-----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, DhUApmYF92gbcPx0WzeCsxvdkGF18+YaY5Q7P4Y/zXr/f3vWQRJD3lW0ssKwjddF vZmL1cqGDskRjGMnDWnqhA== 0000950131-96-004701.txt : 19960926 0000950131-96-004701.hdr.sgml : 19960926 ACCESSION NUMBER: 0000950131-96-004701 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960924 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDI JECT CORP /MN/ CENTRAL INDEX KEY: 0001016169 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411350192 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06661 FILM NUMBER: 96633963 BUSINESS ADDRESS: STREET 1: 1840 BERKSHIRE LANE CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125531102 MAIL ADDRESS: STREET 1: 1840 BERKSHIRE LANE CITY: PLYMOUTH STATE: MN ZIP: 55431 S-1/A 1 FORM S-1 AMENDMENT 2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996 REGISTRATION NO. 333-6661 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO 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 (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) 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 & DORSEY & WHITNEY LLP SHEINFELD, LLP 220 SOUTH SIXTH STREET 551 FIFTH AVENUE MINNEAPOLIS, MINNESOTA 55402-1498 NEW YORK, NEW YORK 10176 (612) 340-2600 (212) 661-6500 --------------- 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 (3) - ----------------------------------------------------------------------------------------- Common Stock, $.01 par value................. 2,750,000 shares $10.00 $27,500,000 $9,483 - ----------------------------------------------------------------------------------------- Warrants to purchase Common Stock to be issued to the Representatives....... 220,000 warrants $.001 $220 $1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Including 330,000 shares of Common Stock issuable upon exercise of an option which the Underwriters may exercise to cover over-allotments, if any, and 220,000 shares issuable upon exercise of a Warrant to be issued to the Representatives in connection with the offering. (2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457. (3) Previously paid. --------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1996 2,200,000 SHARES 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 Common Stock has been approved for quotation 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 [Picture of Medi-Jector VI-B system with vial, adapter, and disposable front- end chamber] FRONT-END VIAL ADAPTER CHAMBER INJECTOR The Medi-Jector VI-B system shown above is a hand-held, spring-powered device that injects drugs from a 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. [Picture of Medi-Jector VI-B system and pen-like Medi-Jector system, each held in hand.] 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. The picture at left shows both the Medi-Jector VI-B system and the Company's future generation pen-like Medi-Jector system. The Medi-Jector VI-B system is an improved version of the Company's current Medi-Jector VI system which will include the disposable plastic front-end chamber pictured above. The Medi- Jector VI-B system is expected to be commercially introduced in late 1996 or early 1997. Although the device on the right shows current plans for the pen-like 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. 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 effected on August 6, 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 Corporation 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 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 sharp needle and manipulate a plunger with the needle inserted through the skin. Therefore, many people perceive injections with the Medi-Jector system to be less threatening than injections 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 individuals who require self-injection will benefit from the Medi-Jector system because it (i) eliminates the need to pierce themselves with needles for each injection, which should lead to increased compliance with a prescribed injection regimen and consequently reduce health complications, (ii) provides the ability to inject themselves discreetly and (iii) eliminates the need for sharps 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, based upon discussions with pharmaceutical companies, the Company believes that those companies are motivated to provide improved drug delivery methods in an attempt to differentiate their products in the marketplace and improve patient compliance, which may result in 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., Schwarz Pharma AG, Teva Pharmaceuticals Co., Ltd. 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. See "Business--Collaborative Agreements." 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 presently are self-administered and are or may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headaches, growth retardation, impotence, female infertility, AIDS and hepatitis. The Company also believes that other 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. In 1993, the Company hired a new management team with the goal of revitalizing and redefining the Company's strategic direction. Since that time, the Company has focused on entering into collaborative arrangements with pharmaceutical and medical device companies, and has increased its product development efforts to emphasize ease of use and to reduce the cost of its products to make them more competitive in the marketplace. 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. The terms of an option to purchase 380,808 shares of Common Stock held by Becton Dickinson (the "Becton Dickinson Option") provide that such option will expire upon the closing of an initial public offering of the Company's Common Stock at a public offering price of not less than $7.88 per share and gross proceeds of not less than $10 million. Becton Dickinson has notified the Company of its intent to exercise the Becton Dickinson Option immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 per share. See "Description of Capital Stock" and "Certain Transactions--Becton Dickinson." 4 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- --------------- 1993 1994 1995 1995 1996 ------- -------- -------- ------ ------- STATEMENT OF OPERATIONS DATA: Sales........................... $ 1,058 $ 1,518 $ 1,654 $ 831 $ 814 Licensing and product develop- ment........................... 125 470 921 410 686 ------- -------- -------- ------ ------- Revenues....................... 1,183 1,988 2,575 1,241 1,500 ------- -------- -------- ------ ------- Cost of sales................... 409 631 1,049 465 502 Research and development........ 146 401 1,195 607 1,093 General and administrative...... 615 868 978 628 672 Sales and marketing............. 485 1,128 1,146 450 467 ------- -------- -------- ------ ------- Operating expenses............. 1,655 3,028 4,368 2,150 2,734 ------- -------- -------- ------ ------- Net operating loss.............. (472) (1,040) (1,793) (909) (1,233) Net other income (expense)...... (28) (26) (89) (21) 49 ------- -------- -------- ------ ------- Net loss........................ $ (500) $ (1,066) $ (1,882) $ (930) $(1,184) ======= ======== ======== ====== ======= Pro forma net loss per common $ (0.36) $ (0.19) share (1)...................... ======== ======= Pro forma weighted average com- mon shares outstanding (1)..... 5,180 6,354
AT JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED (2) -------- --------------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 2,233 $ 20,148 Working capital...................................... 1,699 19,614 Total assets......................................... 3,705 21,620 Long-term liabilities, less current maturities....... 54 54 Accumulated deficit.................................. (10,486) (10,486) Total shareholders' equity (3)....................... 2,544 20,459
- -------- (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 June 30, 1996, had an accumulated shareholders' deficit of approximately $10.5 million. Net losses for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 were $500,319, $1,066,462, $1,882,459 and $1,184,178, 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 NEW PRODUCTS 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 "--Need to Comply with 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. 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. See "Business--Collaborative Agreements," "--Products and Technology" and "Certain Transactions--Becton Dickinson." 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. The Company currently is a party to seven such agreements. There can be no assurance that the Company will be successful in executing additional agreements with pharmaceutical or medical device companies 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-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." 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 components in limited quantities. The Company's 7 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 to produce and manufacture successfully the Company's future needle-free injection systems. Any failure to do so would negatively impact the Company's business, financial condition and results of operations. See "Business--Manufacturing." 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 The Company's current competition is primarily from traditional hypodermic needles and syringes which are used for the vast majority of injections administered today. In order to make needles and syringes easier and safer to use, certain companies have developed syringes with hidden needles, spring- powered needle injectors and injectors with sheathed needles. In addition to competing with these types of traditional hypodermic needles and syringes, 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 (drugs derived from living organisms, such as insulin and human growth hormone) that cannot currently be delivered orally, transdermally (through the skin) or pulmonarily (through the lungs). 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." NEED TO COMPLY WITH 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 Food and Drug Administration (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, 8 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 ("GMP") 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." 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 of which has been recently allowed, 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, 9 there can be no assurance that measures taken by the Company to protect its unpatented proprietary rights will be sufficient to protect these 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. 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." 10 RISK OF PRODUCT LIABILITY; LIMITATIONS OF INSURANCE COVERAGE 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 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 11 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, upon completion of this offering, the Company's Board of Directors will be classified and directors will serve for staggered terms. Finally, 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" 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 1,850,562 of the shares may become eligible for sale without restriction pursuant to Rule 144(k), an additional 929,757 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 the event the Becton Dickinson Option is exercised, there will be an additional 380,808 shares eligible for resale under Rule 144 beginning two years after the closing of this offering. 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 "Certain Transactions--Becton Dickinson," "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 $6.09. Investors may also experience additional dilution as a result of the exercise of outstanding stock options and warrants. See "Dilution." 12 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 $17.9 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) $5.0 million of capital expenditures, primarily in connection with the improvement of the Company's manufacturing and assembly capability, (ii) $4.0 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) $4.0 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. 13 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 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 JUNE 30, 1996 ---------------------- PRO FORMA PRO FORMA AS ADJUSTED --------- ----------- (IN THOUSANDS) Long-term liabilities, less current maturities........... $ 54 $ 54 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.............................. 12,983 30,876 Accumulated deficit..................................... (10,486) (10,486) -------- -------- Total shareholders' equity............................. 2,544 20,459 -------- -------- Total capitalization................................. $ 2,598 $ 20,513 ======== ========
- -------- (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. Becton Dickinson has notified the Company of its intent to exercise the Becton Dickinson Option to purchase 380,808 shares of Common Stock immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 per share. See "Description of Capital Stock" and "Certain Transactions--Becton Dickinson." (2) Reflects the conversion of all outstanding Convertible Preferred Stock into Common Stock, described in Note 13 of Notes to Financial Statements. 14 DILUTION The Company's pro forma net tangible book value as of June 30, 1996 was $2,226,364, or approximately $0.47 per share. Pro forma net tangible book value per share as of June 30, 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 June 30, 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 June 30, 1996 would have been $20,141,364, or $2.91 per share. This represents an immediate increase in net tangible book value of $2.44 per share to existing shareholders and an immediate dilution to new investors of $6.09 per share, or 67.7%. 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 June 30, 1996....... $0.47 Increase per share attributable to new investors................... 2.44 ----- Pro forma net tangible book value per share at June 30, 1996, as adjusted.......................................................... 2.91 ----- Dilution in net tangible book value per share to new investors..... $6.09 =====
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 $3.15 per share, which would result in dilution to new investors of $5.85 per share, or 64.9%. The following table summarizes, as of June 30, 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% $13,030,342 39.7% $2.76 New investors............. 2,200,000 31.8 19,800,000 60.3 9.00 --------- ----- ----------- ----- Total................... 6,925,633 100.0% $32,830,342 100.0% ========= ===== =========== =====
- -------- (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. Becton Dickinson has notified the Company of its intent to exercise the Becton Dickinson Option to purchase 380,808 shares of Common Stock immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 per share. 15 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 statement 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 six months ended June 30, 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 six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1996.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------ ------- STATEMENT OF OPERATIONS DATA: Sales ................. $1,067 $1,058 $1,058 $ 1,518 $ 1,654 $ 831 $ 814 Licensing and product -- -- 125 470 921 410 686 development .......... ------ ------ ------ ------- ------- ------ ------- Revenues.............. 1,067 1,058 1,183 1,988 2,575 1,241 1,500 ------ ------ ------ ------- ------- ------ ------- Cost of sales.......... 290 356 409 631 1,049 465 502 Research and develop- ment.................. -- -- 146 401 1,195 607 1,093 General and administra- tive.................. 480 462 615 868 978 628 672 Sales and marketing.... 345 349 485 1,128 1,146 450 467 ------ ------ ------ ------- ------- ------ ------- Operating expenses.... 1,115 1,167 1,655 3,028 4,368 2,150 2,734 ------ ------ ------ ------- ------- ------ ------- Net operating loss..... (48) (109) (472) (1,040) (1,793) (909) (1,233) Net other income (ex- (60) (50) (28) (26) (89) (21) 49 pense)................ ------ ------ ------ ------- ------- ------ ------- Net loss .............. $ (108) $ (159) $ (500) $(1,066) $(1,882) $ (930) $(1,184) ====== ====== ====== ======= ======= ====== ======= Pro forma net loss per common share $ (0.36) $ (0.19) (unaudited) (1)....... ======= ======= Pro forma weighted average common shares outstanding (unaudited) (1)....... 5,180 6,354
AT DECEMBER 31, ------------------------------------------- AT JUNE 30, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- ----------- BALANCE SHEET DATA: Cash and cash equiva- lents................. $ 170 $ 55 $ 649 $ 646 $ 36 $ 2,233 Working capital (defi- cit).................. (622) (37) 197 108 (650) 1,699 Total assets........... 373 267 894 1,361 1,240 3,705 Long-term liabilities, less current maturi- ties.................. -- 363 190 299 136 54 Accumulated deficit.... (5,694) (5,846) (6,353) (7,419) (9,302) (10,486) Total shareholders' eq- uity (deficit)........ (548) (329) 119 252 (74) 2,544
- -------- (1) Computed on the basis described in Note 1 of the Notes to Financial Statements. 16 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 Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Revenues increased to approximately $1,500,000 in the first six months of 1996 from approximately $1,241,000 in the first six months of 1995, an increase of approximately 21%. This increase was primarily the result of increased licensing and product development fees. Sales of injectors, parts, supplies and repairs declined to approximately $814,000 in the first six months of 1996 from approximately $831,000 in the first six months of 1995, a decrease of approximately 2%. This decrease resulted from a decrease in the number of injectors sold (1,512 in the first six months of 1995 and 1,363 in the first six months of 1996). The average selling price per injector also decreased from $404 to $389 due to an increase in the number of injectors sold to pharmacies at wholesale prices. The decrease was partially offset by an increase in sales of parts, supplies and repairs. Licensing and product development fees increased to approximately $686,000 in the first six months of 1996 from $410,000 in the first six months of 1995, an increase of 67%. The increase in fee income reflects the execution of the Becton Dickinson Agreement in January 1996. 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 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 $502,000 in the first six months of 1996 from approximately $465,000 in the first six months of 1995, an increase of approximately 8%. The increase in cost of sales was due to an increase in per unit manufacturing costs and an increase in sales of replacement parts, supplies and repairs. The Company expects that per injector manufacturing costs will decrease as volumes increase. Research and development expenses increased to approximately $1,093,000 in the first six months of 1996 from approximately $607,000 in the first six months of 1995, an increase of approximately 80%. This increase 17 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 $672,000 in the first six months of 1996 from approximately $628,000 in the first six months of 1995, an increase of approximately 7%. The largest component of this increase was legal expenses related to the negotiation of the Becton Dickinson Agreement. Sales and marketing expenses increased to approximately $467,000 in the first six months of 1996 from approximately $450,000 in the first six months of 1995, an increase of approximately 4%. This increase was primarily the result of a general increase in spending on domestic sales activities. The Company had net other income of approximately $49,000 in the first six months of 1996 compared to net other expense of approximately $21,000 in the first six months 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 six months 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, supplies 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, and an increase of approximately $126,000 in sales of parts, supplies and repairs offset by a decrease in the average unit selling price from $465 in 1994 to $397 in 1995. 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 and the fact that a larger number of units were sold. 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 and expenses relating to 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. 18 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 from an average selling price of $574 in 1993 to $465 in 1994 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 and sold. The cost to manufacture injectors decreased from 1993 to 1994 as a result of the increased volume. 