------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED --------- ----------- (IN THOUSANDS) Long-term liabilities, less current maturities................. $ 95 $ 95 Shareholders' equity: Preferred stock, undesignated as to series, $.01 par value, 1,000,000 shares authorized pro forma and pro forma as adjusted; no shares issued and outstanding pro forma or pro forma as adjusted........................................ -- -- Common Stock, $.01 par value, 17,000,000 shares authorized; 4,725,633 shares issued and outstanding pro forma; 6,925,633 shares issued and outstanding, pro forma as adjusted (1) (2)................................ 47 69 Additional paid-in capital................................... 12,986 30,954 Accumulated deficit.......................................... (9,855) (9,855) --------- --------- Total shareholders' equity.................................. 3,179 21,169 --------- --------- Total capitalization...................................... $ 3,274 $21,264 ========= =========
___________________ (1) Excludes 2,966,810 shares consisting of (i) 481,690 shares issuable upon exercise of outstanding options granted under the Company's 1993 Stock Option Plan and (ii) 2,485,120 shares issuable upon exercise of outstanding options and warrants granted to third parties. See "Description of Capital Stock." (2) Reflects the conversion of all outstanding Convertible Preferred Stock into Common Stock, described in Note 13 of Notes to Financial Statements. 15 DILUTION The Company's pro forma net tangible book value as of March 31, 1996 was $2,882,949, or approximately $0.61 per share. Pro forma net tangible book value per share as of March 31, 1996, represents total assets, less intangible assets and total liabilities, divided by the number of shares outstanding, after giving effect to a subsequent 1-for-1.313 reverse stock split and the conversion of all outstanding shares of Convertible Preferred Stock into Common Stock. Without taking into account any changes in such net tangible book value per share after March 31, 1996, other than to give effect to the sale of the 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the receipt of the net proceeds of such sale after deducting underwriting discounts and commissions and estimated expenses payable by the Company, the pro forma net tangible book value as of March 31, 1996 would have been $20,872,949, or $3.01 per share. This represents an immediate increase in net tangible book value of $2.40 per share to existing shareholders and an immediate dilution to new investors of $5.99 per share, or 66.6%. The following table sets forth this per share dilution: Assumed initial public offering price per share................. $ 9.00 Pro forma net tangible book value per share at March 31, 1996... $ 0.61 Increase per share attributable to new investors................ 2.40 ------- Pro forma net tangible book value per share at March 31, 1996, as adjusted................................................... 3.01 ------- Dilution in net tangible book value per share to new investors.. $ 5.99 =======
If the Underwriters' over-allotment option is exercised in full, the net tangible book value per share of Common Stock after this offering would be $3.26 per share, which would result in dilution to new investors of $5.74 per share, or 63.8%. The following table summarizes, as of March 31, 1996, the differences between existing shareholders and new investors with respect to the total number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid (assuming an initial public offering price of $9.00 share).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE ---------------------- --------------------- NUMBER PERCENT AMOUNT PERCENT PER SHARE -------- --------- ---------- --------- -------------- Existing shareholders (1).. 4,725,633 68.2% $13,033,465 39.7% $2.76 New investors.............. 2,200,000 31.8 19,800,000 60.3 $9.00 --------- ----- ----------- ----- Total..................... 6,925,633 100.0% $32,833,465 100.0% ========= ===== =========== =====
__________________ (1) Excludes 2,966,810 shares consisting of (i) 481,690 shares issuable upon exercise of outstanding options granted under the Company's 1993 Stock Option Plan and (ii) 2,485,120 shares issuable upon exercise of outstanding options and warrants granted to third parties. 16 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected financial data of the Company are qualified by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1993, 1994 and 1995, and the balance sheet data at December 31, 1994 and 1995 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Prospectus and should be read in conjunction with those financial statements and notes thereto. The statements of operations data for the years ended December 31, 1991 and 1992 and the balance sheet data at December 31, 1991, 1992 and 1993 are derived from unaudited financial statements not included herein. The selected financial data as of and for the three months ended March 31, 1995 and 1996 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1996.
Three Months Ended Year Ended December 31, March 31, ----------------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 --------- ------- ------- ------- ------ ------ ------ STATEMENT OF OPERATIONS DATA: Sales............................................. $ 1,067 $ 1,058 $ 1,058 $ 1,518 $ 1,654 $ 447 $ 444 Licensing and product development................. -- -- 125 470 921 95 325 ------- ------- ------- ------- ------- ------- ------- Revenues......................................... 1,067 1,058 1,183 1,988 2,575 542 769 ------- ------- ------- ------- ------- ------- ------- Cost of sales..................................... 290 356 409 631 1,049 231 292 Research and development.......................... -- -- 146 401 1,195 269 450 General and administrative........................ 480 462 615 868 978 331 389 Sales and marketing............................... 345 349 485 1,128 1,146 241 213 ------- ------- ------- ------- ------- ------- ------- Operating expenses............................... 1,115 1,167 1,655 3,028 4,368 1,072 1,344 ------- ------- ------- ------- ------- ------- ------- Net operating loss................................ (48) (109) (472) (1,040) (1,793) (530) (575) Net other income (expense)........................ (60) (50) (28) (26) (89) (10) 22 -------- ------- ------- ------- ------- ------- ------- Net loss.......................................... $ (108) $ (159) $ (500) $(1,066) $(1,882) $ (540) $ (553) ======= ======== ======= ======= ======== ======== ======== Pro forma net loss per common share (1)........................................ $(0.36) $(0.09) ======= ======= Pro forma weighted average common shares outstanding (1)........................... 5,180 6,353
At December 31, At March 31, ----------------------------------------------------------- 1991 1992 1993 1994 1995 1996 ----------- -------- -------- ------- -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................... $ 170 $ 55 $ 649 $ 646 $ 36 $ 2,811 Working capital..................................... (622) (37) 197 108 (650) 2,454 Total assets........................................ 373 267 894 1,361 1,240 4,331 Accumulated deficit................................. (5,694) (5,846) (6,353) (7,419) (9,302) (9,855) Total shareholders' equity (deficit)................ (548) (329) 119 252 (74) 3,179
(1) Computed on the basis described in Note 1 of the Notes to Financial Statements. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the financial statements and notes thereto included elsewhere in this Prospectus. This Prospectus, including the following discussion, contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the heading "Risk Factors." GENERAL Medi-Ject Corporation designs, manufactures and markets needle-free injection systems. In 1993, the Company hired a new management team with the goal of revitalizing and redefining the Company's strategic direction. Since that time, product development efforts have increased, emphasizing reductions in the cost of the Company's systems to make them more competitive in the marketplace. In addition, marketing efforts have been focused on increasing sales in the domestic insulin market and on expanding the use of needle-free injection systems for parenteral drugs other than insulin. As part of this effort to encourage broader use of needle-free injection systems, the Company began entering into technology and product license agreements to sell the Medi-Jector system. The licensing and development income from these agreements has been used primarily to fund increased product development efforts. This development effort has resulted in a new generation of the Medi-Jector system, the Medi-Jector VI system, which incorporates molded plastic components rather than tooled steel components and was introduced in July 1995, and an innovative needle-free injection technology that is the subject of eight United States patent applications. RESULTS OF OPERATIONS Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 Revenues increased to approximately $769,000 in the first quarter of 1996 from approximately $542,000 in the first quarter of 1995, an increase of approximately 42%. This increase was primarily the result of increased licensing and product development fees. Sales of injectors, parts and repairs declined to approximately $444,000 in the first quarter of 1996 from approximately $447,000 in the first quarter of 1995, a decrease of approximately 1%. This decrease resulted from an unchanged number of injector sales (811 in each such period) an increased percentage of which were pharmacy wholesale sales made at a lower average price. The decrease was partially offset by an increase in sales of replacement parts and supplies. Licensing and product development fees increased to approximately $325,000 in the first quarter of 1996 from $95,000 in the first quarter of 1995, an increase of approximately 242%. The increase in fee income reflected both the execution of the Becton Dickinson Agreement in January 1996 and an increase in fee revenues from other ongoing development projects. The Company expects that licensing and product development fee income will tend to fluctuate on a quarter to quarter basis, depending on a number of factors, including the timing of the execution of new development and licensing agreements and the timing, nature and size of fee payments to be made under existing and new agreements. In addition, since the Company in general does not recognize project-based fee income until the related development work has been performed, quarterly results will fluctuate with the timing of the Company's research and development efforts. Cost of sales increased to approximately $292,000 in the first quarter of 1996 from approximately $231,000 in the first quarter of 1995, an increase of approximately 27%. The increase in cost of sales was due to an increase in per unit manufacturing costs and an increase in the number of replacement parts and supplies manufactured. The Company expects that per injector manufacturing costs will decrease as volumes increase. 18 Research and development expenses increased to approximately $450,000 in the first quarter of 1996 from approximately $269,000 in the first quarter of 1995, an increase of approximately 67%. This increase was primarily attributable to research and development expenditures related to the Company's collaboration with Becton Dickinson, which is being funded in large part by Becton Dickinson under the Becton Dickinson Agreement. General and administrative expenses increased to approximately $389,000 in the first quarter of 1996 from approximately $331,000 in the first quarter of 1995, an increase of approximately 18%. The largest component of this increase was legal expenses related to the negotiation of the Becton Dickinson Agreement. Sales and marketing expenses declined to approximately $213,000 in the first quarter of 1996 from approximately $241,000 in the first quarter of 1995, a decrease of approximately 12%. This decrease was primarily the result of generally reduced spending on domestic sales activities. The Company had net interest income of approximately $14,000 in the first quarter of 1996 compared to net interest expense of approximately $10,000 in the first quarter of 1995. The change was the result of increased cash on hand following the sale of equity securities to Becton Dickinson in January 1996. In addition, the Company realized income of approximately $8,000 in the first quarter of 1996 from the sale of certain equipment. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenues increased to approximately $2,575,000 in 1995 from approximately $1,988,000 in 1994, an increase of approximately 30%. This increase was primarily the result of a growth in licensing and product development fees. Sales of injectors, parts and repairs increased to approximately $1,654,000 in 1995 from approximately $1,518,000 in 1994, an increase of approximately 9%. This increase was attributable to an increase in the number of injectors sold, to 3,110 in 1995 from 2,636 in 1994, largely for use with human growth hormone. Licensing and product development fees increased to approximately $921,000 in 1995 from $470,000 in 1994, an increase of approximately 96%. This increase was the result of the additional license and development agreements entered into during 1995 with Bio-Technology General Corporation, JCR Pharmaceuticals Co., Ltd. and GeneMedicine, Inc., and increased revenue earned under license and development agreements executed in prior periods. Cost of sales increased to approximately $1,049,000 in 1995 from approximately $631,000 in 1994, an increase of approximately 66%. This increase was due in large part to nonrecurring expenses associated with the commercial introduction of the Medi-Jector VI system. Research and development expenses increased to approximately $1,195,000 in 1995 from approximately $401,000 in 1994, an increase of approximately 198%. This increase was the result of an increased number of research and development projects at the Company. General and administrative expenses increased to approximately $978,000 in 1995 from approximately $868,000 in 1994, an increase of approximately 13%. This increase related primarily to increased salary and employee benefits expenses for a larger support staff. Sales and marketing expenses increased to approximately $1,146,000 in 1995 from approximately $1,128,000 in 1994, an increase of approximately 2%. Interest income remained relatively constant at approximately $16,000 in both 1995 and 1994. Interest and other expense increased to approximately $106,000 in 1995 from approximately $42,000 in 1994, an increase of approximately 152%. This increase was largely attributable to a non-cash expense in 1995 relating to certain modifications to the terms of an investor option agreement. 19 Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Revenues increased to approximately $1,988,000 in 1994 from approximately $1,183,000 in 1993, an increase of approximately 68%. Sales increased to approximately $1,518,000 in 1994 from approximately $1,058,000 in 1993, an increase of approximately 43%. This increase was the result of an increase in the number of injectors sold to 2,636 in 1994 from 1,399 in 1993, largely because the Company decreased the prices of its systems in the domestic insulin market and began to market its systems in Europe and Japan for use with human growth hormone. Product development and licensing fees increased to $470,000 in 1994 from $125,000 in 1993, an increase of approximately 276%. This increase was the result of the license and development agreement entered into during 1994 with Schwarz Pharma AG, and revenue under the Ferring NV license and development agreement entered into in 1993. Cost of sales increased to approximately $631,000 in 1994 from approximately $409,000 in 1993, an increase of approximately 54%. This increase was driven primarily by the increase in the number of units produced. Research and development expense increased to approximately $401,000 in 1994 from approximately $146,000 in 1993, an increase of approximately 175%. This increase was the result of increased research and development work related to the Medi-Jector VI system (which was introduced in 1995) and to other systems. General and administrative expenses increased to approximately $868,000 in 1994 from approximately $615,000 in 1993, an increase of approximately 41%. This increase was attributable primarily to the hiring of additional management and support personnel and increased rent expenses. Sales and marketing expenses increased to approximately $1,128,000 in 1994 from approximately $485,000 in 1993, an increase of approximately 133%. This increase was driven by increased advertising expenditures, the addition of new sales and marketing personnel and an increase generally in marketing-related expenditures. Interest income increased to approximately $16,000 in 1994 from approximately $3,000 in 1993, an increase of approximately 433%, as a result of higher average cash balances resulting from private equity financings completed during the year. Interest and other expense increased to approximately $42,000 in 1994 from approximately $30,000 in 1993, an increase of approximately 40%, as a result of debt financings completed in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through private sales of equity and debt securities, loans, revenues from product sales and licensing and development fees. From September 1993 through the first quarter of 1996, the Company realized net proceeds of approximately $7.6 million from private sales of its equity securities. Among other things, these funds were used to increase sales and marketing and research and development efforts. In January 1996, the Company received gross proceeds of approximately $3.1 million from a private sale to Becton Dickinson of shares of convertible preferred stock (which will convert into 761,615 shares of Common Stock upon the closing of this offering), options to purchase additional shares of convertible preferred stock (which will convert into an option to purchase 380,808 shares of Common Stock at an exercise price of $4.60 per share and which will terminate upon the closing of this offering unless exercised prior to such time) and warrants to purchase additional shares of convertible preferred stock (which will convert into warrants to purchase 1,904,037 shares of Common Stock at $5.91 per share). The Company intends to use these funds, together with monthly contract development income from Becton Dickinson and from pharmaceutical company licensees, for the development of the proposed smaller injector and for the addition of new drug therapies. See "Business--Products and Technology" and "Certain Transactions." 20 The Company's long term capital requirements will depend on numerous factors, including the status of the Company's collaborative arrangements, the progress of the Company's research and development programs and the receipt of revenues from the sales of the Company's products. Cash and cash equivalents were $2.8 million at March 31, 1996. The Company believes that the net proceeds to the Company from this offering, combined with cash on hand, interest expect to be earned thereon and anticipated revenues, will meet its needs at least through 1997. In order to meet its needs beyond this period, the Company may be required to raise additional funds through public or private financings, including equity financings. The Company has not generated taxable income through March 31, 1996, and at such date it had an accumulated deficit of approximately $9.9 million. INCOME TAX LOSS CARRYFORWARDS At March 31, 1996, the Company had approximately $9.5 million of net operating loss carryforwards that may be available to offset future taxable income for federal income tax purposes. These net operating loss carryforwards begin to expire in 1996. In addition to its net operating loss carryforwards, at March 31, 1996, the Company had approximately $117,000 in research and development tax credit carryforwards which begin to expire in 1997. Under Section 382 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, a change in ownership of greater than 50% of a company within a three-year period can result in an annual limitation on such company's ability to utilize net operating loss carryforwards from tax periods prior to the change in ownership. The annual limitation may be increased for any built-in gains recognized within five years of the date of the change in ownership. The Company's January 1996 sale of capital stock to Becton Dickinson resulted in a "change in ownership" of the Company, and future utilization of the Company's net operating loss carryforwards will be limited to approximately $1.1 million per year. If the Company were to undergo a further "change in ownership," this limitation might be changed. As a result of the annual limitation, a portion of the Company's carryforwards may expire before ultimately becoming available to reduce potential federal income tax liabilities. See "Certain Transactions." 21 BUSINESS OVERVIEW Medi-Ject is a drug delivery company focused on developing, manufacturing and marketing needle-free injection systems for the self-administration of a wide range of parenteral (injectable) drugs. The Company's product, the Medi- Jector system, is a hand-held, spring-powered device that injects drugs from a drug-containing front-end chamber through the skin without a needle as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to pierce the skin with a hypodermic needle and therefore is perceived by many people to be less threatening than injection with a needle. Today's Medi-Jector systems are smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems. The Company believes that the key to widespread market acceptance of its needle-free injection systems depends upon continued improvements in these areas. The Company believes that needle-free injection systems will benefit individuals who require self-injection by (i) eliminating the need to pierce themselves with needles for each injection, which should lead to an increased willingness to comply with a prescribed injection regimen and consequently reduce health complications, (ii) providing the ability to inject themselves discreetly and (iii) eliminating the need for special disposal of used needles. In addition, healthcare industry providers and payors may benefit from the decrease in long-term costs of patient care which may result from improved patient compliance. Furthermore, pharmaceutical companies may benefit from an increased ability to differentiate their products in the marketplace and improved patient compliance, both of which may lead to increased sales and larger market share. Although the single largest indication for self-injection is the administration of insulin for the treatment of diabetes, the number of drugs associated with frequent self-injection is increasing as novel biopharmaceuticals are introduced and individuals previously managed in the hospital are now cared for in the home. Medi-Ject was a pioneer in the development of portable needle-free injection systems. Prior to the development of portable systems, needle-free injection systems were powered by large air compressors and their use was limited to mass vaccination by the military or school health programs. These injectors were painful in comparison to today's injectors. The Company's first commercial injector was five times as heavy as its current injector, which weighs eight ounces. Acceptance of the Company's needle-free injection systems has gradually expanded as functionality and ease of use have improved and the purchase price has been reduced. INDUSTRY TRENDS Historically, with the exception of the self-administration of insulin, parenteral drug administration was limited to hospitals, doctors' offices and clinics. Liquid injectable medicines came packaged in single or multi-dose vials. Healthcare professionals filled disposable syringes with the medication, injected the patient and discarded the used syringe. Advances in pharmacology have resulted in an increasing number of drugs that require frequent injections over long periods of time. These drugs have provided dramatic therapeutic effects for conditions that in the past resisted more conventional medications. Although the availability of these drugs provides new treatment opportunities, the Company believes that the requirement to inject the drugs has and will continue to hinder their acceptance and reduce patient compliance. This perception has led pharmaceutical manufacturers to explore many alternative delivery technologies, including novel needle injectors (for example, sheathed and spring-powered needle injectors), transdermal patches, controlled release oral delivery methods and inhalation devices. However, the Company believes that injection will continue as the major delivery method, because many of these drugs are protein biopharmaceuticals which are destroyed in the gastrointestinal tract, do not readily penetrate the skin or are not effectively absorbed through the lungs. 22 In addition to the increase in the number of drugs requiring self- injection, changes in the frequency of insulin injections for the treatment of diabetes also may contribute to an increase in the number of self-injections. For many years, standard treatment protocol was for insulin to be administered once or twice daily for the treatment of diabetes. However, according to a recent study, tightly controlling the disease by, among other things, administration of insulin as many as four to six times a day, can decrease its debilitating effects. The Company believes that as the benefits of tightly controlling diabetes become more widely known, the number of insulin injections self-administered by individuals with diabetes will increase. The need to increase the number of injections given per day may lead additional diabetes patients to seek an alternative to traditional needles and syringes. In Western Europe, pharmaceutical and medical product companies, including Becton Dickinson, market pen-like needle injection systems. Patients have demonstrated a willingness to pay a premium for these systems over traditional needles and syringes. While the Company currently is not pursuing drug applications administered by healthcare professionals, needle-free injection systems may be attractive to hospitals, doctors offices and clinics, and the Company may explore such applications in the future. The issues raised by accidental needle sticks and disposal of used syringes have led to the development of syringes with sheathed needles and have led hospitals to give injections through intravenous tubing to reduce the number of contaminated needles. The Company believes that needle-free injection systems may be attractive to healthcare professionals as a further means to reduce accidental needle sticks and the burdens of disposing of contaminated needles. Becton Dickinson has the option to distribute Medi-Jector systems to hospitals worldwide. MARKET OPPORTUNITY An estimated nine to 12 billion needles and syringes are sold annually worldwide. The Company believes that a significant portion of these are used for the administration of drugs that could be delivered using the Company's Medi-Jector system but that only a small percentage of individuals who self- administer drugs currently use needle-free injection systems. The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin. In the United States, over 3.2 million people inject insulin for the treatment of diabetes, resulting in an estimated 2.3 billion injections annually, and the Company believes that the number of insulin injections will increase with time as the result of new diabetes management approaches which recommend more frequent use. Other parenteral drugs that are self-administered and may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headache, growth retardation, impotence, female infertility, AIDS and hepatitis. The Company also believes that more existing parenteral drugs will be self-administered in the future and that additional parenteral drugs that are under development will be deemed appropriate for self-administration. STRATEGY The Company's goal is to establish its needle-free injectors as the drug delivery method of choice for the self-administration of a wide range of parenteral drugs. The Company believes that the key to this goal is the development and marketing of a new generation of needle-free injectors that are less expensive and more user friendly than existing needle-free injection systems. The Company's strategic plan for accomplishing this goal consists of: Developing Proprietary Technologies. To address the need for improved injector systems, the Company initiated a product development program in 1993. The Company believes that the design improvements resulting from these efforts can reduce production costs and lower sales prices. Central to this program is a new proprietary injection power source, the gas spring. The gas spring injectors will be smaller, operate more intuitively and may give more comfortable injections. 23 Generating an Income Stream from Consumable Components. In addition to sales of injectors, the Company intends to generate revenue from the ongoing sale of disposable front-end chambers, which soon will replace the current stainless steel chambers. Collaborating with Pharmaceutical and Medical Device Companies. To achieve more rapid distribution of and capture a portion of the value added by the Company's delivery system, the Company has chosen to pursue licensing and development agreements with pharmaceutical and medical device companies. The Company anticipates that these pharmaceutical and medical device companies will promote and sell the Medi-Jector systems. Using this approach will enable the Company to reduce its marketing expenses and leverage off of the marketing strength and expertise of the other companies. Focusing on Proprietary Pharmaceuticals. The Company has focused on entering into agreements covering high-priced drugs, largely biopharmaceuticals, which may cost many thousands of dollars per year. The Company believes that pharmaceutical companies that perceive a problem with patient compliance have in many instances demonstrated a willingness to fund the development of alternatives to traditional needle injection. As new injectors become available at reduced costs, the Company will address distribution strategies for less expensive drugs. PRODUCTS AND TECHNOLOGY Current Needle-Free Injection Systems The Company's current Medi-Jector system consists of a coil spring mechanism, a dosage meter, a steel front-end chamber and a plastic adaptor. This injector is used by arming the spring mechanism, filling the medication chamber and then setting the pressure level for an optimally effective and comfortable injection. The coil spring is armed by turning the two overlapping tubes in the power pack to shorten the coil spring. The unit is then filled by placing a plastic adapter on a drug vial, turning the power pack body in the opposite direction to pull the medication into the front-end chamber until the proper dosage is displayed in the dosage window and removing the vial and adapter assembly. The pressure is adjusted by again turning the winding grip. An injection is given by holding the Medi-Jector system perpendicular to the skin in a location appropriate for the injection and pressing the trigger button. The most common injection sites are the upper arm, upper thigh, buttocks or the side of the torso. It is recommended that the steel front-end chamber on current models be cleaned after two weeks of use. The first lightweight Medi-Jector system, the Medi-Jector EZ system, was introduced by the Company in 1987. Although the Medi-Jector EZ system provided significant advantages over previous needle-free injection systems, it was fabricated from stainless steel parts, which are expensive to manufacture. In July 1995, the Company introduced the Medi-Jector VI system which replaced the stainless steel body of the Medi-Jector EZ system with a composite plastic body. This change will allow the Company to reduce manufacturing costs as unit volumes increase. The composite body also provides a natural lubricity which reduces friction and therefore the effort required to arm the coil spring. The Medi-Jector VI system incorporated additional design changes to improve functionality. New Product Research and Development The Company continues to improve its existing products while developing new products and technology. Specifically, it is now developing a novel injector power source which it anticipates will form the basis of a new generation of pen-like injectors. In addition, the Company is customizing its injectors in collaboration with pharmaceutical and medical device companies for use with a broader range of parenteral drugs. These development efforts are focused on making Medi-Jector systems more attractive to users by eliminating the periodic cleaning requirements, reducing the size of the system, making the system easier to arm and lowering the cost barrier for new users. 24 Pen-Like Injectors. The Company believes that a major obstacle to widespread market acceptance of needle-free injection systems has been the lack of a suitably compact and easy to use power source. Although the Company has reduced the size and complexity of its coil spring injectors, the Company believes further reduction in size or improvement in ease of use of systems using a coil spring are not feasible. Other companies have developed and marketed injectors powered by CO/2/ cartridges, but these systems do not provide any advantage in size and are complex and costly to manufacture. To overcome this obstacle, the Company is developing a novel and proprietary power source, the gas spring. The Company's gas spring is a permanently charged gas cylinder that is smaller than a coil spring with comparable capabilities, allowing the development of smaller systems. A rubber seal surrounds a central rod, preventing the gas from escaping and allowing it to be reused thousands of times. The spring is armed by pushing the rod into the cylinder and compressing the gas in the cylinder. When the rod is released, it springs forward with the energy stored from arming. Medi- Ject built its first prototype gas spring injector in 1994 and filed a patent application shortly after the successful testing of the technology. Use of the Company's proprietary gas spring will allow its needle-free injection systems to be reduced in size and easier to arm and may result in more comfortable injections. Plastic Front-End Chambers. The Company plans to replace the steel front-end chamber of the current Medi-Jector system with a multi-use disposable plastic front-end chamber in its next generation Medi-Jector system, the Medi-Jector VIB system, which it expects to introduce in late 1996 or early 1997. The Company believes that one of the reasons its needle-free injection systems have not gained widespread market acceptance is the inconvenience of cleaning the systems every two weeks. The disposable front- end chamber will eliminate the need to perform this cleaning process and increase ease of use. In addition, use of this plastic front-end chamber will allow the Company to further reduce the manufacturing costs of the Medi-Jector system. The Company expects that each front-end chamber will be labeled for use for 14 injections, subject to FDA approval. The Company currently anticipates that the retail selling price of the Medi-Jector VIB system will be reduced by 20% to 30% from the price of the current version and the total annual cost of disposable front-end chambers and related supplies will increase to approximately $200 per year depending upon the number of injections per day and the final cost per unit. Although the total cost to use the Medi-Jector VIB system over time will be more than with models that do not require disposable front-end chambers, the Company believes that lowering the initial purchase price of a Medi-Jector system will encourage more individuals to make the initial investment in the injector and increase market acceptance. In addition, the Company plans to introduce a single-use disposable plastic front-end chamber for use with its new generation pen-like injectors. The Company believes that the single-use disposable chamber will be priced competitively but at a premium compared to disposable syringes, and that it will offer users sterility and increased convenience. Application Specific Systems. In addition to pen-like injectors for insulin, the Company, in collaboration with Becton Dickinson and other pharmaceutical and medical device companies, is in the process of developing customized pen-like needle-free injection systems for specific drug applications. Modified injectors are being developed for use in gene therapy, the treatment of erectile dysfunction, and the treatment of multiple sclerosis. Research and Development Programs. The Company manages four outside product development programs relating to the further development of (i) the gas spring, (ii) an electronic dosage display, (iii) an electric arming system and (iv) the miniaturization of its systems. In addition, over the past year, the Company has expanded its internal development efforts by hiring additional technical personnel, purchasing laboratory equipment and dedicating facility space to internal product development efforts. Product development currently is the largest single category of Company 25 expenditure, in part supported by fees under license and development agreements. The Company has expended approximately $146,000, $401,000, $1,195,000 and $450,000 on research and development efforts during fiscal years 1993, 1994 and 1995 and the first quarter of 1996, respectively. Of these amounts, approximately $125,000, $470,000, $921,000 and $325,000, respectively, were funded by third-party sponsored development programs and licensing fees. TARGET MARKETS Insulin Approximately 3.2 million people take insulin daily for the control of high blood sugar observed in individuals with diabetes. Most of these individuals take two injections daily, often combining short acting insulin and long acting insulin. In the United States, the vast majority of insulin users use disposable plastic syringes and needles, while in Western Europe and Japan, in addition to disposable plastic syringes, patients use pen-like injectors that hold small vial cartridges of insulin and use small needles. The management of Type I (insulin dependent) diabetes has been found to be benefitted by a more disciplined approach to glucose management, including, among other things, more frequent injections, which have been proven to reduce long-term complications such as heart disease, strokes, neuropathy, kidney failure and loss of vision. As a result, some individuals with diabetes take four to six injections daily. Needle-free injectors have been available to and used by diabetes patients with a serious aversion to needles for many years and for these patients, cost and complexity are not significant barriers to use. The Company believes that another, much larger group of individuals, not seriously averse to needles yet still reluctant to piercing themselves, find it difficult to comply with injection regimens and would benefit from the Company's new, less costly and more user friendly needle-free technology. Human Growth Hormone Approximately 52,000 children worldwide receive frequent injections of human growth hormone for the treatment of growth retardation. The disease may be diagnosed as early as age three, with injections administered until bone maturity is reached at age seventeen or beyond. The hormone drug used for the treatment of this condition costs an estimated $20,000 or more at the wholesale level annually. Despite the use of pen-like needle injection systems which are more convenient to use than traditional needles, compliance with the prescribed injection regimen continues to be a problem. A study in Germany found that 35% of children on human growth hormone therapy did not fully comply with the therapy using needle injections. In addition, a study performed in the Netherlands showed that most children in the study preferred to have their human growth hormone administered using a Medi-Jector system rather than a pen-like needle injector. A small number of pharmaceutical companies currently hold a significant percentage of the worldwide human growth hormone market. The Company believes that its needle-free injector system offers a marketing advantage to the pharmaceutical companies with which it has agreements relating to human growth hormone. Erectile Dysfunction Studies estimate the number of men in the United States suffering from impotence at over fifteen million. The causes, earlier thought to be mainly psychogenic, are now thought to be most often a natural result of aging, or a complication of diabetes, urogenital surgery or other physiological causes. Over ten years ago, it was observed that penile injections of vasoactive drugs caused temporary erections sufficient to allow satisfactory sexual intercourse. The first drug approved for such use in the United States was the generic drug prostaglandin E\1\. However, the Company believes that use of this drug has been hindered because penile self-injection is difficult and viewed as unpleasant by most men. As a result, drug companies are seeking both local and oral alternative drug delivery methods to avoid the problems of needle injection. The Company believes that its needle-free injection technology may provide an attractive alternative to needles. 26 Gene Therapy Gene therapy involves the injection of replacement genes into the body instead of biopharmaceutical protein drugs. In recent years, investigators have been successful in inserting missing genes directly into the body for therapeutic purposes. For example, theoretically, an intramuscular injection of genes of Factor VIII, the blood component necessary for proper clotting, which is missing in individuals with hemophilia, could produce sufficient levels of Factor VIII to prevent excessive bleeding. Gene therapy is also being tested as a more effective method of vaccination. At least one published study suggests that gene delivery with a needle-free injector results in higher blood levels of the protein drug or antibodies compared to vaccines in animals. Multiple Sclerosis Multiple sclerosis is a progressive neurological disease where, most commonly, nerve function loss occurs following an acute episode of peripheral nerve damage. The cause of the disease is obscure, but recent studies have demonstrated that at least three drugs reduce the number of acute episodes. Each of the drugs is a protein or mixture of proteins and requires frequent injections, ranging from daily to weekly. One of these drugs, Betaseron, has been available in the United States for over one year, and the Company believes that many individuals using Betaseron are having difficulty with the prescribed injection regimen due to needle aversion. As a result, the Company believes that administration of these drugs would benefit from needle-free injection systems. Approximately 100,000 individuals in the United States are candidates for treatment with such drugs. Other Target Markets The Company has targeted other parenteral drugs that are regularly self- administered. These include narcotic analgesics, the anticoagulant heparin used to prevent blood clots, hormones used in the treatment of female infertility, biopharmaceuticals used to treat hepatitis or to elevate red and white blood cell production following chemotherapy or for the treatment of AIDS. Although the Company has chosen to focus initially on self-injection opportunities, similar opportunities exist in hospitals, doctors' offices, clinics, nursing homes and hospices. Certain opportunities may address the concern for well being, such as the vaccination of small children, and others may be prompted by the danger of accidental needle sticks in high risk environments, such as the emergency room of the hospital. 27 COLLABORATIVE AGREEMENTS The Company's business development efforts are focused on entering into collaborative agreements with pharmaceutical companies. The table below summarizes certain elements of the Company's current agreements.
VOLUME AND COMPANY MARKET TYPE OF INJECTION ------- ------ ----------------- Becton Dickinson Insulin 0.5 ml subcutaneous and Company(1) Ferring NV Growth Hormone 0.5 ml subcutaneous (Worldwide except United States, Canada, Japan and Korea) JCR Pharmaceuticals Co., Growth Hormone 0.5 ml subcutaneous Ltd. (Japan) Bio-Technology Growth Hormone 0.5 ml subcutaneous General Corporation (United States) Schwarz Pharma AG Prostaglandin E/1/ 1.0 ml intrapenile (Erectile Dysfunction) GeneMedicine, Inc. Gene Therapy 0.5 ml intramuscular Teva Pharmaceutical Copaxone (R) 1.0 ml subcutaneous Industries Ltd. (Multiple Sclerosis)
_______________ (1) Becton Dickinson has (i) worldwide distribution rights to injectors for use with insulin and certain other potential future drugs, (ii) an option for distribution rights for injection systems used by healthcare professionals and (iii) manufacturing rights to the disposable front-end chambers for any indication. Becton Dickinson Agreement The Company entered into a Development and License Agreement with Becton Dickinson in January 1996. Under the agreement, Becton Dickinson is required to pay to the Company periodic development fees for the development of a pen-sized insulin injector. Becton Dickinson obtained (i) a worldwide license to distribute the new, smaller pen-like injectors for use with insulin and potentially certain other drugs and (ii) the exclusive right to manufacture a disposable front-end chamber for such injector and for injectors to be developed for use in the administration of such other drugs. Medi-Ject retained the right to manufacture the injectors. Both companies have certain rights to share in future revenues generated from injector and disposable front-end chamber sales. In connection with this transaction, Becton Dickinson purchased convertible preferred stock and options and warrants to purchase preferred stock from the Company. See "Certain Transactions--Becton Dickinson." Ferring Agreement The Company entered into an agreement with Ferring NV ("Ferring") in December 1993. Pursuant to this agreement, the Company developed and granted Ferring exclusive rights to use, market and distribute a Medi-Jector system to be used in conjunction with human growth hormone worldwide with the exception of the United States, Canada, Japan and Korea. Ferring distributes human growth 28 hormone manufactured by Bio-Technology General Corporation ("Bio-Technology General") in Europe. The Company received an initial development fee at the time the agreement was executed and additional licensing fees are to be paid to the Company by Ferring at the time of regulatory approval of the product in certain countries. The Company has retained its rights as the exclusive manufacturer and supplier of the Medi-Jector system as modified pursuant to this agreement. Ferring first launched the Medi-Jector system in Germany in October 1994, and subsequently in certain other European countries. Ferring has purchased injectors from the Company on a regular basis and has contributed research funding for the modification of the system to meet certain European regulatory requirements. Approximately 400 children are using the Medi-Jector system and have received the Medi-Jector system and training from Ferring without charge. JCR Agreement In February 1995, the Company entered into a license agreement with JCR Pharmaceuticals, Ltd. ("JCR") for the use, marketing and distribution of the Medi-Jector system with human growth hormone in Japan. Recently, JCR has entered into the human growth hormone market, after licensing the drug from Bio- Technology General. JCR has distributed approximately 250 injectors for use with human growth hormone. Bio-Technology General Agreement The Company entered into an agreement with Bio-Technology General in June 1995. Pursuant to this agreement, the Company developed and granted Bio- Technology General the exclusive rights to use, market and distribute a Medi- Jector system to be used in conjunction with its human growth hormone in the United States in exchange for a licensing fee, research fee payments and ongoing royalty payments. The Company has retained its rights as the exclusive manufacturer and supplier of the Medi-Jector system as modified pursuant to this agreement. The Medi-Jector system was approved for use with the Bio-Technology General human growth hormone by the FDA in April 1996, but the sale of Bio- Technology General human growth hormone in the United States is currently prohibited by a federal injunction issued in late 1995 as a result of an unresolved patent infringement suit brought by Genentech, Inc. Bio-Technology General and Medi-Ject are currently considering various options in connection with the status of this agreement in light of the injunction. Schwarz Pharma Agreement The Company entered into an agreement with Schwarz Pharma AG ("Schwarz") in October 1994. Pursuant to this agreement, the Company is to develop and grant Schwarz the exclusive right to use, market and distribute a Medi-Jector system for use in conjunction with prostaglandin of the E series for any human ailment, and any other drug for the treatment of erectile dysfunction. The Company received an initial fee at the time the agreement was executed and additional fees are to be paid at the time of reaching certain milestones in the development. The preliminary design of an injector for this purpose has been completed and human clinical testing is expected to begin in 1996. Data on efficacy, pain and tissue damage will be collected prior to finalizing the design of the injector. Clinical trials of the injector are planned to determine the occurrence of any adverse effects which commonly occur as a result of frequent penile needle usage. The Company has retained its rights as the exclusive manufacturer and supplier of the Medi-Jector system as modified pursuant to this agreement. GeneMedicine Agreement The Company entered into an agreement with GeneMedicine, Inc. ("GeneMedicine") in July 1995. GeneMedicine and the Company agreed to collaborate in the development of an injector to deliver gene constructs to muscle and solid tissue in humans. The Company received an initial fee at the time the agreement was executed and additional funds for research support were paid to the Company at regular intervals thereafter. GeneMedicine may secure rights to distribute the injector for certain gene therapies in exchange for licensing fees, and both companies will share in fees and sales revenues 29 generated by licenses to other gene therapy companies. The Company has retained its rights as the exclusive manufacturer and supplier of the Medi-Jector system as modified pursuant to this agreement. Teva Agreement The Company entered into an agreement with Teva Pharmaceutical Industries Ltd. ("Teva") in May 1996. Teva has obtained a license to distribute a Medi- Jector system to be modified specifically for the administration of the Teva drug, Copaxone(R), for the treatment of multiple sclerosis. Copaxone(R) is the subject of a currently pending FDA new drug application. Teva has agreed to support the product development work required to modify the injector for Copaxone(R) administration. PATENTS The Company actively seeks, when appropriate, protection for its products and proprietary information by means of United States and foreign patents and trademarks. In addition, the Company relies on trade secrets and confidential contractual agreements to protect certain proprietary information and products. The Company currently holds two United States patents relating to the drug vial adapter and the front-end chamber, one United States design patent relating to the appearance of the Medi-Jector system and has eight United States patent applications pending, one Patent Cooperation Treaty application and one Taiwanese patent application relating to the gas spring energy source and aspects of its use. Much of the Company's technology is being developed on its behalf by independent outside contractors. To protect the rights of its proprietary know- how and technology, Company policy requires all employees and consultants with access to proprietary information to execute confidentiality agreements prohibiting the disclosure of confidential information to anyone outside of the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such individuals while devoted to Company sponsored activities. Companies with which the Company has entered into development agreements have the right to certain technology developed in connection with such agreements. The Company has obtained the rights to certain technology and makes milestone payments to the inventors of certain core technology. See "Risk Factors--Dependence on Proprietary Technology Rights." MANUFACTURING The Company operates a manufacturing facility in compliance with current Good Manufacturing Practices ("GMP") established by the FDA. Injector parts are manufactured by third-party suppliers and assembled at the Company's facility in Plymouth, Minnesota. Disposable vial adapters are either assembled at the Company's facility or by third parties. Quality control and final packaging are performed on site. A strong effort has been directed toward reducing component part costs and accelerating assembly procedures, and the Company anticipates a need to invest in automated assembly equipment as volumes increase in the future. Becton Dickinson has the right to manufacture the disposable plastic components of the gas spring systems for the Company in exchange for royalty payments and certain profit sharing arrangements. See "Risk Factors--Dependence on Relationship with Becton Dickinson," "Risk Factors--Dependence on Third-party Suppliers" and "Certain Transactions." MARKETING The Company's strategy is to leverage off of the marketing strength, existing distribution systems and expertise of the pharmaceutical and medical device companies with which it collaborates by relying on them to promote and sell its needle-free injection systems together with the products they manufacture. The Company anticipates that under these collaborative arrangements, it will manufacture and supply the needle-free injection technology for specific drug applications to the 30 pharmaceutical company which will market the system for use with its drugs. In some instances pharmaceutical companies may choose to give the injection systems and disposable components to users without charge as an inducement to customers to use their products. Becton Dickinson has informed the Company that it intends to distribute the insulin injection system to be developed under the Becton Dickinson Agreement through an existing distribution system. The Company currently sells most Medi-Jector systems through a limited pharmacy distribution system consisting of approximately 3,100 pharmacies and pharmacy distributors. Pharmacies marketing the Company's products display sales literature describing the Medi-Jector system. Often, individuals with diabetes call the Company directly for additional information regarding the product and its uses. The Company's sales personnel explain the need for a doctor's prescription and advise on methods of filing for insurance reimbursement. Additionally, a small national advertising program in lay journals generates additional inquiries. Such inquiries are either referred by the Company to local pharmacies, or may result in mail order sales. The Company also sells a small number of Medi-Jector systems to exclusive distributors outside the United States. Training is supported by a video and manual that accompany each product purchased. However, approximately 75% of buyers seek additional help over the telephone through the Company's customer service department. The Company employs two nurses to provide training and support for customers through this channel. The customer service 800 number is prominently displayed on each injector. The Company plans, coincident with the introduction of the multi-use disposable front-end chamber, to enlist diabetes nurse educators to promote and train prospective users. This program will involve placing demonstrator injectors in selected clinics with the suggestion that individuals, especially those just beginning insulin therapy, be presented with the choice of needle-free drug delivery. The most common retail price of an injector (which can be used over a period of several years) is $595, and disposable adapters cost approximately $50 annually. This compares to an annual cost of approximately $140 to use two syringes with needles daily. The Company anticipates that the retail price of future generation Medi-Jector systems will be less than the current retail price, and that additional revenues will be generated by sales of multi-use and single-use disposable plastic front-end chambers when they are introduced. COMPETITION Competition in the drug delivery market is intensifying. The Company faces competition from traditional needle syringes, newer pen-like and sheathed needle syringes and other needle-free injection systems as well as alternative drug delivery methods including oral, transdermal and pulmonary delivery systems. Because injection is typically only used when other drug delivery methods are not feasible, the Company's needle-free injection systems may be made obsolete by the development or introduction of drugs or drug delivery methods which do not require injection for the treatment of conditions currently targeted by the Company. In addition, because the Company intends to enter into collaborative arrangements with pharmaceutical companies, the Company's competitive position will depend upon the competitive position of the pharmaceutical company with which it collaborates for each drug application. While competition in the needle-free injection market currently is limited to small companies with modest financial resources, the barriers to entry are not great and the Company anticipates additional competition from companies with greater financial, commercial, personnel and development resources in the future. Two companies, Health-Mor Personal Care Corp. and Vitajet Corporation, currently sell coil spring injectors to the United States insulin market. The products of these companies resemble earlier versions of the Medi-Jector system and sell at prices ranging from $600 to over $800. Another company, Bioject, Inc., has sold a CO/2/ powered injector since 1993. The injector is designed for and used almost exclusively for vaccinations in doctors' offices or public clinics. Bioject has 31 announced that it has a contract with a pharmaceutical company to develop a self-injection system for use with drugs for the treatment of multiple sclerosis. Even though the Company expects the needle-free injection market to expand, improvements continue to be made in needle syringes, including syringes with hidden needles and pen-like needle injectors. The Company expects that it will compete with existing needle injection methods as well as new needle injection methods yet to be developed. GOVERNMENT REGULATION The Company's products and manufacturing operations are subject to extensive government regulations, both in the United States and abroad. In the United States, the FDA administers the FDA Act and has adopted regulations, including those governing the introduction of new medical devices, the observation of certain standards and practices with respect to the manufacturing and labeling of medical devices, the maintenance of certain records and the reporting of device-related deaths, serious injuries and certain malfunctions to the FDA. Manufacturing facilities and certain Company records are also subject to FDA inspections. The FDA has broad discretion in enforcing the FDA Act and the regulations thereunder, and noncompliance can result in a variety of regulatory steps ranging from warning letters, product detentions, device alerts or field corrections to mandatory recalls, seizures, injunctive actions and civil or criminal actions or penalties. Drug delivery systems such as the Company's injectors may be approved or cleared for sale as a medical device or may be evaluated as part of the drug approval process in connection with a new drug application ("NDA"). To the extent permitted under the FDA Act and current FDA policy, the Company intends to seek the required approvals and clearance for the use of its new injectors, as modified for use in specific drug applications such as gene therapy, the treatment of erectile dysfunction, and the treatment of multiple sclerosis, under the medical device rather than under the new drug provisions of the FDA Act. As a result of discussions with FDA personnel in connection with the approval of the Company's injector for use with human growth hormone the Company believes that, as a general rule, handling these new injectors as devices rather than as new drugs will be allowed in connection with drugs that have been previously approved by the FDA; however, the Company anticipates that it will be required to seek the necessary approvals through an NDA for use of its injectors with drugs that have not previously been approved by the FDA. There can be no assurance, however, that any of these new injectors can be handled as medical devices or that the FDA will not change its current position with respect to this issue. Products regulated as medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA, unless otherwise exempted. There are two methods for obtaining such clearance or approvals. Certain products qualify for a premarket notification under Section 510(k) of the FDA Act ("510(k) notification") of the manufacturer's intention to commence marketing the product. The manufacturer must, among other things, establish in the 510(k) notification that the product to be marketed is substantially equivalent to another legally marketed product (that is, that it has the same intended use and that it is as safe and effective as a legally marketed device and does not raise questions of safety and effectiveness that are different from those associated with the legally marketed device). Marketing may commence when the FDA issues a letter finding substantial equivalence to such a legally marketed device. The FDA may require, in connection with a 510(k) notification, that it be provided with animal and/or human test results. If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a premarket approval ("PMA") application under Section 515 of the FDA Act. A PMA must show that the device is safe and effective and is generally a much more complex submission than a 510(k) notification, typically requiring more extensive prefiling testing and a longer FDA review process. The Company believes that its Medi-Jector systems regulated as medical devices are eligible for clearance through the 510(k) notification process, although there can be no assurance that the FDA will not require a PMA in the future. 32 In addition to submission when a device is being introduced into the market for the first time, a 510(k) notification is also required when the manufacturer makes a change or modification to an already marketed device that could significantly affect safety or effectiveness, or where there is a major change or modification in the intended use or in the manufacture of the device. When any change or modification is made in a device or its intended use, the manufacturer is expected to make the initial determination as to whether the change or modification is of a kind that would necessitate the filing of a new 510(k) notification. The FDA's regulations provide only limited guidance in making this determination. If the FDA concludes that any or all of the Company's new injectors must be handled under the new drug provisions of the FDA Act, substantially greater regulatory requirements and approval times will be imposed. Use of a modified new product with a previously unapproved new drug will be likely to be handled as part of the NDA for the new drug itself. Under these circumstances, the device component will be handled as a drug accessory and will be approved, if ever, only when the NDA itself is approved. The Company's injector may be required to be approved as part of the drug delivery system under a supplemental NDA for use with previously approved drugs. Under these circumstances, the Company's device could be used with the drug only if and when the supplemental NDA is approved for this purpose. It is possible that, for some or even all drugs, the FDA may take the position that a drug-specific approval must be obtained through a full NDA or supplemental NDA before the device may be labeled for use with that drug. There can be no assurance that those approvals will be obtained in a timely manner or at all. To the extent that the Company's modified injectors are handled as drug accessories or part of a drug delivery system, rather than as medical devices, they are subject to all of the requirements that apply to new drugs. These include drug GMP requirements, drug adverse reaction reporting requirements, and all of the restrictions that apply to drug labeling and advertising. In general, the drug requirements under the FDA Act are more onerous and strict than medical device requirements. These requirements could have a substantial adverse impact on the profitability of the Company. Similar requirements apply to systems regulated as medical devices. The Company received 510(k) marketing clearance from the FDA allowing the Company to market the Medi-Jector IV system in February 1987, the Medi-Jector V system in October 1988 and for the use of the Medi-Jector system to administer Bio-Technology General's human growth hormone in April 1996. The Company determined that a new 510(k) notification was not required in connection with the commercial introduction of the Medi-Jector VI system which incorporates a change to a plastic component body, although there can be no assurance that the FDA will not require a 510(k) notification in the future. The Company expects that it will submit a 510(k) notification regarding the use of plastic front-end chambers with the Medi-Jector VI system in 1996. In addition, the Company expects in the future to submit 510(k) notifications with regard to further device design improvements and uses with additional drug therapies. There can be no assurance that the FDA will grant timely 510(k) clearance for any such system or use, or that the FDA will not require the submission of a PMA with respect to any such system or use. The FDA Act also regulates the Company's quality control and manufacturing procedures by requiring the Company and its contract manufacturers to demonstrate current GMP compliance. These regulations require, among other things, that (i) the manufacturing process must be regulated and controlled by the use of written procedures and (ii) the ability to produce devices which meet the manufacturer's specifications must be validated by extensive and detailed testing of every aspect of the process. They also require investigation of any deficiencies in the manufacturing process, the products produced or record- keeping. Further, the FDA's interpretation and enforcement of these requirements has been increasingly strict in recent years and seems likely to be even more stringent in the future. The FDA monitors compliance with these requirements by requiring manufacturers to register with the FDA and by conducting periodic FDA inspections of manufacturing facilities. If the inspector observes 33 conditions that might be violative of the GMP, the manufacturer must correct those conditions or explain them satisfactorily. Failure to adhere to GMP requirements would cause the devices produced to be considered in violation of the FDA Act and subject to FDA enforcement action that might include physical removal of the Company's devices from the marketplace. The FDA's Medical Device Reporting Regulation requires that the Company provide information to the FDA on the occurrence of any death or serious injuries alleged to have been associated with the use of the Company's products, as well as any product malfunction that would likely cause or contribute to a death or serious injury if the malfunction were to recur. In addition, FDA regulations prohibit a device from being marketed for unapproved or uncleared indications. If the FDA believed that the Company was not in compliance with these regulations, it could institute proceedings to detain or seize the Company's devices, issue a recall, seek injunctive relief or assess civil and criminal penalties against the Company or its executive officers, directors or employees. The Company is subject to the Occupational Safety and Health Act ("OSHA") and other federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices, environmental protection and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws, regulations or policies in the future, or that such laws, regulations or policies will not increase the costs of producing the Company's devices or otherwise have a material adverse effect upon the Company's ability to do business. Laws and regulations regarding the manufacture, sale and use of medical devices are subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in regulations or interpretations made by the FDA, OSHA or other regulatory bodies, will not adversely affect the Company. Sales of medical devices outside of the United States are subject to foreign legal and regulatory requirements. The Company's Medi-Jector EZ systems have been approved for sale only in certain foreign jurisdictions. 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 relies upon the companies marketing its injectors in foreign countries to obtain the necessary regulatory approvals for sales of its injectors in those countries. Generally, devices having an effective 510(k) clearance or PMA may be exported without further FDA authorization. FDA authorization is generally required in order to export other medical devices. The Company is in the process of implementing ISO 9002, a certification showing that the Company's procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Such certification, along with European Medical Device Directive ("MDD") certification would evidence compliance with the requirements enabling the Company to affix the CE Mark to its current products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union ("EU") countries. After June 1998, medical devices may not be sold in EU countries unless they display the CE Mark. There is no assurance that the Company will obtain the right to affix the CE Mark prior to such time. PROPERTY The Company leases approximately 9,000 square feet of office, manufacturing and warehouse space in Plymouth, a suburb of Minneapolis, Minnesota. The lease expiration date is April 1997. The Company believes its facilities will be sufficient to meet its requirements through such time and is exploring options for alternative space. 34 EMPLOYEES As of June 1, 1996, the Company employed 30 full-time employees, of whom six were engaged in administration, eight were engaged in sales and marketing, four were engaged in research and development, three were engaged in business development and customer service and nine were engaged in manufacturing. None of the Company's employees are represented by any labor union or other collective bargaining unit. The Company believes that its relations with its employees are good. LIABILITY INSURANCE The business of the Company entails the risk of product liability claims. Although the Company has not experienced any material product liability claims to date, any such claims could have a material adverse impact on the Company. The Company maintains product liability insurance with coverage of $1 million per occurrence and an annual aggregate maximum of $5 million. The Company evaluates its insurance requirements on an ongoing basis. There can be no assurance that product liability claims will be covered by such insurance or will not exceed such insurance coverage limits or that such insurance will be available on commercially reasonable terms or at all. 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Franklin Pass, M.D........... 59 President, Chief Executive Officer and Chairman of the Board of Directors Mark S. Derus................ 40 Vice President, Finance, Chief Financial Officer and Secretary Todd Leonard................. 37 Vice President, Sales and Marketing Peter Sadowski, Ph.D......... 48 Vice President, Product Development Fred L. Shapiro, M.D......... 61 Director Louis C. Cosentino, Ph.D..... 52 Director Kenneth Evenstad............. 52 Director Geoffrey Guy................. 42 Director Norman A. Jacobs............. 58 Director Peter Sjostrand.............. 49 Director
______________ The following is a brief summary of the business experience of each of the executive officers and directors of the Company: Franklin Pass, M.D., joined the Company as a director and consultant in January 1992, and has served as the Company's President, Chief Executive Officer and Chairman of the Board of Directors since February 1993. From 1990 to 1992, Dr. Pass served as President of International Agricultural Investments, Ltd., an agricultural technology consulting and investment company. Dr. Pass, a physician and scientist, was Director of the Division of Dermatology at Albert Einstein College of Medicine from 1967 to 1973, the Secretary and Treasurer of the American Academy of Dermatology from 1978 to 1981 and the co-founder and Chief Executive Officer of Molecular Genetics, Inc., now named MGI Pharma, Inc., from 1979 to 1986. He is the author of more than 40 published medical and scientific articles. Dr. Pass serves on the board of directors of Ringer Corporation, a producer of lawn and garden care products. Mark S. Derus joined the Company in December 1993 as Vice President, Finance, Chief Financial Officer and Secretary. Mr. Derus served as a director of the Company from 1992 until he joined the Company as an employee in 1993. From 1986 to December 1993, Mr. Derus was Vice President, Finance of Cherry Tree Investments, Inc., a venture capital company that invests in early stage ventures. Todd Leonard joined the Company in April 1993 as Vice President, Business Development, and has served as Vice President, Sales and Marketing since April 1996. From 1991 to 1993, Mr. Leonard served as a Senior Licensing Specialist in the Office of Technology Transfer at the National Institutes of Health. Peter Sadowski, Ph.D., joined the Company in March 1994 as Vice President, Product Development. From October 1992 to February 1994, Dr. Sadowski served as Manager, Product Development for GalaGen, Inc., a biopharmaceutical company. From 1988 to 1992, he was Vice President, Research and Development for American Biosystems, Inc., a medical device company. Dr. Sadowski holds a Ph.D. in microbiology. Fred L. Shapiro, M.D., joined the Board of Directors in September 1992 and is a member of the Compensation Committee of the Board of Directors. Dr. Shapiro is currently a consultant to Hennepin Faculty Associates, the Hennepin County Medical Center faculty's health maintenance organization in 36 Minneapolis, Minnesota, of which he was President from 1983 to his retirement in 1995. Dr. Shapiro is a nephrologist who has authored or co-authored more than 100 published medical and scientific articles. Dr. Shapiro is also a director and co-founder of Minntech Corporation ("Minntech"), a company that designs and manufactures dialysis equipment. Louis C. Cosentino, Ph.D., joined the Board of Directors in January 1995 and is a member of the Audit Committee of the Board of Directors. Dr. Cosentino was a co-founder of Minntech in 1975, and has served as its President and Chief Executive Officer since that time. Dr. Cosentino holds a Ph.D. in biomedical engineering and has authored or co-authored nine scientific publications. Kenneth Evenstad joined the Board of Directors in May 1993. Since 1969 Mr. Evenstad has been the Chairman and Chief Executive Officer of Upsher-Smith Laboratories, Inc., a private pharmaceutical company specializing in branded generic cardiovascular drugs. Mr. Evenstad is trained as a pharmacist. Geoffrey Guy joined the Board of Directors in September 1993 and is a member of the Compensation Committee of the Board of Directors. Dr. Guy was a co-founder in 1985 of Ethical Holdings plc ("Ethical"), a company that develops new transdermal and oral drug delivery systems and has served as its Chief Executive Officer since that time. Dr. Guy has been Ethical's Chairman of the Board since 1992. Dr. Guy holds a Diploma of Pharmaceutical Medicine from the British Royal College of Physicians. Norman A. Jacobs joined the Board of Directors in January 1996. Since 1990, Mr. Jacobs has been the President of Becton Dickinson Transdermal Systems, a division of Becton Dickinson, and in 1996 he also became President of Becton Dickinson's Advanced Injection Systems, a recently formed division of Becton Dickinson. Mr. Jacobs serves on the board of directors of Seragen, Inc., a biopharmaceutical company. Peter Sjostrand joined the Board of Directors in December 1995 and is a member of the Audit Committee of the Board of Directors. Dr. Sjostrand is a board member of Pharma Vision, a Swiss investment company. From 1975 to 1993, he served in various capacities with the Astra Group, most recently as deputy board member, Executive Vice President and Chief Financial Officer. Dr. Sjostrand holds a Swedish medical degree. Dr. Sjostrand also serves on the board of directors of SE Banken Fonder, a group of Swedish-based investment funds and Tryggh Hansa, a major insurance company in Sweden. Each director serves for an indefinite term that expires at the next regular meeting of the shareholders of the Company, and such director's successor is elected and qualified, or until such director's earlier death, resignation, disqualification, or removal as provided by statute. Dr. Guy was elected to the Board of Directors as the designee of Ethical under an agreement between Ethical and the Company. The relevant section of the agreement with Ethical will terminate upon the closing of this offering. Mr. Jacobs was elected as the designee of Becton Dickinson under an agreement between Becton Dickinson and the Company. The relevant terms of the agreement with Becton Dickinson provide that, so long as Becton Dickinson controls, directly or indirectly, not less than 5% of the capital stock of the Company, the Company shall use its best efforts to nominate and elect to the Board of Directors a person designated by Becton Dickinson and that the Board of Directors shall consist of at least a majority of members who are not employed by the Company. In the event that a person designated by Becton Dickinson shall not be a member of the Board of Directors, Becton Dickinson shall be entitled to notice of and to attend all meetings of the Board of Directors and its committees and shall receive all information distributed to the directors at the same time as the directors and shall receive the same notice of meetings as the directors. These provisions of the agreement with Becton Dickinson will continue in force following the closing of this offering. Both Dr. Guy and Mr. Jacobs will continue to serve as directors upon completion of this offering. The Company's executive officers are elected by the Board of Directors and serve until the next election of officers or until their successors are elected or appointed and qualify. 37 Committees The Board of Directors has established an Audit Committee and a Compensation Committee. The Compensation Committee makes recommendations concerning executive salaries and incentive compensation for employees of the Company, subject to ratification by the full Board of Directors, and administers the Company's 1993 Stock Option Plan and the Company's 1996 Stock Option Plan. The Audit Committee reviews the results and scope of the audit and other services provided by the Company's independent auditors, as well as the Company's accounting principles and its system of internal controls, and reports the results of its review to the full Board of Directors and to management. DIRECTORS' COMPENSATION The Company has not in the past paid cash directors' fees and does not intend to do so after the closing of this offering. All directors may be reimbursed for expenses actually incurred in attending meetings of the Board of Directors and its committees. In the past, the Board of Directors has made annual discretionary grants of options to purchase shares of Common Stock under the Company's 1993 Stock Option Plan to all members of the Board of Directors. The size of these grants has varied from year to year. EXECUTIVE COMPENSATION Summary Compensation. The following table sets forth the cash and noncash compensation awarded to or earned by the Chief Executive Officer for each of the last three fiscal years. No other executive officer of the Company earned a salary and bonus in excess of $100,000 during 1995. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS -------------- SECURITIES NAME AND ANNUAL COMPENSATION UNDERLYING ALL OTHER ------------------------------------- PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) STOCK OPTIONS COMPENSATION - ------------------------------- ---- ---------- ---------- --------- ------------- --------------- Franklin Pass, M.D............. 1995 $ 175,000 $ -- $ 5,174 45,697 $ -- President, Chief Executive.... 1994 150,000 20,000 3,879 -- 1,200(2) Officer and Chairman of the... 1993(3) 103,661 -- -- 76,161 -- Board of Directors
______________ (1) Represents premiums paid for disability and life insurance policies with coverage limits in excess of those provided under the Company's employee insurance policy. (2) Implied compensation associated with a grant of 19,040 shares of Common Stock. (3) Dr. Pass became the Company's President, Chief Executive Officer and Chairman of the Board of Directors in February 1993. 38 Option Grants. The following table summarizes options granted during the year ended December 31, 1995 to the Chief Executive Officer. OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995
Percent Potential Realizable Number of of Total Value at Assumed Shares Options Annual Rates of Stock Underlying Granted to Exercise Price Appreciation Options Employees Price Expiration for Option Term (2) -------------------------- Name Granted (1) in 1995 Per Share Date 5% 10% - ---- ----------- ----------- ----------- ----------- --------- --------- Franklin Pass, M.D........ 45,697 32.1% $ 3.28 1/1/00 $ 32,301 $ 69,562
________________ (1) Incentive stock option granted pursuant to the 1993 Stock Option Plan on January 3, 1995. Such option vests as to all shares covered on December 31, 1996. (2) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission (the "SEC") and do not represent the Company's estimate or projection of the Company's future Common Stock prices. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market conditions. The amounts reflected in this table may not necessarily be achieved. Option Values. The following table summarizes the value of options held at December 31, 1995, by the Chief Executive Officer. The Chief Executive Officer did not exercise any options during 1995. AGGREGATED OPTION VALUES AT DECEMBER 31, 1995
Number of Unexercised Value of Unexercised Options at In-the-Money Options December 31, 1995 at December 31, 1995(1) -------------------------------- ---------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ------------------------------------------------ -------------- Franklin Pass, M.D.................. 68,595 53,312 $ 482,097 $ 364,959
___________ (1) Value is based on the difference between an assumed initial public offering price of $9.00 per share and the exercise price of such options. EMPLOYMENT AGREEMENT WITH DR. PASS In January 1995, the Company entered into an employment agreement with Dr. Pass (the "Pass Employment Agreement"). The Pass Employment Agreement provides for a base salary of $175,000 for 1995 and, as to subsequent years, for a base salary to be mutually agreed upon between the Company and Dr. Pass prior to the beginning of each year. For 1996, the parties have agreed that Dr. Pass' base salary is $192,500. The Pass Employment Agreement also contains provisions regarding participation in benefits plans, repayment of expenses, participation in projects and ventures involving the Company and third parties (which is permitted), protection of confidential information and ownership of intellectual property. In addition, the Pass Employment Agreement contains covenants that Dr. Pass will not compete with the Company during the term of his employment and that he will not solicit or interfere with the Company's customers, suppliers or employees during the term of his employment and for a period of two years thereafter. The Pass Employment Agreement had an initial term through December 31, 1995, which term is automatically extended for successive one-year periods unless either party objects by written notice at least 90 days prior to the end of the current term. The Pass Employment Agreement may be terminated prior to the end of the initial term or any extension thereof if Dr. Pass dies; if the Board of Directors of the Company determines that Dr. Pass has become disabled (as defined), has breached the Pass Employment Agreement in any material respect and Dr. Pass has 39 not cured or cannot cure such breach within 30 days after delivery of written notice of such breach or has engaged in willful and material misconduct; or if Dr. Pass is terminated by the Company, with or without cause, following not less than 90 days' prior written notice. The Company maintains a $1,000,000 key person life insurance policy on Dr. Pass, payable to the Company. EMPLOYEE STOCK OPTION PLANS Under the Company's 1993 Stock Option Plan, as amended (the "1993 Plan"), and the Company's 1996 Stock Option Plan, as amended (the "1996 Plan" and, together with the 1993 Plan, the "Plans"), full- and part-time employees of the Company or of its future subsidiary corporations and directors, consultants and independent contractors of the Company or of its future subsidiary corporations are eligible to receive options to purchase Common Stock. The Plans are administered by the Compensation Committee. The Plans provide for the grant of both incentive stock options intended to qualify for preferential tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options that do not qualify for such treatment. The exercise price of all incentive stock options granted under the Plans shall be as determined by the Compensation Committee, but shall not be less than 100% of the fair market value of the Common Stock on the date of grant; the exercise price of nonqualified stock options shall be as determined by the Compensation Committee. Only employees are eligible for the grant of incentive stock options. A total of 495,050 and 500,000 shares of Common Stock have been reserved for issuance under the 1993 Plan and the 1996 Plan, respectively. As of June 1, 1996, the Company had outstanding options to purchase an aggregate of 481,690 shares with a weighted average exercise price of $2.54 per share under the 1993 Plan and no shares under the 1996 Plan. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Bylaws and the statutes of the State of Minnesota require the Company to indemnify any director, officer, employee or agent who was or is a party to any threatened, pending or completed action, suit or proceedings, whether civil, criminal, administrative or investigative, against certain liabilities and expenses incurred in connection with the action, suit or proceeding, except where such persons have not acted in good faith or did not reasonably believe that the conduct was in the best interests of the Company. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or other persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 40 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock, as of June 1, 1996, after giving effect to a 1-for-1.313 reverse stock split to be effected on July 10, 1996, and the conversion of the outstanding shares of Convertible Preferred Stock into Common Stock upon the effectiveness or closing of this offering, before giving effect to the sale by the Company of the 2,200,000 shares of Common Stock hereby and as adjusted to reflect such sale, by (i) each person who is known by the Company to beneficially own more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) the executive officer named in the Summary Compensation Table above and (iv) all directors and executive officers of the Company as a group:
AMOUNT AND NATURE OF PERCENTAGE OWNED (1) --------------------------- BENEFICIAL BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OFFERING OFFERING - ------------------------------------ ------------- -------- -------- Franklin Pass, M.D. (2).................... 209,411 4.3% 3.0% Fred L. Shapiro, M.D. (3).................. 67,408 1.4 * Louis C. Cosentino, Ph.D. (4).............. 15,234 * * Kenneth Evenstad (5)....................... 14,092 * * Peter Sjostrand (6)........................ 11,426 * * Geoffrey Guy (7)........................... 7,618 * * Norman A. Jacobs (8)....................... -- -- -- Becton Dickinson and Company (9)........... 3,046,460 43.5 33.1 Ethical Holdings plc (10).................. 1,224,198 25.9 17.7 Cherry Tree Ventures I and II (11)......... 820,810 17.3 11.8 Enskilda Kapitalforvaltning (12)........... 542,992 11.5 7.8 All executive officers and directors as a group (10 persons) (13)................... 444,383 8.9 6.2
_____________ * Less than 1%. (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes generally voting power and/or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days of June 1, 1996, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. This table does not reflect any shares that these existing shareholders may acquire in this offering. Except as indicated by footnote, the Company believes that the persons named in this table, based on information provided by such persons, have sole voting and investment power with respect to the shares of Common Stock indicated. (2) Includes 100,319 shares of Common Stock issuable to Dr. Pass upon the exercise of outstanding options. (3) Includes 14,092 shares of Common Stock issuable to Dr. Shapiro upon the exercise of outstanding options and 22,851 shares issuable to Dr. Shapiro upon the exercise of outstanding warrants. (4) Includes 7,617 shares of Common Stock issuable to Dr. Cosentino upon the exercise of outstanding options. (5) Includes 14,092 shares of Common Stock issuable to Mr. Evenstad upon the exercise of outstanding options. (6) Includes 3,809 shares of Common Stock issuable to Dr. Sjostrand upon the exercise of outstanding options. Dr. Sjostrand is a member of the Advisory Board of Enskilda. 41 (7) Includes 7,618 shares of Common Stock issuable to Dr. Guy upon the exercise of outstanding options. Dr. Guy is the Chairman and Chief Executive Officer and an approximately 11% shareholder of Ethical. (8) Mr. Jacobs is the President of Becton Dickinson Transdermal Systems and of Advanced Injection Systems, both of which are divisions of Becton Dickinson. (9) Includes 380,808 shares of Common Stock issuable to Becton Dickinson upon the exercise of outstanding options and 1,904,037 shares of Common Stock issuable to Becton Dickinson upon the exercise of outstanding warrants. The address of Becton Dickinson is 1 Becton Drive, Franklin Lakes, NJ 07417. (10) The address of Ethical is Corpus Christi House, 9 West Street, Godmanchester, Huntingdon, Cambs., PE18 8HG, United Kingdom. (11) Includes 581,418 shares of Common Stock held of record by Cherry Tree Ventures II, L.P. ("Cherry Tree I") and 208,926 shares of Common Stock held of record by Cherry Tree Ventures I, L.P. ("Cherry Tree II"). Also includes 30,466 shares of Common Stock issuable to Cherry Tree II upon the exercise of outstanding warrants. Tony Christianson and Gordon Stofer, the general partners of each of Cherry Tree I and Cherry Tree II, share voting and investment power with respect to the shares of Common Stock indicated. The address for Cherry Tree I and Cherry Tree II is 3800 West 80th Street, Suite 1400, Bloomington, MN 55431. (12) The address of Enskilda is c/o Skandinaviska Enskilda Banken, Jakobsbergsgatan 17, Box 16053, 103 21 Stockholm, Sweden. (13) Includes 278,167 shares of Common Stock issuable to all directors and executive officers as a group upon the exercise of outstanding options and warrants. 42 CERTAIN TRANSACTIONS CHERRY TREE II On April 16 and June 4, 1993, Cherry Tree II loaned the Company an aggregate of $40,000 pursuant to the terms of loan agreements and related 9% Demand Promissory Notes; in partial consideration for these loans, Cherry Tree II received warrants to purchase an aggregate of 30,466 shares of Common Stock at $1.31 per share, which warrants expire on April 16, 1998 and June 3, 1998. The principal amount of these loans was converted into 30,465 shares of Series A Convertible Preferred Stock in November 1993 which was in turn converted into 30,465 shares of Common Stock in January 1996; the Company paid Cherry Tree II an aggregate of $2,017 interest in cash on these loans. FRED L. SHAPIRO, M.D. On April 16 and June 4, 1993, Fred L. Shapiro, M.D., a director of the Company, loaned the Company an aggregate of $20,000 pursuant to the terms of loan agreements and related 9% Demand Promissory Notes; in partial consideration for these loans, Dr. Shapiro received warrants to purchase an aggregate of 15,234 shares of Common Stock at $1.31 per share, which warrants expire on April 16, 1998 and June 3, 1998. The Company repaid the principal amount of these loans, together with an aggregate of $747 in interest, on October 9, 1993. On August 29, 1994, Dr. Shapiro loaned the Company $100,000 pursuant to the terms of a promissory note due August 29, 1995, bearing interest at 12% per year; Dr. Shapiro also received a warrant to purchase 7,617 shares of Common Stock at $3.28 per share, which warrant expires on August 31, 1997. In August 1995, the Company and Dr. Shapiro agreed to extend the term of the loan and to amend the terms of the loan to permit Dr. Shapiro to convert the principal amount of the loan into shares of Common Stock. On February 29, 1996, Dr. Shapiro elected to convert the outstanding principal amount of this loan into 30,465 shares of Common Stock. The Company paid Dr. Shapiro an aggregate of $18,000 interest in cash on the loan. ETHICAL On September 27, 1993, Ethical and the Company entered into a Preferred Stock Purchase Agreement pursuant to which Ethical purchased 380,808 shares of Series B Convertible Preferred Stock for a price of $1.31 per share. At the same time, the Company and Ethical also entered into (i) an Option Agreement (the "Ethical Option") pursuant to which Ethical obtained the right to purchase 761,615 shares of Series B Convertible Preferred Stock at a price of $1.31 per share (subject to adjustment to $2.62 per share upon the occurrence of certain events) at any time before the first to occur of March 10, 1995, or the effectiveness of a registration statement under the Securities Act registering the Common Stock and (ii) a Technology License and Co-Development Agreement (the "Ethical License Agreement"). In a letter dated December 10, 1993, Ethical and the Company amended the Ethical Option to provide that the $1.31 per share price should in all events remain valid as to 380,808 shares through September 30, 1994. On March 24, 1995, pursuant to the terms of the Ethical Option, the exercise price was adjusted to $2.62 upon the Company raising in excess of $1,000,000 through the sale of additional shares of capital stock at a price of at least $2.62 per share. On September 16, 1994, Ethical and the Company executed a Waiver and Notice of Exercise Agreement pursuant to which (i) the parties agreed to waive a 380,808 share minimum exercise amount provision in the Ethical Option, (ii) the parties agreed to a 152,323 share minimum exercise amount for the Ethical Option, (iii) the parties agreed to extend the $1.31 per share exercise price on 380,808 shares subject to the Ethical Option through October 31, 1994, and (iv) Ethical exercised the Ethical Option as to 152,323 shares of Series B Convertible Preferred Stock for $1.31 per share. On February 10, 1995, in return for a commitment by Ethical to exercise $100,000 worth of the Ethical Option under certain circumstances, the Company and Ethical amended the Ethical Option to extend its term through September 10, 1995. Ethical exercised the Ethical Option as to 76,161 shares of Series B Convertible Preferred Stock in February 1995, at a price of $1.31 per share. Pursuant to an Agreement dated September 1, 1995, between Ethical and the Company, (i) the parties agreed to waive the 380,808 share minimum exercise increment in the Ethical Option, (ii) the Company agreed to extend the Ethical Option through 43 February 29, 1996, provided that Ethical exercise the Ethical Option as to at least 152,323 shares by September 1, 1995, (iii) Ethical exercised the Ethical Option as to 152,323 shares of Series B Convertible Preferred Stock for $1.64 per share (with the Company agreeing to such price) and (iv) the parties agreed that the Company would have the unilateral right to terminate the Ethical License Agreement at any time. In January 1996, the Company and Ethical agreed to terminate the Ethical License Agreement. On December 22, 1995, Ethical and the Company entered into a Loan Agreement (the "Ethical Loan") pursuant to which the Company borrowed $312,500 from Ethical in three installments in December 1995 and January 1996; amounts outstanding under the Ethical Loan bore interest at the rate of 10% per year. In connection with the Ethical Loan, the Company and Ethical again amended the Ethical Option to reduce the per share exercise price on 190,404 of the shares of Series B Convertible Preferred Stock subject to the Ethical Option from $2.62 to $1.64 and to extend the term of the Ethical Option through the later of February 29, 1996, or the repayment date of the Ethical Loan. On February 28, 1996, the Company issued 190,404 shares of Series B Convertible Preferred Stock to Ethical at a price of $1.64 per share in repayment of all principal amounts advanced under the Ethical Loan and paid $1,301 interest in cash. On the same date, Ethical exercised the remainder of the Ethical Option and purchased 190,404 shares of Series B Convertible Preferred Stock for $2.62 per share. As the result of certain anti-dilution protections applicable to the Series B Convertible Preferred Stock sold to Ethical, these shares will convert upon the effectiveness of this offering into 1,224,198 shares of Common Stock. ENSKILDA On December 28, 1993, the Company and Enskilda entered into a Preferred Stock Purchase Agreement pursuant to which Enskilda purchased 57,121 shares of Series B Convertible Preferred Stock at a purchase price of $1.31 per share. At the same time, the Company and Enskilda orally agreed that Enskilda should be allowed to purchase an additional 399,848 shares of Series B Convertible Preferred Stock. On February 1, 1994, the Company and Enskilda entered into a Preferred Stock Agreement pursuant to which Enskilda purchased 399,848 shares of Non-Voting Series B Convertible Preferred Stock for $1.31 per share. On December 29, 1994, Enskilda purchased 30,465 shares of Series B Convertible Preferred Stock for $3.28 per share as part of a private placement of such shares. On May 31, 1995, Enskilda purchased 22,848 shares of Series B Convertible Preferred Stock for $3.28 per share as part of a private placement of such shares. As the result of certain anti-dilution protections applicable to the Series B Convertible Preferred Stock sold to Enskilda, these shares will convert upon the effectiveness of this offering into 542,992 shares of Common Stock. BECTON DICKINSON On January 25, 1996, the Company and Becton Dickinson entered into a Preferred Stock, Option and Warrant Purchase Agreement pursuant to which Becton Dickinson purchased 761,615 shares of Series C Convertible Preferred Stock for $3.94 per share. Becton Dickinson also received, for no additional consideration, an option (the "Becton Dickinson Option") to purchase 380,808 shares of Series D Convertible Preferred Stock at $4.60 per share and purchased, for $125,000, a warrant (the "Becton Dickinson Warrant") to purchase 1,904,037 shares of Series E Convertible Preferred Stock at $5.91 per share. Under its terms and the proposed terms of this offering, the Becton Dickinson Option will expire on the date on which the Company completes this offering. All shares of Series C convert 1-for-1 into, and the Becton Dickinson Option and the Becton Dickinson Warrant will become exercisable for, shares of Common Stock upon the closing of this offering. At the same time, the Company and Becton Dickinson entered into a Development and License Agreement relating to the further development of the Company's needle-free injection systems and Becton Dickinson's development of certain disposables for use with the Company's systems. The terms 44 of the Development and License Agreement include the grant to Becton Dickinson during the term of the agreement of an exclusive, world-wide license to (i) sell and use certain of the Company's needle-free injection systems that are not designed or calibrated for use with a specific drug made by a specific drug company and that are intended to be distributed primarily through pharmacies for non-professional use and (ii) make, have made, use, sell and import single- or multiple-use disposable front-end chambers or other related drug-containing or drug-contacting components for use with certain of the Company's needle-free injection systems. DESCRIPTION OF CAPITAL STOCK Upon completion of this offering the authorized capital stock of the Company will consist of 17,000,000 shares of Common Stock, $.01 par value, and 1,000,000 shares of preferred stock, $.01 par value, that are undesignated as to terms and preferences. As of June 1, 1996, there were 4,725,633 shares of Common Stock outstanding, which were held of record by approximately 91 shareholders, and no shares of undesignated preferred stock outstanding. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. There is no cumulative voting for the election of directors so that the holders of more than 50% of the outstanding Common Stock can elect all directors. Subject to preferences that may be applicable to any outstanding preferred stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors of the Company out of funds legally available therefor and in liquidation proceedings. Holders of Common Stock have no preemptive or subscription rights and there are no redemption rights with respect to such shares. The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, validly issued, fully paid and nonassessable. PREFERRED STOCK All of the Company's outstanding Convertible Preferred Stock will be converted into Common Stock upon the effectiveness or the closing of this offering pursuant to its terms. Immediately after the conversion of the Convertible Preferred Stock into Common Stock, there will be no Convertible Preferred Stock outstanding and the Company will have authorized 1,000,000 shares of preferred stock that is undesignated as to terms and preferences. Under Minnesota law and the Company's Second Amended and Restated Articles of Incorporation to be effective upon the closing of this offering, the Board of Directors is authorized, without further shareholder action, to issue preferred stock in one or more classes or series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences, of the preferred stock. Accordingly, although it has no current intention of doing so, the Board of Directors of the Company may, without shareholder approval, issue shares of a class or series of preferred stock with voting and conversion rights which could adversely affect the voting power and the dividend and other rights of the holders of Common Stock. In addition, the existence of undesignated preferred stock may have the effect of discouraging, delaying, deferring or preventing an attempt, through acquisition of a substantial number of shares of Common Stock, to acquire control of the Company with a view to effecting a merger, sale or exchange of assets or a similar transaction. The anti-takeover effects of the undesignated preferred stock may deny shareholders the receipt of a premium on their Common Stock and may also have a depressive effect on the market price of the Common Stock. WARRANTS AND OPTIONS As of June 1, 1996, the Company had outstanding options to purchase 481,690 shares of Common Stock that had been issued to employees, directors and consultants to the Company pursuant to the 1993 45 Stock Option Plan with a weighted average exercise price of $2.54 per share. Such options expire between October 1997 and January 2006. As of June 1, 1996, the Company also had outstanding warrants and options to purchase a total of 2,485,120 shares of Common Stock that have been granted to third parties outside of the 1993 Stock Option Plan with a weighted average exercise price of $5.35 per share. Such third-party warrants and options are all currently exercisable and expire on dates ranging from February 1997 to January 2006. All agreements embodying such outstanding third-party warrants and options provide for antidilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the corporate structure of the Company. Holders of third-party warrants and options to purchase approximately 2,287,893 shares of Common Stock are entitled to certain rights to cause the Company to register the sale of such shares under the Securities Act. See "Shares Eligible for Future Sale." ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT Certain provisions of Minnesota law described below could have an anti- takeover effect. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Company if the Board of Directors determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company, which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Section 302A.671 of the Minnesota Business Corporation Act (the "MBCA") provides that, unless the acquisition of certain new percentages of voting control of the Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other person is approved by a majority of the disinterested shareholders of the Company, the shares acquired above such new percentage level of voting control will not be entitled to voting rights. The Company is required to hold a special shareholders' meeting to vote on any such acquisition within 55 days after the delivery to the Company by the acquirer of an information statement describing, among other things, the acquirer and any plans of the acquirer to liquidate or dissolve the Company and copies of definitive financing agreements for any financing of the acquisition not to be provided by funds of the acquirer. If any acquirer does not submit an information statement to the Company within ten days after acquiring shares representing a new threshold percentage of voting control of the Company, or if the disinterested shareholders vote not to approve such an acquisition, the Company may redeem the shares so acquired by the acquirer at their market value. Section 302A.671 generally does not apply to a cash offer to purchase all shares of voting stock of the issuing corporation if such offer has been approved by a majority vote of disinterested board members of the issuing corporation. Section 302A.673 of the MBCA restricts certain transactions between the Company and a shareholder who becomes the beneficial holder of 10% or more of the Company's outstanding voting stock (an "interested shareholder") unless a majority of the disinterested directors of the Company have approved, prior to the date on which the shareholder acquired a 10% interest, either the business combination transaction suggested by such a shareholder or the acquisition of shares that made such a shareholder a statutory interested shareholder. If such prior approval is not obtained, the statute imposes a four-year prohibition from the statutory interested shareholder's share acquisition date on mergers, sales of substantial assets, loans, substantial issuances of stock and various other transactions involving the Company and the statutory interested shareholder or its affiliates. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar with respect to the Common Stock will be Norwest Bank, Minnesota, N.A. 46 SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares by current shareholders could adversely affect the price of the Company's Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 6,925,633 shares of Common Stock, assuming the issuance of the 2,200,000 shares of Common Stock offered hereby. Of the total outstanding shares of Common Stock, the 2,200,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act (whose sales would be subject to certain volume limitations and other restrictions described below). The remaining 4,725,633 shares of Common Stock will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Of these, an aggregate of 4,293,378 shares are owned by the Company's directors, officers and certain of the Company's shareholders who, together with the Company, have agreed that they will not sell, directly or indirectly, any Common Stock without the prior consent of Rodman & Renshaw, Inc. for a period of 180 days from the date of this Prospectus. Of the shares not subject to this agreement, 125,008 shares will be eligible for immediate sale without restriction pursuant to Rule 144(k) on the effective date of this offering, 381 shares will be eligible for sale, subject to compliance with the volume limitations and other restrictions of Rule 144, 90 days after the effective date of this offering, and 306,866 shares will become eligible for sale under Rule 144 after the expiration of the two-year holding periods from the dates of acquisition, which end between December 29, 1996 and May 31, 1998. Beginning on the 181st day after the date of this Prospectus, when the agreements not to sell shares expire, an additional 929,757 of the shares may become eligible for sale without restriction pursuant to Rule 144(k), an additional 1,850,562 of the shares will become eligible for sale, subject to compliance with the volume limitations and other restrictions of Rule 144, and the remaining 1,513,059 shares will become eligible for sale under Rule 144 after the expiration of the two-year holding periods from the dates of acquisition, which end between December 29, 1996 and February 28, 1998. In general, under Rule 144, as currently in effect, if at least two years have elapsed from the date that shares of Common Stock were acquired from the Company or an affiliate of the Company, then the holder is entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (69,256 shares immediately after this offering) or (ii) generally, the average weekly trading volume in the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale, subject to certain other limitations and restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. The Company intends to file registration statements under the Securities Act, covering 495,050 and 650,000 shares of Common Stock reserved for issuance under, respectively, the 1993 Stock Option Plan and the 1996 Stock Option Plan. Such registration statements are expected to be filed soon after the date of this Prospectus and will automatically become effective upon filing. Accordingly, shares issued under such registration statements upon the exercise of options will be available for resale in the open market subject to the agreements not to sell described above. See "Management--Stock Option Plans." In addition, after this offering, the holders of 2,761,547 shares of Common Stock and warrants and options to purchase 2,287,893 shares of Common Stock (together, the "Registrable Securities") will be entitled to certain rights to cause the Company to register the sale of such shares under the Securities Act. After this offering, if the Company proposes to register any of its securities under the Securities Act for its own account, holders of Registrable Securities will be entitled 47 to notice of such registration and will be entitled to include Registrable Securities therein, subject to certain conditions and exceptions, including the right of the underwriters of any such offering to limit the number of shares that may be included in such registration. Certain of the holders of Registrable Securities have the right to require the Company to prepare and file a registration statement under the Securities Act at its expense, and the Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations; provided, however, that with respect to certain of the Registrable Securities, the Company shall not be required to obtain the effectiveness of any such registration statement until six months after the date of this Prospectus. Furthermore, the Company's obligation to effect such shareholder-initiated registrations is limited in number with respect to certain of the Registrable Securities. Registration of such shares would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. All but 3,048 of these shares are subject to the agreements not to sell described above. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock or the availability of Common Stock for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of the Common Stock in the public markets or the perception that such sales will occur could adversely affect the market price or the future ability to raise capital through an offering of its equity securities. 48 UNDERWRITING The Underwriters below, for whom Rodman & Renshaw, Inc. ("Rodman") and R. J. Steichen & Company are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company, the number of shares of Common Stock set forth opposite their names below.
UNDERWRITER NUMBER OF SHARES ----------- ---------------- Rodman & Renshaw, Inc.............................. R. J. Steichen & Company........................... --------- Total.................................. 2,200,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other considerations. The nature of obligations is such that they are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriters, through the Representatives, have advised the Company that they propose to offer the Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share; and that such dealers may reallow a concession of $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriters. Application has been made for the Common Stock to be included for quotation on the Nasdaq National Market. The Representatives have advised the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. The Company has granted to the Underwriters a 30-day over-allotment option to purchase up to an aggregate of 330,000 additional shares of Common Stock, exercisable at the public offering price less the underwriting discount. If the Underwriters exercise such over-allotment option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares of Common Stock to be purchased by it as shown in the above table, bears to the 2,200,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. In connection with this offering, the Company has agreed to issue and sell to the Representatives, for nominal consideration, warrants to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock sold in this offering, exclusive of any shares of Common Stock sold pursuant to the Underwriters' over-allotment option (the "Representatives' Warrants"). The Representatives' Warrants will be initially exercisable at a price per share equal to 120% of the public offering price, commencing one year from the date of this Prospectus, and will continue to be exercisable for a period of four years after such date. The Representatives' Warrants are restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the effective date of this offering, except to officers, partners or successors of the Representatives. The exercise price of the Representatives' Warrants and the number of shares of Common Stock issuable upon exercise thereof are subject to adjustment under certain circumstances. The Representatives' Warrants grant to the holders thereof certain rights regarding the registration of the Common Stock issuable upon exercise of the Representatives' Warrants. 49 The officers, directors and certain shareholders of the Company, who will beneficially own 4,293,378 shares of Common Stock after the offering, have agreed that they will not publicly sell or dispose of any shares of Common Stock for a period of 180 days after the date on which the Registration Statement is declared effective by the Commission, without the prior written consent of Rodman. See "Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against certain liabilities, losses and expenses, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price has been determined through negotiations between the Company and the Representatives. Among the factors considered in determining the initial public offering price were prevailing market and economic conditions, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, an assessment of the Company's management and the consideration of the above factors in relation to the market valuation of companies in related businesses. See "Risk Factors --No Prior Public Market; Possible Volatility of Price." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal matters in connection with the sale of the Common Stock offered hereby will be passed on for the Underwriters by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. EXPERTS The financial statements as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995, included in this Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. On December 29, 1995, on the recommendation of the Audit Committee and with the approval of the Board of Directors, the Company engaged KPMG Peat Marwick LLP to audit the consolidated financial statements of the Company for the year ended December 31, 1995. KPMG Peat Marwick LLP has also conducted a reaudit of the financial statements as of December 31, 1994, and for each of the years in the two-year period ended December 31, 1994. There were no disagreements (whether resolved to the satisfaction of Stirtz Bernards or not) between the Company and Stirtz Bernards on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Stirtz Bernards, would have caused Stirtz Bernards to make a reference to the subject matter of the disagreement in connection with its report. The audit opinion of Stirtz Bernards Boyden Surdel & Larter Professional Association ("Stirtz Bernards"), the Company's prior accountants, for the years ended December 31, 1993 and 1994 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified as to uncertainty, audit scope, or accounting principles. 50 ADDITIONAL INFORMATION The Company has filed with the SEC in Washington, D.C. a Registration Statement on Form S-1, including amendments thereto, with respect to the shares of Common Stock offered hereby has been filed with the SEC. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information pertaining to the Company and the shares of Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits, financial statements and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected, without charge, and copies may be obtained, at prescribed rates, at the public reference facilities of the SEC maintained at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at 7 World Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement may also be obtained by mail at prescribed rates, from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company intends to furnish its shareholders with annual reports containing financial statements audited by its independent public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 51 MEDI-JECT CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report.................................................. F-2 Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited) and Pro forma Shareholders' Equity as of March 31, 1996 (unaudited).................................................... F-3 Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited)....... F-4 Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited).................................................... F-5 Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited)....... F-6 Notes to Financial Statements................................................. F-7
F-1 WHEN THE TRANSACTION REFERRED TO IN NOTE 13(A) OF THE NOTES TO FINANCIAL STATEMENTS HAS BEEN APPROVED BY THE COMPANY'S BOARD OF DIRECTORS, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. Independent Auditors' Report To the Shareholders and Board of Directors Medi-Ject Corporation: We have audited the accompanying balance sheets of Medi-Ject Corporation (the Company) as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1995. 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 Medi-Ject Corporation as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota June 7, 1996, except as to Note 13(a) which is as of July 10, 1996 F-2 MEDI-JECT CORPORATION Balance Sheets
Pro Forma December 31, March 31, March 31, ------------------------- 1994 1995 1996 1996 --------- ---------- ---------- ------------ (unaudited) (unaudited) ASSETS: Current assets: Cash and cash equivalents $ 645,667 $ 35,817 $ 2,810,769 Accounts receivable, less allowance for doubtful accounts of $1,501 for 1994, $4,125 for 1995, and $4,125 for March 31, 1996 89,303 176,240 325,528 Inventories, net 170,861 280,229 296,256 Prepaid expenses 12,318 35,508 79,313 ----------- ----------- ----------- 918,149 527,794 3,511,866 ----------- ----------- ----------- Equipment, furniture and fixtures 907,248 1,027,462 1,049,697 Less accumulated depreciation (464,654) (550,436) (526,108) ----------- ----------- ----------- 442,594 477,026 523,589 ----------- ----------- ----------- Patent rights 0 235,288 295,596 ----------- ----------- ----------- $ 1,360,743 $ 1,240,108 $ 4,331,051 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT): Current liabilities: Accounts payable $ 160,018 $ 243,281 $ 362,892 Accrued expenses 291,039 398,232 320,606 Deferred revenue 110,000 148,563 209,240 Capital lease obligations--current maturities 42,455 45,534 44,283 Notes payable--current maturities 206,324 342,457 120,418 ----------- ----------- ----------- 809,836 1,178,067 1,057,439 ----------- ----------- ----------- Long-term liabilities: Capital leases, less current maturities 85,326 40,109 29,366 Notes payable, less current maturities 213,554 96,097 65,701 ----------- ----------- ----------- 298,880 136,206 95,067 ----------- ----------- ----------- Shareholders' equity (deficit): Series C convertible preferred stock: $.01 par; authorized 716,615 shares: 0; 0; and 761,615 issued and outstanding at December 31, 1994, 1995 and March 31, 1996, respectively -- -- 7,616 $ -- Series B convertible preferred stock: $.01 par; authorized 3,046,459 shares: 1,488,958; 2,090,633; and 2,471,484 issued and outstanding at December 31, 1994, 1995 and March 31, 1996, respectively 14,890 20,906 24,714 -- Series A convertible preferred stock: $.01 par; authorized 1,218,584 shares: 1,103,867; 1,103,867; and 0 issued and outstanding at December 31, 1994, 1995 and March 31, 1996, respectively 11,039 11,039 -- -- Common stock: $.01 par; authorized 7,616,147 shares: 217,722; 218,864; and 1,353,785 issued and outstanding at December 31, 1994, 1995 and March 31, 1996, respectively 2,177 2,189 13,538 47,255 Additional paid-in capital 7,643,361 9,193,600 12,987,591 12,986,204 Accumulated deficit (7,419,440) (9,301,899) (9,854,914) (9,854,914) ------------ ------------ ------------ ------------ Total shareholders' equity (deficit) 252,027 (74,165) 3,178,545 3,178,545 ------------ ------------ ------------ ------------ $ 1,360,743 $ 1,240,108 $ 4,331,051 $ 4,331,051 ============= ============ ============ ============
See accompanying notes to financial statements. F-3 MEDI-JECT CORPORATION Statements of Operations
Three Months Ended Year Ended December 31, March 31, ----------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ---------- ------------ --------- ---------- ----------- (unaudited) Revenues: Sales $1,057,703 $ 1,517,660 $ 1,653,869 $ 446,727 $ 443,826 Licensing and product development 125,000 470,000 920,937 95,000 325,373 ---------- ----------- ----------- ---------- ---------- 1,182,703 1,987,660 2,574,806 541,727 769,199 ---------- ----------- ----------- ---------- ---------- Operating expenses: Cost of sales 409,247 630,628 1,048,937 231,052 292,511 Research and development 146,061 401,382 1,195,435 269,013 449,732 General and administrative 615,035 867,616 977,579 330,757 388,938 Sales and marketing 484,939 1,128,232 1,145,894 241,187 213,050 ---------- ----------- ----------- ---------- ---------- 1,655,282 3,027,858 4,367,845 1,072,009 1,344,231 ---------- ----------- ----------- ---------- ---------- Net operating loss (472,579) (1,040,198) (1,793,039) (530,282) (575,032) ---------- ----------- ----------- ---------- ---------- Other income (expense): Interest and other income 2,538 15,916 16,486 6,373 35,498 Interest and other expense (30,278) (42,180) (105,906) (16,374) (13,481) ---------- ----------- ----------- ---------- ---------- (27,740) (26,264) (89,420) (10,001) 22,017 ---------- ----------- ----------- ---------- ---------- Net loss $ (500,319) $(1,066,462) $(1,882,459) $ (540,283) $ (553,015) ========== =========== =========== =========== ========== Pro forma per share data (Note 1) (unaudited): Net loss per common share $ (0.36) $ (0.09) =========== ========== Weighted average common shares outstanding 5,180,184 6,353,112 ----------- ----------
See accompanying notes to financial statements. F-4 MEDI-JECT CORPORATION Statements of Shareholders' Equity (Deficit)
Convertible preferred stock ------------------------------------------------------------------------ Series C Series B Series A Common Stock -------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount Shares Amount ------- ---------- --------- -------- --------- -------- ---------- ----------- Balance, December 31, 1992 -- $ -- -- $ -- 1,073,402 $ 10,734 229,216 $ 2,292 Common stock: Stock incentive awards expired -- -- -- -- -- -- (97,696) (977) Shares issued as compensation -- -- -- -- -- -- 46,078 461 Series A: Conversion of notes payable -- -- -- 30,465 305 -- -- Series B: Shares issued for cash -- -- 761,615 7,616 -- -- -- -- Offering costs -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993 -- -- 761,615 7,616 1,103,867 11,039 177,598 1,776 Common stock: Shares issued as compensation -- -- -- -- -- -- 37,310 373 Shares issued for cash -- -- -- -- -- -- 2,814 28 Series B: Exercise of stock options -- -- 552,171 5,522 -- -- -- -- Shares issued for cash -- -- 175,172 1,752 -- -- -- -- Offering costs -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 -- -- 1,488,958 14,890 1,103,867 11,039 217,722 2,177 Common stock: Exercise of stock options -- -- -- -- -- -- 1,142 12 Series B: Exercise of stock options -- -- 228,483 2,284 -- -- -- -- Shares issued for cash -- -- 373,192 3,732 -- -- -- -- Offering costs -- -- -- -- -- -- -- -- Amendments to investor option agreement -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 -- -- 2,090,633 20,906 1,103,867 11,039 218,864 2,189 Conversion of Series A to common stock (1) -- -- -- -- (1,103,867) (11,039) 1,103,867 11,039 Conversion of loan (1) -- -- -- -- -- -- 30,465 305 Shares issued for reverse stock split(1) -- -- 43 -- -- -- 589 5 Series B: (1) Exercise of stock options -- -- 380,808 3,808 -- -- -- -- Series C:(1) Shares issued for cash 761,615 7,616 -- -- -- -- -- -- Offering costs -- -- -- -- -- -- -- -- Series E: (1) Warrant issued for cash -- -- -- -- -- -- -- -- Net loss (1) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1996 761,615 $7,616 2,471,484 $ 24,714 -- -- 1,353,785 $13,538 - ------------------------------------------------------------------------------------------------------------------------------------ Additional paid-in Accumulated capital deficit Total ----------- ----------- ---------- Balance, December 31, 1992 5,511,019 (5,852,659) (328,614) Common stock: Stock incentive awards expired 977 -- -- Shares issued as compensation 2,467 -- 2,928 Series A: Conversion of notes payable 39,695 -- 40,000 Series B: Shares issued for cash 992,385 -- 1,000,001 Offering costs (95,274) -- (95,274) Net loss -- (500,319) (500,319) - ---------------------------------------------------------------------------------- Balance, December 31, 1993 6,451,269 (6,352,978) 118,722 Common stock: Shares issued as compensation 2,029 -- 2,402 Shares issued for cash 200 -- 228 Series B: Exercise of stock options 719,478 -- 725,000 Shares issued for cash 548,248 -- 550,000 Offering costs (77,863) -- (77,863) Net loss -- (1,066,462) (1,066,462) - ---------------------------------------------------------------------------------- Balance, December 31, 1994 7,643,361 (7,419,440) 252,027 Common stock: Exercise of stock options 1,548 -- 1,560 Series B: Exercise of stock options 347,716 -- 350,000 Shares issued for cash 1,221,268 -- 1,225,000 Offering costs (65,383) -- (65,383) Amendments to investor option agreement 45,090 -- 45,090 Net loss -- (1,882,459) (1,882,459) - ---------------------------------------------------------------------------------- Balance, December 31, 1995 9,193,600 (9,301,899) (74,165) Conversion of Series A to common stock (1) -- -- -- Conversion of loan (1) 99,695 -- 100,000 Shares issued for reverse stock split (5) -- -- Series B: (1) Exercise of stock options 808,692 -- 812,500 Series C: Shares issued for cash 2,992,384 -- 3,000,000 Offering costs (231,775) -- (231,775) Series E: (1) Warrant issued for cash 125,000 -- 125,000 Net loss (1) -- (553,015) (553,015) - ---------------------------------------------------------------------------------- Balance, March 31, 1996 12,987,591 (9,854,914) 3,178,545 - ----------------------------------------------------------------------------------
(1) Unaudited See accompanying notes to financial statements. F-5 MEDI-JECT CORPORATION Statements of Cash Flows
Three Months Year Ended December 31, Ended March 31, --------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ------------ ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss $ (500,319) $ (1,066,462) $ (1,882,459) $ (540,283) $ (553,015) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 26,324 36,945 85,960 12,713 32,305 Shares issued as compensation 2,928 2,402 -- -- -- Amendments to investor option agreement -- -- 45,090 -- -- Changes in operating assets and liabilities: Accounts receivable (15,455) (20,639) (86,937) (44,248) (149,288) Inventories 15,006 (121,547) (109,368) (81,152) (16,027) Prepaid expenses 7,121 3,542 (23,190) (38,722) (43,805) Accounts payable 42,524 16,854 83,263 4,101 119,611 Deferred revenue 43,750 66,250 38,563 (60,000) 60,677 Accrued expenses 73,907 90,026 107,193 28,883 (77,626) ---------- ---------- ----------- ------------ ----------- Net cash used in operating activities (304,214) (992,629) (1,741,885) (718,708) (627,168) ---------- ---------- ----------- ------------ ----------- Cash flows from investing activities: Purchases of equipment, furniture and fixtures (39,096) (256,622) (120,392) (44,817) (78,868) Purchase of patent rights -- -- (235,288) (121,981) (60,308) ---------- ---------- ----------- ------------ ----------- Net cash used in investing activities (39,096) (256,622) (355,680) (166,798) (139,176) ---------- ---------- ----------- ------------ ----------- Cash flows from financing activities: Principal payments on capital lease obligations (7,194) (26,729) (42,138) (10,205) (11,995) Proceeds from issuance of common stock -- 228 1,560 1,560 100,000 Proceeds from issuance of convertible preferred stock 1,000,001 1,275,000 1,575,000 575,000 3,812,500 Warrants issued -- -- -- -- 125,000 Proceeds from issuance of notes payable 40,000 100,000 125,000 -- 187,500 Principal payments on notes payable -- (24,967) (106,324) (26,038) (439,935) Offering costs (95,274) (77,863) (65,383) (27,904) (231,774) ---------- ---------- ----------- ------------ ----------- Net cash provided by financing activities 937,533 1,245,669 1,487,715 512,413 3,541,296 ---------- ---------- ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents 594,223 (3,582) (609,850) (373,093) 2,774,952 Cash and cash equivalents: Beginning of period 55,026 649,249 645,667 645,667 35,817 ---------- ---------- ----------- ------------ ----------- End of period $ 649,249 $ 645,667 $ 35,817 $ 272,574 $2,810,769 ========== ========== =========== ============ ===========
See accompanying notes to financial statements. F-6 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business The Company is primarily a manufacturer/distributor of needle-free injection devices and disposables for the injection of insulin and human growth hormone. Products are sold throughout the United States, Europe, the Middle East, and Asia. Interim Financial Information The financial information presented for the three months ended March 31, 1996 is unaudited. In the opinion of management, this unaudited financial information contains all adjustments (which consist only of normal, recurring adjustments) necessary for a fair presentation. Operating results for the three months ended March 31, 1996 are not necessarily indicative of results that may be expected for the full year. Pro Forma Net Loss Per Share Pro forma net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of shares of common stock and common stock equivalents outstanding, after applying the treasury stock method and after giving effect to the reverse stock split and the automatic conversion of all outstanding shares of convertible preferred stock in accordance with the Company's initial public offering (see Note 13). Pursuant to certain requirements of the Securities and Exchange Commission, common stock equivalents include the impact of the issuance of stock, options and warrants (see Note 8) within one year prior to the date of the initial filing of the Company's initial public offering ("IPO") (see Note 13) at exercise prices less than the assumed initial public offering price of $9.00 per share, whether or not the effects are antidilutive. Cash Equivalents The Company considers highly liquid debt instruments with remaining maturities of ninety days or less at time of purchase to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Equipment, Furniture, and Fixtures Equipment, furniture, and fixtures are stated at cost and are depreciated using the straight-line method over their estimated useful lives. F-7 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) Sales Recognition Sales and related costs are recognized upon shipment of product to customers. Sales are recorded net of provisions for returns and discounts. Licensing and Product Development Revenue Recognition Licensing and product development revenue is recognized when underlying performance criteria for payment have been met and the Company has an unconditional right to such payment. Depending on a license or product development agreement's terms, recognition criteria may be satisfied upon achievement of milestones, passage of time, or product sales by the licensee. Payments received by the Company in excess of amounts earned are classified as deferred revenue. Product Warranty The Company recognizes the estimated cost of warranty obligations to its customers at the time the products are shipped. Research and Development Company sponsored research and development expenses related to both present and future products are expensed as incurred. Income Taxes Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Concentration of Credit Risk Financial instruments that may subject the Company to concentration of credit risk consist principally of accounts receivable. This risk is mitigated by the large number of individual customers and long-standing credit relationships with the Company's major distributors. 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 these estimates. F-8 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) New Accounting Pronouncements For 1996, the Company is required to adopt Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 121 prescribes accounting and reporting standards when circumstances indicate that the carrying amount of an asset may not be recoverable. Initial application of SFAS No. 121 is not expected to result in recognition of a cumulative effect of a change in accounting principle by the Company. SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans. Since the Company intends to elect continued recognition of certain stock- based compensation using the intrinsic value method prescribed under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, no effect on the Company's expense recognition is expected. 2. INVENTORIES: Inventories consist of the following:
December 31, March 31, ------------------------- 1994 1995 1996 ---------- ---------- ----------- (unaudited) Raw material................. $ 119,316 $ 145,603 $ 151,372 Work-in-process.............. 45,878 80,663 103,668 Finished goods............... 5,667 53,963 41,216 ---------- ---------- ----------- $ 170,861 $ 280,229 $ 296,256 ========== ========== ===========
3. EQUIPMENT, FURNITURE, AND FIXTURES Equipment, furniture, and fixtures consisted of the following:
December 31, March 31, Useful ------------------------ 1994 1995 1996 Lives ---------- ---------- ----------- ---------- (unaudited) Office equipment........ $ 222,350 $ 262,847 $ 300,147 3-5 years Production equipment.... 674,862 753,319 738,254 3-10 years Displays................ 10,036 11,296 11,296 3-5 years ---------- ---------- ---------- $ 907,248 $1,027,462 $1,049,697 ========== ========== ==========
F-9 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 4. ACCRUED EXPENSES Accrued expenses consisted of the following: (unaudited)
December 31, March 31, ------------------------- 1994 1995 1996 ---------- ---------- ----------- (unaudited) Accrued product warranty and returns................ $ 95,438 $ 71,620 $ 71,620 Payroll..................... 18,795 29,787 23,690 Accrued patent rights obligation................. -- 96,500 -- Other....................... 176,806 200,325 225,296 ---------- ---------- ----------- $ 291,039 $ 398,232 $ 320,606 ========== ========== ===========
5. NOTES PAYABLE Notes payable consisted of the following:
December 31, March 31, ------------------------- 1994 1995 1996 ---------- ---------- ----------- (unaudited) Unsecured notes payable, interest at 10%...... $ -- $ 125,000 $ -- Notes payable, due in aggregate monthly payments of $11,127 including interest at 10% through October 1997. Notes are secured by all assets of the Company........ 319,878 213,554 186,119 Unsecured note payable to shareholder/ director, with interest at 12% payable monthly. Principal is due August 1996. Convertible into 30,465 shares of common stock....................................... 100,000 100,000 -- ---------- ---------- ----------- 419,878 438,554 186,119 Notes payable, less current maturities....... (206,324) (342,457) (120,418) ---------- ---------- ----------- $ 213,554 $ 96,097 $ 65,701 ========== ========== ===========
Aggregate future maturities are as follows: 1996...................................................................... $ 342,457 1997...................................................................... 96,097 ----------- $ 438,554 ===========
F-10 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 6. LEASES The Company has a noncancelable operating lease for its office and manufacturing facility that expires in October 1996. This lease requires the Company to pay all executory costs such as maintenance and insurance. Rent expense incurred for the years ended December 31, 1993, 1994, and 1995 was $57,924, $102,306, and $107,616, respectively. The Company is also obligated under noncancelable leases classified as capital leases. The leases call for aggregate monthly payments of $5,301 with various expiration dates through September 1999. Equipment, furniture, and fixtures include $163,506 and $326,186 of cost and $25,791 and $221,341 of accumulated amortization as of December 31, 1994 and 1995, respectively, related to these leases. Future minimum lease payments are as follow as of December 31, 1995:
Capital Operating leases leases -------- --------- 1996..................................... $ 57,034 $ 76,729 1997..................................... 35,220 -- 1998..................................... 7,070 -- 1999..................................... 1,901 -- -------- --------- $101,225 $ 76,729 ========= Less amount representing interest (at rates ranging from 12% to 20.9%)............... 15,582 -------- Present value of minimum capital lease payments............................... 85,643 Less current maturities.................. 45,534 -------- Obligations under capital leases less current maturities..................... $ 40,109 ========
F-11 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 7. INCOME TAXES The Company incurred losses for both book and tax purposes in each of the three years in the period ended December 31, 1995 and, accordingly, no income taxes were provided. Effective tax rates differ from statutory federal income tax rates in the years ended December 31, 1995, 1994, and 1993 as follows:
1993 1994 1995 ------------ ------------- ------------- Statutory federal income tax rate........................ (34.0)% (34.0)% (34.0)% Valuation allowance increase.............................. 36.0 36.0 36.0 State income taxes, net of federal benefit................ (2.0) (2.0) (2.0) ------------ ------------- ------------- 0.0% 0.0% 0.0% ============ ============= =============
Deferred taxes as of December 31, 1995 and 1994 consist of the following:
1994 1995 ----------- ----------- Deferred tax assets: Inventory reserve ............................ $ 65,100 $ 72,100 Net operating loss carryforward .............. 2,462,000 3,123,600 Research credit carryforward ................. 117,000 117,000 Other ........................................ 34,900 27,300 ----------- ----------- 2,679,000 3,340,000 Less valuation allowance..... (2,679,000) (3,340,000) ----------- ----------- $ 0 $ 0 =========== ===========
At December 31, 1995, the Company had net operating loss carryforwards ("NOL") of approximately $9,000,000 for federal income tax purposes, which begin to expire in 1996. Additionally, the Company had research credit carryforwards of approximately $117,000, which begin to expire in 1997. Pursuant to the Tax Reform Act of 1986, use of the Company's NOL will be limited because of a cumulative "change of ownership" of more than 50%. This ownership change occurred as a result of the sale of 1,000,000 shares of Series C convertible preferred stock on January 25, 1996. (See Note 12.) F-12 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 8. SHAREHOLDERS' EQUITY Series A Convertible Preferred Stock The Series A convertible preferred stock carries voting rights, has no dividend preference over the Company's common stock and a liquidation preference of $0.641. Each Series A share is convertible into one share of common stock at the option of the holder and is, under certain circumstances, automatically converted to common stock. (See Note 12.) Series B Convertible Preferred Stock The Series B convertible preferred stock, which carries voting rights, has dividend preference over Series A convertible preferred and common stock and a liquidation preference of $1.72. Each Series B share is convertible into one share of common stock, subject to certain anti-dilution adjustments. In January 1994, the Board of Directors established a new Series B non- voting convertible preferred stock and authorized 761,615 shares for this class of stock. The Series B non-voting ranks on par with the Series B voting convertible preferred stock, with regard to dividends and liquidation preference, and is convertible at the option of the holder into common stock. In October 1994, the Board of Directors established a new Series B, Class II, voting convertible preferred stock and authorized 304,646 shares for this class of stock. The Series B-II has a liquidation preference of $3.28 per share, and otherwise ranks on par with the Series B voting convertible preferred stock. In April 1995, the Board of Directors established a new Series B, Class III, voting convertible preferred stock and authorized 152,323 shares for this class of stock. The Series B-III has a liquidation preference of $3.28 per share, and otherwise ranks on par with the Series B voting convertible preferred stock. In August 1995, the Board of Directors established a new Series B, Class IV, voting convertible preferred stock and authorized 76,162 shares for this class of stock. The Series B-IV has a liquidation preference of $3.28 per share, and otherwise ranks on par with the Series B voting convertible preferred stock. At December 31, 1995, the total number of shares authorized for all classes of stock was 13,404,420 shares: 7,616,147 common shares; 1,218,584 Series A preferred shares; 2,284,844 Series B preferred shares; 761,615 nonvoting Series B preferred shares; and 1,523,230 preferred shares undesignated as to class. F-13 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) Stock Options and Warrants The Company has issued options and warrants for common stock to various lenders and others. These options and warrants have exercise prices ranging from $0.79 to $3.28 per share, are fully exercisable, and expire from August 1996 to December 2003. The Company also has stock options outstanding for 380,808 shares of its Series B convertible preferred stock issued in connection with a 1993 stock purchase agreement. This option agreement, as amended, expired on February 29, 1996. The exercise price is $1.64 per share for 190,404 shares and $2.63 for the remaining 190,404 shares. Amendments during 1995 to the Series B preferred option agreement resulted in the recognition of $45,090 in expense. This expense was associated with decreases in the exercise price of certain options in exchange for a short-term credit facility, and the cancellation of a technology license and co-development agreement. (See Note 12.) Under the terms of the Company's 1993 Stock Option Plan, incentive stock options and nonqualified options may be granted to officers, directors, employees, and consultants. 495,050 shares of common stock have been reserved under this plan and at December 31, 1995, 87,891 shares remain available for grant. Stock options granted under the 1993 Stock Option Plan become exercisable over varying periods and expire up to ten years from date of grant. The option price for incentive stock options cannot be less than fair market value on the date of the grant. The option price for nonqualified stock options may be set by the Board of Directors. F-14 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) Stock option and warrant activity for the three years ended December 31, 1995 and the 3 months ended March 31, 1996 is summarized as follows:
Number Exercise price of shares per share ------------ ---------------- Outstanding at December 31, 1992................ 4,570 $26.26-32.83 Granted................................... 1,038,712 0.79-2.63 Exercised................................. -- -- Canceled.................................. -- -- ------------ -------------- Outstanding at December 31, 1993................ 1,043,282 0.79-32.83 Granted................................... 124,995 1.31-1.64 Exercised................................. (152,323) 1.31 Canceled.................................. (7,236) 0.79-32.83 ------------ -------------- Outstanding at December 31, 1994................ 1,008,718 0.79-1.64 Granted................................... 214,776 1.31-3.28 Exercised................................. (229,627) 1.31-1.64 Canceled.................................. (2,057) 3.28 ------------ -------------- Outstanding at December 31, 1995................ 991,810 0.79-3.28 Granted (unaudited)....................... 2,372,677 3.94-5.91 Exercised (unaudited)..................... (380,808) 1.64-2.63 Canceled (unaudited)...................... (16,869) 1.31-2.63 ------------ -------------- Outstanding at March 31, 1996 (unaudited)....... 2,966,810 $ 0.79-5.91 ============ ==============
9. EMPLOYEE SAVINGS PLAN The Company has an employee savings plan that covers all employees who have met minimum age and service requirements. Under the plan, eligible employees may contribute up to 15% of their compensation into the plan. The Company, at the discretion of the Board of Directors, may contribute elective amounts to the plan, allocated in proportion to employee contributions to the plan, employee's salary, or both. No elective contributions have been made for the years ended December 31, 1993, 1994, and 1995. 10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION During 1994, the Company entered into capital lease obligations for equipment of $111,571. Cash paid for interest during the years ended December 31, 1993, 1994, and 1995 was $7,119, $67,785, and $62,515, respectively. F-15 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 11. SALES The Company had a foreign customer, a distributor of the Company's products, who accounted for approximately 0%, 5%, and 18% of sales for the years ended December 31, 1993, 1994, and 1995, respectively. Foreign sales were $148,506, $161,609, and $620,656 for the years ended December 31, 1993, 1994, and 1995, respectively. These sales were primarily to the European and Asian regions. 12. SUBSEQUENT EVENTS On January 25, 1996, the Company sold 761,615 shares of Series C Junior convertible preferred stock to Becton Dickinson and Company ("Becton Dickinson") for $3,000,000. In addition, the Company granted Becton Dickinson an option to purchase 380,808 shares of Series D Junior preferred stock with an exercise price of $4.60. These options expire on the tenth anniversary of the agreement or on the first anniversary of an IPO of the Company's stock if the per share price is less than $7.88 but more than $6.57, or on the IPO date if the per share price is greater than or equal to $7.88. Warrants for 1,904,037 shares of Series E Junior convertible preferred stock were also granted at an exercise price of $5.91 for initial consideration of $125,000. These warrants expire on the tenth anniversary of the agreement or on the seventh anniversary following an IPO if the per share price is greater than or equal to $7.88. In connection with the above transaction the Company entered into a licensing agreement with Becton Dickinson, which provides Becton Dickinson exclusive worldwide rights to certain Medi-Ject technology. In exchange for granting this exclusive right, the Company will receive $100,000 per month for 24 months beginning January 1996 to develop the technology. On January 25, 1996, the Company converted an unsecured note payable totaling $312,500 (of which $125,000 is outstanding at year end) into 190,404 shares of Series B convertible preferred stock. In addition, the holder of the debt purchased an additional 190,404 shares of Series B convertible preferred stock for proceeds of $500,000 in connection with a stock option exercise. On January 31, 1996, the Company converted its Series A convertible preferred stock into common stock. Automatic conversion into common stock of the Series A was precipitated by the Company's net worth exceeding $1.0 million. On February 29, 1996 an unsecured note payable to a shareholder totaling $100,000, which is outstanding at year end, was converted to 30,465 shares of common stock. F-16 MEDI-JECT CORPORATION Notes to Financial Statements December 31, 1995 (Unaudited as to March 31, 1996 data) 13. ITEMS SUBSEQUENT TO DATE OF AUDITORS' REPORT (a) Reverse Stock Split ------------------- In connection with the Company's IPO, the Board of Directors approved a 1-for-1.313 reverse stock split of its common stock, effective July 10, 1996. The effect of the stock split has been retroactively reflected in the accompanying financial statements and notes thereto. (b) Initial Public Offering (unaudited) ----------------------------------- The Company is in the process of preparing for an IPO of up to 2,530,000 shares of its common stock. Simultaneously with the effective or closing date of this offering, all outstanding shares of preferred stock (consisting of 2,471,484 shares Series B, and 761,615 shares Series C) will be automatically converted into an aggregate of 3,371,848 shares of common stock. Included in the Series B conversion are 138,749 additional shares related to an antidilution adjustment. (See Note 8.) The conversion of the Company's preferred stock to common stock has been reflected in the pro forma shareholders' equity column of the balance sheet at March 31, 1996. F-17 MEDI-JECTOR(R) SYSTEM OPERATION
STEP 1: ARM STEP 2: ATTACH DRUG VIAL TURN THE WINDING GRIP IN ATTACH THE DRUG VIAL THE DIRECTION OF THE ARROW TO AND ADAPTOR TO THE A COMPLETE STOP. MEDI-JECTOR SYSTEM FRONT-END CHAMBER. [DRAWING OF MEDI-JECTOR SYSTEM HELD [DRAWING OF MEDI-JECTOR SYSTEM, VIAL IN HANDS WITH ARROW SHOWING DIRECTION ADAPTER AND VIAL.] OF WINDING.] STEP 3: FILL STEP 4: REMOVE VIAL AND ADAPTOR TURN THE WINDING GRIP IN REMOVE VIAL AND ADAPTOR THE OPPOSITE DIRECTION OF BY TWISTING ADAPTOR. THE ARROW UNTIL THE PROPER DOSAGE APPEARS IN THE DOSAGE WINDOW. [DRAWING OF MEDI-JECTOR SYSTEM HELD [DRAWING OF MEDI-JECTOR SYSTEM HELD IN HANDS WITH ARROW SHOWING IN HANDS WITH ARROW SHOWING DIRECTION DIRECTION OF WINDING.] OF WINDING.] STEP 5: ADJUST INJECTION PRESSURE STEP 6: INJECT DRUG TURN THE WINDING GRIP HOLD THE MEDI-JECTOR SYSTEM IN THE DIRECTION OF THE ARROW UNTIL POINTING STRAIGHT INTO THE THE DESIRED COMFORT LEVEL IS SELECTED INJECTION SITE AND REACHED. PUSH THE INJECT BUTTON. [DRAWING OF MEDI-JECTOR SYSTEM HELD [DRAWING OF MEDI-JECTOR SYSTEM HELD IN HANDS WITH ARROW SHOWING DIRECTION AGAINST THIGH OF INDIVIDUAL RECEIVING OF WINDING.] INJECTION.]
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANY ONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ______________ TABLE OF CONTENTS PAGE ---- Prospectus Summary ................................................... 3 Risk Factors ......................................................... 6 Use of Proceeds ...................................................... 14 Dividend Policy ...................................................... 14 Capitalization ....................................................... 15 Dilution ............................................................. 16 Selected Financial Data .............................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 18 Business ............................................................. 22 Management ........................................................... 36 Principal Shareholders ............................................... 41 Certain Transactions ................................................. 43 Description of Capital Stock ......................................... 45 Shares Eligible for Future Sale ...................................... 47 Underwriting ......................................................... 49 Legal Matters ........................................................ 50 Experts .............................................................. 50 Additional Information ............................................... 51 Index to Financial Statements ........................................ F-1 [MEDI-JECT LOGO] 2,200,000 SHARES COMMON STOCK _________________ PROSPECTUS _________________ RODMAN & RENSHAW, INC. R. J. STEICHEN & COMPANY , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following fees and expenses will be paid by the Company in connection with the issuance and distribution of the securities registered hereby and do not include underwriting commissions and discounts. All such expenses, except for the SEC, NASD and Nasdaq fees, are estimated. SEC registration fee.................... $ 8,725 NASD filing fee......................... 3,030 Nasdaq Stock Market listing fee......... 35,639 Legal fees and expenses................. 125,000 Accounting fees and expenses............ 45,000 Blue Sky fees and expenses.............. 15,000 Transfer Agent's and Registrar's fees... 5,000 Printing and engraving expenses......... 70,000 Miscellaneous........................... 17,606 ---------- Total............................. $ 325,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 302A.521 of the Minnesota Statutes provides that a corporation shall indemnify any person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines (including, without limitation, excise taxes assessed against such person with respect to any employee benefit plan), settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person (1) has not been indemnified therefor by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255 (with respect to director conflicts of interest), if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions in such person's official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions in such person's official capacity for other affiliated organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation. Section 302A.521 also requires payment by a corporation, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the shareholders or by a court. Provisions regarding indemnification of officers and directors of the Company to the extent permitted by Section 302A.521 of the Minnesota Statutes are contained in the Company's Second Amended and Restated Bylaws as they will be amended immediately upon closing of the offering (Exhibit 3.4 hereto), which are incorporated herein by reference. Under Section 7 of the Underwriting Agreement to be filed as Exhibit 1.1 hereto, the Underwriters have agreed to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The information set forth below (i) gives effect to a 1-for-3.313 reverse split of the Company's capital stock to be effected on July 10, 1996, and (ii) does not give effect to the automatic conversion of all shares of Convertible Preferred Stock into shares of Common Stock prior to or upon the closing of the offering. Since June 1, 1993, the Company has issued and sold the following securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): In June 1993, the Company issued warrants to purchase an aggregate of 53,315 shares of Common Stock at a price of $1.31 per share to three accredited investors including two existing securityholders, which warrants were issued in connection with the issuance of 9% Demand Promissory Notes in the aggregate original principal amount of $80,000. In September 1993, the Company sold 380,808 shares of Series B Convertible Preferred Stock to Ethical Holdings plc, an accredited investor, at a per share price of $1.31. In connection with this sale, the Company also issued to Ethical Holdings plc an option to purchase 761,615 shares of Series B Convertible Preferred Stock at a price of $1.31 per share (subject to adjustment to $2.62 per share upon the occurrence of certain events). In November 1993, the Company issued 381 shares of Common Stock to Lois Jovanovic Peterson, M.D., a former consultant to the Company, in consideration of a release and waiver of the Company under a consulting agreement. In November 1993, the Company sold to Grayson & Associates a warrant to purchase 19,041 shares of Common Stock at a price of $1.31 per share, which warrant was sold in consideration of services rendered in connection with the private placement of shares of Series B Convertible Preferred Stock. In November 1993, the Company sold 30,465 shares of Series A Convertible Preferred Stock to Cherry Tree Ventures II, L.P., an accredited investor, in consideration of conversion of 9% Demand Promissory Notes in the aggregate principal amount of $40,000. In November 1993, the Company sold to Physical Sciences, Inc. a warrant to purchase 33,000 shares of Common Stock at a price of $0.79 per share, which warrant was issued in consideration of engineering services rendered. In November and December 1993, the Company sold an aggregate of 380,808 shares of Series B Convertible Preferred Stock to six accredited investors at a price of $1.31 per share, including 38,081 shares sold in consideration of conversion of a 9% Demand Promissory Note in the principal amount of $50,000. In February 1994, the Company sold an aggregate of 399,848 shares of Non- Voting Series B Convertible Preferred Stock to Enskilda Kapitalforvaltning, an accredited investor and existing shareholder, for $1.31 per share. In February 1994, the Company sold to Nordberg Capital, Inc. a warrant to purchase 22,849 shares of Common Stock at a price of $1.31 per share, which warrant was sold in consideration of services rendered in connection with the private placement of shares of Series B Convertible Preferred Stock. In February 1994, the Company sold to Martha Russell a warrant to purchase 1,905 shares of Common Stock at a price of $1.31 per share, which warrant was sold in consideration of grant-writing services rendered. II-2 In June 1994, the Company sold 15,233 shares of Non-Voting Series B Convertible Preferred Stock to Joseph Card, an accredited investor, for $1.64 per share. In August 1994, the Company sold to Physical Sciences, Inc. a warrant to purchase 20,314 shares of Common Stock at a price of $1.64 per share, which warrant was issued in consideration of engineering services rendered. In August 1994, the Company sold a warrant to purchase 7,617 shares of Common Stock at a price of $3.28 per share to Fred L. Shapiro, M.D., a director of the Company, which warrant was issued in connection with a $100,000 loan from Dr. Shapiro to the Company. In September 1994, the Company sold 152,323 shares of Series B Convertible Preferred Stock to Ethical Holdings plc, an accredited investor and existing shareholder, at a price of $1.31 per share upon a partial exercise of the stock option described above. In November 1994, the Company sold 2,806 shares of Common Stock to Calvert Social Ventures Partners, L.P., an accredited investor, at a price of $0.081 per share upon the exercise of certain preemptive rights triggered by the issuance during 1994 of stock grants as compensation to employees of the Company. In connection with this sale, the Company also issued warrants to purchase (a) 1,842 shares of Common Stock at a price of $1.31 per share, which warrant was issued in consideration of $24.18, (b) 567 shares of Common stock at a price of $3.28 per share, which warrant was issued in consideration of $7.44, and (c) 1,512 shares of Common Stock at a price of $1.64 per share, which warrant was issued in consideration of $19.84. From December 1994 through March 1995, the Company sold an aggregate of 304,665 shares of Series B Convertible Preferred Stock (Class II) to 23 accredited investors, including certain existing shareholders and a director, at a price of $3.28 per share. In connection with this offering, the Company issued warrants to purchase an aggregate of 3,048 shares of Common Stock at a price of $3.28 per share to Delphi Financial Corp. in consideration of its services as placement agent. (On March 24, 1995, such warrants were transferred to Robert Fullerton and Michael Trautner, principals of Delphi Financial Corp.) In January 1995, the Company sold 762 shares of Common Stock to John L. Brooks, an employee, at a price of $1.31 per share upon exercise of an incentive stock option. In February 1995, the Company sold 381 shares of Common Stock to Deborah A. Close, an employee, at a price of $1.31 per share upon exercise of an incentive stock option. In February 1995, the Company sold 76,161 shares of Series B Convertible Preferred Stock to Ethical Holdings plc, an accredited investor and existing shareholder, at a price of $1.31 per share upon a partial exercise of the stock option described above. In February 1995, the Company sold to Nordberg Capital, Inc. a warrant to purchase 4,570 shares of Common Stock at a price of $3.28 per share, which warrant was sold in consideration of $60 and services rendered in connection with the private placement of shares of Series B Convertible Preferred Stock (Class II). In April 1995, the Company sold to Perry Silverman a warrant to purchase 229 shares of Common Stock at a price of $3.28 per share, which warrant was sold in consideration of $3.00 and services rendered in connection with the private placement of shares of Series B Convertible Preferred Stock (Class II). From May 1995 through August 1995, the Company sold an aggregate of 152,335 shares of Series B Convertible Preferred Stock (Class III) to 16 accredited investors, including existing shareholders, at a price of $3.28 per share. II-3 In September 1995, the Company sold an aggregate of 76,170 shares of Series B Convertible Preferred Stock (Class IV) to 11 accredited investors, at a price of $3.28 per share. In September 1995, the Company sold 152,323 shares of Series B Convertible Preferred Stock to Ethical Holdings plc, an accredited investor and existing shareholder, at a price of $1.64 per share upon a partial exercise of the stock option described above. In January 1996, the Company sold 761,615 shares of Series C Junior Convertible Preferred Stock to Becton Dickinson and Company, an accredited investor, at a price of $3.94 per share. In connection with this sale, the Company granted Becton Dickinson and Company an option to purchase 380,808 shares of Series D Junior Convertible Preferred Stock at a price of $4.60 per share and the Company sold Becton Dickinson and Company a warrant to purchase 1,904,037 shares of Series E Junior Convertible Preferred Stock at a price of $5.91 per share for a warrant purchase price of $125,000. In February 1996, the Company sold 30,465 shares of Common Stock to Fred L. Shapiro, M.D., a director of the Company, in consideration of conversion of a loan in the principal amount of $100,000. In February 1996, the Company sold 380,808 shares of Series B Convertible Preferred Stock to Ethical Holdings plc, an accredited investor and existing shareholder, 190,404 of which shares had a per share price of $1.64 and were issued in consideration of conversion of all principal amounts advanced under a $312,500 loan from Ethical to the Company and 190,404 of which shares were sold at a price of $2.62 per share; all such shares represented the final partial exercise of the stock option described above. In May 1996, the Company sold to William Anderson, an employee, 381 shares of Common Stock at a price of $1.31 per share and 191 shares of Common Stock at a price of $3.28 per share upon exercise of incentive stock options. The shares sold to employees upon the exercise of stock options were issued pursuant to Rule 701 under the Securities Act. The other sales of capital stock and of warrants and options to purchase capital stock have been made by the Company in reliance upon Section 4(2) of the Securities Act and Rule 506 thereunder. The Company has relied upon such exemption because it believed that each of the purchasers had such knowledge and experience in financial and business matters that it, he or she, as the case may be, was capable of evaluating the merits and risks of the prospective investment. With respect to all of such sales, the Company imprinted a legend on the certificates representing such securities restricting their transfer. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
Number Description ------ ----------- *1.1 Underwriting Agreement. *1.2 Form of Representative's Warrant 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended Bylaws of the Company. *3.3 Second Amended and Restated Articles of Incorporation of the Company (as proposed to be effective upon completion of the offering).
II-4 *3.4 Second Amended and Restated Bylaws of the Company (as proposed to be effective upon completion of the offering). *4.1 Form of Certificate for Common Stock . 4.2 Stock Warrant, dated January 25, 1996, issued to Becton Dickinson and Company. 4.3 Stock Option, dated January 25, 1996, issued to Becton Dickinson and Company. 4.4 Warrant, dated March 24, 1995, issued to Robert Fullerton. 4.5 Warrant, dated March 24, 1995, issued to Michael Trautner. 4.6 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company (filed herewith as Exhibit 10.7). *5.1 Opinion of Dorsey & Whitney LLP. 10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments thereto. 10.2 Promissory Note, dated August 29, 1994, issued to Fred Shapiro. 10.3 Security Agreement, dated September 30, 1994, by and between the Company and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership. 10.4 Promissory Note, dated September 30, 1994, issued to Kelsey Lake Limited Partnership. 10.5 Promissory Note, dated September 30, 1994, issued to Kerry Lake Company, a Limited Partnership. 10.6 Loan Agreement, dated as of December 22, 1995, by and between Ethical Holdings, plc and the Company, including the related Promissory Note, dated December 22, 1995, issued to Ethical Holdings, plc. 10.7 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company. 10.8 Employment Agreement, dated as of January 3, 1995, between the Company and Franklin Pass, M.D. 10.9 Employment Agreement, dated as of January 3, 1995, between the Company and Mark Derus. 10.10 Employment Agreement, dated as of January 3, 1995, between the Company and Todd Leonard. 10.11 Employment Agreement, dated as of January 3, 1995, between the Company and Peter Sadowski.
II-5 10.12 1993 Stock Option Plan. 10.13 Form of incentive stock option agreement for use with 1993 Stock Option Plan. 10.14 Form of nonqualified stock option agreement for use with 1993 Stock Option Plan. *10.15 1996 Stock Option Plan, with form of stock option agreement. 10.16 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and the Company, dated February 1, 1994, relating to the Company's Non-Voting Series B Convertible Preferred Stock. 10.17 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and the Company, dated December 28, 1993, relating to the Company's Series B Convertible Preferred Stock. 10.18 Preferred Stock Purchase Agreement between Calvert Social Venture Partners, L.P. and the Company, dated November 29, 1993, relating to the Company's Series B Convertible Preferred Stock. 10.19 Form of Preferred Stock Purchase Agreement relating to the Company's Series B Convertible Preferred Stock. *+10.20 Development and License Agreement between Becton Dickinson and Company and the Company, effective January 1, 1996. 16.1 Letter Regarding Change in Certifying Accountant. 23.1 Consent of KPMG Peat Marwick LLP. *23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included on signature page). 27.1 Financial Data Schedule.
___________________ * To be filed by amendment. + Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibit 10.20 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the II-6 opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on June 21, 1996. MEDI-JECT CORPORATION By: /s/ Franklin Pass, M.D. ------------------------------------------- Franklin Pass, M.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Franklin Pass, M.D. and Mark Derus, or either of them (with full power to act alone), as his or her true and lawful attorneys-in- fact and agents, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any additional Registration Statement pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any or all amendments (including post- effective amendments) to this Registration Statement (or Registration Statements, if an additional Registration Statement is filed pursuant to Rule 462(b)), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on June 21, 1996. SIGNATURE TITLE --------- ----- /s/ Franklin Pass, M.D. President, Chief Executive Officer and - ---------------------------- Franklin Pass, M.D. Director (principal executive officer) /s/ Mark Derus Vice President of Finance, Chief - ---------------------------- Mark Derus Financial Officer (principal financial and accounting officer) /s/ Louis Cosentino Director - ---------------------------- Louis Cosentino /s/ Kenneth Evenstad Director - ---------------------------- Kenneth Evenstad /s/ Geoffrey Guy Director - ---------------------------- Geoffrey Guy /s/ Norman Jacobs Director - ---------------------------- Norman Jacobs /s/ Fred Shapiro, M.D. Director - ---------------------------- Fred Shapiro, M.D. /s/ Peter Sjostrand Director - ---------------------------- Peter Sjostrand EX-3.1 2 AMENDED & RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF DERATA CORPORATION ARTICLE I - NAME The name of this corporation shall be Derata Corporation. ARTICLE II -- REGISTERED OFFICE The location and post office address of the registered office of this Corporation shall be 1840 Berkshire Lane, Minneapolis, Minnesota 55441. ARTICLE III - CAPITAL STOCK 3.1) Authorized Shares; Establishment of Classes and Series. The aggregate number of shares that this Corporation shall have the authority to issue shall be 146,000,000 shares, one hundred million (100,000,000) of which shall be designated Common Stock, $.01 par value (hereinafter referred to as "Common Stock"); sixteen million (16,000,000) of which shall be designated Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares") and thirty million (30,000,000) of which shall be preferred shares undesignated as to series (hereinafter referred to as the "Undesignated Preferred Shares"). The Common Stock and the Series A Preferred Shares are hereinafter referred to collectively as the "Capital Stock." 3.2) Authority Relative to Undesignated Preferred Shares. Authority is hereby expressly vested in the Board of Directors of the Corporation, subject to the provisions of this Article III and to the limitations prescribed by law, to authorize the issue from time to time of one or more series of Undesignated Preferred Shares and, with respect to each such series, to determine or fix, by resolution or resolutions adopted by the affirmative vote of a majority of the whole Board of Directors providing for the issue of such series, the voting powers, full or limited, if any, of the shares of such series and the designations, preference and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limitation, the determination or fixing of the rates of and terms and conditions upon which any dividends shall be payable on such series, any terms under or conditions on which the shares of such series may be redeemed, any provision made for the conversion or exchange of the shares of such series for shares of any other class or classes or of any other series of the same or any other class or classes of the Corporation's capital stock, and any rights of the holders of the shares of such series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation. 3.3) Issuance of Shares. The Board of Directors of the Corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of any class or series of the Corporation to such persons, at such times and upon such terms and conditions as the Board shall determine, valuing all nonmonetary consideration and establishing a price in money or other consideration, or a minimum price or a general formula or method by which the price will be determined. 3.4) Issuance of Rights to Purchase Shares. The Board of Directors is further authorized from time to time to grant and issue rights to subscribe for, purchase, exchange securities for, or convert securities into shares of the Corporation of any class or series and to fix the terms, provisions and conditions of such rights, including the exchange or conversion basis or the price at which such shares may be purchased or subscribed. 3.5) Issuance of Shares to Holders of Another Class or Series. The Board is further authorized to issue shares of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits. ARTICLE IV - RIGHTS AND PRIVILEGES OF SHARES AND OF SHAREHOLDERS The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of stock or the holders thereof are set forth below. 4.1) Voting Privileges. Each holder of Common Stock shall have one vote on all matters submitted to the shareholders for each share of Common Stock standing in the name of such holder on the books of this Corporation. Each holder of Series A Preferred Shares shall have one vote on all matters submitted to the shareholders for each share of Common Stock that such holder of Series A Preferred Shares would be entitled to receive upon the conversion of such Series A Preferred Shares as provided in subsection 4.4(d). 4.2) Preemptive Rights. No holder of shares of any class of Capital Stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class whatsoever or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter -2- authorized and whether issued for cash or other consideration or by way of dividend. 4.3) No Cumulative Voting. No holder of shares of Capital Stock shall have any cumulative voting rights. 4.4) Series A Preferred Shares. (a) Relative Seniority. With respect to the relative rights and preferences set forth herein, the Series A Preferred Shares shall rank senior to the Common Stock, but may otherwise be junior with respect to the rights and preferences of any future class or series of Undesignated Preferred Shares that may be designated by the Board of Directors. Nothing contained herein shall be deemed to prevent the Board of Directors from issuing any such Undesignated Preferred Shares the relative rights and preferences of which may rank senior, junior, or pari passu with the Series A Preferred Shares. (b) Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to $.0488 per share for each outstanding Series A Preferred Share. If in any such event, the assets of the Corporation are insufficient to make such payment, the holders of the Series A Preferred Shares shall be entitled to a ratable distribution. The merger or consolidation of the Corporation into or with another Corporation or the merger or consolidation of any other Corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive distributions of cash or securities or other property as a result of such consolidation or merger) or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this subparagraph. Nothing hereinabove set forth shall affect in any way the right or obligation of each holder of Series A Preferred Shares to convert such shares at any time and from time to time in accordance with subsection 4.4(d) below. (c) Dividends and Distributions. In case this Corporation shall declare a dividend or other distribution (whether payable in cash, in-kind or securities of the Corporation, including shares of Common Stock or securities convertible into Common Stock) upon its Common Stock, the holders of Series A Preferred Shares shall be deemed to be holders of such number of shares of Common Stock as the holders of the Series A Preferred Shares are entitled to receive, upon the conversion thereof as provided in Subsection 4.4(d) below, as of -3- the record date for such distribution, participating on the same basis as the holders of the Common Stock in any such dividend or other distribution. (d) Conversion Rights; Mandatory Conversion. (1) Each Series A Preferred Share shall be convertible at the option of the holder thereof into one (1) share of Common Stock of this Corporation, subject to adjustment as provided for herein. In order to exercise the conversion privilege, a holder of Series A Preferred Shares shall surrender the certificate representing such shares to the Corporation at its principal office, accompanied by written notice to the Corporation that the holder elects to convert a specified portion or all of such shares. Series A Preferred Shares shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such shares, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of the Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of shares of Common Stock issuable upon conversion, computed to the nearest one- hundredth of a full share, and a certificate or certificates for the balance of the Series A Preferred Shares surrendered, if any, not so converted into Common Stock. (2) The number of shares of Common Stock issuable in exchange for Series A Preferred Shares upon the exercise of these conversion rights (the "Conversion Ratio") shall be subject to adjustment from time to time as hereinafter provided: (i) In case the Corporation shall at any time subdivide or split its outstanding Common Stock into a greater number of shares, the Conversion Ratio in effect immediately prior to such subdivision or split shall be proportionately increased; and, conversely, in case the outstanding Common Stock of the Corporation shall be combined into a smaller number of shares, the Conversion Ratio in effect immediately prior to such combination shall be proportionately reduced. (ii) If any capital reorganization or reclassification of the Capital Stock of the Corporation or consolidation or merger of the Corporation with another Corporation or the sale of all or substantially all of its assets to another Corporation shall be affected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, -4- then as a condition of such reorganization, reclassification, consolidation, merger or sale lawful and adequate provision shall be made whereby the holders of Series A Preferred Shares shall thereafter have the right to receive, in lieu of the Common Stock of the Corporation, immediately theretofore receivable upon the conversion of any such Series A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore receivable upon the conversion of such Series A Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place; and in any such case, appropriate provision shall be made with respect to the rights and interests of the holders of the Series A Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Ratio and of the number of shares receivable upon the conversion of such Series A Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Series A Preferred Shares. This Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Series A Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets, as, in accordance with the foregoing provisions, such holders may be entitled to receive. (3) Upon any adjustment of the Conversion Ratio, then and in each such case, the Corporation shall give written notice thereof by first-class mail, postage prepaid, addressed to the registered holders of the Series A Preferred Shares at the addresses of such holders as shown on the books of the Corporation, which notice shall state the Conversion Ratio resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of the Series A Preferred Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (4) As used in this subsection 4.4(d), the term Common Stock shall mean and include this Corporation's presently authorized Common Stock and shall also include any capital stock of any class of this Corporation hereafter authorized which shall have the right to vote on all matters submitted to the shareholders of this Corporation and shall not be limited to -5- a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of this Corporation; provided that the shares receivable pursuant to conversion of the Series A Preferred Shares shall include shares designated as Common Stock of this Corporation as of the date of issuance of such Series A Preferred Shares or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subsection 4.4(d)(2)(ii) above. (5) Notwithstanding the foregoing right to convert at the option of the holder, each Series A Preferred Share shall automatically be deemed converted (but only to the extent, and as soon as such conversion would be exempt from the registration and qualification requirements of the applicable federal and state securities laws) into the appropriate number of shares of Common Stock of the Corporation in the manner and upon the terms set forth herein, without any act by the Corporation or the holders of such shares, on the earlier to occur of (i) the date upon which the Corporation completes an offering of its Capital Stock pursuant to a registration statement filed pursuant to and declared effective under the Securities Act of 1933, as amended, (ii) the calendar month-end upon which the Corporation first obtains a total net worth of $1 million, as determined pursuant to generally accepted accounting principles, or (iii) the date following the merger of the Corporation with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Corporation continues as the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Corporation equals or exceeds $1 million, calculated for purposes of this Section 4.4(d), as the product of the average closing price for the Corporation's Common Shares during any 20 consecutive trading days times the number of outstanding Common Shares, and including in such number, that number of Common Shares into which the Series A Preferred Shares are convertible hereby. ARTICLE V- BOARD OF DIRECTORS The Board of Directors of this Corporation shall consist of not more than nine members. At all times subsequent to December 31, 1992, a majority of the members of the Board of Directors shall be persons who are not in the employment of the Corporation. -6- ARTICLE VI - DIRECTOR LIABILITY To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of this Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article VI by the shareholders of this Corporation shall not adversely affect any right existing at the time of such repeal or modification. -7- ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF DERATA CORPORATION The undersigned, the President of Derata Corporation, a Minnesota corporation (the "Company"), hereby certifies that: 1. The name of the Company is Derata Corporation. 2. The Company is a Minnesota corporation. 3. The amendment adopted is: "ARTICLE III - CAPITAL STOCK" 3.1) Authorized Shares; Establishment of Classes and Series. The aggregate number of shares that this Corporation shall have the authority to issue shall be 14,600,000 shares, ten million (10,000,000) of which shall be designated Common Stock, $.01 par value (hereinafter referred to as "Common Stock); one million six hundred thousand (1,600,000) of which shall be designated Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares") and three million (3,000,000) of which shall be preferred shares undesignated as to series (hereinafter referred to as the "Undesignated Preferred Shares"). The Common Stock and the Series A Preferred Shares are hereinafter referred to collectively as the "Capital Stock." 4. The amendment will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series and will not result in the percentage of authorized shares that remains unissued after the combination exceeding the authorized shares that were unissued before the combination. 5. The amendment has been adopted pursuant to Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, W. Dirk Dunlap, President of Derata Corporation, being duly authorized on behalf of the Company, has executed this document effective as of the 15th day of October, 1992. By: /s/ W. Dirk Dunlap -------------------- W. Dirk Dunlap President -1- ARTICLES OF AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION OF DERATA CORPORATION The undersigned, the President of Derata Corporation, a Minnesota corporation (the "Company"), hereby certifies that: 1. The name of the Company is Derata Corporation. 2. The Company is a Minnesota corporation. 3. The amendment adopted is: "Article I The name of this corporation shall be Medi-Ject Corporation." 4. The above amendment was adopted at a Special Meeting of Shareholders of Derata Corporation, held on November 16, 1992. 5. The amendment has been adopted pursuant to Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, W. Dirk Dunlap, President of the Company, being duly authorized on behalf of the Company, has executed this document effective as of the 16th day of November, 1992. By: /s/ W. Dirk Dunlap -------------------- W. Dirk Dunlap President MEDI-JECT CORPORATION _____________________ CERTIFICATE OF DESIGNATIONS FOR $1.00 CONVERTIBLE PREFERRED STOCK, SERIES B (Pursuant to Minnesota Statutes, Section 302A.401, Subd. 3(b)) _____________________ The undersigned, being the Secretary of Medi-Ject Corporation (the "Corporation"), a corporation organized and existing under the Minnesota Business Corporation Act, in accordance with the provisions of Minnesota Statutes, Section 302A.401, Subd. 3(b), does hereby certify that: Pursuant to the authority vested in the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation, the Board of Directors on September 16, 1993 in accordance with Minnesota Statutes, Section 302A.401, Subd. 3, duly adopted the following resolution establishing a series of 3,000,000 shares of the Corporation's Preferred Stock, to be designated as its Series B Convertible Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation (the "Board of Directors") by the Articles of Incorporation of the Corporation, the Board of Directors hereby establishes a Series B Convertible Preferred Stock of the Corporation and hereby states the designation and number of shares, and fixes the relative rights and preferences, of such series of shares as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series B Convertible Preferred Stock" (the "Series B Preferred Shares") and the number of shares constituting such series shall be 3,000,000, which number may be decreased (but not increased) by the Board of Directors without a vote of shareholders, provided, however, that such number may not be decreased below the number of the currently outstanding Series B Preferred Shares and options for Series B Preferred Shares. Section 2. Dividends and Distributions. (a) The holders of Series B Preferred Shares, in preference to the holders of shares of the Common Stock, $.01 par value (the "Common Shares") and Series A Preferred Shares, $.01 par value (the "Series A Preferred Shares"), of the Corporation, which shall rank junior to the Series B Preferred Shares as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for such purpose, cash dividends on the Series B Preferred Shares in such amounts and at such times as declared by the Board of Directors. However, in no event shall any dividend be paid on any Common Shares or Series A Preferred Shares unless comparable dividends are paid on the Series B Preferred Shares. Series B Preferred Shares shall be counted on an as-if-converted basis in determining whether dividends on Series B Preferred Shares, Series A Preferred Shares and Common Shares are comparable. (b) Dividends payable pursuant to paragraph (a) shall be in such amount at least equal to any dividends payable on any other capital stock of the Corporation as determined on a per share basis. Holders of Series B Preferred Shares shall be entitled to receive such dividends in preference to and in priority over dividends upon the Series A Preferred Shares, Common Shares and all other capital stock of the Corporation. Section 3. Voting Rights. The holders of Series B Preferred Shares shall have the following voting rights: (a) One vote on all matters submitted to the shareholders of the Corporation for each Common Share that such older of Series B Preferred Shares would be entitled to receive upon the conversion of such Series B Preferred Shares. (b) (i) If an unremedied event of default (an "Event of Default") occurs under section 11 of the investment agreement, dated September 27, 1993 between this Corporation and Ethical Holdings plc, a corporation organized under the laws of England, (the "Investment Agreement"), which Investment Agreement may be amended from time to time without eh approval of the shareholders of this Corporation, the holders of Series B Preferred Shares, voting jointly as a separate class, shall be entitled to designate and elect that number of directors that is the lowest number that constitutes a majority (the "Majority") of the members of this Corporation's Board of Directors, and the holders of Series A Preferred Shares and Common Shares, voting together as a class, shall be entitled to elect the remaining members of this Corporation's Board of Directors. Such right of the holders of Series B Preferred Shares to designate and elect the Majority of the members of the Board of Directors may be exercised until the Event of Default under the Investment Agreement has been cured or waived. When such Event of Default under the Investment Agreement shall have been cured or waived, the holders of Series B Preferred Shares shall be divested of such right to elect the Majority of the members of the Board of Directors, and any additional directors elected by the holders of Series B Preferred Shares shall be automatically removed from the Board of Directors without further action by the Directors or shareholders; subject always to the same provisions in the vesting of such right in the holders of the Series B Preferred Shares in the case of any future Event of Default under the Investment Agreement. (ii) The foregoing right of the holders of Series B Preferred Shares with respect to the election of directors of this Corporation may be exercised at any annual meeting of shareholders or, within the limitations hereinafter provided, at a special meeting of the shareholders held for such purpose. If the date upon which such right of the holders of Series B Preferred Shares shall become vested shall be more than thirty (30) days preceding the date of the next ensuing annual meeting of shareholders as fixed by the Bylaws of this Corporation, the President of this Corporation shall, immediately after delivery to this Corporation at its principal office of a request to such effect signed by the holders of at least a majority of Series B Preferred Shares then outstanding, call a special meeting of the shareholders, to be held within fifteen (15) days after the delivery of such request for the purpose of electing the directors who they shall designate as the representatives of Series B Preferred Shares on the Board of Directors, which directors shall serve until the next annual meeting, until their successors shall be elected and shall qualify or until they are divested of such office pursuant to the immediately preceding paragraph. Notice of such meeting shall be mailed to each shareholder not less than ten (10) days prior to the date of such meeting. (iii) Any holder of Series B Preferred Shares shall have the right, during regular business hours, in person or by any authorized representative, to examine and to make transcripts of the stock records of this Corporation for Series B Preferred Shares for the purpose of communicating with other holders of Series B Preferred Shares with respect to the exercise of the foregoing right of election. (iv) At any annual or special meeting of shareholders held for the purpose of electing directors when the holders of Series B Preferred Shares shall be entitled to elect the Majority of the members of the Board of Directors, the presence in person or by proxy of the holders of a majority of the outstanding Series B Preferred Shares shall be required to constitute a quorum for the election by such class of such directors, and the presence in person or by proxy of the holders of a majority of the outstanding Series A Preferred Shares and Common Shares shall be required to constitute a quorum for the election by such class of the remaining directors; provided, however, that the holders of a majority of either such class of stock who are present in person or by proxy shall have power to adjourn such meeting for the election of directors by such class from time to time without notice other than announcement at the meeting. No delay or failure by the holders of either of such classes of stock to elect the members of the Board of Directors whom such holders are entitled to elect shall invalidate the election of the remaining members of the Board of Directors by the holders of the other such class of stock. (v) Any director elected by the holders of Series B Preferred Shares may be removed from office by vote of the holders of at least a majority of the outstanding Series B Preferred Shares. A special meeting of the holders of Series B Preferred Shares may be called by a majority vote of the Board of Directors for the purpose of removing a director in accordance with the provisions of this Section 3(b)(v). The Chairman of the Board of the Corporation shall, in any event, within 10 days after delivery of the Corporation at its principal offices of a request to call such a special meeting signed by the holders of at least 51% of the outstanding Series B Preferred Shares, call a special meeting for such purpose to be held as promptly as practicable after the delivery of such request. (vi) If, during any interval between annual meetings of shareholders for the election of directors and while the holders of Series B Preferred Shares shall be entitled to elect the Majority of the members of the Board of Directors, the number of directors in office who have been elected by the holders of Series B Preferred Shares or Series A Preferred Shares and Common Shares, as the case may be, shall, by reason of resignation, death or removal, be less than the total number of directors subject to election by the holders of shares of any such class, the vacancy or vacancies in the directors elected by a given class of shares shall be filled by a majority vote of the remaining directors then in office who were elected by the holders of such class or succeeded a director so elected, although such majority may be less than a quorum. (c) If the Corporation shall not set a date for an annual meeting to elect directors within thirteen months of the previous annual meeting, then within 10 days after delivery to the Corporation at its principal office of a request to call such an annual meeting signed by the holders of at least 50% of the outstanding Series B Preferred Shares, the Chairman of the Board of the Corporation shall call an annual meeting to be held as promptly as practicable after the delivery of such request. Section 4. Liquidation, Dissolution or Winding Up. (a) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of capital stock of the Corporation ranking junior (upon liquidation, dissolution or winding up) to the Series B Preferred Shares unless, prior thereto, the holders of Series B Preferred Shares shall, have received the liquidation value per share which, for each Series B Preferred Share, shall be equal to $1.00 the ("Liquidation Value"). If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay such Liquidation Value per Series B Preferred Share, the holders of such Series B Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Series B Preferred Shares upon such liquidation, dissolution, or winding up of the Corporation, the holders of Series A Preferred Shares and Common Shares shall then be entitled, to the exclusion of the holders of Series B Preferred Shares, to share in all the assets of this Corporation thereafter remaining in accordance with the relative rights and preferences of such classes. (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other individual, firm, corporation or other entity (including any successor, by merger or otherwise, of such entity) (each a "Person", collectively, "Persons"), nor the sale of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposed of this Section 4. Section 5. Conversion. Each Series B Preferred Share may be converted at any time, at the option of the holder thereof, into Common Shares, on the terms and conditions set forth in this Section 5. (a) Each Series B Preferred Share shall be convertible at the option of the holder thereof into one (1) Common Shares of this Corporation, subject to adjustment as provided for herein. In order to exercise the conversion privilege with respect to any Series B Preferred Shares, a holder of Series B Preferred Shares shall surrender the certificate representing such Series B Preferred Shares to the Corporation at its principal office, accompanied by written notice to the Corporation that the holder elects to convert a specified portion or all of such Series B Preferred Shares. Series B Preferred Shares shall be deemed to have been converted on the day of surrender of the certificate representing such Series B Preferred Shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Series B Preferred Shares, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of the Common Shares issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, rounded to the nearest hundredth of a full share, and a certificate or certificates for the balance of the Series B Preferred Shares surrendered, if any, not so converted into Common Shares. (b) The number of Common Shares issuable in exchange for Series B Preferred Shares upon either optional, or automatic conversion pursuant to Section 5(g), shall be equal to One Dollar and Twenty-Five Cents ($1.25), divided by the conversion price then in effect (the "Conversion Price"). The Conversion Price shall initially be $1.25, but shall be subject to adjustment from time to time as hereinafter provided: (i) In case this corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of this corporation shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (ii) Except for issuances for shares or other equity purchase rights specifically permitted by the terms of the Investment Agreement, if and whenever this Corporation shall issue or sell any Common Shares for a consideration per share less than $1.25 (other than dividends payable in Series A Preferred Shares or Common Shares), or shall issue any options, warrants or other rights for the purchase of such shares at a consideration per share of less than $1.25, the Conversion Price in effect immediately prior to such issuance or sale shall be adjusted and shall be equal to (i) the Conversion Price then in effect, multiplied by (ii) a fraction, the numerator of which shall be an amount equal to the sum of (a) the number of Series A Preferred Shares and Common Shares outstanding immediately prior to such issuance or sale multiplied by the Conversion Price then in effect, and (b) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of Series A Preferred Shares and Common Shares outstanding immediately after such issuance or sale plus the number of the Common Shares issuable upon the exercise of any purchase rights thus issued, by (bb) the Conversion Price then in effect. If any options or purchase rights that are taken into account in any such adjustment of the Conversion Price subsequently expire without exercise, the Conversion Price shall be recomputed by deleting such options or purchase rights. If the Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights. (iii) The antidilution provisions of this subsection 5(b) may be waived by the affirmative vote of the holders (acting together as a class) of at least ninety percent (90%) of the then outstanding Series B Preferred Shares. (c) Upon any adjustment of the Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Series B Preferred Shares at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Series B Preferred Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (d) The holders of Series B Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares: (i) In case this Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or other than in Common Shares, then thereafter each holder of Series B Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Series B Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares. (ii) If any capital reorganization or reclassification of the capital stock of this Corporation, or consolidation or merger of this Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Series B Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of this Corporation immediately theretofore receivable upon the conversion of such Series B Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore receivable upon the conversion or such Series B Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to me rights and interests of the holders of the Series B Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price and of the number of shares receivable upon the conversion of such Series B Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Series B Preferred Shares. The Corporation shall not effect any such reorganization, reclassification, consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Series B Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive. (e) The Board of Directors may increase the number of Common Shares into which each Share may be converted, in addition to the adjustments required by this section, as shall be determined by it (as evidenced by a resolution of the Board of Directors) to be advisable in order to avoid or diminish any income deemed to be received by any holder for Federal income tax purposes of Series B Preferred Shares resulting from any events of occurrences giving rise to adjustments pursuant to this Section 5 or from any other similar event. (f) As used in this Section 5, the term Common Shares shall mean and include this Corporation's presently authorized Common Shares and shall also include any capital stock of any class of this Corporation hereafter authorized which shall have the right to vote on all matters submitted to the shareholders of this Corporation and shall not be limited to a fixed sum of percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of this Corporation; provided that the shares receivable pursuant to conversion of the Series B Preferred Shares shall include shares designated as Common Shares of this Corporation as of the date of issuance of such Series B Preferred Shares or, in the case of any reclassification of the outstanding shares thereto, the stock, securities or assets provided for in Section 5(b)(ii) above. (g) Notwithstanding the foregoing right to convert at the option of the holder, each Share shall automatically be deemed converted (but only to the extent, and as soon as such conversion would be exempt from the registration and qualification requirements of the applicable Federal and state securities laws, into the appropriate number of Common Shares of the Corporation in the manner and upon the terms set forth herein, without any act by the Corporation or the holders of such Series B Preferred Shares, on the earlier to occur of (i) the date upon which the Corporation completes an offering of its capital stock pursuant to a registration statement filed pursuant to and declared effective under the Securities Act of 1933, as amended in which the net proceeds received by the Corporation equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate reorganizations) or (ii) the date following the merger of the Corporation with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Corporation continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Corporation equals or exceeds $5 million, calculated for purposes of this Section 5, as the product of the average closing price for the Corporation's Common Shares during any 20 consecutive trading days times the number of outstanding Common Shares, and including in such number, that number of Common Shares into which the Series B Preferred Shares are convertible hereby. (h) The Corporation will pay any and all stamp or similar taxes that may be payable in respect of the issuance or delivery of Common Shares on conversion of Series B Preferred Shares. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of Common Shares in a name other than that in which the Series B Preferred Shares so converted were registered, and no such issuance or delivery shall be made unless and until the Person requesting such issuance has paid to the Corporation the amount of any such tax or has established to the satisfaction of the Corporation that such tax has been paid. IN WITNESS WHEREOF, the undersigned has caused this Certificate of Designation to be signed on behalf of the Corporation this 17th day of September, 1993. /s/ Mary Deschenes -------------------- Mary Deschenes, Secretary ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF MEDI-JECT CORPORATION The undersigned, the President of Medi-Ject Corporation, a Minnesota corporation (the "Company"), hereby certifies that: 1. The name of the Company is Medi-Ject Corporation. 2. The Company is a Minnesota corporation. 3. The amendment adopted is: "ARTICLE III - CAPITAL STOCK 3.1 Authorized Shares; Establishment of Classes and Series. The total number of shares of all classes of stock that the Corporation is authorized to issue is twenty million (20,000,000) shares, consisting of (i) ten million (10,000,000) shares which shall be designated as common stock $.01 par value (hereinafter referred to as "Common Stock"), (ii) one million six hundred thousand (1,600,000) shares of which shall be designated Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares") (iii) three million (3,000,000) shares of which shall be designated Series B Convertible Preferred Stock, $.01 par value (hereinafter referred to as the "Series B Preferred Shares"), (iv) one million (1,000,000) shares of which shall be designated Non-Voting Series B Convertible Preferred Shares $.01 par value (the "Non-Voting Series B Preferred Shares") and two million (2,000,000) shares of which shall be preferred shares, undesignated as to series (the "Undesignated Preferred Shares"). The Common Stock, the Series A Preferred Shares, the Series B Preferred Shares and the Non-Voting Series B Preferred Shares are hereinafter referred to collectively as the Capital Stock. 3.2) Authority Relative to Undesignated Preferred Shares. Authority is hereby expressly vested in the Board of Directors of the Corporation, subject to the provisions of this Article III and to the limitations prescribed by law, to authorize the issue from time to time of one or more series of Undesignated Preferred Shares and, with respect to each such series, to determine or fix, by resolution or resolutions adopted by the affirmative vote of a majority of the whole Board of Directors providing for the issue of such series, the voting powers, full or limited, if any, of the shares of such series and the designations, preference and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limitation, the determination or fixing of the rates of and terms and conditions upon which any dividends shall be payable on such series, any terms under or conditions on which the shares of such series may be redeemed, any provision made for the conversion or exchange of the shares of such series for shares of any other class or classes or of any other series of the same or any other class or classes of the Corporation's capital stock, and any rights of the holders of the shares of such series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation. 3.3) Issuance of Shares. The Board of Directors of the Corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of any class or series of the Corporation to such persons, at such times and upon such terms and conditions as the Board shall determine, valuing all nonmonetary consideration and establishing a price in money or other consideration, or a minimum price or a general formula or method by which the price will be determined. 3.4) Issuance of Rights to Purchase Shares. The Board of Directors is further authorized from time to time to grant and issue rights to subscribe for, purchase, exchange securities for, or convert securities into shares of the Corporation of any class or series and to fix the terms, provisions and conditions of such rights, including the exchange or conversion basis or the price at which such shares may be purchased or subscribed. 3.5) Issuance of Shares to Holders of Another Class or Series. The Board is further authorized to issue shares of one class or series to holders of that class or series or to holders of another class or series to effectuate share dividends or splits. ARTICLE IV - RIGHTS AND PRIVILEGES OF SHARES AND OF SHAREHOLDERS The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of stock or the holders thereof are set forth below. 4.1) Voting Privileges. Each holder of Common Stock shall have one vote on all matters submitted to the shareholders for each share of Common Stock standing in the name of such holder on the books of this Corporation. Each holder of Series A Preferred Shares shall have one vote on all matters submitted to the shareholders for each share of Common Stock that such holder of Series A Preferred Shares would be entitled to receive upon the conversion of such Series A Preferred Shares as provided in subsection 4.4(d). 4.2) Preemptive Rights. No holder of shares of any class of Capital Stock shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any class whatsoever or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. 4.3) No Cumulative Voting. No holder of shares of Capital Stock shall have any cumulative voting rights. 4.4) Series A Preferred Shares. (a) Relative Seniority. With respect to the relative rights and preferences set forth herein, the Series A Preferred Shares shall rank senior to the Common Stock, but may otherwise be junior with respect to the rights and preferences of any future class or series of Undesignated Preferred Shares that may be designated by the Board of Directors. Nothing contained herein shall be deemed to prevent the Board of Directors from issuing any such Undesignated Preferred Shares the relative rights and preferences of which may rank senior, junior, or pari passu with the Series A Preferred Shares. (b) Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to $.0488 per share for each outstanding Series A Preferred Share. If in any such event, the assets of the Corporation are insufficient to make such payment, the holders of the Series A Preferred Shares shall be entitled to a ratable distribution. The merger or consolidation of the Corporation into or with another Corporation or the merger or consolidation of any other Corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive distributions of cash or securities or other property as a result of such consolidation or merger) or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this subparagraph. Nothing hereinabove set forth shall affect in any way the right or obligation of each holder of Series A Preferred Shares to convert such shares at any time and from time to time in accordance with subsection 4.4(d) below. (c) Dividends and Distributions. In case this Corporation shall declare a dividend or other distribution (whether payable in cash, in-kind or securities of the Corporation, including shares of Common Stock or securities convertible into Common Stock) upon its Common Stock, the holders of Series A Preferred Shares shall be deemed to be holders of such number of shares of Common Stock as the holders of the Series A Preferred Shares are entitled to receive, upon the conversion thereof as provided in Subsection 4.4(d) below, as of the record date for such distribution, participating on the same basis as the holders of the Common Stock in any such dividend or other distribution. (d) Conversion Rights; Mandatory Conversion. (1) Each Series A Preferred Share shall be convertible at the option of the holder thereof into one (1) share of Common Stock of this Corporation, subject to adjustment as provided for herein. In order to exercise the conversion privilege, a holder of Series A Preferred Shares shall surrender the certificate representing such shares to the Corporation at its principal office, accompanied by written notice to the Corporation that the holder elects to convert a specified portion or all of such shares. Series A Preferred Shares shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such shares, as such holder, shall cease and such holder shall be treated for all purposes as the record holder of the Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of shares of Common Stock issuable upon conversion, computed to the nearest one- hundredth of a full share, and a certificate or certificates for the balance of the Series A Preferred Shares surrendered, if any, not so converted into Common Stock. (2) The number of shares of Common Stock issuable in exchange for Series A Preferred Shares upon the exercise of these conversion rights (the "Conversion Ratio") shall be subject to adjustment from time to time as hereinafter provided: (i) In case the Corporation shall at any time subdivide or split its outstanding Common Stock into a greater number of shares, the Conversion Ratio in effect immediately prior to such subdivision or split shall be proportionately increased; and, conversely, in case the outstanding Common Stock of the Corporation shall be combined into a smaller number of shares, the Conversion Ratio in effect immediately prior to such combination shall be proportionately reduced. (ii) If any capital reorganization or reclassification of the Capital Stock of the Corporation or consolidation or merger of the Corporation with another Corporation or the sale of all or substantially all of its assets to another Corporation shall be affected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then as a condition of such reorganization, reclassification, consolidation, merger or sale lawful and adequate provision shall be made whereby the holders of Series A Preferred Shares shall thereafter have the right to receive, in lieu of the Common Stock of the Corporation, immediately theretofore receivable upon the conversion of any such Series A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore receivable upon the conversion of such Series A Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place; and in any such case, appropriate provision shall be made with respect to the rights and interests of the holders of the Series A Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Ratio and of the number of shares receivable upon the conversion of such Series A Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Series A Preferred Shares. This Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Series A Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets, as, in accordance with the foregoing provisions, such holders may be entitled to receive. (3) Upon any adjustment of the Conversion Ratio, then and in each such case, the Corporation shall give written notice thereof by first-class mail, postage prepaid, addressed to the registered holders of the Series A Preferred Shares at the addresses of such holders as shown on the books of the Corporation, which notice shall state the Conversion Ratio resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of the Series A Preferred Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (4) As used in this subsection 4.4(d), the term Common Stock shall mean and include this Corporation's presently authorized Common Stock and shall also include any capital stock of any class of this Corporation hereafter authorized which shall have the right to vote on all matters submitted to the shareholders of this Corporation and shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of this Corporation; provided that the shares receivable pursuant to conversion of the Series A Preferred Shares shall include shares designated as Common Stock of this Corporation as of the date of issuance of such Series A Preferred Shares or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subsection 4.4(d)(2)(ii) above. (5) Notwithstanding the foregoing right to convert at the option of the holder, each Series A Preferred Share shall automatically be deemed converted (but only to the extent, and as soon as such conversion would be exempt from the registration and qualification requirements of the applicable federal and state securities laws) into the appropriate number of shares of Common Stock of the Corporation in the manner and upon the terms set forth herein, without any act by the Corporation or the holders of such shares, on the earlier to occur of (i) the date upon which the Corporation completes an offering of its Capital Stock pursuant to a registration statement filed pursuant to and declared effective under the Securities Act of 1933, as amended, (ii) the calendar month-end upon which the Corporation first obtains a total net worth of $1 million, as determined pursuant to generally accepted accounting principles, or (iii) the date following the merger of the Corporation with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Corporation continues as the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Corporation equals or exceeds $1 million, calculated for purposes of this Section 4.4(d), as the product of the average closing price for the Corporation's Common Shares during any 20 consecutive trading days times the number of outstanding Common Shares, and including in such number, that number of Common Shares into which the Series A Preferred Shares are convertible hereby. 4.5) Series B Preferred Shares. The rights and preferences of the Series B Preferred Shares shall be as set forth in that certain Certificate of Designation, as filed with the Secretary of State of the State of Minnesota on September 27, 1993, the terms of which are incorporated herein by this reference. 4.6) Non-Voting Series B Preferred Shares. The Non-Voting Series B Preferred Shares shall have identical rights and preferences to the Series B Preferred Shares and shall rank pari passu in all respects with the Series B Preferred Shares; provided, however, that the holders of Non-Voting Series B Preferred Shares shall not have any voting rights, except as such may otherwise be prescribed by law." 5. The amendment has been adopted pursuant to Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, W. Dirk Dunlap, President of Medi-Ject Corporation, being duly authorized on behalf of the Company, has executed this document effective as of the 31st day of January, 1994. By: /s/ W. Dirk Dunlap ----------------------------------- W. Dirk Dunlap President ARTICLES OF CORRECTION OF MEDI-JECT CORPORATION In order to correct the Articles of Amendment of Restates Articles of Incorporation as filed with the Minnesota Secretary of State on January 31, 1994 in accordance with the provisions set forth in Minnesota Statute Section 5.16, the undersigned hereby makes the following statements. 1. The name of the person who filed the instrument is W. Dirk Dunlap. 2. The instrument to be corrected is the Articles of Amendment of Restated Articles of Incorporation of Medi-Ject Corporation filed with the Minnesota Secretary of State on January 31, 1994. 3. The error to be corrected is contained within Section 4.4(b) Liquidation Preference of the instrument described in item number 2 above and the error to be corrected is the liquidation amount per share. 4. The following portion of the Articles of Amendment of Restated Articles of Incorporation is hereby set forth in its corrected form in its entirety as follows: "4.4) Series A Preferred Shares. (a) Relative Seniority. With respect to the relative rights and preferences set forth herein, the Series A Preferred Shares shall rank senior to the Common Stock, but may otherwise be junior with respect to the rights and preferences of any future class or series of Undesignated Preferred Shares that may be designated by the Board of Directors. Nothing contained herein shall be deemed to prevent the Board of Directors from issuing any such Undesignated Preferred Shares the relative rights and preferences of which may rank senior, junior, or pari passu with the Series A Preferred Shares. (b) Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to $.488 per share for each outstanding Series A Preferred Share. If in any such event, the assets of the Corporation are insufficient to make such payment, the holders of the Series A Preferred Shares shall be entitled to a ratable distribution. The merger or consolidation of the Corporation into or with another Corporation or the merger or consolidation of any other Corporation into or with another Corporation (in which consolidation or merger the shares of the Corporation receive distributions of cash or securities or other property as a result of such consolidation or merger) or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation shall be deemed toe a liquidation or dissolution of the Corporation for purposes of this subparagraph. Nothing hereinabove set forth shall affect in any way the right or obligation of each holder of Series A Preferred Shares to convert such shares at any time and from time to time in accordance with subsection 4.4(d) below." Dated: June 15, 1994 /s/ W. Dirk Dunlap ------------------------------ W. Dirk Dunlap, President CERTIFICATE OF DESIGNATIONS OF SERIES B CONVERTIBLE PREFERRED STOCK (CLASS II) OF MEDI-JECT CORPORATION The undersigned duly elected Secretary of Medi-Ject Corporation, a Minnesota corporation (the "Corporation"), hereby certifies that the following is a true, complete and correct copy of resolutions duly adopted by a majority of the directors of the Board of Directors of the Corporation on October 12, 1994: FURTHER RESOLVED, that 400,000 shares of Series B Preferred Stock shall be designated as Series B Convertible Preferred Stock (Class II) (the "Series B-II Preferred Stock"). FURTHER RESOLVED, that the Series B-II Preferred Stock shall have all of the same rights and preferences as the Series B Preferred Stock, except that (i) the Liquidation Value set forth in Section 4(a) of the Certificate of Designations for the Series B Preferred Stock shall be equal to $2.50 per share and (ii) the Conversion Price set forth in Section 5(b) of the Certificate of Designations for the Series B Preferred Stock shall be adjusted only as a result of events occurring after the date the Series B- II Preferred Stock is first issued. In the event capital stock of the Company is issued pursuant to the exercise of an option or warrant to purchase such stock, the date of such event for purposes of calculating an adjustment to the Conversion Price of the Series B-II Preferred Stock shall be the date the option or warrant was first issued by the Company. FURTHER RESOLVED, following the requisite approval by the Company's shareholders, the officers of the Company are hereby authorized to file the above resolutions designating the Series B-II Preferred Stock with the Secretary of State of Minnesota in accordance with the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned has signed this Certificate of Designations on behalf of the Corporation this 28th day of December, 1994. /s/ Mark Derus ---------------- Mark Derus, Secretary (Pursuant to Minnesota Statutes, Section 302A.401, Subd. 3(b)) ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF MEDI-JECT CORPORATION 1. The name of the corporation is Medi-Ject Corporation. 2. The following is the full text of the amendment to the Articles of Incorporation of Medi-Ject Corporation: NOW, THEREFORE, BE IT RESOLVED, that Section 3.1 of the Company's Articles of Incorporation be read in its entirety as follows: "3.1 Authorized Shares; Establishment of Classes and Series. The total number of shares of all classes of stock that the Corporation is authorized to issue is seventeen million six hundred thousand (17,600,000) shares, consisting of (i) ten million (10,000,000) shares which shall be designated as common stock, $.01 par value (hereinafter referred to as "Common Stock"), (ii) one million six hundred thousand (1,600,000) shares of which shall be designated Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares") (iii) three million (3,000,000) shares of which shall be designated Series B Convertible Preferred Stock, $.01 par value (hereinafter referred to as the "Series B Preferred Shares"), (iv) one million (1,000,000) shares of which shall be designated Non-Voting Series B Convertible Preferred Shares, $.01 par value (the "Non-Voting Series B Preferred Shares") and two million (2,000,000) shares of which shall be preferred shares, undesignated as to series (the "Undesignated Preferred Shares"). The Common Stock, the Series A Preferred Shares, the Series B Preferred Shares and the Non-Voting Series B Preferred Shares are hereinafter referred to collectively as the Capital Stock. The Series B Preferred Shares may be classified by the Board of Directors in one or more classes with such relative rights and preferences as shall be states or expressed in a resolution or resolutions providing for the issue of any such class or classes as may be adopted from time to time by the Board of Directors pursuant to the authority hereby vested in the Board of Directors and Minnesota Statutes, Section 301A.401, or any successor provision, provided, however, that any class of the Series B Preferred Shares shall differ from any other class of Series B Preferred Shares only in the liquidation preference o the ration at which the Series B Preferred Shares convert into shares of Common Stock, and provided further that the liquidation preference per share of any class of Series B Preferred Shares shall not exceed the minimum purchase price paid for any shares of such class and the ratio at which the Series B Preferred Shares convert into shares of Common Stock shall be equal to one-for-one on the date the first share of such class is issued and shall thereafter adjust in the same manner as each other class of Series B Preferred Shares, except that such conversion ratio shall only be adjusted as a result of events occurring after such date." 3. The foregoing amendment to the Articles of Incorporation of the Company was approved by the Board of Directors on October 11, 1994, and approved by the shareholders on November 4, 1994, in accordance with Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, President of Medi-Ject Corporation, being duly authorized on behalf of such corporation, has executed this certificate this 5th day of November, 1994. /s/ Mark Derus ---------------- Mark Derus, Vice President, Finance/CFO CERTIFICATE OF DESIGNATIONS OF SERIES B CONVERTIBLE PREFERRED STOCK (CLASSS III) OF MEDI-JECT CORPORATION The undersigned duly elected Secretary of Medi-Ject Corporation, a Minnesota corporation (the "Corporation"), hereby certifies that the following is a true, complete and correct copy of resolutions duly adopted by all of the directors of the Board of Directors of the Corporation on April 5, 1995: RESOLVED, that 200,000 shares of Series B Preferred Stock shall be designated as Series B Convertible Preferred Stock (Class III) (the "Series B-III Preferred Stock"). FURTHER RESOLVED, that the Series B-III Preferred Stock shall have all of the same rights and preferences as the Company's Series B Convertible Preferred Stock (Class II). FURTHER RESOLVED, that the officers of the Company are hereby authorized to file the above resolutions designating the Series B-III Preferred Stock with the Secretary of State of Minnesota in accordance with the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned has signed this Certificate of Designations on behalf of the Corporation this 31st day of May, 1995. /s/ Mark Derus -------------------------------- Mark Derus, Secretary CERTIFICATE OF DESIGNATIONS OF SERIES B CONVERTIBLE PREFERRED STOCK (CLASSS IV) OF MEDI-JECT CORPORATION The undersigned duly elected Secretary of Medi-Ject Corporation, a Minnesota corporation (the "Corporation"), hereby certifies that the following is a true, complete and correct copy of resolutions duly adopted by all of the directors of the Board of Directors of the Corporation on August 31, 1995: RESOLVED, that 100,000 shares of Series B Preferred Stock shall be designated as Series B Convertible Preferred Stock (Class IV) (the "Series B-IV Preferred Stock"). FURTHER RESOLVED, that the Series B-IV Preferred Stock shall have all of the same rights and preferences as the Company's Series B Convertible Preferred Stock (Class III). FURTHER RESOLVED, that the officers of the Company are hereby authorized to file the above resolutions designating the Series B-IV Preferred Stock with the Secretary of State of Minnesota in accordance with the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned has signed this Certificate of Designations on behalf of the Corporation this 15th day of September, 1995. /s/ Mark Derus ------------------------------- Mark Derus, Secretary ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF MEDI-JECT CORPORATION 1. The name of the corporation is Medi-Ject Corporation, a Minnesota corporation. 