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 second 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 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). Becton Dickinson has indicated its intent to exercise its option immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 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." 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 19 the receipt of revenues from the sales of the Company's products. Cash and cash equivalents were $2.2 million at June 30, 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 June 30, 1996, and at such date it had an accumulated deficit of approximately $10.5 million. INCOME TAX LOSS CARRYFORWARDS At June 30, 1996, the Company had approximately $10.1 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 June 30, 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." 20 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 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 sharp needle and manipulate a plunger with the needle inserted through the skin. Therefore many people perceive injections with the Medi-Jector system to be less threatening than injections 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 individuals who require self-injection will benefit from the Medi-Jector system because it (i) eliminates the need to pierce themselves with needles for each injection, which should lead to increased compliance with a prescribed injection regimen and consequently reduce health complications, (ii) provides the ability to inject themselves discreetly and (iii) eliminates the need for sharps 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, based upon discussions with pharmaceutical companies, the Company believes that those companies are motivated to provide improved drug delivery methods in an attempt to differentiate their products in the marketplace and improve patient compliance, which may result in 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. The Company believes that most individuals view piercing their skin with a needle as unpleasant. In addition, individuals are often reluctant to use needles in public because needles are frequently associated with illegal drug use and cause fear of accidental needle sticks in others. These and other factors can deter patients from fully complying with their doctor- prescribed injection regimens. The failure to administer all prescribed injections can lead to increased health complications for the patient, decreased drug sales for pharmaceutical companies and increased healthcare costs for payors. In addition, needles require special disposal and therefore must be carried after use until they can be discarded in a special sharps container. These factors have led pharmaceutical manufacturers to explore many alternative delivery technologies, including novel needle injectors (for example, sheathed and spring-powered needle injectors), transdermal 21 patches, controlled release oral delivery methods and inhalation devices. 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. The Company believes, however, 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. 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 insulin injections given per day may also lead additional patients to seek an alternative to 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 according to industry sources. 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 presently self-administered and may be suitable for injection with the Medi- Jector system include therapies for the treatment of multiple sclerosis, migraine headaches, growth retardation, impotence, female infertility, AIDS and hepatitis. The Company also believes that other 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 22 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. 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 adapter. 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. Based in part upon the results of focus group studies performed by the Company, it believes that injections using a Medi-Jector system are more comfortable than injections using a needle because there is no need to pierce the skin with a sharp needle and manipulate a plunger with the needle inserted through the skin. In addition, the Company believes injections can be administered more discreetly using a Medi-Jector system than with a needle and syringe. Although both types of injections can be and are performed in public, many people are reluctant to use needles in public because needles are frequently associated with illegal drug use and cause fear of accidental needle sticks in others. 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 23 reduces friction and therefore the effort required to arm the coil spring. The Medi-Jector VI system, which is approximately 7 3/4 inches long and weighs approximately eight ounces, also 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. 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 easier to arm and reduced in size (anticipated to be approximately 7 3/4 inches long, seven ounces in weight and 30% smaller in diameter than the Medi- Jector VI system) 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 VI-B 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 VI-B unit (excluding the disposable front-end chamber) will be reduced by 20% to 30% from the price of the current version (which includes the steel front-end chamber). The total annual cost to the end user of disposable front-end chambers and related supplies is anticipated to increase from approximately $50 per year for disposable supplies used with the current system to approximately $200 to $250 per year, depending upon the final cost per unit (based upon an average of two injections per day). Although the total cost to use the Medi-Jector VI-B 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. 24 The disposable front-end chambers to be used with the Medi-Jector system should not require special disposal. Because a used front-end chamber will not pierce the skin, the risk of cross-infection from discarded front-end chambers is reduced significantly over the risk associated with needles. 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 currently 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 expenditure, in part supported by fees under license and development agreements. The Company has expended approximately $146,000, $401,000, $1,195,000 and $1,093,000 on research and development efforts during fiscal years 1993, 1994 and 1995 and the six month period ended June 30, 1996, respectively. Of these amounts, approximately $125,000, $470,000, $921,000 and $686,000, respectively, were funded by third- party sponsored development programs and licensing fees. TARGET MARKETS The Company intends to target the following markets for use of the Medi- Jector system. To date, the Medi-Jector system has only been approved for use in the United States, Japan and certain European countries for the administration of insulin and human growth hormone. Insulin Approximately 3.2 million people take insulin daily for the control of high blood sugar observed in individuals with diabetes according to the National Institutes of Health. 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 (degeneration of the nervous system), 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 according to industry sources. 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 36% of children on human growth hormone therapy did not fully comply with the therapy using needle 25 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 (blood vessel relaxing) 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. 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 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. 26 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 and Insulin Company (1)............. 0.5 ml subcutaneous 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 General Growth Hormone 0.5 ml subcutaneous 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 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. The agreement has a term of ten years from the date the product is introduced in France, Germany, Italy and Spain and may be extended at Ferring's option for additional periods of two years. The agreement may be terminated by Ferring at any time prior to the receipt of all approvals necessary to market the injector in each of these countries. 27 JCR Agreement In February 1995, the Company entered into an exclusive license agreement with JCR Pharmaceuticals, Ltd. ("JCR") for the use, marketing and distribution of the Medi-Jector system with human growth hormone in Japan. The Company has retained the exclusive right to manufacture the Medi-Jector system under the agreement. 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. The agreement is for a period of ten years, and may be extended at the option of JCR for additional two year periods. 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. The agreement may be terminated by either party prior to the first commercial sale of product under the agreement and is otherwise for a period of five years following the first commercial sale or until the expiration of all patent coverage for the covered product, and may be extended for additional three year terms upon mutual agreement of the parties. 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 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. The agreement may be terminated by either party upon sixty days' written notice. Teva Agreement The Company entered into an agreement with Teva Pharmaceutical Industries Ltd. ("Teva") in May 1996. Teva has obtained a non-exclusive license to distribute a Medi-Jector system to be modified specifically for the 28 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. The Company has retained its rights as the exclusive manufacturer and supplier of the Medi- Jector system as modified pursuant to this agreement. The agreement has an initial term of ten years and will be extended for additional two year terms unless either party notifies the other of its intention to terminate the agreement at least six months prior to the expiration of the current term. 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 of which has been recently allowed, 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 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," "--Dependence on Single Source 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 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. 29 The Company currently sells most Medi-Jector systems through a 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. The vast majority of injections currently are administered using needles. 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 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. 30 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. There can be no assurance, however, that any of these new injectors will be classified as medical devices. 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. 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 31 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 EZ 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 submitted a 510(k) notification regarding the use of plastic front-end chambers with the Medi-Jector VI-B system in July 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 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 Companys devices or otherwise have a material adverse effect upon the Company's ability to do business. 32 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 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. EMPLOYEES As of June 30, 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. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Franklin Pass, M.D...... 60 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. .. 49 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 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. 34 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 November 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 and Compensation Committees 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, a Swedish pharmaceutical firm, 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 S-E Banken Fonder AB, a group of Swedish-based investment funds and Tryggh Hansa, a major insurance company in Sweden. Under the terms of the Company's Second Amended and Restated Articles of Incorporation which will become effective upon the closing of this offering, the directors will be divided into three classes, with the term of one class expiring each year. As the term of each class expires, the successors to the directors in that class will be elected for a term of three years. The Company believes that classification of the Board of Directors will help to ensure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. The terms of Mr. Evenstad and Dr. Cosentino will expire at the Annual Meeting of Shareholders in fiscal 1997, the terms of Drs. Guy and Shapiro will expire at the Annual Meeting of Shareholders in fiscal 1998, and the terms of Drs. Pass and Sjostrand and Mr. Jacobs will expire at the Annual Meeting of Shareholders in fiscal 1999. Vacancies on the Board of Directors and newly created directorships can be filled by vote of the majority of the directors then in office. 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. 35 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 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 ANNUAL COMPENSATION COMPENSATION AWARDS ---------------------------------- ------------ SECURITIES UNDERLYING NAME AND STOCK ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS OTHER (1) OPTIONS COMPENSATION - ------------------ ---- -------- ------- --------- ------------ ------------ Franklin Pass, M.D. ... 1995 $175,000 $ -- $5,174 45,697 $ -- President, Chief 1994 150,000 20,000 3,879 -- 1,200(2) Executive Officer and 1993(3) 103,661 -- -- 76,161 -- Chairman of the 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. 36 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
POTENTIAL REALIZABLE PERCENT VALUE AT ASSUMED NUMBER OF OF TOTAL ANNUAL RATES OF STOCK SHARES OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (2) OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------- 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. 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
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT 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 not cured or cannot cure such breach within 30 days after delivery of written notice of such breach or has engaged in willful 37 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 1993 Plan is administered by the Compensation Committee and the 1996 Plan is administered by the Board of Directors. 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 30, 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 available 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. 38 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 effected on August 6, 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.
PERCENTAGE OWNED (1) AMOUNT AND NATURE OF ------------------------------ NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) BEFORE OFFERING AFTER OFFERING - ------------------------ ------------------------ --------------- -------------- Franklin Pass, M.D. (2). 177,636 3.7% 2.5% 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)..... 7,617 * * 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)................... 542,994 11.5 7.8 All executive officers and directors as a group (10 persons) (13)................... 408,597 8.2% 5.7%
- -------- * 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 68,544 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) Dr. Sjostrand is a board member of S-E Banken Fonder AB. (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. Becton Dickinson has notified the Company of its intent to exercise its option to purchase 380,808 shares of Common Stock immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 per share. 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. Enskilda Kapitalforvaltning is a wholly owned subsidiary of S-E Banken Fonder AB. (13) Includes 242,381 shares of Common Stock issuable to all directors and executive officers as a group upon the exercise of outstanding options and warrants. 39 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 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 40 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 terminated 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, the Becton Dickinson Option will expire on the date on which the Company completes this offering provided that the public offering price per share is at least $7.88 and gross proceeds equal or exceed $10 million. Becton Dickinson has notified the Company of its intent to exercise the Becton Dickinson Option immediately prior to and contingent upon the closing of this offering provided that the public offering price is at least $7.88 per share. 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 of the Development and 41 License Agreement include the grant to Becton Dickinson during the term of the agreement of an exclusive, worldwide 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. These exclusive rights with respect to the injectors will continue for a period of at least five years from the date of 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. 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 30, 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. 42 WARRANTS AND OPTIONS As of June 30, 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 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 30, 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 anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the corporate structure of the Company. Becton Dickinson has notified the Company of its intent to exercise the Becton Dickinson Option for 380,808 shares of Common Stock immediately prior to and contingent upon the closing of this offering in the event the public offering price is at least $7.88 per share. 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. 43 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 500,000 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 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 44 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. 45 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 offered hereby 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. The Common Stock has been approved 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. 46 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. 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 between the Company and Stirtz Bernards Boyden Surdel & Larter Professional Association ("Stirtz Bernards"), the Company's prior accountants, (whether resolved to the satisfaction of Stirtz Bernards or not) on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The audit opinion of Stirtz Bernards 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. 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. 47 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. 48 MEDI-JECT CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.............................................. F-2 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited) and Pro forma Shareholders' Equity as of June 30, 1996 (unaudited).............................................................. F-3 Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996 (unaudited)......... F-4 Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1996 (unaudited).............................................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996 (unaudited)......... F-6 Notes to Financial Statements............................................. F-7
F-1 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 August 6, 1996 F-2 MEDI-JECT CORPORATION BALANCE SHEETS