2. The following is the full text of the amendment to the Articles of Incorporation of Medi-Ject Corporation: NOW, THEREFORE, BE IT RESOLVED, that Section 3.1 of the Company's Articles of Incorporation be amended to read in its entirety as follows: 3.1 Authorized Shares; Establishment of Classes and Series. The total number of shares of all classes of stock that the Corporation is authorized to issue is twenty-five million, six hundred thousand (25,600,000) shares, consisting of (i) fifteen million (15,000,000) shares which shall be designated as common stock, $.01 par value (hereinafter referred to as "Common Stock"), (ii) one million six hundred thousand (1,600,000) shares of which shall be designated Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares") (iii) three million (3,000,000) shares of which shall be designated Series B Convertible Preferred Stock, $.01 par value (hereinafter referred to as the "Series B Preferred Shares"), (iv) one million (1,000,000) shares of which shall be designated Non-Voting Series B Convertible Preferred Shares, $.01 par value (the "Non-Voting Series B Preferred Shares") and five million (5,000,000) shares of which shall be preferred shares, undesignated as to series (the "Undesignated Preferred Shares"). The Common Stock, the Series A Preferred Shares, the Series B Preferred Shares and the Non-Voting Series B Preferred Shares are hereinafter referred to collectively as the Capital Stock. The Series B Preferred Shares may be classified by the Board of directors in one or more classes with such relative rights and preferences as shall be stated or expressed in a resolution or resolutions providing for the issue of any such class or classes as may be adopted from time to time by the Board of Directors pursuant to the authority hereby vested in the Board of Directors and Minnesota Statutes, Section 302A.401, or any successor provision, provided, however, that any class of the Series B Preferred Shares shall differ from any other class of Series B Preferred Shares only in the liquidation preference of the class and the ratio at which the Series B Preferred Shares convert into shares of Common Stock, and provided further that the liquidation preference per share of any class of Series B Preferred Shares shall not exceed the minimum purchase price paid for any shares of such class and the ratio at which the Series B Preferred Shares convert into shares of Common Stock shall be equal to one- for-one on the date the first share of such class is issued and shall thereafter adjust in the same manner as each other class of Series B Preferred Shares, except that such conversion ratio shall only be adjusted as a result of events occurring after such date. 3. The foregoing amendment to the Articles of Incorporation was approved by the Board of Directors on November 22, 1995 and approved by the shareholders on December 22, 1995, in accordance with Chapter 302A of the Minnesota Business Corporation Act. IN WITNESS WHEREOF, the undersigned, the Vice President of Finance, Chief Financial Officer and Secretary of Medi-Ject Corporation, being duly authorized on behalf of Medi-Ject Corporation, has executed this document this 10th day of January, 1996. /s/ Mark Derus -------------------------------------- Mark Derus, Vice President of Finance, Chief Financial Officer, Secretary/Treasurer MEDI-JECT CORPORATION ____________ CERTIFICATE OF DESIGNATIONS FOR JUNIOR CONVERTIBLE PREFERRED STOCK, SERIES C, SERIES D AND SERIES E (Pursuant to Minnesota Statutes, Section 302A.401, Subd. 3(b)) ____________ The undersigned, being the Secretary of Medi-Ject Corporation (the "Corporation"), a corporation organized and existing under the Minnesota Business Corporation Act, in accordance with the provisions of Minnesota Statutes, Section 302A.401, Subd. 3(b), does hereby certify that: Pursuant to the authority vested in the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation, the Board of Directors on January 11, 1996 in accordance with Minnesota Statutes, Section 302A.401, Subd. 3, duly adopted the following resolution establishing a series of 1,000,000 shares of the Corporation's Preferred Stock, to be designated as its Series C Junior Convertible Preferred Stock, a series of 500,000 shares of the Corporation's Preferred Stock, to be designated as its Series D Junior Convertible Preferred Stock and a series of 2,500,000 shares of the Corporation's Preferred Stock, to be designated as its Series E Junior Convertible Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation (the "Board of Directors") by the Articles of Incorporation of the Corporation, the Board of Directors hereby establishes a Series C Junior Convertible Preferred Stock, a Series D Junior Convertible Preferred Stock and a Series E Junior Convertible Preferred Stock of the Corporation and hereby states the designation and number of shares, and fixes the relative rights and preferences, of each such series of shares as follows: Section 1. Designation and Amount. The Corporation's previously undesignated preferred shares shall be designated as to series as follows: (a) 1,000,000 shares shall be designated as "Series C Junior Convertible Preferred Stock" (the "Series C Preferred Shares"), (b) 500,000 shares shall be designated as "Series D Junior Convertible Preferred Stock" (the "Series D Preferred Shares") and (c) 2,500,000 shares shall be designated as "Series E Junior Convertible Preferred Stock" (the "Series E Preferred Shares") The Series C Preferred Shares, Series D Preferred Shares and Series E Preferred Shares are referred to collectively herein as the "Series C, D and E Preferred Shares". Section 2. Dividends and Distributions. (a) The holders of Series C, D and E Preferred Shares, in preference to and in priority over the holders of shares of the Common Stock, $.01 par value (the "Common Shares") and Series A Preferred Shares, $.01 par value (the "Series A Preferred Shares"), of the Corporation, each of which shall rank junior to the Series C, D and E Preferred Shares as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for such purpose, cash dividends on the Series C, D and E Preferred Shares in such amounts and at such times as declared by the Board of Directors; provided, however, that the holders of the Series C, D and E Preferred Shares shall not be entitled to receive any dividends on the Series C, D and E Preferred Shares, and no such dividends shall be declared or paid, unless and until comparable dividends are declared and paid to the holders of the Corporation's Series B Convertible Preferred Shares, $.01 par value per share (the "Series B Preferred Shares"). Dividends payable pursuant hereto shall be in such amount at least equal to any dividends payable on the Series A Preferred Shares or the Common Shares determined on an as-if-converted basis. (b) In no event shall any dividend be paid on any Common Shares or Series A Preferred Shares unless dividends are paid on the Series C, D and E Preferred Shares in accordance with subparagraph (a) . Holders of Series C, D and E Preferred Shares shall be entitled to receive dividends comparable to dividends on the Series B Preferred Shares. (c) Series A Preferred Shares, Series B Preferred Shares and Series C, D and E Preferred Shares shall be counted on an as-if-converted basis in determining whether dividends on any such preferred shares or Common Shares are comparable. (d) Notwithstanding anything to the contrary contained herein, the provisions of this Section 2 shall not apply to dividends payable in Common Shares or Common Stock Equivalents (as defined in Section 5.1) for which an appropriate adjustment is made in the Conversion Price (as defined in Section 5.1) pursuant to Section 5.3(d). Section 3. Voting Rights. (a) General. Except as otherwise provided herein, the holders of Series C, D and E Preferred Shares shall have one vote on all matters submitted to the shareholders of the Corporation for each Common Share that such holder of Series C, D or E Preferred Shares would be entitled to receive upon the conversion of such Series C, D or E Preferred Shares. -2- (b) Election of Director. Subject to the provisions of Section 3(b) of the Certificate of Designations for the Series B Preferred Shares, at any time there are outstanding any Series C, D or E Preferred Shares, the holders of the Series C, D and E Preferred Shares, exclusively and voting as a single class, shall be entitled, by a vote of holders of a majority of the total voting power to which such holders are entitled as set forth in subparagraph (a) above, to elect one of the directors of the Corporation and to exercise any right of removal or replacement of such director. Section 4. Liquidation, Dissolution or Winding Up. (a) Subject to the provisions of subparagraph (b) hereof, upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of capital stock of the Corporation ranking junior (upon liquidation, dissolution or winding up) to the Series C, D and E Preferred Shares unless, prior thereto, the holders of outstanding Series C, D and E Preferred Shares shall have received the liquidation value per share which, for each Series C Preferred Share, shall be equal to $3.00, for each Series D Preferred Share, shall be equal to $3.50 and for each Series E Preferred Share, shall equal $4.50 (each such liquidation value per share shall be subject to appropriate adjustment to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) (the "Liquidation Value"). If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay such Liquidation Value per Series C, D or E Preferred Share, after payment to the holders of the Series B Preferred Shares as set forth in subparagraph (b) below, the holders of such Series C, D and E Preferred Shares shall share pro rata in the remaining assets. Following such payment to the holders of Series B, C, D and E Preferred Shares upon such liquidation, dissolution, or winding up of the Corporation, the holders of Series A Preferred Shares and Common Shares (which Series A Preferred Shares and Common Shares shall rank junior to the Series B, C, D and E Preferred Shares upon liquidation, dissolution or winding-up) shall then be entitled, to the exclusion of the holders of Series B, C, D and E Preferred Shares, to share in all the assets of this Corporation thereafter remaining in accordance with the relative rights and preferences of such classes. (b) The Series B Preferred Shares shall rank senior to the Series C, D and E Preferred Shares upon any liquidation, dissolution or winding up of the Corporation, and no distribution shall be made to the holders of the Series C, D or E Preferred Shares unless and until the holders of the Series B Preferred Shares shall have received the full amount due to such holders in accordance with the rights and preferences of the Series B Preferred Shares upon any liquidation, dissolution or winding up of the Corporation, and payment to the holders of the Series B Preferred Shares shall be prior and in preference to the Series C, D and E Preferred Shares. (c) Neither the consolidation, merger or other business combination of the Corporation with or into any other individual, firm, corporation or other entity -3- (including any successor, by merger or otherwise, of such entity), nor the sale of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 4. 5. Conversion to Common Stock. The Series C, D and E Preferred Shares shall be convertible into Common Shares of the Corporation as follows: 5.1 Definitions. For purposes of this Section 5, the following definitions shall apply: (a) "Common Stock Equivalents" shall mean Convertible Securities and rights entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock without the payment of any consideration by such holder for such additional shares of Common Stock or Common Stock Equivalents. (b) "Common Stock Outstanding" shall mean the aggregate of all Common Stock outstanding and all Common Stock issuable upon exercise of all outstanding Options and conversion of all outstanding Convertible Securities. (c) "Conversion Price" shall mean the price, determined pursuant to this Section 5, at which shares of Common Stock shall be deliverable upon conversion of Series C, D and E Preferred Stock. (d) "Convertible Securities" shall mean any indebtedness or shares of stock convertible into or exchangeable for Common Stock, including Series C, D and E Preferred Shares. (e) "Current Conversion Price" shall mean the Conversion Price immediately before the occurrence of any event which, pursuant to Section 5.3, causes an adjustment to the Conversion Price. (f) "Issue Price" of each of the Series C, D and E Preferred Shares shall be equal to $3.00 per Series C, D and E Preferred Share. (g) "Series C Issuance Date" shall mean the first date on which the Corporation issues any shares of Series C Preferred Shares. (h) "Option" shall mean any right, warrant or option to subscribe for or purchase Common Stock or Convertible Securities of the Corporation. -4- 5.2 Right to Convert; Initial Conversion Price. (a) Each holder of the Series C, D and E Preferred Shares may, at any time, convert any or all of such preferred stock into fully-paid and nonassessable shares of Common Stock based upon the Conversion Price. Each Series C, D and E Preferred Share shall be convertible into the number of shares of Common Stock that results from dividing the Conversion Price in effect for the respective series at the time of conversion into the Issue Price for the respective series. The Conversion Price for each of the Series C, D and E Preferred Shares shall be subject to adjustment from time to time in certain instances as hereinafter provided. (b) The Conversion Price of the Series C, D and E Preferred Shares shall initially be equal to $3.00 per Series C, D and E Preferred Share. (c) No adjustments with respect to conversion shall be made on account of any dividends that may be declared but unpaid on the Series C, D or E Preferred Shares surrendered for conversion, but no dividends shall thereafter be paid on the Common Stock unless such unpaid dividends have first been paid to the holders entitled to payment at the time of conversion of the Series C, D or E Preferred Shares. (d) Before any holder of Series C, D or E Preferred Shares shall be entitled to convert the same into Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, to the office of the Corporation or any transfer agent for such Series C, D or E Preferred Shares and shall give written notice to the Corporation at such office that the holder elects to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series C, D and E Preferred Shares, or to such holder's nominee or nominees, certificates for the number of full shares of Common Stock to which such holder shall be entitled, and, if less than all of the shares of Series C, D or E Preferred Shares represented by such certificate are converted, a certificate representing the shares of Series C, D and E Preferred Shares not converted. Such conversion shall be deemed to have been made as of the date of such surrender of the certificate for the Series C, D or E Preferred Shares to be converted, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. If the conversion is in connection with an offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series C, D and E Preferred Shares for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series C, D or E Preferred Shares shall not be deemed to have converted such Preferred Shares until immediately prior to the closing of such sale of securities. -5- 5.3 Adjustments to Conversion Price. Subject to Section 5.3(h), the Conversion Price in effect from time to time for Series C, D and E Preferred Shares shall be subject to adjustment in certain cases as follows: (a) Issuance of Securities. Subject to Section 5.3(k), with respect to the Series C, D and E Preferred Shares, in case the Corporation shall at any time after the Series C Issuance Date issue or sell any Common Stock without consideration, or for a consideration per share less than the Current Conversion Price in effect for each of the Series C, D and E Preferred Shares, as the case may be, then, and thereafter successively upon each such issuance or sale, the Current Conversion Price for such Series C, Series D or Series E Preferred Shares shall simultaneously with such issuance or sale be adjusted to a Conversion Price (calculated to the nearest cent) equal to: the Current Conversion Price for such series, multiplied by (ii) a fraction, the numerator of which shall be an amount equal to the sum of (a) the number of shares of Common Stock Outstanding immediately prior to such issuance or sale multiplied by the Current Conversion Price, and (b) the total consideration payable to the Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock Outstanding immediately after such issuance or sale by (bb) the Current Conversion Price provided, however, that the Conversion Price shall at no time exceed $3.00 for the Series C, D or E Preferred Shares (subject to appropriate adjustment to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected). For the purposes of this subsection 5.3(a), the following provisions shall also be applicable: (i) Cash Consideration. In case of the issuance or sale of additional Common Stock for cash, the consideration received by the Corporation therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if such shares are offered by the Corporation for subscription, the subscription price, or, if such shares are sold to underwriters or dealers for public offering without a subscription offering, the initial 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. (ii) Noncash Consideration. In case of the issuance (otherwise than upon conversion or exchange of Convertible Securities) or sale of additional Common Stock, Options or Convertible Securities for a consideration other than cash or for consideration a part of which shall be other than cash, the fair value of -6- such consideration as determined by the board of directors of the Corporation 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 5, of the consideration other than cash received by the Corporation for such securities. (iii) Options and Convertible Securities. In case the Corporation shall in any manner issue or grant any Options or any Convertible Securities, the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (regardless of when 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 5.3(a) and to have been issued for the sum of the amount (if any) paid for such Options or Convertible Securities and the amount (if any) payable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities as of the date such securities are first issued regardless of when such securities first become convertible or exchangeable; provided that, subject to the provisions of Section 5.3(b), no further adjustment of the Conversion Price shall be made upon the actual issuance of any such Common Stock or Convertible Securities or upon the conversion or exchange of any such Convertible Securities. (b) Change in Option Price or Conversion Rate. If the purchase price provided for in any option referred to in subsection 5.3(a)(iii), or the rate at which any Convertible Securities referred to in subsection 5.3(a)(iii) are convertible into or exchangeable for shares of Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Current Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price that would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any such Option referred to in subsection 5.3(a)(iii), or the additional consideration (if any) payable upon the conversion or exchange of any Convertible Securities referred to in subsection 5.3(a)(iii), or the rate at which any Convertible Securities referred to in subsection 5.3(a)(iii) are convertible into or exchangeable for shares of Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of shares of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Current Conversion Price then in effect hereunder shall, upon issuance of such shares of Common Stock, be adjusted to such amount as would have been obtained had such Option or Convertible Security never been issued and had adjustments been made only upon the issuance of the shares of Common Stock delivered as aforesaid and for the consideration actually received for such Option or Convertible Security and the Common Stock. -7- (c) Termination of Option or Conversion Rights. In the event of the termination or expiration of any right to purchase Common Stock under any Option or of any right to convert or exchange Convertible Securities, the Current Conversion Price shall, upon such termination, be changed to the Conversion 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 Common Stock issuable thereunder shall no longer be deemed to be Common Stock Outstanding. (d) Stock Splits, Dividends, Distributions and Combinations. If the Corporation should at any time or from time to time after the Series C Issuance Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other Distribution payable in additional shares of Common Stock or Common Stock Equivalents, then, following such record date (or the date of such dividend, Distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series C, D and E Preferred Shares shall be increased in proportion to such increase in the number of outstanding shares of Common Stock (including for this purpose, Common Stock Equivalents) determined in accordance with Section 5.3(f). If the number of shares of Common Stock outstanding at any time after the Issuance Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series C, Series D and E Preferred Shares shall be decreased in proportion to such decrease in the number of outstanding shares of Common Stock. (e) Other Dividends. If the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 5.3(a)(iii), then, in each such case for the purpose of this Section 5.3(e), the holders of Series C, D and E Preferred Shares shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series C, D and E Preferred Shares are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or a sale of assets transaction provided for elsewhere in this Section 5) provision shall be made so that the holders of Series C, D and E Preferred Shares shall thereafter be entitled to receive upon conversion of shares of Series C, D and E Preferred Shares the number of shares of stock or other securities or property of the -8- Corporation or otherwise, to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled upon such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the holders of Series C, D and E Preferred Shares after the recapitalization to the end that the provisions of this Section 5 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of shares of Series C, D and E Preferred Shares) shall be applicable after that event as nearly equivalent as may be practicable to their application prior to such event. (g) Successive Changes. The above provisions of this Section 5 shall similarly apply to successive issuances, changes, sales, dividends or other distributions, subdivisions and combinations on or of the Common Stock after the Series C Issuance Date. (h) Other Events Reducing Conversion Price. Upon the occurrence of any event not specifically denominated in this Section 5 as altering the Conversion Price that, in the reasonable exercise of the business judgment of the Board of Directors, requires, on equitable principles, the reduction of the Conversion Price, the Conversion Price will be equitably reduced. (i) No Impairment. The Corporation will not take any action, by amendment of its Articles of Incorporation, including the filing of a certificate of designations, or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, the purpose of which, in whole or in part, is to avoid or seek to avoid the observance or performance of the intents and purposes of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the intents and purposes of the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series C, D and E Preferred Shares against impairment. (j) Miscellaneous Conversion Price Matters. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares of Common Stock deliverable upon conversion of all the then outstanding Series C, D and E Preferred Shares; and shall, at its own expense, take all such actions and obtain all such permits and orders as may be necessary to enable the Corporation lawfully to issue such Common Stock upon the conversion of such Series C, D and E Preferred Shares. (k) Excluded Events. Notwithstanding anything in this Section 5 to the contrary, the Conversion Price shall not be adjusted by virtue of (a) the conversion of shares of Series A, B, C, D or E Preferred Shares into shares of Common Stock, (b) the repurchase of shares from the Corporation's employees, consultants, officers or directors at such person's cost (or at such other price as may -9- be agreed to by the Corporation's board of directors), or (c) the issuance and sale of, or the grant of options to purchase after the date hereof, an aggregate of not more than 115,700 shares of Common Stock, or such greater number of shares of Common Stock as shall be approved by a majority of the Board of Directors of the Corporation, including the member of the Board of Directors elected by the holders of the Series C, D and E Preferred Shares pursuant to Section 3(b) hereof, to employees, advisors, directors, officers or consultants of the Corporation and its subsidiaries, at a price which is less than the Conversion Price at the time of such issuance or sale (all as determined in accordance with this Section 5), and none of such shares shall be included in any manner in the computation from time to time of the Conversion Price under subsection 5.3(a) or in the number of Common Shares outstanding for purposes of such computation. (k) No Fractional Shares. No fractional shares shall be issued upon conversion of shares of Series C, D or E Preferred Shares and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share determined on the basis of the total number of shares of Series C, D or E Preferred Shares the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock (including the aggregation of all fractional shares) issuable upon such aggregate conversion. (l) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, the Corporation, at its expense, upon request by any holder of Series C, D or E Preferred Shares, shall compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series C, D or E Preferred Shares a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series C, D or E Preferred Shares, furnish or cause to be furnished to such holder a like certificate setting forth (a) such adjustment and readjustment, (b) the Current Conversion Price at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of any series of Series C, D or E Preferred Shares. 5.4 Automatic Conversion. Immediately upon the effectiveness of the Corporation's registration statement pursuant to which Common Stock is sold to the public by the Corporation in a public offering registered under the Securities Act of 1933, as amended, at a per share public offering price of not less than $4.00 (subject to appropriate adjustment to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) and an aggregate public offering price greater than or equal to $5,000,000, each share of Series C, D and E Preferred Shares shall automatically be converted into shares of Common Stock based upon the applicable Conversion Price then in effect. On and after said conversion date, notwithstanding that any certificates for the shares of Series C, D and E Preferred Shares shall not have been surrendered for conversion, -10- the shares of such series of Series C, D and E Preferred Shares evidenced thereby shall be deemed to be no longer outstanding, and all rights with respect thereto shall forthwith cease and terminate, except only the rights of the holder (i) to receive the shares of Common Stock to which such holder shall be entitled upon conversion thereof and (ii) with respect to dividends declared but unpaid on the Series C, D or E Preferred Shares prior to such conversion date, to receive such dividends. In the event that any holder of Series C, D or E Preferred Shares presents such holder's certificate therefor for surrender to the Corporation or its transfer agent upon such conversion, a certificate for the number of shares of Common Stock into which the shares of Series C, D or E Preferred Shares surrendered were convertible on such conversion date promptly shall be issued and delivered to such holder. 5.5 Merger; Sale of Corporation. In the event, after the Series C Issuance Date, of any proposed consolidation of the Corporation with, or merger of the Corporation with or into another Corporation (other than a consolidation or merger in which the Corporation is the continuing Corporation and which does not result in any reclassification of, or change in, the outstanding shares of Common Stock), or in case of any proposed sale or transfer to another Corporation of all or substantially all of the assets of the Corporation, any holder of Series C, D or E Preferred Shares may elect to have each share of Series C, D or E Preferred Shares held by such holder treated for all purposes as if it had been converted into Common Stock on the later of (i) the record date, if any, for voting by holders of Common Stock on such event and (ii) the date of such event. 5.6 Waiver. The provisions of this Certificate of Designations may be waived by the written consent of the holders of a majority of the Series C, D and E Preferred Shares outstanding or subject to outstanding options or warrants for the purchase of Series C, D or E Preferred Shares. IN WITNESS WHEREOF, the undersigned has caused this Certificate of Designation to be signed on behalf of the Corporation this 25th day of January, 1996. /s/ Mark Derus ---------------------------- Mark Derus, Secretary -11- EX-3.2 3 AMENDED BYLAWS OF THE COMPANY Exhibit 3.2 RESTATED BYLAWS OF DERATA CORPORATION ARTICLE 1. OFFICES 1.1) Offices. The principal executive office of the corporation shall be 7380 32nd Avenue North, Minneapolis, Minnesota, 55427, and the corporation may have offices a- such other places within or without the State of Minnesota as the Board of Directors shall from time to time determine or the business of the corporation requires. ARTICLE 2. MEETINGS OF SHAREHOLDERS 2.1) Regular Meetings. Regular meetings of the shareholders of the corporation entitled to vote shall be held on an annual or other less frequent basis as shall be determined by the Board of Directors or by the chief executive officer; provided, that if a regular meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3 percent or more of the voting power of all shares entitled to vote may demand a reguLar meeting of shareholders by written notice of demand given to an officer of the corporation. At each regular meeting, the shareholders, voting as provided in the Articles of Incorporation and these Bylaws, shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting, and shall transact such other business as shall come before the meeting. No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting or unless all the shareholders entitled to vote are present in person or by proxy and none of them objects to such designation. 2.2) Special Meetings. Special meetings of the shareholders entitled to vote may be called at any time by the Chairman of the Board, the chief executive officer, the chief financial officer, two or more directors, or a shareholder or shareholders holding 10 percent or more of the voting power of all shares entitled to vote. 2.3) Place of Meetings. Meetings of the shareholders shall be held at the principal executive office of the corporation or at such other place, within or without the State of Minnesota, as is designated by the Board of Directors, except that a regular meeting called by or at the demand of a shareholder shall be held in the county where the principal executive office of the corporation is located. 2.4) Notice of Meetings. There shall be mailed to each holder of shares entitled to vote, at his address as shown by the books of the corporation, a notice setting out the place, date and hour of any regular or special meeting, which notice shall be not less than ten days, unless notice is given by any means in which delivery is assured within two days in which case the notice may be five days, nor more than sixty days prior to the date of the meeting; provided, that notice of a meeting at which there is to be considered a proposal (i) to dispose of all, or substantially all, of the property and assets of the corporation or (ii) to dissolve the corporation shall be mailed to all shareholders of record, whether or not entitled to vote; and provided further, that notice of a meeting at which there is to be considered a proposal to adopt a plan of merger or exchange shall be mailed to all shareholders of record, whether or not entitled to vote, at least fourteen days prior thereto. Notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to the purposes stated in the notice, unless all of the shareholders are present in person or by proxy and none of them objects to consideration of a particular item of business. Attendance at a meeting by any shareholder, without objection by him, shall constitute his waiver of notice of the meeting. 2.5) Quorum and Adjourned Meeting. The holders of a majority of the voting power of the shares entitled to vote at a meeting, represented either in person or by proxy, shall constitute a quorum for the transaction of business at any regular or special meeting of shareholders. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of shareholders originally present leaves less than the proportion or number otherwise required for a quorum. In case a quorum is not present at any meeting, those present shall have the power to-adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite number of shares entitled to vote shall be represented. At such adjourned meeting at which the required amount of shares entitled to vote shall be represented, any business may be transacted which might have been transacted at the original meeting. 2.6) Voting. At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one (1) vote for each share having voting power standing in his name on the books of the corporation except as may be otherwise provided in the terms of the share or as may be required to provide for cumulative voting (if not denied by the Articles). Upon the demand of any shareholder, the vote for directors or the vote upon any question before the meeting shall be by ballot. All elections shall be determined and all questions decided by a majority vote of the number of shares entitled to vote and represented at any meeting at which there is a quorum except in such cases as shall otherwise be required by statute, the Articles of Incorporation or these Bylaws. Except as may otherwise be required to conform to -2- cumulative voting procedures, directors shall be elected by a plurality of the votes cast by holders of shares entitled to vote thereon. 2.7) Record Date. The Board of Directors may fix a time, not exceeding sixty days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of and entitled to vote at such meeting, notwithstanding any transfer of any shares on the books of the corporation after any record date so fixed. In the absence of action by the Board, only shareholders of record twenty days prior to a meeting may vote at such meeting. 2.8) Order of Business. The suggested order of business at any regular meeting and, to the extent appropriate, at all other meetings of the shareholders shall, unless modified by the presiding chairman, be: (a) Call of roll (b) Proof of due notice of meeting or waiver of notice (c) Determination of existence of quorum (d) Reading and disposal of any unapproved minutes (e) Reports of officers and committees (f) Election of directors (g) Unfinished business (h) New business (i) Adjournment. ARTICLE 3. DIRECTORS 3.1) General Powers. Except as authorized by the shareholders pursuant to a shareholder control agreement or unanimous affirmative vote, the business and affairs of the corporation shall be managed by or under the direction of a Board of Directors. 3.2) Number, Term and Qualifications. The Board of Directors shall consist of not more than nine members, of which at least a majority shall at all times be persons who are not in the employment of the Company. Until such time as Article 4 of the corporation's Articles of Incorporation is no longer effective or is no longer controlling as to the election of directors, the number of directors and their election shall be controlled by such Article 4. Thereafter, at each regular meeting, the shareholders shall determine the number of directors; provided, that between regular meetings the authorized number of directors may be increased or decreased by the shareholders or increased by the Board of Directors. Each director shall serve for an indefinite term that expires at the next regular meeting of shareholders, and until his successor is elected and qualified, or until his earlier death, resignation, disqualification, or removal as provided by statute. -3- 3.3) Vacancies. If not controverted by Article 4 of the corporation's Articles of Incorporation, vacancies on the Board of Directors may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum; provided, that newly created directorships resulting from an increase in the authorized number of directors shall be filled by the affirmative vote of a majority of the directors serving at the time of such increase. Persons so elected shall be directors until their successors are elected by the shareholders, who may make such election at the next regular or special meeting of the shareholders. 3.4) Quorum and Voting. A majority of the directors currently holding office shall constitute a quorum for the transaction of business. Except as otherwise provided in the Articles of Incorporation or these Bylaws, the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. 3.5) Board Meetings; Place and Notice. Meetings of the Board of Directors may be held from time to time at any place within or without the State of Minnesota that the Board of Directors may designate. In the absence of designation by the Board of Directors, Board meetings shall be held at the principal executive office of the corporation, except as may be otherwise unanimously agreed orally, or in writing, or by attendance. Any director may call a Board meeting by giving ten days' notice to all directors of the date and time of the meeting; a directors' meeting may be called upon five days' notice if notice is given by any means in which delivery is assumed within two days. If a meeting schedule is adopted by the Board, or if the date and time of a Board meeting has been announced at a previous meeting, no notice is required. The notice need not state the purpose of the meeting, and may be given by mail, telephone, telegram, or in person. 3.6) Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes of the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. 3.7) Compensation. Directors who are not salaried officers of the corporation shall receive such fixed sum per meeting attended or such fixed annual sum or both as shall be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. -4- 3.8) Committees. The Board of Directors may, by resolution approved by the affirmative vote of a majority of the Board, establish committees having the authority of the Board in the management of the business of the corporation only to the extent provided in the resolution. Each such committee shall consist of one or more natural persons (who need not be directors) appointed by affirmative vote of a majority of the directors present, and shall be subject at all times to the direction and control of the Board. A majority of the members of a committee present at a meeting shall constitute a quorum for the transaction of business. 3.9) Order of Business. The suggested order of business at any meeting of the Board of Directors shall, to the extent appropriate and unless modified by the presiding chairman, be: (a) Roll call (b) Proof of due notice of meeting or waiver of notice, or unanimous presence and declaration by presiding chairman (c) Determination of existence of quorum (d) Reading and disposal of any unapproved minutes (e) Reports of officers and committees (f) Election of officers (g) Unfinished business (h) New business (i) Adjournment. ARTICLE 4. OFFICERS 4.1) Number and Designation. The corporation shall have one or more natural persons exercising the functions of the offices of chief executive officer and chief financial officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the corporation including, but not limited to, a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these Bylaws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person. The chief executive officer is authorized to appoint individuals to divisional type non-executive offices from time to time; provided, that individuals appointed to such offices shall not be deemed executive officers. 4.2) Election, Term of Office and Qualification. At the first meeting of the Board following each election of directors, the Board shall elect officers, who shall hold office until the next election of officers or until their successors are elected or appointed and qualify; provided, however, that any officer may be removed with or -5- without cause by the affirmative vote of a majority of the Board of Directors present (without prejudice, however, to any contract rights of such officer). 4.3) Resignation. Any officer may resign at any time by giving written notice to the corporation. The resignation is effective when notice is given to the corporation, unless a later date is specified in the notice, and acceptance of the resignation shall not be necessary to make it effective. 4.4) Vacancies in Office. If there be a vacancy in any office of the corporation, by reason of death, resignation, removal or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. 4.5) Chief Executive Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the chief executive officer (a) shall have general active management of the business of the corporation; (b) shall, when present and in the absence of the Chairman of the Board, preside at all meetings of the shareholders and Board of Directors; (c) shall see that all orders and resolutions of the Board are carried into effect; (d) shall sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Articles, these Bylaws or the Board to some other officer or agent of the corporation; (e) may maintain records of and certify proceedings of the Board and shareholders; and (f) shall perform such other duties as may from time to time be assigned to him by the Board. 4.6) Chief Financial Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the chief financial officer (a) shall keep accurate financial records for the corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the corporation in such banks and depositories as the Board of Directors shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board; (e) shall render to the chief executive officer and the Board of Directors, whenever requested, an account of all of his transactions as chief financial officer and of the financial condition of the corporation; and (f) shall perform such other duties as may be prescribed by the Board of Directors or the chief executive officer from time to time. 4.7) Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board and shall exercise general supervision and direction over the more significant matters of policy affecting the affairs of the corporation, including particularly its financial and fiscal affairs. -6- 4.8) President. Unless otherwise determined by the Board, the President shall be the chief executive officer. If an officer other than the President is designated chief executive officer, the President shall perform such duties as may from time to time be assigned to him by the Board. 4.9) Vice President. Each Vice President shall have such powers and shall perform such duties as may be specified in these Bylaws or prescribed by the Board of Directors. In the event of absence or disability of the President, the Board of Directors may designate a Vice President or Vice Presidents to succeed to the power and duties of the President. 4.10) Secretary. The Secretary shall, unless otherwise determined by the Board, be secretary of and attend all meetings of the shareholders and Board of Directors, and may record the proceedings of such meetings in the minute book of the corporation and, whenever necessary, certify such proceedings. The Secretary shall give proper notice of meetings of shareholders and shall perform such other duties as may be prescribed by the Board of Directors or the chief executive officer from time to time. 4.11) Treasurer. Unless otherwise determined by the Board, the Treasurer shall be the chief financial officer of the corporation. If an officer other than the Treasurer is designated chief financial officer, the Treasurer shall perform such duties as may be prescribed by the Board of Directors or the chief executive officer from time to time. 4.12) Delegation. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may delegate in writing some or all of the duties and powers of his office to other persons. ARTICLE 5. INDEMNIFICATION 5.1) The corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as permitted by Minnesota Statutes, Section 302A.521, as now enacted or hereafter amended. ARTICLE 6. SHARES AND THEIR TRANSFER 6.1) Certificate of Stock. Every owner of stock of the corporation stall be entitled to a certificate, in such form as the Board of Directors may prescribe, certifying the number of shares of stock of the corporation owned by him. The -7- certificates for such stock shall be numbered (separately for each class) in the order in which they are issued and shall, unless otherwise determined by the Board, be signed by the chief executive officer, the chief financial officer, or any other officer of the corporation. A signature upon a certificate may be a facsimile. Certificates on which a facsimile signature of a former officer, transfer agent or registrar appears may be issued with the same effect as if he were such officer, transfer agent or registrar on the date of issue. 6.2) Stock Record. As used in these Bylaws, the term "shareholder" shall mean the person, firm or corporation in whose name outstanding shares of capital stock of the corporation are currently registered on the stock record books of the corporation. The corporation shall keep, at its principal executive office or at another place or places within the United States determined by the Board, a share register not more than one year old containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder. The corporation shall also keep at its principal executive office or at another place or places within the United States determined by the Board, a record of the dates on which certificates representing shares were issued. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled (except as provided for in Section 6.4 of this Article 6). 6.3) Transfer of Shares. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate (or his legal representative or duly authorized attorney-in-fact) and upon surrender for cancellation of the certificate or certificates for such shares. The shareholder in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of shares shall be made as collateral security and not absolutely, such fact, if known to the corporation or to the transfer agent, shall be so expressed in the entry of transfer; and provided, further, that the Board of Directors may establish a procedure whereby a shareholder may certify that all or a portion of the shares registered in the name of the shareholder are held for the account of one or more beneficial owners. 6.4) Lost Certificate. Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board of at least double the value, as determined by the Board, of the stock represented by such certificate in order to indemnify the corporation against any claim that may be made against it on account of the alleged loss or destruction of -8- such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost. ARTICLE 7. GENERAL PROVISIONS 7.1) Distributions; Acquisitions of Shares. Subject to the provisions of law, the Board of Directors may authorize the acquisition of the corporation's shares and may authorize distributions whenever and in such amounts as, in its opinion, the condition of the affairs of the corporation shall render it advisable. 7.2) Fiscal Year. The fiscal year of the corporation shall be established by the Board of Directors. 7.3) Seal. The corporation shall have such corporate seal or no corporate seal as the Board of Directors shall from time to time determine. 7.4) Securities of Other Corporations. (a) Voting Securities Held by the Corporation. Unless otherwise ordered by the Board of Directors, the chief executive officer shall have full power and authority on behalf of the corporation (i) to attend and to vote at any meeting of security holders of other companies in which the corporation may hold securities; (ii) to execute any proxy for such meeting on behalf of the corporation; and (iii) to execute a written action in lieu of a meeting of such other company on behalf of this corporation. At such meeting, by such proxy or by such writing in lieu of meeting, the chief executive officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation might have possessed and exercised if it had been present. The Board of Directors may from time to time confer like powers upon any other person or persons. (b) Purchase and Sale of Securities. Unless otherwise ordered by the Board of Directors, the chief executive officer shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber securities of any other company owned by the corporation which represent not more than 10 percent of the outstanding securities of such issue, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may from time to time confer like powers upon any other person or persons. 7.5) Shareholder Agreements. In the event of any conflict or inconsistency between these Bylaws, or any amendment thereto, and any shareholder control agreement, whenever adopted, such shareholder control agreement shall govern. -9- ARTICLE 8. MEETINGS 8.1) Waiver of Notice. Whenever any notice whatsoever is required to be given by these Bylaws, the Articles of Incorporation or any of the laws of the State of Minnesota, a waiver thereof given by the person or persons entitled to such notice, whether before, at or after the time stated therein and either in writing, orally or by attendance, shall be deemed equivalent to the actual required notice. 8.2) Telephone Meetings and Participation. A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference constitutes a Board meeting, if the same notice is given of the conference as would be required for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. Participation in a meeting by that means constitutes presence in person at the meeting. A director may participate in a Board meeting not heretofore described in this paragraph, by any means of communication through which the director, other directors so participating, and all directors physically present at the meeting may simultaneously hear each other during the meeting. Participation in a meeting by that means constitutes presence in person at the meeting. The provisions of this section shall apply to committees and members of committees to the same extent as they apply to the Board and directors. 8.3) Authorization Without Meeting. Any action of the shareholders, the Board of Directors, or any committee of the corporation which may be taken at a meeting thereof, may be taken without a meeting if authorized by a writing signed by all of the holders of shares who would be entitled to vote on such action, by all of the directors (unless less than unanimous action is permitted by the Articles of Incorporation), or by all of the members of such committee, as the case may be. ARTICLE 9. AMENDMENTS OF BYLAWS 9.1) Amendments. Unless the Articles of Incorporation provide otherwise, these Bylaws may be altered, amended, added to or repealed by the affirmative vote of a majority of the members of the Board of Directors. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws, and the Board of Directors shall not make or alter any By Laws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies on the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but the Board may adopt or amend a Bylaw to increase the number of directors. -10- The undersigned, Secretary of DERATA CORPORATION hereby certifies that the foregoing Restated Bylaws were duly adopted as the Bylaws of the corporation by a special meeting of Directors and its shareholders on October 1, 1984. /s/ Richard G. May ------------------------------ Richard G. May, Secretary Attest: /s/ Wilfred D. Pote - -------------------------------- Wilfred D. Pote, President and Chief Executive Officer -11- EX-4.2 4 WARRANT 1/25/96 TO BECTON DICKINSON & CO THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 OR RULE 144A UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THIS WARRANT CONTAINS RESTRICTIONS ON TRANSFERABILITY AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED HEREIN. MEDI-JECT CORPORATION 1840 Berkshire Lane Minneapolis, Minnesota 55441 WARRANT TO PURCHASE 2,500,000 SHARES OF SERIES E JUNIOR CONVERTIBLE PREFERRED STOCK THIS CERTIFIES THAT, for value received, BECTON DICKINSON AND COMPANY or permitted assigns (the "Holder") is entitled to subscribe for and purchase TWO MILLION FIVE HUNDRED THOUSAND (2,500,000) shares (the "Shares") of the fully paid and nonassessable Series E Preferred Stock (as hereinafter defined) of MEDI-JECT CORPORATION, a Minnesota corporation (the "Company") at the Warrant Price as determined in accordance with the terms hereof, which shall initially be equal to $4.50 per share, subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Series E Preferred Stock" shall mean the Company's presently authorized Series E Preferred Stock, $.01 par value, and any stock into or for which such Series E Preferred Stock may be hereafter converted or exchanged. 1. Term. The purchase right represented by this Warrant is exercisable, ---- in whole or in part, at any time and from time to time commencing on the date hereof and ending at the earlier of 5:00 p.m. Minnesota time (a) on the tenth (10th) calendar anniversary hereof, (b) the seventh (7th) calendar anniversary of the date the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed and declared effective by the Securities and Exchange Commission pursuant to the Act in which the gross proceeds received by the Company equal or exceed $10,000,000 and the per share purchase price to the public equals or exceeds $6.00 (as adjusted for Recapitalization Events, as defined in Paragraph 4) or (c) in the event the Development and License Agreement between the Company and Becton Dickinson and Company ("BD") dated as of January 1, 1996 (the "Development Agreement") is terminated by BD prior to the date BD provides an aggregate of $2,400,000 of funding to the Company thereunder, other than a termination by BD for material breach by the Company, the date of such termination and (d) upon the occurrence of the event set forth in Section 3.1(b) of the Development Agreement or (e) upon the termination of the Development Agreement pursuant to Section 12.5 thereof. 2. Method of Exercise; Payment; Issuance of New Warrant. Subject to ---------------------------------------------------- Paragraph 1 hereof, the purchase right represented by this Warrant may be exercised by the Holder, in whole or in part and from time to time, by either, at the election of the Holder, (a) the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the Holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. The person or person in whose name(s) any certificate(s) representing the Shares shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the Holder as soon as possible and in any event within fifteen days of receipt of such notice and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder as soon as possible and in any event within such fifteen- day period. Notwithstanding anything to the contrary contained herein, the minimum number of Shares as to which this Warrant may be exercised hereunder shall be the lower of (i) 100,000 Shares or (ii) the remaining number of Shares for which this Warrant may be exercised. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be --------------------------------------- issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable, and free from all preemptive rights, taxes, liens and charges with respect to the issue thereof; provided that the Company shall not be required to pay any withholding taxes with respect to the issue of shares or any transfer taxes with respect to the issue of shares in any name other than that of the registered holder hereof. During the period within which the rights represented by -2- this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series E Preferred Stock and the Common Stock of the Company, par value $.01 per share (the "Common Stock") into which it may be converted to provide for the exercise (and any subsequent conversion into Common Stock) of the rights represented by this Warrant. The Company shall at all times take all such action and obtain all such permits or orders as may be necessary to enable the Company lawfully to issue such shares of Series E Preferred Stock and the Common Stock into which it may be converted as duly and validly issued, fully paid and nonassessable shares upon exercise in full of this Warrant by Holder. 4. Adjustment of Warrant Price and Number of Shares. The number and kind ------------------------------------------------ of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events. 4.1 Definitions. For purposes of this Warrant, the following ----------- definitions shall apply: "Common Stock Equivalents" shall mean Convertible Securities and rights entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock without the payment of any consideration by such holder for such additional shares of Common Stock or Common Stock Equivalents. "Common Stock Outstanding" shall mean the aggregate of all Common Stock outstanding and all Common Stock issuable upon exercise of all outstanding Options and conversion of all outstanding Convertible Securities. "Convertible Securities" shall mean any indebtedness or shares of stock convertible into or exchangeable for Common Stock, including, without limitation, Series A, Series B, Series C, Series D and Series E Preferred Stock. "Conversion Date" shall mean the date the Series E Preferred Stock is automatically converted into Common Stock pursuant to the terms of the Certificate of Designations setting forth the rights and preferences of the Series E Preferred Stock. "Current Warrant Price" shall mean the Warrant Price immediately before the occurrence of any event, which, pursuant to this Warrant, causes an adjustment to the Warrant Price. "Issuance Date" shall mean the date hereof. -3- "Warrant Price" shall mean the price, determined pursuant to this Warrant, at which shares of Common Stock shall be deliverable upon exercise of this Warrant. "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Recapitalization Events" shall mean stock splits, stock dividends, recapitalizations, reclassifications and similar events. "Warrant Price" shall mean the price, determined pursuant to this Warrant, at which shares of Common Stock shall be deliverable upon exercise of this Warrant, which, as of the date hereof and at all times prior to the Conversion Date, shall be equal to $4.50 per share, as of the Conversion Date, shall be determined in accordance with Section 5 and thereafter shall be subject to adjustment as provided in Section 4. 4.2 Adjustments to Warrant Price. Subject to Paragraph 4.2.8, the ---------------------------- Warrant Price in effect from time to time shall be subject to adjustment in certain cases as follows: 4.2.1 Issuance of Securities. Subject to Paragraph 4.2.10, ---------------------- in case the Company shall at any time after the Issuance Date issue or sell any Common Stock without consideration, or for a consideration per share less than the lower of (a) $3.00 (as adjusted for Recapitalization Events), or (b) the Current Warrant Price, (such lower amount is referred to as the "Adjustment Price") then, and thereafter successively upon each such issuance or sale, the Current Warrant Price shall simultaneously with such issuance or sale be adjusted and shall be equal to (i) the Current Warrant Price, multiplied by (ii) a fraction, the numerator of which shall be an amount equal to the sum of (a) the number of shares of Common Stock Outstanding immediately prior to such issuance or sale multiplied by the Adjustment Price, and (b) the total consideration payable to the Company upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock Outstanding immediately after such issuance or sale by (bb) the Adjustment Price; provided, however, that the Warrant Price -------- ------- shall at no time exceed $4.50 (as adjusted for Recapitalization Events). For the purposes of this subparagraph 4.2.1, the following provisions shall also be applicable: 4.2.1.1 Cash Consideration. In case, following the Issuance ------------------ Date, of the issuance or sale of additional Common 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 -4- Company for subscription, the subscription price, or, if such shares are sold to underwriters or dealers for public offering without a subscription offering, the initial 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. 4.2.1.2 Non-Cash Consideration. In case, following the Issuance ---------------------- Date, of the issuance (otherwise than upon conversion or exchange of Convertible Securities) or sale of additional Common 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 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 Paragraph 4, of the consideration other than cash received by the Company for such securities. 4.2.1.3 Options and Convertible Securities. In case, following ---------------------------------- the Issuance Date, the Company shall in any manner issue or grant any Options or any Convertible Securities, the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (regardless of when 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 Warrant and to have been issued for the sum of the amount (if any) paid for such Options or Convertible Securities and the amount (if any) payable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities as of the date such securities are first issued regardless of when such securities first become convertible or exchangeable; provided that, subject to the provisions of Paragraph 4.2.2, no further adjustment of the Warrant Price shall be made upon the actual issuance of any such Common Stock or Convertible Securities or upon the conversion or exchange of any such Convertible Securities. 4.2.2 Change in Option Price or Conversion Rate. If the ----------------------------------------- purchase price provided for in any option referred to in subparagraph 4.2.1.3, or the rate at which any Convertible Securities referred to in subparagraph 4.2.1.3 are convertible into or exchangeable for shares of Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Current Warrant Price in effect at the time of such event shall forthwith be readjusted to the Warrant Price that would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any such Option referred to in subparagraph 4.2.1.3, or the additional consideration (if any) payable upon the conversion or exchange of any Convertible Securities -5- referred to in subparagraph 4.2.1.3, or the rate at which any Convertible Securities referred to in subparagraph 4.2.1.3 are convertible into or exchangeable for shares of Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of shares of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Current Warrant Price then in effect hereunder shall, upon issuance of such shares of Common Stock, be adjusted to such amount as would have obtained had such Option or Convertible Security never been issued and had adjustments been made only upon the issuance of the shares of Common Stock delivered as aforesaid and for the consideration actually received for such Option or Convertible Security and the Common Stock. 4.2.3 Termination of Option or Conversion Rights. In the event ------------------------------------------ of the termination or expiration of any right to purchase Common Stock under any Option or of any right to convert or exchange Convertible Securities, the Current Warrant Price shall, upon such termination, be changed to the Warrant 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 Common Stock issuable thereunder shall no longer be deemed to be Common Stock Outstanding. 4.2.4 Stock Splits, Dividends, Distributions and Combinations. ------------------------------------------------------- If the Company should at any time or from time to time after the Issuance Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Series E Preferred Stock or Common Stock or the determination of holders of Series E Preferred Stock or Common Stock entitled to receive a dividend or other distribution payable in additional shares of Series E Preferred Stock or Common Stock or Common Stock Equivalents, then, following such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Warrant price shall be appropriately decreased so that the number of shares of Series E Preferred Stock or Common Stock issuable on exercise of this Warrant shall be increased in proportion to such increase in the number of outstanding shares of Series E Preferred Stock or Common Stock (including for this purpose, Common Stock Equivalents) determined in accordance with Paragraph 4.2. If the number of shares of Series E Preferred Stock or Common Stock outstanding at any time after the Issuance Date is decreased by a combination of the outstanding shares of Series E Preferred Stock or Common Stock, then, following the record date of such combination, the Warrant Price shall be appropriately increased so that the number of shares of Series E Preferred Stock or Common Stock issuable on exercise of this Warrant shall be decreased in proportion to such decrease in the number of Series E Preferred Stock or outstanding shares of Common Stock. 4.2.5 Other Dividends. If the Company, following the Issuance --------------- Date, shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subparagraph 4.2.1.3, then, in each -6- such case for the purpose of this Paragraph 4.2.5, provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the Shares receivable thereupon, a proportionate share of any such distribution as though it were the holder of the number of shares of Series E Preferred Stock or Common Stock of the Company had this Warrant been exercised as of the record date fixed for the determination of the holders of Series E Preferred Stock or Common Stock of the Company entitled to receive such distribution. 4.2.6 Recapitalizations. If at any time or from time to time, ----------------- following the Issuance Date, there shall be a recapitalization of the Series E Preferred Stock or Common Stock (other than a subdivisions, combination or merger or a sale of assets transaction provided for elsewhere in this Paragraph 4) provision shall be made so that the Holders shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Series E Preferred Stock or Common Stock deliverable upon exercise of this Warrant would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Paragraph 4 with respect to the rights of the Holders after the recapitalization to the end that the provisions of this Paragraph 4 (including adjustment of the Warrant Price then in effect and the number of shares purchasable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable to their application prior to such event. 4.2.7 Successive Changes. The above provisions of this ------------------ Paragraph 4 shall similarly apply to successive issuances, changes, sales, dividends or other distributions, subdivisions and combinations on or of the Series E Preferred Stock or Common Stock after the Issuance Date. 4.2.8 Other Events Reducing Warrant Price. Upon the occurrence ----------------------------------- of any event not specifically denominated in this Paragraph 4 as altering the Warrant Price that, in the reasonable exercise of the business judgment of the Board of Directors, requires, on equitable principles, the reduction of the Warrant Price, the Warrant Price will be equitably reduced. 4.2.9 No Impairment. The Company will not take any action, by ------------- amendment of its Articles of Incorporation, including the filing of a certificate of designations, or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, the purpose of which, in whole or in part, is to avoid or seek to avoid the observance or performance of the intents and purposes any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the intents and purposes of the provisions of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. -7- 4.2.10 Excluded Events. Notwithstanding anything in this --------------- Paragraph 4 to the contrary, the Warrant Price shall not be adjusted by virtue of (a) the conversion of shares of Series A, B, C, D or E Preferred Stock into shares of Common Stock or the exercise of any option or warrant outstanding on the date hereof (none of which contain any antidilution provisions), (b) the repurchase of shares from the Company's employees, consultants, officers or directors at such person's cost (or at such other price as may be agreed to by the Company's board of directors), (c) the issuance and sale of, or the grant of options to purchase following the date hereof, an aggregate of not more than 115,700 shares of Common Stock, or such greater number of shares of Common Stock as shall be approved by a majority of the Board of Directors of the Company, including the member of the Board of Directors elected by the holders of the Company's Series C, D and E Preferred Stock pursuant to the terms of the Certificate of Designations setting forth the rights and preferences thereof, to employees, advisors, directors, officers or consultants of the Company and its subsidiaries at a price which is less than the Adjustment Price at the time of such issuance or sale (all as determined in accordance with this Paragraph 4) and none of such shares shall be included in any manner in the computation from time to time of the Warrant Price under subparagraph 4.2 or in the number of shares of Common Stock outstanding for purposes of such computation or (d) any issuance of any Common Stock, any declaration of any distribution or dividend, any recapitalization or any other event for which an appropriate adjustment in the Conversion Price of the Series E Preferred Stock shall have been made pursuant to the terms of the Certificate of Designations setting forth the rights and preferences of the Series E Preferred Stock. 4.2.11 Certificate as to Adjustments. In the case of each ----------------------------- adjustment or readjustment of the Warrant Price pursuant to this Paragraph 4, the Company will promptly compute such adjustment or readjustment in accordance with the terms hereof and cause a certificate setting forth such adjustment or readjustment, and showing in detail the facts upon which such adjustment or readjustment is based to be delivered to the holder of this Warrant. The Company will upon the written request at any time of the holder of this Warrant, furnish or cause to be furnished to such holder a certificate setting forth: (a) such adjustment and readjustment; (b) the Warrant Price at the time in effect; and (c) the number of Shares receivable upon the exercise of this Warrant. 5. Conversion into Company Stock. In the event that all of the shares of ----------------------------- the Company's outstanding Series E Preferred Stock are converted into shares of Common Stock pursuant to the Company's Articles of Incorporation prior to the exercise (in whole or in part) of this Warrant, this Warrant shall automatically become exercisable for a number of shares of Common Stock that the Holder would -8- have received had this Warrant, to the extent not previously exercised in part prior to such date, been exercised for Series E Preferred Stock immediately prior to the first date of the Series E Preferred Stock was so converted. In the event that this Warrant shall become exercisable for Common Stock, all references in this Warrant to Series E Preferred Stock shall thereafter be deemed to mean and include Common Stock. Upon the automatic conversion of the Series E Preferred Stock, the Warrant Price shall be recalculated and shall be equal to (i) $4.50 times the number of shares of Series E Preferred Stock purchasable immediately prior to the conversion, divided by (ii) the number of shares of Common Stock that such shares of Series E Preferred Stock would be converted into upon the conversion thereof as of such date. 6. Fractional Shares. No fractional shares of Series E Preferred Stock ----------------- will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the current market price of such Shares then in effect as determined in good faith by the Company's Board of Directors. 7. No Privilege of Stock Ownership. Prior the to exercise of this ------------------------------- Warrant, the Holder shall not be entitled, by virtue of holding this Warrant, to any rights of a stockholder of the Company, including (without limitation) the right to vote, receive dividends or other distributions, or exercise preemptive rights, and the Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. Nothing in this Paragraph 7, however, shall limit the right of the Holder to be provided the notices described in this Warrant, hereof, or to participate in distributions described in Paragraph 4 hereof if the Holder ultimately exercises this Warrant. Notwithstanding the foregoing, the Company will transmit to the Holder such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders. 8. Limitation of Liability. Except as otherwise provided herein, in the ----------------------- absence of affirmative action by the Holder hereof to purchase the Shares, no mere enumeration herein of the rights or privileges of the Holder hereof shall give rise to any liability of Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9. Transfer of Warrant. ------------------- 9.1 The Company will maintain a register (the "Warrant Register") containing the name and address of the Holder. Holder may change its address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the -9- Holder as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. 9.2 This Warrant shall be non-assignable and otherwise non- transferable except as specifically permitted and in accordance with the terms hereof. Subject to the provisions of this Warrant, specifically including paragraph 10, and compliance with the Act, title to this Warrant may be transferred in whole or in part by endorsement (by the Holder executing the Transfer Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery at any time after the termination or expiration of the Development Agreement (as defined in paragraph 1), provided that this Warrant shall not be transferable other than to (a) an -------- ---- Affiliate (as defined in Rule 12b of the Securities Exchange Act of 1934, as amended) of the Holder, or to a successor or assignee of substantially all of the Holder's assets or (b) any transferee who, together with such transferees' affiliates, (i) does not acquire from the Holder the right to buy in excess of 500,000 shares pursuant to this Warrant or the Option issued on the date hereof and (ii) acquires not less than the lesser of (A) the right to purchase 100,000 shares of Series E Preferred Stock or Common Stock or (B) the remaining number of shares subject to the Warrant. This Warrant may not be transferred or assigned without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). 9.3 On surrender of this Warrant for exchange, properly endorsed on the Transfer Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers and contained in this Paragraph 9 and Paragraph 10, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the transferee or as the transferee (on payment by the transferee of any applicable transfer taxes) may direct, or the number of shares issuable upon exercise hereof. 9.4 The Holder, by acceptance hereof, acknowledges that this Warrant and the Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of the Act or exercise hereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of this Warrant, the Holder shall, if reasonably requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Shares so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. -10- 10. Right of First Offer. Prior to making any transfer of all or any -------------------- portion of the Warrant, the Holder will first offer to transfer the Warrant or such portion thereof to the Company by sending notice to the Company of its intent to transfer the Warrant or a portion thereof. The Company shall then have the assignable option, within 30 days following the receipt of such notice, to offer to purchase all or any portion of the Warrant subject to transfer referred to in such notice, specifying the purchase price to be paid therefore and the other material terms of such purchase (the "Offer"). The Holder shall have a period of 30 days from its receipt of an Offer to determine whether to accept such Offer. In the event the Holder determines to accept the Offer, the closing of the sale of the Warrant (or such portion thereof referred to in the Offer) shall occur within 45 days of the date the Holder notifies the Company of its intent to accept the Offer. In the event the Holder does not accept the Offer, subject to the terms of Section 9.2, the Holder shall have the right to transfer the Warrant, or the portion thereof referred to in the notice, on any terms more favorable than the terms of the Offer, to any person or entity who enters into a binding agreement with the Holder for such purchase, or who so purchases the Warrant, or such portion thereof, within 150 days from the date that either the Holder received the Offer or the expiration of the time in which the Company had the right to make an Offer. 11. Registration Rights. The holder the Warrant Shares is entitled to ------------------- the registration and other rights set forth in that certain Preferred Stock, Option and Warrant Purchase Agreement (subject to the conditions and limitations set forth therein) dated January 25, 1996 by and among the Company and Becton Dickinson and Company, as may be amended from time to time. 12. Notices. Any notice, request or other document required or permitted ------- to be given or delivered to the Holder or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 13. Binding Effect on Successors. This Warrant shall be binding upon any ---------------------------- corporation succeeding the Company by merger or consolidation and all of the obligations of the Company relating to the Series E Preferred Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Holder. The Company will, at the same time of the exercise or conversion of this Warrant, in whole or in part, upon request of the Holder but at the Company's expense, acknowledge in writing its continuing obligation to the Holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Common Stock) to which the Holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the Holder to make any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. 14. Lost Warrants or Stock Certificates. The Company covenants to the ----------------------------------- Holder that upon receipt of evidence reasonably satisfactory to the Company of loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably -11- satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company 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. 15. Descriptive Headings. The descriptive headings of the several -------------------- paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 16. Governing Law. This Warrant shall be construed and enforced in ------------- accordance with, and the rights of the parties shall be governed by, the laws of the State of Minnesota. 17. Amendments and Waivers. Any term of this Warrant may be amended, and ---------------------- the observance of any term of this Warrant may be waived (either generally or in a particular instance, and either retroactively or prospectively), with the written consent of the Company and the Holder. Any such amendment or waiver shall be binding on the Company and the Holder and any subsequent transferee of this Warrant. MEDI-JECT CORPORATION By /s/ Franklin Pass ------------------------------- Title: President and CEO --------------------------- Address: 1840 Berkshire Lane Minneapolis, Minnesota 55441 Dated: January 25, 1996 -12- NOTICE OF EXERCISE ------------------ Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, Minnesota 55441 Gentlemen: (the "Investor") hereby elects to ---------------------------- purchase, pursuant to the provisions of the Warrant dated January 25, 1996, shares of the [Series E Preferred] [Common] Stock of Medi-Ject - ----- Corporation, a Minnesota corporation. In exercising the Warrant, the undersigned hereby confirms and acknowledges that the shares of Stock to be issued upon exercise hereof are being -------- acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Stock except under ----------- circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Please issue a certificate or certificates representing said shares of Stock in the name of the undersigned. - ---------- Dated: , 19 --------------- -- --------------------------------- By: ----------------------------- Name: -------------------------- Title: -------------------------- Address: ------------------------ --------------------------------- -13- EXHIBIT A-1 ----------- NOTICE OF EXERCISE ------------------ To: MEDI-JECT CORPORATION (the "Company") 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S- , filed , 19 , the undersigned hereby -- -------------- -- elects to purchase shares of Common Stock ( shares of Series E --- ----- Preferred Stock, as converted) of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such shares. ---- 3. The undersigned has instructed the custodian for the selling shareholder to deliver to the Company $ or, if less, the net proceeds due the --- undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. --------------------------------- (Signature) - --------------------- (Date) -14- TRANSFER FORM ------------- FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Transferee named below all of the rights of the undersigned under the within Warrant, and does hereby irrevocably constitute and appoint to make such transfer on the books of ----------- Medi-Ject Corporation, maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Transferee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Transferee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further the Transferee has acknowledged that upon exercise of this Warrant, the Transferee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or sale. Dated: ----------------- ---------------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- Address: ------------------------- ---------------------------------- ---------------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- Address: ------------------------- ---------------------------------- -15- EX-4.3 5 STOCK OPTION 1/25/96 TO BECTON DICKINSON & CO THIS OPTION AND THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 OR RULE 144A UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THIS OPTION CONTAINS RESTRICTIONS ON TRANSFERABILITY AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PROVIDED HEREIN. MEDI-JECT CORPORATION 1840 Berkshire Lane Minneapolis, Minnesota 55441 OPTION TO PURCHASE 500,000 SHARES OF SERIES D JUNIOR CONVERTIBLE PREFERRED STOCK THIS CERTIFIES THAT, for value received, BECTON DICKINSON AND COMPANY ("BD") or permitted assigns (the "Holder") is entitled to subscribe for and purchase FIVE HUNDRED THOUSAND (500,000) shares (the "Shares") of the fully paid and nonassessable Series D Preferred Stock (as hereinafter defined) of MEDI-JECT CORPORATION, a Minnesota corporation (the "Company") at the Option Price as determined in accordance with the terms hereof, which shall initially be equal to $3.50 per share, subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Series D Preferred Stock" shall mean the Company's presently authorized Series D Junior Convertible Preferred Stock, $.01 par value, and any stock into or for which such Series D Preferred Stock may be hereafter converted or exchanged. 1. Term. The purchase right represented by this Option is exercisable, ---- in whole or in part, at any time and from time to time commencing on the date hereof and ending at the earliest of 5:00 p.m. Minnesota time (a) on the tenth (10th) calendar anniversary hereof, (b) the first (1st) calendar anniversary of the date the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed and declared effective by the Securities and Exchange Commission (the "Commission") pursuant to the Act in which the gross proceeds to the Company equal or exceed $10,000,000 and the per share purchase price to the public equals or exceeds $5.00 (as adjusted for Recapitalization Events, as defined in Paragraph 4), (c) the date the Company completes an offering of its shares of capital stock to the public pursuant to a registration statement filed and declared effective by the Commission pursuant to the Act in which the gross proceeds received by the Company equal or exceed $10,000,000 and the per share purchase price to the public equals or exceeds $6.00 (as adjusted for Recapitalization Events), (d) in the event the Development and License Agreement between the Company and BD dated as of January 1, 1996 (the "Development Agreement") is terminated by BD prior to the date BD provides an aggregate of $2,400,000 of funding to the Company thereunder, other than a termination by BD for material breach by the Company, the date of such termination, (e) upon the occurrence of the event set forth in Section 3.1(b) of the Development Agreement or (f) upon the termination of the Development Agreement pursuant to Section 12.5 thereof. 2. Method of Exercise; Payment; Issuance of New Option. Subject to --------------------------------------------------- Paragraph 1 hereof, the purchase right represented by this Option may be exercised by the Holder, in whole or in part and from time to time, by either, at the election of the Holder, (a) the surrender of this Option (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Option Price per share multiplied by the number of Shares then being purchased, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Option (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the Holder in such public offering of an amount equal to the then applicable Option Price per share multiplied by the number of Shares then being purchased. The person or person in whose name(s) any certificate(s) representing the Shares shall be issuable upon exercise of this Option shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Option is exercised. In the event of any exercise of the rights represented by this Option, certificates for the shares of stock so purchased shall be delivered to the Holder as soon as possible and in any event within fifteen days of receipt of such notice and, unless this Option has been fully exercised or expired, a new Option representing the portion of the Shares, if any, with respect to which this Option shall not then have been exercised shall also be issued to the Holder as soon as possible and in any event within such fifteen- day period. Notwithstanding anything to the contrary contained herein, the minimum number of Shares as to which this Option may be exercised hereunder shall be the lower of (i) 100,000 -2- Shares or (ii) the remaining number of Shares for which this Option may be exercised. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be --------------------------------------- issued upon the exercise of the rights represented by this Option will, upon issuance, be fully paid and nonassessable, and free from all preemptive rights, taxes, liens and charges with respect to the issue thereof; provided that the Company shall not be required to pay any withholding taxes with respect to the issue of shares or any transfer taxes with respect to the issue of shares in any name other than that of the registered holder hereof. During the period within which the rights represented by this Option may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Option, a sufficient number of shares of its Series D Preferred Stock and the Common Stock of the Company, par value $.01 per share (the "Common Stock"), into which it may be converted to provide for the exercise (and any subsequent conversion into Common Stock) of the rights represented by this Option. The Company shall at all times take all such action and obtain all such permits or orders as may be necessary to enable the Company lawfully to issue such shares of Series D Preferred Stock and the Common Stock into which it may be converted as duly and validly issued, fully paid and nonassessable shares upon exercise in full of this Option by Holder. 4. Adjustment of Option Price and Number of Shares. The number and kind ----------------------------------------------- of securities purchasable upon the exercise of this Option and the Option Price shall be subject to adjustment from time to time upon the occurrence of certain events. 4.1 Definitions. For purposes of this Option, the following ----------- definitions shall apply: "Common Stock Equivalents" shall mean Convertible Securities and rights entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock without the payment of any consideration by such holder for such additional shares of Common Stock or Common Stock Equivalents. "Common Stock Outstanding" shall mean the aggregate of all Common Stock outstanding and all Common Stock issuable upon exercise of all outstanding Options and conversion of all outstanding Convertible Securities. "Convertible Securities" shall mean any indebtedness or shares of stock convertible into or exchangeable for Common Stock, including, without limitation, Series A, Series B, Series C, Series D and Series E Preferred Stock. -3- "Conversion Date" shall mean the date the Series D Preferred Stock is automatically converted into Common Stock pursuant to the terms of the Certificate of Designations setting forth the rights and preferences of the Series D Preferred Stock. "Current Option Price" shall mean the Option Price immediately before the occurrence of any event, which, pursuant to this Option, causes an adjustment to the Option Price. "Issuance Date" shall mean the date hereof. "Option Price" shall mean the price, determined pursuant to this Option, at which shares of Common Stock shall be deliverable upon exercise of this Option. "Options" shall mean any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Recapitalization Events" shall mean stock splits, stock dividends, recapitalizations, reclassifications and similar events. 4.2 Adjustments to Option Price. Subject to Paragraph 4.2.8, the --------------------------- Option Price in effect from time to time shall be subject to adjustment in certain cases as follows: 4.2.1 Issuance of Securities. Subject to Paragraph 4.2.10, in case the Company shall at any time after the Issuance Date issue or sell any Common Stock without consideration, or for a consideration per share less than the lower of (a) $3.00 (as adjusted for Recapitalization Events), or (b) the Current Option Price (such lower amount is referred to as the "Adjustment Price"), then, and thereafter successively upon each such issuance or sale, the Current Option Price shall simultaneo usly with such issuance or sale be adjusted and shall be equal to (i) the Current Option Price, multiplied by (ii) a fraction, the numerator of which shall be an amount equal to the sum of (a) the number of shares of Common Stock Outstanding immediately prior to such issuance or sale multiplied by the Adjustment Price, and (b) the total consideration payable to the Company upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock Outstanding immediately after such issuance by (bb) the Adjustment Price; provided, however, that the Option Price shall at no -------- ------- time exceed $3.50 (as adjusted for Recapitalization Events). -4- For the purposes of this subparagraph 4.2.1, the following provisions shall also be applicable: 4.2.1.1 Cash Consideration. In case, following the Issuance Date, of ------------------ the issuance or sale of additional Common 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 initial 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. 4.2.1.2 Non-Cash Consideration. In case, following the Issuance ---------------------- Date, of the issuance (otherwise then upon conversion or exchange of Convertible Securities) or sale of additional Common 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 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 Paragraph 4, of the consideration other than cash received by the Company for such securities. 4.2.1.3 Options and Convertible Securities. In case, following the ---------------------------------- Issuance Date, the Company shall in any manner issue or grant any Options or any Convertible Securities, the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (regardless of when 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 Option and to have been issued for the sum of the amount (if any) paid for such Options or Convertible Securities and the amount (if any) payable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities as of the date such securities are first issued regardless of when such securities first become convertible or exchangeable; provided that, subject to the provisions of Paragraph 4.2.2, no further adjustment of the Option Price shall be made upon the actual issuance of any such Common Stock or Convertible Securities or upon the conversion or exchange of any such Convertible Securities. -5- 4.2.2 Change in Option Price or Conversion Rate. If the purchase ----------------------------------------- price provided for in any option referred to in subparagraph 4.2.1.3, or the rate at which any Convertible Securities referred to in subparagraph 4.2.1.3 are convertible into or exchangeable for shares of Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Current Option Price in effect at the time of such event shall forthwith be readjusted to the Option Price that would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any such Option referred to in subparagraph 4.2.1.3, or the additional consideration (if any) payable upon the conversion or exchange of any Convertible Securities referred to in subparagraph 4.2.1.3, or the rate at which any Convertible Securities referred to in subparagraph 4.2.1.3 are convertible into or exchangeable for shares of Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of shares of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Current Option Price then in effect hereunder shall, upon issuance of such shares of Common Stock, be adjusted to such amount as would have obtained had such Option or Convertible Security never been issued and had adjustments been made only upon the issuance of the shares of Common Stock delivered as aforesaid and for the consideration actually received for such Option or Convertible Security and the Common Stock. 4.2.3 Termination of Option or Conversion Rights. In the event of ------------------------------------------ the termination or expiration of any right to purchase Common Stock under any Option or of any right to convert or exchange Convertible Securities, the Current Option Price shall, upon such termination, be changed to the Option 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 Common Stock issuable thereunder shall no longer be deemed to be Common Stock Outstanding. 4.2.4 Stock Splits, Dividends, Distributions and Combinations. If ------------------------------------------------------- the Company should at any time or from time to time after the Issuance Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Series D Preferred Stock or Common Stock or the determination of holders of Series D Preferred Stock or Common Stock entitled to receive a dividend or other distribution payable in additional shares of Series D Preferred Stock or Common Stock or Common Stock Equivalents, then, following such record date (or the date of such dividend, Distribution, split or subdivision if no record date is fixed), the Option Price shall be appropriately decreased so that the number of shares of Series D Preferred Stock or Common Stock issuable on exercise of this Option shall be increased in proportion to such increase in the number of outstanding shares of -6- Series D Preferred Stock or Common Stock (including for this purpose, Common Stock Equivalents) determined in accordance with Paragraph 4.2. If the number of shares of Series D Preferred Stock or Common Stock outstanding at any time after the Issuance Date is decreased by a combination of the outstanding shares of Series D Preferred Stock or Common Stock, then, following the record date of such combination, the Option Price shall be appropriately increased so that the number of shares of Series D Preferred Stock or Common Stock issuable on exercise of this Option shall be decreased in proportion to such decrease in the number of outstanding shares of Series D Preferred Stock or Common Stock. 4.2.5 Other Dividends. If the Company, following the Issuance Date, --------------- shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subparagraph 4.2.1.3, then, in each such case for the purpose of this Paragraph 4.2.5, provision shall be made so that the Holder shall receive upon exercise of this Option, in addition to the Shares receivable thereupon, a proportionate share of any such distribution as though it were the holder of the number of shares of Series D Preferred Stock or Common Stock of the Company had this Option been exercised as of the record date fixed for the determination of the holders of Series D Preferred Stock or Common Stock of the Company entitled to receive such distribution. 4.2.6 Recapitalizations. If at any time or from time to time, ----------------- following the Issuance Date, there shall be a recapitalization of the Series D Preferred Stock or Common Stock (other than a subdivision, combination or merger or a sale of assets transaction provided for elsewhere in this Paragraph 4) provision shall be made so that the Holders shall thereafter be entitled to receive upon exercise of this Option the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Series D Preferred Stock or Common Stock deliverable upon exercise of this Option would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Paragraph 4 with respect to the rights of the Holders after the recapitalization to the end that the provisions of this Paragraph 4 (including adjustment of the Option Price then in effect and the number of shares purchasable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable to their application prior to such event. 4.2.7 Successive Changes. The above provisions of this Paragraph 4 ------------------ shall similarly apply to successive issuances, changes, sales, dividends or other distributions, subdivisions and combinations on or of the Series D Preferred Stock or Common Stock after the Issuance Date. 4.2.8. Other Events Reducing Option Price. Upon the occurrence of ---------------------------------- any event not specifically denominated in this Paragraph 4 as altering the Option -7- Price that, in the reasonable exercise of the business judgment of the Board of Directors, requires on equitable principles, the reduction of the Option Price, the Option Price will be equitably reduced. 4.2.9. No Impairment. The Company will not take any action, by --------------------- amendment of its Articles of Incorporation, including the filing of a certificate of designations, or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, the purpose of which, in whole or in part, is to avoid or seek to avoid the observance or performance of the intents and purposes any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the intents and purposes of the provisions of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. 4.2.10 Excluded Events. Notwithstanding anything in this Paragraph 4 --------------- to the contrary, the Option Price shall not be adjusted by virtue of (a) the conversion of shares of Series A, B, C, D or E Preferred Stock into shares of Common Stock or the exercise of any option or warrant outstanding on the date hereof (none of which contain any antidilution provisions), (b) the repurchase of shares from the Company's employees, consultants, officers or directors at such person's cost (or at such other price as may be agreed to by the Company's board of directors), (c) the issuance and sale of, or the grant of options to purchase following the date hereof, an aggregate of not more than 115,700 shares of Common Stock, or such greater number of shares of Common Stock as shall be approved by a majority of the Board of Directors of the Company, including the member of the Board of Directors elected by the holders of the Company's Series C, D and E Preferred Stock pursuant to the terms of the Certificate of Designations setting forth the rights and preferences thereof, to employees, advisors, directors, officers or consultants of the Company and its subsidiaries at a price which is less than the Adjustment Price at the time of such issuance or sale (all as determined in accordance with this Paragraph 4), and none of such shares shall be included in any manner in the computation from time to time of the Option Price under subparagraph 4.2 or in the number of shares of Common Stock outstanding for purposes of such computation or (d) any issuance of any Common Stock, any declaration or payment of any distribution or dividend, any recapitalization or any other event for which an appropriate adjustment in the Conversion Price of the Series D Preferred Stock shall have been made pursuant to the terms of the Certificate of Designations setting forth the rights and preferences of the Series D Preferred Stock. 4.2.11 Certificate as to Adjustments. In the case of each adjustment ----------------------------- or readjustment of the Option Price pursuant to this Paragraph 4, the Company will promptly compute such adjustment or readjustment in accordance with the terms hereof and cause a certificate setting forth such adjustment or -8- readjustment, and showing in detail the facts upon which such adjustment or readjustment is based to be delivered to the holder of this Option. The Company will, upon the written request at any time of the holder of this Option, furnish or cause to be furnished to such holder a certificate setting forth: (a) such adjustments and readjustments; (b) the Option Price at the time in effect; and (c) the number of Shares receivable upon the exercise of this Option. 5. Conversion into Common Stock. In the event that all of the ---------------------------- shares of the Company's outstanding Series D Preferred Stock are converted into shares of Common Stock pursuant to the Company's Articles of Incorporation prior to the exercise (in whole or in part) of this Option, this Option shall automatically become exercisable for a number of shares of Common Stock that the Holder would have received had this Option, to the extent not previously exercised in part prior to such date, been exercised for Series D Preferred Stock immediately prior to the first date the Series D Preferred Stock was so converted. In the event that this Option shall become exercisable for Common Stock, all references in this Option to Series D Preferred Stock shall thereafter be deemed to mean and include Common Stock. Upon the automatic conversion of the Series D Preferred Stock, the Option Price shall be recalculated and shall be equal to (i) $3.50 times the number of shares of Series D Preferred Stock purchasable immediately prior to the conversion, divided by (ii) the number of shares of Common Stock that such shares of Series D Preferred Stock would be converted into upon the conversion thereof as of such date. 6. Fractional Shares. No fractional shares of Series D Preferred ----------------- Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the current market price of such Shares then in effect as determined in good faith by the Company's Board of Directors. 7. No Privilege of Stock Ownership. Prior to the exercise of this ------------------------------- Option, the Holder shall not be entitled, by virtue of holding this Option, to any rights of a stockholder of the Company, including (without limitation) the right to vote, receive dividends or other distributions, or exercise preemptive rights, and the Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. Nothing in this Paragraph 7, however, shall limit the right of the Holder to be provided the notices described in this Option, hereof, or to participate in distributions described in Paragraph 4 hereof if the Holder ultimately exercises this Option. Notwithstanding the foregoing, the Company will transmit to the Holder such information, documents and reports as are generally -9- distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders. 8. Limitation of Liability. Except as otherwise provided herein, in ----------------------- the absence of affirmative action by the Holder hereof to purchase the Shares, no mere enumeration herein of the rights or privileges of the Holder hereof shall give rise to any liability of Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9. Transfer of Option. ------------------ 9.1 The Company will maintain a register (the "Option Register") containing the name and address of the Holder. Holder may change its address as shown on the Option Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to Holder as shown on the Option Register and at the address shown on the Option Register. Until this Option is transferred on the Option Register of the Company, the Company may treat the Holder as the absolute owner of this Option for all purposes, notwithstanding any notice to the contrary. 9.2 This Option shall be non-assignable and otherwise non- transferable except as specifically permitted and in accordance with the terms hereof. Subject to the provisions of this Option, specifically including paragraph 10, and compliance with the Act, title to this Option may be transferred in whole or in part by endorsement (by the Holder executing the Transfer Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery at any time after the termination or expiration of the Development Agreement (as defined in paragraph 1), provided that this Option shall not be transferable other than to (a) an -------- ---- Affiliate (as defined in Rule 12b of the Securities Exchange Act of 1934, as amended) of the Holder, or to a successor or assignee of substantially all of the Holder's assets or (b) any transferee who, together with such transferees' affiliates, (i) does not acquire from the Holder the right to buy in excess of 500,000 shares pursuant to this Option or the Warrant issued on the date hereof and (ii) acquires not less than the lesser of (A) the right to purchase 100,000 shares of Series D Preferred Stock or Common Stock or (B) the remaining number of shares subject to the Option. This Option may not be transferred or assigned without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). -10- 9.3 On surrender of this Option for exchange, properly endorsed on the Transfer Form and subject to the provisions of this Option with respect to compliance with the Act and with the limitations on assignments and transfers and contained in this Paragraph 9 and Paragraph 10, the Company at its expense shall issue to or on the order of the Holder a new option or options of like tenor, in the name of the transferee or as the transferee (on payment by the transferee of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. 9.4 The Holder, by acceptance hereof, acknowledges that this Option and the Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Option or any Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of this Option, the Holder shall, if reasonably requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Shares so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. 10. Right of First Offer. Prior to making any transfer of all or any -------------------- portion of the Option, the Holder will first offer to transfer the Option or such portion thereof to the Company by sending notice to the Company of its intent to transfer the Option or a portion thereof. The Company shall then have the assignable option, within 30 days following the receipt of such notice, to offer to purchase all or any portion of the Option subject to transfer referred to in such notice, specifying the purchase price to be paid therefore and the other material terms of such purchase (the "Offer"). The Holder shall have a period of 30 days from its receipt of an Offer to determine whether to accept such Offer. In the event the Holder determines to accept the Offer, the closing of the sale of the Option (or such portion thereof referred to in the Offer) shall occur within 45 days of the date the Holder notifies the Company of its intent to accept the Offer. In the event the Holder does not accept the Offer, subject to the terms of Section 9.2, the Holder shall have the right to transfer the Option, or the portion thereof referred to in the notice, on any terms more favorable than the terms of the Offer, to any person or entity who enters into a binding agreement with the Holder for such purchase, or who so purchases the Option, or such portion thereof, within 150 days from the date that either the Holder received the Offer or the expiration of the time in which the Company had the right to make an Offer. 11. Registration Rights. The holder of the Option Shares is entitled ------------------- to the registration and other rights set forth in that certain Preferred Stock, Option and Warrant Purchase Agreement (subject to the conditions and limitations set -11- forth therein) dated January 25, 1996 by and among the Company and Becton Dickinson and Company, as may be amended from time to time. 12. Notices. Any notice, request or other document required or ------- permitted to be given or delivered to the Holder or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Option. 13. Binding Effect on Successors. This Option shall be binding upon ---------------------------- any corporation succeeding the Company by merger or consolidation, and all of the obligations of the Company relating to the Series D Preferred Stock issuable upon the exercise or conversion of this Option shall survive the exercise, conversion and termination of this Option and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the Holder. The Company will, at the time of the exercise or conversion of this Option, in whole or in part, upon request of the Holder but at the Company's expense, acknowledge in writing its continuing obligation to the Holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Common Stock) to which the Holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Option; provided, that the failure of the Holder to make any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. 14. Lost Options or Stock Certificates. The Company covenants to the ---------------------------------- Holder that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Option or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Option or stock certificate, the Company will make and deliver a new Option or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Option or stock certificate. 15. Descriptive Headings. The description headings of the several -------------------- paragraphs of this Option are inserted for convenience only and do not constitute a part of this Option. 16. Governing Law. This Option shall be construed and enforced in ------------- accordance with, and the rights of the parties shall be governed by, the laws of the State of Minnesota. 17. Amendments and Waivers. Any term of this Option may be amended, ---------------------- and the observance of any term of this Option may be waived (either generally or in a particular instance, and either retroactively or prospectively), with -12- the written consent of the Company and the Holder. Any such amendment or waiver shall be binding on the Company and the Holder and any subsequent transferee of this Option. MEDI-JECT CORPORATION By: /s/ Franklin Pass -------------------------- Title: President and CEO -------------------------- Address: 1840 Berkshire Lane Minneapolis, Minnesota 55441 Dated: January 25, 1996 -13- NOTICE OF EXERCISE ------------------ Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, Minnesota 55441 Gentlemen: ___________________________________ (the "Investor") hereby elects to purchase, pursuant to the provisions of the Option dated January 25, 1996, __________ shares of the [Series D Preferred] [Common] Stock of Medi-Ject Corporation, a Minnesota corporation. In exercising the Option, the undersigned hereby confirms and acknowledges that the shares of __________ Stock to be issued upon exercise hereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of __________ Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Please issue a certificate of certificates representing said shares of _______ Stock in the name of the undersigned. Dated: __________, 19___ ---------------------------------- By: ______________________________ Name: ____________________________ Address: _________________________ __________________________________ -14- EXHIBIT A-1 ----------- NOTICE OF EXERCISE ------------------ To: MEDI-JECT CORPORATION (the "Company") 1. Contingent upon and effect immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S-______________, filed ___________________________________, 19________, the undersigned hereby elects to purchase _______________ shares of Common Stock (__________ shares of Series D Preferred Stock, as converted) of the Company or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Option. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ____________ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $______________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. --------------------------- (Signature) ------------------------------ (Date) -15- TRANSFER FORM ------------- FOR VALUE RECEIVED, the undersigned registered owner of this Option hereby sells, assigns and transfers unto the Transferee named below all of the rights of the undersigned under the within Option, and does hereby irrevocably constitute and appoint _________________________________ to make such transfer on the books of Medi-Ject Corporation, maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Transferee acknowledges that this Option and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Transferee will not offer, sell or otherwise dispose of this Option or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Transferee has acknowledged that upon exercise of this Option, the Transferee shall, if requested by the Company, confirm in writing, a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: ____________________ --------------------------------------- By: ___________________________________ Name: _________________________________ Title: ________________________________ Address: ______________________________ _______________________________________ _______________________________________ By: ___________________________________ Name: _________________________________ Title: ________________________________ Address: ______________________________ _______________________________________ -16- EX-4.4 6 WARRANT 3/24/95 TO ROBERT FULLERTON MEDI-JECT CORPORATION COMMON STOCK PURCHASE WARRANT Medi-Ject Corporation, a Minnesota corporation (the "Company"), hereby agrees that, for value received, Robert Fullerton, Minneapolis, Minnesota, or his assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after March 23, 1996, and before 5:00 p.m., Minneapolis, Minnesota time, on March 24, 2000, Two Thousand (2,000) shares of the Common Stock of the Company (the "Common Stock"), at an exercise price of $2.50 per share, subject to adjustment as provided herein. 1. Exercise of Warrant. The purchase rights granted by this Warrant shall ------------------- be exercised (in minimum quantities of 1,000 shares, or such smaller number of shares as are exercisable under the Warrant) by the holder surrendering this Warrant with the form of exercise attached hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by cashier's check payable to the order of the Company, of the purchase price payable in respect of the Common Stock being purchased. If less than all of the Common Stock purchasable hereunder is purchased, the Company will, upon such exercise, execute and deliver to the holder hereof a new Warrant (dated the date hereof) evidencing the number of shares of Common Stock not so purchased. As soon as practicable after the exercise of this Warrant and payment of the purchase price, the Company will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates representing the shares purchased upon such exercise. The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows: "No sale, offer to sell or transfer of the shares represented by this certificate shall be made unless a Registration Statement under the Federal Securities Act of 1933, as amended (the "Act"), with respect to such shares is then in effect or an exemption from the registration requirements of the Act is then in fact applicable to such shares." 2. Negotiability and Transfer. This Warrant is issued upon the following -------------------------- terms, to which each holder hereof consents and agrees: (a) Except where directed by a court of competent jurisdiction pursuant to the dissolution or liquidation of a corporate holder hereof, for one (1) year from March 24, 1995, title to this Warrant may be transferred only to Delphi Financial Corp. (the "Agent"), or to a person who is both an officer and shareholder, or both an officer and employee, or a registered representative, of the Agent, or to a successor (or both an officer and shareholder, or both an officer and employee, or both an employee and registered representative of the successor) in interest to the business of the Agent, by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) Until this Warrant is duly transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. (c) Each successive holder of this Warrant, or of any portion of the rights represented thereby, shall be bound by the terms and conditions set forth herein. 3. Antidilution Adjustments. If the Company shall at any time hereafter ------------------------ subdivide or combine its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of this Warrant, immediately preceding such event, shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock. No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Common Stock on the day of exercise as determined in good faith by the Company. In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation, which is effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation, merger or sale, the holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price, and (a) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and (b) cause a copy of such statement to be mailed to the holder of the Warrant as of a date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. Registration Rights. Prior to making any disposition of the Warrant ------------------- or of any Common Stock purchased upon exercise of the Warrant, the holder will give written notice to the Company describing briefly the manner of any such proposed disposition. The holder will not make any such disposition until (i) if requested, the Company has been provided an opinion by counsel for the holder that registration under the Act is not required with respect to such disposition, or (ii) a Registration Statement covering the proposed distribution has been filed and has become effective. The holder then will make any disposition only pursuant to the conditions of such opinion or registration. The Company agrees that, upon receipt of written notice from the holder hereof with respect to such proposed distribution, it will cooperate in providing the holder with information necessary to make such determination. If, at any time prior to the expiration of seven (7) years from March 24, 1995, the Company shall propose to file any Registration Statement (other than any registration on Forms S-4, S-8 or any other similarly inappropriate form or Registration Statement with respect to an initial public offering in which there are no selling shareholders) under the Securities Act of 1933, as amended, covering a public offering of the Company's Common Stock, it will notify the holder hereof at least forty-five (45) days prior to each such filing and will include in the Registration Statement (to the extent permitted by applicable regulation) the Common Stock purchased by the holder or purchasable by the holder upon the exercise of the Warrant to the extent requested by the holder hereof, in writing, within twenty (20) days of the holder's receipt of such notice from the Company. Notwithstanding the foregoing, the number of shares of the holders of the Warrants proposed to be registered thereby shall be reduced pro rata with any other selling shareholder (other than the Company) upon the request of the managing underwriter of such offering. If the Registration Statement or Offering Statement filed pursuant to such forty-five (45) day notice has not become effective within six months following the date such notice is given to the holder hereof, the Company must again notify such holder in the manner provided above. All expenses of any such registrations referred to in this Section 4, except the fees of counsel to such holders and underwriting commissions or discounts, filing fees, and any transfer or other taxes applicable to such shares, shall be borne by the Company. The Company will furnish the holder hereof with a reasonable number of copies of any prospectus included in such filings and will amend or supplement the same as required during the period of required use thereof. In the case of the filing of any Registration Statement, and to the extent permissible under the Securities Act of 1933, as amended, and controlling precedent thereunder, the Company and the holder hereof shall provide cross indemnification agreements to each other in customary scope covering the accuracy and completeness of the information furnished by each. The holder of the Warrant agrees to cooperate with the Company in the preparation and filing of any such Registration Statement or Offering Statement, and in the furnishing of information concerning the holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Act as to any proposed distribution. 5. Right to Convert. ---------------- (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. ("NASDAQ") Automated Quotation National Market System or Small-Cap System or is traded in the over-the-counter market, then the holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right"), at any time prior to its expiration, into shares of Common Stock as provided for in this Section 5. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any exercise price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate exercise price for the Warrant Common Stock in effect immediately prior to the exercise of the Conversion Right from the aggregate Fair Market Value (as determined below) for the Warrant shares immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day, by delivering a written notice (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Stock the Warrantholder will purchase pursuant to such conversion, and (ii) a place, and a date not less than five (5) nor more than twenty (20) business days from the date of the Conversion Notice for the closing of such purchase. (c) At any closing under Section 5(b) hereof, (i) the holder will surrender the Warrant, (ii) the Company will deliver to the holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the holder a new Warrant representing the number of shares, if any, with respect to which the Warrant shall not have been exercised. (d) "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock (or common stock) is traded on an exchange or is quoted on the NASDAQ National Market System or the Small-Cap System, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date. (ii) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System, but is traded in the over-the-counter market, then the average of the closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date. 6. Notices. The Company shall mail to the registered holder of the ------- Warrant, at the holder's last known post office address appearing on the books of the Company, not less than fifteen (l5) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription rights, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. 7. Reservation of Common Stock. A number of shares of Common Stock --------------------------- sufficient to provide for the exercise of the Warrant upon the basis herein set forth shall at all times be reserved for the exercise thereof. 8. Miscellaneous. The Company will not, by amendment of its Articles of ------------- Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the holder hereof against dilution. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of shares purchased on the exercise of this Warrant, and the word "holder" shall include the plural thereof. This Common Stock Purchase Warrant shall be interpreted under the laws of the State of Minnesota. All shares of Common Stock or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and non-assessable, and the Company will pay all taxes in respect of the issuer thereof. Notwithstanding anything contained herein to the contrary, the holder of this Warrant shall not be deemed a stockholder of the Company for any purpose whatsoever until and unless this Warrant is duly exercised. IN WITNESS WHEREOF, this Warrant has been duly executed by Medi-Ject Corporation, this 24th day of March, 1995. MEDI-JECT CORPORATION By /s/ Mark Derus ----------------------------------- Title: CFO --------------------------- WARRANT EXERCISE FORM To be signed only upon exercise of Warrant. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________________ of the shares of Common Stock of Medi- Ject Corporation to which such Warrant relates and herewith makes payment of $___________ therefor in cash or by certified check, and requests that such shares be issued and be delivered to, _________________________, the address for which is set forth below the signature of the undersigned. Dated: ______________________ ______________________________ __________________________________________ (Taxpayer's I.D. Number) (Signature) __________________________________________ __________________________________________ (Address) ________________________________ ASSIGNMENT FORM To be signed only upon authorized transfer of Warrant. FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto _____________________, the right to purchase shares of Common Stock of Medi-Ject Corporation to which the within Warrant relates and appoints _________________, attorney, to transfer said right on the books of Medi-Ject Corporation with full power of substitution in the premises. Dated: ___________________ __________________________________________ (Signature) __________________________________________ __________________________________________ (Address) EX-4.5 7 WARRANT 3/24/95 TO MICHAEL TRAUTNER MEDI-JECT CORPORATION COMMON STOCK PURCHASE WARRANT Medi-Ject Corporation, a Minnesota corporation (the "Company"), hereby agrees that, for value received, Michael Trautner, Minneapolis, Minnesota, or his assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after March 23, 1996, and before 5:00 p.m., Minneapolis, Minnesota time, on March 24, 2000, Two Thousand (2,000) shares of the Common Stock of the Company (the "Common Stock"), at an exercise price of $2.50 per share, subject to adjustment as provided herein. 1. Exercise of Warrant. The purchase rights granted by this Warrant ------------------- shall be exercised (in minimum quantities of 1,000 shares, or such smaller number of shares as are exercisable under the Warrant) by the holder surrendering this Warrant with the form of exercise attached hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by cashier's check payable to the order of the Company, of the purchase price payable in respect of the Common Stock being purchased. If less than all of the Common Stock purchasable hereunder is purchased, the Company will, upon such exercise, execute and deliver to the holder hereof a new Warrant (dated the date hereof) evidencing the number of shares of Common Stock not so purchased. As soon as practicable after the exercise of this Warrant and payment of the purchase price, the company will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate of certificates representing the shares purchased upon such exercise. The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows: "No sale, offer to sell or transfer of the shares represented by this certificate shall be made unless a Registration Statement under the Federal Securities Act of 1933, as amended (the "Act"), with respect to such shares is then in effect or an exemption from the registration requirements of the Act is then in fact applicable to such shares." 2. Negotiability and Transfer. This Warrant is issued upon the -------------------------- following terms, to which each holder hereof consents and agrees: (a) Except where directed by a court of competent jurisdiction pursuant to the dissolution or liquidation of a corporate holder hereof, for one (1) year from March 24, 1995, title to this Warrant may be transferred only to Delphi Financial Corp. (the "Agent"), or to a person who is both an officer and shareholder, or both an officer and employee, or a registered representative, of the Agent, or to a successor (or both an officer and shareholder, or both an officer and employee, or both an employee and registered representative of the successor) in interest to the business of the Agent, by endorsement (by the holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) Until this Warrant is duly transferred on the books of the Company, the company may treat the registered holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the contrary. (c) Each successive holder of this Warrant, or of any portion of the rights represented thereby, shall be bound by the terms and conditions set forth herein. 3. Antidilution Adjustments. If the Company shall at any time hereafter ------------------------ subdivide or combine its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of this Warrant, immediately preceding such event, shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock. No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Common Stock on the day of exercise as determined in good faith by the Company. In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation, which is effected in such manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation, merger or sale, the holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price, and (a) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and (b) cause a copy of such statement to be mailed to the holder of the Warrant as of a date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. Registration Rights. Prior to making any disposition of the Warrant ------------------- or of any Common Stock purchased upon exercise of the Warrant, the holder will give written notice to the Company describing briefly the manner of any such proposed disposition. The holder will not make any such disposition until (i) if requested, the Company has been provided an opinion by counsel for the holder that registration under the Act is not required with respect to such disposition, or (ii) a Registration Statement covering the proposed distribution has been filed and has become effective. The holder then will make any disposition only pursuant to the conditions of such opinion or registration. The Company agrees that, upon receipt of written notice from the holder hereof with respect to such proposed distribution, it will cooperate in providing the holder with information necessary to make such determination. If, at any time prior to the expiration of seven (7) years from March 24, 1995, the Company shall propose to file any Registration Statement (other than any registration on Forms S-4, S-8 or any other similarly inappropriate form or Registration Statement with respect to an initial public offering in which there are no selling shareholders) under the Securities Act of 1933, as amended, covering a public offering of the Company's Common Stock, it will notify the holder hereof at least forty-five (45) days prior to each such filing and will include in the Registration Statement (to the extent permitted by applicable regulation) the Common Stock purchased by the holder or purchasable by the holder upon the exercise of the Warrant to the extent requested by the holder hereof, in writing, within twenty (20) days of the holder's receipt of such notice from the Company. Notwithstanding the foregoing, the number of shares of the holders of the Warrants proposed to be registered thereby shall be reduced pro rata with any other selling shareholder (other than the Company) upon the request of the managing underwriter of such offering. If the Registration Statement or Offering Statement filed pursuant to such forty-five (45) day notice has not become effective within six months following the date such notice is given to the holder hereof, the Company must again notify such holder in the manner provided above. All expenses of any such registrations referred to in this Section 4, except the fees of counsel to such holders and underwriting commissions or discounts, filing fees, and any transfer or other taxes applicable to such shares, shall be borne by the Company. The Company will furnish the holder hereof with a reasonable number of copies of any prospectus included in such filings and will amend or supplement the same as required during the period of required use thereof. In the case of the filing of any Registration Statement, and to the extent permissible under the Securities Act of 1933, as amended, and controlling precedent thereunder, the Company and the holder hereof shall provide cross indemnification agreements to each other in customary scope covering the accuracy and completeness of the information furnished by each. The holder of the Warrant agrees to cooperate with the Company in the preparation and filing of any such Registration Statement or Offering Statement, and in the furnishing of information concerning the holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Act as to any proposed distribution. 5. Right to Convert. ---------------- (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. ("NASDAQ") Automated Quotation National Market System or Small-Cap System or is traded in the over-the-counter market, then the holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right"), at any time prior to its expiration, into shares of Common Stock as provided for in this Section 5. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any exercise price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate exercise price for the Warrant Common Stock in effect immediately prior to the exercise of the Conversion Right from the aggregate Fair Market Value (as determined below) for the Warrant shares immediately prior to the exercise of the Conversion Right) by (y) the Fair Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day, by delivering a written notice (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Stock the Warrantholder will purchase pursuant to such conversion, and (ii) a place, and a date not less than five (5) nor more than twenty (20) business days from the date of the Conversion Notice for the closing of such purchase. (c) At any closing under Section 5(b) hereof, (i) the holder will surrender the Warrant, (ii) the Company will deliver to the holder a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the holder a new Warrant representing the number of shares, if any, with respect to which the Warrant shall not have been exercised. (d) "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock (or common stock) is traded on an exchange or is quoted on the NASDAQ National Market System or the Small-Cap System, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date. (ii) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System, but is traded in the over-the- counter market, then the average of the closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date. 6. Notices. The Company shall mail to the registered holder of the ------- Warrant, at the holder's last known post office address appearing on the books of the Company, not less than fifteen (l5) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription rights, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. 7. Reservation of Common Stock. A number of shares of Common Stock --------------------------- sufficient to provide for the exercise of the Warrant upon the basis herein set forth shall at all times be reserved for the exercise thereof. 8. Miscellaneous. The Company will not, by amendment of its Articles of ------------- Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of the holder hereof against dilution. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the "holder of" include the immediate holder of shares purchased on the exercise of this Warrant, and the word "holder" shall include the plural thereof. This Common Stock Purchase Warrant shall be interpreted under the laws of the State of Minnesota. All shares of Common Stock or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and non-assessable, and the Company will pay all taxes in respect of the issuer thereof. Notwithstanding anything contained herein to the contrary, the holder of this Warrant shall not be deemed a stockholder of the Company for any purpose whatsoever until and unless this Warrant is duly exercised. IN WITNESS WHEREOF, this Warrant has been duly executed by Medi-Ject Corporation, this 24th day of March, 1995. MEDI-JECT CORPORATION By /s/ Mark Derus -------------------------------------- Title: CFO ---------------------------- WARRANT EXERCISE FORM To be signed only upon exercise of Warrant. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, of the shares of Common Stock of Medi- ------------------ Ject Corporation to which such Warrant relates and herewith makes payment of $ therefor in cash or by certified check, and requests that such ----------- shares be issued and be delivered to, , the address for ------------------------- which is set forth below the signature of the undersigned. Dated: ---------------------- - ------------------------------ ------------------------------------------ (Taxpayer's I.D. Number) (Signature) ------------------------------------------ ------------------------------------------ (Address) -------------------------------- ASSIGNMENT FORM To be signed only upon authorized transfer of Warrant. FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto , the right to purchase shares of Common Stock of --------------------- Medi-Ject Corporation to which the within Warrant relates and appoints ,attorney, to transfer said right on the books of Medi-Ject - ----------------- Corporation with full power of substitution in the premises. Dated: ------------------- ------------------------------------------ (Signature) ------------------------------------------ ------------------------------------------ (Address) EX-10.1 8 OFFICE/WAREHOUSE/SHOWROOM LEASE OFFICE/WAREHOUSE/SHOWROOM LEASE BASIC LEASE INFORMATION Date of Lease: 1/2/91 Landlord: Minneapolis Business Parks Joint Venture Tenant: Derata Corporation Name and Location of Building: Westpoint Business Center, Building "B" [Paragraph 1(a)] Net Rentable Area of Premises: 5,414 [Paragraph 1(b)] Base Year: 1991 [Paragraph 1(c)] Tenant's Percentage Share: 8.5% [Paragraph 1(k)] Net Rentable Area of Building: 63,550 [Paragraph 1(k)] Term Commencement: February 1, 1991 [Paragraph 3] Term Expiration: April 30, 1996 [Paragraph 3] Minimum Rent: See Exhibit "D" Addendum to Lease [Paragraph 4(a)] Permitted Use: Office, storage, production [Paragraph 9] Security Deposit: $2,391.00 [Paragraph 32] Tenant's Address for Notices: 1840 Berkshire Lane, Plymouth, MN 55441 [Paragraph 32] Landlord's Address for Notices: Metric Property Management, 8140 26th Avenue [Paragraph 37] South, Suite 115, Bloomington, Exhibits: MN 55425 [Paragraph 44] Exhibit A - Legal Description of Building Exhibit B - Floor Plan of Premises Exhibit C - Rules and Regulations Exhibit D - Guaranty Addendum Additional Provisions: [Paragraph 45] **[Usutruc] [Paragraph 45] *Plus applicable sales taxes (for use in Florida and Arizona only) **For use in Georgia only The provisions of the Lease identified above in rackets are those provisions where reference to particular Basic Lease Information appear. Each reference to an item of Basic Lease Information, wherever it may appear in the Lease, shall incorporate the applicable Basic Lease Information set forth above. In the event of any conflict between any Basic Lease Information and the Lease, the latter shall control. TENANT By Derata Corporation - --------------------------------- By /s/William D. Dunlap ------------------------------- - --------------------------------- Date of Execution By Tenant: 12/26/90 * - ---------------------------------- Witness * - ---------------------------------- Witness *For use in Florida only. **For use in Washington, Arizona, North and South Carolina. ***For use in Georgia only. MINNEAPOLIS BUSINESS PARKS JOINT VENTURE, A California general partnership By: Century Pension Income Fund XXIV, a California limited partnership By: Fox Partners VI, a California general partnership, its general partner By: Metric Realty Services, L.P., a Delaware limited partnership, as Attorney-in-Fact By: MP Services, Inc., a Delaware corporation, its general partner By: /s/ Richard C. Dooley ------------------------------------- Richard C. Dooley Portfolio Manager
TABLE OF CONTENTS Page 1. Definitions........................................... 1 2. Premises.............................................. 2 3. Term.................................................. 3 4. Rent.................................................. 3 5. Taxes and Assessments................................. 4 6. Operating Expenses.................................... 4 7. Estimated Payments.................................... 4 8. Common Areas.......................................... 5 9. Use................................................... 5 10. Services.............................................. 6 11. Alterations, Fixtures and Improvements................ 6 12. Liens................................................. 7 13. Repair and Maintenance of Premises.................... 7 14. Damage and Destruction................................ 8 15. Indemnification....................................... 8 16. Insurance............................................. 9 17. Condemnation.......................................... 10 18. Compliance with Legal Requirements.................... 11 19. Assignment and Subletting............................. 11 20. Rules and Regulations................................. 13 21. Landlord's Access..................................... 13 22. Default............................................... 13 23. Landlord's Right to Cure Default...................... 15 24. Attorney's Fees....................................... 15 25. Subordination......................................... 15 26. No Merger............................................. 16 27. Sale by Landlord...................................... 16 28. Estoppel Certificate.................................. 16 29. Holdover Tenancy...................................... 16 30. Parking............................................... 17 31. Security Deposit...................................... 17 32. No Partnership........................................ 17 33. Recording............................................. 17 34. Modification and Financing Conditions................. 17 35. Waiver................................................ 18 36. Notices and Consents.................................. 18 37. Complete Agreement.................................... 18 38. Corporate Authority................................... 18 39. Limits to Tenant's Remedy............................. 18 40. Brokers............................................... 18 41. No Light and Air Easement............................. 18 42. Miscellaneous......................................... 18 43. Signs................................................. 19 44. Surrender of Premises................................. 19 45. Additional Provisions................................. 19 *[46. Usufruct.............................................. 19]
*For use in Georgia only. OFFICE/WAREHOUSE/SHOWROOM LEASE THIS LEASE, DATED January 2, 1991, for purposes of reference only, is made and entered into by and between MBPJV ("Landlord") and DERATA CORP ("Tenant"). WITNESSETH: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the premises described in paragraph 1(b) below for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree. 1. Definitions. Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "Building" shall mean the parcel of real property described on Exhibit A attached hereto, situated in the location and commonly known by the name specified in the Basic Lease Information, which name the Landlord may change at any time, and all other improvements on or appurtenances to such parcel. (b) The term "premises" shall mean that portion of a floor of the Building outlined in red on the diagrams attached hereto as Exhibit B. The premises contain the net rentable area specified in the Basic Lease Information. (c) The term "Base Year" shall mean the calendar year specified in the Basic Lease Information as the Base Year. (d) The term "Operating Expense" shall mean all costs paid or incurred in connection with the operation, maintenance and repair of the Office/Warehouse/ Showroom by Landlord, (excluding those expenses which are the responsibility of Tenant pursuant to paragraphs 6, 10, 13 and 16 hereof) including without limitation, all costs and expenses paid or incurred with respect to the following: operating, cleaning, sweeping, restriping, repairing and resurfacing the parking lot and driveway areas; maintenance and replanting of plantings and landscaping; maintenance, repair and replacement of landscape sprinkler systems, parking bumpers, directional signs and other signs and markers, fire protection systems, lights and light standards (including bulb replacement), drainage systems and utility systems (excluding heating, ventilation and air-conditioning of the Office/Warehouse/Showroom area); operation and maintenance of Office/Warehouse/Showroom signs, including depreciation on such signs if purchased and rent for such signs if leased; depreciation on all equipment purchased for the purpose of operating and/or maintaining the common area, or rent for such equipment if leased, and maintenance and repair of such equipment; rental of space outside the boundaries of the Office/Warehouse/Showroom, if needed, for use as storage and/or maintenance of equipment, supplies, props and other items used in connection with the common area; cleaning, maintenance and repair of all sidewalks, including those situated on the perimeter of and outside the boundaries of the Office/Warehouse/Showroom (but nothing herein contained shall be construed as obligation Landlord to clean, maintain or repair any areas or improvements outside the Office/Warehouse/Showroom boundaries); operation, maintenance and repair of any public address systems, music systems, and security and alarm systems, including depreciation on such systems if purchased and rent for such systems if leased; the reasonable cost of personnel to implement such services and to regulate and administer employee parking and to police and provide security for the common area and for the buildings in the Office/Warehouse/Showroom, including all social security and other contributions, and including workmen's compensation insurance costs paid or incurred with respect to such personnel; all premiums for public liability and property damage insurance (including, without limitation, extended and broad form coverage risks, mudslide, land subsidence, volcanic eruption, flood and earthquake), workmen's compensations, and rental loss insurance (notwithstanding anything contained in this Lease to the contrary). Tenant's pro rata share of insurance premiums shall be in the same proportion as the rentable area of the premises bears to the total rentable area of all space in the shopping center which is covered by the insurance policies herein described); such reasonable property management fees shall not exceed 5% of total Gross Revenue defined as Base rent and operating expenses only; fees to any property manager, provided that any benefits from any tax disputes shall be paid by Tenant in Tenant's proportionate share as defined in this Article. The cost of compliance with all state, federal or local governmental regulations affecting the Office/Warehouse/ Showroom; all Property Taxes (as defined in subparagraph (g) below) and personal property taxes on all land, improvements and personal property comprising the common area and all costs and expenses incurred by Landlord in attempts to obtain reductions in taxes or assessments affecting the common area (the allocation of such taxes, assessments, costs and expenses between land constituting the common area and land under tenant store buildings to be made on a straight area proration, and the allocation of such taxes, assessments, costs and expenses, between improvements constituting common area improvements and improvements constituting non-common area improvements to be based upon the respective original construction costs of such improvement(s); depreciation on mechanical equipment; or rental for such equipment if leased, and maintenance and repair of such equipment, costs of electricity, water and other utilities used with respect to the operation and maintenance of the common area; garbage and refuse removal; audit expenses; reasonable legal expenses incurred in contesting real property tax assessments an in connection with attempts to control trespassing, picketing, demonstrations, gatherings or assemblies, vandalism, thefts and any other interferences with use of the common area by persons not authorized for use the common area. (e) The term "Base Operating Expenses" shall mean the Operating Expenses paid or incurred by Landlord in the Base Year. (f) The term "common area" shall refer to all areas, spaces, equipment, special services, improvements, and facilities in or near the Office/Warehouse/Showroom provided by Landlord for the common or joint use and benefit of the occupants of the Office/Warehouse/Showroom, their officers, agents, employees, servants, customers and invitees, including but not limited to all parking areas, access roads, streets, driveways, entrances, exits, sidewalks, malls, courts, loading docks, package pick-up stations, ramps, corridors, halls, stairs, retaining walls and landscaped areas. (g) The term "Lease Year" shall mean each twelve month period during the term hereof ending on December 31, provided that the first Lease Year shall commence upon the commencement of the term hereof and shall end of the next succeeding December 31, and the last Lease Year shall end upon the expiration of the term hereof. (h) The term "Property Taxes" shall mean any form of real or personal property taxes, assessments, special assessments, fees, charges, levies, penalties, service payments in lieu of taxes, excises, assessments and charges for transit, housing or any other purpose, impositions or taxes of every kind and nature whatsoever, assessed or levied or imposed by any authority having the direct and indirect power to tax including, without limitation, any city, county, state or federal government, or any improvement or assessment district of any kind or nature whatsoever, whether to not consented to or joined in by Landlord against the Building or any legal or equitable interest of Landlord therein or any personal property of Landlord used in the operation thereof, whether now or thereafter imposed, whether or not now customary or in the contemplation of the parties on the date of this Lease, excepting only taxes measured by the net income of Landlord from all sources; provided that Property taxes shall not include any taxes, assessments or other charges payable by Tenant pursuant to paragraph 5 below. (i) The term "Tenant's percentage share" shall mean the percentage figure specified in the Basic Lease Information. Landlord and Tenant acknowledge the Tenant's percentage share has been obtained by dividing the rentable area of the premises as specified in the Basic Lease Information, by the total rentable area of the existing rental space in the Office/Warehouse/Showroom as specified in the Basic Lease Information and multiplying such quotient by 100. In the event the rentable area of the premises of the Office/Warehouse/Showroom is changed, Tenant's percentage share shall be appropriately adjusted, and as to the calendar year in which such change occurs, Tenant's percentage shares shall be determined as of the last day of the calendar quarter. 2. Premises. (a) Tenant hereby acknowledges that the premises shall be delivered in an "as is" condition and that Landlord, except as may be expressly agreed by Landlord in writing, has no obligation to alter, repair, renovate, or render fit for Tenant's occupancy, any part of the premises. Landlord reserves to itself the use of roof, exterior walls and the area beneath the premises, together with the right to install, maintain, use, repair and replace plumbing, telephone facilities, equipment, machinery, connections, pipes, ducts, conduits, and wire leading through the premises and serving other parts of the Building in a manner an din locations which will not unreasonably interfere with Tenant's use. In the event of any of the foregoing, Landlord's actions materially interferes with Tenant's operation or use of the Premises and such interference continues for more than one business day, Tenant's Rent, as defined hereafter by Article 4, shall abate for a period equal to such interference. (b) In the event Landlord determined to permit early occupancy of the premises and, therefore, informs Tenant in writing that the premises are ready for occupancy prior tot he date set forth in the Basic Lease Information for the commencement of the term of the Lease, Tenant shall have the right to take early occupancy of the premises on such date as Landlord and Tenant shall agree, and notwithstanding the provisions of paragraph 3 below, the term of the Lease shall commence upon such occupancy. (c) The occupancy by Tenant of the premises shall constitute an acknowledgment by Tenant that the premises are then in good, sanitary and tenantable condition and repair. Notwithstanding the foregoing, Tenant shall have 30 days from the Commencement Date to notify Landlord of any defects to the Premises and Landlord will proceed to immediately cure such defects. 3. Term. The term of this Lease shall commence and, unless sooner terminated, shall end on e dates respectively specified in the Basic Lease Information. If Landlord for any reason cannot deliver possession of the premises to Tenant by the date specified for term commencement, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any damage resulting therefrom, but in -2- that event, provided that the delay is not occasioned by the act or omission of Tenant, rental shall be waived for the period between the commencement of such term and the date when possession is delivered. Provided, however, if Landlord has not delivered the premises to Tenant within two years of the Term Commencement, this Lease shall be deemed null and void without liability to either party, so long as such failure is not due to delay caused by the act of omission of Tenant. 4. Rent. Tenant shall pay to Landlord as rental for the use and occupancy of the premises, all the time and in the manner hereinafter provided, the following sums of money: (a) Tenant shall pay to Landlord [applicable sales taxes and] minimum rent in the amount specified in the Basic Lease Information per year, payable in equal monthly installments in advance on the commencement of the term hereof and on or before the first day of each and every successive calendar month during the term hereof. If the term commences on other than the first day of a calendar month, the first payment of rent shall be appropriately prorated on the basis of a 30-day month. (b) Tenant shall pay, as additional rent, all sums of money required to be paid to Landlord pursuant to paragraphs 5, 6, 7, 10, 13 and 16 below, and all other sums of money or charges required to be paid by Tenant hereunder in addition to minimum rental, whether or not the same are designated "additional rent". If such amounts or charges are not paid at the time provided in this Lease, they shall nevertheless be collectible as additional rent with the next installment of minimum rental thereafter falling due, but nothing herein contained shall e deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Landlord. All amounts of money payable by Tenant to Landlord under this Lease, if not paid within five (5) days after such payments are due and payable, shall bear interest from e due date until paid at the rate of the lesser of 15% per annum or the prime rate publicly announced by the Bank of America, N.T. & S.A. at its main office in San Francisco, California, but not to exceed the maximum rate of interest permitted by law ("Default Interest"). All payments due from Tenant to Landlord hereunder shall be made to Landlord without deduction or offset in lawful money of the United States of american at Landlord's address for notices hereunder, or to such other person at such other place as Landlord may from time to time designate in writing to Tenant. 5. Taxes and Assessments. In addition to the monthly rental and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes, assessments (provided any special assessment is paid over the longest period provided by Law), levies, fees, charges and impositions whatsoever levied or imposed or assessed by any authority having the direct or indirect power to tax including, without limitation, any city, county, state or federal government or any improvement or other assessment district, whether or not consented to or joined in by Landlord, payable by Landlord (other than income taxes, measured by the net income of Landlord from all sources), whether or not now customary or within the contemplation of the parties hereto on the date of this Lease: (a) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixture and other personal property located in the premises or by the cost or value of any leasehold improvements made in or to the premises by or for Tenant, other than building standard tenant improvements made by Landlord, regardless of whether title to such improvements shall be in Tenant or Landlord; (b) upon or measured by the rental payable hereunder; (c) upon or with respect to the possession, leasing, operation, management, maintenance, improvement, alteration, repair, use or occupancy by Tenant of the premises or portion thereof; (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the premises. 6. Operating Expenses. Tenant shall, during the entire term hereof, pay to Landlord tenant's percentage share of the amount by which all Operating Expenses paid or incurred by Landlord in any Lease Year exceed Base Operating Expenses. The amount of all sums payable hereunder shall be paid by Tenant to Landlord in the manner set forth in paragraph 7 below. 7. Estimated Payments. Unless otherwise expressly designated herein, all monetary amounts payable by Tenant to Landlord pursuant to this Lease shall be payable as follows: (a) During December of each Lease Year or as soon thereafter as practicable, Landlord shall give Tenant Notice of its estimate of amounts payable hereunder for the ensuing Lease Year. On or before the first day of each month during the ensuing Lease Year, Tenant shall pay to Landlord 1/12 of such estimated amounts, provided that if such notice is not given in December, Tenant shall continue to pay on the basis of the prior year's estimate until the month such notice is given. If at any time or times it appears to Landlord that the amounts payable for the current Lease Year will vary from its estimate by more than 5%, Landlord shall, by notice to Tenant, revise its estimate for such year, in which case subsequent payments by Tenant for such year shall be based upon such revised estimate. (b) Within 90 days after the close of each Lease Year or as soon after such 90-day period as practicable, Landlord shall deliver to Tenant a statement of amounts payable for such Lease Year. Tenant shall have the right, at Tenant's expense, to inspect or audit Landlord's document records or other information used to determined such statement. If on the basis of such statement Tenant owes an -3- amount that is less than the estimated payments for such Lease Year previously made by Tenant and tenant is not in default hereunder, Tenant shall receive a credit in the amount of such excess against the next installments due under paragraphs 6 and 7 hereof. If on the basis of such statement Tenant owes an amount that is more than the estimated payments for such Lease Year previously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of the statement. (c) If this lease shall terminate on other than the last day of a calendar year, the adjustment in rent applicable to the Lease Year in which such termination shall occur shall be prorated on the basis which the number of days from the commencement of such Lease Year to and including such expiration date bears to 365. If the adjustment in rent is not determined until after the termination of this Lease, any excess amounts due Tenant or deficiency amounts due Landlord shall be paid in cash within 30 days after delivery of the statement setting forth such adjustment determination. 8. Use and Maintenance of Common Area. (a) The use and occupation by Tenant of the premises shall include a right to the use in common with others entitled thereto of the common areas and other facilities as may be designated from time to time by Landlord, subject, however, to the terms and conditions of this Lease. All common areas and facilities not within the premises, excluding parking areas, which Tenant may be permitted to use and occupy pursuant to this paragraph, are to be used and occupied under a revocable license, and if the amount of such areas be diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. (b) Landlord shall at all times during the term of this Lease have the following rights with respect to the common area: (1) Landlord shall have the right from time to time to make changes in the common area, including the location and relocation of driveways, entrances, exits, parking spaces, the direction and flow of traffic, installation of prohibited areas, landscaped areas, and all other facilities thereof, except that Landlord shall not make any materially detrimental change in the parking ratio or in the nature of the parking facilities concerning that portion of the common area which is reasonably and customarily used by Tenant's customers. (2) Landlord shall have the right to establish and from time to time change, alter, amend and to enforce against Tenant and other users of the common areas, such reasonable rules and regulations as may be deemed necessary or advisable for the proper and efficient operation and maintenance of the common area. the rules and regulations herein provided may include, without limitation, the hours during which the common area shall be open for use but in no event shall the parking lot be closed until a reasonable period of time after Tenant closes its premises. (3) Landlord shall have the sole and exclusive control of the common area, and may at any time and from time to time exclude and restrain any person from use or occupancy thereof, excepting however, bona fide customers, patrons and service suppliers of Tenant, and other tenants of Landlord who make use of the common area in accordance with the rules and regulations established by Landlord from time to time with respect thereto. Nothing herein shall limit the rights of Landlord at any time to remove any unauthorized persons from the common area or to restrain the use of any of said area by unauthorized persons. The rights of Tenant in and to the common area shall at all times be subject to the rights of Landlord and other occupants of the buildings in the Office/Warehouse/Showroom to use the same in common with Tenant, and it shall be the duty of Tenant to keep all of the common area free and clear of any obstructions created or permitted by Tenant or resulting from Tenant's operation and to permit the use of the common area only for the purpose hereinabove set forth. (4) Landlord shall have the right to post temporary or permanent signs and to temporarily close any portion or all of the common area from time to time and to such extent as Landlord reasonably deems necessary to prevent a dedication or other prescriptive right therein in favor of the public or any group or individual and to prevent the accrual of any such right, and Landlord shall have the right by temporary closure or other reasonable means to discourage or prevent the use of the common area by persons other than those expressly authorized hereby. (5) Landlord shall have the right to designate specific areas from time to time, either in the Office/Warehouse/Showroom or reasonably close thereto, for the parking of vehicles of the employees of Tenant. Tenant shall cause its agents and employees to park its vehicles only within such designated areas. When requested by Landlord, Tenant shall give Landlord written notice of the license numbers of all vehicles from time to time parked on the Office/Warehouse/Showroom by Tenant's officers, agents and employees. If a vehicle of Tenant or its officers, agents or employees is at any time parked in a part of the Office/Warehouse/Showroom other than the designated area, -4- Landlord shall have the right to have the vehicle towed and to collect towing and storage charges as a condition of releasing such vehicle to its owner. 9. Use. (a) The premises shall be used solely for the permitted use as described in the Basic Lease information and for any other lawful purpose not otherwise violating any zoning ordinance or regulation with Landlord's consent. Tenant shall not use or permit the premises to be used for any other purpose without Landlord's prior written consent. Landlord and tenant hereby further acknowledge that the identity of Tenant, the specific character of Tenant's business and anticipated use of the premises and the relationship between the use and other uses within the Building has been a material consideration to Landlord's entry into this Lease. Any material change in the character of Tenant's business or use may constitute a default use this Lease. (b) Tenant shall not do or permit to be done in, on or about the premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is prohibited by the standard form of fire insurance policy or will in any way increase the existing rate of or affect any fire or other insurance upon the Building, or cause a cancellation of any insurance policy covering the building or any part thereof of any of its contents. Tenant shall not do or permit anything to be done in or about the premises which will in any way obstruct or interfere with the rights of other tenants of the Building or injure or annoy them, or use or allow the premises to be used for any improper, immoral, unlawful or objectionable purpose. Nor shall Tenant cause, maintain or permit any nuisance in, or about or commit or suffer to be committed any waste in or upon the premises. (c) Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the premises or the Building. If Tenant breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the premises or the Building caused or permitted by Tenant results in contamination of the premises or the Building then Tenant shall indemnify, defend and hold Landlord harmless for, from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including without limitation, diminution in value of the Building, damages for the loss or restriction on use of rentable or usable space or any amenity of the Building, damages arising from any adverse impact on marketing of space in the Building, and sums paid in settlement of claims, reasonable attorneys' fees, consultant fees and expert fees) which arise during or after the Lease Term as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local government agency or political subdivision because of Hazardous Material present in or about any part of the Building including, without limitation, the soil or ground water under the Building. As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any federal, state or other local governmental authority including, without limitation, any material or substance which is designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. (S) 1317), defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. 6901 et seq.). or defined as a "hazardous waste" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, (42 U.S.C. (S) 9601 et seq). 10. Utilities. Tenant shall pay all initial utility deposits and fees, and all monthly service charges for water, electricity, sewage, gas, telephone and any other utility services furnished to the premises and the improvements thereon during the entire term of this Lease. In the event any such services are not separately metered or billed to Tenant but rather are billed to and paid by Landlord, Tenant shall pay to Landlord its pro rata share of the cost of such services, as determined on the Basic Lease Information. Landlord shall not be liable for any reason for any loss or damage resulting from an interruption of any of the above services, provided that, such interruption is not the result of Landlord's, its agents' or employees' negligence. 11. Alteration, Fixtures and Improvements. (a) Tenant shall not make or suffer to be made any alterations, additions, or improvements to or of the premises or any part thereof, or attach any fixture or equipment thereto, without first obtaining Landlord's written consent. Any alterations, additions or improvements to the premises consented to by Landlord shall be made by Tenant at Tenant's sole cost and expense according to plans and specifications approved by Landlord, and any contractor or person selected by Tenant to make the same must first be approved by Landlord. Landlord may require, at its option, that Tenant provide Landlord at Tenant's sole cost and expense, payment and performance bonds in an amount equal to the estimated cost of any contemplated alterations, fixtures, and improvements, to insure Landlord against any liability for mechanic's or materialmen's liens and to insure the completion of such work. All -5- alterations, additions, fixtures and improvements, whether temporary or permanent in character, made in or upon the premises either by Landlord (other than furnishings, trade fixtures and equipment installed by Tenant), shall be Landlord's property and, at the end of the term hereof, shall remain on the premises without compensation to Tenant. Upon such removal Tenant shall immediately and fully repair any damage to the premises occasioned by the removal. (b) Landlord may perform or cause to be performed, substantial renovation and remodeling to the exterior and interior of the Office/Warehouse/Showroom and Landlord reserved the right to enter the premises in connection therewith. Landlord shall reasonably minimize any interruption of Tenant's business caused by such renovation and remodeling. In the event such renovation or remodeling prevents Tenant from conducts its business, Tenant's rent shall abate for a period equal to such. 12. Liens. Tenant shall keep the premises and the Building free from any liens arising out of any work performed, material furnished or obligations incurred by Tenant. In the event that Tenant shall not, within 10 days following the imposition of any such lien, cause the same to be released of record, Landlord shall have in addition to all other remedies provided herein and by law, the right but not the obligation to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums incurred by it in connection therewith including, without limitation, any attorneys' fees, court costs, and expenses of litigation, together with Default Interest thereon, shall be payable to Landlord by Tenant on demand. Nothing in this Lease shall be construed in any way as constituting the consent or request of the Landlord, expressed or imposed, by inference or otherwise to any contractor, subcontractor, laborer, or materialmen, for the performance of any labor, or the furnishing of any material for any specific improvement, alteration and repair of or to the premises or as giving Tenant the right, power or authority, to contract for or permit the rendering of any service or the furnishing of any material that would give rise to the filing of any mechanic's liens against the premises. Landlord shall have the right to post and keep posted on the premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the premises and the Building from such liens, and Tenant shall give Landlord at least 5 days' prior notice of the date of commencement of any construction on the premises in order to permit the posting of such notices. Notwithstanding the foregoing, Tenant shall have the right to contest any mechanic's lien by posting security in the amount of such dispute. 13. Repairs and Maintenance. (a) Tenant shall at all times during the term of this Lease keep and maintain at its own cost and expense, in good order, condition and repair the entire premises (including, without limitation, all improvements, fixtures and equipment thereon) making all repairs* and replacements interior and exterior, above or below ground, and ordinary or extraordinary; provided, however, that if the premises are only a portion of a building which contains other leasable space, then Landlord shall keep in good order, condition and repair the foundations and exterior walls (excluding the interior of all walls and the exterior and interior of all doors, plate glass, display and other windows, and excluding interior ceiling) of the premises, except for any damage thereto caused by and any act, negligence or omission of Tenant or Tenant's employees, agents, contractors or customers, except for reasonable wear and tear and except for any structural alterations or improvements required by any governmental agency by reason of Tenant's use and occupancy of the premises. Tenant shall reimburse Landlord for Tenant's pro rata share of the costs which Landlord incurs in performing its foregoing repair and maintenance obligations with respect to all of the building within the Office/Warehouse/ Showroom which Landlord is obligated to repair and maintain. Tenant's pro rata share shall be in the same proportion as defined in the Basic Lease. * Any replacements of HVAC and underground plumbing required by this paragraph shall be made by Landlord, and Landlord shall amortize such cost over the useful life of this replacement, and Tenant shall pay its share of such amortized expense incurred during the remaining Term, as additional rent as defined by paragraph 4 of this Lease. Reimbursement by Tenant to Landlord for its share of such costs shall be made in the manner set forth in paragraph 8 hereof. It is an express condition precedent to all obligations of Landlord to repair that Tenant shall have notified Landlord in writing of the need for such repair. If Landlord shall fail to commence the making of repairs as it is obligated to do by the terms hereof within thirty (30) days after such notice and the failure to repair has materially interfered with Tenant's use of the premises, Tenant's sole right and remedy for such failure on the part of the Landlord shall be to cause such repairs to be made and to charge Landlord the reasonable cost therefor; provided that, if the repair to be performed by Landlord is of an emergency type and if Landlord after receiving notice from Tenant of such emergency fails to commence repair of same as soon as reasonably possibly, Tenant may do at Landlord's cost, without waiting thirty (30) days. (b) Tenant's obligation to keep and maintain the premises in good order, condition and repair shall include, without limiting the generality of Tenant's obligations, all plumbing and sewage facilities in the premises, floors (including floor coverings), doors, locks and closing devices, window -6- casements and frames, glass and plate glass, grilles, all electrical facilities and equipment, HVAC system and equipment, all other appliances and equipment f every kind and nature, and all landscaping upon, within or attached to the premises provided that any replacement to any of the foregoing shall be made pursuant to Section (a) of this paragraph. In addition, Tenant shall at its sole cost and expense install or construct any improvements, equipment, or fixtures required by any governmental authority or agency as a consequence of Tenant's use and occupancy of the premises. Tenant shall replace any damaged plate glass within forty-eight (48) hours of the occurrence of such damage. (c) Landlord shall assign to Tenant, and Tenant shall have the benefit of, any guarantee or warranty to which Landlord is entitled under any purchase, construction or installation contract relating to a component of the premises which Tenant is obligated to repair and maintain. Tenant shall have the right to call upon the contractor to make such adjustments, replacements, or repairs which are required to be made by the contractor under such contract. (d) Landlord may at Landlord's option employ and pay a firm satisfactory to Landlord, engaged in the business of maintaining systems, to perform periodic inspections of the HVAC systems serving the premises and to perform any necessary work, maintenance or repair thereon, provided and said rates are competitive. In such event, Tenant shall reimburse Landlord for all sums paid by Landlord in connection therewith, such reimbursement to be made in the manner set forth in paragraph 8 above. (e) Upon the expiration or termination of this Lease, Tenant shall surrender the premises to Landlord in good order, condition and state of repair, ordinary wear and tear excepted. Tenant hereby waives the right to make repairs at Landlord's expense under the provisions of any laws permitting repairs by a tenant at the expense of a landlord to the extent allowed by law; Landlord and Tenant have by this Lease made specific provision for such repairs and have expressly defined their respective obligations. 14. Damage and Destruction. (a) If the premises or the portion of the Office/Warehouse/Showroom necessary for Tenant's occupancy should be damaged or destroyed during the term hereof by any casually insurable under standard fire and extended coverage insurance policies, Landlord shall (except as hereafter provided) repair or rebuild the premises to substantially the condition in which the premises were immediately prior to such destruction. (b) Landlord's obligation under this paragraph shall in no event exceed the extent of proceeds received by Landlord of any insurance policy maintained by Landlord pursuant to paragraph 16(b) below, unless Landlord nevertheless elects to repair or rebuild the premises. (c) The minimum rent shall be abated proportionately during any period in which there is a substantial interference with the operation of the business of Tenant. Such abatement shall be proportional to the amount that the net rentable area damaged bears to the total net rentable area. In the event that Tenant is unable to operate its business as a result of such damage, Rent as defined paragraph 4 shall abate in its entirety in the premises which Tenant may be required to discontinue. The abatement shall continue for the period commencing with such destruction or damage and ending with the completion by the Landlord of such work, repair or reconstruction as Landlord is obligated to do. (d) Notwithstanding the foregoing, if the premises, or, the portion of the Office/Warehouse/Showroom necessary for Tenant's occupancy should be damaged or destroyed (1) to the extent of 10% or more of the then replacement value of either, (2) in the last year of the term hereof, (3) by a cause or casually other than those covered by fire and extended coverage insurance, or (4) to the extent that it would take, in Landlord's opinion, in excess of ninety (90) days to complete the requisite repairs, then Landlord may either terminate this Lease or elect to repair or restore said damage or destruction, in which event Landlord shall repair or rebuild the same as provided in subparagraph (a) above. If such damage or destruction occurs and this Lease is not so terminated by Landlord, this Lease shall remain in full force and effect. The parties hereby waive the provisions of any law that would dictate automatic termination or grant either party an option to terminate in the event of damage or destruction. Landlord's election to terminate the Landlord's obligation under this paragraph shall be exercised by written notice to Tenant given within sixty (60) days following the damage or destruction. Such notice shall set forth the effective date of the termination of this Lease. Notwithstanding the foregoing, in the event Landlord elects to repair the Premises and such repair is not completed within 90 days of such casualty, Tenant shall have the right to terminate this Lease. (e) Upon the completion of any such work of repair or restoration by Landlord, Tenant shall forthwith repair and restore all other parts of the premises including without limitation, non-building standard leasehold improvements and all trade fixtures, equipment, furnishings, signs and other improvements originally installed by Tenant, subject to the requirements of paragraph 11(a) above. -7- (f) Tenant agrees during any period of reconstruction or repair of the premises to continue the operation of its business in the leased premises to the extent reasonably practicable from the standpoint of good business. 15. Indemnification. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the premises by or from any cause whatsoever, including, without limitation, acts of other tenants or other third parties, gas fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the premises provided that such damage is not the result of any default or omission of Landlord pursuant to the terms and conditions of this Lease. Tenant shall hold Landlord and any ground landlord harmless for, from and against and defend Landlord against any and all claims, liability, damage or loss, and for, from and against all costs and expenses, including reasonable attorneys' fees, arising out of any injury to or death of any person or damage to or destruction of any property, from any cause whatsoever (except any cause resulting solely from the negligence or willful act of Landlord, its authorized agents or employees) occurring in or about the premises and, if occurring on or about any portion of the common areas or elsewhere in or about the Building, when such injury or damage shall be caused in whole or in part by the act, neglect, default or omission of any duty by Tenant, its agents, employees or invitees, including any failure of Tenant to observe or perform any of its obligations hereunder. The provisions of this paragraph 15 shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. See Addendum. 16. Insurance. (a) Tenant shall procure and maintain in full force and effect during the entire term hereof, at its own expense and in companies acceptable to Landlord, the following policies of insurance: (1) Comprehensive liability insurance, including property damage, insuring Landlord and Tenant from and against all claims, demands, actions or liability for injury to or death of any persons, and for damage to property arising from or related to the use of occupancy of the premises or the operation of Tenant's business. No reasonable deductible shall be carried under this coverage without the prior written consent of Landlord. Such policy shall contain, but not be limited to, coverage for premises and operations, products and completed operations, blanket contractual, personal injury, operations, ownership, maintenance and use of owned, non-owned, or hired automobiles, bodily injury and property damage. The policy shall have limits in amounts not less than one million dollars ($1,000,000.00) per person and per occurrence. This insurance shall carry a contractual coverage endorsement specifically insuring the performance by Tenant of its indemnity agreement contained in paragraph 15 above. If in the opinion of Tenant's insurance advisor, based on a substantial increase in recovered liability claims, the aforesaid amounts of coverage are no longer adequate, then such work shall be proportionately increased. (2) Worker's Compensation Insurance and Employer's Liability Insurance per State guidelines. (3) Fire Insurance with standard extended coverage of "all risk" endorsement including, without limitation, vandalism and malicious mischief, to the extent of 90% of the replacement value of all furnishings trade fixtures, leasehold improvements, equipment, merchandise and other personal property and leasehold improvements from time to time situated in, on or upon the premises. As long as this Lease is in effect, the proceeds rom any such insurance shall be held in trust to be used only for the repair or replacement of the improvements, fixtures and other property so insured. (b) Landlord shall procure and maintain liability insurance and all risk insurance covering fire and such other risks of direct or indirect loss or damage for the full insurable value of the Building, including extended and broad form coverage risks, mudslide, land subsidence, volcanic eruption, flood and earthquake, on leasehold improvements in the Building. Tenant shall reimburse Landlord for the costs of all such insurance as part of Operating Expenses reimbursable pursuant to paragraph (6). Any insurance coverage herein provided shall be for the benefit of Landlord, Tenant and any additional designated insured, as their interests may appear. Tenant shall not adjust losses or execute proofs of loss under such policies without Landlord's prior written approval. (c) Should this Lease be canceled pursuant to the provisions of paragraph 14 above by reason of damage or destruction and Tenant is thus relieved of its obligation to restore or rebuild the improvements on he premises, any insurance proceeds for damage to the premises, including all fixtures and leasehold improvements installed by Landlord thereon, shall belong to Landlord, free and clear of any claims by Tenant. (d) All policies of insurance described in this paragraph 16 of which Tenant is to procure and maintain, shall be issued by companies, reasonably acceptable to Landlord and qualified to do business in the state in which the Building is situated. Executed copies of such policies of insurance or, -8- at Landlord's election, certificates thereof, shall be delivered to Landlord within ten (10) days after delivery of possession of the premises to Tenant and thereafter within thirty (30) days prior to the termination or expiration of the term of each existing policy. All public liability and property damage policies shall contain the following provisions: (1) Landlord, although named as additional insured, shall nevertheless be entitled to recover under said policies for any loss occasioned to them, their servants, agents and employees by reason of the negligence of Tenant, its officers, agents or employees; (2) the company writing such policy shall agree to give Landlord not less than thirty (30) days' notice in writing prior to any cancellation, reduction or modification of such insurance. All public liability, property damage and other casualty policies shall be written as primary policies, not entitled to contribution from, nor contributing with, any coverage which Landlord may carry. (e) Notwithstanding anything to the contrary contained within this paragraph, Tenant's obligations to carry the insurance provided for herein may be brought within the coverage of so-called blanket policy or policies of insurance carried and maintained by Tenant; provided, however, that (1) Landlord and such other persons shall be named as additional insureds thereunder as their interest may appear; (2) the coverage afforded to Landlord and such other persons will not be reduced or diminished by reason of the use of such blanket policy of insurance; and (3) all other requirements set forth herein are otherwise satisfied. (f) If Tenant should fall either to acquire the insurance required pursuant to this paragraph 16 and to pay the premiums therefor or to deliver required certificates or policies, Landlord may in addition to any other rights and remedies available to landlord, acquire such insurance and pay the requisite premiums therefor, which premiums shall be payable by Tenant to Landlord immediately upon demand. (g) Landlord and Tenant hereby waive any rights each may have against the other for loss or damage to its property, or property in which it may have an interest, where such loss is caused by a peril of the type generally covered by fire insurance with extended coverage or arising from any cause which the claiming party was obligated to insure against under this Lease, and each party on behalf of its insurer waives any right of subrogation that the insurer might otherwise have against the other party. The parties agree to cause their respective insurance companies insuring the premises or insuring their property on or in the premises to execute a waiver of any such rights of subrogation so long as such a waiver does not invalidate Tenant's insurance coverage. 17. Condemnation. (a) The term "total taking" meaning the taking of the fee title or Landlord's master leasehold estate to so much of the premises or a portion of the Building necessary for Tenant's occupancy by right of eminent domain or other authority of law, or a voluntary transfer under the threat of the exercise thereof, that the premises are not suitable for Tenant's intended use. The term "partial taking" means the taking of only a portion of the premises or the Building which does not constitute a total taking as above defined. (b) If during the term hereof there shall be a total taking than this Lease, and the leasehold estate of Tenant in and to the premises, shall cease and terminate as of the date possession is taken. As used in this paragraph the phrase "date possession is taken" means the date of taking actual physical possession thereof by the condemning authority or such earlier date as the condemning authority gives notice that it shall be deemed to have taken possession. (c) If during the term hereof there shall be a partial taking of the premises, this Lease shall terminate as of the portion of the premises taken on the date on which actual possession of the portion of the premises is taken pursuant to the eminent domain proceedings and this Lease shall continue in full force and effect as the remainder of the premises. The minimum rent payable by Tenant for the balance of the term shall be abated in the ratio that the net rentable area of the premises taken bears to the net rentable area of the premises immediately prior to such taking, and Landlord shall make all necessary repairs or alterations to make the remaining premises a complete architectural unit. Notwithstanding anything contained in this Section 17(c), Tenant shall have the right to terminate the Lease in the event that either (i) such partial taking materially interferes with the operation of Tenant's business; or (ii) Landlord cannot make such repairs or alterations within 90 days of such taking. (d) All compensation and damages award for the taking of the premises, any portion thereof, or the whole or any portion of the common areas or Building shall, except as otherwise herein provided belong to and be the sole property of Landlord, and Tenant shall not have any claim or be entitled to any award for diminution in value of its rights hereunder or for the value of any unexpired term of this Lease; provided, however, that Tenant shall be entitled to make its own claim for, and receive separate award that may be made for Tenant's loss of business or for the taking of or injury to Tenant's improvements, or on account of any cost or loss Tenant may sustain the removal of Tenant's trade fixtures, equipment, and furnishings, or as a result of any alterations, modifications or repairs -9- which may be reasonably required by Tenant in order to place the remaining portion of the Premises not so condemned in a suitable condition for the continuance of Tenant's occupancy. The Tenant's award pursuant to this subparagraph shall not reduce Landlord's award. (e) If this Lease is terminated pursuant to the provisions of this paragraph 17, then all rentals and other charges payable by Tenant to Landlord hereunder shall be paid up to the date upon which possession shall be taken by the condemning agency and any rentals and other charges paid in advance and allocable to the period after the date possession is taken, shall be repaid to Tenant by Landlord, and the parties shall thereupon be released from all further liability hereunder. 18. Compliance With Legal Requirements. Tenant shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the premises, as they relate to or affect the condition, use or occupancy of the premises, excluding requirements of structural changes not related to or affected by improvements made by or for Tenant or Tenant's use of the premises. Landlord warrants that the Premises comply with all applicable governmental rules, regulations and other requirements of this paragraph not otherwise a result of Tenant's use of the premises. 19. Assignment and Subletting. (a) Tenant shall not transfer, assign, sublet, enter into license or concession agreements, or hypothecate this Lease or the Tenant's interest in and to the premises without first procuring the written consent of Landlord, which consent shall not unreasonably be withheld. Any attempted transfer, assignment, subletting license or concession agreement or hypothecation without Landlord's consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant by operation of law without the consent of Landlord. Tenant agrees to reimburse Landlord for Landlord's reasonable attorneys' fees incurred in conjunction with the processing and documentation of any such requested transfer, assignment, subletting, licensing or concession agreement, or hypothecation of this Lease or Tenant's interest in and to the premises. (b) Before entering into any assignment of this Lease or into a sublease of all or part of the premises, Tenant shall give written notice to Landlord identifying the intended assignee or subtenant by name and address and specifying the terms of the intended assignment or sublease. For a period of ten (10) business days, after such notice is given, Landlord shall have the right by written notice to Tenant to (i) in the case of a proposed sublease either (A) sublet from Tenant any portion of the premises proposed to be sublet for the term for which such portion is proposed to be sublet but at the same rent as Tenant is required to pay Landlord under this Lease for the same space, computed on a pro rata square footage basis, or (B) if the proposed subletting is for substantially the remaining period of the term of this Lease, terminate this Lease, or terminate this Lease as it pertains to me portion of the premises so proposed by Tenant to be sublet, or (ii) in the case of a proposed assignment, terminate this Lease. If Landlord so terminates this Lease, such termination shall be as of the date specified in Landlord's notice. If Landlord so terminates this Lease, Landlord may, if it elects enter into a new lease covering the premises or a portion thereof with the intended assignee or subtenant on such terms as Landlord and such person may agree, or enter into a new lease covering the premises or a portion thereof with any other person; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. Landlord's exercise of its aforesaid option shall not be construed to impose any liability upon Landlord with respect to any real estate brokerage commission(s) or any other costs or expenses incurred by Tenant in connection with its proposed subletting or assignment. (c) If Tenant complies with the provisions of this section and Landlord does not exercise an option provided to Landlord under (b) above, Landlord's consent to a proposed assignment or sublet shall not be unreasonably withheld. Without limiting the other instances in which it may be reasonable for Landlord to withhold his consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold its consent in any of the following instances: (1) the proposed assignee or sublessee is a governmental agency; (2) In Landlord's reasonable judgment, the use of the premises by the proposed assignee or sublessee would entail any alterations which would lessen the value of the leasehold improvements in the premises, or would require increased services by Landlord; (3) In Landlord's reasonable judgment, the financial worth of the proposed assignee or sublessee does not meet the credit standards applied by Landlord for other tenants under leases with comparable terms; -10- (4) In Landlord's reasonable judgment, the character, reputation or business of tenant is inconsistent with the desired tenant-mix or the quality of other tenancies in the Building; (5) Landlord has received from any prior lessor to the proposed assignee or subtenant a negative report concerning such prior lessor's experience with the proposed assignee or subtenant; (6) Landlord has experienced previous defaults by or is in litigation with the proposed assignee or subtenant; (7) (i) the proposed assignee's or subtenant's anticipated use of the premises involves the generation, storage, use, treatment or disposal of Hazardous Material; (ii) the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such assignee's or subtenant's actions or use of the property in question; or (iii) the proposed assignee or subtenant is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material; (8) the use of the premises by the proposed assignee or subtenant will violate any applicable law, ordinance or regulation; (9) the proposed assignment or sublease will create a vacancy elsewhere in the Building; (10) the proposed assignee or subtenant is a person with whom Landlord is negotiating to lease space in the Building. (11) the proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this paragraph; (12) Tenant is in default of any obligation of Tenant under this Lease, or Tenant has defaulted under this Lease on three (3) or more occasions during the twelve (12) months preceding the date that Tenant shall request consent; or (13) In the case of a subletting of less than the entire premises, if the subletting would result in the division of the premises into more than two subparcels or would require access to be provided through space leased or held for lease to another tenant or improvements to be made outside of the premises. (d) In the case of an assignment, 100% of any sums or other economic consideration received by Tenant as a result of such assignment shall be paid to Landlord after first deducting the unamortized cost of leasehold improvements paid by Tenant, and the cost of any real estate commissions incurred in connection with such assignment. In the case of a subletting, 100% of any sum or economic consideration received by Tenant as a result of such subletting shall be paid to Landlord after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet portion of the premises, and (2) the cost of any real estate commissions incurred in connection with such subletting, amortized over the term of the sublease. Upon Landlord's request, Tenant shall assign to Landlord all amounts to be paid to Tenant by any such subtenant or assignee and shall direct such subtenant or assignee to pay the same directly to Landlord. (e) Notwithstanding the provisions of subparagraphs (a) and (b) above, Tenant may assign this Lease or sublet the premises or any portion thereof, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant or to any corporation resulting from the merger or consolidation with Tenant, provided that said assignee assumes, in full, the obligations of Tenant under this Lease. (f) Regardless of Landlord's consent, no subletting, assignment, hypothecation, license or concession shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rental and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment, subletting, hypothecation, license or concession agreement shall not be deemed consent to any subsequent assignment, subletting, hypothecation, license or concession agreement. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successors. Landlord may consent to subsequent assignments, subletting, hypothecations, licenses or concession agreements and to amendments or modifications to this Lease, with assignees of Tenant without notifying Tenant or any successor of -11- Tenant, and without obtaining its or their consent thereto and such action shall not relieve Tenant of liability under this Lease. (g) Each transfer, assignment, subletting, license, concession agreement and hypothecation to which there has been consent or which has been permitted pursuant to subparagraph (e) above, shall be by an instrument in form satisfactory to Landlord and shall be executed by the transferor, assignor, sublessor, licensor, concessionaire, hypothecator or mortgagee in each instance, as the case may be; and each transferee, assignee or sublessee shall agree in writing for the benefit of Landlord to assume, to be bound by, and to perform the terms, covenants and conditions of this Lease to be done, kept and performed by Tenant. One executed copy of such instrument shall be delivered to Landlord. No sublessee other than Landlord shall have the right further to sublet. (h) In the event Tenant shall assign or sublet the premises or request Landlord's consent to a proposed assignment, subletting, or other act, then Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection therewith. 20. Rules and Regulations. Tenant shall faithfully observe and comply with the rules and regulations attached to this Lease as Exhibit C and, after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of such rules and regulations. 21. Landlord's access. Landlord may enter the premises at reasonable hours to (1) inspect the same; (2) exhibit the same to prospective purchasers, mortgagees or tenants; (3) determine whether Tenant is complying with all its obligations hereunder; (4) supply any service to be provided by Landlord to Tenant hereunder; (5) post notices of non-responsibility; (6) post "To Lease" signs of reasonable size upon the premises during the last 90 days of the term hereof; and (7) make repairs required of Landlord under the terms hereof or repairs to any adjoining space or utility service or make repairs, alterations or additions to the premises or any other portion of the Building, provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible and that any repairs, alterations, or additions to the premises shall, when completed, not materially and adversely affect Tenant's use of the premises. Tenant's Rent, as defined by paragraph 4 hereof, shall abate for the period of time that any such action by Landlord materially interferes with Tenant's occupancy or quiet enjoyment of the Premises. Landlord shall at all times have and retain a key with which to unlock all of the doors in, on or about the premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance) and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in an emergency in order to obtain entry to the premises. Any entry to the premises obtained by Landlord by any of such means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the premises or an eviction, actual or constructive, of Tenant from the premises, or any portion thereof. 22. Default. If: (1) Tenant shall fail to pay any rent or other sum payable hereunder for a period of five (5) days after the same is due; (2) Tenant shall fail to observe, keep or perform any of the other terms, covenants, agreements or conditions contained herein or in the rules and regulations to be observed or performed by Tenant and such default continues for a period of thirty (30) days after notice by Landlord or beyond the time reasonably necessary for cure if such default is of a nature to require in excess of thirty (30) days to remedy; (3) Tenant shall become bankrupt or insolvent or make a transfer in fraud of creditors, or make an assignment for the benefit of creditors, or take or have taken against Tenant any proceedings of any kind under any provision of the Federal Bankruptcy Act, or under any other insolvency, bankruptcy or reorganization act or, in the event any such proceedings are involuntary, such involuntary proceedings are not dismissed within sixty (60) days thereafter; (4) a receiver is appointed for a substantial part of the assets of Tenant; (5) Tenant shall vacate or abandon the premises; or (6) this Lease or any interest of Tenant hereunder shall be levied upon by any attachment or execution, then any such event shall constitute an event of default by Tenant. Upon the occurrence of any event of default by Tenant hereunder, Landlord may, at its option and without any further notice or demand, in additions tony other rights and remedies given hereunder or by law do any of the following: (a) Landlord shall have the right, so long as such default continues to give notice of termination to Tenant. On the date specified in such notice (which shall not be less than three (3) days after the giving of such notice) this Lease shall terminate. (b) In the event of any such termination of this Lease, Landlord may then or at any time thereafter, re-enter the premises and remove therefrom all persons and property and again repossess and enjoy the premises, without prejudice to any other remedies that Landlord may have by reason of Tenant's default or of such termination. -12- (c) The amount of damages which Landlord may recover in event of such termination shall include, without limitation, (1) the amount at the time of award of (A) unpaid rental earned and other sums owed by Tenant to Landlord hereunder, as of the time of termination, together with interest thereon as provided in this Lease, (B) the amount by which the unpaid rent which would have been earned during the period from termination until the award exceeds the amount of such rental loss that Tenant provides could be reasonably avoided (computed by discounting such amount at the discount rate of the Federal REserve Bank of San Francisco at the time of award plus one percent), (2) all legal expenses and other related costs incurred by Landlord following Tenant's default including reasonable attorneys' fees incurred in collecting any amount owed hereunder, (3) all costs incurred by Landlord in restoring the premises to good order and condition, or in remodeling, renovating or otherwise preparing the premises for reletting, and (4) all costs (including, without limitation, any brokerage commissions) incurred by Landlord in reletting the premises. For the purpose of determining the unpaid rent in the event of a termination of this Lease, the monthly rental reserved in this Lease shall be deemed to be the sum of (1) the minimum rent and (2) the Operating Expense charge and any other amounts last payable by Tenant pursuant to paragraphs 5, 6, 7, 10, 13 and 16 above. (d) Following the termination of this Lease or Tenant's right to possession hereunder (or upon Tenant's failure to remove its personal property from the premises after the expiration of the term of this Lease), Landlord may remove any and all personal property located in the premises and place such property in a public or private warehouse or elsewhere at the sole cost and expense of Tenant; such warehouser shall have all rights and remedies provided by law against Tenant as the owner of such property. In addition, in the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of thirty (30) days or more, Landlord may sell any or all thereof at a public or private sale in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to or demand upon Tenant. Tenant waives all claims for damages that may be caused by Landlord's removing or storing or selling the property as herein provided, and Tenant shall indemnify and hold Landlord free and harmless for, from and against any and all losses, costs and damages, including without limitation all costs of court and attorneys' fees of Landlord occasioned thereby. Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in- fact with the rights and powers necessary in order to effectuate the provisions of this paragraph (d). Such appointment shall be deemed coupled with an interest. (e) Landlord shall have the right to cause a receiver toe appointed in any action against Tenant to take possession of the premises and to collect the rents or profits derived therefrom. The appointment of such receiver shall not constitute an election on the part of Landlord to terminate this Lease unless notice of such intention is given to Tenant. (f) Even though Tenant has breached this Lease and/or abandoned the premises, this Lease shall continue in effect for so long as Landlord does not terminate this Lease, the Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rental in periodic actions as it becomes due under this Lease. In such event, Landlord may re-enter the premises and remove all persons and property if the premises have not been vacated, using any available summary proceeding, without such re-entry or removal being deemed a termination or acceptance of surrender of this Lease. Landlord shall make reasonable efforts to relet the premises upon commercially reasonable terms for the account of Tenant for a period which may extend beyond the term hereof, and upon such offer terms as Landlord may reasonably deem appropriate; provided, however, Tenant shall be responsible for only those terms and conditions, including Rent, for a period equal to the amount of time remaining in the Term as defined by this Lease. Tenant shall reimburse Landlord upon demand for all costs incurred by Landlord in connection with such reletting, including, without limitation, necessary restoration, renovation, or improvement costs, reasonable attorneys' fees and brokerage commissions. The proceeds of such reletting shall be applied first to any sums then due and payable Landlord from Tenant, including the reimbursement described above. The balance, if any, shall be applied to the payment of future rent as it becomes due hereunder. (g) Landlord may change door locks if Tenant is delinquent in paying rent, provided Landlord posts notices as required by law. If Tenant abandons the premises, Landlord may permanently change the locks and Tenant shall not be entitled to a key or re-entry. No other notice requirements or lockout rights shall apply and Tenant Waiver any and all duties and/or liabilities imposed on Landlord by Section 92.008, TX. Prop. Code.]" 23. Landlord's Right to Cure Default. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be at its sole cost and expense and without any abatement of rental. If Tenant shall fall to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder and such failure shall have become an event of default under paragraph 22 above, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of Tenant, making any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by Landlord and all necessary incidental costs shall be deemed additional -13- rent hereunder and shall be payable to Landlord on demand together with Default interest from the date of expenditure by Landlord until repaid. 24. Attorneys' Fees. If as a result of any breach or default in the performance of any of the provisions of this Lease or in order to enforce its rights hereunder, Landlord or Tenant uses the services of an attorney in a nonjudicial action, at trial, or upon an appeal, to secure compliance with such provisions or recover damages therefor to exercise such rights, or to terminate this Lease or evict Tenant, non-prevailing party shall reimburse the other upon demand for any and all reasonable attorneys' fees and expenses so incurred by such party Landlord. 25. Subordination. (a) This Lease shall be subject and subordinated at all times to all ground or underlying leases which may hereafter by executed affecting the Building, and the lien of all mortgages and deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building or on or against Landlord's interest or estate therein or on or against all such ground or underlying leases, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing (1) in the event of termination for any reason whatsoever of any ground or underlying lease hereinafter executed, this Lease shall not be barred, terminated, cut off or foreclosed nor shall the rights and possession of Tenant hereunder be disturbed if Tenant shall not then be in default in the payment of rental or other sums or be otherwise in default under the terms of this Lease, and Tenant shall attorn to the Landlord of any such ground or underlying Lease, or, if requested, enter into new lease for the balance of the original or extended term hereof then remaining upon the same terms and provisions as are in this Lease contain; (2) in the event of a foreclosure of any such mortgage or deed of trust hereafter executed or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease will not be barred, terminated, cut off or foreclosed nor will the rights and possession of Tenant thereunder be disturbed if Tenant shall not then be in default in e payment of rental or other sums or be otherwise in default under the terms of this Lease, and Tenant shall attorn to the purchaser at such foreclosure, sale or other action or proceeding; and (3) Tenant agrees to execute and deliver upon demand such further instruments evidencing such subordination of this Lease, ground or underlying leases, and to the lien of any such mortgages or deeds of trust as may reasonably be required by Landlord. Tenant's covenant to subordinate this Lease to ground or underlying leases, and mortgages or deeds of trust hereafter executed is conditioned upon each such senior instrument containing the commitments specified in the preceding clauses (1) and (2). (b) Tenant shall mail by certified or registered post, return receipt requested, or personally deliver to any landlord under a ground lease or mortgage lender a duplicate copy of any and all notices in writing which Tenant may from time to time give to or serve upon Landlord pursuant to the provisions of this Lease, and such copy shall be mailed or delivered at, or as near as possible to, the same time such notices are given or served by Tenant. No notice by Tenant to Landlord hereunder shall be deemed to have been given unless and until a copy thereof shall have been so mailed or delivered to any ground lease landlord or mortgage lender. Upon the execution of any ground lease or mortgage. (c) Should any event of default by Landlord under this Lease occur, any ground lease landlord or mortgage lender shall have thirty (30) days after receipt of written notice from Tenant selling forth the nature of such event of default within which to remedy the default; provided that in the case of a default which cannot with due diligence be cured with such 30-day period, the ground lease landlord or mortgage lender shall have the additional time reasonably necessary to accomplish the cure, provided that (i) it has commenced the curing within such thirty (30) days and (ii) thereafter diligently prosecutes the cure to completion. If the default is such that the possession of the premises may be reasonably necessary to remedy the default, any ground lease landlord or mortgage lender shall have a reasonable additional time after the expiration of such 30-day period within which to remedy such default, provided that (i) it shall have fully cured any default in the payment of any monetary obligations of Landlord under this Lease within such thirty (30) day period and shall continue to pay currently such monetary obligations as and when the same are due and (ii) it shall have acquired Landlord's estate or commenced foreclosure or other appropriate proceedings within such period, or prior thereto, and is diligently prosecuting any such proceedings. In the event that such default materially interferes with Tenant's operation of its business or quiet enjoyment thereof, Tenant's Rent shall abate for a period equal to such interference. 26. No Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. 27. Sale by Landlord. In the event the original Landlord hereunder, or any successor owner of the Building shall sell or convey the Buildings, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon -14- all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such now owner. 28. Estoppel Certificate. At any time from time to time, but not more than once per year but not less than ten (10) days prior notice by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each such modification), (b) the date, if any, to which rental and other sums payable hereunder have been paid, (c) that no notice has been received by Tenant of any default which has not been cured, except as to defaults specified in said certificate, and (d) such other matters as may be reasonably requested by Landlord. Tenant hereby appoints Landlord to execute, acknowledge and deliver such certificate if Tenant shall fail to do so within the above-prescribed time period. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under any deed of trust of the Building. 29. Holdover Tenancy. If, without objection by Landlord, Tenant holds possession of the premises after expiration of the term of this Lease, Tenant shall become a tenant from month to month upon all of the terms specified in this Lease as applicable immediately prior to expiration of such term, except that minimum rent will be 150% of that applicable immediately prior to expiration of such term. Each party shall give the other notice of its intention to terminate such tenancy at least one month prior to the date of such termination. 30. Parking. (a) Any parking areas appurtenant or within the Building, or designated portions thereof, shall be available for the use of tenants of the Building, ad, to the extent designated by Landlord, the employees, agents, customers and invitees of said tenants, subject to the rules, regulations, charges and rates as set forth by the Landlord from time to time; provided, however, that Landlord may restrict to certain portions of the parking areas, parking for Tenant or other tenants of the Building and their employees and agents, and may designate other areas to be used only by customers and invitees of tenants of the Building. Notwithstanding anything herein contained, Landlord reserves the right from time to time to make reasonable changes in, additions to, and deletions from parking areas as now or hereafter constituted. (b) Landlord, or its agents, shall have the right to cause to be removed any cars, trucks, trailers or other motorized or nonmotorized vehicles of tenants, its employees, agents, guests or invitees that are parked in violation hereof or in violation of regulations of the Building, without liability of any kind to Landlord, its agents and employees, and Tenant agrees to hold Landlord harmless from and defend it against any and all claims, losses, or damages and demands asserted or arising in respect to or in connection with the removal of any such vehicles as aforesaid. Tenant shall from to time upon request of Landlord supply Landlord with a list of license plate numbers of all vehicles owned by its employees and agents who are to have parking privileges hereunder. Landlord may, as a part of the regulations promulgated by it for the use of the parking areas, require that Tenant cause any identification slicker issued by Landlord to be affixed to the bumpers or other designated location on all vehicles of Tenant and its employees and agents who are authorized to park in the parking areas. 31. Security Deposit. Tenant has deposited with Landlord the sum specified in the Basic Lease Information (the "deposit"). The deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the provisions of this Lease to be performed or observed by Tenant. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the deposit, Tenant shall within ten (10) days after demand therefore deposit cash with Landlord in an amount sufficient to restore the deposit to the full amount thereof. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, the deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration or earlier termination of the term hereof, and after Tenant has vacated the premises; provided that Landlord may retain such security deposit as security for the payment of any adjustment in rent following an expiration or by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. Landlord may retain such security deposit as security for the payment of any adjustment in rent following an expiration or termination pursuant to paragraph 7 (c) above and shall, upon the determination of such adjustment, apply the retained security deposit against any deficiency due Landlord and return the balance, if any, to Tenant. No trust relationship is created herein between Landlord and Tenant with respect to the -15- deposit. Such security deposit shall not be considered an advance payment of rental or a measure of Landlord's damages in cash of default by Tenant. 32. No Partnership. It is expressly understood that Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a member of a joint enterprise with Tenant. 33. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. 34. Waiver. The wavier by Landlord of any term, covenant, agreement or condition hereunder contained shall not be deemed to be a waiver of any other then existing or subsequent breach of the same or any other term, covenant, agreement or condition herein contained. Nor shall any custom or practice which may develop between the parties in the administration of the terms hereof be construed to waive or to lesson the right of the Landlord to insist upon the performance by Tenant in strict accordance with such term. The subsequent acceptance of rent or any other sum of money or other performance hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant, agreement or condition of this Lease, other than the failure of Tenant to pay the particular rent or other sum so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent or other sum performance. 35. Notices and Consents. All notices, demands, consents or approvals which may be given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, and addressed as follows: to Tenant at the address specified in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a notice to Landlord; to Landlord at the address specified in the Basic Lease Information, or touch place as Landlord may from time to time designate in a notice to Tenant; or, in the case of Tenant, delivered to Tenant at the premises. Tenant hereby appoints as its agent to receive the service of all dispossessory or distraint proceedings and policies thereunder and person or persons in charge of or occupying the premises at the time, and, if no person shall be in charge of or occupying the same, then such service may be made by attaching the same on the main entrance of the premises. 36. Complete Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements, understandings, if any between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease or the Building. There are no representations between Landlord and Tenant other than those contained in this Lease and all reliance with respect to any representations is solely upon the representation contained herein. This Lease may note amended or modified in any respect whatsoever except by an instrument in writing signed by Landlord and Tenant. 37. Corporate Authority. If Tenant signs as a corporation, each of the persons executing this Lease on behalf of the Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation, that Tenant is qualified to do business in the state in which the Building is situated, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. 38. Limits to Tenant's Remedy. If Landlord should default in the performance of its obligations hereunder, it is understood and agreed that any claims by Tenant against Landlord shall be limited to recourse to Landlord's interest in the Building. Tenant expressly waives any and all rights otherwise to proceed on a recourse basis against Landlord, the individual partners or Landlord, or the officers, directors and shareholders of any corporate partner of Landlord. 39. Brokers. Tenant warrants that it has had no dealing with any real estate broker or agents in connection with the location or negotiation of this Lease other than any broker or agent identified in paragraph 45 below. 40. No Light and Air Easement. No diminution or shutting off of light, air, or view by an y structure which may be erected on lands adjacent to or in e vicinity of the Building shall in any way affect this Lease or impose any liability on Landlord. 41. Miscellaneous. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not be effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. The terms, covenants, agreements and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. If any provisions of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provisions of this Lease and all such other -16- provisions shall remain in full force and effect. Landlord and Tenant agree that each party and its counsel have reviewed this Lease and that the normal rule of construction to the effect that ambiguities are to be resolved against the drafting party is not appropriate and shall not be employed in the interpretation of this Lease. This Lease shall be governed by and construed pursuant to the laws of the state in which the Building is situated. 42. Signs. (a) Tenant shall purchase and erect one sign on the front of the premises not later than the date Tenant opens for business or within thirty (30) days of date of commencement of the Lease, whichever is sooner. Such sign shall be subject to Landlord's approval including, without limitation, location, size and design. It is Tenant's responsibility to maintain, repair and replace said sign as required by Landlord during the tenure of this Lease. (b) Without the prior written consent of Landlord, Tenant shall not place or permit to be placed (1) any sign, advertising material or lettering upon the exterior of the premises or (2) any sign, advertising material or lettering upon the exterior or interior surface of any door or show window or at any point inside the premises from which the same may be visible from outside the premises. Upon request of Landlord, Tenant shall immediately remove any sign, advertising material or lettering which Tenant has placed or permitted to be placed in, on or about the premises contrary to the provisions of the preceding sentence, and if Tenant fails so to do, Landlord may enter upon the premises and remove the same at Tenant's expense. Tenant shall comply with such regulations as may from time to time be promulgated by Landlord governing signs, advertising material or lettering of all tenants in the retail area, provided that Tenant shall note required to change any sign or lettering that was in compliance with applicable regulations at the time it was installed or placed in, on or adjacent to the premises. 43. Surrender of Premises. At the termination of this Lease, or any renewal term thereof, Tenant shall surrender the premises in the same condition (subject to the removals herein required) as the premises were on the date the Tenant opened the premises for business with the public, reasonable wear and tear excepted, and shall surrender all keys for the premises to Landlord at the place then fixed for the payment of rent and shall inform Landlord of all combinations on locks, safes and vault, if any, in the premises. Tenant, during the last thirty (30) days of such term, shall remove all its trade fixtures, and to the extent required by Landlord by written notice, before surrendering the premises as aforesaid and shall repair any damage to the -17- premises caused thereby. Tenant's obligation to observe or perform any covenant of this Lease shall survive the expiration or other termination of the Lease Term. 44. Additional Provisions. ***[45. Usutruct]. This contract and Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord and Tenant has only a usutruct which is not subject to levy and sale.] IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to be duly executed, sealed and delivered on the date set forth below. TENANT By Derata Corporation ___________________________ By /s/ William Dirk Dunlap ------------------------- ___________________________ Date of Execution By Tenant: 12/26/90 * - --------------------------- Witness * - --------------------------- Witness *For use in Florida only. **For use in Washington, Arizona and North and South Carolina. ***For use in Georgia only. MINNEAPOLIS BUSINESS PARKS JOINT VENTURE, A California general partnership By: Century Pension Income Fund XXIV, a California limited partnership By: Fox Partners VI, a California general partnership, its general partner By: Metric Realty Services, L.P., a Delaware limited partnership, as Attorney-in-Fact By: MP Services, Inc., a Delaware corporation, its general partner By: /s/ Richard C. Dooley ------------------------ Richard C. Dooley Portfolio Manager -18- EXHIBIT A Legal Description of Building Parcel 1: That part of Lot 1, Block 4, Minneapolis Industrial Park 2nd Addition lying West of the East 368 feet thereof, according to the recorded plat thereof, and situated in Hennepin County, Minnesota. Abstract Property. Parcel 2: That part of Lot 3, Block 4, Minneapolis Industrial Park 2nd Addition, lying North of the South 300 feet thereof, and lying West of a line drawn parallel to and 368 feet West of the East line of Lot 1, Block 4, extended South. Also that part of Lot 2, Block 4, Minneapolis Industrial Park 2nd Addition, lying North of the following described line: Beginning at the point of intersection of a line parallel to and 281.5 feet North of the South lot line of said Lot 2, with the West lot line of said Lot 2; thence Easterly along said parallel line to its intersection with a line perpendicular to the South line of said Lot 2 from a point therein distant 237.5 feet West of the Southeast corner of said Lot 2; thence Northerly along said perpendicular line a distance of 20 feet; thence Easterly along a line parallel to the South line of said Lot 2, a distance of 230 feet; thence Southerly along a line drawn perpendicular to the South line of said Lot 2 a distance of 1.5 feet; thence Easterly along a line drawn parallel to the South line of said Lot 2 to its intersection with the East line of said Lot 2, and there terminating, according to the recorded plat thereof, and situate in Hennepin County, Minnesota. Abstract Property. Registered Property. Parcel 3: The East 388 feet of Lot 1, Block 4, Minneapolis Industrial Park 2nd addition, except that part lying South of the North 530 feet thereof, according to the recorded plat thereof, and situated in Hennepin County, Minnesota [daily] EXHIBIT C Rules and Regulations 1. The sidewalks, halls, passages, exits, entrances, elevators and stairways of the Building shall not be obstructed by any of the Tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its Tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No Tenant and no employee or invitee of any Tenant shall go upon the roof of the Building 2. No sign, placard, picture, name, advertisement or notice visible for the exterior of any Tenant's premises shall be inscribed, painted, affixed or otherwise displayed by any Tenant on any part of the Building without the prior written consent of the Landlord. Landlord will adopt and furnish to Tenant general guidelines, but may request approval of Landlord for modification, which approval will note unreasonably withheld. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of the Tenant by a person approved by Landlord, which approval will not be unreasonably withheld. Material visible from outside the Building will not be permitted. 3. The premises shall note used for lodging or the storage of merchandise held for sale to the public, unless ancillary to a restaurant or other food service use specifically authorized in the lease of a particular Tenant, no cooking shall be done or permitted by any Tenant on the premises, except that the preparation of coffee, tea, hot chocolate and similar items for Tenants and their employees shall be permitted. 4. Landlord will furnish each Tenant a reasonable amount of keys free of charge upon occupancy. Landlord may make reasonable charge for any additional keys. No Tenant shall have any keys made. No Tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises without the prior consent of Landlord. Each Tenant shall in each case furnish Landlord with a key for any such lock. Each Tenant upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Building which shall have been furnished to Tenant. Each Tenant shall see that the doors of its premises are closed and securely locked at such times as Tenant's employees leave the premises. 5. No Tenant shall use or keep in the premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material or use any method of heating or air conditioning other than that supplied by Landlord. No Tenant shall use, keep or permit to be used or kept any foreign or noxious gas or substance in the premises, or permit or suffer the premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations, or interfere in any way with other Tenants or those having business therein. 6. In the case of invasion, mob, riot, public excitement, or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such an action as Landlord deems appropriate, including closing entrances to the Building. 7. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, sloppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it. 8. Except with prior consent of Landlord, no Tenant shall sell, or permit the sale in the premises or use or permit the use of any common area for the sale of newspapers, magazines, periodicals, theatre tickets or any other goods, merchandise or service. Tenant shall not carry on, or permit or allow any employee or other person to carry on the business of stenography, typewriting, or any similar business in or from the premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any Tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in such Tenant's lease. 9. Tenant shall not use any advertising media which may be heard outside of the premises, and Tenant shall not place or permit the placement of any radio or television, or other communications antenna, loudspeaker, sound amplifier, phonograph, searchlight, flashing light or other device of any nature on the roof or outside of the boundaries of the premises (except for Tenant's approved identification sign or signs) or at any place where the same may be seen or heard outside of the premises. 10. All loading and unloading of merchandise, supplies, material, garbage and refuse shall be made only through such entryways and elevators and at such times as Landlord shall designate. In its use of the load areas the Tenant shall not obstruct or permit the obstruction of said loading area and at no time shall park or allow its officers, agents or employees to park vehicles therein except for loading and unloading. 11. Landlord shall have the right, exercisable with reasonable notice and without liability to any Tenant, to change the name and street address of the Building. 12. No Tenant shall obtain for use in the premises, ice, drinking water, food beverage, towel or other similar services, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. 13. Each Tenant shall see that the doors of its premises are closed, locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the premises, so as to prevent waste or damage, and for any default or carelessness in this regard Tenant shall be liable for, and shall indemnify Landlord against and hold Landlord harmless for, from and against all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all Tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 14. No Tenant shall use any portion of the common area for any purpose when the premises of such Tenant are not open for business or conducting work in preparation therefor. 15. The requirements of the Tenants will be attended to only upon application by telephone or in person at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 16. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the Tenants of the Building. 17. These Rules and Regulations are in addition to and shall note construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any Lease of premises in the Building. 18. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein. EXHIBIT D ADDENDUM TO LEASE THIS ADDENDUM to Lease Agreement is attached to and forms a part of that certain lease dated December 26, 1990, by and between Minneapolis Business Parks Joint Venture, a California general partnership as Landlord ("Landlord") and Derata Corporation, as Tenant ("Tenant"), as the same shall modify, amend, supplement or alter the terms and provisions of said Lease Agreement and by these presents shall be incorporated therein by reference and form a part thereof for all purposes. In consideration of the Premises, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto further mutually agree as follows: 1. Rent. Subject only to the provisions of paragraphs 5, 6 and 7 of ---- this Lease, Tenant shall pay monthly rent in e following amounts during the term of this Lease. (a) Commencing the later of February 1, 1991, or the Commencement Date, as defined hereafter, and continuing for the three successive months after the Commencement Date, Tenant shall be responsible for the payment of only taxes and operating expenses as defined in Paragraphs 1-7 of the lease and estimated at $1,218.00. (b) Commencing after the third successive month following the Commencement Date, unless otherwise extended as provided hereafter, and continuing through the Termination Date, as defined hereafter, Tenant shall pay rent equal to $3,609 payable as follows: (i) monthly rent equal to $2,391 as base rent; and (ii) in addition to and not in lieu of monthly rent, taxes and operating expense estimated at $1,218.00 In the event of any fractional calendar month at the beginning or termination of the term, Tenant shall pay for each day in such partial month rent equal to one-thirtieth of the monthly rent and additional rent. 2. Commencement Date. This Lease shall commence February 1, 1991 (the ----------------- "Commencement Date") and terminate April 30, 1996 (the "Termination Date"). Notwithstanding the foregoing, Tenant shall have the right to occupy the office portion of the Premises on or before January 28, 1991. In the event that Landlord completes Tenant Improvements, as defined hereafter, prior to the Commencement Date, Tenant shall have the right to occupy the Premises pursuant to the terms and conditions of the Lease, except Tenant shall not be required to pay any rent prior to the Commencement Date. Notwithstanding Tenant's early occupancy of the Premises, the Commencement Date and Termination Date, as defined herein, shall remain the same. In the event that either a portion of or the entire Premises is not ready for occupancy as of February 1, 1991, the Commencement Date and Termination Date shall be extended by an amount of time equal to the delay. Further, Landlord will be given 30 days to complete the improvements to the space following mutual execution of this Lease. Should said improvements not be substantially complete and, as a result, cause an interruption in Tenant's ability to conduct its business; then rent shall be abated in an equivalent to the length of said interruption. 3. Parking. Tenant shall have the temporary exclusive use of 18 ------- parking spaces directly in front of and adjacent to the premises, as crosshatched on Exhibit B. Landlord and Tenant acknowledge that approximately half the parking spaces directly adjacent to the premises are a result of the vacant unleased space adjacent to the premises. In the event this vacant space is occupied during the term of this lease, the parking spaces directly adjacent to Tenant's premises may be insufficient to satisfy Tenant's parking as required by this paragraph. If as a result of the vacant spaces occupancy, Landlord is unable to provide 18 tenant parking spaces adjacent to the premises and Tenant demonstrates a need for additional parking either in front of the premises or adjacent to the premises (including the rear of the building), Landlord will create additional parking by constructing a parking area on the southside of the building adjacent to the premises. 4. Additional Space. Tenant shall have the first opportunity to lease, ---------------- for a minimum of 24 months, any available space adjacent to the premises upon the third anniversary date of the commencement date, provided that such additional space exceeds 2,000 square feet of the amount of net rentable space contained in the lease premises. In the event Tenant requires additional space of 2,000 square feet and adjacent space is not available to satisfy Tenant's additional needs, Landlord shall have the right to relocate Tenant to alternate comparable space which is suitable to satisfy Tenant's needs within the West Point Business Center Complex. In the event of such relocation, Landlord shall be solely responsible for the cost of tenant improvements and reasonable moving costs necessary to relocate Tenant, and any lease shall be upon the same terms and conditions contained in this lease including rental on a per square foot basis for the first two years of occupancy of the new space. The following three years of the lease shall be based on the then market rates for comparable space. In the event that (i) such additional space is unavailable; or (ii) the alternate space is not suitable to satisfy Tenant's needs, then Tenant shall have the right to terminate this lease, provided Tenant gives Landlord ninety (90) days written notice prior to such termination. In the event Tenant terminates this lease, Tenant shall pay Landlord the unamortized portion of tenant improvements installed by Landlord (as hereafter defined), any unamortized leasing commission paid, and two (2) months of base rent. 5. Tenant Improvements. Prior to the Commencement Date of this Lease, ------------------- Landlord shall construct the following improvements at its sole cost and expense. See Exhibit B and B1 Space Plan. Landlord's contractor needs a minimum of thirty (30) days to construct the space after mutual execution of this lease. 6. HVAC System. Notwithstanding anything contained in paragraph 13 of ----------- the Lease, Landlord represents and warrants that the HVAC system is in good order and repair as of the Commencement Date of the Lease. In the event that the HVAC system needs any repair during the term of the Leave, and such repair exceeds $500.00, Landlord and Tenant shall divide the cost of such expense in the following manner: (a) During lease year 1, Landlord shall pay 100 percent; (b) During least year 2, Landlord shall pay 80 percent and Tenant shall pay 20 percent; (c) During lease year 3, Landlord shall pay 60 percent and Tenant shall pay 40 percent. (d) During lease year 4, Landlord shall pay 40 percent and Tenant shall pay 60 percent; and (e) During lease year 5, Landlord shall pay 20 percent and Tenant shall pay 80 percent. Tenant further agrees to enter into a maintenance contract with a qualified contractor to provide quarterly maintenance to the HVAC units. Tenant shall provide Landlord with a copy of such agreement within thirty (30) days of the commencement of this Lease. Notwithstanding the foregoing, Tenant's contribution to such repair shall not exceed $1,500 in any lease year. 7. Operating Expense. Notwithstanding anything contained in paragraph ----------------- 1(d), operating expense shall exclude: (a) leasing commissions, attorneys' fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, or prospective tenants or other occupants of the Building; (b) costs of correcting defects in the design or construction of the Building or material used in the construction of the Building (including latent defects in the Building or the inadequacy of design of the Building) or in the Building equipment or appurtenances thereto, except that for the purposes of this subparagraph conditions (not occasioned by design or construction defects) resulting from ordinary wear and tear and use shall not be deemed defects; and (c) costs of Landlord's general corporate overhead and general administrative expenses (including but not limited to costs paid to third parties to collect rents, prepare tax returns and accounting reports and obtain financing) and any expenses related to the formation or continue existence of the partnership of Landlord. 8. Indemnification. Tenant shall not be liable to Landlord and Landlord --------------- hereby waives all claims against Tenant for any injury to or death of any person or damage to or destruction of property in or about the Building by or from any cause whatsoever, including without limitation acts of other tenants or third parties, gas, fire, oil, or electricity, provided that such damage is not the result of any default or omission of Tenant pursuant to the terms and conditions of this Lease. Landlord shall hold Tenant harmless for, from and against and defend Tenant against any and all claims, liability, damage or loss and for, from and against all costs and expenses, including reasonable attorneys' fees, arising out of any injury to or death of person or damage to or destruction of any property, from any cause whatsoever, except any cause resulting solely from the negligence or willful act of Tenant, it authorized agents or employees, occurring in or about the Building, and if occurring on or about any portion of the common areas or elsewhere in or about the Building, when such injury or damage shall be caused in whole or in part by the act, neglect, default or omission of any duty of Landlord, its agents, employees or invitees. The provisions of this paragraph shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. 9. Consent. Whenever consent is required by Landlord or Tenant under any ------- term or condition of this Lease, such consent shall not be unreasonably withheld or delayed. 10. Conflicting Terms. In the event that any term or condition of this ----------------- Addendum conflicts with any term or condition of the Lease this Addendum shall control. IN WITNESS WHEREOF, the parties have executed this Addendum the day and year first written above. Tenant: DERATA CORPORATION By: /s/ William Dirk Dunlap ---------------------------------- W. Dirk Dunlap Landlord: MINNEAPOLIS BUSINESS PARKS JOINT VENTURE, a California general partnership By: Century Pension Income Fund XXIV, a California limited partnership By: Fox Partners VI, a California general partnership, its general partner By: Metric Realty Services, L.P., a Delaware limited partnership, as Attorney-in-Fact By: MP Services, Inc., a Delaware corporation, its general partner By: /s/ Richard C. Dooley ---------------------------------- Richard C. Dooley Portfolio Manager This Modification and Ratification of Lease Agreement is made and entered into between Minneapolis Business Parks Joint Venture (Landlord) and Medi-Ject Corporation. (Tenant) for and in consideration of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged. WITNESSETH: Landlord and Tenant hereby confirm and ratify, except as modified below, all of the terms, conditions, and covenants in that certain written Lease Agreement dated January 2, 1991 and modified December 6, 1993 and January 29, 1996, between Landlord and Tenant for the rental of the following described property: 8943 square feet of space located in Westpoint Business Center, 1840 Berkshire Lane Plymouth, Minnesota 55441. 1. The term of this lease will be extended six months with the new termination date becoming April 30, 1997. 2. Effective November 1, 1996, monthly rent will continue to be $6809.00. This amount includes base operating costs of $2436.97. 3. For purposes of this Modification, Tenant shall accept the space "as is". All other terms and conditions of the Lease remain in full force and effect. TENANT: ON BEHALF OF FOX FUNDS: Medi-Ject Corporation Minneapolis Business Parks Joint Venture, a California General Partnership, Owner Westpoint Business Center, BY: /s/ Mark Derus BY: Metric Management Inc. --------------------------- d/b/a Metric Property Management, a Delaware corporation, as agent for the Owner ITS: CFO BY: /s/ Rita Ubi ----------------------------- Its Authorized Representative DATE: 6/5/96 This Modification and Ratification of Lease Agreement is made and entered into between Minneapolis Business Parks Joint Venture (Landlord) and Medi-Ject Corporation. (Tenant) for and in consideration of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged. WITNESSETH: Landlord and Tenant hereby confirm and ratify, except as modified below, all of the terms, conditions, and covenants in that certain written Lease Agreement dated January 2, 1991 and modified December 6, 1993, between Landlord and Tenant for the rental of the following described property: 8943 square feet of space located in Westpoint Business Center, 1840 Berkshire Lane Plymouth, Minnesota 55441. 1. The term of this lease will be extended six months with the new termination date becoming October 31, 1996. 2. Effective May 1, 1996, monthly rent will be $6809.00. This amount includes base operating costs of $2436.97. 3. For purposes of this Modification, Tenant shall accept the space "as is". All other terms and conditions of the Lease remain in full force and effect. TENANT: ON BEHALF OF FOX FUNDS: Medi-Ject Corporation Minneapolis Business Parks Joint Venture, a California General Partnership, Owner Westpoint Business Center, BY: /s/ Mark Derus BY: Metric Management Inc. --------------------------- d/b/a Metric Property Management, a Delaware corporation, as agent for the Owner ITS: CFO BY: /s/ Rita Ubi ------------------------------- Its Authorized Representative DATE: 1/29/96 This Modification and Ratification of Lease Agreement is made and entered into between Minneapolis Business Parks Joint Venture (Landlord) and Derata Corporation (Tenant) for and in consideration of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged. WITNESSETH: Landlord and Tenant hereby confirm and ratify, except as modified below, all of the terms, conditions, and covenants in that certain written Lease Agreement dated January 2, 1991 between Landlord and Tenant for the rental of the following described property: 5414 square feed of space located in Westpoint Business Center, 1840 Berkshire Lane, Plymouth, Mn. 55441 1. For purposes of this Modification Tenant's name shall be changed to Medi-Ject Corporation. 2. Tenant's leased square footage shall increase by 3529 square feet effective February 1, 1994. Tenant's total leased space will be 8943 square feet. 3. Effective February 1, 1994 Tenant's new monthly rent shall be $8967.97. 4. Landlord shall, at it's sole cost, construct the improvements in the new space and make changes in Tenant's existing space according to the mutually agreed to space plan dated Sept. 15, 1993, and revised 10/15/93 and 11/29/93. 5. Tenant's operating stop shall be changed to $3.27. 6. Should expansion space be available for occupancy prior to February one, Tenant may occupy early at no additional cost other than utilities. 7. All other terms and conditions shall remain the same. TENANT: LANDLORD: Medi-Ject Corporation Minneapolis Business Parks Joint Venture, a California General Partnership, BY: /s/ William D. Dunlap BY: Century Pension Income --------------------------- Fund XXIV, a California Limited Partnership, Its General Partner ITS: President BY: Metric management Inc. a Delaware limited partnership, as Attorney- In-Fact DATE: 12/6/93 BY: /s/ Stephen B. Harn ------------------------------ Its Authorized Representative EX-10.2 9 PROMISSORY NOTE TO FRED SHAPIRO Minneapolis, Minnesota $100,000.00 August 29, 1994 PROMISSORY NOTE FOR VALUE RECEIVED, Medi-Ject Corporation ("Maker") hereby promises to pay to the order of Fred Shapiro, or his successors or assigns, as the case may be ("Payee"), at Minneapolis, Minnesota, or such other place as may be specified in writing, to Payee the principal sum of One Hundred Thousand Dollars ($100,000.00). Simple interest shall accrue on the unpaid balance at a rate of interest of twelve percent (12%) per annum. During the term of this note, interest payments in the amount of $1,000.00 each shall be payable on the first day of each month beginning October 1, 1994. The principal amount of this Promissory Note and any remaining accrued interest on it shall be payable to Payee on August 29, 1995. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest, and in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys' fees. No payments of principal are required at anytime prior to August 29, 1995. Satisfaction of this note prior to August 29, 1995 is permitted only if the Maker has made payments to Payee hereunder of an aggregate amount of One Hundred Twelve Thousand Dollars ($112,000). This promissory note shall be governed by the laws of the state of Minnesota. IN WITNESS WHEREOF, Maker has executed this Promissory Note as of the date first written above. MEDI-JECT CORPORATION By: /s/ Franklin Pass --------------------------- Franklin Pass Its: Chairman & CEO EX-10.3 10 SECURITY AGREEMENT Exhibit 10.3 SECURITY AGREEMENT ------------------ AGREEMENT, made this 30th day of September, 1994 by and between Medi-Ject Corporation of Plymouth, Minnesota (hereinafter referred to as "Debtor") and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership (hereinafter referred to as "Noteholders"). WITNESSETH; WHEREAS, Debtor has delivered to Noteholders its promissory notes dated September 30, 1994 in the principal amount totaling $344,845.00 as of the date hereof (the "Promissory Notes") in consideration for the cancellation of certain notes and the payment of forty thousand five hundred and thirty one dollars and ten cents ($40,531.10) in accrued interest due on such notes. WHEREAS, Noteholders have required that Debtor grant, and Debtor is willing to grant to Noteholders, a security interest in certain assets of the Debtor as described in Exhibit A attached to this agreement, as security for the payment by Debtor of its obligations under the Promissory Notes. NOW THEREFORE, in consideration of the premises and the mutual covenants set forth below and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor and Noteholders hereby agree as follows: 1. Grant of Security Interest. -------------------------- 1.1 As security for the payment of any amount at any time due, whether or not by acceleration, to Noteholders from Debtor pursuant to the Promissory Note, Debtor hereby grants a security interest to Noteholders in the assets of the Debtor described in Exhibit A to this agreement. 1.2 Immediately upon execution of this agreement, Debtor will deliver to Noteholders a properly executed UCC statement covering the Collateral (the "Collateral"). 2.0 Transfer or Assignment. ---------------------- Except as provided or specifically permitted herein, Debtor shall not pledge, sell, assign, transfer or otherwise dispose of any item of Collateral other than in the ordinary course of business without the written consent of Noteholders. 3.0 Event of Default. ---------------- An "Event of Default" shall occur in the event Debtor fails to make timely payment of all amounts due under the Promissory Note as they become due. Upon occurrence of an Event of Default, the Noteholders may, during the continuance of such Event of Default, provide notice of the default to Debtor and if such default is not cured within thirty (30) days of Debtor's receipt of such notice, Noteholders shall have the option to declare this agreement in default and thereupon Noteholders will be authorized to exercise and shall have, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of Minnesota and any other applicable laws and the rights and remedies provided in this agreement. 4.0 Release of Collateral. --------------------- The security interest created by this Security Agreement shall terminate immediately upon payment in full of the Promissory Note. Upon such termination, Noteholders shall execute and deliver to Debtor such termination statements and other instruments of release as Debtor may reasonably require. 5.0 Waiver. ------ This Agreement cannot be waived, modified, amended or terminated except by a writing duly executed by the Noteholders. A waiver shall be effective only in the specific instance and for the specific purpose given. 6.0 Cooperation. ----------- At the execution of this agreement and at any time or from time to time thereafter, each of the parties agrees to cooperate in carrying out the terms of this agreement, including the execution and delivery of such further instruments and documents as may be reasonably requested in order to more effectively carry out the terms and conditions hereof. 7.0 Notices. ------- All notices required or permitted hereunder shall be in writing and shall be deemed received on the date the notice is delivered personally or on the second business day following the date the notice is mailed postage prepaid, addressed as follows, or at such address as the Debtor or the Noteholders shall notify the other in compliance with these requirements: If to Debtor: Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, MN 55441 If to Noteholders: The Winton Company 1910 IDS Center 80 South Eight Street Minneapolis, MN 55402 8.0 Miscellaneous. ------------- All the terms, covenants, representations, warranties and conditions of this agreement shall be binding upon, and inure to the benefit of and be enforceable by Debtor and Noteholders and their respective heirs, successors and assigns, but this agreement shall not be assignable without written permission of the other party. The section headings are for reference purposes only and shall not in any way affect the meaning or interpretation of this agreement. The agreement shall be governed and construed under the laws of the State of Minnesota. IN WITNESS WHEREOF, Debtor and Noteholders have duly executed this agreement as of the date set forth in the first paragraph. Medi-Ject Corporation By: /s/ Franklin Pass ------------------------ Its: Chairman Noteholders: Kelsey Lake Limited Partnership By: /s/ Bradley E. Foss ------------------------ Its: Attorney-in-Fact Kerry Lake Company By: /s/ Bradley E. Foss ------------------------ Its: Attorney-in-Fact EXHIBIT A TO SECURITY AGREEMENT Collateral, as used in the Security Agreement dated September 30, 1994 between Medi-Ject Corporation and Kelsey Lake Limited Partnership and Kerry Lake Company, shall consist of the following assets of Debtor, whether now owned, or hereafter acquired: (i) all inventory, (ii) all equipment, (iii) all accounts receivable and other rights to the payment of money, and (iv) all general intangibles, and except that Collateral shall not include (i) any asset subject to a contract or agreement that restricts the Debtor's right to transfer an interest therein or subject to a purchase money security interest or (ii) any contract rights arising out of any contract that restricts the Debtor's right to transfer an interest therein. EX-10.4 11 PROMISSORY NOTE TO KELSEY LAKE LIMITED PARTNERSHIP Exhibit 10.4 Minneapolis, Minnesota $277,086.00 September 30, 1994 PROMISSORY NOTE FOR VALUE RECEIVED, Medi-Ject Corporation ("Debtor") hereby promises to pay to the order of Kelsey Lake Limited Partnership or its successors or assigns, as the case may be ("Noteholder"), at Minneapolis, Minnesota, or such other place as may be specified in writing, the principal sum of two hundred seventy-seven thousand and eighty six dollars ($277,086.00) together with simple interest which shall accrue on the unpaid balance at a rate of ten percent (10%) per annum. During the term of this note, 36 monthly payments in the amount of $8,940.79 each shall be payable on the first day of each month beginning November 1, 1994. The principal amount of this Promissory Note and any remaining accrued interest on it shall be payable to Noteholder on October 15, 1997. Debtor hereby waives presentment for payment, notice of dishonor, protest and notice of protest, and in the event of default hereunder, Debtor agrees to pay all costs of collection, including reasonable attorneys' fees. This Promissory Note and all amounts due hereunder are secured by a Security Agreement made this same date and delivered to Noteholder with this Promissory Note. This Promissory Note shall be governed by the laws of the state of Minnesota. IN WITNESS WHEREOF, Debtor has executed this Promissory Note as of the date first written above. MEDI-JECT CORPORATION By: /s/ Franklin Pass ---------------------- Franklin Pass Its: Chairman & CEO EX-10.5 12 PROMISSORY NOTE TO KERRY LAKE COMPANY Exhibit 10.5 Minneapolis, Minnesota $67,759.00 September 30, 1994 PROMISSORY NOTE FOR VALUE RECEIVED, Medi-Ject Corporation ("Debtor") hereby promises to pay to the order of Kerry Lake Company, a Limited Partnership or its successors or assigns, as the case may be ("Noteholder"), at Minneapolis, Minnesota, or such other place as may be specified in writing, the principal sum of sixty - seven thousand seven hundred fifty nine dollars ($67,759.00) together with simple interest which shall accrue on the unpaid balance at a rate of ten percent (10%) per annum. During the term of this note, 36 monthly payments in the amount of $2,186.39 each shall be payable on the first day of each month beginning November 1, 1994. The principal amount of this Promissory Note and any remaining accrued interest on it shall be payable to Noteholder on October 15, 1997. Debtor hereby waives presentment for payment, notice of dishonor, protest and notice of protest, and in the event of default hereunder, Debtor agrees to pay all costs of collection, including reasonable attorneys' fees. This Promissory Note and all amounts due hereunder are secured by a Security Agreement made this same date and delivered to Noteholder with this Promissory Note. This Promissory Note shall be governed by the laws of the state of Minnesota. IN WITNESS WHEREOF, Debtor has executed this Promissory Note as of the date first written above. MEDI-JECT CORPORATION By: /s/ Franklin Pass ---------------------- Franklin Pass Its: Chairman & CEO EX-10.6 13 LOAN AGREEMENT WITH ETHICAL HOLDINGS, PLC Exhibit 10.6 LOAN AGREEMENT THIS LOAN AGREEMENT is entered into as of December 22, 1995 by and between Ethical Holdings, plc ("Ethical") and Medi-Ject Corporation ("Medi-ject"). WHEREAS, Medi-Ject desires to borrow money from Ethical and Ethical is willing to make a loan to Medi-Ject upon the terms and conditions set forth in this Agreement; and WHEREAS, Medi-Ject and Ethical are parties to an Option Agreement dated September 27, 1995, as subsequently amended (the "Option Agreement") pursuant to which Ethical has the option (the "Option") to purchase from Medi-Ject 500,000 shares of Series B Convertible Preferred Stock of Medi-Ject (the "Series B Preferred Stock"); and WHEREAS, pursuant to an amendment to the Option Agreement dated as of the date hereof, Medi-Ject has agreed to decrease the exercise price per share under the Option to $1.25 per share with respect to 250,000 shares; and WHEREAS, Ethical agrees that the loan to Medi-Ject shall be repaid by Ethical's exercise of the Option provided such loan is repaid upon the closing of Medi-Ject's next round of equity financing of $1,000,000 or more. NOW, THEREFORE, the parties agree as follows: 1. Loan Commitment. Upon the terms and subject to the conditions of this --------------- Agreement, Ethical agrees to lend (and upon repayment, will relend) to Medi- Ject, during the period on and after the date hereof until the Repayment Date (as defined in Section 5 hereof), in such amounts and at such times as Medi-Ject shall request, amounts up to, but not exceeding in aggregate principal amount at any time outstanding, $312,500. 2. Note. Amounts advanced by Ethical under this Agreement shall be ---- evidenced by a promissory note, dated the date hereof, payable to the order of Ethical in the amount of $312,500 (the "Note"). 3. Interest. Medi-Ject will pay Ethical interest on the unpaid principal -------- amount of each outstanding advance at a rate provided for in the Note. 1 4. Advances. --------- (a) Ethical shall automatically advance funds to Medi-Ject in the amounts and on the dates set forth below: December 29, 1995 $125,000 January 15, 1996 $125,000 January 31, 1996 $ 62,500