DECEMBER 31, PRO FORMA ---------------------- JUNE 30, JUNE 30, 1994 1995 1996 1996 ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents... $ 645,667 $ 35,817 $ 2,232,660 Accounts receivable, less allowance for doubtful ac- counts of $1,501 for 1994, $4,125 for 1995, and $4,000 for June 30, 1996.......... 89,303 176,240 128,218 Inventories................. 170,861 280,229 334,535 Prepaid expenses............ 12,318 35,508 110,941 ---------- ---------- ----------- 918,149 527,794 2,806,354 ---------- ---------- ----------- Equipment, furniture and fix- tures....................... 907,248 1,027,462 1,144,619 Less accumulated deprecia- tion........................ (464,654) (550,436) (563,685) ---------- ---------- ----------- 442,594 477,026 580,934 ---------- ---------- ----------- Patent rights................ 0 235,288 317,901 ---------- ---------- ----------- $1,360,743 $1,240,108 $ 3,705,189 ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............ $ 160,018 $ 243,281 $ 235,951 Accrued expenses............ 291,039 398,232 248,630 Deferred revenue............ 110,000 148,563 457,024 Capital lease obligations-- current maturities......... 42,455 45,534 42,350 Notes payable--current matu- rities..................... 206,324 342,457 123,454 ---------- ---------- ----------- 809,836 1,178,067 1,107,409 ---------- ---------- ----------- Long-term liabilities: Capital leases, less current maturities................. 85,326 40,109 20,214 Notes payable, less current maturities................. 213,554 96,097 33,301 ---------- ---------- ----------- 298,880 136,206 53,515 ---------- ---------- ----------- Shareholders' equity (defi- cit): Series C convertible pre- ferred stock: $.01 par; au- thorized 761,615 shares: 0; 0; and 761,615 issued and outstanding at December 31, 1994, 1995, and June 30, 1996, respectively......... -- -- 7,616 $ -- Series B convertible pre- ferred stock: $.01 par; au- thorized 3,046,459 shares: 1,488,958; 2,090,633; and 2,471,484 issued and out- standing at December 31, 1994, 1995 and June 30, 1996, respectively......... 14,890 20,906 24,714 -- Series A convertible pre- ferred stock: $.01 par; au- thorized 1,218,584 shares: 1,103,867; 1,103,867; and 0 issued and outstanding at December 31, 1994, 1995 and June 30, 1996, respective- ly......................... 11,039 11,039 -- -- Common stock: $.01 par; au- thorized 7,616,147 shares: 217,722; 218,864; 1,353,785; and 4,725,633 issued and outstanding at December 31, 1994, 1995, June 30, 1996, and June 30, 1996 pro forma, respec- tively .................... 2,177 2,189 13,538 47,256 Additional paid-in capital.. 7,643,361 9,193,600 12,984,474 12,983,086 Accumulated deficit......... (7,419,440) (9,301,899) (10,486,077) (10,486,077) ---------- ---------- ----------- ----------- Total shareholders' equity (deficit).................. 252,027 (74,165) 2,544,265 2,544,265 ---------- ---------- ----------- ----------- $1,360,743 $1,240,108 $ 3,705,189 $ 3,705,189 ========== ========== =========== ===========
See accompanying notes to financial statements. F-3 MEDI-JECT CORPORATION STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------ ----------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ---------- ----------- (UNAUDITED) Revenues: Sales.................. $1,057,703 $ 1,517,660 $ 1,653,869 $ 831,130 $ 814,244 Licensing and product development........... 125,000 470,000 920,937 410,000 686,038 ---------- ----------- ----------- ---------- ----------- 1,182,703 1,987,660 2,574,806 1,241,130 1,500,282 ---------- ----------- ----------- ---------- ----------- Operating expenses: Cost of sales.......... 409,247 630,628 1,048,937 465,277 501,718 Research and develop- ment.................. 146,061 401,382 1,195,435 606,613 1,093,087 General and administra- tive.................. 615,035 867,616 977,579 628,046 672,079 Sales and marketing.... 484,939 1,128,232 1,145,894 450,173 466,880 ---------- ----------- ----------- ---------- ----------- 1,655,282 3,027,858 4,367,845 2,150,109 2,733,764 ---------- ----------- ----------- ---------- ----------- Net operating loss...... (472,579) (1,040,198) (1,793,039) (908,979) (1,233,482) ---------- ----------- ----------- ---------- ----------- Other income (expense): Interest and other in- come.................. 2,538 15,916 16,486 10,824 69,485 Interest and other ex- pense................. (30,278) (42,180) (105,906) (31,506) (20,181) ---------- ----------- ----------- ---------- ----------- (27,740) (26,264) (89,420) (20,682) 49,304 ---------- ----------- ----------- ---------- ----------- Net loss................ $ (500,319) $(1,066,462) $(1,882,459) $ (929,661) $(1,184,178) ========== =========== =========== ========== =========== Pro forma per share data (unaudited) (Note 1): Net loss per common share................. $ (0.36) $ (0.19) =========== =========== Weighted average common shares outstanding.... 5,180,186 6,353,706
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 ADDITIONAL -------------- ------------------ -------------------- ------------------ PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ------- ------ --------- -------- ---------- -------- --------- ------- ----------- ------------ Balance, December 31, 1992......... -- $ -- -- $ -- 1,073,402 $ 10,734 229,216 $ 2,292 $ 5,511,019 $ (5,852,659) Common stock: Stock incentive awards expired.. -- -- -- -- -- -- (97,696) (977) 977 -- Shares issued as compensation.... -- -- -- -- -- -- 46,078 461 2,467 -- Series A: Conversion of notes payable... -- -- -- 30,465 305 -- -- 39,695 -- Series B: Shares issued for cash........ -- -- 761,615 7,616 -- -- -- -- 992,385 -- Offering costs.. -- -- -- -- -- -- -- -- (95,274) -- Net loss........ -- -- -- -- -- -- -- -- -- (500,319) ------- ------ --------- -------- ---------- -------- --------- ------- ----------- ------------ Balance, December 31, 1993......... -- -- 761,615 7,616 1,103,867 11,039 177,598 1,776 6,451,269 (6,352,978) Common stock: Shares issued as compensation.... -- -- -- -- -- -- 37,310 373 2,029 -- Shares issued for cash........ -- -- -- -- -- -- 2,814 28 200 -- Series B: Exercise of stock options... -- -- 552,171 5,522 -- -- -- -- 719,478 -- Shares issued for cash........ -- -- 175,172 1,752 -- -- -- -- 548,248 -- Offering costs.. -- -- -- -- -- -- -- -- (77,863) -- Net loss........ -- -- -- -- -- -- -- -- -- (1,066,462) ------- ------ --------- -------- ---------- -------- --------- ------- ----------- ------------ Balance, December 31, 1994......... -- -- 1,488,958 14,890 1,103,867 11,039 217,722 2,177 7,643,361 (7,419,440) Common stock: Exercise of stock options... -- -- -- -- -- -- 1,142 12 1,548 -- Series B: Exercise of stock options... -- -- 228,483 2,284 -- -- -- -- 347,716 -- Shares issued for cash........ -- -- 373,192 3,732 -- -- -- -- 1,221,268 -- Offering costs.. -- -- -- -- -- -- -- -- (65,383) -- Amendments to investor option agreement....... -- -- -- -- -- -- -- -- 45,090 -- Net loss........ -- -- -- -- -- -- -- -- -- (1,882,459) ------- ------ --------- -------- ---------- -------- --------- ------- ----------- ------------ Balance, December 31, 1995......... -- -- 2,090,633 20,906 1,103,867 11,039 218,864 2,189 9,193,600 (9,301,899) Conversion of Series A to com- mon stock (1)... -- -- -- -- (1,103,867) (11,039) 1,103,867 11,039 -- -- Conversion of note payable (1)............. -- -- -- -- -- -- 30,465 305 99,695 -- Shares issued for reverse stock split (1). -- -- 43 -- -- -- 589 5 (5) -- Series B: (1) Exercise of stock options and conversion of note payable.... -- -- 380,808 3,808 -- -- -- -- 809,822 -- Series C: (1) Shares issued for cash........ 761,615 7,616 -- -- -- -- -- -- 2,992,384 -- Offering costs.. -- -- -- -- -- -- -- -- (236,022) -- Series E: (1) Warrant issued for cash........ -- -- -- -- -- -- -- -- 125,000 -- Net loss (1).... -- -- -- -- -- -- -- -- -- (1,184,178) ------- ------ --------- -------- ---------- -------- --------- ------- ----------- ------------ Balance, June 30, 1996 (1)......... 761,615 $7,616 2,471,484 $ 24,714 -- $ -- 1,353,785 $13,538 $12,984,474 $(10,486,077) ======= ====== ========= ======== ========== ======== ========= ======= =========== ============ TOTAL ------------ Balance, December 31, 1992......... $ (328,614) Common stock: Stock incentive awards expired.. -- Shares issued as compensation.... 2,928 Series A: Conversion of notes payable... 40,000 Series B: Shares issued for cash........ 1,000,001 Offering costs.. (95,274) Net loss........ (500,319) ------------ Balance, December 31, 1993......... 118,722 Common stock: Shares issued as compensation.... 2,402 Shares issued for cash........ 228 Series B: Exercise of stock options... 725,000 Shares issued for cash........ 550,000 Offering costs.. (77,863) Net loss........ (1,066,462) ------------ Balance, December 31, 1994......... 252,027 Common stock: Exercise of stock options... 1,560 Series B: Exercise of stock options... 350,000 Shares issued for cash........ 1,225,000 Offering costs.. (65,383) Amendments to investor option agreement....... 45,090 Net loss........ (1,882,459) ------------ Balance, December 31, 1995......... (74,165) Conversion of Series A to com- mon stock (1)... -- Conversion of note payable (1)............. 100,000 Shares issued for reverse stock split (1). -- Series B: (1) Exercise of stock options and conversion of note payable.... 813,630 Series C: (1) Shares issued for cash........ 3,000,000 Offering costs.. (236,022) Series E: (1) Warrant issued for cash........ 125,000 Net loss (1).... (1,184,178) ------------ Balance, June 30, 1996 (1)......... $ 2,544,265 ============
- ----- (1) Unaudited. See accompanying notes to financial statements. F-5 MEDI-JECT CORPORATION STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------ ------------------------ 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss............... $ (500,319) $(1,066,462) $(1,882,459) $ (929,661) $(1,184,178) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation........... 26,324 36,945 85,960 25,422 69,881 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) (4,539) 48,022 Inventories............ 15,006 (121,547) (109,368) (145,274) (54,306) Prepaid expenses....... 7,121 3,542 (23,190) (31,028) (75,433) Accounts payable....... 42,524 16,854 83,263 (49,197) (7,330) Deferred revenue....... 43,750 66,250 38,563 (35,000) 308,461 Accrued expenses....... 73,907 90,026 107,193 125,042 (149,602) ---------- ----------- ----------- ----------- ----------- Net cash used in operating activities... (304,214) (992,629) (1,741,885) (1,044,235) (1,044,485) ---------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of equipment, furniture and fixtures.............. (39,096) (256,622) (120,392) (64,862) (173,789) Purchase of patent rights................ -- -- (235,288) (125,853) (82,613) ---------- ----------- ----------- ----------- ----------- Net cash used in investing activities.. (39,096) (256,622) (355,680) (190,715) (256,402) ---------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations........... (7,194) (26,729) (42,138) (20,225) (23,079) Proceeds from issuance of common stock....... -- 228 1,560 1,560 101,130 Proceeds from issuance of convertible preferred stock....... 1,000,001 1,275,000 1,575,000 980,000 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) (52,507) (469,299) Offering costs......... (95,274) (77,863) (65,383) (45,571) (236,022) ---------- ----------- ----------- ----------- ----------- Net cash provided by financing activities... 937,533 1,245,669 1,487,715 863,257 3,497,730 ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............ 594,223 (3,582) (609,850) (371,693) 2,196,843 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 $ 273,974 $ 2,232,660 ========== =========== =========== =========== ===========
See accompanying notes to financial statements. F-6 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 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 six months ended June 30, 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 six months ended June 30, 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. Sales Recognition Sales and related costs are recognized upon shipment of product to customers. Sales are recorded net of provisions for returns and discounts. F-7 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) 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. 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. F-8 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) 2. INVENTORIES Inventories consist of the following:
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Raw material................................... $119,316 $145,603 $178,026 Work-in-process................................ 45,878 80,663 76,208 Finished goods................................. 5,667 53,963 80,301 -------- -------- -------- $170,861 $280,229 $334,535 ======== ======== ========
3. EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures consisted of the following:
DECEMBER 31, ------------------- JUNE 30, USEFUL 1994 1995 1996 LIVES -------- ---------- ----------- ---------- (UNAUDITED) Office equipment.................. $222,350 $ 262,847 $ 376,489 3-5 years Production equipment.............. 674,862 753,319 756,834 3-10 years Displays.......................... 10,036 11,296 11,296 3-5 years -------- ---------- ---------- $907,248 $1,027,462 $1,144,619 ======== ========== ==========
4. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Accrued product warranty and returns........... $ 95,438 $ 71,620 $ 71,620 Payroll........................................ 18,795 29,787 23,706 Accrued patent rights obligation............... -- 96,500 -- Other.......................................... 176,806 200,325 153,304 -------- -------- -------- $291,039 $398,232 $248,630 ======== ======== ========
F-9 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) 5. NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, -------------------- JUNE 30, 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..... 319,878 213,554 156,755 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 -- --------- --------- --------- 419,878 438,554 156,755 Current maturities........................ (206,324) (342,457) (123,454) --------- --------- --------- Notes payable, less current maturities.... $ 213,554 $ 96,097 $ 33,301 ========= ========= ========= Aggregate future maturities are as fol- lows: 1996..................................... $ 342,457 1997..................................... 96,097 --------- $ 438,554 =========
6. LEASES The Company has a noncancelable operating lease for its office and manufacturing facility that expires in April 1997. 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 maturi- ties................................................... $ 40,109 ========
F-10 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 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 in- crease................. 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). 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 $1.31. Each Series B share is convertible into one share of common stock, subject to certain anti-dilution adjustments. F-11 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) 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 761,162 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. 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. Under this plan, 495,050 shares of common stock have been reserved. 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-12 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) Stock option and warrant activity for the three years ended December 31, 1995 and the six months ended June 30, 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 June 30, 1996 (unaudited).............. 2,966,810 $ 0.79-5.91 ========= ============
As of December 31, 1995 and June 30, 1996, 406,931 and 481,690 (unaudited) options and 584,879 and 2,485,120 (unaudited) warrants were outstanding, respectively. As of December 31, 1995 and June 30, 1996 options for 238,240 and 323,951 (unaudited) shares, and warrants for 584,879 and 2,485,120 (unaudited) shares, respectively, were exercisable. 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, 1995 and the six months ended June 30, 1996 was $7,119, $67,785, $62,515 and $20,182 (unaudited), respectively. On January 25, 1996 and February 29, 1996, notes payable of $312,500 and $100,000, respectively, were converted into 190,404 shares of Series B Preferred Stock and 30,465 shares of Common Stock, respectively. 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. F-13 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) Foreign sales by geography were as follows:
1993 1994 1995 -------- -------- -------- Europe (primarily Germany).......................... $ 20,877 $ 14,960 $301,277 Other............................................... 127,629 146,649 319,379 -------- -------- -------- Total............................................. $148,506 $161,609 $620,656 ======== ======== ========
Other consists mainly of sales to Asia and South America. 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. 13. ITEMS SUBSEQUENT TO DATE OF AUDITORS' REPORT (a) Reverse Stock Split In connection with the Company's IPO, the Board of Directors and shareholders approved a 1-for-1.313 reverse stock split of its common stock, effective August 6, 1996. The effect of the stock split has been retroactively reflected in the accompanying financial statements and notes thereto. F-14 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1995 (UNAUDITED AS TO JUNE 30, 1996 DATA) (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, as described herein, has been reflected in the pro forma shareholders' equity column of the balance sheet at June 30, 1996. F-15 [ART WORK] Medi-Jector(R) System Operation - ---- STEP 1: RESET POWER SOURCE Turn winding grip in the direction of the arrow to a complete stop. - ---- - ----- [Drawing of Medi-Jector system held in hands with arrow showing direction of winding.] - ---- - ---- STEP 2: FILL DRUG CHAMBER Attach drug vial with adapter and turn winding grip until the proper dosage is indicated in the window. - ---- - ----- [Drawings of Medi-Jector systems held in hands with arrows showing direction of winding and vial attachment.] - ---- - ---- STEP 3: ADJUST PRESSURE AND INJECT REMOVE DRUG VIAL AND TURN WINDING GRIP TO OPTIMUM COMFORT LEVEL. INJECT. - ---- - ---- [Drawing of Medi-Jector system held in hands with arrow showing direction of winding.] [Drawing of Medi-Jector system held against thigh of individual receiving injection.] - ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION 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 COM- PANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE 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 CIRCUM- STANCES 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 SECURI- TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DE- LIVER 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 AL- LOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Capitalization............................................................ 14 Dilution.................................................................. 15 Selected Financial Data................................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 17 Business.................................................................. 21 Management................................................................ 34 Principal Shareholders.................................................... 39 Certain Transactions...................................................... 40 Description of Capital Stock.............................................. 42 Shares Eligible for Future Sale........................................... 44 Underwriting.............................................................. 46 Legal Matters............................................................. 47 Experts................................................................... 47 Additional Information.................................................... 47 Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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............................................... $ 9,484 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 Directors' and Officers' Insurance................................. 60,000 Miscellaneous...................................................... 31,847 -------- Total........................................................ $400,000 ========
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. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The information set forth below (i) gives effect to a 1-for-1.313 reverse split of the Company's capital stock effected on August 6, 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. II-1 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. 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. II-2 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. 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. II-3 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(a) Amended and Restated Articles of Incorporation of the Company. 3.2(a) Amended Bylaws of the Company. 3.3(a) Second Amended and Restated Articles of Incorporation of the Company (as proposed to be effective upon completion of the offering). 3.4(a) Second Amended and Restated Bylaws of the Company (as proposed to be effective upon completion of the offering). 4.1(a) Form of Certificate for Common Stock. 4.2(a) Stock Warrant, dated January 25, 1996, issued to Becton Dickinson and Company. 4.3(a) Stock Option, dated January 25, 1996, issued to Becton Dickinson and Company. 4.4(a) Warrant, dated March 24, 1995, issued to Robert Fullerton. 4.5(a) Warrant, dated March 24, 1995, issued to Michael Trautner. 4.6(a) 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(a) Opinion of Dorsey & Whitney LLP. 10.1(a) Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments thereto. 10.2(a) Promissory Note, dated August 29, 1994, issued to Fred Shapiro. 10.3(a) Security Agreement, dated September 30, 1994, by and between the Company and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership.