(b) Funds shall be sent to Medi-Ject by wire transfer on the date specified as follows: Norwest Bank N.A. ABA Number: 091000019 Account Name: Medi-Ject Corporation Account Number: 3238691379 5. Repayment. --------- (a) All principal amounts outstanding under the Note and all accrued interest thereon shall become due and payable upon the earlier to occur of (i) the date Medi-Ject closes its next round of equity financing of $1,000,000 or more or (ii) the date which is one year from the date hereof (in either case, the "Repayment Date"). (b) In the event the Repayment Date is triggered by clause (a)(i) of this Section 5, Ethical agrees to exercise the Option with respect to such full number of shares of Series B Preferred Stock as is equal to the amount of principal and interest due under the Note divided by the exercise price per share ($1.25 as of the date hereof), up to the number of shares purchasable under the Option, and that the aggregate exercise price thereunder shall be credited against the amount due under the Note. (c) Notwithstanding the above, Medi-Ject shall have the right to prepay the Note voluntarily from time to time, in whole or in part, and any such prepayment shall be applied first to the payment of accrued interest and then to the payment of principal. 6. Negative Covenants. Unless Ethical shall otherwise consent in ------------------ writing, Medi-Ject will not: (a) Create or grant any mortgage, security interest or any other lien on any of Medi-Ject's assets, except for (i) liens in favor of Ethical (ii) liens 2 existing on the date hereof or (iii) liens incurred by Medi-Ject which are incidental to the conduct of its business which were not incurred in connection with the borrowing of money or the acquisition of property on credit and which do not in the aggregate materially detract from the value of Medi-Ject properties or assets or materially impair the use thereof in the operation of the business of Medi-Ject. (b) Borrow any money, or sign any promissory note, except for loans from Ethical and notes to Ethical. (c) Sell any of its assets, except in the ordinary course of business. (d) Consolidate or merge with any other corporation or acquire the assets of any corporation or other business. (e) Pay any dividends or otherwise make any distributions on, or redemptions of, any of its outstanding stock. 7. Default. An Event of Default shall exist if Medi-Ject breaches any of ------- its obligations under this Agreement or the Note. Upon an Event of Default, Ethical's obligation to advance funds to Medi-Ject under this Agreement shall immediately terminate and Ethical may, at its option, declare all amounts outstanding under the Note due and payable 30 days from the date of such notice if such Event of Default has not been cured as of such date, provided, however, that, in the event Medi-Ject becomes insolvent, or bankruptcy proceedings involving the Company are initiated, this Agreement shall terminate immediately as of the date of such event. 8. U.S. Dollars. All dollar amounts referred to herein and in the Note ------------ shall refer to dollars of the United States of America. 9. Governing Law. This Agreement, the Promissory Note and the amendment ------------- to the Option Agreement shall be governed by and construed in accordance with the laws of the United States and the domestic laws of the State of Minnesota, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the United States and the State of Minnesota. Medi-Ject hereby represents and warrants that this Agreement is enforceable under Minnesota law. 10. Amendment. No amendment or modification to or waiver under this --------- Agreement shall be effective unless it is in writing and signed by both of the parties hereto. 3 11. Notices. Any notice or communication under any of the provisions of ------- this Agreement shall be deemed effectively given only if such notice is in writing and is delivered. Any delivery under this Agreement shall be made personally, by registered mail, return receipt requested, by overnight courier, or by telecopy or other facsimile transmission with original copy to follow by registered mail, return receipt requested or by overnight courier, addressed to the respective addresses of the parties hereto as set forth below or at such other address as any of the parties hereto may hereafter specify to the others in writing. If sent by mail, the notice shall be deemed delivered on the third day after mailing. If to Ethical: Ethical Holdings, plc Corpus Christi House 9 West Street, Godmanchester Huntington, Cambs., PE18 8Hg United Kingdom Attention: Geofrey Guy Facsimile: 44-480-431-149 If to Medi-Ject: Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, Minnesota 55441 Attention: Franklin Pass, M.D. Facsimile: (612) 553-1610 12. Captions. The paragraph captions used herein are for reference -------- purposes only, and shall not in any way affect the meaning or interpretation of this Agreement. 13. Counterparts This Agreement may be executed in two or more ------------ counterparts, all of which taken together shall constitute one instrument. 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date set forth in the first paragraph. ETHICAL HOLDINGS, PLC By: /s/ Michael O'Sullivan ------------------------------------ Its: Chief Financial Officer MEDI-JECT CORPORATION By: /s/ Franklin Pass ------------------------------------ Franklin Pass Chief Executive Officer 5 PROMISSORY NOTE --------------- $312,500 Minneapolis, Minnesota December 22, 1995 FOR VALUE RECEIVED, Medi-Ject Corporation, a Minnesota corporation ("Maker") hereby promises to pay to the order of Ethical Holdings, plc, or its successors or assigns ("Payee"), in lawful money of the United States of America, the principal amount of Three Hundred Twelve Thousand Five Hundred Dollars (U.S. $312,500) or, if less, the aggregate unpaid principal amount of all advances made by Ethical under the Loan Agreement hereinafter referred to, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rate of 10% per annum and at the time or times as set forth in the Loan Agreement. This note is the Note referred to in the Loan Agreement dated as of December 22, 1995 (the "Loan Agreement") between Maker and Payee. This note is subject to the terms of the Loan Agreement. Maker hereby waives presentment for payment, notice of dishonor, protest and notice of protest, and in the event of default hereunder, Maker agrees to pay all costs of collection, including reasonable attorneys' fees. This promissory note shall be governed by the laws of the United States and the state of Minnesota. The validity, construction and enforceability of this note shall be governed by the internal laws of the state of minnesota without giving effect to the conflict of laws principles thereof. IN WITNESS WHEREOF, Maker has executed this promissory note as of the date set forth above. MEDI-JECT CORPORATION By /s/ Franklin Pass -------------------------------------- Franklin Pass Chief Executive Officer EX-10.7 14 PREFERRED STOCK, OPTION & WARRANT PURCHASE AGREE. Exhibit 10.7 ================================================================================ MEDI-JECT CORPORATION -------------------------- PREFERRED STOCK, OPTION AND WARRANT PURCHASE AGREEMENT -------------------------- Dated January 25, 1996 1,000,000 Shares of Series C Junior Convertible Preferred Stock ($.01 Par Value) (Liquidation Preference $3.00 per share) ================================================================================ Medi-Ject Corporation PREFERRED STOCK, OPTION AND WARRANT PURCHASE AGREEMENT ------------------------------------------------------ January 25, 1996 Becton Dickinson and Company 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 Ladies and Gentlemen: Medi-Ject Corporation, a Minnesota corporation (the "Company") agrees with Becton Dickinson and Company, a corporation incorporated under the laws of the state of New Jersey ("BD"), as follows: 1. Authorization of Issue of Shares. The Company has authorized (i) the -------------------------------- issue and sale of up to 1,000,000 shares of its present class of Preferred Stock designated as the "Series C Junior Convertible Preferred Stock" (the "Series C Preferred Shares"), (ii) the issue of an Option for the purchase of 500,000 shares of its present class of Preferred Stock designated as the "Series D Junior Convertible Preferred Stock" (the "Series D Preferred Shares") and (iii) the issue of a Warrant for the purchase of 2,500,000 shares of its present class of Preferred Stock designated as the "Series E Junior Convertible Preferred Stock" (the "Series E Preferred Shares") (the Series C Preferred Shares, the Series D Preferred Shares and the Series E Preferred Shares are referred to collectively as the "Series C, D and E Preferred Shares"). The relative powers, preferences and rights and qualifications, limitations and restrictions of the Series C, D and E Preferred Shares shall be set forth in a Certificate of Designations, Preferences and Rights (the "Certificate of Designations") which shall be substantially in the form attached hereto as Exhibit A. Certain capitalized terms used in this agreement (this "Agreement") are used as defined herein; references to an Article or Section are, unless otherwise specified, to one of the Articles or Sections of this Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to this Agreement. 2. Sale and Purchase Price. The Company will issue and sell to BD and, ----------------------- subject to the terms and conditions herein set forth, BD will purchase from the Company 1,000,000 shares of Series C Preferred Shares at the purchase price of $3.00 per share (the "Shares"). Simultaneously herewith, the Company is issuing to BD an Option (the "Option") dated as of the date hereof, without any additional consideration, pursuant to which the Company is granting BD an option to purchase 500,000 Series D Preferred Shares (subject to appropriate adjustment in the event of stock splits, stock dividends or other reorganizations) (the "Option Shares") and is selling to BD, for the purchase price of $125,000, a Warrant (the "Warrant") dated as of the date hereof pursuant to which the Company is granting BD the right -2- to purchase 2,500,000 Series E Preferred Shares (subject to appropriate adjustment in the event of stock splits, stock dividends or other reorganizations) (the "Warrant Shares"). 3. Closing. The closing of the sale of the Shares, Option and Warrant to ------- BD shall take place at the offices of Dorsey & Whitney, 220 South Sixth Street, Minneapolis, Minnesota at 9:00 A.M. Minneapolis time on January 25, 1996 or such other date and time thereafter as shall be mutually agreeable to BD and the Company (the "Closing Date"). At the closing, the Company shall deliver to BD the Option, the Warrant and a certificate, dated the Closing Date, representing the Shares purchased by it on such date, registered in its name against payment to the Company of the purchase price of the Shares and Warrant being purchased. 4. Representations and Warranties by the Company. In order to induce BD --------------------------------------------- to enter into this Agreement and to purchase the Shares, the Company hereby represents and warrants to BD that, except as disclosed in the attached Exhibit B by express reference to the appropriate Section: 4.1 Organization, Standing, etc. The Company is a corporation duly ---------------------------- organized, validly existing and in good standing under the laws of the State of Minnesota, and has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business in all material respects as it is now being conducted and as it currently proposes to conduct it in the future. The Company has the requisite corporate power and authority to issue the Shares, the Option, the Warrant, the Option Shares, the Warrant Shares and the shares of its common stock into which the Shares, the Option Shares and the Warrant Shares are exercisable and/or convertible (collectively, the "Conversion Shares") and to otherwise perform its obligations under this Agreement. 4.2 Governing Instruments. The copies of the Articles of --------------------- Incorporation, as amended (the "Articles of Incorporation") and bylaws of the Company which have been delivered to legal counsel for BD prior to the execution of this Agreement and which are attached as to the Certificate of the Secretary of the Company delivered pursuant to Section 6.9, are true and complete copies of the duly and legally adopted Articles of Incorporation and Bylaws of the Company in effect as of the date of this Agreement, except that such Articles of Incorporation shall have been amended by the filing of the Certificate of Designations. 4.3 Subsidiaries, Etc. The Company does not own (or have any ----------------- ownership interest of any type) or control, directly or indirectly, any corporation, partnership, joint venture, association or other business enterprise. -3- 4.4 Qualification. The Company is duly qualified, licensed or ------------- domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. 4.5 Financial Statements. (a) Attached to this Agreement as Exhibit -------------------- C are (a) a balance sheet (the "Balance Sheet"), as of November 30, 1995 (the "Balance Sheet Date") for the Company together with the related statements of operations and shareholders equity for the eleven month period then ended, which Balance Sheet and related statements are unaudited and (b) a consolidated balance sheet of the Company for the fiscal years ending December 31, 1993 and 1994, and the consolidated statements of income and retained earnings and changes in financial position for the same periods, all as reported on by the Company's independent certified public accountants (the financial statements referred to in (a) and (b), together with the notes thereto, are collectively referred to as the "Financial Statements"). The Financial Statements have, in all material respects, been prepared in accordance with generally accepted accounting principles consistently applied, are in accordance with the books and records of the Company and present fairly the results of its operations for the periods therein specified and, with respect to the Balance Sheet, the financial condition of the Company at the Balance Sheet Date. Without limiting the generality of the foregoing, the Balance Sheet or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at the Balance Sheet Date, which, individually or in the aggregate, are material and which in accordance with generally accepted accounting principles would be required to be disclosed in such Balance Sheet, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. (b) The Company has no liability or obligation, which individually or taken together with any other liability or obligation that is related thereto, exceeds $50,000, absolute or contingent, including, without limiting the generality of the foregoing, any tax liabilities due or to become due, not reflected in the Financial Statements, except (i) obligations and liabilities incurred after the Balance Sheet Date in the ordinary course of business that are not, individually or taken together with any other such liability or obligation that is related thereto, material and (ii) obligations under contracts made in the ordinary course of business that would not be required to be reflected in financial statements prepared in accordance with GAAP and (iii) obligations under this Agreement. Without limiting the generality of the foregoing, the Company does not know, and has no reasonable ground to know, of any basis for the assertion against the Company as of the date hereof of any material liabilities not reflected in the Financial Statements of the Company. (c) Since the Balance Sheet Date, there has been no occurrence, condition or development that has materially and adversely affected the Company's -4- business, prospects, condition, affairs, operations, or assets, and there has been no material change in the business, assets or financial condition of the Company except pursuant to transactions contemplated by this Agreement or as set forth on Exhibit B hereto. 4.6 Tax Returns and Audits. All tax returns, tax filings and ---------------------- appropriate extension requests whatsoever involving the Company, whether pertaining to foreign or U.S., federal, state or local or any other jurisdiction, and all taxes, assessments, or similar governmental charges required to be paid with respect to such returns or other filing have been paid, or due provision for the payment thereof has been made. The Company is not and has not been delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. No deficiency assessment or proposed adjustment of federal income taxes or state or municipal taxes of the Company is pending, and the Company has no knowledge of any proposed liability for any tax to be imposed. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. The Company has not received any information from or related to any taxing authority which would cause it to believe, reasonably, that a notice of any deficiency for any taxes, or other similar government charges is likely to be issued with respect to the Company. The Company does not have any tax liabilities or other similar government charges except those reflected on the Financial Statements or those incurred in the ordinary course of business since the Balance Sheet Date. 4.7 Changes, Dividends, etc. Except for the transactions ------------------------ contemplated by this Agreement or except as otherwise disclosed on Exhibit B, since the Balance Sheet Date, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company; (vii) entered into any transaction other than in the ordinary course of business except for this Agreement; (viii) encountered any labor difficulties or labor union organizing activities; (ix) issued or sold any shares of capital stock or other securities or granted any options, warrants, or other purchase rights with respect thereto other than pursuant to this Agreement; (x) made any acquisition or -5- disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (xi) increased the compensation payable, or to become payable, to any employees, or made any bonus payment or similar arrangement with any employees or increased the scope or nature of any fringe benefits provided for its employees; (xii) waived any valuable right or a material debt owed to it; (xiii) changed or amended any material contract or arrangement by which the Company or any of its assets or properties is bound or subject; or (xiv) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since the Balance Sheet Date (other than continued losses from operations that the Company has incurred, which are generally consistent with its historical losses from operations since December 31, 1994). 4.8 Title to Properties and Encumbrances. The Company has good and ------------------------------------ marketable title to all of its tangible properties and assets reflected in the Balance Sheet, except for property disposed of in the ordinary course of business since the Balance Sheet Date, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described in the Financial Statements, (b) liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, or (c) those which do not materially affect the value of or interfere with the use made of such properties and assets. 4.9 Properties. The plant, offices and equipment of the Company ---------- have been kept in good condition and repair in the ordinary course of business. The Company's sole plant and office is located at 1840 Berkshire Lane, Plymouth, Minnesota. Except as set forth on Exhibit B, all of the Company's material assets are located at such address. 4.10 Litigation; Governmental Proceedings. There are no material ------------------------------------ legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or any of its officers, directors or employees (in their capacity as such) or any of the Company's properties, assets or business nor is the Company aware that there is any reasonable basis for the foregoing. The Company is not in default with respect to or a party to or subject to the provisions of any writ, judgment, order or decree of any court or any governmental agency or instrumentality. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 4.11 Compliance With Applicable Laws and Other Instruments. The ----------------------------------------------------- business and operations of the Company have been and are being conducted in all material respects in accordance with all material, applicable federal, state and local laws, rules and regulations, with respect to which failure to so comply would have a -6- material adverse impact upon the Company's business operations, properties or financial condition or prospects. Neither the execution, delivery and performance of this Agreement, the Option and the Warrant and the issuance of the Shares, the Warrant, the Option, the Option Shares, the Warrant Shares and the Conversion Shares nor fulfillment of nor compliance with the terms and provisions hereof or thereof or of the Series C Preferred Shares, Series D Preferred Shares and Series E Preferred Shares including, without limitation, the provisions of the Certificate of Designations, nor the conduct of the Company's business as currently conducted or proposed to be conducted as of the date hereof will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, (a) the Articles of Incorporation or Bylaws of the Company, (b) any material mortgage, agreement, understanding or instrument, to which the Company is a party or (c) any order, judgement, decree, statute, law, rule or regulation applicable to the Company or its property. The Company is not in default under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money or in arrears with respect to any dividends upon any shares of its preferred stock, and there exists no default by the Company under any of its contracts or agreements, or under any instrument (including without limitation its Articles of Incorporation and Bylaws) by which the Company is bound, which materially and adversely affects its business, operations, properties, prospects or financial condition. To the knowledge of the Company, no employee of the Company is in violation of any term of any employment contract, patent or other proprietary information disclosure agreement or any other contract or agreement relating to the employment of such employee with the Company. 4.12 Governmental Consent, Etc. The Company is not required to ------------------------- obtain any consent, approval or authorization of, or to make any declaration or filing with any governmental authority as a condition to or in connection with the valid execution, delivery and performance of this Agreement, and the valid offer, issue, sale or delivery of the Shares, or the performance by the Company of its obligations in respect thereof other than the filing of a Form D with the Securities and Exchange Commission (the "Commission"), which will be timely filed. 4.13 Shares and Conversion Shares. The Shares, when issued and paid ---------------------------- for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Article 11 or in the Company's Articles of Incorporation. The Series C Preferred Shares, Series D Preferred Shares and Series E Preferred Shares will rank junior to all classes of the Company's Series B Convertible Preferred Stock, but senior to the shares of each other series of preferred stock of the Company now outstanding with respect to priority in payment of dividends and the distribution of assets upon any liquidation of the Company and will be entitled to the rights and preferences set forth in the Certificate of Designations. The Option and the Warrant are duly authorized, validly granted and outstanding, fully paid and free and clear of all pledges, liens, -7- and encumbrances and restrictions, except as set forth in Article 11. The Conversion Shares, the Option Shares and the Warrant Shares have been duly authorized and reserved for issuance and, when issued upon conversion of the Shares, the Option Shares or the Warrant Shares or exercise of the Option or Warrant, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Article 11. 4.14 Securities Laws. Based in part upon the representations in --------------- Article 5, no consent, and assuming full compliance with Article 11, no authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Shares, the Option or the Warrant, the Option Shares, the Warrant Shares or the Conversion Shares to BD, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales other than the filing of a Form D with the Commission. The offer, issuance, sale and delivery of the Shares, the Option, and the Warrant and, in accordance with the terms of the Option and Warrant, the Option Shares, the Warrant Shares and the Conversion Shares, will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). None of the shares of the Company's capital stock issued and outstanding has been offered or sold in such a manner as to make the issuance and sale of such shares subject to such registration requirements, and all such shares of capital stock have been offered and sold in compliance with all applicable federal and state securities laws. 4.15 Patents and Other Intangible Rights. To the Company's ----------------------------------- knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, manufacture, operation and sale of all products sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, (d) is not using any confidential information or trade secrets of others and (e) has not received any notice of infringement of the asserted rights of others with respect to any patent, trademark, trade name, copyright or other intangible asset. -8- 4.16 Capital Stock. On the Closing Date, the authorized capital ------------- stock of the Company will consist of twenty-five million six hundred thousand (25,600,000) shares, consisting of: (i) fifteen million (15,000,000) shares which shall be designated as common stock, $.01 par value (hereinafter referred to as "Common Stock"), of which (A) 287,368 shares are issued and outstanding, (B) 1,449,376, 3,426,883, 1,000,000, 500,000, and 2,500,000, are reserved, respectively, for issuance on conversion of the Series A Preferred Shares, Series B Preferred Shares, the Shares, the Option Shares and the Warrant Shares, (C) 307,946 are reserved for issuance upon exercise of outstanding warrants and (D) 650,000 are reserved for issuance pursuant to employee stock purchase or stock ownership plans adopted by the Company for key employees; (ii) one million six hundred thousand (1,600,000) shares which are designated as Series A Convertible Preferred Shares, $.01 par value (hereinafter referred to as the "Series A Preferred Shares"), of which 1,449,376 shares are issued and outstanding; (iii) three million (3,000,000) shares which are designated as Series B Convertible Preferred Stock, $.01 par value (hereinafter referred to as the "Series B Preferred Shares"), of which 2,200,001 shares are issued and outstanding; (iv) one million (1,000,000) shares which are designated as Non- Voting Series B Convertible Preferred Shares, $.01 par value (the "Non-Voting Series B Preferred Shares"), of which 545,000 shares are issued and outstanding; (v) one million (1,000,000) shares which are designated as Series C Junior Convertible Preferred Shares, $.01 par value, none of which are issued and outstanding; (vi) five hundred thousand (500,000) shares which are designated as Series D Junior Convertible Preferred Shares, $.01 par value, none of which are issued and outstanding; (vii) two million, five hundred thousand (2,500,000) shares which are designated as Series E Junior Convertible Preferred Shares, $.01 par value, none of which are issued and outstanding; and (viii) one million (1,000,000) shares of which shall be preferred shares, undesignated as to series (the "Undesignated Preferred Shares"). All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. The list set forth in Exhibit B hereto is a complete and correct list of all security holders of record of the Company, -9- showing their holdings of issued and outstanding shares of Common Stock or other Company securities (including warrants and options) as of the date of this Agreement. Except as set forth on Exhibit B, there are (i) no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than this Agreement, the Option and the Warrant, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company (ii) so far as known to the Company, no voting trusts or voting agreements among, or irrevocable proxies executed by, stockholders of the Company, (iii) no existing rights of stockholders to require the Company to register any securities of the Company or to participate with the Company in any registration by the Company of its securities, (iv) so far as known to the Company, no agreements among stockholders providing for the purchase or sale of the Company's capital stock and (v) no obligations (contingent or otherwise) of the Company to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. Neither the offer nor the issuance or sale of the Shares constitutes an event under any anti- dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. No holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company; provided, however, that nothing in this Section 4.16 shall affect, alter or diminish any right granted to BD in this Agreement. 4.17 Outstanding Debt. The Company does not have any material ---------------- indebtedness incurred as the result of a direct borrowing of money, including, but not limited to, indebtedness with respect to trade accounts, except as set forth in the Financial Statements. The Company is not in default in the payment of the principal of or interest or premium on any such indebtedness, and no event has occurred or is continuing under the provisions of any instrument, document or agreement evidencing or relating to any such indebtedness which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 4.18 Performance of Material Agreements. The Company has ---------------------------------- substantially performed all material obligations required to be performed by it to date and is not in default in any material respect under any material contract, agreement, lease, document, commitment or other arrangement to which it is a party or by which it is otherwise bound. There is not under any of such contracts, agreements, leases, documents, commitments or other arrangements any existing material default or event of default or event which, with notice or lapse of time or both, would constitute an event of default thereunder. All parties having material contractual arrangements with the Company are in substantial compliance therewith and none are in material default in any respect thereunder. -10- 4.19 Corporate Acts and Proceedings. The execution, delivery and ------------------------------ performance of this Agreement, the authorization, issuance and delivery of the Shares, Option and Warrant being sold under this Agreement and of the Option Shares, Warrant Shares and Conversion Shares, and the adoption of the Certificate of Designations have been duly authorized by all necessary corporate action on behalf of the Company and its stockholders, have been duly executed and delivered by authorized officers of the Company, and, with respect to each of this Agreement, the Option and the Warrant is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. All corporate action necessary to the authorization, creation, reservation, issuance and delivery of the Shares, the Option, the Warrant, the Option Shares, the Warrant Shares and the Conversion Shares has been taken by the Company, or will be taken by the Company on or prior to the Closing Date. 4.20 Accounts Receivable. To the extent that they exceed the ------------------- reserves for doubtful accounts set forth on the Balance Sheet, the accounts receivable which are reflected on the Balance Sheet and all accounts receivable of the Company which have arisen since the Balance Sheet Date (less a reserve for doubtful accounts in accordance with past practice of the Company), except such accounts receivable as have been collected since the Balance Sheet Date, are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were sold and delivered in material conformity with the applicable purchase orders, agreements and specifications. Such accounts receivable are subject to no valid defense or offsets except routine customer complaints or warranty demands which in the aggregate do not exceed $130,000. 4.21 Inventories. The inventories of the Company which are reflected ----------- on the Balance Sheet and all inventory items which have been acquired since the Balance Sheet Date consist of raw materials, supplies, work-in-process and finished goods of such quality and quantities as are, to the Company's knowledge, currently usable or salable in the ordinary course of its business and are in good and merchantable condition. 4.22 Purchase Commitment and Outstanding Bids. No material purchase ---------------------------------------- commitment of the Company is in excess of normal, ordinary and usual requirements of its business, or was made at any price in excess of the then current market price, or contains terms and conditions more onerous than those usual and customary in the industry. There is no outstanding material bid, sales proposal, contract or unfilled order of the Company which (a) will, or could if accepted, require the Company to supply goods or services at a cost to the Company in excess of the revenues to be received therefrom, or (b) quotes prices which do not include a -11- mark-up over reasonably estimated costs consistent with past mark-ups on similar business or market conditions current at the time. 4.23 Insurance Coverage. There are in full force and effect policies ------------------ of insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts and with such deductibles, as (a) are consistent with industry practice, and (b) in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 4.24 No Brokers or Finders. Except as disclosed on Exhibit B, no --------------------- person, firm or corporation has or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or BD for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. The Company will indemnify, defend and hold BD harmless against any and all liability (including without limitation, reasonable attorneys' fees and expenses) with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 4.25 Conflicts of Interest. No officer, director or, to the --------------------- knowledge of the Company, shareholder of the Company or any "affiliate" or "associate" (as such terms are defined in Rule 405 under the Securities Act) of any such person has any direct or indirect interest (a) in any entity which does business with the Company, (b) in any property, asset or right which is used by the Company in the conduct of its business, or (c) in any contractual relationship with the Company other than as an employee. For the purpose of this Section 4.25, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market or any payment required to be made by the Company in an amount less than $2,500 annually. 4.26 Licenses. The Company possesses from the appropriate agencies, -------- commissions, boards and/or government bodies and authorities, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the business currently conducted by it, and (b) if not possessed by the Company would have a material adverse impact on the Company's business. 4.27 Disclosure. The Company has not knowingly withheld from BD any ---------- material facts relating to the assets, business, operations, financial condition or prospects of the Company taken as a whole. Neither the Financial Statements nor any representation or warranty in this Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to BD pursuant hereto or in connection with the transactions contemplated hereby contains and will not contain as of the Closing Date any untrue statement of a material fact or omits or -12- will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. The Company's financial projections dated October 20, 1995 and attached hereto as Exhibit E (the "Projections") were prepared in good faith and with a good faith belief in the reasonableness of the assumptions on which the Projections are based. Such assumptions are included in Exhibit E hereto. The Company has a good faith belief in its ability to achieve the Projections and is not currently aware of any facts or circumstances which would materially adversely affect the Company's ability to achieve the Projections. The Projections fairly present the information they purport to present. The Projections sets forth each of the material business assumptions on which the Projections were based. 4.28 Registration Rights. Other than under this Agreement and except ------------------- as set forth on Exhibit B, the Company has not agreed to register or is under any obligation to register any of its authorized or outstanding securities under the Securities Act. 4.29 ERISA. Except as listed on Exhibit B, the Company does not ----- maintain, sponsor, or contribute to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan", as those terms are defined in Sections 3(1), 3(2) or 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Except as listed in Exhibit B, the Company has no other material incentive or benefit arrangements. 4.30 Environmental and Safety Laws. To the Company's knowledge, the ----------------------------- Company is not in violation of any applicable statute, law, rule or regulation relating to the environment or occupational health and safety, nor has the Company received any notice from any person or entity alleging the foregoing, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 4.31 Employees. To the Company's knowledge, no officer of the --------- Company or employee of the Company (whose annual compensation is in excess of $70,000) has any plans to terminate his or her employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has not encountered any material labor difficulties. To the Company's knowledge, the Company does not have any worker's compensation liabilities. 4.32 Absence of Restrictive Agreements; Protection of Intellectual ------------------------------------------------------------- Property. To the Company's knowledge, no employee of the Company is subject to - -------- any secrecy or non-competition agreement or any other agreement or restriction of any kind that would impede or otherwise adversely affect in any way the ability of -13- such employee to carry out fully all activities of such employee in furtherance of the business of the Company. To the Company's knowledge, no employer or former employer of any employee of the Company has any claim of any kind whatsoever in respect of any of the rights described in Section 4.15 of this Agreement. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all the intellectual property of the Company. Each of the Company's employees and other persons who, either alone or in concert with others, developed, invented, discovered, derived, programmed or designed the intellectual property, have entered into a written agreement with the Company (i) providing that the intellectual property and other information are proprietary to the Company and are not to be divulged or misused and (ii) transferring to the Company, without any further consideration being given therefor by the Company, all of such employee's or other party's right, title and interest in and to such intellectual property and other information and to all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to such intellectual property and information. Each of the Company's employee's has signed an agreement agreeing not to use or disclose to others confidential information of the Company. The Company is not aware that any of its employees or prospective employees who have signed such agreements are in violation thereof. 4.33 Contracts. Except as set forth on Exhibit B, the Company is not --------- a party to any contract, and has no obligation or commitment, in each case (i) involving aggregate payments by the Company or having an aggregate value of more than $25,000, or (ii) that is otherwise material to the business of the Company, or (iii) that is, or is reasonably likely to be, materially adverse to the business, properties or financial condition of the Company. Exhibit B hereto also lists all employment, non-competition and confidentiality agreements (i) between the Company and any employee of the Company or any other entity and (ii) to the Company's knowledge between any employee of the Company and any former employer or person for whom such employee performed consulting or other services. 5. Representations of BD. BD represents that: --------------------- 5.1 Investment Intent. The Shares being acquired are being purchased ----------------- for investment for BD's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof, except that BD is contemplating a transfer of the Shares on or before May 31, 1996 to a direct or indirect subsidiary of BD in a transaction exempt from the registration requirements of the Securities Act pursuant to which such subsidiary will represent to BD and the Company in writing that the Shares are being acquired for investment for such subsidiary's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof, which for purposes of this Agreement shall be deemed to be a direct representation of each of such subsidiary and BD; provided that the disposition -------- of BD's property shall at all times be and remain within its control and subject to the provisions of this Agreement. BD understands -14- that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by BD. BD further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. BD understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Commission. BD understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 5.2 Qualification as an Accredited Investor, Etc. BD is an -------------------------------------------- "accredited investor" for purposes of Regulation D promulgated under the Securities Act. BD acknowledges that the Company has made available to it at a reasonable time prior to the execution of this Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by this Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to it. BD (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 5.3 Acts and Proceedings. This Agreement has been duly authorized by -------------------- all necessary corporate action, has been duly executed and delivered and the performance hereof by BD is within its corporate powers. 5.4 No Brokers or Finders. No person, firm or corporation has or --------------------- will have, as a result of any act or omission by BD, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. BD will indemnify, defend and hold the Company harmless against any and all liability (including without limitation, reasonable attorneys' fees and expenses) with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 6. Conditions of BD's Obligation to Purchase the Shares on the Closing ------------------------------------------------------------------- Date. The obligation to purchase and pay for the Shares, the Option and the - ---- Warrant which BD has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on such Closing Date of the conditions set forth in this -15- Article 6. In the event that any such condition is not satisfied to the satisfaction of BD, it shall not be obligated to proceed with the purchase of the Shares, the Option and the Warrant. 6.1 Accuracy of Representations and Warranties. The representation ------------------------------------------- and warranties of the Company under this Agreement shall be true and accurate in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6.2 Compliance with Agreement. The Company shall have performed and ------------------------- complied with all agreements or conditions required by this Agreement to be performed and complied with by it prior to or as of the Closing Date. 6.3 Certificate of Officers. The Company shall have delivered a ----------------------- certificate, dated the Closing Date, executed by the President of the Company and certifying to the satisfaction of the conditions specified in Sections 6.1, 6.2 and 6.5. 6.4 Opinion of the Company's Counsel. The Company shall have -------------------------------- delivered an opinion, satisfactory in form and substance to BD, of Dorsey & Whitney, counsel for the Company, dated the Closing Date and in the form of Exhibit D attached hereto. 6.5 Filing of Certificate of Designations. The Certificate of ------------------------------------- Designations containing the rights, preferences, privileges and restrictions of the Series C, D and E Preferred Shares set forth in Exhibit A shall have been duly filed with the Secretary of State of the State of Minnesota. A copy of the Articles of Incorporation as in effect immediately prior to the filing of the Certificate of Designations, certified by the Minnesota Secretary of State, shall be attached to the certificate of the Secretary of the Company delivered pursuant to Section 6.9 hereof. 6.6 Purchase Permitted by Applicable Law. The purchase of and ------------------------------------ payment for the Shares, the Option and the Warrant to be purchased by BD on the Closing Date, on the terms and conditions herein provided shall not violate any applicable law or governmental regulation and shall not subject BD to any tax, penalty or liability, or require BD to make any filings or to register or qualify, under or pursuant to any applicable law or governmental regulation. 6.7 No Adverse Action or Decision. There shall be no action, suit, ----------------------------- investigation or proceeding pending, or, to the Company's knowledge, threatened against or affecting the Company, any of its properties or rights, or any of its employees, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect transactions contemplated by this -16- Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. 6.8 Approvals and Consents. The Company shall have secured all ---------------------- permits, consents and authorizations that shall be necessary or required lawfully to consummate this Agreement, to issue the Shares, Option and Warrant to be purchased by BD, and to issue the Option Shares, Warrant Shares and Conversion Shares for which it may be exercised or into which it may be converted. 6.9 Supporting Documents. BD shall have received the following: -------------------- (a) A copy of resolutions of the Board of Directors of the Company certified by the secretary of the Company authorizing and approving the execution, delivery and performance of this Agreement, the Option and the Warrant; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute this Agreement and further certifying that the Articles of Incorporation and Bylaws of the Company attached thereto have been validly adopted and have not been amended, supplemented or modified other than the amendment to the Articles of Incorporation effected by the filing of the Certificate of Designations; and (c) Such additional supporting documentation and other information with respect to the transaction contemplated hereby as legal counsel for BD may reasonably request. 6.10 Qualification Under State Securities Laws. All registrations, ----------------------------------------- qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of this Agreement and the offer, sale, issuance and delivery of the Shares to BD at the Closing shall have been obtained. 6.11 Proceedings and Documents. All corporate and other proceedings ------------------------- and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to legal counsel for BD and BD and counsel for BD shall have received all such counterpart originals or certified or other copies of such documents as BD or counsel for BD may reasonably request. 6.12 Warrant and Option. The Company shall have executed and ------------------ delivered to BD the Option and Warrant -17- 6.13 Board Representation and Related Matters. On the Closing Date, ---------------------------------------- the Board of Directors of the Company shall consist of seven persons and Norman Jacobs shall have been elected a director of the Company. 6.14 Development and License Agreement. The Company and BD shall --------------------------------- have entered into the Development and License Agreement dated as of January 1, 1996. 7. Affirmative Covenants of the Company. Subject to the provisions of ------------------------------------ Article 13, and so long as the Option or the Warrant shall remain outstanding and not fully exercised or BD shall beneficially hold in excess of 5%, determined on an as if exercised and as if converted basis, of the capital stock of the Company, considered on a fully diluted basis, the Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its corporate ------------------- existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 7.2 Books of Account and Reserves. The Company will keep books of ----------------------------- record and account in which full, true and correct entries are made of all of its dealings, business and affairs, in accordance with GAAP consistently applied. The Company will employ certified public accountants of recognized national standing selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). 7.3 Furnishing of Financial Statements and Information. The Company -------------------------------------------------- will deliver to BD: (a) as soon as practicable, but in any event within 30 days after the close of each month, an unaudited consolidated balance sheet of the Company as of the end of such month, together with the related statements of consolidated operations for each month setting forth in each case in comparative form the figures for the budget as approved by the Board of Directors of the Company, all in reasonable detail and certified, subject to changes resulting from year-end adjustments, by the CFO (as hereinafter defined); -18- (b) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a statement of income and a statement of changes in financial position of the Company for each period, and in the case of the first, second and third quarterly periods, for the period from the beginning of the current fiscal year to the end of such quarterly period, and a balance sheet of the Company as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail, and subject to changes resulting from year-end adjustments certified, subject to changes resulting from year-end audit adjustments, by the chief financial officer of the Company ("CFO") that such financial statements were prepared in accordance with GAAP applied on a basis consistent (except as otherwise disclosed therein and consented to by a majority of the Board of Directors) with that of preceding periods, and except as otherwise stated therein, present fairly the financial position of the Company as of their date; (c) as soon as practicable, but in any event within 90 days after the end of each fiscal year, a statement of income and a consolidated statement of changes in financial position of the Company for such year, and a balance sheet of the Company as at the end of such year prepared in accordance with GAAP applied on a basis consistent with that of the preceding fiscal year (except as otherwise approved by the Board of Directors), setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and together with an opinion directed to the Company of independent certified public accountants of recognized standing selected by the Company which opinion shall state that such balance sheet and statements of income have been prepared in accordance with GAAP and present fairly in all material respects the financial position of the Company as of their date, and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and was not qualified as to the scope of the examination; and; (d) within 15 days after the Company learns of the commencement or written threats of the commencement of any material suit, legal or equitable, or of any material administrative, arbitration or other proceeding against the Company or its business, assets or properties, written notice of the nature and extent of such suit or proceedings; (e) promptly after the submission thereof to the Company, copies of all reports and recommendations submitted by independent public accountants in connection with any annual, interim or special audit of the accounts of the Company made by such accountants; -19- (f) promptly upon transmission thereof, copies of all reports, notices, financial statements, proxy statements, registration statements and notifications filed by it with the Commission pursuant to any act administered by the Commission or furnished to shareholders of the Company or to any national securities exchange, except reports on Form D filed pursuant to Rule 503 under the Securities Act; (g) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company as is available to the Company and as from time to time BD may reasonably request. 7.4 Inspection. The Company covenants that it will permit BD and any ---------- persons or entities designated in writing by BD to visit and inspect at its expense any of the properties, corporate books and financial records of the Company and its subsidiaries (and to make photocopies thereof or make extracts therefrom), and to discuss the affairs, finances and accounts of any such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as BD may reasonably request, subject to BD's obligation of confidentiality contained in Section 14.10. 7.5 Preparation and Approval of Budgets. At least one month prior to ----------------------------------- the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. The Company will, simultaneously with the submission thereof to the Board of Directors, deliver a copy of such annual plan to BD. 7.6 Payment and Taxes and Maintenance of Properties. The Company ----------------------------------------------- will: (a) pay and discharge promptly, or cause to be paid and discharged promptly when due and payable, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, other than such taxes, assessments, charges or levies as the Company is contesting in good faith through appropriate proceedings; and (b) maintain and keep, or cause to be maintained and kept its properties in good repair, working order and condition. 7.7 Insurance. The Company will obtain and maintain in force such --------- property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be -20- necessary or appropriate to protect the Company from the insurable hazards or risks associated with the conduct of the Company's business. The Company shall obtain and keep in effect so long as the Board of Directors deems advisable, term life insurance on the lives of such key employees as, and in the principal amounts as, the Board of Directors shall determine, in each case with proceeds payable to the Company, provided that the Company can obtain such insurance at normally prevailing rates for persons in good health. The Company's executive officers shall periodically report to the Board of Directors on the status of such insurance coverage. All such insurance policies shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors. All such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 7.8 Payment of Indebtedness and Discharge of Obligations. To the ---------------------------------------------------- fullest extent reasonably possible, the Company will make timely payment of all amounts due under, and will observe, perform and discharge all of the material covenants, conditions and obligations which are imposed on it by, any and all indentures and other agreements securing or evidencing all indebtedness resulting from bank or other direct borrowings by the Company or pursuant to which such indebtedness is issued. 7.9 Representation on Board of Directors; Directors' and ---------------------------------------------------- Shareholders' Meetings. So long as BD shall hold or control, directly or - ---------------------- indirectly, not less than 5%, determined on an as if converted basis, of the capital stock of the Company, in the event the holders of the Series C, D and E Preferred Shares do not have the right to elect one director to the Board of Directors of the Company pursuant to the Certificate of Designations for any reason, the Company shall use its best efforts to nominate and elect to the Company's Board of Directors a person designated by BD so that at least one of the Company's directors shall be a person designated by BD. In the event a person designated by BD shall not be a director of the Company, BD shall be entitled to notice of and to attend all meetings of the Board of Directors and its committees and shall receive all information distributed to the directors at the same time as the directors and shall receive the same notice of meetings as such director. At least a majority of the Company's directors shall at all times be persons who are not in the employment of the Company. The Company agrees, as a general practice, to hold meetings of its Board of Directors at least once each calendar quarter, and to hold its annual meeting of shareholders as provided in its Bylaws. -21- 7.10 Retirement Plans. The Company will cause each retirement plan ---------------- of the Company in which any employees of the Company participate that is subject to the provisions of ERISA to be administered in a manner consistent with those provisions of ERISA which may, from time to time, become effective and operative with respect to such plans. 7.11 Patents and Other Intangible Rights. The Company will apply ----------------------------------- for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessman operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.12 Subsidiaries. If the Company establishes or maintains any ------------ subsidiary corporations, it shall cause each such subsidiary corporation to comply with each of the covenants set forth in this Article 7. 7.13 Preemptive Rights. ----------------- (a) The Company hereby grants to BD the right of first refusal to purchase its pro-rata share of all or any part of New Securities (as defined in Section 7.13(c)) that the Company may, from time to time, propose to sell and issue. BD's pro rata share shall be the ratio of the number of shares of Common Stock held by BD, as determined in accordance with Section 7.13(b), as of the date of the Rights Notice (as defined in Section 7.13(d)) to the total number of shares of Common Stock outstanding as of such date, determined in accordance with Section 7.13(b). (b) Prior to the occurrence of an Automatic Conversion Event (as defined in Section 13), (i) the number of shares of Common Stock held by BD shall be deemed to include the aggregate of the number of shares of Common Stock held by BD, together with the number of shares of Common Stock issuable upon conversion of the Shares, the Option Shares and the Warrant Shares (as if the Option and Warrant had been exercised in full) and (ii) the number of shares of Common Stock outstanding shall be deemed to include the aggregate of (A) all Common Stock outstanding, (B) all Common Stock issuable upon exercise of all outstanding options or warrants to purchase Common Stock and (C) the conversion of all outstanding Convertible Securities (as defined in Section 7.13(f)) and of all Convertible Securities issuable upon exercise of outstanding options or warrants to purchase Convertible Securities. On or following the occurrence of an Automatic Conversion Event, (i) the number of shares of Common Stock held by BD shall include only the aggregate number of shares of Common Stock held by BD as of such date and (ii) the number of shares of Common Stock outstanding shall include only the aggregate of all Common Stock outstanding as of such date. -22- (c) "New Securities" shall mean any Common Stock or preferred shares -------------- of any kind of the Company, whether now or hereafter authorized, and rights, options, or warrants to purchase said Common Stock or preferred shares, and securities of any type whatsoever that are, or may become, convertible into said Common Stock or preferred shares; provided, however, that "New Securities" shall not include (i) securities issuable upon the exercise of any rights, options or warrants outstanding as of the date hereof or upon conversion of or with respect to any Convertible Securities; (ii) securities issued in connection with acquisition of another corporation, business entity or line of business of another business entity by the Company by merger, purchase of substantially all of the assets, or other reorganization as a result of which the Company owns not less than a majority of the voting power of such corporation, business entity or line of business; (iii) up to 115,700 remaining shares of Common Stock (or such greater number of shares of Common Stock as approved by the Board of Directors of the Company, including the director elected or nominated by the holders of the Series C, D and E Preferred Shares) reserved for issuance pursuant to stock purchase, stock option or stock ownership plans or similar stock-based or related plans which have been adopted or in the future may be adopted by the Company for its employees, consultants and directors; or (iv) shares of the Company's Common Stock or preferred shares issued in connection with any stock split, stock dividends, recapitalization, reclassification and similar events. (d) If the Company proposes to issue New Securities, it shall give BD written notice (the "Rights Notice") of its intention, describing the New Securities, the price, and the general terms upon which the Company proposes to issue them. BD shall have ten (10) business days from the date of receipt of the Rights Notice to agree to purchase all or any part of its pro-rata share of such New Securities, for the price and upon the general terms specified in the Rights Notice by giving written notice to the Company setting forth the quantity of New securities to be purchased. (e) The Company shall have one hundred twenty (120) days after the date of mailing of the Rights Notice to sell the remaining New Securities at a price and upon general terms no more favorable to the purchasers thereof than specified in the Rights Notice. If the Company has not sold the New Securities within said one hundred twenty (120) day period the Company shall not thereafter issue or sell any New Securities without first offering such securities to BD in the manner provided above. (f) "Convertible Securities" shall mean indebtedness or shares convertible into or exchangeable for Common Stock. 7.14 Investment of Proceeds. Pending use of the proceeds in the ---------------------- business, they shall be deposited in a bank or banks having deposits of $150,000,000 or more, invested in certificates of deposit or repurchase agreements of a bank or -23- banks having deposits of $150,000,000 or more, invested in money market mutual funds having assets of $500,000,000 or more, or invested in securities issued or guaranteed by the United States Government. 7.15 Use of Proceeds. The Company shall use the proceeds from the --------------- sale of the Shares to expand manufacturing, to purchase tooling and for general working capital purposes. 7.16 Public Information. At any time that BD owns any Shares, the ------------------ Option, the Warrant, any Option Shares or Warrant Shares or any Conversion Shares, then after the earlier of the close of business on such date as (i) a registration statement filed by the Company under the Securities Act becomes effective, (ii) the Company registers a class of securities under Section 12 of the Securities Exchange Act of 1934, as amended, or any federal statute or code which is a successor thereto (the "Exchange Act"), or (iii) the Company issues ------------ an offering circular meeting the requirements of Regulation A under the Securities Act, the Company shall use reasonable efforts (including expending reasonable sums), to make publicly available and available to the holders of the Series C, D and E Preferred Shares, pursuant to Rule 144, such information as is necessary to enable the such holders to make sales of Registrable Stock pursuant to that Rule. The Company shall comply with the current public information requirements of Rule 144 and shall furnish thereafter to any such holder, upon request, a written statement executed by the Company as to the steps it has taken to so comply. 8. Negative Covenants of the Company. Subject to the provisions of --------------------------------- Article 13, and so long as the Option or the Warrant shall remain outstanding and not fully exercised or BD shall beneficially hold in excess of 5%, determined on an as if exercised and as if converted basis, of the capital stock of the Company, considered on a fully diluted basis, the Company will be limited and restricted as follows: 8.1 Consolidation, Merger, Acquisition, etc. The Company will not, ---------------------------------------- nor will it permit any subsidiary to, sell, lease, license or otherwise dispose of all or substantially all of its assets or any asset or assets which have a material affect upon the business assets or financial condition of the Company, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it without the approval of holders of a majority in interest of the Series C, D and E Preferred Shares; provided, however, that a subsidiary of the Company may be merged with the Company or another subsidiary of the Company or the Company may be merged with a subsidiary of the Company without such approval if in each case the Company is the surviving entity. 8.2 Dividends on or Redemption of Junior Stock. The Company will ------------------------------------------ not, without the approval of holders of a majority in interest of the Series C, D and E Preferred Shares, (a) declare or pay any cash dividend on its Common Shares, or make any other distribution on any Common Shares or any other shares of stock of any other class of the Company at any time created and issued ranking junior to -24- the Series C Preferred Shares with respect to the rights to receive dividends and/or the right to the distribution of assets upon liquidation, dissolution or winding up of the Company ("Junior Stock"), other than those payable solely in shares of Junior Stock, unless the Company simultaneously declares and pays at least a comparable dividend or distribution to the holders of the Series C, D and E Preferred Shares as it declares and pays to other shareholders or, (b) except pursuant to the terms of the Shareholder Agreement dated September 27, 1993 by and among the Company and certain shareholders of the Company named therein, purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock or debt securities convertible into other shares of Junior Stock), or set aside as a sinking fund or other fund for the redemption or repurchase of any shares of Junior Stock, rights or options to purchase shares of Junior Stock. 8.3 Other Restrictions. The Company will not, nor will it permit any ------------------ subsidiary to, without the prior written consent of the holders of a majority in interest of the Series C, D and E Preferred Shares: (a) guarantee, endorse or otherwise be or become contingently liable in excess of $10,000 in the aggregate in connection with the obligations, securities or dividends of any person, firm, association or corporation other than the Company or a subsidiary, except that the Company may endorse negotiable instruments for collection in the ordinary course of business; (b) make loans or advances in excess of $10,000 in the aggregate to any person (including without limitation to any officer, director or shareholder of the Company or any subsidiary of the Company), firm, association or corporation, except (i) advances to suppliers made in the ordinary course of business, and (ii) loans to employees to assist such employees in relocating to the Minneapolis-St. Paul area, as approved by the Company's Board of Directors; (c) pay compensation, whether by way of salaries, bonuses, participation in pension or profit sharing plans, fees under management contracts or for professional services or fringe benefits to any officer in excess of amounts fixed by the Board of Directors of the Company prior to any payment to such officer; (d) alter the authorized capital stock of the Company as set forth in the Company's Articles of Incorporation as of the date hereof whether (i) by the authorization of additional amounts, classes or series of such capital stock (including an increase in the number of shares of the Series C, D, and E Preferred Shares), (ii) by the authorization of any new class of capital stock, (iii) by way of any stock split or combination, or (iv) altering the rights and/or preferences of the Series C Preferred Shares, Series D Preferred Shares or Series E Preferred Shares; -25- (e) change its fiscal year; (f) make any material change in the nature of its business as carried on at the date of this Agreement; (g) mortgage or pledge, or create a security interest in, or permit any corporation, firm or entity under its control (a "Controlled Entity") to mortgage, pledge or create a security interest in, all or substantially all of the property of the Company or such Controlled Entity, unless unanimously authorized by the entire Board of Directors of the Company; or 9. Conversion of Shares. -------------------- 9.1 Conversion of Shares. BD may, at its option, from and after -------------------- the occurrence of such events as are set forth in the relevant provisions of the Company's Articles of Incorporation, convert the Shares, or any thereof, into Conversion Shares at the rate and upon the terms and conditions and subject to the adjustments set forth in the Company's Articles of Incorporation. Each Share shall be automatically converted into Conversion Shares on such terms and conditions as are set forth in the Company's Articles of Incorporation. 9.2 Stock Fully Paid; Reservation of Shares. The Company --------------------------------------- covenants and agrees that all Conversion Shares that may be issued upon the exercise of the conversion privilege referred to in Section 9.1 will, upon issuance in accordance with the terms of the Company's Articles of Incorporation be fully paid and nonassessable and free from all taxes, liens and charges (except for taxes, if any, upon income and applicable transfer taxes) with respect to the issue thereof, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of its common shares for the purpose of issue upon the exercise of such conversion privilege. 9.3 Adjustment of Number of Shares and Conversion Price. The --------------------------------------------------- number of common shares issuable upon conversion of the Shares, the Option Shares and the Warrant Shares and the conversion price with the respect thereto shall be subject to adjustment from time to time as set forth in the Company's Articles of Incorporation. 10. Registration. ------------ 10.1 Definitions. As used in this Section 10, the following ----------- terms have the following meanings: -26- (a) "Forms S-1, SB-1, S-2, SB-2 and S-3" shall mean the forms so designated, promulgated by the Commission for registration of securities under the Securities Act, and any forms succeeding to the functions of such forms, whether or not bearing the same designation. (b) "Holder" shall mean BD and any holder of Registrable Stock to whom the registration rights granted hereunder have been transferred in accordance with Section 10.13, provided that anyone who acquires any Registrable Stock in a distribution pursuant to a registration statement filed by the Company under the Securities Act shall not thereby be deemed to be a "Holder". (c) "Register", "registered" and "registration" shall refer to a registration effected by filing a registration statement in compliance with the Securities Act and the declaration or ordering by the Commission of effectiveness of such registration statement. (d) "Registrable Stock" shall mean all shares of Common Stock issued or issuable upon conversion of the Shares, issued or issuable upon exercise and/or conversion of the Option Shares and the Warrant Shares and in each case held by a Holder, all shares of Common Stock issued by the Company in respect of such shares and all shares of Common Stock which the Holders may hereafter purchase pursuant to their preemptive rights. (e) "Required Demand Amount" shall mean 51% of the shares of Registrable Stock then outstanding. 10.2 Required Registration. --------------------- (a) If (i) the Holder(s) of an aggregate of at least the Required Demand Amount propose to dispose of at least 20% of the then Registrable Stock (the "Initiating Holders"), and (ii) such disposition may not, in the opinion of such Initiating Holders, be effected in the public marketplace (as opposed to a private transaction under the Securities Act) at equally favorable net terms to the Initiating Holders without registration of such shares under the Securities Act, the Initiating Holders may request the Company in writing to effect such registration, stating the number of shares of Registrable Stock to be disposed of by such Initiating Holders (which shall be not less than 20% of the then Registrable Stock) and the intended method of disposition. Upon receipt of such request, the Company will give prompt written notice thereof to all other Holders (including in such notice, the name of any managing underwriter designated by the requesting Holders pursuant to Section 10.7) whereupon such other Holders shall give written notice to the Company within 20 days after the date of the Company's notice (the "Notice Period") if they propose to dispose of any shares of Registrable Stock pursuant to such -27- registration, stating the number of shares of Registrable Stock to be disposed of by such Holder(s) and the intended method of disposition. (b) The Company will use its best efforts to effect promptly after the Notice Period the registration under the Securities Act of all shares of Registrable Stock specified in the requests of the Initiating Holders, and the requests of the other Holders, subject, however, to the limitations set forth in Section 10.4. 10.3 Registration Procedures. Whenever the Company is required by the ----------------------- provisions of this Section 10 to use its best efforts to effect promptly the registration of shares of Registrable Stock, the Company will: (a) prepare and file with the Commission a registration statement with respect to such shares and use its best efforts to cause such registration statement to become and remain effective as provided herein; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the disposition of all shares covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition from time to time of the prospective seller or sellers of such shares, but for no longer than one hundred fifty (150) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1, SB-1, SB- 2 or S-2 and for no longer than ninety (90) days in the case of a registration statement on Form S-3; (c) furnish to each prospective seller such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the shares owned by such seller; (d) use its best efforts to register or qualify the shares covered by such registration statement under such other securities or blue sky or other applicable laws of such jurisdictions within the United States as each prospective seller shall reasonably request, to enable such seller to consummate the public sale or other disposition in such jurisdictions of the shares owned by such seller; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not at the time so qualified; and -28- (e) furnish to each prospective seller a signed counterpart, addressed to the prospective sellers, of (i) an opinion of counsel for the Company, dated the effective date of the registration statement, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the "comfort" letter) with respect to events subsequent to the date of the financial statements, as are customarily covered (at the time of such registration) in opinions of issuer's counsel and in "comfort" letters delivered to the underwriters in underwritten public offerings of securities. 10.4 Limitations on Required Registrations. ------------------------------------- (a) The Company shall not be required to effect more than two registrations pursuant to Section 10.2. (b) The Company shall not be required to cause a registration requested pursuant to Section 10.2 to become effective prior to six (6) months after the effective date of the first registration statement initiated by the Company (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable). (c) The Company shall not register securities for sale for its own account in any registration requested pursuant to Section 10.2 unless permitted to do so by the written consent of Initiating Holders who hold at least 51% of the shares of Registrable Stock as to which registration has been requested. The Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan) to be initiated after a registration requested pursuant to Section 10.2 and to become effective less than 120 days after the effective date of any registration requested pursuant to Section 10.2. (d) Whenever a requested registration is for an underwritten offering, only shares which are to be included in the underwriting may be included in the registration. Notwithstanding the provisions of Sections 10.2(b) and 10.4(c), if the underwriter determines that (i) marketing factors require a limitation of the total number of shares to be underwritten, or (ii) the offering price per share would be reduced by the inclusion of the shares of the Company, then the number of shares to be included in the registration and underwriting shall first be allocated among all Holders who indicated to the Company their decision to distribute any of their Registrable Stock through such underwriting, in proportion, as nearly as practicable, to the respective numbers of shares of Registrable Stock owned by such Holders at the time of filing the registration statement, and the remainder, if any, to -29- the Company. No stock excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If the Company disapproves of any such underwriting, the Company may elect to withdraw therefrom by written notice to the Initiating Holders and the underwriter. The securities so withdrawn from such underwriting shall also be withdrawn from such registration. (e) If at the time of any request to register Registrable Stock pursuant to Section 10.2, the Company is engaged, or has fixed plans to engage within 90 days of the time of the request, in a registered public offering as to which the Holders may include such Stock pursuant to Section 10.5 or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of three months from the effective date of such offering, or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than twice while the rights set forth in Section 10.2 are in effect. 10.5 Incidental Registration. If the Company at any time proposes to ----------------------- register any of its securities under the Securities Act (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable), it will each such time give written notice to all Holders of its intention so to do. Upon the written request of a Holder or Holders (stating the number of shares of Registrable Stock to be disposed of by such Holder or Holders and the intended method of disposition) given within 30 days after receipt of any such notice, the Company will use its best efforts to cause all such shares of Registrable Stock intended to be disposed of, the Holders of which shall have requested registration thereof, to be included in such registration, subject, however, to the limitations set forth in Section 10.6. 10.6 Limitations on Incidental Registration. -------------------------------------- (a) If any registration pursuant to Section 10.5 shall be underwritten in whole or in part, the Company may require that the Registrable Stock requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. (b) If, in connection with a registration initiated by the Company for the sale by it of its securities, the Registrable Stock requested for inclusion pursuant to Section 10.5, together with all additional shares of all other shareholders that have requested inclusion of their shares (the Registrable Stock and all of the other shares requested for inclusion are herein together referred to as the "Selling Shareholders' Shares") pursuant to the incidental -30- registration rights granted by the Company prior to the date hereof (including permitted transferees and assignees of such incidental registration rights), would constitute more than twenty-five percent (25%) of the total number of shares to be included in such proposed underwritten public offering, and if in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Selling Shareholders' Shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among the holders thereof requesting such registration (based upon the number of shares requested to be included by each such holder); provided, however, that after any such required reduction the Selling Shareholders' Shares to be included in such offering shall constitute at least twenty-five percent (25%) of the total number of shares to be included in such offering. (c) If, in connection with a registration initiated at the request of any security holder of the Company pursuant to a demand registration right granted to such security holder (the "Requesting Security Holder"), the Registrable Stock requested for inclusion pursuant to Section 10.5, together with all additional shares of all other shareholders that have requested inclusion of their shares (the Registrable Stock and all of the other shares requested for inclusion are herein together referred to as the "Other Selling Shareholders' Shares") pursuant to the incidental registration rights granted by the Company prior to the date hereof (including permitted transferees and assignees of such incidental registration rights), would reduce the number of shares to be offered by the Requesting Shareholder or interfere with the successful marketing of the shares of stock offered by the Requesting Shareholder, the number of Other Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among the holders thereof requesting such registration (based upon the number of shares requested to be included by each such holder). (d) Those Selling Shareholders' Shares or Other Selling Shareholders' Shares which are excluded from the underwritten public offering pursuant to this Section 10.6 shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. The registration rights granted under Sections 10.5 and 10.8 shall terminate as to any Holder or permissible transferees or assignees of such rights if such person (a) holds one percent (1%) or less of the outstanding shares of Common Stock of the Company (as an as-converted basis) and (b) would be permitted to sell all of the Registrable Stock held by him within one three- month period pursuant to Rule 144. -31- 10.7 Designation of Underwriter. In the case of any registration effected -------------------------- pursuant to Section 10.2 or 10.8, Holders of a majority in interest of the Registrable Stock requested to be registered shall have the right to designate the managing underwriter in any underwritten offering. In the case of any registration initiated by the Company, the Company shall have the right to designate the managing underwriter in any underwritten offering. 10.8 Form S-3. The Company shall register its Common Stock under the -------- Exchange Act as soon as legally permissible following the effective date of the first registration of any securities of the Company on Form S-1, SB-1 or SB-2, and the Company shall thereafter effect all qualifications and compliances as would permit or facilitate the sale and distribution of its stock on Form S-3. After the Company has qualified for the use of Form S-3, the Holders shall have the right to request up to six registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Stock to be disposed of and the intended method of disposition), subject to the limitations set forth in Sections 10.4(d) and (e) and the following: (a) The Company shall not be required to effect a registration pursuant to this Section 10.8, unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Stock having an aggregate expected public offering price (before deduction of underwriting discounts and expenses of sale) of at least $500,000. (b) The Company shall not be required to effect a registration pursuant to this Section 10.8 more frequently than once every six months. The Company shall give notice to all Holders of the receipt of a request for registration pursuant to this Section 10.8, and shall provide a reasonable opportunity for other Holders to participate in the registration, provided that if the registration is for an underwritten offering, the terms of paragraph (d) of Section 8.4 shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Stock on Form S-3 to the extent requested by the Holder or Holders thereof. 10.9 Cooperation by Prospective Sellers. ---------------------------------- (a) Each prospective seller of Registrable Stock, and each underwriter designated by each such seller, will furnish to the Company such information as the Company may reasonably require from such seller or underwriter in connection with the registration statement (and the prospectus included therein). (b) Failure of a prospective seller of Registrable Stock to furnish the information and agreements described in this Section 10 shall not affect the -32- obligations of the Company under this Section 10 to remaining sellers who furnish such information and agreements, unless, in the reasonable opinion of counsel to the Company or the underwriters, such failure impairs or may impair the viability of the offering or the legality of the registration statement or the underlying offering. (c) The Holders holding shares included in the registration statement will suspend (until further notice) further sales of such shares after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus or, if the Company reasonably determines that correcting or updating the registration statement or prospectus would require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, during the time that such suspension is necessary so that the registration statement and prospectus will meet the requirements of the Securities Act; but the obligations of the Company with respect to maintaining any registration statement current and effective shall be extended by a period of days equal to the period such suspension is in effect. At the end of the period during which the Company is obligated to keep the registration statement current and effective as described in paragraph (b) of Section 10.3 (and any extensions thereof required by the preceding sentence), the Holders holding shares included in the registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holders shall (after written request for such notice, describing the information required in the response) notify the Company of the number of shares registered which remain unsold promptly upon receipt of such notice from the Company. 10.10 Expenses of Registration. All expenses incurred in effecting any ------------------------ registration pursuant to this Section 10, including, without limitation, all registration and filing fees, printing expenses, expenses of compliance with blue sky laws, fees and disbursements of counsel for the Company and expenses of any audits incidental to or required by any such registration, shall be borne by the Company, except (a) that all underwriting discounts and commissions shall be borne by the Holders holding the securities registered pursuant to such registration, pro-rata according to the quantity of their securities so registered; and (b) the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 10.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 10.2; provided, however, that if immediately prior to the -------- ------- time of such withdrawal, the Holders have learned of a materially adverse -33- change in the condition, business or prospects of the Company from that known to the Holders at the time of their request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 10.2. 10.11 Indemnification. --------------- (a) To the extent permitted by law, the Company will indemnify each Holder requesting or joining in a registration, each agent, officer and director of such Holders, each person controlling such Holder, and each underwriter and selling broker of the securities so registered (collectively, "Representatives" and collectively with each such Holder, agent, officer, director or person, "Indemnitees") against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Indemnitee for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that the Company will not be liable to any -------- ------- Indemnitee in any such case to the extent that any such claim, loss, damage or liability is caused by any untrue statement or omission so made in strict conformity with written information furnished to the Company by an instrument duly executed by such Indemnitee and stated to be specifically for use therein and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this -------- ------- indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement -------- ------- contained in this subsection 10.11(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld. -34- (b) To the extent permitted by law, each Holder requesting or joining in a registration and each underwriter of the securities so registered will indemnify each other Holder, the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made; and will reimburse the Company and each other person indemnified pursuant to this paragraph (b) for all legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that this -------- ------- paragraph (b) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon and in strict conformity with written information (including, without limitation, written negative responses to inquiries) furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use in such prospectus, offering circular or other document (or related registration statement, notification or the like) or any amendment or supplement thereto and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this -------- ------- indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement -------- ------- contained in this subsection 10.11(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided, further, that the -------- ------- obligations of such Holders shall be limited to an amount equal to the proceeds to each such Holder of the Registrable Stock sold as contemplated herein, unless such claim, loss, damage, liability or action resulted from such Holder's fraudulent misconduct. (c) Each party entitled to indemnification hereunder (the "indemnified party") shall give notice to the party required to provide -35- indemnification (the "indemnifying party") promptly after such indemnified party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the indemnifying party (at its expense) to assume the defense of any claim or any litigation resulting therefrom, provided -------- that counsel for the indemnifying party, who shall conduct the defense of ---- such claim or litigation, shall be satisfactory to the indemnified party, and the indemnified party may participate in such defense at such party's expense, and provided, further, the omission by any indemnified party to -------- ------- give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 10.11, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give notice. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) The reimbursement required by this Section 10.11 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. (e) The obligation of the Company under this Section 10.11 shall survive the redemption or conversion, if any, of the Series C, D and E Preferred Shares, the completion of any offering of Registrable Stock in a registration statement under this Section 10, or otherwise. 10.12 Rights Which May Be Granted to Subsequent Holders. ------------------------------------------------- (a) Within the limitations prescribed by this paragraph (a), but not otherwise, the Company may grant to subsequent investors in the Company rights of incidental registration. Such rights may only pertain to shares of Common Stock, including shares of Common Stock into which any other securities may be converted. Such rights may be granted with respect to (i) registrations actually requested by Initiating Holders pursuant to Section 10.2, but only in respect of that portion of any such registration as remains available after inclusion of all Registrable Stock requested by Holders and (ii) registrations initiated by the Company, but only in respect of that portion of such registration as is available under the limitations set forth in Section 10.6 (which limitations shall apply pro- rata to all Holders) and such rights shall be limited in all cases to sharing pro-rata in the available portion of the registration in question with Holders, such sharing to be based on the number of shares of Common Stock held by the respective Holders and held by such other investors, plus the number of shares of Common Stock into which other securities held by the Holders and such other investors are convertible, -36- which are entitled to registration rights. With respect to registrations which are for underwritten public offerings, "available portion" shall mean the portion of the underwritten shares which is available as specified in clauses (i) and (ii) of the third sentence of this paragraph (a). Shares not included in such underwriting shall not be registered. (b) The Company may not grant to subsequent investors in the Company rights of registration upon request unless (i) such rights are limited to shares of Common Stock and (ii) such rights shall not become effective prior to one year following an Automatic Conversion Event. 10.13 Transfer of Registration Rights. The registration rights granted ------------------------------- under this Section 10 may be transferred but only to a transferee who shall acquire not less than 100,000 shares of Registrable Stock (as adjusted for Recapitalization Events). Notwithstanding any provision of this Section 10.13, the registration rights granted to the Holders under this Section 10 may not be assigned to any person or entity which, in the Company's reasonable judgment, is a competitor of the Company. 10.14 "Stand-Off" Agreement. In consideration for the Company performing --------------------- its obligations under this Section 10, each Holder severally agrees for a period of time (not to exceed 180 days) from the effective date of any registration of securities of the Company (upon request of the Company or of the underwriters managing any underwritten offering of the Company's securities) not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Stock, other than shares of Registrable Stock included in the registration, without the prior written consent of the Company or such underwriters, as the case may be, provided that all officers and directors of the Company and each holder of more than 2% of the outstanding Common Stock shall enter into similar agreements. 10.15 Delay of Registration. The Holders shall have no right to take any --------------------- action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 10. 11. Restriction on Transfer of Shares. --------------------------------- 11.1 Restrictions. The Shares, the Option, the Warrant, the Option ------------ Shares, the Warrant Shares and the Conversion Shares are only transferable pursuant to (a) an offering registered under the Securities Act, (b) Rule 144 or Rule 144A or other exemption under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) subject to the conditions specified elsewhere in this Article 11, and, with respect to the Option, the terms of the Option and with respect to the Warrant, the terms of the Warrant, any other legally available means of transfer. -37- 11.2 Legend. Each certificate representing Shares, Option Shares or ------ Warrant Shares shall be endorsed with the following legends: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel reasonably satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended, and all applicable state securities laws or (ii) such registration." Upon the conversion of any Series C Preferred Shares, unless the Company receives an opinion of counsel satisfactory to the Company to the effect that a transfer of such shares may be made without registration or further restriction or transfer, or unless such shares are being disposed of pursuant to a registration under the Securities Act, the same legend shall be endorsed on the certificate evidencing such shares. 11.3 Removal of Legend. Any legend endorsed on a certificate ----------------- evidencing a security pursuant to Section 11.2 hereof shall be removed, and the Company shall issue a certificate without such legend to BD (or its nominee, designee or transferee, as the case may be), if BD delivers to the Company an opinion of such counsel to the effect that such security is not required by the Securities Act to continue to bear such legend. 12. BD Covenant Not to Buy Shares. BD covenants that it shall neither buy ----------------------------- nor solicit offers to sell any shares of capital stock or any purchase rights to acquire any shares of capital stock of the Company, from any person, partnership or entity which is currently a shareholder of the Company on the date of this Agreement without the prior written consent of the Company, until the later to occur of (i) an Automatic Conversion Event or (ii) the Warrant is fully exercised, expires or otherwise terminates unless BD shall first notify the Company of its intention to purchase any such securities and agree in writing, in a form reasonably acceptable to the Company, that the number of shares for which the Option or the Warrant (as BD may elect) may be exercised shall be reduced by the number of shares so purchased from others. As used in this Section 12, BD shall include BD and each of BD's direct and indirect subsidiaries. 13. Termination of Covenants. The obligations of the Company under ------------------------ Articles 7 (other than Section 7.9, 7.13 and 7.16) and 8 of this Agreement, notwithstanding any provisions hereof apparently to the contrary, shall terminate and shall be of no further force or effect on the earliest to occur of (i) the date that the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act in which the net proceeds received by the Company equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate -38- reorganizations), or (ii) the date following the merger of the Company with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Exchange Act, and following such merger, (A) the Company continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Exchange Act, and (C) the market value of the Company equals or exceeds $50 million, calculated for purposes of this Section 13, as the product of the average closing price for the Company's Common Stock during any 20 consecutive trading days times the total number of outstanding shares of Common Stock (either such event in clauses (i) or (ii) being referred to as an "Automatic Conversion Event"). The obligations of the Company under Section 7.13 shall terminate and be of no further force or effect as of the later of the date the Warrant is exercised in full, expires or otherwise terminates or the occurrence as an Automatic Conversion Event. 14. Miscellaneous. ------------- 14.1 Waivers Amendments and Approvals. No amendment or waiver of any -------------------------------- provision of this Agreement, shall in any event be effective unless the same shall be in writing and signed by BD and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 14.2 Changes, Waiver, Etc. Neither this Agreement nor any provision -------------------- hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing, discharge or termination is sought, except to the extent provided in Section 14.1. 14.3 Notices. All notices, demands and other communications to be ------- given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered if personally delivered, the next business day if sent by overnight courier or when receipt is acknowledged if mailed by first class mail, return receipt requested or if sent by facsimile, telecopy or other electronic transmission device. Notices, demands and communications will, unless another address is specified in writing, be sent to the address indicated below: Notices to the Company: with a copy to: - ---------------------- -------------- Medi-Ject Corporation Dorsey & Whitney P.L.L.P. 1840 Berkshire Lane 220 South Sixth Street Minneapolis, Minnesota 55441 Minneapolis, Minnesota 55402 Attention: President Attention: J. Andrew Herring, Esq. Telecopy: (612) 553-1610 Telecopy: (612) 340-8738 -39- Notices to BD: with a copy to: - -------------- --------------- Becton Dickinson and Company Kelley Drye & Warren 1 Becton Drive 101 Park Avenue Franklin Lakes, New Jersey 07417-1880 New York, New York 10178 Attention: Norman Jacobs Attention: Jane E. Jablons, Esq. Dean J. Paranicas, Esq. Telecopy: (212) 808-7898 Telecopy: (201) 848-9228 14.4 Survival of Representations and Warranties, Etc. All ----------------------------------------------- representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by BD or on their behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to this Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. 14.5 Parties in Interest. All the terms and provisions of this ------------------- Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. 14.6 Headings. The headings of the Articles and Sections of this -------- Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 14.7 Choice of Law. The laws of Minnesota shall govern the validity ------------- of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 14.8 Counterparts. This Agreement may be executed concurrently in ------------ two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.9 Definition of Purchased Shares. For purposes of this Agreement ------------------------------ the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Conversion Shares, (c) the Option Shares, (d) the Warrant Shares, (d) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring and (e) all shares of the Company's capital stock which BD may purchase pursuant to their preemptive rights or rights of first refusal or otherwise. 14.10 Confidentiality. BD agrees that it shall not divulge, furnish --------------- or make accessible to anyone or use in any way any confidential or secret knowledge or -40- information of the Company which BD has acquired or become acquainted with or will acquire or become acquainted with pursuant to the terms of this Agreement except BD may use such knowledge or information in furtherance of its interests as an investor in the Company. BD acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. BD will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this agreement. 14.11 Entire Agreement. This Agreement, the Option and the Warrant ---------------- contain the entire agreement between the parties with respect to the transactions contemplated hereby and thereby, and supersede all negotiations, agreements, representations, warranties, commitments, whether in writing or oral, prior to the date hereof. 