II-4
NUMBER DESCRIPTION ------ ----------- 10.4(a) Promissory Note, dated September 30, 1994, issued to Kelsey Lake Limited Partnership. 10.5(a) Promissory Note, dated September 30, 1994, issued to Kerry Lake Company, a Limited Partnership. 10.6(a) 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(a) Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company. 10.8(a) Employment Agreement, dated as of January 3, 1995, between the Company and Franklin Pass, M.D. 10.9(a) Employment Agreement, dated as of January 3, 1995, between the Company and Mark Derus. 10.10(a) Employment Agreement, dated as of January 3, 1995, between the Company and Todd Leonard. 10.11(a) Employment Agreement, dated as of January 3, 1995, between the Company and Peter Sadowski. 10.12(a) 1993 Stock Option Plan. 10.13(a) Form of incentive stock option agreement for use with 1993 Stock Option Plan. 10.14(a) Form of nonqualified stock option agreement for use with 1993 Stock Option Plan. 10.15(a) 1996 Stock Option Plan, with form of stock option agreement. 10.16(a) 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(a) 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(a) 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(a) 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. 11.1(a) Statement Regarding Computation of Earnings Per Share. 16.1(a) Letter Regarding Change in Certifying Accountant. 23.1 Consent of KPMG Peat Marwick LLP. 23.2(a) Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1(a) Powers of Attorney (included on signature page). 27.1(a) Financial Data Schedule.
- -------- + 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. (a) Previously filed. II-5 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 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-6 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE 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 SEPTEMBER 24, 1996. Medi-Ject Corporation /s/ Franklin Pass, M.D. By: _________________________________ FRANKLIN PASS, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON SEPTEMBER 24, 1996. SIGNATURE TITLE /s/ Franklin Pass, M.D. President, Chief Executive Officer and - ------------------------------------- Director (principal executive officer) FRANKLIN PASS, M.D. /s/ Mark Derus Vice President of Finance, Chief - ------------------------------------- Financial Officer (principal financial MARK DERUS and accounting officer) * Director - ------------------------------------- LOUIS COSENTINO * Director - ------------------------------------- KENNETH EVENSTAD * Director - ------------------------------------- GEOFFREY GUY * Director - ------------------------------------- NORMAN JACOBS * Director - ------------------------------------- FRED SHAPIRO, M.D. * Director - ------------------------------------- PETER SJOSTRAND /s/ Mark Derus *By: ________________________________ MARK DERUS, ATTORNEY-IN-FACT II-7 EX-1.1 2 UNDERWRITING AGREEMENT Exhibit 1.1 2,200,000 SHARES MEDI-JECT CORPORATION Common Stock UNDERWRITING AGREEMENT ---------------------- _____________, 1996 Rodman & Renshaw, Inc. R. J. Steichen & Company c/o Rodman & Renshaw, Inc. 225 Liberty Street 2 World Financial Center 30th Floor New York, New York 10281 On behalf of the Several Underwriters named in Schedule I attached hereto. Ladies and Gentlemen: Medi-Ject Corporation, a Minnesota corporation (the "Company"), proposes to sell to you (the "Representatives") and the other underwriters named in Schedule I attached hereto (the "Underwriters"), for whom you are acting as the Representatives, an aggregate of 2,200,000 shares (the "Firm Shares") of the Company's Common Stock, $.01 par value (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 330,000 shares (the "Option Shares"), of Common Stock for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. Sale and Purchase of the Shares. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to issue and sell the Shares to the several Underwriters and each of the Underwriters agrees, severally and not jointly, to purchase at the purchase price per share of Common Stock of $_____ (the "Initial Price"), the aggregate number of Firm Shares set forth opposite such Underwriter's name in Schedule I attached hereto. The Underwriters agree to offer the Firm Shares to the public as set forth in the Prospectus. (b) The Company grants to the several Underwriters an option to purchase all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriter as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part, but only once, at any time within 30 days after the date of this Agreement, upon written notice, or verbal or telephonic notice confirmed by written notice, by the Representatives to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before any Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. (c) On the Firm Shares Closing Date (as defined below), the Company shall issue and sell to the Representatives, individually and not as Representatives of the Underwriters, for an aggregate purchase price of $.001 per warrant, warrants representing the right of the Representatives to purchase a number of Shares of Common Stock (the "Warrant Shares") equal to 10.0% of the Firm Shares (which warrants shall be evidenced in the form set forth as an exhibit to the Registration Statement) (the "Representatives' Warrants"). The Representatives' Warrants shall be allocated between each of the Representatives as the Company shall be advised in writing. 2. Delivery and Payment. Delivery by the Company of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company, shall take place at the offices of Rodman & Renshaw, Inc., at 225 Liberty Street, 2 World Financial Center, 30th Floor, New York, New York 10281, at 10:00 a.m., New York City time, on the third business day following the date on which the public offering of the Shares commences (unless such date is postponed in accordance with the provisions of Section 10(b) hereof), or at such time and place on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). The public offering of the Shares shall be deemed to have commenced at the time which is the earlier of (a) the time, after the Registration Statement (as defined in Section 4 below) becomes effective, of the release by you for publication of the first newspaper advertisement which is subsequently published relating to the Shares or (b) the time, after the Registration Statement becomes effective, when the Shares are first released by you for offering by the Underwriters or dealers by letter or telegram. In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company shall take place at the offices of Rodman & Renshaw, Inc. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of -2- delivery and payment is called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Dates are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be, and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be. 3. Public Offering. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus (as defined in Section 4 below), as soon after the effective date of the Registration Statement and the date of this Agreement as the Representatives deem advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented). 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed one or more amendments thereto, on Form S-1 (Registration No. 333-06661), including in such registration statement and each such amendment a related preliminary prospectus (a "Preliminary Prospectus"), for the registration of the Shares and the Option Shares, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"). The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Shares, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means such registration statement, as amended, on file with the Commission at the time such registration statement becomes effective (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof or incorporated by reference directly or indirectly therein), provided that such registration statement, at the time it becomes effective, may omit such information as is permitted to be omitted from the registration statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information ("Rule 430A Information") shall be deemed to be included in such Registration Statement when a final prospectus is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act -3- (including the Original Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time the Original Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement, or any amendments thereto, before it becomes effective under the Act, the form of prospectus omitting Rule 430A Information included in the Registration Statement when it becomes effective, if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company with your consent pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. (ii) When the Registration Statement becomes effective, and at all times subsequent thereto to and including the Closing Dates, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is included in the Registration Statement at the time it becomes effective, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will contain all Rule 430A Information; and each Preliminary Prospectus, as of the date filed with the Commission, did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; except that no representation or warranty is made in this Section 4(a)(ii) with respect to statement or omissions made in reliance upon and in conformity with written information furnished to the Company as stated in Section 7(a) with respect to any Underwriter by or on behalf of such Underwriter through the Representatives expressly for inclusion in any Preliminary Prospectus, the Registration -4- Statement, or the Prospectus, or any amendment or supplement thereto. (iii) If the Company has elected to rely on Rule 462(b), then (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (iv) Neither the Commission nor the "blue sky" or securities authority of any jurisdiction has issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Firm Shares or the Option Shares nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (v) Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (vi) The Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of incorporation, with full corporate power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, foreign and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on its business as now being conducted and in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing in each jurisdiction in which its ownership, leasing, licensing, or character, location or use of property and assets or the conduct of its business makes such qualification necessary. (vii) The authorized capital stock of the Company consists of _______________ shares of Common Stock, of which _____________ shares are outstanding; and _____________ shares of preferred stock, $.01 par value, of the Company of which _____ shares are outstanding. Each outstanding share of Common Stock has -5- been duly and validly authorized and issued, fully paid, and non- assessable, without any personal liability attaching to the ownership thereof and has not been issued and is not owned or held in violation of any preemptive rights of shareholders. There is no commitment, plan, preemptive right or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, shares of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company or of any Subsidiary, except as may be properly described in the Prospectus. (viii) The consolidated financial statements of the Company included in the Registration Statement and the Prospectus fairly present, with respect to the Company, the financial position, the results of operations, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act") consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company. The accountants whose report on the audited financial statements is filed with the Commission as a part of the Registration Statement are, and for the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations. No other financial statements are required by Form S-1 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (ix) There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or, to the best knowledge of the Company, any basis therefor) with respect to the Company, or any of its operations, business, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. The Company is not involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon -6- the operations, business, properties, assets or financial condition of the Company. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree which would have a material adverse effect upon the operations, business, properties, assets or financial conditions of the Company; nor is the Company required to take any corrective action in order to avoid any such violation or default. (x) The Company has good title to all properties and assets which the Prospectus indicates are owned by it, and has valid and enforceable leasehold interests in each item of leased real property and personal property, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages (except as may be properly described or as may not be required to be disclosed in the Prospectus). No real property owned, leased, licensed or used by the Company lies in an area which is, or to the best knowledge of the Company is expected to be, subject to zoning, use or building code restrictions which would prohibit, and no state of facts relating to the actions or inaction of another person or entity or such person's or entity's ownership, leasing, licensing or use of any real or personal property exists or is expected to exist which would prevent, the continued effective ownership, leasing, licensing or use of such real property in the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting (except as may be properly described in the Prospectus). (xi) Neither the Company nor, to the best knowledge of the Company, any other party is now or is expected by the Company to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is material to the Company or by which any of its properties or business may be bound or affected, and no event has occurred which with notice or lapse of time or both would constitute such a default (subject to the best knowledge of the Company with respect to third-party events constituting a default with the lapse of time or in which any required notice to the Company has not been given), and each such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding is in full force and is the legal, valid and binding obligation of the parties thereto and is enforceable as to them (subject to the best knowledge of the Company with respect to third parties) in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization and other laws affecting creditors' rights generally, and by general limitations in the availability of equitable remedies. The Company enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. The Company is not a party to or bound by any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, or subject to any charter or other restriction, which has had or is expected to have a material adverse effect on -7- the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company. The Company is not in violation or breach of, or in default with respect to, any term of its articles of incorporation (or other charter document) or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation which default or violation with respect to any franchise, license, permit judgment, decree, order, statute, rule or regulation would have a material adverse effect on the operations, business, properties, assets or financial condition of the Company. (xii) The Company has filed all federal, state, local and foreign tax returns which are required to be filed through the date hereof, or has received extensions thereof, and has paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. (xiii) All patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, franchises, and other intangible properties and assets listed in the Registration Statement under "Business- Patents" (all of the foregoing being collectively herein called "Intangibles") that the Company owns, possesses or has pending, or under which it is licensed, are in good standing and, to the best knowledge of the Company, uncontested. There is no right under any Intangible necessary to the business of the Company as presently conducted or that the Prospectus indicates the Company has that the Company does not have (except as may be so described in the Prospectus). The Company has not infringed, is not infringing, and has not received any notice of infringement with respect to asserted Intangibles of others. To the best knowledge of the Company, there is no infringement by others of Intangibles of the Company. To the best knowledge of the Company, there is no Intangible of others which is expected to have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company. (xiv) Neither the Company nor, to the best knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. No transaction has occurred between or among the Company and any of its officers or directors or any affiliates or affiliates of any such officer or director, except as described in the Prospectus or as may be omitted from the Prospectus in accordance with the Regulations. -8- (xv) The Company has all requisite power and authority to execute, deliver and perform each of this Agreement and the Representatives' Warrants (collectively, the "Company Documents"). All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery and performance of each of the Company Documents. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms and each of the other Company Documents have been duly authorized and when executed and delivered by the Company will be the legal, valid and binding obligation of the Company enforceable as to the Company in accordance with its terms (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally and to general limitations on the availability of equitable remedies). No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal, state, local or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery or performance by the Company of the Company Documents (except filings under the Act which have been or will be made before the applicable Closing Date and such consents consisting only of consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement or others as have been made or obtained). No consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of the Company Documents, except as have been obtained, and the execution, delivery and performance of the Company Documents, will not violate, result in a breach of, conflict with, accelerate the due date of any payments under, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement, or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment or decree binding on the Company or to which any of its operations, business, properties or assets are subject. (xvi) The Firm Shares and the Option Shares are duly and validly authorized. The Firm Shares and the Option Shares, when delivered in accordance with this Agreement will be duly and validly issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the Underwriters will receive good title to the Firm Shares and the Option Shares purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. -9- (xvii) The Warrant Shares are validly authorized and reserved for issuance and, when issued and delivered upon exercise of the Representatives' Warrants, will be validly issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the holders of the Representatives' Warrants will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. (xviii) The Firm Shares, the Option Shares, the Representatives' Warrants, all of the classes of the Common Stock and the Preferred Stock conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (xix) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described therein, there has not been any material adverse change in the assets or properties, business or results of operations or financial condition of the Company, whether or not arising from transactions in the ordinary course of business; the Company has not sustained any material loss or interference with its business or properties from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance; since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected in the Prospectus, the Company has not undertaken any liability or obligation, direct or contingent, except for liabilities or obligations undertaken in the ordinary course of business and except in connection with the issuance and sale of the Shares; and, except as reflected in the Prospectus, the Company has not (A) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (B) entered into any transaction not in the ordinary course of business, or (C) declared or paid any dividend or made any distribution on any of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock. (xx) Neither the Company nor, to the best knowledge of the Company, any of its officers, directors or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Firm Shares or the Option Shares. (xxi) The Company has obtained from each of its executive officers and directors, his or her enforceable written -10- agreement, in form and substance satisfactory to counsel for the Underwriters, that for a period of 180 days from the date on which the public offering of the Shares commences he or she will not, without the prior written consent of Rodman & Renshaw, Inc. ("Rodman"), on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or other securities of the Company (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by him or her. (xxii) The Company is not, and does not intend to conduct its business in a manner in which it would become, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "Investment Company Act"). (xxiii) All offers and sales of the Company's capital stock, prior to the date hereof, were at all relevant times exempt from the registration requirements of the Act, and were the subject of an available exemption from the registration requirements of all applicable state securities or blue sky laws. (xxiv) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement, except such persons or entities from whom written waivers of such rights have been received prior to the date hereof. (xxv) Except as may be set forth in the Prospectus, the Company has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. (xxvi) No transaction has occurred between or among the Company or any of the Subsidiaries and any of their respective officers or directors or any affiliates of any such officer or director, that is required to be described in and is not described in the Registration Statement and the Prospectus. (xxvii) The Company has, and at each Closing Date will have, made all filings required to be made by it under the Exchange Act, and such filings, at the time they were made, complied in all material respects with the requirements of the Exchange Act, and the rules and regulations thereunder, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. -11- (xxviii) The Common Stock, including the Shares, is authorized for quotation on the Nasdaq National Market upon official notice of issuance. (xxix) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate of any person located in Cuba. If, at any time after the date that the Registration Statement is declared effective with the Commission or with the Florida Department of Banking and Finance (the "Florida Department"), whichever date is later, and prior to the end of the period referred to in the first clause of Section 4(ii) hereof, the Company commences engaging in business with the government of Cuba or with any person or affiliate of any person located in Cuba, the Company will so inform the Florida Department within ninety days after such commencement of business in Cuba, and during the period referred to in Section 4(ii) hereof will inform the Florida Department within ninety days after any change occurs with respect to previously reported information. 5. Conditions of the Underwriters' Obligations. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject in the Representatives' sole discretion, to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement; if the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall be effective not later than the earlier of (i) 11:00 a.m. New York time, on the date on which the amendment to the registration statement originally filed with respect to the Shares or to the Registration Statement, as the case may be, containing information regarding the public offering price of the Shares has been filed with the Commission, and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2) or, with respect to the Original Registration Statement, such later time and date as shall have been consented to by the Representatives. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representatives. (c) The representations and warranties of the Company contained in this Agreement and in the certificate delivered pursuant to Section 5(d) shall be true and correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all -12- covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. (d) The Representatives shall have received on each Closing Date, a certificate, addressed to the Representatives and dated such Closing Date, executed on behalf of the Company by the chief executive officer and the chief financial officer of the Company to the effect that the persons executing such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (e) The Representatives shall have received at the time this Agreement is executed and on each Closing Date a signed letter from KPMG Peat Marwick LLP addressed to the Representatives and dated, respectively, the date of this Agreement and each such Closing Date, in form and scope reasonably satisfactory to the Representatives, with reproduced copies or signed counterparts thereof for each of the Underwriters confirming that they are independent accountants within the meaning of the Act and the Regulations, that the response to Item 10 of the Registration Statement is correct in so far as it relates to them and stating in effect that: (i) in its opinion the audited financial statements and financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectus and reported on by it comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the heading "Selected Financial Data" which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the shareholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Selected Financial Data," and included or incorporated by reference in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited financial statements from which such amounts were derived; or -13- (B) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any decreases in net sales, income before income taxes and net income or any increases in long-term debt of the Company or any decreases in the capital stock, working capital or the shareholders' equity in the Company, as compared with the amounts shown on the Company's audited Balance Sheet for the fiscal year ended March 31, 1996 included in the Registration Statement or the audited Statement of Operations, for such year; and (iii) they have performed certain other procedures as a result of which they determined that information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company. References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of such letter. (f) The Representatives shall have received on each Closing Date from Dorsey & Whitney LLP, counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters, with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Minnesota and has duly elected directors, held its first meeting of the board of directors, adopted by-laws, elected officers and received payment of any statutory minimum amount for capital stock pursuant to the Minnesota Business Corporation Act. The Company has full corporate power and authority to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. To the knowledge of such counsel, the Company has no subsidiary and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. The Company is duly qualified to do business and is in good standing, in each state where the failure to be so qualified could have a material adverse effect on the operating condition (financial and otherwise) or business of the Company. (ii) The Company has authorized, issued and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares are in due and proper legal form under the Minnesota Business Corporation Act. Each outstanding share of Common Stock has been duly authorized and validly issued and is fully paid and -14- non-assessable, without any personal liability attaching solely to the ownership thereof, and, to the knowledge of such counsel, has not been issued and is not owned or held in violation of any preemptive right of shareholders. To the knowledge of such counsel, there is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as may be described in the Prospectus. To the knowledge of such counsel, there is outstanding no security or other instrument which by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company, except as may be described in the Prospectus. (iii) To the knowledge of such counsel, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect with respect to the Company, or any of its respective operations, businesses, properties, assets, or financial condition which is required to be described in the Prospectus that is not described as required under the Act or the Exchange Act. (iv) The issuance and sale of the Shares and Representatives' Warrants as described in the Prospectus, will not violate or conflict with, or constitute a breach or default with respect to, the articles of incorporation or bylaws of the Company, or any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding known to such counsel to which the Company is a party. (v) The Company has all requisite corporate power to execute, deliver and perform the Company Agreements and to issue and sell the Shares and to issue the Representatives' Warrants. All necessary corporate proceedings of the Company have been taken to authorize the execution, delivery and performance by the Company of the Company Documents. Each of the Company Documents has been duly authorized by all requisite corporate action, executed and delivered by the Company, is the legal, valid and binding obligation of the Company and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally and general limitations on the availability of equitable remedies) is enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal state, local or other governmental authority or any court or other tribunal is required by the Company, for the execution and delivery by the Company of the Company Documents and the issuance and sale of the Shares and Representatives' Warrants as contemplated by the Registration Statement (except filings under the Act and the Exchange Act which have been made prior to the Closing Date and consents consisting only of approvals and consents under "blue sky" or securities -15- laws). To the knowledge of such counsel, no consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of the Company Documents (except as have been obtained); and the execution, delivery and performance of the Company Documents will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, in each case known to such counsel, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule or regulation of the United States, the State of Minnesota or any government authority or regulatory body thereof or any, order, judgment, or decree known to such counsel and binding on the Company or to which any of its respective operations, businesses, properties or assets are subject. (vi) The Firm Shares and the Option Shares are duly and validly authorized. Such opinion delivered at each of the Closing Dates shall state that each Share to be delivered on that date is duly and validly issued, fully paid, and non-assessable, with no personal liability attaching solely to the ownership thereof, and is not issued, to the knowledge of such counsel, in violation of any preemptive rights of shareholders, and the Underwriters have received good title to the Shares purchased by them from the Company for the consideration contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of any liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting trusts and other claims. The Common Stock, the Firm Shares and the Option Shares conform substantially and in all material respects to the description thereof contained in the Registration Statement or the Prospectus. (vii) The Warrant Shares have been duly and validly reserved for issuance and, upon issuance, delivery and payment therefore, as described in the Representatives' Warrants, will be validly issued, fully paid and non-assessable, without any personal liability attaching solely to the ownership thereof, and will not be issued, to the knowledge of such counsel, in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons. The Representatives' Warrants have been duly and validly issued, fully paid, and non-assessable, with no personal liability attaching solely to the ownership thereof, and will not have been issued, to the knowledge of such counsel, in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons, and the holders of the Representatives' Warrants will receive good title to the securities purchased by them from the Company, for the consideration -16- contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of any liens, security interests, pledges, charges, encumbrances, stockholders' agreements, voting trusts and other claims. The Warrant Shares and the Representatives' Warrants conform substantially and in all material respects to the description thereof contained in the Registration Statement or the Prospectus. (viii) Any contract, agreement, instrument, lease or license known to such counsel and required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease or license known to such counsel and required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (ix) Insofar as statements in the Prospectus purport to summarize provisions of the Company's agreements and licenses with pharmaceutical and medical device companies, the Minnesota Business Corporation Act, the Company's lease for its facilities in Minneapolis, Minnesota, the Company' employee agreements, the Company's stock option plans, the Company's loan agreements, the Company's preferred, common and warrant purchase agreements and the Act and Exchange Act, such statements have been prepared or reviewed by such counsel and to the knowledge of such counsel, accurately reflect the provisions purported to be summarized and are correct in all material respects. (x) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the Prospectus, will not become an "investment company" and will not be required to be registered under the Investment Company Act. (xi) To the knowledge of such counsel, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement except such persons or entities from whom written waivers of such rights have been received prior to the Closing Date. (xii) The Registration Statement has become effective under the Act. No Stop Order has been issued and no proceedings for that purpose have been instituted or, to the knowledge of such counsel, are threatened, pending or contemplated. (xiii) The Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), comply as to form -17- in all material respects with the requirements of the Act and the Regulations. In addition, such counsel shall state that such counsel has participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel has not independently verified and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing and relying as to materiality upon the representations of executive officers of the Company after conferring with such executive officers, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement, except for the financial statements and other financial and statistical data included therein as to which counsel need express no statement, at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, or any Rule 430A Prospectus, except for the financial statements and other financial and statistical data included therein as to which counsel need express no statement, as amended or supplemented on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by the Company as to laws of any jurisdiction other than the Federal laws of the United States and the laws of the State of Minnesota, provided that (1) each such local counsel is reasonably acceptable to the Representatives and (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is addressed to the Representatives and is in form and substance reasonably satisfactory to them and their counsel. In addition, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company, provided that executed copies of such certificates are provided to the Representatives. (g) The Representatives shall have received on each Closing Date from Pennie & Edmonds, patent counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters. (h) The Representatives shall have received on each Closing Date from Covington & Burling, FDA counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters. (i) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be satisfactory in form and substance to the Representatives and their counsel, and the Underwriters shall have received from Squadron, Ellenoff, Plesent & -18- Sheinfeld, LLP, a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (j) On the Firm Shares Closing Date, the Company shall have issued to the Representatives, the Representatives' Warrants equal to 10% of the Firm Shares. 6. Covenants of the Company. (a) The Company covenants and agrees as follows: (i) The Company shall use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of prospectus omitting Rule 430A information, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company shall notify you immediately, and confirm such notice in writing, (A) when the Registration Statement and any post-effective amendment thereto become effective, (B) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (C) of the receipt of any notification with respect to a Stop Order. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any Stop Order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) During the time when a Prospectus relating to the Shares is required to be delivered hereunder or under the Act or the Regulations, comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act and the Regulations, there shall occur any event as a result of which the Prospectus as then amended or supplemented would include any 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 under which they were made not misleading, or if it -19- shall be necessary to amend or supplement the Prospectus to comply with the Act or the Regulations, the Company promptly shall prepare and file with the Commission, subject to the third sentence of paragraph (i) of this Section 6(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (iii) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Act or Rule 158 of the Regulations. (iv) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits and amendments thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act or the Regulations, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (v) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vi) For a period of five years after the date of this Agreement, the Company shall supply to the Representatives, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representatives a copy of each annual or other report it shall be required to file with the Commission. (vii) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 p.m. eastern time on the date of -20- this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (viii) Without the prior written consent of Rodman, on behalf of the Underwriters, for a period of 180 days from the date on which a public offering of the Shares commences, the Company shall not issue, sell or register with the Commission or otherwise dispose of, directly or indirectly, any securities of the Company (or any securities convertible into or exercisable or exchangeable for securities of the Company), except for (A) the issuance of the Shares pursuant to the Registration Statement (B) the issuance of Common Stock upon the exercise of currently outstanding options and warrants or pursuant to outstanding contingent share agreements, (C) the issuance of options under plans disclosed in the Registration Statement, (D) the filing of a registration statement on Form S-8 or other comparable form in respect of the shares underlying the option plans disclosed in the Registration Statement and (E) the issuance of Common Stock in connection with acquisitions with consent not to be unreasonably withheld. (ix) The Company shall use its reasonable efforts to assure that the restrictions set forth in the so-called "lock-up" agreements signed by certain shareholders of the Company are enforced. (x) Prior to each Closing Date and for a period of 25 days thereafter, you shall be given reasonable written prior notice of any press release or other direct or indirect communication and of any press conference with respect to the Company, the financial conditions, results of operations, business, properties, assets, liabilities of the Company, or this offering. (xi) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market. (xii) Until expiration of the Representatives' Warrants, the Company shall keep reserved sufficient shares of Common Stock for issuance upon exercise thereof. (xiii) The Company will make all filings required to be made under the Exchange Act and such filings shall comply in all material respects with the Requirements of the Exchange Act and the rules and regulations thereunder. (xiv) Prior to each Closing Date and for a period of 25 days thereafter, you shall be given reasonable written prior notice of any press release or other direct or indirect communication and of any press conference with respect to the Company, the financial condition, results of operations, business, properties, assets, liabilities of the Company, or this offering. (xv) The Company shall participate in conference calls designated and arranged by the Representatives on a quarterly basis in connection with the release of its quarterly earnings for a period of one year from the Firm Shares Closing Date, subject to any applicable law. (b) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are -21- consummated or this Agreement is terminated, all of its costs and expenses relating to the registration and public offering of the Shares including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and any documents required to be delivered with any Preliminary Prospectus or the Prospectus, and the printing, filing and distribution of the Agreement Among Underwriters, this Agreement and related documents; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v), including the fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of all reports and information required by Section 6(a)(vi); (vii) inclusion of the Shares for quotation on the Nasdaq National Market; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Except as otherwise contemplated by Section 9 hereof, the Underwriters will pay their own out-of-pocket expenses, including counsel fees and expenses to the extent not otherwise covered by clause (iii) above, and their own travel and travel-related expenses in connection with the offering and distribution of the Shares. Without limiting the Company's obligations set forth above, it agrees to pay all of its other costs and expenses incident to the performance of its obligations under this Agreement and the sale of the Shares by it hereunder. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise -22- out of or are based upon any omission or alleged omission to state therein such fact required to be stated therein or necessary to make such statements therein not misleading. Such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein. In no event shall the indemnification agreement contained in this Section 7(a) inure to the benefit of any Underwriter on account of any losses, claims, damages, liabilities or actions arising from the sale of the Shares upon the public offering to any person by such Underwriter if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus and if, in respect to such statement, omission or alleged omission, the Prospectus differs in a material respect from such preliminary prospectus, such that the Prospectus does not contain such untrue statement or such omission or alleged untrue statement or omission, and a copy of the Prospectus has not been sent or given to such person at or prior to the confirmation of such sale to such person. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, which were made in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter for specific use therein; provided, however, that except as otherwise provided in section 9 below the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received or to be received by the Company from such Underwriter. For all purposes of this Agreement, the public offering price and underwriting discounts and commissions set forth on the cover of the Prospectus, the stabilization language in the penultimate paragraph on page 2 of the Prospectus and the third paragraph under the caption "Underwriting" (except for the penultimate sentence thereof) constitute the only information furnished in writing by or on behalf of any Underwriter expressly for inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto. -23- (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party), or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent. 8. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 7(a) and (b) is due in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, such as the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who -24- may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts but before deducting expenses) received by the Company from the sale of the Shares, as set forth in the table on the cover page of the Prospectus (but not taking into account the use of the proceeds of such sale of Shares by the Company), bear to (y) the underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company, or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) the Company shall be liable and responsible under this Section 8 for any amount in excess of the underwriting discount; provided, however (i) that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i), (ii) and (iii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriters' obligations to -25- contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. Termination. This Agreement may be terminated with respect to the Shares to be purchased on any Closing Date by the Representatives by notifying the Company at any time prior to the purchase of the Shares: (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the Offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or the Nasdaq National Market System has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or federal authority, or (b) at or before any Closing Date, if any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company or all of them to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder but not to exceed an aggregate of $25,000 and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability (without limitation as to amount) to the Company or to the other Underwriters for all damages occasioned by its failure or refusal. 10. Substitution of Underwriters. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date -26- the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date: (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. Miscellaneous. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, and the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive -27- delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and their respective heirs, executors, administrators, personal representatives, successors and assigns and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and delivered by mail, overnight courier, personal delivery, or by telefax if subsequently confirmed by letter, (a) if to the Representatives, to Rodman & Renshaw, Inc., 225 Liberty Street, 2 World Financial Center, 30th Floor, New York, New York 10281, and Attention: John J. Borer III, Managing Director, telecopy: (212) 416- 7439 and (b) if to the Company, to the Company's agent for service as such agent's address appears on the cover page of the Registration Statement or telecopy: (612) 553-1610, with a copy to Amy Lange, Esq. as such person's address appears on the cover page of the Registration Statement. Such notices and communications shall be deemed received three days following the date of dispatch if by mail, upon receipt if by overnight courier, upon confirmation if by telefax or when made if by personal delivery. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons or entity or entities requires. -28- All section headings herein are for convenience of reference only and are not part of this Agreement, and no construction or inference shall be derived therefrom. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, MEDI-JECT CORPORATION By: --------------------------------------------- Name: Franklin Pass, M.D. Title: President, Chief Executive Officer and Chairman of the Board of Directors Confirmed on behalf of itself and as a Representative of the several Underwriters named in Schedule I annexed hereto: RODMAN & RENSHAW, INC. By: --------------------------- Name: John J. Borer III Title: Managing Director R. J. STEICHEN & COMPANY By: --------------------------- Name: -------------------- Title: Managing Director -29- SCHEDULE I
Number of Firm Shares to be Name of Underwriter Purchased ------------------- -------------- Rodman & Renshaw, Inc................................ R. J. Steichen & Company............................. --------- Total 2,200,000
-30- EX-1.2 3 FORM OF REPRESENTATIVE'S WARRANT DRAFT SEPTEMBER 23, 1996 WARRANT FOR COMMON STOCK W/CASHLESS EXERCISE THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER, NEITHER THE WARRANTS NOR SUCH SHARES MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. MEDI-JECT CORPORATION Warrant for the Purchase of Shares of Common Stock, $.01 par value per Share No. 1 [__________] Shares THIS CERTIFIES that, for receipt in hand of [$______] [$0.001 per share of underlying Common Stock] and other value received, [______________] (the "Holder"), is entitled to subscribe for and purchase from MEDI-JECT CORPORATION, a Minnesota corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time after [one year after the effective date], and before 5:00 P.M. on [five years after the effective date], New York time (the "Exercise Period"), [________] shares of the Company's Common Stock, $.01 par value ("Common Stock"), at a price of $_____ per share (120% of the offering price) (the "Exercise Price"). This Warrant is the warrant or one of the warrants (collectively, including any warrants issued upon the exercise or transfer of any such warrants in whole or in part, the "Warrants") issued pursuant to the Underwriting Agreement, dated __________, between Rodman & Renshaw, Inc., as representative of the several Underwriters named therein, and the Company. This Warrant may not be sold, transferred, assigned or hypothecated until [one year after the effective date] except that it may be transferred, in whole or in part, to (i) one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) any other underwriting firm or member of the selling group which participated in the public offering of Common Stock (the "Offering") which commenced on [effective date] (or the officers or partners of any such firm); (iii) a successor to the Holder, or the officers or partners of such successor; (iv) a purchaser of substantially all of the assets of the Holder; or (v) by operation of law; and the term the "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with the above. The number of shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time to time as hereinafter set forth. 1. This Warrant may be exercised during the Exercise Period, as to the whole or any lesser number of whole Warrant Shares, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its office at 1840 Berkshire Lane, Minneapolis, Minnesota 55441, or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Warrant Shares for which this Warrant is being exercised (the "Stock Purchase Price"). 2. (a) In lieu of the payment of the Stock Purchase Price, the Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 2. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Stock Purchase Price) that number of shares of Common Stock (the "Conversion Shares") equal to the quotient obtained by dividing (x) the value of this Warrant (or portion thereof as to which the Conversion Right is being exercised if the Conversion Right is being exercised in part) at the time the Conversion Right is exercised (determined by subtracting the aggregate Stock Purchase Price of the shares of Common Stock as to which the Conversion Right is being exercised in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Price (as defined in Section 6(c) hereof) of the shares of Common Stock as to which the Conversion Right is being exercised immediately prior to the exercise of the Conversion Right) by (y) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Rights provided under this Section 2 may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the Conversion Right, the Holder shall surrender to the Company, at its offices, this Warrant with the Notice of Conversion at the end hereof duly executed. The presentation and surrender shall be deemed a waiver of the Holder's obligation to pay all or any portion of the aggregate purchase price payable for the shares of Common Stock as to which such Conversion Right is being exercised. This Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant for conversion in accordance with the foregoing provisions. 3. Upon each exercise of the Holder's rights to purchase Warrant Shares or Conversion Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares or Conversion Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise or conversion of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, -2- registered in the name of the Holder or its designee. If this Warrant should be exercised or converted in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 4. Any Warrants issued upon the transfer or exercise or conversion in part of this Warrant shall be numbered and shall be registered in a Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by the Holder's duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of the authority of such person or entity shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares and/or Conversion Shares granted pursuant to the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full Exercise Price therefor, and all shares of Common Stock issuable upon conversion of this Warrant, shall be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons and the Holders will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts which might be created by acts or omissions to act of the Company. 6. (a) In case the Company shall at any time after the date the Warrants were first issued (i) declare a dividend on the outstanding Common -3- Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price, and the number and kind of securities issuable upon exercise or conversion of this Warrant, in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, or reclassification, shall be proportionately adjusted so that the Holder after such time shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised or converted immediately prior to such time, the Holder would have owned upon such exercise or conversion and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of Common Stock (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness, cash (other than any cash dividend which, together with any cash dividends paid within the 12 months prior to the record date for such distribution, does not exceed 5% of the Current Market Price at the record date for such distribution) or assets (other than dividends payable in shares of its capital stock), or rights, options, or warrants to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for shares of Common Stock, then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive, absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share, and the denominator of which shall be such Current Market Price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the record date for the determination of stockholders entitled to receive such distribution. (c) For the purpose of any computation under this Warrant, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 30 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, the Nasdaq National Market) on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is no longer reporting such information. If on any such date the Common Stock is not listed or admitted to -4- trading on any national securities exchange and is not quoted by Nasdaq or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error, shall be used. (d) No adjustment in the Exercise Price shall be required if such adjustment is less than $.05; provided, however, that any adjustments which by reason of this Section 6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. (e) In any case in which this Section 6 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised or converted this Warrant after such record date, the shares of Common Stock, if any, issuable upon such exercise or conversion over and above the shares of Common Stock, if any, issuable upon such exercise or conversion on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (f) Upon each adjustment of the Exercise Price as a result of the calculations made in this Section, this Warrant shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated to the nearest thousandth) obtained by dividing (i) the product obtained by multiplying the number of shares purchasable upon exercise of this Warrant prior to adjustment of the number of shares by the Exercise Price in effect prior to adjustment of the Exercise Price, by (ii) the Exercise Price in effect after such adjustment of the Exercise Price. (g) Whenever there shall be an adjustment as provided in this Section 6, the Company shall promptly cause written notice thereof to be sent by registered mail or overnight courier, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. (h) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise or conversion of this Warrant. If any fraction of a share would be issuable on the exercise or conversion of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such share of Common Stock on the date of exercise or conversion of this Warrant. 