14.12 Successors and Assigns. All of the terms of this Agreement ---------------------- shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided, however, that BD's rights and obligations under this Agreement may only be assigned to any direct or indirect subsidiary of BD or to any person or entity that acquires not less than 100,000 Series C, D or E Preferred Shares (as adjusted for recapitalization events) and provided further that the rights contained in Sections 7.9 and 7.13 may not be assigned by BD (other than to a direct or indirect subsidiary of BD) and the obligations under Section 12 shall not be binding upon any transferee (other than to a direct or indirect subsidiary of BD) unless such transferee acquires 1,000,000 or more Series C, D and E Preferred Shares from BD (as adjusted for recapitalization events). 14.13 Enforcement. ----------- (a) Remedies at Law or in Equity. If the either party shall ---------------------------- defaults in any of its obligations under this Agreement or if any representation or warranty made by or on behalf of such party in this Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall be untrue in any material respect as of the date of this Agreement or as of the Closing Date or as of the date it was made, furnished or delivered, the other party may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement or the Articles of Incorporation of the Company or for an injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement or such Articles of Incorporation, or to enforce any other legal or equitable right of such party or to take any one or more of such actions. In the event either party brings such an action against the other, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement or the Restated Articles of Incorporation of the Company, including without limitation -41- such fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. (b) Remedies Cumulative; Waiver. No remedy referred to herein is --------------------------- intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to either party at law or in equity. No express or implied waiver by either party of any default shall be a waiver of any future or subsequent default. The failure or delay of either party in exercising any rights granted it hereunder shall not constitute a waiver of any such right, and any single or partial exercise of any particular right by such party shall not exhaust the same or constitute a waiver of any other right provided herein. 14.14 Execution and Counterparts. This Agreement may be executed in -------------------------- any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Each party shall receive a duplicate original of the counterpart copy or copies executed by it and by the Company. 14.15 Severability. In the event any provision of this Agreement or ------------ the application of any such provision to any party shall be held by a court of competent jurisdiction to be contrary to law, the remaining provisions of this Agreement shall remain in full force and effect. If BD is in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned. Very truly yours, MEDI-JECT CORPORATION By /s/ Franklin Pass, M.D. -------------------------------------- Name: Franklin Pass, M.D. Title: Chief Executive Officer -42- ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Preferred Stock, Option and Warrant Purchase Agreement, dated January __, 1996, by and between Medi-Ject Corporation and the undersigned as the terms and conditions applicable to the purchase by the undersigned of preferred shares of the Company. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in Article 5 of such Purchase Agreement. The undersigned further represents that it qualifies as an "accredited investor," as that term is used in Regulation D promulgated under the federal Securities Act of 1933, because (check one): the undersigned is an individual with a net worth in excess of ---- $1,000,000; the undersigned is an individual who either (a) had an income in ---- excess of $200,000 in each of the years 1992 and 1991 and who reasonably expects an income in excess of $200,000 in 1993, or (b) had a joint income with the undersigned's spouse in excess of $300,000 in each of the years 1992 and 1991 and who reasonably expects a joint income in excess of $300,000 in 1993; it is a private business development company as defined in Section ---- 202(a)(22) of the Investment Advisors Act of 1940; the undersigned is a director or executive officer of Medi-Ject ---- Corporation; X it is a corporation, partnership, business trust or a nonprofit ---- organization within the meaning of Section 501(c)(3) of the Internal Revenue Code that was not formed for the purpose of acquiring the securities of Medi-Ject Corporation and that has total assets in excess of $5,000,000; it is a small business investment company licensed by the United ---- States Small Business Administration; it is a self-directed employee benefit plan for which all persons ---- making investment decisions are "accredited investors"; or it is an entity, all of whose equity owners or partners are ---- "accredited investors." BECTON DICKINSON AND COMPANY By /s/ Raymond P. Ohlmuller -------------------------------------- Name: Raymond P. Ohlmuller Title: Vice President and Secretary -43- EX-10.8 15 EMPLOYMENT AGREEMENT WITH FRANKLIN PASS, MD EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of January 3, 1995, by and between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and Franklin Pass, M.D. an individual resident of Hennepin County in the State of Minnesota ("Executive"). WHEREAS, the Company wishes to employ Executive to render services for the Company on the terms and conditions set forth in this Agreement, and Executive wishes to be retained and employed by the Company on such terms and conditions. NOW, THEREFORE, in consideration of the premises and the respective undertakings of the Company and Executive set forth below, the company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive ---------- accepts such employment and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term. Unless terminated at an earlier date in accordance with Section ---- 9 of this Agreement, the term of Executive's employment hereunder shall be for a period commencing on the date of this agreement and continuing until December 31, 1995 (the "Initial Term"), and, thereafter, the term of this Agreement shall be automatically extended for successive one (1) year periods (each an "Extension Term"), unless either party objects to such extension by written notice to the other party at least ninety (90) days prior to the end of the Initial Term or any Extension term. 3. Position and Duties. ------------------- 3.01 Service with Company. During the term of this Agreement, Executive -------------------- agrees to perform such reasonable employment duties as the Board of Directors of the Company shall assign to him from time to time. As of the date of this Agreement, Executive has been elected to serve as Chairman, President and Chief Executive Officer of the Company, with responsibility for managing all affairs of the company. 3.02 Performance of Duties. Executive agrees to serve the Company --------------------- faithfully and to the best of his ability, to devote his full time, attention and efforts to the business and affairs of the Company during the term of this Agreement. Executive hereby confirms that, other than as set forth herein, he is under no contractual commitments inconsistent with his obligations set forth in this Agreement, and that during the term of this Agreement, he will not render or perform services for any other corporation, firm, entity or person that are inconsistent with the provisions of this Agreement. 4. Compensation. ------------- 4.01. Base Salary. As compensation in full for all services to be ----------- rendered by the Executive under this Agreement during the first year of the term of this Agreement, the Company shall pay to Executive a base annual salary of $175,000 which salary shall be paid in accordance with the Company's normal payroll procedures and policies. The compensation payable to Executive during each subsequent year during the term of this Agreement shall be mutually agreed upon by the Company and Executive prior to the commencement of each such year. 4.02. Participation in Benefit Plans. Executive shall also be entitled ------------------------------ to participate in all employee benefit plans or programs (including vacation time) of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate. The Company does not guarantee the adoption of continuance of any particular employee benefit plan or program during the term of this Agreement, and Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. In addition to the normal employee benefit programs of the company, Executive shall be eligible for reimbursement or direct payment of expenses incurred for additional personal life insurance policies representing an aggregate policy amount of $2,000,000 and additional disability insurance premiums not to exceed $3,000 in each calendar year. 4.03 Expenses. The Company will pay or reimburse Executive for all -------- reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expense verification. 5. Confidential Information. Except as permitted or directed by the ------------------------ Company's Board of Directors, during the term of this Agreement and for a period of five years thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company which Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company (including employment by the Company or any affiliated companies prior to the date of this Agreement), whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, any customer or -2- supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. Executive acknowledges that the above- described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause, irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by Executive. 6. Ventures. During the term of this Agreement, it is anticipated that -------- Executive will be engaged in or associated with the planning and implementing of projects, programs and ventures involving the Company and third parties, and Executive hereby expressly acknowledges and agrees that all rights in such projects, programs and ventures shall belong to the Company. Except as formally approved by the Company's Board of Directors, Executive shall not be entitled to any interest in such projects, programs and ventures or to any commission, finder's fee or other compensation in connection therewith, other than the salary to be paid to Executive as provided in this Agreement and the incentive compensation described in Sections 4.02 and 4.03 of this Agreement. 7. Noncompetition and Nonsolicitation Covenants. ------------------------------------------- 7.01 Agreement Not to Compete. Executive agrees that, during the term of ------------------------ his employment by the Company he shall not, directly or indirectly, engage in competition with the Company in any manner or capacity (e.g., as an advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association, or otherwise) in any phase of the business that the Company is conducting during the term of this Agreement, including the design, development, manufacture, distribution, marketing, leasing or selling of accessories, devices, or systems related to the products or services being sold by the Company. 7.02 Geographic Extent of Covenant. The obligations of Executive under ----------------------------- Section 7.01 shall apply to any geographic area in which the Company: (a) has engaged in business during the term of this Agreement through production, promotional, sales or marketing activity, or otherwise, or (b) has otherwise established its goodwill, business reputation, or any customer or supplier relations. -3- 7.03 Limitation on Covenant. Ownership by Executive, as a passive ---------------------- investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 7. 7.04 Nonsolicitation and Noninterference. During the term of this ----------------------------------- Agreement and for a period of two years thereafter, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere adversely with the relationship between any such employee and the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advise to or supply confidential business information or trade secrets of the company to any third person, firm or corporation or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor or other business relation and the Company. 7.05 Indirect Competition and Interference. Executive further agrees that, ------------------------------------- during the term of this Agreement and, solely with respect to Section 7.04, the period covered by Section 7.04, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 7 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity. 8. Patent and Related Matters. -------------------------- 8.01 Disclosure and Assignment. Executive will promptly disclose in ------------------------- writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, either solely or in collaboration with others, during the term of this Agreement, or within six months thereafter, whether or not during regular working hours, relating either directly or indirectly to the business, products, practices, or techniques of the Company (hereinafter referred to as "Developments"). Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all of said Developments are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive's right, title and interest in and to any and all of such Developments. Without limiting the foregoing, any and all original works of authorship which are created by Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright law shall be deemed "works -4- made for hire," as that term is defined in the U.S. Copyright Act (17 U.S.C. Section 101). 8.02 Future Developments. As to any future Developments made by Executive ------------------- that relate to the business, products or practices of the Company and that are first conceived or reduced to practice during the term of this Agreement, or within six months thereafter, but that are claimed for any reason to belong to an entity or person other than the company, Executive will promptly disclose the same in writing to the Company and shall not disclose the same to others if the Company, within twenty (20) days thereafter, shall claim ownership of such Developments under the terms of this Agreement. If the Company makes such claim, Executive agrees that, insofar as the rights (if any) of Executive are involved, it will be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association. The locale of the arbitration shall be Minneapolis, Minnesota (or other locale convenient to the Company's principal executive offices). If the Company makes no such claim, Executive hereby acknowledges that the company has made no promise to receive and hold in confidence any such information disclosed by Executive. 8.03 Limitation on Sections 8.01 and 8.02. The provisions of Sections 8.01 ------------------------------------ and 8.02 shall not apply to any Development meeting the following conditions: (a) such Development was developed entirely on Executive's own time; (b) such Development was made without the use of any Company equipment, supplies, facility or trade secret information. (c) such Development does not relate (i) directly to the business of the Company, or (ii) to the Company's actual or demonstrable anticipated research (d) such Development does not result from any work performed by Executive for the Company. 8.04 Assistance of Executive. Upon request and without further ----------------------- compensation therefor, but at no expense to Executive, and whether during the term of this Agreement or thereafter, Executive will do all lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that in the opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all of such Developments, and for perfecting, affirming and recording the -5- Company's complete ownership and title thereto, and to cooperate otherwise in all proceedings and matters relating thereto. 8.05 Records. Executive will keep complete, accurate and authentic ------- accounts, notes, data and records of all Developments in the manner and form requested by the Company. Such accounts, notes, data and records shall be the property of the Company, and, upon its request, Executive will promptly surrender the same to it or, if not previously surrendered upon its request or otherwise, Executive will surrender the same, and all copies thereof, to the company upon the conclusion of his employment. 8.06 Obligations, Restrictions and Limitations. Executive understands that ----------------------------------------- the company may enter into Agreements or arrangements with agencies of the United States Government, and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it wit h respect to inventions and patents that may be acquired by it or that may be conceived or developed by employees, consultants or other agents rendering services to it. Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the term of this Agreement and shall take any and all further action that may be required to discharge such obligations and to comply with such restrictions and limitations. 9. Termination. ----------- 9.01 Grounds for Termination. This Agreement shall terminate prior to the ----------------------- expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time during the initial term or any extension thereof: (a) Executive shall die; (b) the Board of Directors of the Company shall determine that: (i) Executive has become disabled; (ii) Executive had breached this Agreement in any material respect, which breach is not cured by Executive or is not capable of being cured by Executive within thirty (30) days after written notice of such breach is delivered to Executive, or (iii) Executive has engaged in willful and material misconduct, including willful and material failure to perform his duties as an officer or employee of the Company; or -6- (c) Executive is terminated by the Company (which may be with or without cause), following not less than ninety days prior written notice of such termination. Notwithstanding any termination of this Agreement, Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of this Agreement that specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive's employment. 9.02 "Disability" Defined. The Board of Directors may determine that -------------------- Executive has become disabled, for the purpose of this Agreement, in the event that Executive shall fail, because of illness or incapacity, to render services of the character contemplated by this Agreement over a period of ninety (90) days during any one hundred and eighty (180) day period. The existence or nonexistence of grounds for termination in good faith by the Board of Directors after notice in writing given to Executive at least thirty (30) days prior to such determination. During such thirty (30) day period, Executive shall be permitted to make a presentation to the Board of Directors for its consideration. 9.03 Surrender of Records and Property. Upon termination of his employment --------------------------------- with the Company, Executive shall deliver promptly to the Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 10. Miscellaneous. ------------- 10.01 Governing Law. This Agreement is made under and shall be ------------- governed by and construed in accordance with the laws of the State of Minnesota. 10.02 Prior Agreements. This Agreement contains the entire Agreement ---------------- of the parties relating to the subject matter hereof and supersedes all prior Agreements and understandings with respect to such subject matter, and the parties hereto have made no Agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 10.03 Withholding Taxes. The Company may withhold from any benefits ----------------- payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. -7- 10.04 Amendments. No amendment or modification of this Agreement shall ---------- be deemed effective unless made in writing and signed by the parties hereto. 10.05 No Waiver. No term or condition of this Agreement shall be --------- deemed to have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10.06 Severability. To the extent any provision of this Agreement ------------ shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceable be covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10.07 Assignment. This Agreement shall not be assignable, in whole or ---------- in part, by either party without the written consent of the other party, except that the Company, may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 10. 10.08 Injunctive Relief. Executive agrees that it would be difficult ----------------- to compensate the company fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Sections 5, 7,8 and 9.03. Accordingly, Executive specifically agrees that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief shall not, however, -8- diminish the right of the Company to claim and recover damages in addition to injunctive relief. IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. MEDI-JECT CORPORATION EMPLOYEE By: /s/ Mark Derus /s/ Franklin Pass ------------------------- ------------------------ Its: CFO --------------------- -9- EX-10.9 16 EMPLOYMENT AGREEMENT WITH MARK DERUS EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of January 3, 1995, by and between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and Mark Derus an individual resident of Hennepin County in the State of Minnesota ("Executive"). WHEREAS, the Company wishes to employ Executive to render services for the Company on the terms and conditions set forth in this Agreement, and Executive wishes to be retained and employed by the Company on such terms and conditions. NOW, THEREFORE, in consideration of the premises and the respective undertakings of the Company and Executive set forth below, the company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive ---------- accepts such employment and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term. Unless terminated at an earlier date in accordance with Section ---- 9 of this Agreement, the term of Executive's employment hereunder shall be for a period commencing on the date of this agreement and continuing until December 31, 1995 (the "Initial Term"), and, thereafter, the term of this Agreement shall be automatically extended for successive one (1) year periods (each an "Extension Term"), unless either party objects to such extension by written notice to the other party at least ninety (90) days prior to the end of the Initial Term or any Extension term. 3. Position and Duties. ------------------- 3.01 Service with Company. During the term of this Agreement, Executive -------------------- agrees to perform such reasonable employment duties as the Board of Directors of the Company shall assign to him from time to time. As of the date of this Agreement, Executive has been elected to serve as Vice President, Finance and Chief Financial Officer of the company, with responsibility for managing the financial and operational affairs of the company. 3.02 Performance of Duties. Executive agrees to serve the Company --------------------- faithfully and to the best of his ability, devote his full time, attention and efforts to the business and affairs of the Company during the term of this Agreement. Executive hereby confirms that, other than as set forth herein, he is under no contractual commitments inconsistent with his obligations set forth in this Agreement, and that during the term of this Agreement, he will not render or perform services for any other corporation, firm, entity or person that are inconsistent with the provisions of this Agreement. 4. Compensation. ------------- 4.01. Base Salary. As compensation in full for all services to be rendered ----------- by the Executive under this Agreement during the first year of the term of this Agreement, the Company shall pay to Executive a base annual salary of $89,500 which salary shall be paid in accordance with the Company's normal payroll procedures and policies. The compensation payable to Executive during each subsequent year during the term of this Agreement shall be mutually agreed upon by the Company and Executive prior to the commencement of each such year. 4.02. Participation in Benefit Plans. Executive shall also be entitled to ------------------------------ participate in all employee benefit plans or programs (including vacation time) of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate. The Company does not guarantee the adoption of continuance of any particular employee benefit plan or program during the term of this Agreement, and Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 4.03 Expenses. The Company will pay or reimburse Executive for all -------- reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expense verification. 5. Confidential Information. Except as permitted or directed by the ------------------------ Company's Board of Directors, during the term of this Agreement and for a period of five years thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company which Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company (including employment by the Company or any affiliated companies prior to the date of this Agreement), whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, any customer or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. Executive acknowledges that the above -described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause, -2- irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the b reach of this Agreement by Executive. 6. Ventures. During the term of this Agreement, it is anticipated that -------- Executive will be engaged in or associated with the planning and implementing of projects, programs and ventures involving the Company and third parties, and Executive hereby expressly acknowledges and agrees that all rights in such projects, programs and ventures shall belong to the Company. Except as formally approved by the Company's Board of Directors, Executive shall not be entitled to any interest in such projects, programs and ventures or to any commission, finder's fee or other compensation in connection therewith, other than the salary to be paid to Executive as provided in this Agreement and the incentive compensation described in Sections 4.02 and 4.03 of this Agreement. 7. Noncompetition and Nonsolicitation Covenants. ------------------------------------------- 7.01 Agreement Not to Compete. Executive agrees that, during the term of ------------------------ his employment by the Company he shall not, directly or indirectly, engage in competition with the Company in any manner or capacity (e.g., as an advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association, or otherwise) in any phase of the business that the Company is conducting during the term of this Agreement, including the design, development, manufacture, distribution, marketing, leasing or selling of accessories, devices, or systems related to the products or services being sold by the Company. 7.02 Geographic Extent of Covenant. The obligations of Executive under ----------------------------- Section 7.01 shall apply to any geographic area in which the Company: (a) has engaged in business during the term of this Agreement through production, promotional, sales or marketing activity, or otherwise, or (b) has otherwise established its goodwill, business reputation, or any customer or supplier relations. 7.03 Limitation on Covenant. Ownership by Executive, as a passive ---------------------- investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 7. -3- 7.04 Nonsolicitation and Noninterference. During the term of this ----------------------------------- Agreement and for a period of two years thereafter, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere adversely with the relationship between any such employee and the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advise to or supply confidential business information or trade secrets of the company to any third person, firm or corporation or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor or other business relation and the Company. 7.05 Indirect Competition and Interference. Executive further agrees that, ------------------------------------- during the term of this Agreement and, solely with respect to Section 7.04, the period covered by Section 7.04, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 7 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity. 8. Patent and Related Matters. -------------------------- 8.01 Disclosure and Assignment. Executive will promptly disclose in ------------------------- writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, either solely or in collaboration with others, during the term of this Agreement, or within six months thereafter, whether or not during regular working hours, relating either directly or indirectly to the business, products, practices, or techniques of the Company (hereinafter referred to as "Developments"). Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all of said Developments are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive's right, title and interest in and to any and all of such Developments. Without limiting the foregoing, any and all original works of authorship which are created by Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright law shall be deemed "works made for hire," as that term is defined in the U.S. Copyright Act (17 U.S.C. Section 101). 8.02 Future Developments. As to any future Developments made by Executive ------------------- that relate to the business, products or practices of the Company and that are first conceived or reduced to practice during the term of this Agreement, or -4- within six months thereafter, but that are claimed for any reason to belong to an entity or person other than the company, Executive will promptly disclose the same in writing to the Company and shall not disclose the same to others if the Company, within twenty (20) days thereafter, shall claim ownership of such Developments under the terms of this Agreement. If the Company makes such claim, Executive agrees that, insofar as the rights (if any) of Executive are involved, it will be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association. The locale of the arbitration shall be Minneapolis, Minnesota (or other locale convenient to the Company's principal executive offices). If the Company makes no such claim, Executive hereby acknowledges that the company has made no promise to receive and hold in confidence any such information disclosed by Executive. 8.03 Limitation on Sections 8.01 and 8.02. The provisions of Sections 8.01 ------------------------------------ and 8.02 shall not apply to any Development meeting the following conditions: (a) such Development was developed entirely on Executive's own time; (b) such Development was made without the use of any Company equipment, supplies, facility or trade secret information. (c) such Development does not relate (i) directly to the business of the Company, or (ii) to the Company's actual or demonstrable anticipated research (d) such Development does not result from any work performed by Executive for the Company. 8.04 Assistance of Executive. Upon request and without further ----------------------- compensation therefor, but at no expense to Executive, and whether during the term of this Agreement or thereafter, Executive will do all lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that in the opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all of such Developments, and for perfecting, affirming and recording the Company's complete ownership and title thereto, and to cooperate otherwise in all proceedings and matters relating thereto. 8.05 Records. Executive will keep complete, accurate and authentic ------- accounts, notes, data and records of all Developments in the manner and form requested by the Company. Such accounts, notes, data and records shall be the property of the Company, and, upon its request, Executive will promptly surrender the same to it or, if not previously surrendered upon its request or otherwise, -5- Executive will surrender the same, and all copies thereof, to the company upon the conclusion of his employment. 8.06 Obligations, Restrictions and Limitations. Executive understands that ----------------------------------------- the company may enter into Agreements or arrangements with agencies of the United States Government, and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it wit h respect to inventions and patents that may be acquired by it or that may be conceived or developed by employees, consultants or other agents rendering services to it. Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the term of this Agreement and shall take any and all further action that may be required to discharge such obligations and to comply with such restrictions and limitations. 9. Termination. ----------- 9.01 Grounds for Termination. This Agreement shall terminate prior to the ----------------------- expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time during the initial term or any extension thereof: (a) Executive shall die; (b) the Board of Directors of the Company shall determine that: (i) Executive has become disabled; (ii) Executive had breached this Agreement in any material respect, which breach is not cured by Executive or is not capable of being cured by Executive within thirty (30) days after written notice of such breach is delivered to Executive, or (iii) Executive has engaged in willful and material misconduct, including willful and material failure to perform his duties as an officer or employee of the Company; or (c) Executive is terminated by the Company (which may be with or without cause), following not less than ninety days prior written notice of such termination. Notwithstanding any termination of this Agreement, Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by -6- the provisions of this Agreement that specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive's employment. 9.02 "Disability" Defined. The Board of Directors may determine that -------------------- Executive has become disabled, for the purpose of this Agreement, in the event that Executive shall fail, because of illness or incapacity, to render services of the character contemplated by this Agreement over a period of ninety (90) days during any one hundred and eighty (180) day period. The existence or nonexistence of grounds for termination in good faith by the Board of Directors after notice in writing given to Executive at least thirty (30) days prior to such determination. During such thirty (30) day period, Executive shall be permitted to make a presentation to the Board of Directors for its consideration. 9.03 Surrender of Records and Property. Upon termination of his employment --------------------------------- with the Company, Executive shall deliver promptly to the Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 10. Miscellaneous. ------------- 10.01 Governing Law. This Agreement is made under and shall be governed by ------------- and construed in accordance with the laws of the State of Minnesota. 10.02 Prior Agreements. This Agreement contains the entire Agreement of the ---------------- parties relating to the subject matter hereof and supersedes all prior Agreements and understandings with respect to such subject matter, and the parties hereto have made no Agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 10.03 Withholding Taxes. The Company may withhold from any benefits payable ----------------- under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 10.04 Amendments. No amendment or modification of this Agreement shall be ---------- deemed effective unless made in writing and signed by the parties hereto. 10.05 No Waiver. No term or condition of this Agreement shall be deemed to --------- have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom -7- enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10.06 Severability. To the extent any provision of this Agreement shall be ------------ invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceable be covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10.07 Assignment. This Agreement shall not be assignable, in whole or in ---------- part, by either party without the written consent of the other party, except that the Company, may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 10. 10.08 Injunctive Relief. Executive agrees that it would be difficult to ----------------- compensate the company fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Sections 5, 7,8 and 9.03. Accordingly, Executive specifically agrees that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief. -8- IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. MEDI-JECT CORPORATION EMPLOYEE By: /s/ Franklin Pass By: /s/ Mark Derus -------------------------------- ------------------------ Its: Chairman ---------------------------- -9- EX-10.10 17 EMPLOYMENT AGREEMENT WITH TODD LEONARD EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of January 3, 1995, by and between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and Todd Leonard an individual resident of Hennepin County in the State of Minnesota ("Executive"). WHEREAS, the Company wishes to employ Executive to render services for the Company on the terms and conditions set forth in this Agreement, and Executive wishes to be retained and employed by the Company on such terms and conditions. NOW, THEREFORE, in consideration of the premises and the respective undertakings of the Company and Executive set forth below, the company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive ---------- accepts such employment and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term. Unless terminated at an earlier date in accordance with Section ---- 9 of this Agreement, the term of Executive's employment hereunder shall be for a period commencing on the date of this agreement and continuing until December 31, 1995 (the "Initial Term"), and, thereafter, the term of this Agreement shall be automatically extended for successive one (1) year periods (each an "Extension Term"), unless either party objects to such extension by written notice to the other party at least ninety (90) days prior to the end of the Initial Term or any Extension term. 3. Position and Duties. ------------------- 3.01 Service with Company. During the term of this Agreement, Executive -------------------- agrees to perform such reasonable employment duties as the Board of Directors of the Company shall assign to him from time to time. As of the date of this Agreement, Executive has been elected to serve as Vice President, Business Development of the Company, with responsibility for managing licensing, research and corporate partnership alliances, and public relations. 3.02 Performance of Duties. Executive agrees to serve the Company --------------------- faithfully and to the best of his ability and to devote his full time, attention and efforts to the business and affairs of the Company during the term of this Agreement. Executive hereby confirms that, other than as set forth herein, he is under no contractual commitments inconsistent with his obligations set forth in this Agreement, and that during the term of this Agreement, he will not render or perform services for any other corporation, firm, entity or person that are inconsistent with the provisions of this Agreement. 4. Compensation. ------------- 4.01. Base Salary. As compensation in full for all services to be ----------- rendered by the Executive under this Agreement during the first year of the term of this Agreement, the Company shall pay to Executive a base annual salary of $85,500 which salary shall be paid in accordance with the Company's normal payroll procedures and policies. The compensation payable to Executive during each subsequent year during the term of this Agreement shall be mutually agreed upon by the Company and Executive prior to the commencement of each such year. 4.02. Incentive Compensation. In addition to the base salary described ---------------------- in Section 4.01, during the Initial Term, Executive shall be entitled to earn incentive compensation to be calculated based on the receipt by the company of licensing and/or product development fee income during 1995 ("Executive Generated Fees"), up to a maximum amount of $34,000. The first $24,000 of incentive compensation will be tied to the receipt of the budgeted fee income of $1.4 million in calendar 1995. The first $12,000 of bonus is not revocable and shall be paid in $6,000 increments on April 30th and June 30th. The second $12,000 in bonus shall be paid in one lump sum at the time that Executive Generated Fees reach $1.4 million in calendar 1995. Additonal incentive compensation shall be payable at a rate of 2% of Executive Generated Fees in excess of $1.4 million subject to a total cap of $10,000. Executive must be an employee of the Company at the time such fees are earned in order to be eligible to receive incentive compensation. 4.03. Participation in Benefit Plans. Executive shall also be entitled ------------------------------ to participate in all employee benefit plans or programs (including vacation time) of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate. The Company does not guarantee the adoption of continuance of any particular employee benefit plan or program during the term of this Agreement, and Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 4.05 Expenses. The Company will pay or reimburse Executive for all -------- reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expense verification. 5. Confidential Information. Except as permitted or directed by the ------------------------ Company's Board of Directors, during the term of this Agreement and for a period of five years thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company -2- which Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company (including employment by the Company or any affiliated companies prior to the date of this Agreement), whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, any customer or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. Executive acknowledges that the above -described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause, irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the b reach of this Agreement by Executive. 6. Ventures. During the term of this Agreement, it is anticipated that -------- Executive will be engaged in or associated with the planning and implementing of projects, programs and ventures involving the Company and third parties, and Executive hereby expressly acknowledges and agrees that all rights in such projects, programs and ventures shall belong to the Company. Except as formally approved by the Company's Board of Directors, Executive shall not be entitled to any interest in such projects, programs and ventures or to any commission, finder's fee or other compensation in connection therewith, other than the salary to be paid to Executive as provided in this Agreement and the incentive compensation described in Sections 4.02 and 4.03 of this Agreement. 7. Noncompetition and Nonsolicitation Covenants. ------------------------------------------- 7.01 Agreement Not to Compete. Executive agrees that, during the term of ------------------------ his employment by the Company he shall not, directly or indirectly, engage in competition with the Company in any manner or capacity (e.g., as an advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association, or otherwise) in any phase of the business that the Company is conducting during the term of this Agreement, including the design, development, manufacture, distribution, marketing, leasing or selling of accessories, devices, or systems related to the products or services being sold by the Company. -3- 7.02 Geographic Extent of Covenant. The obligations of Executive under ----------------------------- Section 7.01 shall apply to any geographic area in which the Company: (a) has engaged in business during the term of this Agreement through production, promotional, sales or marketing activity, or otherwise, or (b) has otherwise established its goodwill, business reputation, or any customer or supplier relations. 7.03 Limitation on Covenant. Ownership by Executive, as a passive ---------------------- investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 7. 7.04 Nonsolicitation and Noninterference. During the term of this ----------------------------------- Agreement and for a period of two years thereafter, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere adversely with the relationship between any such employee and the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advise to or supply confidential business information or trade secrets of the company to any third person, firm or corporation or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor or other business relation and the Company. 7.05 Indirect Competition and Interference. Executive further agrees that, ------------------------------------- during the term of this Agreement and, solely with respect to Section 7.04, the period covered by Section 7.04, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 7 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity. 8. Patent and Related Matters. -------------------------- 8.01 Disclosure and Assignment. Executive will promptly disclose in ------------------------- writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, either solely or in collaboration with others, during the term of this Agreement, or within six months thereafter, whether or not during regular working hours, relating either directly or indirectly to -4- the business, products, practices, or techniques of the Company (hereinafter referred to as "Developments"). Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all of said Developments are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive's right, title and interest in and to any and all of such Developments. Without limiting the foregoing, any and all original works of authorship which are created by Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright law shall be deemed "works made for hire," as that term is defined in the U.S. Copyright Act (17 U.S.C. Section 101). 8.02 Future Developments. As to any future Developments made by Executive ------------------- that relate to the business, products or practices of the Company and that are first conceived or reduced to practice during the term of this Agreement, or within six months thereafter, but that are claimed for any reason to belong to an entity or person other than the company, Executive will promptly disclose the same in writing to the Company and shall not disclose the same to others if the Company, within twenty (20) days thereafter, shall claim ownership of such Developments under the terms of this Agreement. If the Company makes such claim, Executive agrees that, insofar as the rights (if any) of Executive are involved, it will be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association. The locale of the arbitration shall be Minneapolis, Minnesota (or other locale convenient to the Company's principal executive offices). If the Company makes no such claim, Executive hereby acknowledges that the company has made no promise to receive and hold in confidence any such information disclosed by Executive. 8.03 Limitation on Sections 8.01 and 8.02. The provisions of Sections 8.01 ------------------------------------ and 8.02 shall not apply to any Development meeting the following conditions: (a) such Development was developed entirely on Executive's own time; (b) such Development was made without the use of any Company equipment, supplies, facility or trade secret information. (c) such Development does not relate (i) directly to the business of the Company, or (ii) to the Company's actual or demonstrable anticipated research (d) such Development does not result from any work performed by Executive for the Company. 8.04 Assistance of Executive. Upon request and without further ----------------------- compensation therefor, but at no expense to Executive, and whether during the -5- term of this Agreement or thereafter, Executive will do all lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that in the opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all of such Developments, and for perfecting, affirming and recording the Company's complete ownership and title thereto, and to cooperate otherwise in all proceedings and matters relating thereto. 8.05 Records. Executive will keep complete, accurate and authentic ------- accounts, notes, data and records of all Developments in the manner and form requested by the Company. Such accounts, notes, data and records shall be the property of the Company, and, upon its request, Executive will promptly surrender the same to it or, if not previously surrendered upon its request or otherwise, Executive will surrender the same, and all copies thereof, to the company upon the conclusion of his employment. 8.06 Obligations, Restrictions and Limitations. Executive understands that ----------------------------------------- the company may enter into Agreements or arrangements with agencies of the United States Government, and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it wit h respect to inventions and patents that may be acquired by it or that may be conceived or developed by employees, consultants or other agents rendering services to it. Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the term of this Agreement and shall take any and all further action that may be required to discharge such obligations and to comply with such restrictions and limitations. 9. Termination. ----------- 9.01 Grounds for Termination. This Agreement shall terminate prior to the ----------------------- expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time during the initial term or any extension thereof: (a) Executive shall die; (b) the Board of Directors of the Company shall determine that: (i) Executive has become disabled; (ii) Executive had breached this Agreement in any material respect, which breach is not cured by Executive or is not capable of being cured by Executive within thirty (30) days -6- after written notice of such breach is delivered to Executive, or (iii) Executive has engaged in willful and material misconduct, including willful and material failure to perform his duties as an officer or employee of the Company; or (c) Executive is terminated by the Company (which may be with or without cause), following not less than ninety days prior written notice of such termination. Notwithstanding any termination of this Agreement, Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by the provisions of this Agreement that specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive's employment. 9.02 "Disability" Defined. The Board of Directors may determine that -------------------- Executive has become disabled, for the purpose of this Agreement, in the event that Executive shall fail, because of illness or incapacity, to render services of the character contemplated by this Agreement over a period of ninety (90) days during any one hundred and eighty (180) day period. The existence or nonexistence of grounds for termination in good faith by the Board of Directors after notice in writing given to Executive at least thirty (30) days prior to such determination. During such thirty (30) day period, Executive shall be permitted to make a presentation to the Board of Directors for its consideration. 9.03 Surrender of Records and Property. Upon termination of his employment --------------------------------- with the Company, Executive shall deliver promptly to the Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 10. Miscellaneous. ------------- 10.01 Governing Law. This Agreement is made under and shall be ------------- governed by and construed in accordance with the laws of the State of Minnesota. 10.02 Prior Agreements. This Agreement contains the entire Agreement ---------------- of the parties relating to the subject matter hereof and supersedes all prior Agreements and understandings with respect to such subject matter, and the parties hereto have -7- made no Agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 10.03 Withholding Taxes. The Company may withhold from any benefits ----------------- payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 10.04 Amendments. No amendment or modification of this Agreement shall ---------- be deemed effective unless made in writing and signed by the parties hereto. 10.05 No Waiver. No term or condition of this Agreement shall be --------- deemed to have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10.06 Severability. To the extent any provision of this Agreement ------------ shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceable be covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10.07 Assignment. This Agreement shall not be assignable, in whole or ---------- in part, by either party without the written consent of the other party, except that the Company, may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 10. -8- 10.08 Injunctive Relief. Executive agrees that it would be difficult ----------------- to compensate the company fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Sections 5, 7,8 and 9.03. Accordingly, Executive specifically agrees that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief. IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. MEDI-JECT CORPORATION EMPLOYEE By: /s/ Franklin Pass By: /s/ Todd Leonard ------------------------- --------------------------- Its: Chairman ------------------------- -9- EX-10.11 18 EMPLOYMENT AGREEMENT WITH PETER SADOWSKI EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, dated as of January 3, 1995, by and between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and Peter Sadowski an individual resident of Washington County in the State of Minnesota ("Executive"). WHEREAS, the Company wishes to employ Executive to render services for the Company on the terms and conditions set forth in this Agreement, and Executive wishes to be retained and employed by the Company on such terms and conditions. NOW, THEREFORE, in consideration of the premises and the respective undertakings of the Company and Executive set forth below, the company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive ---------- accepts such employment and agrees to perform services for the Company, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term. Unless terminated at an earlier date in accordance with Section ---- 9 of this Agreement, the term of Executive's employment hereunder shall be for a period commencing on the date of this agreement and continuing until December 31, 1995 (the "Initial Term"), and, thereafter, the term of this Agreement shall be automatically extended for successive one (1) year periods (each an "Extension Term"), unless either party objects to such extension by written notice to the other party at least ninety (90) days prior to the end of the Initial Term or any Extension term. 3. Position and Duties. ------------------- 3.01 Service with Company. During the term of this Agreement, Executive -------------------- agrees to perform such reasonable employment duties as the Board of Directors of the Company shall assign to him from time to time. As of the date of this Agreement, Executive has been elected to serve as Vice President, Product Development of the Company, with responsibility for managing the product and technology development programs of the company. 3.02 Performance of Duties. Executive agrees to serve the Company --------------------- faithfully and to the best of his ability, to devote his full time, attention and efforts to the business and affairs of the Company during the term of this Agreement. Executive hereby confirms that, other than as set forth herein, he is under no contractual commitments inconsistent with his obligations set forth in this Agreement, and that during the term of this Agreement, he will not render or perform services for any other corporation, firm, entity or person that are inconsistent with the provisions of this Agreement. 4. Compensation. ------------- 4.01. Base Salary. As compensation in full for all services to be rendered ----------- by the Executive under this Agreement during the first year of the term of this Agreement, the Company shall pay to Executive a base annual salary of $89,500 which salary shall be paid in accordance with the Company's normal payroll procedures and policies. The compensation payable to Executive during each subsequent year during the term of this Agreement shall be mutually agreed upon by the Company and Executive prior to the commencement of each such year. 4.02. Participation in Benefit Plans. Executive shall also be entitled to ------------------------------ participate in all employee benefit plans or programs (including vacation time) of the Company to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible to participate. The Company does not guarantee the adoption of continuance of any particular employee benefit plan or program during the term of this Agreement, and Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. 4.03 Expenses. The Company will pay or reimburse Executive for all -------- reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expense verification. 5. Confidential Information. Except as permitted or directed by the ------------------------ Company's Board of Directors, during the term of this Agreement and for a period of five years thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company which Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company (including employment by the Company or any affiliated companies prior to the date of this Agreement), whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, any customer or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. Executive acknowledges that the above -described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause, -2- irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by Executive. 6. Ventures. During the term of this Agreement, it is anticipated that -------- Executive will be engaged in or associated with the planning and implementing of projects, programs and ventures involving the Company and third parties, and Executive hereby expressly acknowledges and agrees that all rights in such projects, programs and ventures shall belong to the Company. Except as formally approved by the Company's Board of Directors, Executive shall not be entitled to any interest in such projects, programs and ventures or to any commission, finder's fee or other compensation in connection therewith, other than the salary to be paid to Executive as provided in this Agreement and the incentive compensation described in Sections 4.02 and 4.03 of this Agreement. 7. Noncompetition and Nonsolicitation Covenants. ------------------------------------------- 7.01 Agreement Not to Compete. Executive agrees that, during the term of ------------------------ his employment by the Company he shall not, directly or indirectly, engage in competition with the Company in any manner or capacity (e.g., as an advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association, or otherwise) in any phase of the business that the Company is conducting during the term of this Agreement, including the design, development, manufacture, distribution, marketing, leasing or selling of accessories, devices, or systems related to the products or services being sold by the Company. 7.02 Geographic Extent of Covenant. The obligations of Executive under ----------------------------- Section 7.01 shall apply to any geographic area in which the Company: (a) has engaged in business during the term of this Agreement through production, promotional, sales or marketing activity, or otherwise, or (b) has otherwise established its goodwill, business reputation, or any customer or supplier relations. 7.03 Limitation on Covenant. Ownership by Executive, as a passive ---------------------- investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 7. -3- 7.04 Nonsolicitation and Noninterference. During the term of this ----------------------------------- Agreement and for a period of two years thereafter, Executive shall not (a) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere adversely with the relationship between any such employee and the Company, (b) induce or attempt to induce any employee of the Company to work for, render services or provide advise to or supply confidential business information or trade secrets of the company to any third person, firm or corporation or (c) induce or attempt to induce any customer, supplier, licensee, licensor or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor or other business relation and the Company. 7.05 Indirect Competition and Interference. Executive further agrees that, ------------------------------------- during the term of this Agreement and, solely with respect to Section 7.04, the period covered by Section 7.04, he will not, directly or indirectly, assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 7 if such activity were carried out by Executive, either directly or indirectly; and, in particular, Executive agrees that he will not, directly or indirectly, induce any employee of the Company to carry out, directly or indirectly, any such activity. 8. Patent and Related Matters. -------------------------- 8.01 Disclosure and Assignment. Executive will promptly disclose in ------------------------- writing to the Company complete information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, method or product, whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by Executive, either solely or in collaboration with others, during the term of this Agreement, or within six months thereafter, whether or not during regular working hours, relating either directly or indirectly to the business, products, practices, or techniques of the Company (hereinafter referred to as "Developments"). Executive, to the extent that he has the legal right to do so, hereby acknowledges that any and all of said Developments are the property of the Company and hereby assigns and agrees to assign to the Company any and all of Executive's right, title and interest in and to any and all of such Developments. Without limiting the foregoing, any and all original works of authorship which are created by Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright law shall be deemed "works made for hire," as that term is defined in the U.S. Copyright Act (17 U.S.C. Section 101). 8.02 Future Developments. As to any future Developments made by Executive ------------------- that relate to the business, products or practices of the Company and that are first conceived or reduced to practice during the term of this Agreement, or -4- within six months thereafter, but that are claimed for any reason to belong to an entity or person other than the company, Executive will promptly disclose the same in writing to the Company and shall not disclose the same to others if the Company, within twenty (20) days thereafter, shall claim ownership of such Developments under the terms of this Agreement. If the Company makes such claim, Executive agrees that, insofar as the rights (if any) of Executive are involved, it will be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association. The locale of the arbitration shall be Minneapolis, Minnesota (or other locale convenient to the Company's principal executive offices). If the Company makes no such claim, Executive hereby acknowledges that the company has made no promise to receive and hold in confidence any such information disclosed by Executive. 8.03 Limitation on Sections 8.01 and 8.02. The provisions of Sections 8.01 ------------------------------------ and 8.02 shall not apply to any Development meeting the following conditions: (a) such Development was developed entirely on Executive's own time; (b) such Development was made without the use of any Company equipment, supplies, facility or trade secret information. (c) such Development does not relate (i) directly to the business of the Company, or (ii) to the Company's actual or demonstrable anticipated research (d) such Development does not result from any work performed by Executive for the Company. 8.04 Assistance of Executive. Upon request and without further ----------------------- compensation therefor, but at no expense to Executive, and whether during the term of this Agreement or thereafter, Executive will do all lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that in the opinion of the Company, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patent, including, but not limited to, design patents, on any and all of such Developments, and for perfecting, affirming and recording the Company's complete ownership and title thereto, and to cooperate otherwise in all proceedings and matters relating thereto. 8.05 Records. Executive will keep complete, accurate and authentic ------- accounts, notes, data and records of all Developments in the manner and form requested by the Company. Such accounts, notes, data and records shall be the property of the Company, and, upon its request, Executive will promptly surrender -5- the same to it or, if not previously surrendered upon its request or otherwise, Executive will surrender the same, and all copies thereof, to the company upon the conclusion of his employment. 8.06 Obligations, Restrictions and Limitations. Executive understands that ----------------------------------------- the company may enter into Agreements or arrangements with agencies of the United States Government, and that the Company may be subject to laws and regulations which impose obligations, restrictions and limitations on it wit h respect to inventions and patents that may be acquired by it or that may be conceived or developed by employees, consultants or other agents rendering services to it. Executive agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any such invention conceived or developed by him during the term of this Agreement and shall take any and all further action that may be required to discharge such obligations and to comply with such restrictions and limitations. 9. Termination. ----------- 9.01 Grounds for Termination. This Agreement shall terminate prior to the ----------------------- expiration of the initial term set forth in Section 2 or any extension thereof in the event that at any time during the initial term or any extension thereof: (a) Executive shall die; (b) the Board of Directors of the Company shall determine that: (i) Executive has become disabled; (ii) Executive had breached this Agreement in any material respect, which breach is not cured by Executive or is not capable of being cured by Executive within thirty (30) days after written notice of such breach is delivered to Executive, or (iii) Executive has engaged in willful and material misconduct, including willful and material failure to perform his duties as an officer or employee of the Company; or (c) Executive is terminated by the Company (which may be with or without cause), following not less than ninety days prior written notice of such termination. Notwithstanding any termination of this Agreement, Executive, in consideration of his employment hereunder to the date of such termination, shall remain bound by -6- the provisions of this Agreement that specifically relate to periods, activities or obligations upon or subsequent to the termination of Executive's employment. 9.02 "Disability" Defined. The Board of Directors may determine that -------------------- Executive has become disabled, for the purpose of this Agreement, in the event that Executive shall fail, because of illness or incapacity, to render services of the character contemplated by this Agreement over a period of ninety (90) days during any one hundred and eighty (180) day period. The existence or nonexistence of grounds for termination in good faith by the Board of Directors after notice in writing given to Executive at least thirty (30) days prior to such determination. During such thirty (30) day period, Executive shall be permitted to make a presentation to the Board of Directors for its consideration. 9.03 Surrender of Records and Property. Upon termination of his employment --------------------------------- with the Company, Executive shall deliver promptly to the Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations or copies thereof, which are the property of the Company or which relate in any way to the business, products, practices or techniques of the company, and all other property, trade secrets and confidential information of the Company, including, but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 10. Miscellaneous. ------------- 10.01 Governing Law. This Agreement is made under and shall be governed by ------------- and construed in accordance with the laws of the State of Minnesota. 10.02 Prior Agreements. This Agreement contains the entire Agreement of the ---------------- parties relating to the subject matter hereof and supersedes all prior Agreements and understandings with respect to such subject matter, and the parties hereto have made no Agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 10.03 Withholding Taxes. The Company may withhold from any benefits payable ----------------- under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 10.04 Amendments. No amendment or modification of this Agreement shall be ---------- deemed effective unless made in writing and signed by the parties hereto. 10.05 No Waiver. No term or condition of this Agreement shall be deemed to --------- have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom -7- enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10.06 Severability. To the extent any provision of this Agreement shall be ------------ invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which may validly and enforceable be covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its express terms) possible under applicable law. 10.07 Assignment. This Agreement shall not be assignable, in whole or in ---------- part, by either party without the written consent of the other party, except that the Company, may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity with or into which the Company may merge or consolidate, or to which the Company may sell or transfer all or substantially all of its assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this Section 10. 10.08 Injunctive Relief. Executive agrees that it would be difficult to ----------------- compensate the company fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Sections 5, 7,8 and 9.03. Accordingly, Executive specifically agrees that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement and that such relief may be granted without the necessity of proving actual damages. This provision with respect to injunctive relief shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief. -8- IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. MEDI-JECT CORPORATION EMPLOYEE By: /s/ Franklin Pass By: /s/ Peter Sadowski -------------------------------- ------------------------------------ Its: Chairman ------------------------------- -9- EX-10.12 19 1993 STOCK OPTION PLAN Exhibit 10.12 MEDI-JECT CORPORATION 1993 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN. ------------------- This Plan shall be known as the " Medi-Ject Corporation 1993 Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of the Plan is to aid in maintaining and developing personnel capable of assuring the future success of Medi-Ject Corporation, a Minnesota corporation (the "Company"), to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options as provided herein. Options granted under the Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options that do not qualify as Incentive Stock Options. 2. STOCK SUBJECT TO THE PLAN. ------------------------- Subject to the provisions of Section 16, the shares of stock to be subject to options under the Plan shall be shares of the Company's authorized common stock, $.01 par value (the "Common Stock"). Such shares may be either authorized but unissued shares, or issued shares that have been reacquired by the Company. Subject to the adjustment as provided in Section 12, the maximum number of shares on which options may be exercised under this Plan shall be 300,000 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. ADMINISTRATION OF PLAN. ---------------------- (a) The Plan shall be administered by the Board of Directors of the Company or a committee of three or more directors of the Company. The members of such committee shall be appointed by and serve at the pleasure of the Board of Directors. The group administering the Plan shall be referred to herein as the "Committee" and shall consist initially of Fred Shapiro, M.D., Mark Derus, and Ken Evenstad. (b) The Committee shall have plenary authority in its discretion, but subject to the express provisions of this Plan, (i) to determine the purchase price of the common shares covered by each option, (ii) to determine the employees to whom and the time or times at which such options shall be granted and the number of shares to be subject to each option, (iii) to determine the terms of exercise of each option (including the form of payment to be made upon exercise), (iv) to accelerate the time at which all or any part of an option may be exercised, (v) to amend or modify the terms of any option with the consent of the optionee, (vi) to interpret the Plan, (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, (viii) to determine the terms and provisions of each option agreement under this Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, and (ix) to make all other determinations necessary or advisable for the administration of the Plan, subject to the exclusive authority of the Board of Directors under Section 13 to amend or terminate the Plan. The Committee's determinations on the foregoing matters, unless otherwise disapproved by the Board of Directors of the Company, shall be final and conclusive. (c) The Committee shall select one of its members as its Chairperson and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination that is set forth in a written document and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The granting of an option pursuant to the Plan shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Company and the employee to whom such right is granted. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable. 4. ELIGIBILITY. ----------- Incentive Stock Options may only be granted under this Plan to any full or part-time employee (which term as used herein includes, but is not limited to, officers and directors who are also employees) of the Company and of its future subsidiary corporations (herein called "subsidiaries"). Members of the Board of Directors of the Company, consultants or independent contractors providing valuable services to the Company or one of its subsidiaries who are not also employees thereof shall be eligible to receive options that do not qualify as Incentive Stock Options. In determining the persons to whom options shall be granted and the number of shares subject to each option, the Committee may take into account the nature of services rendered by the respective employees, their present and potential contributions to the success of the Company and such other factors as the Committee in its discretion shall deem relevant. A person who has been granted an option under the Plan may be granted additional options under the Plan if the Committee shall so determine; provided, however, that to the extent the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the stock with respect to which all Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all plans described in Section 422 of the Code of his employer corporation and its parent and subsidiary corporations described in Section 424(e) or 424(f) of the Code) exceeds $100,000, such options shall be treated as options which do not qualify as Incentive Stock Options. -2- 5. PRICE. ----- The option price for all Incentive Stock Options granted under the Plan shall be determined by the Committee but shall not be less than 100% of the fair market value of shares of the Common Stock at the date of granting of such option. The option price for options granted under the Plan that do not qualify as Incentive Stock Options shall also be determined by the Committee. For purposes of the preceding sentence and for all other valuation purposes under the Plan, the fair market value of the Common Stock shall be as reasonably determined by the Committee. If on the date of grant of any option granted under the Plan, the Common Stock is not publicly traded, the Committee shall make a good faith attempt to satisfy the option price requirement of this Section 5 and in connection therewith shall take such action as it deems necessary or advisable. 6. TERM. ---- Each option and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the option agreement. The Committee shall be under no duty to provide terms of like duration for options granted under the Plan, but the term of any options granted under the Plan may not extend more than ten (10) years from the date of granting of such option. 7. EXERCISE OF OPTION OR AWARD. --------------------------- (a) The Committee shall have full and complete authority to determine whether the option will be exercisable in full at any time or from time to time during the term of the option, or to provide for the exercise thereof in such installments, upon the occurrence of such events and at such times during the term of the option as the Committee may determine and specify in the option agreement. (b) The exercise of any option granted hereunder shall only be effective at such time that the sale of the Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. (c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either in cash (including check, bank draft or money order), or, at the discretion of the Committee, (i) by delivering certificates for shares of Common Stock already owned by the optionee having a fair market value equal to the full purchase price of the shares, or (ii) a combination of cash and such shares; provided, however, that an optionee shall not be entitled to tender shares of the Common Stock pursuant to successive, substantially simultaneous exercises of options granted under this or any other stock option plan of the Company. The fair market value of such shares shall be determined as -3- provided in Section 5. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he shall possess no rights as a shareholder with respect to such shares. 8. INCOME TAX WITHHOLDING. ---------------------- In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of an optionee or grantee under the Plan, are withheld or collected from such optionee or grantee. In order to assist an optionee or grantee in paying all federal and state taxes to be withheld or collected upon exercise of an option or award which does not qualify as an Incentive Stock Option hereunder, the Committee, in its absolute discretion and subject to such additional terms and conditions as it may adopt, shall permit the optionee or grantee to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the shares otherwise to be delivered upon exercise of such option with a fair market value, determined in accordance with Section 5 herein, equal to such taxes or (ii) delivering to the Company Common Stock other than the shares issuable upon exercise of such option or award with a fair market value, determined in accordance with Section 5, equal to such taxes. 9. ADDITIONAL RESTRICTIONS. ----------------------- The Committee shall have full and complete authority to determine whether all or any part of the shares of Common Stock acquired upon exercise of any of the options granted under the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner the optionee's rights with respect thereto, but any such restriction shall be contained in the agreement relating to such options. 10. TEN PERCENT SHAREHOLDER RULE. ---------------------------- Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of Section 424(d) of the Code) shares of common stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations (within the meaning of Section 424(e) or 424(f) of the Code), if any, then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(7) of the Code, the option price shall be not less than 110% of the fair market value of the Common Stock determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted. -4- 11. NON-TRANSFERABILITY. ------------------- No option granted under the Plan shall be transferable by an optionee, otherwise than by will or the laws of descent or distribution. During the lifetime of an optionee the option shall be exercisable only by such optionee. 12. DILUTION OR OTHER ADJUSTMENTS. ----------------------------- If there shall be any change in the shares of the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made by the Committee. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares and the price per share subject to outstanding options, in order to prevent dilution or enlargement of option rights. 13. AMENDMENT OR DISCONTINUANCE OF PLAN. ----------------------------------- The Board of Directors may amend or discontinue the Plan at any time. No amendment of the Plan, however, shall, without shareholder approval: (i) increase the maximum number of shares under the Plan as provided in Section 2, (ii) decrease the minimum option price provided in Section 5, (iii) extend the maximum option term under Section 6, or (iv) materially modify the eligibility requirements for participation in the Plan. The Board of Directors shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option. 14. TIME OF GRANTING. ---------------- Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the shareholders of the Company, and no action taken by the Committee or the Board of Directors (other than the execution and delivery of an option), shall constitute the granting of an option hereunder. 15. NO GUARANTY OF EMPLOYMENT. ------------------------- Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate any employee's employment at any time. -5- 16. EFFECTIVE DATE AND TERMINATION OF PLAN. -------------------------------------- (a) The Plan was approved by the Board of Directors on July 15, 1993, and shall be approved by the shareholders of the Company as soon as practicable but in no event later than within twelve (12) months thereof. (b) Unless the Plan shall have been discontinued as provided in Section 13, the Plan shall terminate July 15, 2003. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. -6- EX-10.13 20 FORM OF INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.13 MEDI-JECT CORPORATION FORM OF INCENTIVE STOCK OPTION AGREEMENT This Agreement is made and entered into this __ day of _____, ___, between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and ______________, an individual resident of the State of ________ ("Employee"). WHEREAS, the Company has adopted the Medi-Ject Corporation 1993 Stock Option Plan (the "Plan"), which permits issuance of stock options for the purchase of shares of the Company's common stock, $.01 par value (the "Common Stock"), and the Company has taken all necessary actions to grant the following option pursuant and subject to the terms of the Plan. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. Grant of Option. The Company hereby grants Employee, on the date set --------------- forth above, the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate of _______ (____) shares of Common Stock at the option price of _______ ($___) per share on the terms and conditions set forth in this Option Agreement and in the Plan. It is understood and agreed that the option price is not less than the per share fair market value of such shares on the date of this Agreement. The Company intends that the Option shall be an Incentive Stock Option governed by the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The terms of the Plan and the Option shall be interpreted and administered so as to satisfy the requirements of the Code. A copy of the Plan will be furnished upon request of Employee. 2. Vesting of Option Rights. The Option shall not be exercisable by ------------------------ Employee immediately upon the date of grant. As otherwise provided in Section 3 of this Agreement, the Option may be exercised by Employee in accordance with the following schedule: Cumulative percentage of On or after each of shares with respect to the following dates which the Option is exercisable ------------------- ------------------------------- % Notwithstanding the foregoing, the Option may be exercised as to 100% of the shares of Common Stock for which the Option was granted on the date of a "change of control", as hereinafter defined. A "change in control" shall mean any of the following: (i) A sale of all or substantially all of the assets of the Company; (ii) The acquisition within any rolling twelve-month period of more than 80% of the Common Stock by any person or group of persons, except a Permitted Shareholder as hereinafter defined, acting in concert. A "Permitted Shareholder" means a holder, as of the date the Plan was adopted by the Company, of Common Stock; (iii) A reorganization of the Company wherein the holders of Common Stock receive stock in another company, a merger of the Company with another company wherein there is an 80% or greater change in the ownership of the Common Stock as a result of such merger, or any other transaction in which the Company (other than as the parent corporation) is consolidated for federal income tax purposes or is eligible to be consolidated for federal income tax purposes with another corporation; (iv) In the event that the Common Stock is traded on an established securities market: a public announcement that any person has acquired or has the right to acquire beneficial ownership of more than 50% of the then outstanding Common Stock and for this purpose the terms "person" and "beneficial ownership" shall have the meanings provided in Section 13(d) of the Securities and Exchange Act of 1934 or related rules promulgated by the Securities and Exchange Commission or; the commencement of or public announcement of an intention to make a tender offer for more than 50% of the then outstanding Common Stock; and (v) The Board of Directors of the Company, in its sole and absolute discretion, determines that there has been a sufficient change in the share ownership of the Company to constitute a change of effective ownership or control of the Company. Employee understands that to the extent that the aggregate fair market value (determined at the time the Option was granted) of the Common Stock with respect to which all options, that are incentive stock options within the meaning of Section 422 of the Code, are exercisable for the first time by Employee during any calendar year exceed $100,000, in accordance with Section 422(d) of the Code, such options shall be treated as options that do not qualify as incentive stock options. -2- The Option shall terminate at the close of business on ______, _____ or such shorter period as is prescribed herein. Employee shall not have any of the rights of a shareholder with respect to the shares subject to the Option until such shares shall be issued to Employee upon the proper exercise of the Option. 3. Exercise of Option after Death or Termination of Employment. The ----------------------------------------------------------- Option shall terminate and may no longer be exercised if Employee ceases to be employed by the Company or its subsidiaries, except that: (a) If Employee's employment shall be terminated for any reason, voluntary or involuntary, other than death, disability (as set forth in section 3(c)) or Employee's gross and willful misconduct, then Employee may at any time within a period of three (3) months after such termination exercise the Option to the extent the Option was exercisable by Employee on the date of the termination of Employee's employment; (b) If Employee's employment is terminated as a result of Employee's gross and willful misconduct, including but not limited to wrongful appropriation of funds or the commission of a gross misdemeanor or felony, the Option shall be terminated as of the date of the misconduct; and (c) If Employee dies in the employ of the Company or a subsidiary or Employee's employment is terminated because Employee has become disabled (within the meaning of Code section 22(e)(3)) while in the employ of the Company or a subsidiary, the Option may, within twelve (12) months after Employee's death or the date of termination for such disability, be exercised to the extent that Employee was entitled to exercise the Option on the date of Employee's death or termination of employment, if earlier, by Employee or Employee's personal representatives, if applicable, or by the person or persons to whom Employee's rights under the Option pass by will or by the applicable laws of descent and distribution; provided, however, that the Option may not be exercised to any extent by anyone after the termination date of the Option. 4. Investment Representation. Employee hereby represents and agrees ------------------------- that any shares of Common Stock which Employee may acquire pursuant to the exercise of the Option will be acquired for long-term investment purposes and not with the view toward the distribution or sale thereof in a public offering within the meaning of the federal Securities Act of 1933. Employee acknowledges that at the time of acquisition such shares will not be registered under either the federal or applicable state securities laws, and that the Company will be relying upon the foregoing investment representation in agreeing to issue such shares to Employee. Employee acknowledges that the transferability of such shares will be subject to restrictions imposed by all applicable federal and state securities laws and agrees that -3- the certificates evidencing such shares may be imprinted with an appropriate legend setting forth these restrictions on transferability. 5. Method of Exercise of Option. Subject to the foregoing, the ---------------------------- Option maybe exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office in Minneapolis, Minnesota. The notice shall set forth the number of shares as to which the Option is being exercised and shall be accompanied by payment of the purchase price. Payment of the purchase price shall be made by check payable to the order of Company; or, at the discretion of the Company, (i) by delivering to the Company for cancellation shares of Common Stock already owned by Employee having a fair market value equal to the full purchase price of the shares being acquired, or (ii) a combination of cash and such shares. The fair market value of such shares shall be determined as provided in Section 5 of the Plan. 6. Miscellaneous. ------------- (a) This Agreement shall not confer on Employee any right with respect to continuance of employment with the Company or any subsidiary of the Company, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Neither Employee nor his legal representative, legatees or distributees, as the case may be, will be or will be deemed to be the holder of any shares subject to the Option unless and until the Option has been exercised and the purchase price of the shares purchased has been paid. (b) The Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in paragraph (c) of Section 3, and during Employee's lifetime the Option is exercisable only by Employee. (c) If there shall be any change in the Common Stock subject to the Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of shares and the price per share of the shares subject to the Option in order to prevent dilution or enlargement of the option rights granted hereunder. (d) The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. (e) If Employee shall dispose of any of the shares of Common Stock acquired upon exercise of the Option within two (2) years from the date the Option was granted or within one (1) year after the date of exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction, Employee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and -4- the consideration, if any, received for such shares. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure (i) notice to the Company of any disposition of the shares of Common Stock acquired upon exercise of the Option within the time periods described above and (ii) that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Employee. (f) Employee agrees to disclose neither the contents nor any of the terms and conditions of this Option to any other person, other than Employee's legal or tax advisors, heirs or the persons who will be Employee's personal representative upon Employee's death or legal incapacity. IN WITNESS WHEREOF, the Company and Employee have executed this Agreement as of the date set forth in the first paragraph. MEDI-JECT CORPORATION By ______________________________________ Its ___________________________________ _________________________________________ [Employee] -5- EX-10.14 21 FORM OF NONQUALIFIED STOCK OPTION AGREEMENT Exhibit 10.14 MEDI-JECT CORPORATION NON-INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made as of the __ day of _____, ____, between Medi-Ject Corporation, a Minnesota corporation (the "Company"), and ________ ("Optionee"). WITNESSETH, THAT: WHEREAS, the Company has adopted the Medi-Ject Corporation 1993 Stock Option Plan (the "Plan"), which permits issuance of stock options for the purchase of shares of the Company's common stock, $.01 par value (the "Common Stock"), and the Company has taken all necessary actions to grant the following option pursuant and subject to the terms of the Plan. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Grant of Option. The Company hereby grants Optionee, on the date set --------------- forth above, the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate of _________ (____) shares of Common Stock at the option price of ______ ($___) per share on the terms and conditions set forth in this Option Agreement and in the Plan. The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). A copy of the Plan will be furnished upon request of Optionee. 2. Duration and Exercisability. --------------------------- (a) Commencing upon the date of grant (the "Normal Exercise Date") and subject to the other terms and conditions set forth herein, the Option may be exercised by Optionee in full; provided, however, that the Option shall be exercisable by Optionee prior to the Normal Exercise Date in cumulative installments as follows: Cumulative percentage On or after each of of shares as to which the following dates Option is exercisable ------------------- --------------------- % The Option shall terminate at the close of business on ____, ___ or such shorter period as is prescribed herein. Optionee shall not have any of the rights of a shareholder with respect to the shares subject to the Option until such shares shall be issued to Optionee upon the proper exercise of the Option. (b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. Notwithstanding the foregoing, the Option may be exercised as to 100% of the shares of Common Stock for which the Option was granted on the date of a "change of control", as hereinafter defined. A "change in control" shall mean any of the following: (i) A sale of all or substantially all of the assets of the Company; (ii) The acquisition within any rolling twelve-month period of more than 80% of the Common Stock by any person or group of persons, except a Permitted Shareholder as hereinafter defined, acting in concert. A "Permitted Shareholder" means a holder, as of the date the Plan was adopted by the Company, of Common Stock; (iii) A reorganization of the Company wherein the holders of Common Stock receive stock in another company, a merger of the Company with another company wherein there is an 80% or greater change in the ownership of the Common Stock as a result of such merger, or any other transaction in which the Company (other than as the parent corporation) is consolidated for federal income tax purposes or is eligible to be consolidated for federal income tax purposes with another corporation; (iv) In the event that the Common Stock is traded on an established securities market: a public announcement that any person has acquired or has the right to acquire beneficial ownership of more than 50% of the then outstanding Common Stock and for this purpose the terms "person" and "beneficial ownership" shall have the meanings provided in Section 13(d) of the Securities and Exchange Act of 1934 or related rules promulgated by the Securities and Exchange Commission or; the commencement of or public announcement of an intention to make a tender offer for more than 50% of the then outstanding Common Stock; and (v) The Board of Directors of the Company, in its sole and absolute discretion, determines that there has been a sufficient change in the share ownership of the Company to constitute a change of effective ownership or control of the Company. -2- 3. Exercise of Option after Death or Termination of Employment. The ----------------------------------------------------------- Option shall terminate and may no longer be exercised if Optionee ceases to be employed by the Company or its subsidiaries, except that: (a) If Optionee's employment shall be terminated for any reason, voluntary or involuntary, other than death, disability (as set forth in section 3(c)) or Optionee's gross and willful misconduct, then Optionee may at any time within a period of three (3) months after such termination exercise the Option to the extent the Option was exercisable by Optionee on the date of the termination of Optionee's employment; (b) If Optionee's employment is terminated as a result of Optionee's gross and willful misconduct, including but not limited to wrongful appropriation of funds or the commission of a gross misdemeanor or felony, the Option shall be terminated as of the date of the misconduct; and (c) If Optionee dies in the employ of the Company or a subsidiary or Optionee's employment is terminated because Optionee has become disabled (within the meaning of Code section 22(e)(3)) while in the employ of the Company or a subsidiary, the Option may, within twelve (12) months after Optionee's death or the date of termination for such disability, be exercised to the extent that Optionee was entitled to exercise the Option on the date of Optionee's death or termination of employment, if earlier, by Optionee or Optionee's personal representatives, if applicable, or by the person or persons to whom Optionee's rights under the Option pass by will or by the applicable laws of descent and distribution; provided, however, that the Option may not be exercised to any extent by anyone after the termination date of the Option. 4. Investment Representation. Optionee hereby represents and agrees ------------------------- that any shares of stock which Optionee may acquire pursuant to the exercise of the Option will be acquired for long-term investment purposes and not with the view toward the distribution or sale thereof in a public offering within the meaning of the federal Securities Act of 1933. Optionee acknowledges that at the time of acquisition such shares will not be registered under either the federal or applicable state securities laws, and that the Company will be relying upon the foregoing investment representation in agreeing to issue such shares to Optionee. Optionee acknowledges that the transferability of such shares will be subject to restrictions imposed by all applicable federal and state securities laws and agrees that the certificates evidencing such shares may be imprinted with an appropriate legend setting forth these restrictions on transferability. -3- 5. Method of Exercise of Option. Subject to the foregoing, the ---------------------------- Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office in Minneapolis, Minnesota. The notice shall set forth the number of shares as to which the Option is being exercised and shall be accompanied by payment of the purchase price. Payment of the purchase price shall be made by check payable to the order of Company; or, at the discretion of the Company, (i) by delivering to the Company for cancellation shares of Common Stock already owned by Optionee having a fair market value equal to the full purchase price of the shares being acquired, or (ii) a combination of cash and such shares. The fair market value of such shares shall be determined as provided in Section 5 of the Plan. 6. Miscellaneous. ------------- (a) This Agreement shall not confer on Optionee any right with respect to continuance of employment with the Company or any subsidiary of the Company, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Neither Optionee nor his legal representative, legatees or distributees, as the case may be, will be or will be deemed to be the holder of any shares subject to the Option unless and until the Option has been exercised and the purchase price of the shares purchased has been paid. (b) The Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in paragraph (c) of Section 3, and during Optionee's lifetime the Option is exercisable only by Optionee. (c) If there shall be any change in the Common Stock subject to the Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of shares and the price per share of the shares subject to the Option in order to prevent dilution or enlargement of the option rights granted hereunder. (d) The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. (e) In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option, and in order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee. Optionee may elect to satisfy any federal and state income tax withholding -4- obligations upon exercise of the Option by (i) having the Company withhold a portion of its Common Stock otherwise to be delivered upon exercise of the Option having a fair market value equal to the amount of federal and state income tax required to be withheld upon such exercise, or (ii) delivering to the Company shares of its Common Stock other than the shares issuable upon exercise of the Option with a fair market value equal to such taxes. (f) Optionee agrees to disclose neither the contents nor any of the terms and conditions of this Option to any other person, other than Optionee's legal or tax advisors, heirs or the persons who will be Optionee's personal representative upon Optionee's death or legal incapacity. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed on the day and year first above written. MEDI-JECT CORPORATION By ______________________________________ Its ___________________________________ _________________________________________ [Optionee] -5- EX-10.16 22 PREFERRED STOCK PURCHASE AGREEMENT ================================================================================ MEDI-JECT CORPORATION --------------------- PREFERRED STOCK PURCHASE AGREEMENT --------------------- Dated as of February 1, 1994 525,000 Shares of Non-Voting Series B Convertible Preferred Stock ($.01 Par Value) (Liquidation Preference $1.00 per share) ================================================================================ Medi-Ject Corporation PREFERRED STOCK PURCHASE AGREEMENT ---------------------------------- February 1, 1994 Enskilda Kapitalforvaltning Skandinaviska Enskilda Banken Jakobsbergsgatan 17, Box 16053 103 21 Stockholm SWEDEN Dear Sir: Medi-Ject Corporation, a Minnesota corporation (the "Company") agrees with Enskilda Kapitalforvaltning, a corporation formed under the laws of Sweden (the "Investor"), as follows: 1. Authorization of Issue of Shares. The Board of Directors of the -------------------------------- Company has authorized the issue and sale of up to 1,000,000 shares of a new class of Preferred Stock, such shares to be constituted as a new series of Preferred Stock, and being designated as the "Non-Voting Series B Convertible Preferred Stock" (herein referred to as the "Non-Voting Series B Preferred Shares"). The relative powers, preferences and rights and qualifications, limitations and restrictions of the Non-Voting Series B Preferred Shares are set forth in a proposed amendment to the capital stock provisions of the Restated Articles of Incorporation of the Company (the "Proposed Amendment") in the form attached hereto as Exhibit A. Certain capitalized terms used in this agreement (the "Agreement") are used as defined herein; references to an article or section are, unless otherwise specified, to one of the articles or sections of the Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to the Agreement. 2. Sale and Purchase Price. The Company will issue and sell to ----------------------- Investor and, subject to the terms and conditions herein set forth, Investor agrees to purchase from the Company an aggregate of 525,000 Non-Voting Series B Preferred Shares, at a purchase price of $1.00 per share (the "Shares"). 3. Closing. The closing of the sale of the Shares to Investor shall ------- take place at the offices of Dorsey & Whitney, 220 South Sixth Street, Minneapolis, Minnesota at 10:00 A.M. Minneapolis time on February 1, 1994 or such other date thereafter as shall be mutually agreeable to Investor and the Company (February 1, 1994 or such other date being herein called the "Closing Date"). At the closing, the Company shall deliver to Investor a certificate, dated the Closing Date, representing the Shares purchased by such Investor on such date, registered in its name (or in the name of its nominee if it so specifies to the Company at least 48 hours prior to such date) against payment to the Company of the purchase price of Shares being purchased by such Investor. 4. Representations and Warranties by the Company. In order to --------------------------------------------- induce Investor to enter into the Agreement and to purchase the Shares, the Company hereby represents and warrants to Investor that, except as disclosed in the attached Exhibit B: 4.1 Organization, Standing, etc. The Company is a ---------------------------- corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being conducted. The Company has the requisite corporate power and authority to issue the Shares, the shares of its common stock into which the Shares are convertible (the "Conversion Shares") and to otherwise perform its obligations under the Agreement. 4.2 Governing Instruments. The copies of the articles of --------------------- incorporation, as the same will be modified by the Proposed Amendments (the "Articles of Incorporation") and bylaws of the Company which have been delivered to Investor prior to the execution of the Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and bylaws of the Company in effect as of the date of the Agreement (other than with respect to the Proposed Amendment, which is subject to the receipt of requisite shareholder approval to be sought by the Company at its annual meeting of shareholders to be held on January 31, 1994). 4.3 Subsidiaries, Etc. The Company does not have any ----------------- direct or indirect ownership interest in any corporation, partnership, joint venture, association or other business enterprise. 4.4 Qualification. The Company is duly qualified, licensed ------------- or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. 4.5 Financial Statements. Attached to the Agreement as -------------------- Exhibit C are (a) a balance sheet, as of July 31, 1993 for the Company together with the related statements of operations and shareholders equity for the seven months then ended, which balance sheet and related statements are unaudited. Such financial statements (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company at the balance sheet date and the results of its operations for the period therein specified, and (iii) have, in all material respects, been prepared in accordance with generally accepted -2- accounting principles and (b) a consolidated balance sheet of the Company for the twelve-month fiscal periods ending March 31, 1991 and 1992 and the nine month fiscal period ending December 31, 1992, and the consolidated statements of income and retained earnings and changes in financial position for the same periods, all as reported on by the Company's independent certified public accountants. Without limiting the generality of the foregoing, the balance sheet or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at July 31, 1993, which, individually or in the aggregate, are material and which in accordance with generally accepted accounting principles would be required to be disclosed in such balance sheet, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. 4.6 Tax Returns and Audits. All required federal, state ---------------------- and local tax returns or appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of the Company's tax returns has been audited by governmental authorities in a manner to bring such audits to the Company's attention. The Company does not have any tax liabilities except those reflected on Exhibit C or those incurred in the ordinary course of business since July 31, 1993. 4.7 Changes, Dividends, etc. Except for the transactions ------------------------ contemplated by the Agreement, since January 1,1994, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company; (vii) entered into any transaction other than in the ordinary course of business; (viii) encountered any labor difficulties or labor union organizing activities; (ix) issued or sold any shares of capital stock or other securities or granted any options, warrants, or other purchase rights with respect thereto other than pursuant to the Agreement; (x) made any -3- acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (xi) increased the compensation payable, or to become payable, to any employees, or made any bonus payment or similar arrangement with any employees or increased the scope or nature of any fringe benefits provided for its employees (other than salary increases granted in the ordinary course of business in connection with annual merit increase or pursuant to employment agreements identified herein); or (xi) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since July 31, 1993 (other than continued losses from operations that the Company has incurred, which are generally consistent with its historical losses from operations since December 31, 1992). 4.8 Title to Properties and Encumbrances. The Company has ------------------------------------ good and marketable title to all of its tangible properties and assets, including without limitation the properties and assets reflected on Exhibit C and the properties and assets used in the conduct of its business, except for property disposed of in the ordinary course of business since July 31, 1993, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on Exhibit C or the notes thereto, (b) liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, or (c) those which do not materially affect the value of or interfere with the use made of such properties and assets. 4.9 Conditions of Properties. The plant, offices and ------------------------ equipment of the Company have been kept in good condition and repair in the ordinary course of business. 4.10 Litigation; Governmental Proceedings. There are no ------------------------------------ legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business, and the Company is not aware of any facts which are likely to result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 4.11 Compliance With Applicable Laws and Other Instruments. ----------------------------------------- ----------- The business and operations of the Company have been and are being conducted in all material respects in accordance with all material, applicable federal, state and local laws, rules and regulations, with respect to which failure to so comply would have a material adverse impact upon the Company's business or operations. Neither the execution and delivery of the Agreement and the issuance of the Shares nor fulfillment of nor compliance with the terms and provisions hereof or thereof -4- or of the Non-Voting Series B Preferred Shares, including, without limitation, the provisions of the Proposed Amendment, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, the Articles of Incorporation or By-Laws of the Company or any mortgage, agreement, instrument, order, judgement, decree, statute, law, rule or regulation to which the Company or its property is subject. The Company is not in default under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money or in arrears with respect to any dividends upon any shares of its preferred stock, and there exists no default by the Company under any of its contracts or agreements, or under any instrument by which the Company is bound, which materially and adversely affects its business, operations or financial condition. 4.12 Governmental Consent, Etc. The Company is not required ------------------------- to obtain any consent, approval or authorization of, or to make any declaration or filing with any governmental authority as a condition to or in connection with the valid execution, delivery and performance of the Agreement and the valid offer, issue, sale or delivery of the Shares, or the performance by the Company of its obligations in respect thereof. 4.13 Shares and Conversion Shares. The Shares, when issued ---------------------------- and paid for pursuant to the terms of the Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12 or in the Company's Articles of Incorporation. The Non- Voting Series B Preferred Shares will rank on a par with or superior to the shares of each other series of preferred stock of the Company now outstanding with respect to priority in payment of dividends and the distribution of assets upon any liquidation of the Company. The Conversion Shares have been reserved for issuance and, when issued upon conversion of the Shares, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12. 4.14 Securities Laws. Based in part upon the --------------- representations of Investor in article 5, no consent, and assuming full compliance with article 12, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of the Agreement or the offer, issuance, sale or delivery of the Shares to Investor, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. Under the circumstances contemplated by the Agreement, the offer, issuance, sale and delivery of the Shares and the Conversion Shares will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). -5- 4.15 Patents and Other Intangible Rights. To the best of ----------------------------------- its knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, manufacture, operation and sale of all products sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any confidential information or trade secrets of others. 4.16 Capital Stock. At the date hereof, the authorized ------------- capital stock of the Company consists of 10,000,000 common shares, $.01 par value, of which 237,685 shares are issued and outstanding, 1,600,000 shares of Series A Convertible Preferred Stock, $.01 par value, of which 1,409,376 shares are issued, 3,000,000 shares of Series B Convertible Preferred Stock, of which 1,000,001 shares are issued,1,000,000 shares of Non-Voting Series B Convertible Preferred Stock, none of which are issued and outstanding and 2,000,000 shares of preferred stock undesignated as to series. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than the Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. Other than with respect to the holders of Series B Convertible Preferred Stock, neither the offer nor the issuance or sale of the Shares constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. Other than with respect to certain preemptive rights and anti- dilution protections granted to Ethical Holdings plc, a corporation organized under the laws of England ("Ethical"), pursuant to that certain Preferred Stock Purchase Agreement by and between the Company and Ethical, dated as of September 27, 1993, and to Calvert Social Venture Partners, L.P., a Virginia limited Partnership pursuant to that certain Preferred Stock Purchase Agreement by and between the Company and Ethical, dated as of November 29, 1993 no holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company. -6- 4.17 Outstanding Debt. The Company does not have any ---------------- material indebtedness incurred as the result of a direct borrowing of money, including, but not limited to, indebtedness with respect to trade accounts, except as set forth in Exhibit C or the notes thereto. The Company is not in default in the payment of the principal of or interest or premium on any such indebtedness, and no event has occurred or is continuing under the provisions of any instrument, document or agreement evidencing or relating to any such indebtedness which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 4.18 Schedule of Assets and Contracts. Simultaneous with -------------------------------- the execution of this Agreement, the Company will deliver to Investor a schedule of assets and contracts, specifically referring to this section 4.18 and listing the following items: (a) Schedule 1: a true and complete description of all real properties owned by the Company; (b) Schedule 2: each indenture, lease, sublease, license or other instrument under which the Company claims or holds a leasehold interest in real property; (c) Schedule 3: each lease of personal property involving payments remaining to or from the Company in excess of $10,000; (d) Schedule 4: each written or oral contract, agreement, subcontract, purchase order, commitment or arrangement involving payments remaining to or from the Company in excess of $10,000 and each other agreement material to the Company's business to which the Company is a party or by which it is bound, under which full performance (including payment) has not been rendered by any party thereto; (e) Schedule 5: any collective bargaining agreements, employment agreements, consulting agreements, noncompetition agreements, nondisclosure agreements, executive compensation plans, profit sharing plans, bonus plans, deferred compensation agreements, employee pension retirement plans and employee benefit stock option or stock purchase plans and other employee benefit plans, entered into or adopted by the Company; (f) Schedule 6: all bank accounts (or accounts with other financial institutions) maintained by the Company, together with the persons authorized to make withdrawals from such accounts; (g) Schedule 7: the name of each employee of the Company who is paid a remuneration of $50,000 or more per year, each such employee's -7- job title, and a complete description of the duties and services performed by such employee; (h) Schedule 8: each royalty and/or license agreement material to the Company's business; (i) Schedule 9: list of all patents, patent applications, trademarks, trademark applications, and trade names held by, or filed in the name of, the Company; (j) Schedule 10: list of distributors of the Company's products who individually contribute in excess of 5% of the Company's net sales, and any market studies performed by or on behalf of the Company within the last two years; and (k) Schedule 11: list of all holders of equity in the Company (assuming the exercise of all options and warrants currently outstanding), each such person or entity's respective shareholdings (on a fully diluted basis), and the terms of any outstanding options and/or warrants. Within a reasonable period of time following the Closing, the Company shall provide Investor with a true and complete copy of each document referred to on such schedules. The Company has in all material respects substantially performed all material obligations required to be performed by it to date and is not in default in any material respect under any of the material contracts, agreements, leases, documents, commitments or other arrangements to which it is a party or by which it is otherwise bound. All instruments referred to in the schedules described in this section 4.18 are in effect and enforceable according to their respective terms, and there is not under any of such instruments any existing material default or event of default or event which, with notice or lapse of time or both, would constitute an event of default thereunder. All parties having material contractual arrangements with the Company are in substantial compliance therewith and none are in material default in any respect thereunder. 4.19 Corporate Acts and Proceedings. The execution and ------------------------------ delivery of the Agreement and the adoption of the Proposed Amendment have been duly authorized by all necessary corporate action on behalf of the Company (other than with respect to the receipt of shareholder approval with respect to the Proposed Amendment, as set forth in Section 4.2), has been duly executed and delivered by authorized officers of the Company, and, with respect to the Agreement, is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights -8- generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. All corporate action necessary to the authorization, creation, reservation, issuance and delivery of the Shares and the Conversion Shares has been taken by the Company, or will be taken by the Company on or prior to the Closing Date. 4.20 Accounts Receivable. To the extent that they exceed ------------------- the reserves for doubtful accounts set forth in Exhibit C, the accounts receivable which are reflected in Exhibit C and all accounts receivable of the Company which have arisen since July 31, 1993 (except such accounts receivable as have been collected since July 31, 1993) are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were sold and delivered in conformity with the applicable purchase orders, agreements and specifications. Such accounts receivable are subject to no valid defense or offsets except routine customer complaints or warranty demands of an immaterial nature. 