7. (a) In case of any consolidation with or merger of the Company with or into another corporation (other than a merger or consolidation in which -5- the Company is the surviving or continuing corporation), or in case of any sale, lease, or conveyance to another corporation of all or substantially all of the property and assets of the Company, such successor, leasing, or purchasing corporation, as the case may be, shall (i) execute with the Holder an agreement providing that the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such consolidation, merger, sale, lease, or conveyance by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such consolidation, merger, sale, lease, or conveyance, and (ii) make effective provision in its certificate of incorporation or otherwise, if necessary, to effect such agreement. Such agreement shall provide for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise or conversion of this Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (c) The above provisions of this Section 7 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 8. In case at any time the Company shall propose (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or -6- (c) to effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance of property, described in Section 7; or (d) to effect any liquidation, dissolution, or winding-up of the Company; or (e) to take any other action which would cause an adjustment to the Exercise Price; then, and in any one or more of such cases, the Company shall give written notice thereof, by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or (iii) the date of such action which would require an adjustment to the Exercise Price. 9. The issuance of any shares or other securities upon the exercise or conversion of this Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 10. (a) The Company represents that it has, at the Company's sole expense (other than the fees and disbursements of counsel for the Holders and the underwriting discounts, if any, payable in respect of the Underwriters' Securities sold by any Holder), registered or qualified all of the Underwriters' Securities concurrently with the registration of the Company's initial public offering of Common Stock and such registration statement has become effective under the Act. As used herein, "Underwriters' Securities" shall mean the Warrants and the Warrant Shares and the Conversion Shares which, in each case, have not been previously sold pursuant to a registration statement or Rule 144 promulgated under the Act. (b) The Company shall use its best efforts to cause the Underwriters' Securities so registered to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such Holders may reasonably request and, with respect to the Warrant Shares or -7- Conversion Shares, through the facilities of any securities exchange or over- the-counter market on which the Company's Common Stock is traded, at such time as such Holder or Holders reasonably anticipate selling any Underwriters' Securities and so notifies the Company in writing; provided, however, that the Company shall not for any such purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not otherwise required to be so qualified, (B) subject itself to taxation in any jurisdiction wherein it is not so subject or (C) consent to general service of process in any such jurisdiction or otherwise take action that would subject it to the general jurisdiction of the courts of any jurisdiction to which it is not so subject. (c) The Company shall keep effective any registration or qualification contemplated by this Section 10 and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document, and communication for such period of time as shall be required to permit the holders of any Underwriters' Securities (the "Eligible Holders") to complete the offer and sale of the Underwriters' Securities covered thereby upon notice from an Eligible Holder that such Eligible Holder intends to sell Underwriters' Securities pursuant thereto; provided, however, that the Company shall not be required to effect the foregoing during a period of one year from the date hereof. The Holder agrees not to sell, transfer, assign or otherwise dispose of any Underwriters' Securities pursuant to any registration statement under this Section 10 until the Company has informed the Holder in writing that it has amended or supplemented each applicable registration statement, preliminary prospectus, final prospectus, application document and communication necessary under the Act or Exchange Act for the sale of such Underwriters' Securities. The Holder agrees that if, at the time that the Company is requested to update or amend a registration statement or qualification hereunder in order to facilitate a sale of Underwriters' Securities, the Board of Directors of the Company determines, in good faith, that a sale of Underwriters' Securities pursuant to the registration statement or qualification would require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, the Company shall not be required to update or amend such registration statement, and the Holder shall not sell any Underwriters' Securities pursuant thereto, until such time as such restriction is no longer advisable; provided, however, that such time shall not exceed a period of 90 consecutive days and that the foregoing restriction shall not be applicable more than once during each 12-month period commencing upon the effective date of the Offering. (d) The Company shall furnish to each Eligible Holder such number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents, as any Eligible Holder may reasonably request to facilitate the disposition of the Underwriters' Securities included in such registration. -8- (e) The Company shall furnish each Eligible Holder of any Underwriters' Securities so registered at the time such Eligible Holder desires to sell Underwriters' Securities with an opinion of its counsel (reasonably acceptable to the Eligible Holders) to the effect that (i) the registration statement has become effective under the Act and no order suspending the effectiveness of the registration statement, preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus, or any amendment or supplement thereto has been issued, nor has the Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order and (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder, and such counsel shall provide a statement that such counsel has no knowledge of any material misstatement or omission in such registration statement or any prospectus, as amended or supplemented. The Company shall also deliver a statement of counsel stating the jurisdictions in which the Underwriters' Securities have been registered or qualified for sale pursuant to the provisions of Section 10(b). (f) The Company agrees that until all the Underwriters' Securities have been sold under a registration statement or pursuant to Rule 144 under the Act, it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit holders of the Underwriters' Securities to sell such securities under Rule 144. 11. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Eligible Holder, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 11, but not be limited to, reasonable attorneys' fees and any and all reasonable expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, relating to the sale of any of the Underwriters' Securities, or (B) in any application or other document or communication (in this Section 11 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify any of the Underwriters' Securities under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to such Eligible Holder by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any -9- amendment or supplement thereto, or in any application, as the case may be. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Warrant. If any action is brought against any Eligible Holder or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability pursuant to this Section 11(a) unless the Company was unaware of the action to which such notice would have related and the failure to so notify materially prejudices the Company's ability to defend such action, but the failure to so notify shall not relieve the Company from any liability that it may have for contribution or otherwise under this Section) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be a conflict of interest between the indemnified party or parties and the Company in the conduct of the defense of such action in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section 11 to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company agrees promptly to notify the Eligible Holders of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Underwriters' Securities or any preliminary prospectus, prospectus, registration statement, or amendment or supplement thereto, or any application relating to any sale of any Underwriters' Securities. (b) The Holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering Underwriters' Securities held by the Holder, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their respective counsel, to the same extent as the foregoing indemnity from the Company to the Holder in Section 11(a), but only with respect to statements or -10- omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holder by or on behalf of the Holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder pursuant to this Section 11(b), the Holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 11(a). (c) To provide for just and equitable contribution, if an indemnified party makes a claim for indemnification pursuant to Section 11(a) or 11(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, then the Company shall contribute (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and its or their respective counsel), as one entity, and the Eligible Holders of the Underwriters' Securities included in such registration in the aggregate shall contribute (including for this purpose any contribution by or on behalf of an indemnified party), as a second entity, to the losses, liabilities, claims, damages, and expenses whatsoever (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution (i) received by the Company from persons other than the Eligible Holders, persons who control the Company within the meaning of the Act, officers of the Company who signed the registration statement and directors of the Company, or (ii) received by the Eligible Holders from persons other than the Company, any director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and the Company's or their respective counsel, who may also be liable for contribution) to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and such Eligible Holders in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission relates to information supplied by the Company or by such Eligible Holders, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. The Company and the Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Eligible Holders for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if the Holder and the other indemnified parties were treated as one entity -11- for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 11(c). In no case shall any Eligible Holder be responsible for a portion of the contribution obligation imposed on all Eligible Holders in excess of its pro rata share based on the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by it and included in such registration as compared to the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by all Eligible Holders and included in such registration. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 11(c), each person, if any, who controls any Eligible Holder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent, and counsel of each such Eligible Holder or control person shall have the same rights to contribution as such Eligible Holder or control person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, each director of the Company, and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 11(c). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 11(c), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section 11(c). Anything in this Section 11(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 11(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 12. The Warrant Shares issued upon exercise of the Warrants shall be subject to a stop transfer order and the certificate or certificates evidencing such Warrant Shares shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT." 13. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. -12- 14. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 15. This Warrant shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles of conflicts of law. Dated: , 199_ MEDI-JECT CORPORATION By: --------------------------------------------- Name: Franklin Pass, M.D. Title: President, Chief Executive Officer and Chairman of the Board of Directors [Seal] - ---------------------- Secretary -13- FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, __________________ hereby sells, assigns, and transfers unto __________________ a Warrant to purchase __________ shares of Common Stock, without par value per share, of Medi-Ject Corporation (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint __________________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ----------------------- Signature -------------------------------- NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. -14- To: Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, MN 55441 ELECTION TO EXERCISE The undersigned hereby exercises his or its rights to purchase _______ Warrant Shares covered by the within Warrant and tenders payment herewith in the amount of $_________ in accordance with the terms thereof, and requests that certificates for such securities be issued in the name of, and delivered to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrant Shares shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: Name ------------------------ -------------------------------- (Print) Address: ------------------------------------------------------------------------ ------------------------------------- (Signature) -15- To: Medi-Ject Corporation 1840 Berkshire Lane Minneapolis, MN 55441 CASHLESS EXERCISE FORM (To be executed upon conversion of the attached Warrant) The undersigned hereby irrevocably elects to surrender its Warrant for the number of shares of Common Stock as shall be issuable pursuant to the cashless exercise provisions of the within Warrant, in respect of _____ shares of Common Stock underlying the within Warrant, and requests that certificates for such securities be issued in the name of and delivered to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name, Address and Social Security or Tax Identification Number) and, if such number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the addressed stated below. Dated: Name ------------------------ -------------------------------- (Print) Address: ------------------------------------------------------------------------ ------------------------------------- (Signature) -16- EX-10.20 4 DEVELOPMENT AND LICENSE AGREEMENT Exhibit 10.20 DEVELOPMENT AND LICENSE AGREEMENT This Agreement is made by and between BECTON, DICKINSON AND COMPANY, a New Jersey corporation ("BECTON"), and MEDI-JECT CORPORATION, a Minnesota corporation ("MEDI-JECT"). Whereas, MEDI-JECT has experience in and has committed significant resources to designing and developing needleless injection devices and systems, including disposables, suitable for the delivery of various drugs; Whereas, BECTON has experience in marketing and selling drug delivery devices and systems, including disposables; Whereas, MEDI-JECT and BECTON entered into a Confidentiality Agreement, dated February 1, 1995, for the purpose of sharing information in order to evaluate a possible business relationship; Whereas, the parties have completed their evaluation and now desire to proceed with a development and licensing agreement sufficient to permit MEDI- JECT to develop needleless injection devices and BECTON to develop disposables, to be followed by separate supply agreements; Now, therefore, in consideration of the premises and promises contained herein, the parties agree as follows. ARTICLE I - DEFINITIONS 1.1 "AFFILIATE" shall mean any corporation or other business entity controlled by or in common control of a party. "Control" as used herein means the ownership directly or indirectly of fifty percent (50%) or the maximum interest permitted by local law of the voting stock of a corporation or a fifty percent (50%) or greater interest in the income of such corporation or other business entity or the ability otherwise of a party to secure that the affairs of such corporation or other business entity are managed in accordance with its wishes. 1.2 "BECTON" shall include all of the divisions, subsidiaries and AFFILIATES of Becton, Dickinson and Company. 1.3 "BECTON PROPERTY" shall mean (a) all INTELLECTUAL PROPERTY owned by or licensed to (with right of sublicense) BECTON prior to the EFFECTIVE DATE relating to DISPOSABLES, and (b) all INTELLECTUAL PROPERTY made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or MEDI-JECT or jointly by employees or agents of both parties) during the course of the OPEN DEVELOPMENT PROGRAM or a CLOSED DEVELOPMENT PROGRAM and covering DISPOSABLES (including without limitation the manufacture, use or sale thereof), excluding PROGRAM DISPOSABLE PROPERTY. 1.4 "CLOSED ARCHITECTURE SYSTEM" shall mean any NEEDLELESS INJECTOR and DISPOSABLE (a) each of which is designed or calibrated for use with a specific drug, (b) which are designed to be used together as an integrated unit, and (c) which are intended to be sold to and distributed by or on behalf of a third party pharmaceutical company. The parties will develop and commercialize CLOSED ARCHITECTURE SYSTEMS as set forth in Article III. -2- 1.5 "CLOSED DEVELOPMENT PROGRAM" shall mean each and every development program for the development and commercialization of one or more CLOSED ARCHITECTURE SYSTEMS pursuant to Paragraph 3.3. 1.6 "COST OF GOODS SOLD" shall mean (***). 1.7 "DISPOSABLE" shall mean a single-use or multiple-use disposable drug chamber (either user-filled or pre-fillable) or other related drug-containing or drug-contacting component (e.g., vial adapter) for use with a NEEDLELESS INJECTOR. 1.8 "EFFECTIVE DATE" shall mean January 1, 1996. 1.9 "INTELLECTUAL PROPERTY" shall mean and include all patentable and unpatentable inventions, ideas, discoveries, improvements, design rights, works of authorship, trade secrets, know-how and any equivalents thereof. 1.10 "LICENSED PATENTS" shall mean those United States and foreign patents and/or patent applications within the MEDI-JECT PROPERTY, BECTON PROPERTY, PROGRAM DISPOSABLE PROPERTY or PROGRAM SYSTEM PROPERTY, including any continuations, continuations-in-part, divisions, extensions, substitutions, reissues or re-examinations thereof. 1.11 "MEDI-JECT" shall include all of the divisions, subsidiaries and AFFILIATES of Medi-Ject Corporation. 