4.21 Inventories. The inventories of the Company which are ----------- reflected in Exhibit C and all inventory items which have been acquired since July 31, 1993 consist of raw materials, supplies, work-in-process and finished goods of such quality and quantities as are, to the best of the Company's knowledge, currently usable or salable in the ordinary course of its business. 4.22 Purchase Commitment and Outstanding Bids. No material ---------------------------------------- purchase commitment of the Company is in excess of normal, ordinary and usual requirements of its business, or was made at any price in excess of the then current market price, or contains terms and conditions more onerous than those usual and customary in the industry. There is no outstanding material bid, sales proposal, contract or unfilled order of the Company which (a) will, or could if accepted, require the Company to supply goods or services at a cost to the Company in excess of the revenues to be received therefrom, or (b) quotes prices which do not include a mark-up over reasonably estimated costs consistent with past mark-ups on similar business or market conditions current at the time. 4.23 Insurance Coverage. There are in full force policies ------------------ of insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 4.24 No Brokers or Finders. No person, firm or corporation --------------------- has or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or Investor for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by the Agreement. The Company will indemnify and hold Investor harmless against any and all liability with respect to any such commission, fee or -9- other compensation which may be payable or determined to be payable in connection with the transactions contemplated by the Agreement. 4.25 Conflicts of Interest. No officer, director or --------------------- shareholder of the Company or any affiliate (as such term is defined in Rule 405 under the Securities Act) or any such person has any direct or indirect interest (a) in any entity which does business with the Company, (b) in any property, asset or right which is used by the Company in the conduct of its business, or (c) in any contractual relationship with the Company other than as an employee. For the purpose of this section 4.25, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market or any payment required to be made by the Company in an amount less than $2,500 annually. 4.26 Licenses. The Company possesses from the appropriate -------- agencies, commissions, boards and/or government bodies and authorities, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the business currently conducted by it, and (b) if not possessed by the Company would have a material adverse impact on the Company's business. 4.27 Disclosure. The Company has not knowingly withheld ---------- from Investor any material facts relating to the assets, business, operations, financial condition or prospects of the Company taken as a whole. No representation or warranty in the Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to Investor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 4.28 Registration Rights. Except as otherwise disclosed ------------------- hereunder, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act. 4.29 Retirement Plans. The Company does not have any ---------------- retirement plans in which any employees of the Company participates that is subject to any provisions of the Employee Retirement Income Security Act of 1974 and of the regulations adopted pursuant thereto ("ERISA"). 4.30 Environmental and Safety Laws. To the best of the ----------------------------- Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. -10- 4.31 Employees. To the best of the Company's knowledge, no --------- officer of the Company or employee of the Company (whose annual compensation is in excess of $50,000) has any plans to terminate his or her employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has not encountered any material labor difficulties. To the best of the Company's knowledge, the Company does not have any worker's compensation liabilities, except those reflected on Exhibit B. 4.32 Absence of Restrictive Agreements. To the best of the --------------------------------- Company's knowledge, no employee of the Company is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company. To the best of the Company's knowledge, no employer or former employer of any employee of the Company has any claim of any kind whatsoever in respect of any of the rights described in section 4.15 of the Agreement. 5. Representations of Investor. Investor represents for itself --------------------------- that: 5.1 Investment Intent. The Shares being acquired by ----------------- Investor are being purchased for investment for Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof; provided that the disposition of Investor's property shall at -------- all times be and remain within its control and subject to the provisions of the Agreement. Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by Investor. Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. Investor understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") and that in any event Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a two-year period after it has acquired such securities. Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. -11- 5.2 Qualification as an Accredited Investor, Etc. Unless -------------------------------------------- otherwise indicated on Investors signature page to this Agreement, Investor qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act. Investor acknowledges that the Company has made available to it at a reasonable time prior to the execution of the Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by the Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to it. Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 5.3 Acts and Proceedings. The Agreement has been duly -------------------- executed and delivered and the performance hereof by Investor is within its power. 5.4 No Brokers or Finders. No person, firm or corporation --------------------- has or will have, as a result of any act or omission by Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by the Agreement. Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 6. Conditions of Investor's Obligation to Purchase the Shares on the ----------------------------------------------------------------- Closing Date. The obligation to purchase and pay for the Shares which Investor - ------------ has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on such Closing Date of the conditions set forth in this article 6. In the event that any such condition is not satisfied to the satisfaction of Investor, then Investor shall not be obligated to proceed with its purchase of the Shares. 6.1 No Errors, etc. The representation and warranties of --------------- the Company under the Agreement shall be true in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6.2 Compliance with Agreement. The Company shall have ------------------------- performed and complied with all agreements or conditions required by the Agreement to be performed and complied with by it prior to or as of the Closing Date. 6.3 No Event of Default. There shall exist at the time of ------------------- such closing no condition or event which would constitute an Event of Default (as such -12- term is defined in article 10 hereof) or which, after notice or lapse of time or both, would constitute an Event of Default. 6.4 Certificate of Officers. The Company shall have ----------------------- delivered a certificate, dated the Closing Date, executed by the President of the Company and certifying to the satisfaction of the conditions specified in sections 6.1, 6.2 and 6.3. 6.5 Opinion of the Company's Counsel. The Company shall -------------------------------- have delivered an opinion, satisfactory in form and substance to Investor, of Dorsey & Whitney, counsel for the Company, dated the Closing Date and in the form of Exhibit D attached hereto. 6.6 Amendment of Articles of Incorporation. The Company -------------------------------------- shall have received the requisite shareholder consents to the Proposed Amendment and Articles of Amendment shall have been filed with the Minnesota Secretary of State authorizing the creation of the Non-Voting Series B Preferred Shares. 6.7 Purchase Permitted by Applicable Law. The purchase of ------------------------------------ and payment for the Shares to be purchased by Investor on the Closing Date, on the terms and conditions herein provided (including the use of the proceeds of the issuance of the Shares by the Company) shall not violate any applicable law or governmental regulation and shall not subject Investor to any tax, penalty or liability, or require Investor to make any filings or to register or qualify, under or pursuant to any applicable law or governmental regulation, and Investor shall have received such certificates or other evidence as he may reasonably request to establish compliance with this condition. 6.8 No Adverse Action or Decision. There shall be no ----------------------------- action, suit, investigation or proceeding pending, or, to the best of the Company's knowledge, threatened (by any public official or governmental authority), against or affecting the Company, any of its properties or rights, or any of its employees, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect transactions contemplated by the Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. 6.9 Approvals and Consents. The Company shall have duly ---------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of and shall have made all filings and effected all registrations and qualifications with, all Federal, State and local governmental authorities necessary for the issuance of the Shares, and all thereof shall be in full force and effect at the time of closing and shall be effective to permit such issuance, and Investor shall have received such certificates or other evidence as he may reasonably request to establish compliance with this condition. -13- 6.10 Proceedings. All corporate and other proceedings to be ----------- taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to Investor and Investor shall have received all such counterpart originals or certified or other copies of such documents as he may reasonably request. 6.11 Supporting Documents. Investor shall have received the -------------------- following: (a) A copy of resolutions of the Board of Directors of the Company certified by the secretary of the Company authorizing and approving the execution, delivery and performance of the Agreement; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Agreement and further certifying that the Articles of Incorporation and By-Laws of the Company delivered to Investor have been validly adopted and have not been amended or modified; and (c) Such additional supporting documentation and other information with respect to the transaction contemplated hereby Investor may reasonably request. 6.12 Qualification Under State Securities Laws. All ----------------------------------------- registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of the Agreement and the offer, sale, issuance and delivery of the Shares to Investor at the Closing shall have been obtained. 6.13 Proceedings and Documents. All corporate and other ------------------------- proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to Investor. 7. Affirmative Covenants of the Company. Subject to the provisions ------------------------------------ of article 14, the Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its ------------------- corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 7.2 Books of Account and Reserves. The Company will keep ----------------------------- books of record and account in which full, true and correct entries are made of all of -14- its dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). 7.3 Furnishing of Financial Statements and Information. -------------------------------------------------- The Company will deliver to Investor with reasonable promptness, such financial data relating to the business, affairs and financial condition of the Company as is available to the Company and as from time to time Investor may reasonably request. 7.4 Inspection. The Company covenants that it will permit ---------- any persons or entitles designated in writing by Investor to visit and inspect at such Investor's expense any of the properties, corporate books and financial records of the Company and its subsidiaries (and to make photocopies thereof or make extracts therefrom), and to discuss the affairs, finances and accounts of any such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as Investor may reasonably request. Investor shall maintain, and shall require such Investor's representatives to maintain, all information obtained from the Company pursuant to section 7.3, this section 7.4, and section 7.5 on a confidential basis. 7.5 Preparation and Approval of Budgets. At least one ----------------------------------- month prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. 7.6 Payment and Taxes and Maintenance of Properties. The ----------------------------------------------- Company will: (a) pay and discharge promptly, or cause to be paid and discharged promptly when due and payable, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, other than such taxes, assessments, charges or levies as the Company is contesting in good faith through appropriate proceedings; and -15- (b) maintain and keep, or cause to be maintained and kept its properties in good repair, working order and condition. 7.7 Insurance. The Company will obtain and maintain in --------- force such property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be necessary or appropriate to protect the Company from the insurable hazards or risks associated with the conduct of the Company's business. The Company's executive officers shall periodically report to the Board of Directors on the status of such insurance coverage. All such insurance policies shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors. All such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 7.8 Payment of Indebtedness and Discharge of Obligations. ---------------------------------------------------- To the fullest extent reasonably possible, the Company will make timely payment of all amounts due under, and will observe, perform and discharge all of the material covenants, conditions and obligations which are imposed on it by, any and all indentures and other agreements securing or evidencing all indebtedness resulting from bank or other direct borrowings by the Company or pursuant to which such indebtedness is issued. 7.9 Representation on Board of Directors; Directors' and ---------------------------------------------------- Shareholders' Meetings. From and after the Closing Date, (i) the Company's - ---------------------- Articles of Incorporation shall provide for an authorized Board of Directors of not more than nine (9) members, and (ii) at least a majority of the Company's directors shall at all times be persons who are not in the employment of the Company. The Company agrees, as a general practice, to hold meetings of its Board of Directors at least once each calendar quarter, and during each year to hold its annual meeting of shareholders on or approximately on the date provided in its By-Laws. 7.10 Application of Proceeds. Unless otherwise approved by ----------------------- Investor, the net proceeds received by the Company from the sale of the Shares pursuant to the Agreement will be used substantially for general working capital purposes, including the purchase of capital equipment, advertising, marketing, inventory purchases, personnel expenses and research and development. -16- Pending use of the proceeds in the business, they shall be deposited in a bank or banks having deposits of $150,000,000 or more, invested in certificates of deposit or repurchase agreements of a bank or banks having deposits of $150,000,000 or more, invested in money market mutual funds having assets of $500,000,000 or more, or invested in securities issued or guaranteed by the United States Government. 7.11 Retirement Plans. The Company will cause each ---------------- retirement plan of the Company in which any employees of the Company participate that is subject to the provisions of ERISA to be administered in a manner consistent with those provisions of ERISA which may, from time to time, become effective and operative with respect to such plans. 7.12 Filing of Reports. The Company will, from and after ----------------- such time as it has securities registered pursuant to (S)12 of the Securities Exchange Act of 1934 or has securities registered pursuant to the Securities Act, make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who are otherwise able to take advantage of the provisions of such Rule. 7.13 Patents and Other Intangible Rights. The Company will ----------------------------------- apply for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.14 Subsidiaries. If the Company establishes or maintains ------------ any subsidiary corporations, it shall cause each such subsidiary corporation to comply with the covenants set forth in this article 7. 8. Negative Covenants of the Company. Subject to the provisions of --------------------------------- article 14 (and, with respect to Section 8.2 below, other than share repurchases that the Company may be obligated to effect pursuant to the provisions of that certain Shareholder Agreement, dated as of September 27, 1993 by and among the Company, Ethical and certain other shareholders of the Company (the "Shareholder Agreement")) the Company will be limited and restricted as follows: 8.1 Consolidation, Merger, Acquisition, etc. The Company will --------------------------------------- not, nor will it permit any subsidiary to, sell, lease, license or otherwise dispose of all or substantially all of its assets or any asset or assets which have a material affect upon the business assets or financial condition of the Company, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares; provided, -17- however, that a subsidiary of the Company may be merged with the Company or another subsidiary of the Company without such approval. 8.2 Dividends on or Redemption of Junior Stock. The ------------------------------------------ Company will not, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares, declare or pay any cash dividend on its common shares, or make any other distribution on any common shares or all other shares of stock of any other class of the Company at any time created and issued ranking junior to the Non-Voting Series B Preferred Shares with respect to the rights to receive dividends and the right to the distribution of assets upon liquidation, dissolution or winding up of the Company ("Junior Stock"), other than those payable solely in shares of Junior Stock, or, except pursuant to the terms of the Shareholder Agreement, purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock or debt securities convertible into other shares of Junior Stock), or set aside as a sinking fund or other fund for the redemption or repurchase of any shares of Junior Stock, rights or options to purchase shares of Junior Stock. 8.3 Other Restrictions. The Company will not, nor will it ------------------ permit any subsidiary to, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares: (a) guarantee, endorse or otherwise be or become contingently liable in excess of $10,000 in connection with the obligations, securities or dividends of any person, firm, association or corporation other than the Company or a subsidiary, except that the Company may endorse negotiable instruments for collection in the ordinary course of business; (b) make loans or advances in excess of $10,000 to any person (including without limitation to any officer, director or shareholder of the Company or any subsidiary of the Company), firm, association or corporation, except (i) advances to suppliers made in the ordinary course of business, and (ii) loans to employees to assist such employees in relocating to the Minneapolis-St. Paul area, as approved by the Company's Board of Directors; (c) pay compensation, whether by way of salaries, bonuses, participation in pension or profit sharing plans, fees under management contracts or for professional services or fringe benefits to any officer in excess of amounts fixed by the Board of Directors of the Company prior to any payment to such officer; (d) alter the authorized capital stock of the Company as set forth in the Company's Articles of Incorporation whether (i) by the authorization of additional amounts, classes or series of such capital stock, or (ii) by the authorization of any new class of capital stock, or (iii) by way of any -18- stock split or combination, or (iv) altering the rights and/or preferences of the Non-Voting Series B Preferred Shares; (e) change its fiscal year; or (f) make any material change in the nature of its business as carried on at the date of the Agreement. 9. Conversion of Shares. -------------------- 9.1 Conversion of Shares. Investor may, at its option, -------------------- from and after the occurrence of such events as are set forth in the relevant provisions of the Company's Articles of Incorporation, convert the Shares purchased by it under this Agreement, or any portion thereof, into Conversion Shares at the rate and upon the terms and conditions and subject to the adjustments set forth in the Company's Articles of Incorporation. Each Share shall be automatically converted into Conversion Shares on such terms and conditions as are set forth in the Company's Articles of Incorporation. 9.2 Stock Fully Paid; Reservation of Shares. The Company --------------------------------------- covenants and agrees that all Conversion Shares that may be issued upon the exercise of the conversion privilege referred to in section 9.1 will, upon issuance in accordance with the terms of the Company's Articles of Incorporation be fully paid and nonassessable and free from all taxes, liens and charges (except for taxes, if any, upon income and applicable transfer taxes) with respect to the issue thereof, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of its common shares for the purpose of issue upon the exercise of such conversion privilege. 9.3 Adjustment of Number of Shares and Conversion Price. --------------------------------------------------- The number of common shares issuable upon conversion of the Shares and the conversion price with the respect thereto shall be subject to adjustment from time to time as set forth in the Company's Articles of Incorporation. 10. Default. ------- 10.1 Events of Default. Each of the following events shall ----------------- be an event of default (an "Event of Default") for purposes of the Agreement: (a) if the Company shall default in any material respect in the due and punctual performance of any covenant or agreement in any note, bond, indenture, loan agreement, note agreement, mortgage, security agreement or other instrument evidencing or related to bank indebtedness of the Company in excess of $400,000, and such default shall continue for more -19- than the period of notice and/or grace, if any, therein specified and shall not have been waived; (b) (i) if any representation or warranty made by or on behalf of the Company in the Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall prove to have been untrue or incorrect in any material respect as of the date of the Agreement, or (ii) if any report, certificate, financial statement or financial schedule or other instrument prepared or purported to be prepared by the Company or any officer of the Company hereafter furnished or delivered under or pursuant to the Agreement shall prove to be untrue or incorrect in any material respect as of the date it was made, furnished or delivered; or (c) if the Company defaults in the due and punctual performance or observance of any covenant contained in the Agreement, and such default continue for a period of 15 days after written notice thereof to the Company by Investor; provided, however, that an Event of Default shall not be deemed to have occurred if, at the end of such 15-day, the Company is diligently attempting to cure such default and the existence of such default is not materially adversely affecting the business or financial condition of the Company. 10.2 Notice of Defaults. When, to its knowledge, any Event ------------------ of Default has occurred or exists, the Company shall give written notice within ten (10) business days of such Event of Default to Investor. If Investor shall give any notice or take any other actions in respect of a claimed Event of Default, the Company will forthwith give written notice thereof to all other holders of Non-Voting Series B Preferred Shares at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. 10.3 Suits for Enforcement. In case any one or more Events --------------------- of Default shall have occurred and be continuing, unless such Events of Default shall have been waived in the manner provided in article 15, Investor may proceed to protect and enforce its rights under this article 10 by suit in equity or action at law. It is agreed that in the event of such action, Investor shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys (whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals. 10.4 Remedies Cumulative. No right, power or remedy ------------------- conferred upon Investor hereunder shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any such security or now or hereafter available at law or in equity or by statute or otherwise. -20- 10.5 Remedies Not Waived. No course of dealing between the ------------------- Company and Investor and no delay in exercising any right, power or remedy conferred hereby or by any such security or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power or remedy; provided, however, that this section shall not be construed or applied so as to negate the provisions and intent of any statute which is otherwise applicable. 11. Registration Rights. ------------------- 11.1 Incidental Registration. Each time the Company shall ----------------------- determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for money of any of its securities by it or any of it security holders, the Company will give written notice of its determination to Investor. Upon written request of Investor, given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all Purchased Shares (as defined below) for which Investor has so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by Investor of the Purchased Shares to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of Investor should Investor wish to proceed with a public offering of its Purchased Shares provided Investor agrees to bear all expenses in excess of $25,000 incurred by the Company as the result of such registration after the Company has decided not to proceed. If any registration pursuant to this section shall be underwritten in whole or in part, the Company may require that the Purchased Shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that the Purchased Shares requested for inclusion pursuant to this section would constitute more than twenty-five percent (25%) of the total number of shares to be included in a proposed underwritten public offering, and if in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Purchased Shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Shares otherwise to be included in the underwritten public offering may be reduced pro rata among all holders thereof requesting such registration; provided, however, that after any such required reduction the Purchased Shares to be included in such offering shall constitute at least twenty-five percent (25%) of the total number of shares to be included in such offering. Those shares of Purchase Shares which are thus excluded from the -21- underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 60 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten pubic offering. 11.2 Registration Procedures. If and whenever the Company ----------------------- is required by the provisions of section 11.1 to effect the registration of any Purchased Shares under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (c) furnish to Investor, to the extent he is participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Investor and the underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Investor may reasonably request within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify Investor promptly and confirm such advice in writing: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement or post- effective amendment to the registration statement has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective, -22- (ii) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Purchased Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threat of any proceeding for such purpose, and (iv) of the existence of any fact which results in the registration statement, the prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading; (f) prepare and file with the Commission, promptly upon the request of Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Investor (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Shares by Investor; (g) prepare and promptly file with the Commission and promptly notify Investor of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the 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, in the light of the circumstances in which they were made, not misleading; (h) advise Investor, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for the purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal of such stop order should be issued; (i) not file any amendment or supplement to such registration statement or prospectus to which Investor shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy -23- thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (j) enter into such customary agreements and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Purchased Shares, whether or not an underwriting agreement is entered into and whether or not the Purchased Shares are to be sold in an underwritten offering. 11.3 Expenses. With respect to each inclusion of Purchased -------- Shares in a registration statement pursuant to section 11.1 (except as otherwise provided in section 11.1 with respect to registrations terminated by the Company), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees (or, if applicable, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which such securities are required to be listed), printing expenses and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or Investor (as a selling security holder) are required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the pubic offering, if any, and all legal fees and disbursements and other expenses of complying with the state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified; provided, however, that nothing contained herein shall be deemed to require the Company to consent to general service of process in any state in order to qualify its securities for sale therein. With respect to any registration, the Company shall bear all fees, costs and expenses including, but not limited to, those listed above. Notwithstanding anything to the contrary contained herein, fees and disbursements of counsel and accountants for Investor along with any commissions and transfer taxes owing by Investor shall be borne by Investor. 11.4 Indemnification. In the event that any Purchased --------------- Shares are included in a registration statement under section 11.1: (a) The Company will indemnify Investor and hold Investor harmless pursuant to the provisions of this article and will indemnify any underwriter (as defined in the Securities Act) for Investor and each person, if any, who controls such underwriter within the meaning of the Securities Act, from and against any and all losses, claims, damages, liabilities, costs and expenses (including, but not limited to all legal or other expenses reasonably incurred by it in connection with investigating or defending any loss, claim, damage, liability, cost and expense and any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the -24- prior written consent of the Company) to which Investor and/or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are 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, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable to Investor to the extent that any such loss, claims, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Investor. (b) Investor will indemnify and hold harmless the Company, any controlling person and any underwriter from and against any and all losses, claims, damages, liabilities, costs or expenses to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue, or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with information furnished by Investor. (c) Promptly after receipt by any indemnified party pursuant to the provisions of paragraph (a) or (b) of this section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the -25- indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defence thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 12. Restriction on Transfer of Shares. --------------------------------- 12.1 Restrictions. The Shares and the Conversion Shares ------------ are only transferable pursuant to (a) a public offering registered under the Securities Act, (b) Rule 144 or Rule 144A under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) subject to the conditions specified elsewhere in this article 12, and any other legally available means of transfer. 12.2 Legend. Each certificate representing Shares shall be ------ endorsed with the following legend: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended and all applicable state securities laws or (ii) such registration." Upon the conversion of any Shares, unless the Company receives an opinion of counsel satisfactory to the Company to the effect that a transfer of the Conversion Shares may be made without registration or further restriction or transfer, or unless such Conversion Shares are being disposed of pursuant to a registration under the Securities Act, the same legend shall be endorsed on the certificate evidencing such Conversion Shares. 12.3 Removal of Legend. Any legend endorsed on a ----------------- certificate evidencing a security pursuant to section 12.2 hereof shall be removed, and the Company shall issue a certificate without such legend to Investor (or its nominee, designee or transferee, as the case may be), if such security is being disposed of -26- pursuant to a registration under the Securities Act or pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect or if Investor (or its designee or proposed transferee) provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect, without registration. In addition, if Investor delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in section 12.2. 13. Investors' Covenant Not to Buy Shares. Investor, for itself, ------------------------------------- covenants that it shall neither buy nor solicit offers to sell any shares of capital stock or any purchase rights to acquire any shares of capital stock of the Company, from any person, partnership or entity which is currently a shareholder of the Company on the date of this Agreement until the earlier to occur of the events set forth in section 14(i) or (ii) below. 14. Termination of Covenants. The obligations of the Company under ------------------------ Articles 7 and 8 of the Agreement, notwithstanding any provisions hereof apparently to the contrary, shall terminate and shall be of no further force or effect on the earliest to occur of (i) the date that the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act in which the net proceeds received by the Company equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate reorganizations), (ii) the date following the merger of the Company with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Company continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Company equals or exceeds $5 million, calculated for purposes of this section 14, as the product of the average closing price for the Company's Common Stock during any 20 consecutive trading days times the total number of outstanding shares of Common Stock or (iii) September 27, 1998. 15. Miscellaneous. ------------- 15.1 Waivers Amendments and Approvals. No amendment or -------------------------------- waiver of any provision of the Agreement, shall in any event be effective unless the same shall be in writing and signed by the holders of a majority of the then outstanding Non-Voting Series B Preferred Shares and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. -27- 15.2 Changes, Waiver, Etc. Neither the Agreement nor any -------------------- provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in section 15.1. 15.3 Notices. All notices, requests, consents and other ------- communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail, (a) if to Investor, at the address of Investor appearing on the books and records of the Company, or at such other addresses as Investor may specify by written notice to the Company, or (b) if to the Company at 1840 Berkshire Lane, Minneapolis, Minnesota 55441. Attention: President; with a copy to J. Andrew Herring, Dorsey & Whitney, 220 South Sixth Street, Minneapolis, MN 55402, or at such other address as the Company may specify by written notice to Investor, and such notices and other communications shall for all purposes of the Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 15.4 Survival of Representations and Warranties, Etc. All ----------------------------------------------- representations and warranties contained herein shall survive the execution and delivery of the Agreement, any investigation at any time made by Investor or on its behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to the Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. 15.5 Parties in Interest. All the terms and provisions of ------------------- the Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. 15.6 Headings. The headings of the Articles and sections -------- of the Agreement have been inserted for convenience of reference only and do not constitute a part of the Agreement. -28- 15.7 Choice of Law. The laws of Minnesota shall govern the ------------- validity of the Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 15.8 Counterparts. The Agreement may be executed ------------ concurrently in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.9 Definition of Purchased Shares. For purposes of the ------------------------------ Agreement the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Conversion Shares and (c) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring. If Investor is in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned. Very truly yours, MEDI-JECT CORPORATION By /s/ W. Dirk Dunlap ----------------------------- Name: W. Dirk Dunlap Title: President -29- ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the investment agreement, dated as of February 1, 1994, by and between Medi-Ject Corporation and the undersigned as the terms and conditions applicable to the purchase by the undersigned of preferred shares of the Company. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in article 5 of such investment agreement. The undersigned further represents that it qualifies as an "accredited investor," as that term is used in Regulation D promulgated under the federal Securities Act of 1933, because (check one): ____ the undersigned is an individual with a net worth in excess of $1,000,000; ____ the undersigned is an individual who either (a) had an income in excess of $200,000 in each of the years 1993 and 1992 and who reasonably expects an income in excess of $200,000 in 1994, or (b) had a joint income with the undersigned's spouse in excess of $300,000 in each of the years 1993 and 1992 and who reasonably expects a joint income in excess of $300,000 in 1994; ____ it is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940; ____ the undersigned is a director or executive officer of Medi-Ject Corporation; X it is a corporation, partnership, business trust or a nonprofit ---- organization within the meaning of section 501(c)(3) of the Internal Revenue Code that was not formed for the purpose of acquiring the securities of Medi-Ject Corporation and that has total assets in excess of $5,000,000; ____ it is a small business investment company licensed by the United States Small Business Administration; ____ it is a self-directed employee benefit plan for which all persons making investment decisions are "accredited investors"; or ____ it is an entity, all of whose equity owners or partners are "accredited investors". Enskilda Kapitalforvaltning By /s/ Henrik Rhenman ------------------------------------- Its Fund Manager -------------------------------- -30- EX-10.17 23 PREFERRED STOCK PURCHASE AGREEMENT ENSKILDA ================================================================================ MEDI-JECT CORPORATION ----------------- PREFERRED STOCK PURCHASE AGREEMENT ----------------- Dated as of December 28, 1993 75,000 Shares of Series B Convertible Preferred Stock ($.01 Par Value) (Liquidation Preference $1.00 per share) ================================================================================ Medi-Ject Corporation PREFERRED STOCK PURCHASE AGREEMENT ---------------------------------- December 28, 1993 Enskilda Kapitalforvaltning Skandinaviska Enskilda Banken Jakobsbergsgatan 17, Box 16053 103 21 Stockholm SWEDEN Dear Sir: Medi-Ject Corporation, a Minnesota corporation (the "Company") agrees with Enskilda Kapitalforvaltning, a corporation formed under the laws of Sweden (the "Investor"), as follows: 1. Authorization of Issue of Shares. The Company has authorized the -------------------------------- issue and sale of up to 3,000,000 shares of its present class of Preferred Stock, such shares to be constituted as a new series of Preferred Stock, and being designated as the "Series B Convertible Preferred Stock" (herein referred to as the "Series B Preferred Shares"). The relative powers, preferences and rights and qualifications, limitations and restrictions of the Series B Preferred Shares are set forth in a Certificate of Designations, Preferences and Rights (the "Certificate of Designations") in the form attached hereto as Exhibit A. Certain capitalized terms used in this agreement (the "Agreement") are used as defined herein; references to an article or section are, unless otherwise specified, to one of the articles or sections of the Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to the Agreement. 2. Sale and Purchase Price. The Company will issue and sell to ----------------------- Investor and, subject to the terms and conditions herein set forth, Investor agrees to purchase from the Company an aggregate of 75,000 Series B Preferred Shares, at a purchase price of $1.00 per share (the "Shares"). 3. Closing. The closing of the sale of the Shares to Investor shall ------- take place at the offices of Dorsey & Whitney, 220 South Sixth Street, Minneapolis, Minnesota at 10:00 A.M. Minneapolis time on December 28, 1993 or such other date thereafter as shall be mutually agreeable to Investor and the Company (December 28, 1993 or such other date being herein called the "Closing Date"). At the closing, the Company shall deliver to Investor a certificate, dated the Closing Date, representing the Shares purchased by such Investor on such date, registered in its name (or in the name of its nominee if it so specifies to the Company at least 48 hours prior to such date) against payment to the Company of the purchase price of Shares being purchased by such Investor. 4. Representations and Warranties by the Company. In order to --------------------------------------------- induce Investor to enter into the Agreement and to purchase the Shares, the Company hereby represents and warrants to Investor that, except as disclosed in the attached Exhibit B: 4.1 Organization, Standing, etc. The Company is a corporation ---------------------------- duly organized, validly existing and in good standing under the laws of the state of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being conducted. The Company has the requisite corporate power and authority to issue the Shares, the shares of its common stock into which the Shares are convertible (the "Conversion Shares") and to otherwise perform its obligations under the Agreement. 4.2 Governing Instruments. The copies of the articles of --------------------- incorporation, as amended by the Certificate of Designations (the "Articles of Incorporation") and bylaws of the Company which have been delivered to Investor prior to the execution of the Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and bylaws of the Company in effect as of the date of the Agreement. 4.3 Subsidiaries, Etc. The Company does not have any direct or ----------------- indirect ownership interest in any corporation, partnership, joint venture, association or other business enterprise. 4.4 Qualification. The Company is duly qualified, licensed or ------------- domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. 4.5 Financial Statements. Attached to the Agreement as Exhibit -------------------- C are (a) a balance sheet, as of July 31, 1993 for the Company together with the related statements of operations and shareholders equity for the seven months then ended, which balance sheet and related statements are unaudited. Such financial statements (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company at the balance sheet date and the results of its operations for the period therein specified, and (iii) have, in all material respects, been prepared in accordance with generally accepted accounting principles and (b) a consolidated balance sheet of the Company for the twelve-month fiscal periods ending March 31, 1991 and 1992 and the nine month fiscal period ending December 31, 1992, and the consolidated statements of income -2- and retained earnings and changes in financial position for the same periods, all as reported on by the Company's independent certified public accountants. Without limiting the generality of the foregoing, the balance sheet or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at July 31, 1993, which, individually or in the aggregate, are material and which in accordance with generally accepted accounting principles would be required to be disclosed in such balance sheet, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. 4.6 Tax Returns and Audits. All required federal, state and ---------------------- local tax returns or appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of the Company's tax returns has been audited by governmental authorities in a manner to bring such audits to the Company's attention. The Company does not have any tax liabilities except those reflected on Exhibit C or those incurred in the ordinary course of business since July 31, 1993. 4.7 Changes, Dividends, etc. Except for the transactions ------------------------ contemplated by the Agreement, since December 18,1993, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company; (vii) entered into any transaction other than in the ordinary course of business; (viii) encountered any labor difficulties or labor union organizing activities; (ix) issued or sold any shares of capital stock or other securities or granted any options, warrants, or other purchase rights with respect thereto other than pursuant to the Agreement; (x) made any acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (xi) increased the compensation payable, or to become payable, to any employees, or -3- made any bonus payment or similar arrangement with any employees or increased the scope or nature of any fringe benefits provided for its employees; or (xi) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since July 31, 1993 (other than continued losses from operations that the Company has incurred, which are generally consistent with its historical losses from operations since December 31, 1992). 4.8 Title to Properties and Encumbrances. The Company has good ------------------------------------ and marketable title to all of its tangible properties and assets, including without limitation the properties and assets reflected on Exhibit C and the properties and assets used in the conduct of its business, except for property disposed of in the ordinary course of business since July 31, 1993, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on Exhibit C or the notes thereto, (b) liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, or (c) those which do not materially affect the value of or interfere with the use made of such properties and assets. 4.9 Conditions of Properties. The plant, offices and equipment ------------------------ of the Company have been kept in good condition and repair in the ordinary course of business. 4.10 Litigation; Governmental Proceedings. There are no legal ------------------------------------ actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business, and the Company is not aware of any facts which are likely to result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 4.11 Compliance With Applicable Laws and Other Instruments. The ----------------------------------------- ----------- business and operations of the Company have been and are being conducted in all material respects in accordance with all material, applicable federal, state and local laws, rules and regulations, with respect to which failure to so comply would have a material adverse impact upon the Company's business or operations. Neither the execution and delivery of the Agreement and the issuance of the Shares nor fulfillment of nor compliance with the terms and provisions hereof or thereof or of the Series B Preferred Shares, including, without limitation, the provisions of the Certificate of Designations, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, the Articles of Incorporation or By-Laws of the Company or any mortgage, agreement, instrument, order, judgement, decree, statute, law, rule or regulation to -4- which the Company or its property is subject. The Company is not in default under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money or in arrears with respect to any dividends upon any shares of its preferred stock, and there exists no default by the Company under any of its contracts or agreements, or under any instrument by which the Company is bound, which materially and adversely affects its business, operations or financial condition. 4.12 Governmental Consent, Etc. The Company is not required to ------------------------- obtain any consent, approval or authorization of, or to make any declaration or filing with any governmental authority as a condition to or in connection with the valid execution, delivery and performance of the Agreement and the valid offer, issue, sale or delivery of the Shares, or the performance by the Company of its obligations in respect thereof. 4.13 Shares and Conversion Shares. The Shares, when issued and ---------------------------- paid for pursuant to the terms of the Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12 or in the Company's Articles of Incorporation. The Series B Preferred Shares will rank superior to the shares of each other series of preferred stock of the Company now outstanding with respect to priority in payment of dividends and the distribution of assets upon any liquidation of the Company. The Conversion Shares have been reserved for issuance and, when issued upon conversion of the Shares, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12. 4.14 Securities Laws. Based in part upon the representations of --------------- Investor in article 5, no consent, and assuming full compliance with article 12, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of the Agreement or the offer, issuance, sale or delivery of the Shares to Investor, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. Under the circumstances contemplated by the Agreement, the offer, issuance, sale and delivery of the Shares and the Conversion Shares will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). 4.15 Patents and Other Intangible Rights. To the best of its ----------------------------------- knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise -5- acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, manufacture, operation and sale of all products sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any confidential information or trade secrets of others. 4.16 Capital Stock. At the date hereof, the authorized capital ------------- stock of the Company consists of 10,000,000 common shares, $.01 par value, of which 237,685 shares are issued and outstanding, 1,600,000 shares of Series A Convertible Preferred Stock, $.01 par value, of which 1,409,376 shares are issued and 3,000,000 shares of Series B Convertible Preferred Stock, of which 875,001 shares are issued. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than the Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. Neither the offer nor the issuance or sale of the Shares constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. Other than with respect to certain preemptive rights and anti-dilution protections granted to Ethical Holdings plc, a corporation organized under the laws of England ("Ethical"), pursuant to that certain Preferred Stock Purchase Agreement by and between the Company and Ethical, dated as of September 27, 1993, and to Calvert Social Venture Partners, L.P., a Virginia limited Partnership pursuant to that certain Preferred Stock Purchase Agreement by and between the Company and Ethical, dated as of November 29, 1993 no holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company. 4.17 Outstanding Debt. The Company does not have any material ---------------- indebtedness incurred as the result of a direct borrowing of money, including, but not limited to, indebtedness with respect to trade accounts, except as set forth in Exhibit C or the notes thereto. The Company is not in default in the payment of the principal of or interest or premium on any such indebtedness, and no event has occurred or is continuing under the provisions of any instrument, document or agreement evidencing or relating to any such indebtedness which with -6- the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 4.18 Schedule of Assets and Contracts. Simultaneous with the -------------------------------- execution of this Agreement, the Company will deliver to Investor a schedule of assets and contracts, specifically referring to this section 4.18 and listing the following items: (a) Schedule 1: a true and complete description of all real properties owned by the Company; (b) Schedule 2: each indenture, lease, sublease, license or other instrument under which the Company claims or holds a leasehold interest in real property; (c) Schedule 3: each lease of personal property involving payments remaining to or from the Company in excess of $10,000; (d) Schedule 4: each written or oral contract, agreement, subcontract, purchase order, commitment or arrangement involving payments remaining to or from the Company in excess of $10,000 and each other agreement material to the Company's business to which the Company is a party or by which it is bound, under which full performance (including payment) has not been rendered by any party thereto; (e) Schedule 5: any collective bargaining agreements, employment agreements, consulting agreements, noncompetition agreements, nondisclosure agreements, executive compensation plans, profit sharing plans, bonus plans, deferred compensation agreements, employee pension retirement plans and employee benefit stock option or stock purchase plans and other employee benefit plans, entered into or adopted by the Company; (f) Schedule 6: all bank accounts (or accounts with other financial institutions) maintained by the Company, together with the persons authorized to make withdrawals from such accounts; (g) Schedule 7: the name of each employee of the Company who is paid a remuneration of $50,000 or more per year, each such employee's job title, and a complete description of the duties and services performed by such employee; (h) Schedule 8: each royalty and/or license agreement material to the Company's business; -7- (i) Schedule 9: list of all patents, patent applications, trademarks, trademark applications, and trade names held by, or filed in the name of, the Company; (j) Schedule 10: list of distributors of the Company's products who individually contribute in excess of 5% of the Company's net sales, and any market studies performed by or on behalf of the Company within the last two years; and (k) Schedule 11: list of all holders of equity in the Company (assuming the exercise of all options and warrants currently outstanding), each such person or entity's respective shareholdings (on a fully diluted basis), and the terms of any outstanding options and/or warrants. Within a reasonable period of time following the Closing, the Company shall provide Investor with a true and complete copy of each document referred to on such schedules. The Company has in all material respects substantially performed all material obligations required to be performed by it to date and is not in default in any material respect under any of the material contracts, agreements, leases, documents, commitments or other arrangements to which it is a party or by which it is otherwise bound. All instruments referred to in the schedules described in this section 4.18 are in effect and enforceable according to their respective terms, and there is not under any of such instruments any existing material default or event of default or event which, with notice or lapse of time or both, would constitute an event of default thereunder. All parties having material contractual arrangements with the Company are in substantial compliance therewith and none are in material default in any respect thereunder. 4.19 Corporate Acts and Proceedings. The execution and delivery ------------------------------ of the Agreement and the adoption of the Certificate of Designations have been duly authorized by all necessary corporate action on behalf of the Company, has been duly executed and delivered by authorized officers of the Company, and, with respect to the Agreement, is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. All corporate action necessary to the authorization, creation, reservation, issuance and delivery of the Shares and the Conversion Shares has been taken by the Company, or will be taken by the Company on or prior to the Closing Date. 4.20 Accounts Receivable. To the extent that they exceed the ------------------- reserves for doubtful accounts set forth in Exhibit C, the accounts receivable which -8- are reflected in Exhibit C and all accounts receivable of the Company which have arisen since July 31, 1993 (except such accounts receivable as have been collected since July 31, 1993) are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were sold and delivered in conformity with the applicable purchase orders, agreements and specifications. Such accounts receivable are subject to no valid defense or offsets except routine customer complaints or warranty demands of an immaterial nature. 4.21 Inventories. The inventories of the Company which are ----------- reflected in Exhibit C and all inventory items which have been acquired since July 31, 1993 consist of raw materials, supplies, work-in-process and finished goods of such quality and quantities as are, to the best of the Company's knowledge, currently usable or salable in the ordinary course of its business. 4.22 Purchase Commitment and Outstanding Bids. No material ---------------------------------------- purchase commitment of the Company is in excess of normal, ordinary and usual requirements of its business, or was made at any price in excess of the then current market price, or contains terms and conditions more onerous than those usual and customary in the industry. There is no outstanding material bid, sales proposal, contract or unfilled order of the Company which (a) will, or could if accepted, require the Company to supply goods or services at a cost to the Company in excess of the revenues to be received therefrom, or (b) quotes prices which do not include a mark-up over reasonably estimated costs consistent with past mark-ups on similar business or market conditions current at the time. 4.23 Insurance Coverage. There are in full force policies of ------------------ insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 4.24 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or Investor for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by the Agreement. The Company will indemnify and hold Investor harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by the Agreement. 4.25 Conflicts of Interest. No officer, director or shareholder --------------------- of the Company or any affiliate (as such term is defined in Rule 405 under the Securities Act) or any such person has any direct or indirect interest (a) in any entity which does business with the Company, (b) in any property, asset or right which is used by the Company in the conduct of its business, or (c) in any contractual relationship with the Company other than as an employee. For the purpose of this -9- section 4.25, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market or any payment required to be made by the Company in an amount less than $2,500 annually. 4.26 Licenses. The Company possesses from the appropriate -------- agencies, commissions, boards and/or government bodies and authorities, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the business currently conducted by it, and (b) if not possessed by the Company would have a material adverse impact on the Company's business. 4.27 Disclosure. The Company has not knowingly withheld from ---------- Investor any material facts relating to the assets, business, operations, financial condition or prospects of the Company taken as a whole. No representation or warranty in the Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to Investor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 4.28 Registration Rights. Except as otherwise disclosed ------------------- hereunder, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act. 4.29 Retirement Plans. The Company does not have any retirement ---------------- plans in which any employees of the Company participates that is subject to any provisions of the Employee Retirement Income Security Act of 1974 and of the regulations adopted pursuant thereto ("ERISA"). 4.30 Environmental and Safety Laws. To the best of the Company's ----------------------------- knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 4.31 Employees. To the best of the Company's knowledge, no --------- officer of the Company or employee of the Company (whose annual compensation is in excess of $50,000) has any plans to terminate his or her employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has not encountered any material labor difficulties. To the best of -10- the Company's knowledge, the Company does not have any worker's compensation liabilities, except those reflected on Exhibit B. 4.32 Absence of Restrictive Agreements. To the best of the --------------------------------- Company's knowledge, no employee of the Company is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company. To the best of the Company's knowledge, no employer or former employer of any employee of the Company has any claim of any kind whatsoever in respect of any of the rights described in section 4.15 of the Agreement. 5. Representations of Investor. Investor represents for himself --------------------------- that: 5.1 Investment Intent. The Shares being acquired by Investor ----------------- are being purchased for investment for Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof; provided that the disposition of Investor's property shall at all times -------- be and remain within its control and subject to the provisions of the Agreement. Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by Investor. Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. Investor understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") and that in any event Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a two-year period after he has acquired such securities. Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 5.2 Qualification as an Accredited Investor, Etc. Unless -------------------------------------------- otherwise indicated on Investors signature page to this Agreement, Investor qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act. Investor acknowledges that the Company has made available to it at a reasonable time prior to the execution of the Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by the Agreement and to obtain any additional information (which the Company possesses or can acquire without -11- unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to it. Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 5.3 Acts and Proceedings. The Agreement has been duly -------------------- executed and delivered and the performance hereof by Investor is within its power. 5.4 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission by Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by the Agreement. Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 6. Conditions of Investor's Obligation to Purchase the Shares on the ----------------------------------------------------------------- Closing Date. The obligation to purchase and pay for the Shares which Investor - ------------ has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on such Closing Date of the conditions set forth in this article 6. In the event that any such condition is not satisfied to the satisfaction of Investor, then Investor shall not be obligated to proceed with its purchase of the Shares. 6.1 No Errors, etc. The representation and warranties of the --------------- Company under the Agreement shall be true in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6.2 Compliance with Agreement. The Company shall have performed ------------------------- and complied with all agreements or conditions required by the Agreement to be performed and complied with by it prior to or as of the Closing Date. 6.3 No Event of Default. There shall exist at the time of such ------------------- closing no condition or event which would constitute an Event of Default (as such term is defined in article 10 hereof) or which, after notice or lapse of time or both, would constitute an Event of Default. 6.4 Certificate of Officers. The Company shall have delivered a ----------------------- certificate, dated the Closing Date, executed by the President of the Company and certifying to the satisfaction of the conditions specified in sections 6.1, 6.2 and 6.3. 6.5 Opinion of the Company's Counsel. The Company shall have -------------------------------- delivered an opinion, satisfactory in form and substance to Investor, of Dorsey -12- & Whitney, counsel for the Company, dated the Closing Date and in the form of Exhibit D attached hereto. 6.6 Amendment of Articles of Incorporation. The Articles of -------------------------------------- Incorporation of the Company shall not have been amended, modified or supplemented in any respect except as consented to by Investor in writing. 6.7 Purchase Permitted by Applicable Law. The purchase of and ------------------------------------ payment for the Shares to be purchased by Investor on the Closing Date, on the terms and conditions herein provided (including the use of the proceeds of the issuance of the Shares by the Company) shall not violate any applicable law or governmental regulation and shall not subject Investor to any tax, penalty or liability, or require Investor to make any filings or to register or qualify, under or pursuant to any applicable law or governmental regulation, and Investor shall have received such certificates or other evidence as he may reasonably request to establish compliance with this condition. 6.8 No Adverse Action or Decision. There shall be no action, ----------------------------- suit, investigation or proceeding pending, or, to the best of the Company's knowledge, threatened (by any public official or governmental authority), against or affecting the Company, any of its properties or rights, or any of its employees, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect transactions contemplated by the Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. 6.9 Approvals and Consents. The Company shall have duly ---------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of and shall have made all filings and effected all registrations and qualifications with, all Federal, State and local governmental authorities necessary for the issuance of the Shares, and all thereof shall be in full force and effect at the time of closing and shall be effective to permit such issuance, and Investor shall have received such certificates or other evidence as he may reasonably request to establish compliance with this condition. 6.10 Proceedings. All corporate and other proceedings to be ----------- taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to Investor and Investor shall have received all such counterpart originals or certified or other copies of such documents as he may reasonably request. 6.11 Supporting Documents. Investor shall have received the -------------------- following: -13- (a) A copy of resolutions of the Board of Directors of the Company certified by the secretary of the Company authorizing and approving the execution, delivery and performance of the Agreement; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Agreement and further certifying that the Articles of Incorporation and By-Laws of the Company delivered to Investor have been validly adopted and have not been amended or modified; and (c) Such additional supporting documentation and other information with respect to the transaction contemplated hereby Investor may reasonably request. 6.12 Qualification Under State Securities Laws. All ----------------------------------------- registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of the Agreement and the offer, sale, issuance and delivery of the Shares to Investor at the Closing shall have been obtained. 6.13 Proceedings and Documents. All corporate and other ------------------------- proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to Investor. 7. Affirmative Covenants of the Company. Subject to the provisions ------------------------------------ of article 14, the Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its ------------------- corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 7.2 Books of Account and Reserves. The Company will keep ----------------------------- books of record and account in which full, true and correct entries are made of all of its dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants -14- (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). 7.3 Furnishing of Financial Statements and Information. The -------------------------------------------------- Company will deliver to Investor with reasonable promptness, such financial data relating to the business, affairs and financial condition of the Company as is available to the Company and as from time to time Investor may reasonably request. 7.4 Inspection. The Company covenants that it will permit any ---------- persons or entitles designated in writing by Investor to visit and inspect at such Investor's expense any of the properties, corporate books and financial records of the Company and its subsidiaries (and to make photocopies thereof or make extracts therefrom), and to discuss the affairs, finances and accounts of any such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as Investor may reasonably request. Investor shall maintain, and shall require such Investor's representatives to maintain, all information obtained from the Company pursuant to section 7.3, this section 7.4, and section 7.5 on a confidential basis. 7.5 Preparation and Approval of Budgets. At least one month ----------------------------------- prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. 7.6 Payment and Taxes and Maintenance of Properties. The ----------------------------------------------- Company will: (a) pay and discharge promptly, or cause to be paid and discharged promptly when due and payable, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, other than such taxes, assessments, charges or levies as the Company is contesting in good faith through appropriate proceedings; and (b) maintain and keep, or cause to be maintained and kept its properties in good repair, working order and condition. 7.7 Insurance. The Company will obtain and maintain in force --------- such property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be necessary or appropriate to protect the Company from the insurable hazards or risks associated with the conduct of the Company's business. The -15- Company's executive officers shall periodically report to the Board of Directors on the status of such insurance coverage. All such insurance policies shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors. All such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 7.8 Payment of Indebtedness and Discharge of Obligations. To ---------------------------------------------------- the fullest extent reasonably possible, the Company will make timely payment of all amounts due under, and will observe, perform and discharge all of the material covenants, conditions and obligations which are imposed on it by, any and all indentures and other agreements securing or evidencing all indebtedness resulting from bank or other direct borrowings by the Company or pursuant to which such indebtedness is issued. 7.9 Representation on Board of Directors; Directors' and ---------------------------------------------------- Shareholders' Meetings. From and after the Closing Date, (i) the Company's - ---------------------- Articles of Incorporation shall provide for an authorized Board of Directors of not more than nine (9) members, and (ii) at least a majority of the Company's directors shall at all times be persons who are not in the employment of the Company. The Company agrees, as a general practice, to hold meetings of its Board of Directors at least once each calendar quarter, and during each year to hold its annual meeting of shareholders on or approximately on the date provided in its By-Laws. 7.10 Application of Proceeds. Unless otherwise approved by ----------------------- Investor, the net proceeds received by the Company from the sale of the Shares pursuant to the Agreement will be used substantially for general working capital purposes, including the purchase of capital equipment, advertising, marketing, inventory purchases, personnel expenses and research and development. Pending use of the proceeds in the business, they shall be deposited in a bank or banks having deposits of $150,000,000 or more, invested in certificates of deposit or repurchase agreements of a bank or banks having deposits of $150,000,000 or more, invested in money market mutual funds having assets of $500,000,000 or more, or invested in securities issued or guaranteed by the United States Government. 7.11 Retirement Plans. The Company will cause each retirement ---------------- plan of the Company in which any employees of the Company participate that is subject to the provisions of ERISA to be administered in a manner consistent with those provisions of ERISA which may, from time to time, become effective and operative with respect to such plans. 16 ****************** 7.12 Filing of Reports. The Company will, from and after such ----------------- time as it has securities registered pursuant to (S)12 of the Securities Exchange Act of 1934 or has securities registered pursuant to the Securities Act, make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who are otherwise able to take advantage of the provisions of such Rule. 7.13 Patents and Other Intangible Rights. The Company will apply ----------------------------------- for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.14 Key Man Insurance. Prior to December 31, 1993, the Company ----------------- shall seek to obtain a term life insurance policy which will pay benefits of at least $1,000,000 to the Company upon the death of Dr. Franklin Pass, if such insurance is readily available on commercially reasonable terms and available at reasonably affordable rates in light of the Company's then current financial condition. 7.15 Subsidiaries. If the Company establishes or maintains any ------------ subsidiary corporations, it shall cause each such subsidiary corporation to comply with the covenants set forth in this article 7. 8. Negative Covenants of the Company. Subject to the provisions of --------------------------------- article 14 (and, with respect to Section 8.2 below, other than share repurchases that the Company may be obligated to effect pursuant to the provisions of that certain Shareholder Agreement, dated as of September 27, 1993 by and among the Company, Ethical and certain other shareholders of the Company (the "Shareholder Agreement")) the Company will be limited and restricted as follows: 8.1 Consolidation, Merger, Acquisition, etc. The Company will ---------------------------------------- not, nor will it permit any subsidiary to, sell, lease, license or otherwise dispose of all or substantially all of its assets or any asset or assets which have a material affect upon the business assets or financial condition of the Company, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares; provided, however, that a subsidiary of the Company may be merged with the Company or another subsidiary of the Company without such approval. -17- 8.2 Dividends on or Redemption of Junior Stock. The Company ------------------------------------------ will not, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares, declare or pay any cash dividend on its common shares, or make any other distribution on any common shares or all other shares of stock of any other class of the Company at any time created and issued ranking junior to the Series B Preferred Shares with respect to the rights to receive dividends and the right to the distribution of assets upon liquidation, dissolution or winding up of the Company ("Junior Stock"), other than those payable solely in shares of Junior Stock, or, except pursuant to the terms of the Shareholder Agreement, purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock or debt securities convertible into other shares of Junior Stock), or set aside as a sinking fund or other fund for the redemption or repurchase of any shares of Junior Stock, rights or options to purchase shares of Junior Stock. 8.3 Other Restrictions. The Company will not, nor will it ------------------ permit any subsidiary to, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares: (a) guarantee, endorse or otherwise be or become contingently liable in excess of $10,000 in connection with the obligations, securities or dividends of any person, firm, association or corporation other than the Company or a subsidiary, except that the Company may endorse negotiable instruments for collection in the ordinary course of business; (b) make loans or advances in excess of $10,000 to any person (including without limitation to any officer, director or shareholder of the Company or any subsidiary of the Company), firm, association or corporation, except (i) advances to suppliers made in the ordinary course of business, and (ii) loans to employees to assist such employees in relocating to the Minneapolis-St. Paul area, as approved by the Company's Board of Directors; (c) pay compensation, whether by way of salaries, bonuses, participation in pension or profit sharing plans, fees under management contracts or for professional services or fringe benefits to any officer in excess of amounts fixed by the Board of Directors of the Company prior to any payment to such officer; (d) alter the authorized capital stock of the Company as set forth in the Company's Articles of Incorporation whether (i) by the authorization of additional amounts, classes or series of such capital stock, or (ii) by the authorization of any new class of capital stock, or (iii) by way of any stock split or combination, or (iv) altering the rights and/or preferences of the Series B Preferred Shares; -18- (e) change its fiscal year; or (f) make any material change in the nature of its business as carried on at the date of the Agreement. 9. Conversion of Shares. -------------------- 9.1 Conversion of Shares. Investor may, at its option, from -------------------- and after the occurrence of such events as are set forth in the relevant provisions of the Company's Articles of Incorporation, convert the Shares purchased by it under this Agreement, or any portion thereof, into Conversion Shares at the rate and upon the terms and conditions and subject to the adjustments set forth in the Company's Articles of Incorporation. Each Share shall be automatically converted into Conversion Shares on such terms and conditions as are set forth in the Company's Articles of Incorporation. 9.2 Stock Fully Paid; Reservation of Shares. The Company --------------------------------------- covenants and agrees that all Conversion Shares that may be issued upon the exercise of the conversion privilege referred to in section 9.1 will, upon issuance in accordance with the terms of the Company's Articles of Incorporation be fully paid and nonassessable and free from all taxes, liens and charges (except for taxes, if any, upon income and applicable transfer taxes) with respect to the issue thereof, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of its common shares for the purpose of issue upon the exercise of such conversion privilege. 9.3 Adjustment of Number of Shares and Conversion Price. The --------------------------------------------------- number of common shares issuable upon conversion of the Shares and the conversion price with the respect thereto shall be subject to adjustment from time to time as set forth in the Company's Articles of Incorporation. 10. Default. ------- 10.1 Events of Default. Each of the following events shall be an ----------------- event of default (an "Event of Default") for purposes of the Agreement: (a) if the Company shall default in any material respect in the due and punctual performance of any covenant or agreement in any note, bond, indenture, loan agreement, note agreement, mortgage, security agreement or other instrument evidencing or related to bank indebtedness of the Company in excess of $400,000, and such default shall continue for more than the period of notice and/or grace, if any, therein specified and shall not have been waived; -19- (b) (i) if any representation or warranty made by or on behalf of the Company in the Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall prove to have been untrue or incorrect in any material respect as of the date of the Agreement, or (ii) if any report, certificate, financial statement or financial schedule or other instrument prepared or purported to be prepared by the Company or any officer of the Company hereafter furnished or delivered under or pursuant to the Agreement shall prove to be untrue or incorrect in any material respect as of the date it was made, furnished or delivered; or (c) if the Company defaults in the due and punctual performance or observance of any covenant contained in the Agreement, and such default continue for a period of 15 days after written notice thereof to the Company by Investor; provided, however, that an Event of Default shall not be deemed to have occurred if, at the end of such 15-day, the Company is diligently attempting to cure such default and the existence of such default is not materially adversely affecting the business or financial condition of the Company. 10.2 Notice of Defaults. When, to its knowledge, any Event of ------------------ Default has occurred or exists, the Company shall give written notice within ten (10) business days of such Event of Default to Investor. If Investor shall give any notice or take any other actions in respect of a claimed Event of Default, the Company will forthwith give written notice thereof to all other holders of Series B Preferred Shares at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. 10.3 Suits for Enforcement. In case any one or more Events of --------------------- Default shall have occurred and be continuing, unless such Events of Default shall have been waived in the manner provided in article 15, Investor may proceed to protect and enforce its rights under this article 10 by suit in equity or action at law. It is agreed that in the event of such action, Investor shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys (whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals. 10.4 Remedies Cumulative. No right, power or remedy conferred ------------------- upon Investor hereunder shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any such security or now or hereafter available at law or in equity or by statute or otherwise. 10.5 Remedies Not Waived. No course of dealing between the ------------------- Company and Investor and no delay in exercising any right, power or remedy conferred hereby or by any such security or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice -20- any such right, power or remedy; provided, however, that this section shall not be construed or applied so as to negate the provisions and intent of any statute which is otherwise applicable. 11. Registration Rights. ------------------- 11.1 Incidental Registration. Each time the Company shall ----------------------- determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for money of any of its securities by it or any of it security holders, the Company will give written notice of its determination to Investor. Upon written request of Investor, given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all shares of Purchased Shares for which Investor has so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by Investor of the Purchased Shares to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of Investor should Investor wish to proceed with a public offering of its Purchased Shares provided Investor agrees to bear all expenses in excess of $25,000 incurred by the Company as the result of such registration after the Company has decided not to proceed. If any registration pursuant to this section shall be underwritten in whole or in part, the Company may require that the Purchased Shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that the Purchased Shares requested for inclusion pursuant to this section would constitute more than twenty-five percent (25%) of the total number of shares to be included in a proposed underwritten public offering, and if in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Purchased Shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Shares otherwise to be included in the underwritten public offering may be reduced pro rata among all holders thereof requesting such registration; provided, however, that after any such required reduction the Purchased Shares to be included in such offering shall constitute at least twenty-five percent (25%) of the total number of shares to be included in such offering. Those shares of Purchase Shares which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 60 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten pubic offering. -21- 11.2 Registration Procedures. If and whenever the Company is ----------------------- required by the provisions of section 11.1 to effect the registration of any Purchased Shares under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (c) furnish to Investor, to the extent he is participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Investor and the underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Investor may reasonably request within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify Investor promptly and confirm such advice in writing: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement or post-effective amendment to the registration statement has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Purchased -22- Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threat of any proceeding for such purpose, and (iv) of the existence of any fact which results in the registration statement, the prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading; (f) prepare and file with the Commission, promptly upon the request of Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Investor (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Shares by Investor; (g) prepare and promptly file with the Commission and promptly notify Investor of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the 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, in the light of the circumstances in which they were made, not misleading; (h) advise Investor, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for the purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal of such stop order should be issued; (i) not file any amendment or supplement to such registration statement or prospectus to which Investor shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and -23- (j) enter into such customary agreements and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Purchased Shares, whether or not an underwriting agreement is entered into and whether or not the Purchased Shares are to be sold in an underwritten offering. 11.3 Expenses. With respect to each inclusion of Purchased -------- Shares in a registration statement pursuant to section 11.1 (except as otherwise provided in section 11.1 with respect to registrations terminated by the Company), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees (or, if applicable, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which such securities are required to be listed), printing expenses and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or Investor (as a selling security holder) are required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the pubic offering, if any, and all legal fees and disbursements and other expenses of complying with the state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified; provided, however, that nothing contained herein shall be deemed to require the Company to consent to general service of process in any state in order to qualify its securities for sale therein. With respect to any registration, the Company shall bear all fees, costs and expenses including, but not limited to, those listed above. Notwithstanding anything to the contrary contained herein, fees and disbursements of counsel and accountants for Investor along with any commissions and transfer taxes owing by Investor shall be borne by Investor. 11.4 Indemnification. In the event that any Purchased Shares are --------------- included in a registration statement under section 11.1: (a) The Company will indemnify Investor and hold Investor harmless pursuant to the provisions of this article and will indemnify any underwriter (as defined in the Securities Act) for Investor and each person, if any, who controls such underwriter within the meaning of the Securities Act, from and against any and all losses, claims, damages, liabilities, costs and expenses (including, but not limited to all legal or other expenses reasonably incurred by it in connection with investigating or defending any loss, claim, damage, liability, cost and expense and any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the prior written consent of the Company) to which Investor and/or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of -24- or are 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, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable to Investor to the extent that any such loss, claims, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Investor. (b) Investor will indemnify and hold harmless the Company, any controlling person and any underwriter from and against any and all losses, claims, damages, liabilities, costs or expenses to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue, or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with information furnished by Investor. (c) Promptly after receipt by any indemnified party pursuant to the provisions of paragraph (a) or (b) of this section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defence thereof, the -25- indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 12. Restriction on Transfer of Shares. --------------------------------- 12.1 Restrictions. The Shares and the Conversion Shares are ------------ only transferable pursuant to (a) a public offering registered under the Securities Act, (b) Rule 144 or Rule 144A under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) subject to the conditions specified elsewhere in this article 12, and any other legally available means of transfer. 12.2 Legend. Each certificate representing Shares shall be ------ endorsed with the following legend: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended and all applicable state securities laws or (ii) such registration." Upon the conversion of any Shares, unless the Company receives an opinion of counsel satisfactory to the Company to the effect that a transfer of the Conversion Shares may be made without registration or further restriction or transfer, or unless such Conversion Shares are being disposed of pursuant to a registration under the Securities Act, the same legend shall be endorsed on the certificate evidencing such Conversion Shares. 12.3 Removal of Legend. Any legend endorsed on a certificate ----------------- evidencing a security pursuant to section 12.2 hereof shall be removed, and the Company shall issue a certificate without such legend to Investor (or its nominee, designee or transferee, as the case may be), if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect or if Investor (or its designee or proposed transferee) provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect, without registration. In addition, if Investor delivers to the Company an -26- opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in section 12.2. 13. Investors' Covenant Not to Buy Shares. Investor, for itself, ------------------------------------- covenants that it shall neither buy nor solicit offers to sell any shares of capital stock or any purchase rights to acquire any shares of capital stock of the Company, from any person, partnership or entity which is currently a shareholder of the Company on the date of this Agreement until the earlier to occur of the events set forth in section 14(i) or (ii) below. 14. Termination of Covenants. The obligations of the Company under ------------------------ Articles 7 and 8 of the Agreement, notwithstanding any provisions hereof apparently to the contrary, shall terminate and shall be of no further force or effect on the earliest to occur of (i) the date that the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act in which the net proceeds received by the Company equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate reorganizations), (ii) the date following the merger of the Company with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Company continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Company equals or exceeds $5 million, calculated for purposes of this section 14, as the product of the average closing price for the Company's Common Stock during any 20 consecutive trading days times the total number of outstanding shares of Common Stock or (iii) September 27, 1998. 15. Miscellaneous. ------------- 15.1 Waivers Amendments and Approvals. No amendment or waiver of -------------------------------- any provision of the Agreement, shall in any event be effective unless the same shall be in writing and signed by the holders of a majority of the then outstanding Series B Preferred Shares and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15.2 Changes, Waiver, Etc. Neither the Agreement nor any -------------------- provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in section 15.1. -27- 15.3 Notices. All notices, requests, consents and other ------- communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail, (a) if to Investor, at the address of Investor appearing on the books and records of the Company, or at such other addresses as Investor may specify by written notice to the Company, or (b) if to the Company at 1840 Berkshire Lane, Minneapolis, Minnesota 55441. Attention: President; with a copy to J. Andrew Herring, Dorsey & Whitney, 220 South Sixth Street, Minneapolis, MN 55402, or at such other address as the Company may specify by written notice to Investor, and such notices and other communications shall for all purposes of the Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 15.4 Survival of Representations and Warranties, Etc. All ----------------------------------------------- representations and warranties contained herein shall survive the execution and delivery of the Agreement, any investigation at any time made by Investor or on its behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to the Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. 15.5 Parties in Interest. All the terms and provisions of the ------------------- Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. 15.6 Headings. The headings of the Articles and sections of the -------- Agreement have been inserted for convenience of reference only and do not constitute a part of the Agreement. 15.7 Choice of Law. The laws of Minnesota shall govern the ------------- validity of the Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 15.8 Counterparts. The Agreement may be executed concurrently in ------------ two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -28- 15.9 Definition of Purchased Shares. For purposes of the ------------------------------ Agreement the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Conversion Shares and (c) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring. If Investor is in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned. Very truly yours, MEDI-JECT CORPORATION By /s/ Franklin Pass ------------------------------------ Name: Franklin Pass Title: Chairman -29- ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the investment agreement, dated as of December 28, 1993, by and between Medi-Ject Corporation and the undersigned as the terms and conditions applicable to the purchase by the undersigned of preferred shares of the Company. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in article 5 of such investment agreement. The undersigned further represents either that he qualifies as an "accredited investor," as that term is used in Regulation D promulgated under the federal Securities Act of 1933, because (check one): ____ the undersigned is an individual with a net worth in excess of $1,000,000; ____ the undersigned is an individual who either (a) had an income in excess of $200,000 in each of the years 1992 and 1991 and who reasonably expects an income in excess of $200,000 in 1993, or (b) had a joint income with the undersigned's spouse in excess of $300,000 in each of the years 1992 and 1991 and who reasonably expects a joint income in excess of $300,000 in 1993; ____ it is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940; ____ the undersigned is a director or executive officer of Medi-Ject Corporation; X it is a corporation, partnership, business trust or a nonprofit ---- organization within the meaning of section 501(c)(3) of the Internal Revenue Code that was not formed for the purpose of acquiring the securities of Medi-Ject Corporation and that has total assets in excess of $5,000,000; ____ it is a small business investment company licensed by the United States Small Business Administration; ____ it is a self-directed employee benefit plan for which all persons making investment decisions are "accredited investors"; or ____ it is an entity, all of whose equity owners or partners are "accredited investors", or ____ it is not an accredited investor. /s/ Henrik Rhenman, Fund Manager ------------------------------------- -30- EX-10.18 24 PREFERRED STOCK PURCHASE AGREEMENT Medi-Ject Corporation PREFERRED STOCK PURCHASE AGREEMENT ---------------------------------- November 29, 1993 Calvert Social Venture Partners, L.P. 7201 Wisconsin Avenue, Suite 310 Bethesda, MD 20814 Dear Sirs: Medi-Ject Corporation, a Minnesota corporation (the "Company") agrees with Calvert Social Venture Partners, L.P., a Virginia limited partnership ("Calvert"), and each other person or entity listed on schedule 1 (the "Investors") to this agreement (the "Agreement"), as follows: 1. Authorization of Issue of Shares. The Company has authorized the -------------------------------- issue and sale of up to 3,000,000 shares of its present class of Preferred Stock, such shares to be constituted as a new series of Preferred Stock, and being designated as the "Series B Convertible Preferred Stock" (herein referred to as the "Series B Preferred Shares"). The relative powers, preferences and rights and qualifications, limitations and restrictions of the Series B Preferred Shares are set forth in a Certificate of Designations, Preferences and Rights (the "Certificate of Designations") in the form attached hereto as Exhibit A. Certain capitalized terms used in this Agreement are used as defined herein; references to an article or section are, unless otherwise specified, to one of the articles or sections of the Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to the Agreement. 2. Sale and Purchase Price. The Company will issue and sell to each ----------------------- Investor and, subject to the terms and conditions herein set forth, each Investor severally agrees to purchase from the Company, the number of Shares set forth opposite its name on schedule 1, at a purchase price of $1.00 per share (the "Shares"). 3. Closing. The closing of the sale of the Shares to the Investors ------- shall take place at the offices of Dorsey & Whitney, 220 South Sixth Street, Minneapolis, Minnesota at 10:00 A.M. Minneapolis time on November 29, 1993 or such other date thereafter as shall be mutually agreeable to the Investors and the Company (November 29, 1993 or such other date being herein called the "Closing Date"). At the closing, the Company shall deliver to each Investor a certificate, dated the Closing Date, representing the Shares purchased by such Investor on such date, registered in its name as stated on schedule 1 (or in the name of its nominee if it so specifies to the Company at least 48 hours prior to such date) against payment to the Company of the purchase price of Shares being purchased by such Investor. 4 Representations and Warranties by the Company. In order to --------------------------------------------- induce each Investor to enter into the Agreement and to purchase the number of Shares set forth after its name on schedule 1, the Company hereby represents and warrants to each Investor that, except as disclosed in the attached Exhibit B: 4.1 Organization, Standing, etc. The Company is a --------------------------- corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being conducted. The Company has the requisite corporate power and authority to issue the Shares, the shares of its common stock into which the Shares are convertible (the "Conversion Shares") and to otherwise perform its obligations under the Agreement. 4.2 Governing Instruments. The copies of the articles of --------------------- incorporation, as amended by the Certificate of Designations (the "Articles of Incorporation") and bylaws of the Company which have been delivered each Investor or his or its legal counsel prior to the execution of the Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and bylaws of the Company in effect as of the date of the Agreement. 4.3 Subsidiaries, Etc. The Company does not have any direct ----------------- or indirect ownership interest in any corporation, partnership, joint venture, association or other business enterprise. 4.4 Qualification. The Company is duly qualified, licensed ------------- or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. 4.5 Financial Statements. Attached to the Agreement as Exhibit C are (a) a balance sheet, as of July 31, 1993 for the Company together with the related statements of operations and shareholders equity for the seven months then ended, which balance sheet and related statements are unaudited. Such financial statements (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company at the balance sheet date and the results of its operations for the period therein specified, and (iii) have, in all material respects, been prepared in accordance with generally accepted accounting principles and (b) a consolidated balance sheet of the Company for the twelve-month fiscal periods ending March 31, 1991 and 1992 and the nine month fiscal period ending December 31, 1992, and the consolidated statements of income -2- and retained earnings and changes in financial position for the same periods, all as reported on by the Company's independent certified public accountants. Without limiting the generality of the foregoing, the balance sheet or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at July 31, 1993, which, individually or in the aggregate, are material and which in accordance with generally accepted accounting principles would be required to be disclosed in such balance sheet, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. 4.6 Tax Returns and Audits. All required federal, state and ---------------------- local tax returns or appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of the Company's tax returns has been audited by governmental authorities in a manner to bring such audits to the Company's attention. The Company does not have any tax liabilities except those reflected on Exhibit C or those incurred in the ordinary course of business since July 31, 1993. 4.7 Changes, Dividends, etc. Except for the transactions ------------------------ contemplated by the Agreement, since July 31,1993, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company; (vii) entered into any transaction other than in the ordinary course of business; (viii) encountered any labor difficulties or labor union organizing activities; (ix) issued or sold any shares of capital stock or other securities or granted any options, warrants, or other purchase rights with respect thereto other than pursuant to the Agreement; (x) made any acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (xi) increased the compensation payable, or to become payable, to any employees, or -3- made any bonus payment or similar arrangement with any employees or increased the scope or nature of any fringe benefits provided for its employees; or (xi) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since July 31, 1993 (other than continued losses from operations that the Company has incurred, which are generally consistent with its historical losses from operations since December 31, 1992). 4.8 Title to Properties and Encumbrances. The Company has good ------------------------------------ and marketable title to all of its tangible properties and assets, including without limitation the properties and assets reflected on Exhibit C and the properties and assets used in the conduct of its business, except for property disposed of in the ordinary course of business since July 31, 1993, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on Exhibit C or the notes thereto, (b) liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, or (c) those which do not materially affect the value of or interfere with the use made of such properties and assets. 4.9 Conditions of Properties. The plant, offices and equipment ------------------------ of the Company have been kept in good condition and repair in the ordinary course of business. 4.10 Litigation; Governmental Proceedings. There are no legal ------------------------------------ actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business, and the Company is not aware of any facts which are likely to result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 4.11 Compliance With Applicable Laws and Other Instruments. The ----------------------------------------------------- business and operations of the Company have been and are being conducted in all material respects in accordance with all material, applicable federal, state and local laws, rules and regulations, with respect to which failure to so comply would have a material adverse impact upon the Company's business or operations. Neither the execution and delivery of the Agreement and the issuance of the Shares nor fulfillment of nor compliance with the terms and provisions hereof or thereof or of the Series B Preferred Shares, including, without limitation, the provisions of the Certificate of Designations, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, the Articles of Incorporation or By-Laws of the Company or any mortgage, agreement, instrument, order, judgement, decree, statute, law, rule or regulation to -4- which the Company or its property is subject. The Company is not in default under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money or in arrears with respect to any dividends upon any shares of its preferred stock, and there exists no default by the Company under any of its contracts or agreements, or under any instrument by which the Company is bound, which materially and adversely affects its business, operations or financial condition. 4.12 Governmental Consent, Etc. The Company is not required to ------------------------- obtain any consent, approval or authorization of, or to make any declaration or filing with any governmental authority as a condition to or in connection with the valid execution, delivery and performance of the Agreement and the valid offer, issue, sale or delivery of the Shares, or the performance by the Company of its obligations in respect thereof. 4.13 Shares and Conversion Shares. The Shares, when issued and ---------------------------- paid for pursuant to the terms of the Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12 or in the Company's Articles of Incorporation. The Series B Preferred Shares will rank superior to the shares of each other series of preferred stock of the Company now outstanding with respect to priority in payment of dividends and the distribution of assets upon any liquidation of the Company. The Conversion Shares have been reserved for issuance and, when issued upon conversion of the Shares, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12. 4.14 Securities Laws. Based in part upon the representations of --------------- the Investors in article 5, no consent, and assuming full compliance with article 12, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of the Agreement or the offer, issuance, sale or delivery of the Shares to the Investors, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. Under the circumstances contemplated by the Agreement, the offer, issuance, sale and delivery of the Shares and the Conversion Shares will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). 4.15 Patents and Other Intangible Rights. To the best of its ----------------------------------- knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise -5- acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, manufacture, operation and sale of all products sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any confidential information or trade secrets of others. 4.16 Capital Stock. At the date hereof, the authorized capital ------------- stock of the Company consists of 10,000,000 common shares, $.01 par value, of which 237,685 shares are issued and outstanding, 1,600,000 shares of Series A Convertible Preferred Stock, $.01 par value, of which 1,409,376 shares are issued and 3,000,000 shares of Series B Convertible Preferred Stock, of which 500,001 shares are issued. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than the Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. Neither the offer nor the issuance or sale of the Shares constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. Other than with respect to certain preemptive rights and anti-dilution protections granted to Ethical Holdings plc, a corporation organized under the laws of England ("Ethical"), pursuant to that certain Preferred Stock Purchase Agreement by and between the Company and Ethical, dated as of September 27, 1993, no holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company. 4.17 Outstanding Debt. The Company does not have any material ---------------- indebtedness incurred as the result of a direct borrowing of money, including, but not limited to, indebtedness with respect to trade accounts, except as set forth in Exhibit C or the notes thereto. The Company is not in default in the payment of the principal of or interest or premium on any such indebtedness, and no event has occurred or is continuing under the provisions of any instrument, document or agreement evidencing or relating to any such indebtedness which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. -6- 4.18 Schedule of Assets and Contracts. Prior to the execution of -------------------------------- the Agreement, the Company has delivered to legal counsel for the Investors a schedule of assets and contracts, specifically referring to this section 4.18 and listing the following items: (a) Schedule 1: a true and complete description of all real properties owned by the Company; (b) Schedule 2: each indenture, lease, sublease, license or other instrument under which the Company claims or holds a leasehold interest in real property; (c) Schedule 3: each lease of personal property involving payments remaining to or from the Company in excess of $10,000; (d) Schedule 4: each written or oral contract, agreement, subcontract, purchase order, commitment or arrangement involving payments remaining to or from the Company in excess of $10,000 and each other agreement material to the Company's business to which the Company is a party or by which it is bound, under which full performance (including payment) has not been rendered by any party thereto; (e) Schedule 5: any collective bargaining agreements, employment agreements, consulting agreements, noncompetition agreements, nondisclosure agreements, executive compensation plans, profit sharing plans, bonus plans, deferred compensation agreements, employee pension retirement plans and employee benefit stock option or stock purchase plans and other employee benefit plans, entered into or adopted by the Company; (f) Schedule 6: all bank accounts (or accounts with other financial institutions) maintained by the Company, together with the persons authorized to make withdrawals from such accounts; (g) Schedule 7: the name of each employee of the Company who is paid a remuneration of $50,000 or more per year, each such employee's job title, and a complete description of the duties and services performed by such employee; (h) Schedule 8: each royalty and/or license agreement material to the Company's business; (i) Schedule 9: list of all patents, patent applications, trademarks, trademark applications, and trade names held by, or filed in the name of, the Company; -7- (j) Schedule 10: list of distributors of the Company's products who individually contribute in excess of 5% of the Company's net sales, and any market studies performed by or on behalf of the Company within the last two years; and (k) Schedule 11: list of all holders of equity in the Company (assuming the exercise of all options and warrants currently outstanding), each such person or entity's respective shareholdings (on a fully diluted basis), and the terms of any outstanding options and/or warrants. Subsequent to the Closing Date, the Company shall provide legal counsel for the Investors with a true and complete copy of each document referred to on such schedules. The Company has in all material respects substantially performed all material obligations required to be performed by it to date and is not in default in any material respect under any of the material contracts, agreements, leases, documents, commitments or other arrangements to which it is a party or by which it is otherwise bound. All instruments referred to in the schedules described in this section 4.18 are in effect and enforceable according to their respective terms, and there is not under any of such instruments any existing material default or event of default or event which, with notice or lapse of time or both, would constitute an event of default thereunder. All parties having material contractual arrangements with the Company are in substantial compliance therewith and none are in material default in any respect thereunder. 4.19 Corporate Acts and Proceedings. The execution and delivery ------------------------------ of the Agreement and the adoption of the Certificate of Designations have been duly authorized by all necessary corporate action on behalf of the Company, has been duly executed and delivered by authorized officers of the Company, and, with respect to the Agreement, is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. All corporate action necessary to the authorization, creation, reservation, issuance and delivery of the Shares and the Conversion Shares has been taken by the Company, or will be taken by the Company on or prior to the Closing Date. 4.20 Accounts Receivable. To the extent that they exceed the ------------------- reserves for doubtful accounts set forth in Exhibit C, the accounts receivable which are reflected in Exhibit C and all accounts receivable of the Company which have arisen since July 31, 1993 (except such accounts receivable as have been collected since July 31, 1993) are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were sold and delivered in -8- conformity with the applicable purchase orders, agreements and specifications. Such accounts receivable are subject to no valid defense or offsets except routine customer complaints or warranty demands of an immaterial nature. 4.21 Inventories. The inventories of the Company which are ----------- reflected in Exhibit C and all inventory items which have been acquired since July 31, 1993 consist of raw materials, supplies, work-in-process and finished goods of such quality and quantities as are, to the best of the Company's knowledge, currently usable or salable in the ordinary course of its business. 4.22 Purchase Commitment and Outstanding Bids. No material ---------------------------------------- purchase commitment of the Company is in excess of normal, ordinary and usual requirements of its business, or was made at any price in excess of the then current market price, or contains terms and conditions more onerous than those usual and customary in the industry. There is no outstanding material bid, sales proposal, contract or unfilled order of the Company which (a) will, or could if accepted, require the Company to supply goods or services at a cost to the Company in excess of the revenues to be received therefrom, or (b) quotes prices which do not include a mark-up over reasonably estimated costs consistent with past mark-ups on similar business or market conditions current at the time. 4.23 Insurance Coverage. There are in full force policies of ------------------ insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 4.24 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or the Investors for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by the Agreement. The Company will indemnify and hold the Investors harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by the Agreement. 4.25 Conflicts of Interest. No officer, director or shareholder --------------------- of the Company or any affiliate (as such term is defined in Rule 405 under the Securities Act) or any such person has any direct or indirect interest (a) in any entity which does business with the Company, (b) in any property, asset or right which is used by the Company in the conduct of its business, or (c) in any contractual relationship with the Company other than as an employee. For the purpose of this section 4.25, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market or any -9- payment required to be made by the Company in an amount less than $2,500 annually. 4.26 Licenses. The Company possesses from the appropriate -------- agencies, commissions, boards and/or government bodies and authorities, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the business currently conducted by it, and (b) if not possessed by the Company would have a material adverse impact on the Company's business. 4.27 Disclosure. The Company has not knowingly withheld from the ---------- Investors any material facts relating to the assets, business, operations, financial condition or prospects of the Company taken as a whole. No representation or warranty in the Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to the Investors pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 4.28 Registration Rights. Except as otherwise disclosed ------------------- hereunder, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act. 4.29 Retirement Plans. The Company does not have any retirement ---------------- plans in which any employees of the Company participates that is subject to any provisions of the Employee Retirement Income Security Act of 1974 and of the regulations adopted pursuant thereto ("ERISA"). 4.30 Environmental and Safety Laws. To the best of the Company's ----------------------------- knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 4.31 Employees. To the best of the Company's knowledge, no --------- officer of the Company or employee of the Company (whose annual compensation is in excess of $50,000) has any plans to terminate his or her employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has not encountered any material labor difficulties. To the best of the Company's knowledge, the Company does not have any worker's compensation liabilities, except those reflected on Exhibit B. -10- 4.32 Absence of Restrictive Agreements. To the best of the --------------------------------- Company's knowledge, no employee of the Company is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company. To the best of the Company's knowledge, no employer or former employer of any employee of the Company has any claim of any kind whatsoever in respect of any of the rights described in section 4.15 of the Agreement. 5. Representations of the Investors. Each Investor represents for -------------------------------- itself that: 5.1 Investment Intent. The Shares being acquired by such ----------------- Investor are being purchased for investment for such Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof; provided that the disposition of an Investor's property -------- shall at all times be and remain within its control and subject to the provisions of the Agreement. Each Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by the Investors. Each Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. Such Investor understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") and that in any event an Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a two-year period after it has acquired such securities. Such Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 5.2 Qualification as an Accredited Investor, Etc. The state in -------------------------------------------- which such Investor's principal office is located is the state set forth in such Investor's address on schedule 1. Unless otherwise indicated on such Investors signature page to this Agreement, such Investor qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act. Such Investor acknowledges that the Company has made available to it at a reasonable time prior to the execution of the Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by the Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to it. Such Investor (a) is able to bear -11- the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 5.3 Acts and Proceedings. The Agreement has been duly -------------------- authorized by all necessary corporate action, has been duly executed and delivered and the performance hereof by such Investor is within its power, corporate or otherwise. 5.4 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission by such Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by the Agreement. Such Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 5.5 Exculpation Among Investors. Such Investor acknowledges --------------------------- that in making its decision to invest in the Company, it is not relying on any other Investor or upon any person, firm or company, or than the Company and its officers, employees and/or directors. Such Investor agrees that no other Investor, nor the partners, employees, officers or controlling persons of any other Investor shall be liable for any actions taken by such Investor, or omitted to be taken by such Investor, in connection with such investment. 6. Conditions of Each Investors's Obligation to Purchase the Shares ---------------------------------------------------------------- on the Closing Date. The obligation to purchase and pay for the Shares which - ------------------- each Investor has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on such Closing Date of the conditions set forth in this article 6. In the event that any such condition is not satisfied to the satisfaction of an Investor, then such Investor shall not be obligated to proceed with its purchase of the Shares. 6.1 No Errors, etc. The representation and warranties of the --------------- Company under the Agreement shall be true in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6.2 Compliance with Agreement. The Company shall have performed ------------------------- and complied with all agreements or conditions required by the Agreement to be performed and complied with by it prior to or as of the Closing Date. 6.3 No Event of Default. There shall exist at the time of such ------------------- closing no condition or event which would constitute an Event of Default (as such -12- term is defined in article 10 hereof) or which, after notice or lapse of time or both, would constitute an Event of Default. 6.4 Certificate of Officers. The Company shall have delivered a ----------------------- certificate, dated the Closing Date, executed by the President of the Company and certifying to the satisfaction of the conditions specified in sections 6.1, 6.2 and 6.3. 6.5 Opinion of the Company's Counsel. The Company shall have -------------------------------- delivered an opinion, satisfactory in form and substance to the Investors, of Dorsey & Whitney, counsel for the Company, dated the Closing Date and in the form of Exhibit D attached hereto. 6.6 Articles of Incorporation. The Articles of Incorporation of ------------------------- the Company as in effect on the date hereof shall not have been amended, modified or supplemented in any respect except as consented to by the Investors in writing. 6.7 Purchase Permitted by Applicable Law. The purchase of and ------------------------------------ payment for the Shares to be purchased by each Investor on the Closing Date, on the terms and conditions herein provided (including the use of the proceeds of the issuance of the Shares by the Company) shall not violate any applicable law or governmental regulation and shall not subject any Investor to any tax, penalty or liability, or require any Investor to make any filings or to register or qualify, under or pursuant to any applicable law or governmental regulation, and each Investor shall have received such certificates or other evidence as it may reasonably request to establish compliance with this condition. 6.8 No Adverse Action or Decision. There shall be no action, ----------------------------- suit, investigation or proceeding pending, or, to the best of the Company's knowledge, threatened (by any public official or governmental authority), against or affecting the Company, any of its properties or rights, or any of its employees, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect transactions contemplated by the Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. 6.9 Approvals and Consents. The Company shall have duly ---------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of and shall have made all filings and effected all registrations and qualifications with, all Federal, State and local governmental authorities necessary for the issuance of the Shares, and all thereof shall be in full force and effect at the time of closing and shall be effective to permit such issuance, and each Investor shall have received such certificates or other evidence as it may reasonably request to establish compliance with this condition. -13- 6.10 Proceedings. All corporate and other proceedings to be ----------- taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to the Investors and their legal counsel, and the Investors and their legal counsel shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 6.11 Supporting Documents. Each Investor shall have received the -------------------- following: (a) A copy of resolutions of the Board of Directors of the Company certified by the secretary of the Company authorizing and approving the execution, delivery and performance of the Agreement; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Agreement and further certifying that the Articles of Incorporation and By-Laws of the Company delivered to each Investor or his or its legal counsel at the time of the execution of the Agreement have been validly adopted and have not been amended or modified; and (c) Such additional supporting documentation and other information with respect to the transaction contemplated hereby as legal counsel for the Investors may reasonably request. 6.12 Qualification Under State Securities Laws. All ----------------------------------------- registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of the Agreement and the offer, sale, issuance and delivery of the Shares to the Investors at the Closing shall have been obtained. 6.13 Proceedings and Documents. All corporate and other ------------------------- proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to legal counsel for the Investors. 7. Affirmative Covenants of the Company. Subject to the provisions ------------------------------------ of article 14, the Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its ------------------- corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. -14- 7.2 Books of Account and Reserves. The Company will keep books ----------------------------- of record and account in which full, true and correct entries are made of all of its dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). 7.3 Furnishing of Financial Statements and Information. Until -------------------------------------------------- such time as an Investor owns less than 50% of the Purchased Shares (as that term is defined in section 15.9 hereof), the Company will deliver to each such Investor: (a) as soon as practicable, but in any event within 30 days after the close of each month, an unaudited consolidated balance sheet of the Company as of the end of such month, together with the related statements of consolidated operations for each month; (b) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a statement of income and a statement of changes in financial position of the Company for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail, and subject to changes resulting from year-end adjustments; (c) as soon as practicable, but in any event within 90 days after the end of each fiscal year statement of income and a consolidated statement of changes in financial position of the Company for such year, and a balance sheet of the Company as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and together with an opinion directed to the Company of independent certified public accountants of recognized standing selected by the Company; (d) within 15 days after the Company learns of the commencement or written threats of the commencement of any material suit, legal or equitable, or of any material administrative, arbitration or other -15- proceeding against the Company or its business, assets or properties, written notice of the nature and extent of such suit or proceedings; (e) promptly after the submission thereof to the Company, copies of all reports and recommendations submitted by independent public accountants in connection with any annual, interim or special audit of the accounts of the Company made by such accountants; (f) promptly upon transmission thereof, copies of all reports, notices, financial statements, proxy statements, registration statements and notifications filed by it with the Commission pursuant to any act administered by the Commission or furnished to shareholders of the Company or to any national securities exchange; (g) concurrently with the delivery in each year of the financial statements referred to in section 7.3(c), a statement and report signed by the independent public accountants who certified such financial statements to the effect that they have read the Agreement and that in the course of the audit upon which such certificate was based they have become aware of no condition or event which constituted an Event of Default under article 10 or which, after notice or lapse of time or both, would constitute or if such accountants did become aware of such condition or event, specifying the nature and period of existence thereof; (h) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company as is available to the Company and as from time to time the Investors may reasonably request. 7.4 Inspection. The Company covenants that it will permit any ---------- persons or entitles designated in writing by an Investor holding at least 50% of the Purchase Shares to visit and inspect at such Investor's expense any of the properties, corporate books and financial records of the Company and its subsidiaries (and to make photocopies thereof or make extracts therefrom), and to discuss the affairs, finances and accounts of any such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as such Investor may reasonably request. Such Investor shall maintain, and shall require such Investor's representatives to maintain, all information obtained from the Company pursuant to section 7.3, this section 7.4, and section 7.5 on a confidential basis, and shall only disclose such information to its and its affiliates', officers, directors, agents and/or employees who shall be advised by such Investor of such confidentiality obligation. 7.5 Preparation and Approval of Budgets. At least one month ----------------------------------- prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual -16- plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. 7.6 Payment and Taxes and Maintenance of Properties. The ----------------------------------------------- Company will: (a) pay and discharge promptly, or cause to be paid and discharged promptly when due and payable, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, other than such taxes, assessments, charges or levies as the Company is contesting in good faith through appropriate proceedings; and (b) maintain and keep, or cause to be maintained and kept its properties in good repair, working order and condition. 7.7 Insurance. The Company will obtain and maintain in force --------- such property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be necessary or appropriate to protect the Company from the insurable hazards or risks associated with the conduct of the Company's business. The Company's executive officers shall periodically report to the Board of Directors on the status of such insurance coverage. All such insurance policies shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors. All such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 7.8 Payment of Indebtedness and Discharge of Obligations. To the ---------------------------------------------------- fullest extent reasonably possible, the Coml make timely payment of all amounts due under, and will observe, perform and discharge all of the material covenants, conditions and obligations which are imposed on it by, any and all indentures and other agreements securing or evidencing all indebtedness resulting from bank or other direct borrowings by the Company or pursuant to which such indebtedness is issued. 7.9 Representation on Board of Directors; Directors' and ---------------------------------------------------- Shareholders' Meetings. From and after the Closing Date, (i) the Company's - ---------------------- Articles -17- of Incorporation shall provide for an authorized Board of Directors of not more than nine (9) members, and (ii) at least a majority of the Company's directors shall at all times be persons who are not in the employment of the Company. The Company agrees, as a general practice, to hold meetings of its Board of Directors at least once each calendar quarter, and during each year to hold its annual meeting of shareholders on or approximately on the date provided in its By-Laws. 7.10 Application of Proceeds. Unless otherwise approved by the ----------------------- Investors, the net proceeds received by the Company from the sale of the Shares pursuant to the Agreement will be used substantially for general working capital purposes, including the purchase of capital equipment, advertising, marketing, inventory purchases, personnel expenses and research and development. Pending use of the proceeds in the business, they shall be deposited in a bank or banks having deposits of $150,000,000 or more, invested in certificates of deposit or repurchase agreements of a bank or banks having deposits of $150,000,000 or more, invested in money market mutual funds having assets of $500,000,000 or more, or invested in securities issued or guaranteed by the United States Government. 7.11 Retirement Plans. The Company will cause each retirement ---------------- plan of the Company in which any employees of the Company participate that is subject to the provisions of ERISA to be administered in a manner consistent with those provisions of ERISA which may, from time to time, become effective and operative with respect to such plans. 7.12 Filing of Reports. The Company will, from and after such ----------------- time as it has securities registered pursuant to (S)12 of the Securities Exchange Act of 1934 or has securities registered pursuant to the Securities Act, make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who are otherwise able to take advantage of the provisions of such Rule. 7.13 Patents and Other Intangible Rights. The Company will apply ----------------------------------- for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.14 Key Man Insurance. Prior to December 31, 1993, the Company ----------------- shall seek to obtain a term life insurance policy which will pay benefits of at least $1,000,000 to the Company upon the death of Dr. Franklin Pass, if such insurance is readily available on commercially reasonable terms and available at -18- reasonably affordable rates in light of the Company's then current financial condition. 7.15 Subsidiaries. If the Company establishes or maintains any ------------ subsidiary corporations, it shall cause each such subsidiary corporation to comply with the covenants set forth in this article 7. 7.16 Preemptive Rights. ----------------- (a) Other than with respect to shares of the Company's capital stock that may be issued pursuant to option exercises under the Company's stock option plans, and other than with respect to those warrants, options and convertible promissory notes listed as outstanding on Schedule 11 attached hereto, each Investor holding in excess of 50% of the Purchased Shares, in case of the proposed issuance by the Company of, or the proposed granting by the Company of rights or options to purchase, any additional shares of capital stock of the Company, shall, if the issuance of the shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the voting rights of the holders of the Series B Preferred Shares in any respect, have the right, in accordance with the terms and conditions of this section 7.16, to purchase such additional shares in such proportions as shall be determined in paragraph 7.16(b). (b) The preemptive right provided for in paragraph 7.16(a) shall entitle each holder of in excess of 50% of the Purchased Shares to purchase such number of the shares of capital stock of the Company to be offered or optioned for sale as nearly as practicable in such proportions as would, if such preemptive rights were exercised, preserve the relative voting rights of such Investor and at a price or prices not less favorable than the price or prices at which such additional shares are proposed to be offered for sale to others, without deduction of such reasonable expenses of and compensation for the sale, underwriting or purchase of such shares by underwriters or dealers as may lawfully be paid by the Company. (c) The Board of Directors shall cause to be given to each Investor holding in excess of 50% of the Purchased Shares, a written notice setting forth the time within which and the terms and conditions upon which such Investor may purchase such additional shares or other securities. Such notice shall be given at least twenty days prior to the expiration of the period during which such Investor shall have the right to purchase such shares. 8. Negative Covenants of the Company. Subject to the provisions of --------------------------------- article 14 (and, with respect to Section 8.2 below, other than share repurchases that the Company may be obligated to effect pursuant to the provisions of that certain Shareholder Agreement, dated as of September 27, 1993 by and among the Company, Ethical and certain other shareholders of the Company (the "Shareholder Agreement")), the Company will be limited and restricted as follows: -19- 8.1 Consolidation, Merger, Acquisition, etc. The Company will --------------------------------------- not, nor will it permit any subsidiary to, sell, lease, license or otherwise dispose of all or substantially all of its assets or any asset or assets which have a material affect upon the business assets or financial condition of the Company, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares; provided, however, that a subsidiary of the Company may be merged with the Company or another subsidiary of the Company without such approval. 8.2 Dividends on or Redemption of Junior Stock. The Company ------------------------------------------ will not, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares, declare or pay any cash dividend on its common shares, or make any other distribution on any common shares or all other shares of stock of any other class of the Company at any time created and issued ranking junior to the Series B Preferred Shares with respect to the rights to receive dividends and the right to the distribution of assets upon liquidation, dissolution or winding up of the Company ("Junior Stock"), other than those payable solely in shares of Junior Stock, or, except pursuant to the terms of the Shareholder Agreement, purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock or debt securities convertible into other shares of Junior Stock), or set aside as a sinking fund or other fund for the redemption or repurchase of any shares of Junior Stock, rights or options to purchase shares of Junior Stock. 8.3 Other Restrictions. The Company will not, nor will it ------------------ permit any subsidiary to, without the prior written consent of the holders of a majority of the then outstanding Series B Preferred Shares: (a) guarantee, endorse or otherwise be or become contingently liable in excess of $10,000 in connection with the obligations, securities or dividends of any person, firm, association or corporation other than the Company or a subsidiary, except that the Company may endorse negotiable instruments for collection in the ordinary course of business; (b) make loans or advances in excess of $10,000 to any person (including without limitation to any officer, director or shareholder of the Company or any subsidiary of the Company), firm, association or corporation, except (i) advances to suppliers made in the ordinary course of business, and (ii) loans to employees to assist such employees in relocating to the Minneapolis-St. Paul area, as approved by the Company's Board of Directors; (c) pay compensation, whether by way of salaries, bonuses, participation in pension or profit sharing plans, fees under management contracts or for professional services or fringe benefits to any officer in excess -20- of amounts fixed by the Board of Directors of the Company prior to any payment to such officer; (d) alter the authorized capital stock of the Company as set forth in the Company's Articles of Incorporation whether (i) by the authorization of additional amounts, classes or series of such capital stock, or (ii) by the authorization of any new class of capital stock, or (iii) by way of any stock split or combination, or (iv) altering the rights and/or preferences of the Series B Preferred Shares; (e) change its fiscal year; or (f) make any material change in the nature of its business as carried on at the date of the Agreement. 9. Conversion of Shares. -------------------- 9.1 Conversion of Shares. Each Investor may, at its option, -------------------- from and after the occurrence of such events as are set forth in the relevant provisions of the Company's Articles of Incorporation, convert the Shares purchased by it under this Agreement, or any portion thereof, into Conversion Shares at the rate and upon the terms and conditions and subject to the adjustments set forth in the Company's Articles of Incorporation. Each Share shall be automatically converted into Conversion Shares on such terms and conditions as are set forth in the Company's Articles of Incorporation. 9.2 Stock Fully Paid; Reservation of Shares. The Company --------------------------------------- covenants and agrees that all Conversion Shares that may be issued upon the exercise of the conversion privilege referred to in section 9.1 will, upon issuance in accordance with the terms of the Company's Articles of Incorporation be fully paid and nonassessable and free from all taxes, liens and charges (except for taxes, if any, upon income and applicable transfer taxes) with respect to the issue thereof, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of its common shares for the purpose of issue upon the exercise of such conversion privilege. 9.3 Adjustment of Number of Shares and Conversion Price. The --------------------------------------------------- number of common shares issuable upon conversion of the Shares and the conversion price with the respect thereto shall be subject to adjustment from time to time as set forth in the Company's Articles of Incorporation. -21- 10. Registration Rights. ------------------- 10.1 Incidental Registration. Each time the Company shall ----------------------- determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for money of any of its securities by it or any of it security holders, the Company will give written notice of its determination to Calvert. Upon written request of Calvert, given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all shares of Purchased Shares for which Calvert has so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by Calvert of the Purchased Shares to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of Calvert should Calvert wish to proceed with a public offering of its Purchased Shares provided Calvert agrees to bear all expenses in excess of $25,000 incurred by the Company as the result of such registration after the Company has decided not to proceed. If any registration pursuant to this section shall be underwritten in whole or in part, the Company may require that the Purchased Shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that the Purchased Shares requested for inclusion pursuant to this section would constitute more than twenty-five percent (25%) of the total number of shares to be included in a proposed underwritten public offering, and if in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Purchased Shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Shares otherwise to be included in the underwritten public offering may be reduced pro rata among all holders thereof requesting such registration; provided, however, that after any such required reduction the Purchased Shares to be included in such offering shall constitute at least twenty-five percent (25%) of the total number of shares to be included in such offering. Those shares of Purchase Shares which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 60 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten pubic offering. 10.2 Registration Procedures. If and whenever the Company is ----------------------- required by the provisions of section 10.1 to effect the registration of any Purchased Shares under the Securities Act, the Company will: -22- (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (c) furnish to Calvert, to the extent it is participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Calvert and the underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Calvert may reasonably request within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify Calvert promptly and confirm such advice in writing: (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement or post-effective amendment to the registration statement has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Purchased Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threat of any proceeding for such purpose, and -23- (iv) of the existence of any fact which results in the registration statement, the prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading ; (f) prepare and file with the Commission, promptly upon the request of Calvert, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Calvert (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Shares by Calvert; (g) prepare and promptly file with the Commission and promptly notify Calvert of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the 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, in the light of the circumstances in which they were made, not misleading; (h) advise Calvert, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for the purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal of such stop order should be issued; (i) not file any amendment or supplement to such registration statement or prospectus to which Calvert shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (j) enter into such customary agreements and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Purchased Shares, whether or not an underwriting -24- agreement is entered into and whether or not the Purchased Shares are to be sold in an underwritten offering. 10.3 Expenses. With respect to each inclusion of Purchased -------- Shares in a registration statement pursuant to section 10.1 (except as otherwise provided in section 10.1 with respect to registrations terminated by the Company), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees (or, if applicable, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which such securities are required to be listed), printing expenses and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or Calvert (as a selling security holder) are required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the pubic offering, if any, and all legal fees and disbursements and other expenses of complying with the state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified; provided, however, that nothing contained herein shall be deemed to require the Company to consent to general service of process in any state in order to qualify its securities for sale therein. With respect to any registration, the Company shall bear all fees, costs and expenses including, but not limited to, those listed above. Notwithstanding anything to the contrary contained herein, fees and disbursements of counsel and accountants for Calvert along with any commissions and transfer taxes owing by Calvert shall be borne by Calvert. 10.4 Indemnification. In the event that any Purchased Shares are --------------- included in a registration statement under section 10.1: (a) The Company will indemnify Calvert and hold Calvert harmless pursuant to the provisions of this article and will indemnify any underwriter (as defined in the Securities Act) for Calvert and each person, if any, who controls Calvert or such underwriter within the meaning of the Securities Act, from and against any and all losses, claims, damages, liabilities, costs and expenses (including, but not limited to all legal or other expenses reasonably incurred by it in connection with investigating or defending any loss, claim, damage, liability, cost and expense and any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the prior written consent of the Company) to which Calvert and/or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are 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, in light of the circumstances in -25- which they were made, not misleading; provided, however, that the Company will not be liable to Calvert to the extent that any such loss, claims, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Calvert. (b) Calvert will indemnify and hold harmless the Company, any controlling person and any underwriter from and against any and all losses, claims, damages, liabilities, costs or expenses to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue, or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with information furnished by Calvert. (c) Promptly after receipt by any indemnified party pursuant to the provisions of paragraph (a) or (b) of this section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defence thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the -26- defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 10.5 Registration Rights of Transferees. The registration rights ---------------------------------- granted pursuant to this article 10 shall also be for the benefit of, and enforceable by, any subsequent holder of Purchased Shares, whether or not any express assignment of such rights to any such subsequent holder is made, so long as such subsequent holder acquires at least twenty-five percent (25% ) of the Purchased Shares then outstanding. 11. Default. ------- 11.1 Events of Default. Each of the following events shall be an ----------------- event of default (an "Event of Default") for purposes of the Agreement: (a) if the Company shall default in any material respect in the due and punctual performance of any covenant or agreement in any note, bond, indenture, loan agreement, note agreement, mortgage, security agreement or other instrument evidencing or related to bank indebtedness of the Company in excess of $400,000, and such default shall continue for more than the period of notice and/or grace, if any, therein specified and shall not have been waived; (b) (i) if any representation or warranty made by or on behalf of the Company in the Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall prove to have been untrue or incorrect in any material respect as of the date of the Agreement, or (ii) if any report, certificate, financial statement or financial schedule or other instrument prepared or purported to be prepared by the Company or any officer of the Company hereafter furnished or delivered under or pursuant to the Agreement shall prove to be untrue or incorrect in any material respect as of the date it was made, furnished or delivered; or (c) if the Company defaults in the due and punctual performance or observance of any covenant contained in the Agreement, and such default continue for a period of 15 days after written notice thereof to the Company by the Investors; provided, however, that an Event of Default shall not be deemed to have occurred if, at the end of such 15-day, the Company is diligently attempting to cure such default and the existence of such default is -27- not materially adversely affecting the business or financial condition of the Company. 11.2 Notice of Defaults. When, to its knowledge, any Event of ------------------ Default has occurred or exists, the Company shall give written notice within ten (10) business days of such Event of Default to each holder of Series B Preferred Shares. If any holder of Series B Preferred Shares shall give any notice or take any other actions in respect of a claimed Event of Default, the Company will forthwith give written notice thereof to all other holders of Series B Preferred Shares at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. 11.3 Suits for Enforcement. In case any one or more Events of --------------------- Default shall have occurred and be continuing, unless such Events of Default shall have been waived in the manner provided in article 15, the Investors may proceed to protect and enforce their rights under this article 11 by suit in equity or action at law. It is agreed that in the event of such action, the Investors shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys (whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals. 11.4 Remedies Cumulative. No right, power or remedy conferred ------------------- upon the Investors hereunder shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any such security or now or hereafter available at law or in equity or by statute or otherwise. 11.5 Remedies Not Waived. No course of dealing between the ------------------- Company and the Investors and no delay in exercising any right, power or remedy conferred hereby or by any such security or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power or remedy; provided, however, that this section shall not be construed or applied so as to negate the provisions and intent of any statute which is otherwise applicable. 12. Restriction on Transfer of Shares. --------------------------------- 12.1 Restrictions. The Shares and the Conversion Shares are only ------------ transferable pursuant to (a) a public offering registered under the Securities Act, (b) Rule 144 or Rule 144A under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) subject to the conditions specified elsewhere in this article 12, and any other legally available means of transfer. 12.2 Legend. Each certificate representing Shares shall be ------ endorsed with the following legend: -28- "The shares represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended and all applicable state securities laws or (ii) such registration." Upon the conversion of any Shares, unless the Company receives an opinion of counsel satisfactory to the Company to the effect that a transfer of the Conversion Shares may be made without registration or further restriction or transfer, or unless such Conversion Shares are being disposed of pursuant to a registration under the Securities Act, the same legend shall be endorsed on the certificate evidencing such Conversion Shares. 12.3 Removal of Legend. Any legend endorsed on a certificate ----------------- evidencing a security pursuant to section 12.2 hereof shall be removed, and the Company shall issue a certificate without such legend to an Investor (or its nominee, designee or transferee, as the case may be), if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect or if an Investor (or its designee or proposed transferee) provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect, without registration. In addition, if an Investor delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in section 12.2. 13. Investors' Covenant Not to Buy Shares. Each Investor, for ------------------------------------- itself, covenants that it shall neither buy nor solicit offers to sell any shares of capital stock or any purchase rights to acquire any shares of capital stock of the Company, from any person, partnership or entity which is currently a shareholder of the Company on the date of this Agreement until the earlier to occur of the events set forth in section 14(i) or (ii) below. 14. Termination of Covenants. The obligations of the Company under ------------------------ Articles 7 and 8 of the Agreement, notwithstanding any provisions hereof apparently to the contrary, shall terminate and shall be of no further force or effect on the earliest to occur of (i) the date that the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act in which the net proceeds received by the Company equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate reorganizations), (ii) the date following the merger of the Company with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as -29- amended, and following such merger, (A) the Company continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Company equals or exceeds $5 million, calculated for purposes of this section 14, as the product of the average closing price for the Company's Common Stock during any 20 consecutive trading days times the total number of outstanding shares of Common Stock or (iii) September 27, 1998. 15. Miscellaneous. ------------- 15.1 Waivers Amendments and Approvals. No amendment or waiver of -------------------------------- any provision of the Agreement, shall in any event be effective unless the same shall be in writing and signed by the holders of a majority of the then outstanding Series B Preferred Shares and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15.2 Changes, Waiver, Etc. Neither the Agreement nor any -------------------- provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in section 15.1. 15.3 Notices. All notices, requests, consents and other ------- communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail, (a) if to an Investor, at the address of such Investor appearing on the books and records of the Company, or at such other addresses as an Investor may specify by written notice to the Company, or (b) if to the Company at 1840 Berkshire Lane, Minneapolis, Minnesota 55441. Attention: President; with a copy to J. Andrew Herring, Dorsey & Whitney, 220 South Sixth Street, Minneapolis, MN 55402, or at such other address as the Company may specify by written notice to the Investors. and such notices and other communications shall for all purposes of the Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 15.4 Survival of Representations and Warranties, Etc. All ----------------------------------------------- representations and warranties contained herein shall survive the execution and delivery of the Agreement, any investigation at any time made by an Investor or on -30- its behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to the Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. 15.5 Parties in Interest. All the terms and provisions of the ------------------- Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. 15.6 Headings. The headings of the Articles and sections of the -------- Agreement have been inserted for convenience of reference only and do not constitute a part of the Agreement. 15.7 Choice of Law. The laws of Minnesota shall govern the ------------- validity of the Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 15.8 Counterparts. The Agreement may be executed concurrently in ------------ two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.9 Definition of Purchased Shares. For purposes of the ------------------------------ Agreement the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Conversion Shares and (c) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring. If each Investor is in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned. Very truly yours, MEDI-JECT CORPORATION By /s/ Franklin Pass -------------------------------------------- Name: Franklin Pass Title: Chairman and CEO -31- ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the investment agreement, dated November 29, 1993, by and between Medi-Ject Corporation and the undersigned as the terms and conditions applicable to the purchase by the undersigned of preferred shares of the Company. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in article 5 of such investment agreement. The undersigned further represents either that it qualifies as an "accredited investor," as that term is used in Regulation D promulgated under the federal Securities Act of 1933, because (check one): ____ the undersigned is an individual with a net worth in excess of $1,000,000; ____ the undersigned is an individual who either (a) had an income in excess of $200,000 in each of the years 1992 and 1991 and who reasonably expects an income in excess of $200,000 in 1993, or (b) had a joint income with the undersigned's spouse in excess of $300,000 in each of the years 1992 and 1991 and who reasonably expects a joint income in excess of $300,000 in 1993; ____ it is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940; ____ the undersigned is a director or executive officer of Medi-Ject Corporation; ____ it is a corporation, partnership, business trust or a nonprofit organization within the meaning of section 501(c)(3) of the Internal Revenue Code that was not formed for the purpose of acquiring the securities of Medi-Ject Corporation and that has total assets in excess of $5,000,000; ____ it is a small business investment company licensed by the United States Small Business Administration; ____ it is a self-directed employee benefit plan for which all persons making investment decisions are "accredited investors"; or ____ it is an entity, all of whose equity owners or partners are "accredited investors", or -32- ____ it is not an accredited investor. CALVERT SOCIAL VENTURE PARTNERS, L.P. By SILBY, GUFFY & CO., INC. Its GENERAL PARTNER By /s/ John May ------------------------------------------------ John May Its President -33- EX-10.19 25 PREFERRED STOCK PURCHASE AGREEMENT ================================================================================ MEDI-JECT CORPORATION ---------------------- PREFERRED STOCK PURCHASE AGREEMENT ---------------------- Dated September 27, 1993 ______ Shares of Series B Convertible Preferred Stock ($.01 Par Value) (Liquidation Preference $1.00 per share) ================================================================================ Medi-Ject Corporation PREFERRED STOCK PURCHASE AGREEMENT ---------------------------------- September 27, 1993 [Investor Address] Dear Sirs: Medi-Ject Corporation, a Minnesota corporation (the "Company") agrees with ____________, a _______ corporation ("Investor"), as follows: 1. Authorization of Issue of Shares. The Company has authorized the -------------------------------- issue and sale of up to 3,000,000 shares of its present class of Preferred Stock, such shares to be constituted as a new series of Preferred Stock, and being designated as the "Series B Convertible Preferred Stock" (herein referred to as the "Series B Preferred Shares"). The relative powers, preferences and rights and qualifications, limitations and restrictions of the Series B Preferred Shares shall be set forth in a Certificate of Designations, Preferences and Rights (the "Certificate of Designations") which shall be substantially in the form hereof attached hereto as Exhibit A. Certain capitalized terms used in this agreement (the "Agreement") are used as defined herein; references to an article or section are, unless otherwise specified, to one of the articles or sections of the Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to the Agreement. 2. Sale and Purchase Price. The Company will issue and sell to ----------------------- Investor and, subject to the terms and conditions herein set forth, Investor will purchase from the Company _______ Series B Preferred Shares at the purchase price of $1.00 per share (the "Shares"). 3. Closing. The closing of the sale of the Shares to Investor shall ------- take place at the offices of Dorsey & Whitney, 220 South Sixth Street, Minneapolis, Minnesota at 10:00 A.M. Minneapolis time on September 27, 1993 or such other date thereafter as shall be mutually agreeable to Investor and the Company (September 27, 1993 or such other date being herein called the "Closing Date"). At the closing, the Company shall deliver to Investor a certificate, dated the Closing Date, representing the Shares purchased by it on such date, registered in its name (or in the name of its nominee if it so specifies to the Company at least 48 hours prior to such date) against payment to the Company of the purchase price of Shares being purchased. 4. Representations and Warranties by the Company. In order to --------------------------------------------- induce Investor to enter into the Agreement and to purchase the Shares, the Company hereby represents and warrants to Investor that, except as disclosed in the attached Exhibit B: 4.1 Organization, Standing, etc. The Company is a corporation --------------------------- duly organized, validly existing and in good standing under the laws of the state of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being conducted. The Company has the requisite corporate power and authority to issue the Shares, the Option, the shares of its common stock into which the Shares are convertible (the "Conversion Shares") and to otherwise perform its obligations under the Agreement. 4.2 Governing Instruments. The copies of the articles of --------------------- incorporation, as amended by the Certificate of Designations (the "Articles of Incorporation") and bylaws of the Company which have been delivered to legal counsel for Investor prior to the execution of the Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and bylaws of the Company in effect as of the date of the Agreement. 4.3 Subsidiaries, Etc. The Company does not have any direct or ----------------- indirect ownership interest in any corporation, partnership, joint venture, association or other business enterprise. 4.4 Qualification. The Company is duly qualified, licensed or ------------- domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. 4.5 Financial Statements. Attached to the Agreement as Exhibit -------------------- C are (a) a balance sheet, as of July 31, 1993 for the Company together with -2- the related statements of operations and shareholders equity for the seven months then ended, which balance sheet and related statements are unaudited. Such financial statements (i) are in accordance with the books and records of the Company, (ii) present fairly the financial condition of the Company at the balance sheet date and the results of its operations for the period therein specified, and (iii) have, in all material respects, been prepared in accordance with generally accepted accounting principles and (b) a consolidated balance sheet of the Company for the twelve-month fiscal periods ending March 31, 1991 and 1992 and the nine month fiscal period ending December 31, 1992, and the consolidated statements of income and retained earnings and changes in financial position for the same periods, all as reported on by the Company's independent certified public accountants. Without limiting the generality of the foregoing, the balance sheet or notes thereto disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at July 31, 1993, which, individually or in the aggregate, are material and which in accordance with generally accepted accounting principles would be required to be disclosed in such balance sheet, and includes appropriate reserves for all taxes and other liabilities accrued as of such dates but not yet payable. 4.6 Tax Returns and Audits. All required federal, state and ---------------------- local tax returns or appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of the Company's tax returns has been audited by governmental authorities in a manner to bring such audits to the Company's attention. The Company does not have any tax liabilities except those reflected on Exhibit C or those incurred in the ordinary course of business since July 31, 1993. 4.7 Changes, Dividends, etc. Except for the transactions ----------------------- contemplated by the Agreement, since July 31,1993, the Company has not: (i) incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its assets except in the ordinary course of business; (vi) suffered any physical damage, -3- destruction or loss (whether or not covered by insurance) materially and adversely affecting the properties, business or prospects of the Company; (vii) entered into any transaction other than in the ordinary course of business; (viii) encountered any labor difficulties or labor union organizing activities; (ix) issued or sold any shares of capital stock or other securities or granted any options, warrants, or other purchase rights with respect thereto other than pursuant to the Agreement; (x) made any acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (xi) increased the compensation payable, or to become payable, to any employees, or made any bonus payment or similar arrangement with any employees or increased the scope or nature of any fringe benefits provided for its employees; or (xi) agreed to do any of the foregoing other than pursuant hereto. There has been no material adverse change in the financial condition, operations, results of operations or business of the Company since July 31, 1993 (other than continued losses from operations that the Company has incurred, which are generally consistent with its historical losses from operations since December 31, 1992). 4.8 Title to Properties and Encumbrances. The Company has good ------------------------------------ and marketable title to all of its tangible properties and assets, including without limitation the properties and assets reflected on Exhibit C and the properties and assets used in the conduct of its business, except for property disposed of in the ordinary course of business since July 31, 1993, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on Exhibit C or the notes thereto, (b) liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, or (c) those which do not materially affect the value of or interfere with the use made of such properties and assets. 4.9 Conditions of Properties. The plant, offices and equipment ------------------------ of the Company have been kept in good condition and repair in the ordinary course of business. 4.10 Litigation; Governmental Proceedings. There are no legal ------------------------------------ actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business, and the Company is not aware of any facts which are likely to result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. The Company has not been threatened with any action or proceeding under any business or zoning ordinance, law or regulation. 4.11 Compliance With Applicable Laws and Other Instruments. ----------------------------------------------------- The business and operations of the Company have been and are being conducted in all material respects in accordance with all material, applicable federal, -4- state and local laws, rules and regulations, with respect to which failure to so comply would have a material adverse impact upon the Company's business or operations. Neither the execution and delivery of the Agreement and the issuance of the Shares nor fulfillment of nor compliance with the terms and provisions hereof or thereof or of the Series B Preferred Shares, including, without limitation, the provisions of the Certificate of Designations, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, the Articles of Incorporation or By-Laws of the Company or any mortgage, agreement, instrument, order, judgement, decree, statute, law, rule or regulation to which the Company or its property is subject. The Company is not in default under any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money or in arrears with respect to any dividends upon any shares of its preferred stock, and there exists no default by the Company under any of its contracts or agreements, or under any instrument by which the Company is bound, which materially and adversely affects its business, operations or financial condition. 4.12 Governmental Consent, Etc. The Company is not required to ------------------------- obtain any consent, approval or authorization of, or to make any declaration or filing with any governmental authority as a condition to or in connection with the valid execution, delivery and performance of the Agreement and the valid offer, issue, sale or delivery of the Shares, or the performance by the Company of its obligations in respect thereof. 4.13 Shares and Conversion Shares. The Shares, when issued and ---------------------------- paid for pursuant to the terms of the Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12 or in the Company's Articles of Incorporation. The Series B Preferred Shares will rank superior to the shares of each other series of preferred stock of the Company now outstanding with respect to priority in payment of dividends and the distribution of assets upon any liquidation of the Company. The Option granted pursuant to the Option Agreement is duly authorized, validly granted and outstanding, fully paid and free and clear of all pledges, liens, and encumbrances and restrictions, except as set forth in article 12. The Conversion Shares have been reserved for issuance and, when issued upon conversion of the Shares, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in article 12. 4.14 Securities Laws. Based in part upon the representations --------------- in article 5, no consent, and assuming full compliance with article 12, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of the Agreement or the offer, issuance, sale or delivery of the Shares or the Option to Investor, other than the qualification thereof, if -5- required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. Under the circumstances contemplated by the Agreement, the offer, issuance, sale and delivery of the Shares, the Option and the Conversion Shares will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). 4.15 Patents and Other Intangible Rights. To the best of its ----------------------------------- knowledge, the Company (a) owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, manufacture, operation and sale of all products sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any confidential information or trade secrets of others. 4.16 Capital Stock. At the date hereof, the authorized capital ------------- stock of the Company consists of 10,000,000 common shares, $.01 par value, of which 237,685 shares are issued and outstanding, 1,600,000 shares of Series A Convertible Preferred Stock, $.01 par value, of which 1,409,376 shares are issued and 3,000,000 shares of Series B Convertible Preferred Stock, of which no shares are issued. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than the Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. Neither the offer nor the issuance or sale of the Shares constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. No holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company; provided, however, that nothing in this section 4.16 shall affect, alter or diminish any right granted to Investor in this Agreement. -6- 4.17 Outstanding Debt. The Company does not have any material ---------------- indebtedness incurred as the result of a direct borrowing of money, including, but not limited to, indebtedness with respect to trade accounts, except as set forth in Exhibit C or the notes thereto. The Company is not in default in the payment of the principal of or interest or premium on any such indebtedness, and no event has occurred or is continuing under the provisions of any instrument, document or agreement evidencing or relating to any such indebtedness which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 4.18 Schedule of Assets and Contracts. Prior to the execution -------------------------------- of the Agreement, the Company has delivered to legal counsel for Investor a schedule of assets and contracts, specifically referring to this section 4.18 and listing the following items: (a) Schedule 1: a true and complete description of all real properties owned by the Company; (b) Schedule 2: each indenture, lease, sublease, license or other instrument under which the Company claims or holds a leasehold interest in real property; (c) Schedule 3: each lease of personal property involving payments remaining to or from the Company in excess of $10,000; (d) Schedule 4: each written or oral contract, agreement, subcontract, purchase order, commitment or arrangement involving payments remaining to or from the Company in excess of $10,000 and each other agreement material to the Company's business to which the Company is a party or by which it is bound, under which full performance (including payment) has not been rendered by any party thereto; (e) Schedule 5: any collective bargaining agreements, employment agreements, consulting agreements, noncompetition agreements, nondisclosure agreements, executive compensation plans, profit sharing plans, bonus plans, deferred compensation agreements, employee pension retirement plans and employee benefit stock option or stock purchase plans and other employee benefit plans, entered into or adopted by the Company; (f) Schedule 6: all bank accounts (or accounts with other financial institutions) maintained by the Company, together with the persons authorized to make withdrawals from such accounts; (g) Schedule 7: the name of each employee of the Company who is paid a remuneration of $50,000 or more per year, each such employee's -7- job title, and a complete description of the duties and services performed by such employee; (h) Schedule 8: each royalty and/or license agreement material to the Company's business; (i) Schedule 9: list of all patents, patent applications, trademarks, trademark applications, and trade names held by, or filed in the name of, the Company; (j) Schedule 10: list of distributors of the Company's products who individually contribute in excess of 5% of the Company's net sales, and any market studies performed by or on behalf of the Company within the last two years; and (k) Schedule 11: list of all holders of equity in the Company (assuming the exercise of all options and warrants currently outstanding), each such person or entity's respective shareholdings (on a fully diluted basis), and the terms of any outstanding options and/or warrants. Prior to the Closing Date, the Company shall provide legal counsel for Investor with a true and complete copy of each document referred to on such schedules. The Company has in all material respects substantially performed all material obligations required to be performed by it to date and is not in default in any material respect under any of the material contracts, agreements, leases, documents, commitments or other arrangements to which it is a party or by which it is otherwise bound. All instruments referred to in the schedules described in this section 4.18 are in effect and enforceable according to their respective terms, and there is not under any of such instruments any existing material default or event of default or event which, with notice or lapse of time or both, would constitute an event of default thereunder. All parties having material contractual arrangements with the Company are in substantial compliance therewith and none are in material default in any respect thereunder. 4.19 Corporate Acts and Proceedings. The execution and ------------------------------ delivery of the Agreement and the adoption of the Certificate of Designations have been duly authorized by all necessary corporate action on behalf of the Company, has been duly executed and delivered by authorized officers of the Company, and, with respect to the Agreement, is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors' rights generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. All corporate action necessary to the -8- authorization, creation, reservation, issuance and delivery of the Shares, the Option and the Conversion Shares has been taken by the Company, or will be taken by the Company on or prior to the Closing Date. 4.20 Accounts Receivable. To the extent that they exceed the ------------------- reserves for doubtful accounts set forth in Exhibit C, the accounts receivable which are reflected in Exhibit C and all accounts receivable of the Company which have arisen since July 31, 1993 (except such accounts receivable as have been collected since July 31, 1993) are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were sold and delivered in conformity with the applicable purchase orders, agreements and specifications. Such accounts receivable are subject to no valid defense or offsets except routine customer complaints or warranty demands of an immaterial nature. 4.21 Inventories. The inventories of the Company which are ----------- reflected in Exhibit C and all inventory items which have been acquired since July 31, 1993 consist of raw materials, supplies, work-in-process and finished goods of such quality and quantities as are, to the best of the Company's knowledge, currently usable or salable in the ordinary course of its business. 4.22 Purchase Commitment and Outstanding Bids. No material ---------------------------------------- purchase commitment of the Company is in excess of normal, ordinary and usual requirements of its business, or was made at any price in excess of the then current market price, or contains terms and conditions more onerous than those usual and customary in the industry. There is no outstanding material bid, sales proposal, contract or unfilled order of the Company which (a) will, or could if accepted, require the Company to supply goods or services at a cost to the Company in excess of the revenues to be received therefrom, or (b) quotes prices which do not include a mark-up over reasonably estimated costs consistent with past mark-ups on similar business or market conditions current at the time. 4.23 Insurance Coverage. There are in full force policies of ------------------ insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 4.24 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or Investor for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by the Agreement. The Company will indemnify and hold Investor harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by the Agreement. -9- 4.25 Conflicts of Interest. No officer, director or --------------------- shareholder of the Company or any affiliate (as such term is defined in Rule 405 under the Securities Act) or any such person has any direct or indirect interest (a) in any entity which does business with the Company, (b) in any property, asset or right which is used by the Company in the conduct of its business, or (c) in any contractual relationship with the Company other than as an employee. For the purpose of this section 4.25, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market or any payment required to be made by the Company in an amount less than $2,500 annually. 4.26 Licenses. The Company possesses from the appropriate -------- agencies, commissions, boards and/or government bodies and authorities, whether state, local or federal, all licenses, permits, authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the business currently conducted by it, and (b) if not possessed by the Company would have a material adverse impact on the Company's business. 4.27 Disclosure. The Company has not knowingly withheld from ---------- Investor any material facts relating to the assets, business, operations, financial condition or prospects of the Company taken as a whole. No representation or warranty in the Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to Investor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 4.28 Registration Rights. Other than under this Agreement, the ------------------- Company has not agreed to register any of its authorized or outstanding securities under the Securities Act. 4.29 Retirement Plans. The Company does not have any ---------------- retirement plans in which any employees of the Company participates that is subject to any provisions of the Employee Retirement Income Security Act of 1974 and of the regulations adopted pursuant thereto ("ERISA"). 4.30 Environmental and Safety Laws. To the best of the ----------------------------- Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 4.31 Employees. To the best of the Company's knowledge, no --------- officer of the Company or employee of the Company (whose annual compensation -10- is in excess of $50,000) has any plans to terminate his or her employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and the Company has not encountered any material labor difficulties. To the best of the Company's knowledge, the Company does not have any worker's compensation liabilities, except those reflected on Exhibit B. 4.32 Absence of Restrictive Agreements. To the best of the --------------------------------- Company's knowledge, no employee of the Company is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company. To the best of the Company's knowledge, no employer or former employer of any employee of the Company has any claim of any kind whatsoever in respect of any of the rights described in section 4.15 of the Agreement. 5. Representations of Investor. Investor represents that: --------------------------- 5.1 Investment Intent. The Shares being acquired are being ----------------- purchased for investment for its own account and not with the view to, or for resale in connection with, any distribution or public offering thereof; provided -------- that the disposition of Investor's property shall at all times be and remain within its control and subject to the provisions of the Agreement. Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by Investor. Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. Investor understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") and that in any event Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a two-year period after it has acquired such securities. Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 5.2 Qualification as an Accredited Investor, Etc. Investor -------------------------------------------- qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act. Investor acknowledges that the Company has made available to it at a reasonable time prior to the execution of the Agreement the -11- opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by the Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to it. Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 5.3 Acts and Proceedings. The Agreement has been duly -------------------- authorized by all necessary corporate action, has been duly executed and delivered and the performance hereof by Investor is within its corporate powers. 5.4 No Brokers or Finders. No person, firm or corporation has --------------------- or will have, as a result of any act or omission by Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by the Agreement. Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by the Agreement. 6. Conditions of Investor's Obligation to Purchase the Shares on the ----------------------------------------------------------------- Closing Date. The obligation to purchase and pay for the Shares which Investor - ------------ has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on such Closing Date of the conditions set forth in this article 6. In the event that any such condition is not satisfied to the satisfaction of Investor, it shall not be obligated to proceed with the purchase of the Shares. 6.1 No Errors, etc. The representation and warranties of the -------------- Company under the Agreement shall be true in all material respects as of the Closing Date with the same effect as though made on and as of the Closing Date. 6.2 Compliance with Agreement. The Company shall have ------------------------- performed and complied with all agreements or conditions required by the Agreement to be performed and complied with by it prior to or as of the Closing Date. 6.3 No Event of Default. There shall exist at the time of such ------------------- closing no condition or event which would constitute an Event of Default or which, after notice or lapse of time or both, would constitute an Event of Default. 6.4 Certificate of Officers. The Company shall have delivered ----------------------- a certificate, dated the Closing Date, executed by the President of the Company and certifying to the satisfaction of the conditions specified in sections 6.1, 6.2 and 6.3. -12- 6.5 Opinion of the Company's Counsel. The Company shall have -------------------------------- delivered an opinion, satisfactory in form and substance to Investor, of Dorsey & Whitney, counsel for the Company, dated the Closing Date and in the form of Exhibit D attached hereto. 6.6 Amendment of Articles of Incorporation. The Articles of -------------------------------------- Incorporation of the Company as in effect on the date hereof shall have been amended and supplemented by the Certificate of Designations and, except for the provisions of the Certificate of Designations, such Articles of Incorporation shall not have been amended, modified or supplemented in any respect except as consented to by Investor in writing. 6.7 Purchase Permitted by Applicable Law. The purchase of and ------------------------------------ payment for the Shares to be purchased by Investor on the Closing Date, on the terms and conditions herein provided (including the use of the proceeds of the issuance of the Shares by the Company) shall not violate any applicable law or governmental regulation and shall not subject Investor to any tax, penalty or liability, or require Investor to make any filings or to register or qualify, under or pursuant to any applicable law or governmental regulation, and Investor shall have received such certificates or other evidence as it may reasonably request to establish compliance with this condition. 6.8 No Adverse Action or Decision. There shall be no action, ----------------------------- suit, investigation or proceeding pending, or, to the best of the Company's knowledge, threatened (by any public official or governmental authority), against or affecting the Company, any of its properties or rights, or any of its employees, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect transactions contemplated by the Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions. 6.9 Approvals and Consents. The Company shall have duly ---------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of and shall have made all filings and effected all registrations and qualifications with, all Federal, State and local governmental authorities necessary for the issuance of the Shares, and all thereof shall be in full force and effect at the time of closing and shall be effective to permit such issuance, and Investor shall have received such certificates or other evidence as it may reasonably request to establish compliance with this condition. 6.10 Proceedings. All corporate and other proceedings to be ----------- taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in substance and form to Investor and its legal counsel, and Investor and its legal counsel shall -13- have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 6.11 Supporting Documents. Investor shall have received the -------------------- following: (a) A copy of resolutions of the Board of Directors of the Company certified by the secretary of the Company authorizing and approving the execution, delivery and performance of the Agreement; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Agreement and further certifying that the Articles of Incorporation and By-Laws of the Company delivered to legal counsel for Investor at the time of the execution of the Agreement have been validly adopted and have not been amended or modified; and (c) Such additional supporting documentation and other information with respect to the transaction contemplated hereby as legal counsel for Investor may reasonably request. 6.12 Qualification Under State Securities Laws. All ----------------------------------------- registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of the Agreement and the offer, sale, issuance and delivery of the Shares to Investor at the Closing shall have been obtained. 6.13 Proceedings and Documents. All corporate and other ------------------------- proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to legal counsel for Investor. 6.14 Employee Shareholder Agreements. Each of Dr. Franklin ------------------------------- Pass and Dirk Dunlap shall have executed a shareholder agreement (the "Shareholder Agreement") with each of the Company, Investor, Cherry Tree Ventures I Partnership Liquidating Trust and Cherry Tree Ventures II, a Minnesota limited partnership (together, the Cherry Tree Ventures I Partnership Liquidating Trust and Cherry Tree Ventures II are referred to herein as "CTV"), which provides the Company a first right of refusal and, if this right is not so exercised by the Company, provides CTV and Investor, on a pro rata basis, in proportion to their respective shareholdings (with preferred shares counted on an as-if-converted basis), a right of second refusal on any proposed disposition or transfer by them of any securities issued by the Company to any person or entity (other than transfers to members of a shareholder's immediate family, transfers by a shareholder for estate planning purposes, a transfer to a trust for the benefit of such shareholder or for the -14- benefit of a member of such shareholder's immediate family and transfers upon the death of a shareholder), all as set forth more fully in the Shareholder Agreement. 6.15 Employment Agreements. Each of the Chairman of the Board --------------------- and President of the Company shall have entered into new employment agreements with the Company (which employment agreements shall be in form and substance reasonably satisfactory to Investor). 6.16 Bonus Program. The Board of Directors shall have approved ------------- the adoption of a bonus share program to reward key employees with stock options and/or cash. The terms of such program shall be in form and substance reasonably satisfactory to Investor and no amendment or revision to such program shall become effective without the approval of the Board of Directors. 6.17 Operating Plans. The delivery to Investor, and receipt of --------------- Investor's approval with respect to actual and forecasted income and cash flow statements and balance sheets for the twelve month period ending December 31, 1993, and a forecasted income and cash flow statements and balance sheets for the fiscal years ending December 31, 1994, 1995, 1996 and 1997. 6.18 Co-Sale Agreement. Each of Investor and CTV shall have ----------------- entered into a Co-Sale Agreement (the "Co-Sale Agreement"), in the form of the attached exhibit E. 6.19 Development Agreement. Each of Investor and the Company --------------------- shall have executed that certain Technology License and Co-Development Agreement, (the "Development Agreement") simultaneous with the Closing of the Shares contemplated hereby. 7. Affirmative Covenants of the Company. Subject to the provisions ------------------------------------ of article 14, (and so long as the Option shall remain outstanding and not fully exercised or Investor shall beneficially hold in excess of 5% (determined on an as converted basis) of the capital stock of the Company, considered on a fully diluted basis), the Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its ------------------- corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 7.2 Books of Account and Reserves. The Company will keep books ----------------------------- of record and account in which full, true and correct entries are made of all of its and their respective dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants selected by the Board of Directors of the Company who are -15- "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). 7.3 Furnishing of Financial Statements and Information. The -------------------------------------------------- Company will deliver to Investor: (a) as soon as practicable, but in any event within 30 days after the close of each month, an unaudited consolidated balance sheet of the Company as of the end of such month, together with the related statements of consolidated operations for each month; (b) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a statement of income and a statement of changes in financial position of the Company for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail, and subject to changes resulting from year-end adjustments; (c) as soon as practicable, but in any event within 90 days after the end of each fiscal year statement of income and a consolidated statement of changes in financial position of the Company for such year, and a balance sheet of the Company as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and together with an opinion directed to the Company of independent certified public accountants of recognized standing selected by the Company; (d) within 15 days after the Company learns of the commencement or written threats of the commencement of any material suit, legal or equitable, or of any material administrative, arbitration or other proceeding against the Company or its business, assets or properties, written notice of the nature and extent of such suit or proceedings; (e) promptly after the submission thereof to the Company, copies of all reports and recommendations submitted by independent public -16- accountants in connection with any annual, interim or special audit of the accounts of the Company made by such accountants; (f) promptly upon transmission thereof, copies of all reports, notices, financial statements, proxy statements, registration statements and notifications filed by it with the Commission pursuant to any act administered by the Commission or furnished to shareholders of the Company or to any national securities exchange; (g) concurrently with the delivery in each year of the financial statements referred to in section 7.3(c), a statement and report signed by the independent public accountants who certified such financial statements to the effect that they have read the Agreement and that in the course of the audit upon which such certificate was based they have become aware of no condition or event which constituted an Event of Default under article 11 or which, after notice or lapse of time or both, would constitute or if such accountants did become aware of such condition or event, specifying the nature and period of existence thereof; (h) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company as is available to the Company and as from time to time Investor may reasonably request. 7.4 Inspection. The Company covenants that it will permit any ---------- persons or entitles designated in writing by Investor to visit and inspect at its expense any of the properties, corporate books and financial records of the Company and its subsidiaries (and to make photocopies thereof or make extracts therefrom), and to discuss the affairs, finances and accounts of any such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as Investor may reasonably request. Investor shall maintain, and shall require its representatives to maintain, all information obtained from the Company pursuant to section 7.3, this section 7.4, and section 7.5 on a confidential basis, and shall only disclose such information to its and its affiliates, officers, directors, agents and/or employees who shall be advised by Investor of such confidentiality obligation. 7.5 Preparation and Approval of Budgets. At least one month ----------------------------------- prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. The Company will, simultaneously with the submission thereof to the Board of Directors, deliver a copy of such annual plan to Investor. -17- 7.6 Payment and Taxes and Maintenance of Properties. The Company ----------------------------------------------- will: (a) pay and discharge promptly, or cause to be paid and discharged promptly when due and payable, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, other than such taxes, assessments, charges or levies as the Company is contesting in good faith through appropriate proceedings; and (b) maintain and keep, or cause to be maintained and kept its properties in good repair, working order and condition. 7.7 Insurance. The Company will obtain and maintain in force --------- such property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be necessary or appropriate to protect the Company from the insurable hazards or risks associated with the conduct of the Company's business. The Company's executive officers shall periodically report to the Board of Directors on the status of such insurance coverage. All such insurance policies shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors. All such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 7.8 Payment of Indebtedness and Discharge of Obligations. To the ---------------------------------------------------- fullest extent reasonably possible, the Company will make timely payment of all amounts due under, and will observe, perform and discharge all of the material covenants, conditions and obligations which are imposed on it by, any and all indentures and other agreements securing or evidencing all indebtedness resulting from bank or other direct borrowings by the Company or pursuant to which such indebtedness is issued. 7.9 Representation on Board of Directors; Directors' and ---------------------------------------------------- Shareholders' Meetings. From and after the Closing Date, (i) the Company's - ---------------------- Articles of Incorporation shall provide for an authorized Board of Directors of not more than nine (9) members, (ii) at least one (1) of the Company's directors shall at all times be a person designated by Investor and who shall initially be Geoffrey Guy ("Guy"), so long as Investor owns any Shares or Conversion Shares, and so long as -18- Guy shall be an employee of Investor, (iii) in the event of the death, resignation or removal of any director so designated by Investor, Investor shall be entitled to designate such director's successor, (iv) the Company agrees that in submitting to the Company's shareholders or Board of Directors the names and nominees for election as directors or in filling interim vacancies, it will use its best efforts to cause any person or persons designated pursuant to clauses (ii) or (iii) above, and any person or persons designated to be elected upon exercise of the Option, as a director and (v) at least a majority of the Company's directors shall at all times be persons who are not in the employment of the Company. Failure of any person designated by Investor to be elected pursuant to the foregoing provisions, shall be an Event of Default within the meaning of article 11. On the Closing Date, Investor will own approximately 20% of the issued and outstanding capital stock of the Company on a fully diluted basis. Upon any full or partial exercise of the Option, Investor shall be entitled to designate such number of members of the Board of Directors equal to Investor's percentage equity interest (determined on "as converted" and fully diluted basis) in the equity of the Company (any hundredth fractional interest to be rounded up to the next higher tenth fractional interest) times the number of directors who shall constitute the Board following such exercise, rounded to the nearest whole number. The Company agrees, as a general practice, to hold meetings of its Board of Directors at least once each calendar quarter, and during each year to hold its annual meeting of shareholders on or approximately on the date provided in its By-Laws. Investor shall be provided notice of, and the right to have its representatives (other than its designated director) attend as observers, all meetings of the Company's Board of Directors. The Company shall reimburse Investor for the reasonable out-of- pocket travel expenses incurred by Investor for the directors designated as provided in the first paragraph of this section 7.9 in connection with attending meetings or otherwise fulfilling their fiduciary responsibilities as directors, and shall maintain a provision in its By-Laws providing the indemnification of its directors to the full extent permitted by the law of the state of Minnesota; provided, however, in no event shall the Company be obligated to reimburse Investor for travel expenses that exceed standard "coach" travel rates for airfare between London and Minneapolis, MN. 7.10 Application of Proceeds. Unless otherwise approved by ----------------------- Investor, the net proceeds received by the Company from the sale of the Shares pursuant to the Agreement will be used substantially for general working capital purposes, including the purchase of capital equipment, advertising, marketing, inventory purchases and personal expenses, and research and development. Pending use of the proceeds in the business, they shall be deposited in a bank or banks having deposits of $150,000,000 or more, invested in certificates of deposit or repurchase agreements of a bank or banks having deposits of $150,000,000 or more, invested in money market mutual funds having assets of -19- $500,000,000 or more, or invested in securities issued or guaranteed by the United States Government. 7.11 Retirement Plans. The Company will cause each retirement ---------------- plan of the Company in which any employees of the Company participate that is subject to the provisions of ERISA to be administered in a manner consistent with those provisions of ERISA which may, from time to time, become effective and operative with respect to such plans. 7.12 Filing of Reports. The Company will, from and after such ----------------- time as it has securities registered pursuant to (S)12 of the Securities Exchange Act of 1934 or has securities registered pursuant to the Securities Act, make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who are otherwise able to take advantage of the provisions of such Rule. 7.13 Patents and Other Intangible Rights. The Company will ----------------------------------- apply for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessman operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.14 Key Man Insurance. Within 90 days of the Closing, the ----------------- Company shall seek to obtain a term life insurance policy which will pay benefits of at least $1,000,000 to the Company upon the death of Dr. Franklin Pass, if such insurance is readily available on commercially reasonable terms and available at reasonably affordable rates in light of the Company's then current financial condition. 7.15 Subsidiaries. If the Company establishes or maintains any ------------ subsidiary corporations, it shall cause each such subsidiary corporation to comply with the covenants set forth in this article 7. -20- 7.16 Preemptive Rights. ----------------- (a) Other than with respect to shares of the Company's capital stock that may be issued pursuant to option exercises under the Company's stock option plans, and other than with respect to those warrants, options and convertible promissory notes listed as outstanding on Schedule 11 attached hereto, Investor, in case of the proposed issuance by the Company of, or the proposed granting by the Company of rights or options to purchase, any additional shares of capital stock of the Company, shall, if the issuance of the shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the voting rights of Investor in any respect, have the right, in accordance with the terms and conditions of this section 7.16, to purchase such additional shares in such proportions as shall be determined in paragraph 7.16(b). (b) The preemptive right provided for in paragraph 7.16(a) shall entitle Investor to purchase such number of the shares of capital stock of the Company to be offered or optioned for sale as nearly as practicable in such proportions as would, if such preemptive rights were exercised, preserve the relative voting rights of Investor and at a price or prices not less favorable than the price or prices at which such additional shares are proposed to be offered for sale to others, without deduction of such reasonable expenses of and compensation for the sale, underwriting or purchase of such shares by underwriters or dealers as may lawfully be paid by the Company. (c) The Board of Directors shall cause to be given to Investor, a written notice setting forth the time within which and the terms and conditions upon which Investor may purchase such additional shares or other securities. Such notice shall be given at least twenty days prior to the expiration of the period during which Investor shall have the right to purchase such shares. 8. Negative Covenants of the Company. Subject to the provisions of --------------------------------- article 14 (and, with respect to section 8.2 below, share repurchases effected by the Company pursuant to the Shareholder Agreement) the Company will be limited and restricted as follows: 8.1 Consolidation, Merger, Acquisition, etc. The Company will --------------------------------------- not, nor will it permit any subsidiary to, sell, lease, license or otherwise dispose of all or substantially all of its assets or any asset or assets which have a material affect upon the business assets or financial condition of the Company, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it without the approval of Investor; provided, however, that a subsidiary of the Company may be merged with the Company or another subsidiary of the Company without the approval of Investor. 8.2 Dividends on or Redemption of Junior Stock. The Company ------------------------------------------ will not, without the approval of Investor, declare or pay any cash -21- dividend on its common shares, or make any other distribution on any common shares or all other shares of stock of any other class of the Company at any time created and issued ranking junior to the Series B Preferred Shares with respect to the rights to receive dividends and the right to the distribution of assets upon liquidation, dissolution or winding up of the Company ("Junior Stock"), other than those payable solely in shares of Junior Stock, or, except pursuant to the terms of the Shareholder Agreement, purchase, redeem or otherwise acquire for any consideration (other than in exchange for or out of the net cash proceeds of the contemporaneous issue or sale of other shares of Junior Stock or debt securities convertible into other shares of Junior Stock), or set aside as a sinking fund or other fund for the redemption or repurchase of any shares of Junior Stock, rights or options to purchase shares of Junior Stock. 8.3 Other Restrictions. The Company will not, nor will it ------------------ permit any subsidiary to, without the prior written consent of Investor: (a) guarantee, endorse or otherwise be or become contingently liable in excess of $10,000 in connection with the obligations, securities or dividends of any person, firm, association or corporation other than the Company or a subsidiary, except that the Company may endorse negotiable instruments for collection in the ordinary course of business; (b) make loans or advances in excess of $10,000 to any person (including without limitation to any officer, director or shareholder of the Company or any subsidiary of the Company), firm, association or corporation, except (i) advances to suppliers made in the ordinary course of business, and (ii) loans to employees to assist such employees in relocating to the Minneapolis-St. Paul area, as approved by the Company's Board of Directors; (c) pay compensation, whether by way of salaries, bonuses, participation in pension or profit sharing plans, fees under management contracts or for professional services or fringe benefits to any officer in excess of amounts fixed by the Board of Directors of the Company prior to any payment to such officer; (d) alter the authorized capital stock of the Company as set forth in the Company's Articles of Incorporation whether (i) by the authorization of additional amounts, classes or series of such capital stock, or (ii) by the authorization of any new class of capital stock, or (iii) by way of any stock split or combination, or (iv) altering the rights and/or preferences of the Series B Preferred Shares; (e) change its fiscal year; or (f) make any material change in the nature of its business as carried on at the date of the Agreement. -22- 9. Conversion of Shares. -------------------- 9.1 Conversion of Shares. Investor may, at its option, from and -------------------- after the occurrence of such events as are set forth in the relevant provisions of the Company's Articles of Incorporation, convert the Shares, or any thereof, into Conversion Shares at the rate and upon the terms and conditions and subject to the adjustments set forth in the Company's Articles of Incorporation. Each Share shall be automatically converted into Conversion Shares on such terms and conditions as are set forth in the Company's Articles of Incorporation. 9.2 Stock Fully Paid; Reservation of Shares. The Company --------------------------------------- covenants and agrees that all Conversion Shares that may be issued upon the exercise of the conversion privilege referred to in section 9.1 will, upon issuance in accordance with the terms of the Company's Articles of Incorporation be fully paid and nonassessable and free from all taxes, liens and charges (except for taxes, if any, upon income and applicable transfer taxes) with respect to the issue thereof, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of its common shares for the purpose of issue upon the exercise of such conversion privilege. 9.3 Adjustment of Number of Shares and Conversion Price. The --------------------------------------------------- number of common shares issuable upon conversion of the Shares and the conversion price with the respect thereto shall be subject to adjustment from time to time as set forth in the Company's Articles of Incorporation. 10. Registration Rights. ------------------- 10.1 Required Registration. If, after one year from the Closing --------------------- Date, the Company receives a written request from Investor, the Company shall prepare and file a registration statement under the Securities Act covering the Purchased Shares (as defined in section 15.9 hereof) which are the subject of such request and shall use its best efforts to cause such registration statement to become effective. Notwithstanding the foregoing, the Company may (a) elect not to proceed with such registration if the price at which such shares are to be sold pursuant to such registration statement is less than $4.00 per share (as adjusted for any stock splits, stock dividends or other corporate reorganizations), or (b) postpone the effective date of any such registration to a date which is no more than 180 days after the effective date of any registration filed by the Company prior to or within thirty (30) days after the receipt of the written request from Investor. The Company shall be obligated to prepare, file and cause to become effective only one (1) registration statement pursuant to this section 10.1; notwithstanding the foregoing, Investor may require, pursuant to this section 10.1, the Company to file any number of registration statements on Form S-3 (or any successor form subsequently promulgated by the Commission as a replacement for Form S-3) if such form is then -23- available for use by the Company and Investor. In the event that (a) Investor determines for any reason not to proceed with a registration at any time before the registration statement has been declared effective by the Commission, and Investor requests the Company to withdraw such registration statement, if theretofore filed with the Commission, is withdrawn with respect to the Purchased Shares covered thereby, and (b) Investor agrees to bear its own expenses incurred in connection therewith and to reimburse the Company for the expenses incurred by it attributable to the registration of such Purchased Shares, then Investor shall not be deemed to have exercised its right to require the Company to register securities pursuant to this section 10.1. Without the written consent of Investor, neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgement of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Purchased Shares or require the exclusion of any portion of the Purchased Shares to be registered. 10.2 Incidental Registration. Each time the Company shall ----------------------- determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for money of any of its securities by it or any of it security holders, the Company will give written notice of its determination to Investor. Upon written request of Investor given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all shares of Purchased Shares for which Investor has so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by Investor; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of Investor should Investor wish to proceed with a public offering of its Purchased Shares provided Investor agrees to bear all expenses in excess of $25,000 incurred by the Company as the result of such registration after the Company has decided not to proceed. If any registration pursuant to this section shall be underwritten in whole or in part, the Company may require that the Purchased Shares requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event that the Purchased Shares requested for inclusion pursuant to this section would constitute more than twenty-five percent (25%) of the total number of shares to be included in a proposed underwritten public offering, and if in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Purchased Shares originally covered by a request for registration would reduce the number of -24- shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Purchased Shares otherwise to be included in the underwritten public offering may be reduced pro rata among all holders thereof requesting such registration; provided, however, that after any such required reduction the Purchased Shares to be included in such offering shall constitute at least twenty-five percent (25%) of the total number of shares to be included in such offering. Those shares of Purchase Shares which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 60 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten pubic offering. 10.3 Registration Procedures. If and whenever the Company is ----------------------- required by the provisions of section 10.1 or 10.2 to effect the registration of any Purchased Shares under the Securities Act, the Company will: (a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed six (6) months; (c) furnish to Investor, to the extent it is participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Investor and the underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Investor may reasonably request within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify Investor promptly and confirm such advice in writing: -25- (i) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement or post-effective amendment to the registration statement has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Purchased Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threat of any proceeding for such purpose, and (iv) of the existence of any fact which results in the registration statement, the prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not misleading; (f) prepare and file with the Commission, promptly upon the request of Investor, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Investor (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Purchased Shares by Investor; (g) prepare and promptly file with the Commission and promptly notify Investor of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the 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, in the light of the circumstances in which they were made, not misleading; (h) advise Investor, promptly after it shall receive no or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for the purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal of such stop order should be issued; -26- (i) not file any amendment or supplement to such registration statement or prospectus to which Investor shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (j) enter into such customary agreements and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Purchased Shares, whether or not an underwriting agreement is entered into and whether or not the Purchased Shares are to be sold in an underwritten offering. 10.4 Expenses. With respect to each inclusion of Purchased -------- Shares in a registration statement pursuant to section 10.2 (except as otherwise provided in section 10.2 with respect to registrations terminated by the Company), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees (or, if applicable, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which such securities are required to be listed), printing expenses and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or Investor (as a selling security holder) are required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the pubic offering, if any, and all legal fees and disbursements and other expenses of complying with the state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified; provided, however, that nothing contained herein shall be deemed to require the Company to consent to general service of process in any state in order to qualify its securities for sale therein. With respect to any registration, including registrations pursuant to Form S-3, requested pursuant to section 10.1 (except as otherwise provided in such section with respect to registrations voluntarily terminated at the request of Investor and except with respect to any underwriter's expense on any registration using Form S-3 that is underwritten), the Company shall bear all fees, costs and expenses including, but not limited to, those listed above. Notwithstanding anything to the contrary contained herein, fees and disbursements of counsel and accountants for Investor along with any commissions and transfer taxes owing by Investor shall be borne by Investor. 10.5 Indemnification. In the event that any Purchased Shares --------------- are included in a registration statement under sections 10.1 or 10.2: -27- (a) The Company will indemnify Investor and hold Investor harmless pursuant to the provisions of this article and will indemnify any underwriter (as defined in the Securities Act) for Investor and each person, if any, who controls Investor or such underwriter within the meaning of the Securities Act, from and against any and all losses, claims, damages, liabilities, costs and expenses (including, but not limited to all legal or other expenses reasonably incurred by it in connection with investigating or defending any loss, claim, damage, liability, cost and expense and any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the prior written consent of the Company) to which Investor and/or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are 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, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable to Investor to the extent that any such loss, claims, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Investor. (b) Investor will indemnify and hold harmless the Company, any controlling person and any underwriter from and against any and all losses, claims, damages, liabilities, costs or expenses to which the Company or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities, costs or expenses are caused by any untrue, or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with information furnished by Investor. (c) Promptly after receipt by any indemnified party pursuant to the provisions of paragraph (a) or (b) of this section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said -28- paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defence thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 10.6 Registration Rights of Transferees. The registration ---------------------------------- rights granted pursuant to this article 10 shall also be for the benefit of, and enforceable by, any subsequent holder of Purchased Shares, whether or not any express assignment of such rights to any such subsequent holder is made, so long as such subsequent holder acquires at least twenty-five percent (25% ) of the Purchased Shares then outstanding. 11. Default. ------- 11.1 Events of Default. Each of the following events shall be ----------------- an event of default (an "Event of Default") for purposes of the Agreement: (a) if the Company shall default in any material respect in the due and punctual performance of any covenant or agreement in any note, bond, indenture, loan agreement, note agreement, mortgage, security agreement or other instrument evidencing or related to bank indebtedness of the Company in excess of $400,000, and such default shall continue for more -29- than the period of notice and/or grace, if any, therein specified and shall not have been waived; or (b) (i) if any representation or warranty made by or on behalf of the Company in the Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall prove to have been untrue or incorrect in any material respect as of the date of the Agreement, or (ii) if any report, certificate, financial statement or financial schedule or other instrument prepared or purported to be prepared by the Company or any officer of the Company hereafter furnished or delivered under or pursuant to the Agreement shall prove to be untrue or incorrect in any material respect as of the date it was made, furnished or delivered; or (c) if the Company defaults in the due and punctual performance or observance of any covenant contained in the Agreement, and such default continue for a period of 15 days after written notice thereof to the Company by Investor; provided, however, that an Event of Default shall not be deemed to have occurred if, at the end of such 15-day, the Company is diligently attempting to cure such default and the existence of such default is not materially adversely affecting the business or financial condition of the Company; or (d) if Investor's designee(s) to the Company's Board of Directors shall fail to be elected to the Board of Directors in the manner and under the terms and conditions set forth in section 7.9 of the Agreement. 11.2 Remedy Upon Events of Default. Upon the occurrence of an ----------------------------- Event of Default, and so long as such Event of Default continues unremedied, then, unless such Event of Default shall have been waived in the manner provided in article 15, Investor shall be entitled to designate a majority of the Board of Directors of the Company. 11.3 Notice of Defaults. When, to its knowledge, any Event of ------------------ Default has occurred or exists, the Company shall give written notice within ten (10) business days of such Event of Default to Investor. If Investor shall give any notice or take any other actions in respect of a claimed Event of Default, the Company will forthwith give written notice thereof to all other holders of Purchased Shares at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. 11.4 Suits for Enforcement. In case any one or more Events of --------------------- Default shall have occurred and be continuing, unless such Events of Default shall have been waived in the manner provided in article 15, Investor may proceed to protect and enforce its rights under this article 11 by suit in equity or action at law. It is agreed that in the event of such action, Investor shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such -30- reasonable fees and expenses of attorneys (whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals. 11.5 Remedies Cumulative. No right, power or remedy conferred -------------------- upon Investor hereunder shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any such security or now or hereafter available at law or in equity or by statute or otherwise. 11.6 Remedies Not Waived. No course of dealing between the ------------------- Company and Investor and no delay in exercising any right, power or remedy conferred hereby or by any such security or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power or remedy; provided, however, that this section shall not be construed or applied so as to negate the provisions and intent of any statute which is otherwise applicable. 12. Restriction on Transfer of Shares. --------------------------------- 12.1 Restrictions. The Shares, the Option, the Series B ------------ Preferred Shares issuable upon exercise of the Option and the Conversion Shares are only transferable pursuant to (a) a public offering registered under the Securities Act, (b) Rule 144 or Rule 144A under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) subject to the conditions specified elsewhere in this article 12, and, with respect to the Option, the terms of the Option Agreement, any other legally available means of transfer. 12.2 Legend. Each certificate representing Shares shall be ------ endorsed with the following legends: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended and all applicable state securities laws or (ii) such registration." "The securities represented by this certificate are subject to certain transfer and co-sale rights set forth in certain agreements, dated September 27, 1993, between the registered owner of such securities and certain other persons, and may not be sold, transferred or otherwise disposed of except in compliance with the terms of such agreements, a copy of which is available for inspection in the principal office of the issuer of such securities." Upon the conversion of any Shares, unless the Company receives an opinion of counsel satisfactory to the Company to the effect that a transfer of the Conversion -31- Shares may be made without registration or further restriction or transfer, or unless such Conversion Shares are being disposed of pursuant to a registration under the Securities Act, the same legend shall be endorsed on the certificate evidencing such Conversion Shares. 12.3 Removal of Legend. Other than with respect to the removal ----------------- of any legend evidencing transfer restrictions on Shares arising out of the Co- Sale or Shareholder Agreements (which removal shall be governed by the terms of such Agreements), any legend endorsed on a certificate evidencing a security pursuant to section 12.2 hereof shall be removed, and the Company shall issue a certificate without such legend to Investor (or its nominee, designee or transferee, as the case may be), if such security is being disposed of pursuant to a registration under the Securities Act or pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect or if Investor (or its designee or proposed transferee) provides the Company with an opinion of counsel satisfactory to the Company to the effect that a transfer of such security may be made pursuant to Rule 144, Rule 144A or any rule, regulation or other exemption then in effect, without registration. In addition, if Investor delivers to the Company an opinion of such counsel to the effect that no subsequent transfer of such security will require registration under the Securities Act, the Company will promptly upon such contemplated transfer deliver new certificates evidencing such security that do not bear the legend set forth in section 12.2. 13. Investor Covenant Not to Buy Shares. Other than with respect to ----------------------------------- share purchases which Investor may elect to make pursuant to the Shareholder Agreement, Investor covenants that it shall neither buy nor solicit offers to sell any shares of capital stock or any purchase rights to acquire any shares of capital stock of the Company, from any person, partnership or entity which is currently a shareholder of the Company on the date of this Agreement until the earlier to occur of the events set forth in section 14(i) or (ii) below. 14. Termination of Covenants. The obligations of the Company under ------------------------ Articles 7 and 8 of the Agreement and the right to designate a majority of the Board of Directors of the Company under section 11.2 of the Agreement, notwithstanding any provisions hereof apparently to the contrary, shall terminate and shall be of no further force or effect on the earliest to occur of (i) the date that the Company completes an offering of shares of its capital stock to the public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act in which the net proceeds received by the Company equal or exceed $5,000,000 and the per share purchase price equals or exceeds $4.00 (as adjusted for stock splits, stock dividends or other corporate reorganizations), (ii) the date following the merger of the Company with or into another corporation, the shares of which are currently registered pursuant to Section 12 or 15 -32- of the Securities Exchange Act of 1934, as amended, and following such merger, (A) the Company continues to be the surviving corporation, (B) the surviving corporation's common shares are registered pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as amended, and (C) the market value of the Company equals or exceeds $5 million, calculated for purposes of this section 14, as the product of the average closing price for the Company's Common Stock during any 20 consecutive trading days times the total number of outstanding shares of Common Stock or (iii) September 27, 1998. 15. Miscellaneous. ------------- 15.1 Waivers Amendments and Approvals. No amendment or waiver -------------------------------- of any provision of the Agreement, shall in any event be effective unless the same shall be in writing and signed by Investor and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15.2 Changes, Waiver, Etc. Neither the Agreement nor any -------------------- provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing, discharge or termination is sought, except to the extent provided in section 15.1. 15.3 Notices. All notices, requests, consents and other ------- communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail, (a) if to Investor at ___________________________________ ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- or at such other addresses as Investor may specify by written notice to the Company, or (b) if to the Company at 1840 Berkshire Lane, Minneapolis, Minnesota 55441. Attention: President; with a copy to J. Andrew Herring, Dorsey & Whitney, 220 South Sixth Street, Minneapolis, MN 55402 USA, or at such other address as the Company may specify by written notice to Investor. and such notices and other communications shall for all purposes of the Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 15.4 Survival of Representations and Warranties, Etc. All ----------------------------------------------- representations and warranties contained herein shall survive the execution and delivery of the Agreement, any investigation at any time made by Investor or on their behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or -33- on behalf of the Company pursuant to the Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. 15.5 Parties in Interest. All the terms and provisions of the ------------------- Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. 15.6 Headings. The headings of the Articles and sections of the -------- Agreement have been inserted for convenience of reference only and do not constitute a part of the Agreement. 15.7 Choice of Law. The laws of Minnesota shall govern the ------------- validity of the Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 15.8 Counterparts. The Agreement may be executed concurrently ------------ in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.9 Definition of Purchased Shares. For purposes of the ------------------------------ Agreement the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Conversion Shares, (c) the Series B Preferred Shares and the Common Shares received upon conversion of the Series B Preferred Shares purchased upon exercise of the Option and (d) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring. If Investor is in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned. Very truly yours, MEDI-JECT CORPORATION By _____________________________ Name: Title: -34- ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the investment agreement, dated September 27, 1993, by and between Medi-Ject Corporation and the undersigned as the terms and conditions applicable to the purchase by the undersigned of preferred shares of the Company. By the execution of this acceptance, the undersigned hereby makes each of the representations contained in article 5 of such investment agreement. The undersigned further represents either that it qualifies as an "accredited investor," as that term is used in Regulation D promulgated under the federal Securities Act of 1933, because (check one): ____ the undersigned is an individual with a net worth in excess of $1,000,000; ____ the undersigned is an individual who either (a) had an income in excess of $200,000 in each of the years 1992 and 1991 and who reasonably expects an income in excess of $200,000 in 1993, or (b) had a joint income with the undersigned's spouse in excess of $300,000 in each of the years 1992 and 1991 and who reasonably expects a joint income in excess of $300,000 in 1993; ____ it is a private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940; ____ the undersigned is a director or executive officer of Medi-Ject Corporation; ____ it is a corporation, partnership, business trust or a nonprofit organization within the meaning of section 501(c)(3) of the Internal Revenue Code that was not formed for the purpose of acquiring the securities of Medi-Ject Corporation and that has total assets in excess of $5,000,000; ____ it is a small business investment company licensed by the United States Small Business Administration; ____ it is a self-directed employee benefit plan for which all persons making investment decisions are "accredited investors"; or ____ it is an entity, all of whose equity owners or partners are "accredited investors." INVESTOR By _________________________________ -35- EX-16.1 26 LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT Exhibit 16.1 June 18, 1996 Securities & Exchange Commission 450 - 5th Street, N.W. Washington, D.C. 20549 Dear Sirs: We have been furnished with a copy of the response to Item 304 of Form S-K for the event that occurred on December 29, 1995, to be filed by our former clients, Medi-Ject Corporation. We agree with the statements made in response to Item 304 insofar as they relate to our firm. Sincerely, /s/ Stirtz Bernards Boyden Surdel & Larter, P.A. - ------------------------------------------------- cc: Mark Derus EX-23.1 27 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.1 Consent of Independent Auditors The Board of Directors Medi-Ject Corporation We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------- Minneapolis, Minnesota June 21, 1996 EX-27 28 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED AND UNAUDITED INTERNAL FISCAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 35,817 2,810,769 0 0 180,365 329,653 (4,125) (4,125) 280,229 296,256 527,794 3,511,866 1,027,462 1,049,697 (550,436) (526,108) 1,240,108 4,331,051 1,178,067 1,057,439 136,206 95,067 0 0 31,945 32,330 2,189 13,538 (108,299) 3,132,677 1,240,108 4,331,051 1,653,869 443,826 2,574,806 769,199 1,048,937 292,511 0 0 45,090 0 0 0 60,816 13,481 (1,882,459) (553,015) 0 0 (1,882,459) (553,015) 0 0 0 0 0 0 (1,882,459) (553,015) (.36) (.09) (.36) (.09)
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