1.12 "MEDI-JECT PROPERTY" shall mean (a) all INTELLECTUAL PROPERTY owned by or licensed to (with right of sublicense) MEDI-JECT prior to the EFFECTIVE DATE relating to NEEDLELESS INJECTORS and/or DISPOSABLES - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -3- for OPEN ARCHITECTURE SYSTEMS or CLOSED ARCHITECTURE SYSTEMS and (b) all INTELLECTUAL PROPERTY made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or MEDI-JECT or jointly by employees or agents of both parties) during the course of the OPEN DEVELOPMENT PROGRAM or a CLOSED DEVELOPMENT PROGRAM and covering NEEDLELESS INJECTORS (including without limitation the manufacture, use or sale thereof). 1.13 "MJ-6" shall mean the needleless injector system previously developed by MEDI-JECT as of the EFFECTIVE DATE for use in connection with the delivery of insulin, human growth hormone and those other drugs listed on Exhibit C hereto, including enhancements thereto (e.g. disposables) but excluding any needleless injector system having a size materially smaller than that of the MJ-6. 1.14 "NEEDLELESS INJECTOR" shall mean (a) a reusable device for needleless, transdermal injection of parenteral drugs which is (i) designed for use with a DISPOSABLE and (ii) self-powered or powered by means of any external energy source and, if applicable, (b) any reusable external energy source and related ancillary components. The parties agree that the term NEEDLELESS INJECTOR excludes the MJ-6. 1.15 "NET SALES" shall mean the price at which ROYALTY-BEARING DISPOSABLES are sold by BECTON or MEDI-JECT, its respective AFFILIATES or sublicensees to a purchaser (other than BECTON OR MEDI-JECT, its respective AFFILIATES or sublicensees), (***). The parties recognize that only one royalty shall be payable with respect to any ROYALTY-BEARING DISPOSABLE regardless of the - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -4- number of VALID CLAIMS under the applicable LICENSED PATENTS that may cover the manufacture, sale or use of such DISPOSABLE. 1.16 "OPEN ARCHITECTURE SYSTEM" shall mean a NEEDLELESS INJECTOR and DISPOSABLE (a) which are not designed or calibrated for use with a specific drug made by a specific drug company and (b) which are intended to be distributed primarily through pharmacies for uses other than (***). Initially, the parties will develop an OPEN ARCHITECTURE SYSTEM for insulin; the parties may develop additional OPEN ARCHITECTURE SYSTEMS for other drugs as set forth in Article III. 1.17 "OPEN DEVELOPMENT PROGRAM" shall mean the joint program under which: (i) MEDI-JECT, using PROGRAMS FUNDS paid by BECTON and on behalf of BECTON, shall undertake to develop a NEEDLELESS INJECTOR for an OPEN ARCHITECTURE SYSTEM, including specifications, timetables, milestones, reports and deliverables, as set forth in Exhibit A hereto; (ii) BECTON, using its own funds, shall undertake to develop a DISPOSABLE for use with such NEEDLELESS INJECTOR for an OPEN ARCHITECTURE SYSTEM, including the specifications, timetables, milestones reports and deliverables, also as set forth in Exhibit A hereto; and (iii) MEDI-JECT and BECTON shall work together to integrate the NEEDLELESS INJECTOR and DISPOSABLE so developed into an OPEN ARCHITECTURE SYSTEM. 1.18 (***). 1.19 (***). - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -5- 1.20 "PROGRAM DISPOSABLE PROPERTY" shall mean all INTELLECTUAL PROPERTY made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or MEDI-JECT or jointly by employees or agents of both parties) during the course of the OPEN DEVELOPMENT PROGRAM or a CLOSED DEVELOPMENT PROGRAM and covering DISPOSABLES (including without limitation the manufacture, use or sale thereof) solely for use in connection with NEEDLELESS INJECTORS. 1.21 "PROGRAM FUNDS" shall mean the monies paid by BECTON to MEDI-JECT pursuant to Paragraph 2.4 to fund MEDI-JECT's portion of the OPEN DEVELOPMENT PROGRAM. 1.22 "PROGRAM SYSTEM PROPERTY" shall mean all INTELLECTUAL PROPERTY made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or MEDI-JECT or jointly by employees or agents of both parties) during the course of the OPEN DEVELOPMENT PROGRAM or a CLOSED DEVELOPMENT PROGRAM and covering NEEDLELESS INJECTORS and DISPOSABLES (including without limitation the manufacture, use or sale thereof) as integral parts of an OPEN ARCHITECTURE SYSTEM or CLOSED ARCHITECTURE SYSTEM. 1.23 "ROYALTY-BEARING DISPOSABLE" shall mean: (a) with respect to Paragraphs 3.3, 7.2, 12.4(b) and (c) any DISPOSABLE, (i) the manufacture, use or sale of such is covered, in the country where the DISPOSABLE is manufactured or sold, by (***), a claim of a pending - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -6- patent application within the LICENSED PATENTS, or (***), a VALID CLAIM of any LICENSED PATENT or any third party technology acquired jointly pursuant to Paragraph 6.3; provided that such pending patent application or such LICENSED PATENT, as applicable, names as the sole inventor(s) or as joint inventors, employees of MEDI-JECT; or (ii) which is manufactured or sold in any country in which the FDA or applicable regulatory authority requires the use of such DISPOSABLE with a NEEDLELESS INJECTOR covered by any of the LICENSED PATENTS; or (b) with respect to Paragraphs 3.5, 4.4, 5.5, 12.2 and 12.5 of this Agreement and Paragraph 8 of Exhibit B, any DISPOSABLE, (i) the manufacture, use or sale of such is covered, in the country where the DISPOSABLE is manufactured or sold, by (***), a claim of a pending patent application within the LICENSED PATENTS, or (***), a LICENSED PATENT of any LICENSED PATENT or any third party technology acquired jointly pursuant to Paragraph 6.3; provided that such pending patent application or such LICENSED PATENT, as applicable, names as the sole inventor(s) or joint inventors, employees of BECTON, or (ii) which is manufactured or sold in any country in which the FDA or applicable regulatory authority requires the use of such DISPOSABLE with a NEEDLELESS INJECTOR covered by any of the LICENSED PATENTS. 1.24 "SUPPLY AGREEMENT" shall mean an agreement to be entered into between BECTON and MEDI-JECT under which MEDI-JECT shall supply to BECTON NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS, which - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -7- agreement shall include the terms set forth in Exhibit B below and such other terms and conditions as are customary in such agreements and as the parties shall mutually agree. 1.25 "STOCK PURCHASE AGREEMENTS" shall mean the PREFERRED STOCK PURCHASE AGREEMENT, WARRANT, and OPTION AGREEMENT between BECTON and MEDI-JECT of even date herewith under which BECTON acquired equity and other interests in MEDI- JECT. 1.26 "VALID CLAIM" shall mean at least one claim of an issued or granted LICENSED PATENT so long as such claim shall not have been cancelled or shall not have been held invalid or not infringed in an unappealed or unappealable decision rendered by a tribunal of competent jurisdiction. ARTICLE II - OPEN DEVELOPMENT PROGRAM 2.1 MEDI-JECT and BECTON each shall use reasonably diligent efforts to carry out their respective parts of the OPEN DEVELOPMENT PROGRAM as set forth in Exhibit A. MEDI-JECT shall use PROGRAM FUNDS solely to carry out the OPEN DEVELOPMENT PROGRAM and for no other purpose. MEDI-JECT shall use reasonably diligent efforts to assure that it is the owner of all MEDI-JECT PROPERTY. BECTON shall use reasonably diligent efforts to assure that it is the owner of all BECTON PROPERTY. 2.2 MEDI-JECT warrants that the design, manufacture, sale and use of a NEEDLELESS INJECTOR as part of the OPEN DEVELOPMENT SYSTEM shall not -8- knowingly infringe the valid INTELLECTUAL PROPERTY of others. MEDI-JECT agrees to notify BECTON if it becomes aware of such an infringement before incorporating a feature covered by such rights into NEEDLELESS INJECTOR so developed, and agrees to notify the Executive Committee of the terms of any license necessary to acquire such rights prior to execution thereof. MEDI-JECT shall be responsible for acquiring any such license. MEDI-JECT warrants that its rights under any licenses or other agreements entered into under this Paragraph after the EFFECTIVE DATE shall inure to the benefit of BECTON. 2.3 BECTON warrants that the design, manufacture, sale and use of a DISPOSABLE shall not knowingly infringe the valid INTELLECTUAL PROPERTY of others. BECTON agrees to notify MEDI-JECT if it becomes aware of such an infringement before incorporating a feature covered by such rights into the DISPOSABLE, and agrees to notify the Executive Committee of the terms of any license necessary to acquire such rights prior to execution thereof. BECTON shall be responsible for acquiring any such license. BECTON warrants that its rights under any licenses or other agreements entered into under this Paragraph after the EFFECTIVE DATE shall inure to the benefit of MEDI-JECT. 2.4 Unless earlier terminated under Article XII, as partial consideration for MEDI-JECT's performing the development of NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS, BECTON shall provide PROGRAM FUNDS to MEDI-JECT in an amount not to exceed Two Million Four Hundred Thousand Dollars ($2,400,000), in exchange for such rights granted to BECTON under Article IV. The -9- PROGRAM FUNDS shall be paid in twenty-four equal monthly installments of $100,000, with the first such monthly installment payable on the EFFECTIVE DATE and the remaining monthly installments being due on or before the fifth day of each month commencing February 1996. The initial term of the OPEN DEVELOPMENT PROGRAM shall be two (2) years from the EFFECTIVE DATE. Any extension of the OPEN DEVELOPMENT PROGRAM beyond December 1997 and/or modifications in the scope, direction and efforts of the parties under it after that date, shall be determined by the representatives of the parties comprising the Executive Committee which also shall set the amount and timing of any additional PROGRAM FUNDS to be spent as of January 1998, all of which shall be set forth in a writing amending this Agreement and Exhibit A in order to be effective. The PROGRAM FUNDS shall be allocated to the OPEN DEVELOPMENT PROGRAM and such other development projects as the Executive Committee may determine, but in no event shall such PROGRAM FUNDS be refundable to BECTON. ARTICLE III - COMMERCIALIZATION EFFORTS 3.1 (a) For the (***) period commencing on the EFFECTIVE DATE, BECTON and MEDI-JECT shall (***) to determine whether to develop NEEDLELESS INJECTORS and DISPOSABLES in either OPEN or CLOSED ARCHITECTURE SYSTEMS for a particular drug, class of drugs or indication/disease. Other than particular CLOSED ARCHITECTURE SYSTEMS for which BECTON has declined to manufacture the DISPOSABLES pursuant to Paragraph 3.5, for the (***) period - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -10- commencing on the EFFECTIVE DATE, (***) engage in any research, development, commercialization, manufacturing, marketing or sales activity with respect to NEEDLELESS INJECTORS and DISPOSABLES for OPEN or CLOSED ARCHITECTURE SYSTEMS, except pursuant to this Agreement. In addition, for the (***) period commencing on the EFFECTIVE DATE, each party shall (***) all of its activities with respect to OPEN ARCHITECTURE SYSTEMS, and neither party shall, without the prior consent of the other party, and except as provided in Paragraph 6.3, (***) with any third party relating to NEEDLELESS INJECTORS or DISPOSABLES for OPEN or CLOSED ARCHITECTURE SYSTEMS, except for such activities that would take place after such three (3) year period. (b) After such (***) period, BECTON (***) to engage in any research, development, commercialization, manufacturing, marketing or sales (***) with respect to NEEDLELESS INJECTORS or DISPOSABLES for OPEN or CLOSED ARCHITECTURE SYSTEMS, with any third party. Notwithstanding the foregoing, if BECTON (***) in any research, development, commercialization, manufacturing, marketing or sales activity with respect to NEEDLELESS INJECTORS or DISPOSABLES for OPEN OR CLOSED ARCHITECTURE SYSTEMS, with any third party, other than permitted sublicensing of its rights and obligations under this Agreement, as contemplated herein, or to assist BECTON in performing its obligations hereunder or exploiting its rights hereunder, (***) under (***), shall be (***), effective as follows: - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -11- (i) if BECTON enters into a written agreement with a third party with respect to such activity, (***) shall be effective immediately upon the date of such agreement, without notice to BECTON, (ii) if BECTON (***) (other than pursuant to a written agreement), BECTON shall give MEDI-JECT written notice thereof, and BECTON shall have thirty (30) days from the date of such notice in which either to (***) such activity or to (***), and, if such activity is not (***) within such thirty (30) day period, (***), on the expiration of such thirty (30) day period, or (iii) if MEDI-JECT (***) (other than pursuant to a written agreement), MEDI-JECT shall give BECTON written notice thereof, and (***) thirty (30) days after receipt of such written notice, if BECTON has not (***) the activity which is the subject of such notice. From and after receipt of notice from MEDI-JECT pursuant to this subsection (iii) above, BECTON shall not be entitled (***) until BECTON has (***) the activity which is the subject of the notice. Failure by BECTON to give notice under Section 3.1(b)(ii) shall not constitute a basis for terminating this Agreement. (c) The parties acknowledge that their respective rights and obligations with respect to (***) are not subject to Paragraphs 3.1, 6.3 or 6.4. 3.2 OPEN ARCHITECTURE SYSTEMS for drugs other than insulin shall be developed under modifications of the OPEN DEVELOPMENT PROGRAM determined in accordance with the provisions of Paragraph 2.4 above. MEDI-JECT - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -12- shall have the exclusive right to manufacture and supply NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS, for BECTON'S worldwide sales of such OPEN ARCHITECTURE SYSTEMS. Such manufacture and supply of NEEDLELESS INJECTORS for each OPEN ARCHITECTURE SYSTEM (e.g., initially insulin, and thereafter, such other drugs as the parties may designate pursuant to Paragraph 2.4) shall be pursuant to a SUPPLY AGREEMENT to be executed by the parties; each such SUPPLY AGREEMENT shall include the terms set forth in Exhibit B and such other customary and reasonable terms as the parties may then agree. 3.3 Development of CLOSED ARCHITECTURE SYSTEMS shall be carried out as follows: MEDI-JECT and BECTON shall develop and establish a joint plan for the development, marketing and sale of CLOSED ARCHITECTURE SYSTEMS on behalf of one or more drug companies ("PLAN"). The PLAN shall be completed and submitted to the Executive Committee for approval by it by and on behalf of the parties, no later than (***). It is understood that the PLAN would include provisions to (i) jointly market to and then establish contracts ("Contracts") with individual drug companies to develop a CLOSED ARCHITECTURE SYSTEM for a particular company's drug, and (ii) assist each drug company which entered into such a Contract or Contracts ("Drug Company") to obtain regulatory clearance for the SYSTEM so developed. Each such arrangement with a Drug Company entered into under the PLAN also shall provide that: (i) unless otherwise agreed to with a Drug Company, MEDI-JECT would exclusively supply NEEDLELESS INJECTORS, and BECTON would exclusively supply DISPOSABLES (paying a royalty to MEDI- - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -13- JECT on NET SALES of ROYALTY-BEARING DISPOSABLES pursuant to Paragraph 7.2 below); (ii) MEDI-JECT and BECTON would enter into a CLOSED DEVELOPMENT PROGRAM with the Drug Company (***); (iii) MEDI-JECT and BECTON would grant licenses to each other consistent with the terms of Article IV below; and (iv) (***). 3.4 In the event that the purchase price paid for one or more of the NEEDLELESS INJECTORS for CLOSED ARCHITECTURE SYSTEMS pursuant to any Contract contemplated in Paragraph 3.3 (***). The Executive Committee will discuss in good faith whether it is desirable for BECTON and MEDI-JECT to contract jointly with the Drug Company. In any event, neither party shall have the right or authority to enter into a Contract alone or to bind the other to a Contract without having first obtained the prior express written approval to do so. 3.5 If BECTON determines, in good faith, that it is not commercially feasible for it to manufacture DISPOSABLES for a particular CLOSED ARCHITECTURE SYSTEM, then it shall grant to MEDI-JECT, and it hereby does, the exclusive worldwide right and license under the BECTON PROPERTY, to make, have made, use, sell and import such DISPOSABLES for such particular CLOSED ARCHITECTURE SYSTEM only, together with the right to grant sublicenses under the terms and conditions of this Agreement. Such license shall be subject to a (***) royalty on NET SALES of such ROYALTY-BEARING DISPOSABLES, provided, however, that the manufacture, use or sale of such DISPOSABLE is covered, in the - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -14- country whether the DISPOSABLE is manufactured or sold, by a VALID CLAIM under such BECTON PROPERTY. 3.6 For a period of two (2) years from the EFFECTIVE DATE, BECTON shall assist MEDI-JECT in the distribution and marketing of the MJ-6 to pharmacies in the United States for use in conjunction with vials of insulin. (***). The parties agree that except as expressly provided in this Section 3.6, development and commercialization of the MJ-6 is outside of the scope of this Agreement. ARTICLE IV - GRANT 4.1 MEDI-JECT hereby grants to BECTON an exclusive, world-wide right and license under MEDI-JECT PROPERTY, PROGRAM DISPOSABLE PROPERTY and PROGRAM SYSTEM PROPERTY, during the term of this Agreement, (i) to sell and use NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS and (ii) to make, have made, use, sell and import DISPOSABLES for use with OPEN ARCHITECTURE SYSTEMS and CLOSED ARCHITECTURE SYSTEMS, together with the right to grant sublicenses under the terms and conditions of this Agreement. 4.2 BECTON hereby grants to MEDI-JECT an exclusive, world-wide right and license under the BECTON PROPERTY, during the term of this Agreement, to make and have made NEEDLELESS INJECTORS as part of OPEN ARCHITECTURE SYSTEMS, CLOSED ARCHITECTURE SYSTEMS or (***), together with the right to grant sublicenses under the terms and conditions of this Agreement. - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -15- 4.3 BECTON agrees not to assert against MEDI-JECT any of its rights under any INTELLECTUAL PROPERTY owned or controlled by BECTON and covering the manufacture, use or sale of NEEDLELESS INJECTORS, with respect to MEDI-JECT's manufacture and supply of any NEEDLELESS INJECTORS hereunder, or under any SUPPLY AGREEMENT or any CONTRACT, or with respect to MEDI-JECT's exercise of any of its licenses hereunder. 4.4 MEDI-JECT also shall have the right to convert BECTON's rights under Paragraph 4.1 to non-exclusive if either BECTON fails (***). In the event MEDI- JECT converts BECTON's license rights to non-exclusive due to a failure to (***), MEDI-JECT shall have the non-exclusive, world-wide right (with right of sublicense) under the BECTON PROPERTY to make, have made, use and sell such DISPOSABLES for use with OPEN ARCHITECTURE SYSTEMS, CLOSED ARCHITECTURE SYSTEMS or (***), and to the extent that such DISPOSABLES are ROYALTY-BEARING DISPOSABLES, MEDI-JECT shall pay a (***) royalty on NET SALES of such ROYALTY- BEARING DISPOSABLES. ARTICLE V - (***) RIGHTS 5.1 In the course of this Agreement, MEDI-JECT shall be free to work on and develop one or more (***). In the course of this work, MEDI-JECT shall be free to incorporate and use MEDI-JECT PROPERTY, BECTON PROPERTY, PROGRAM DISPOSABLE PROPERTY and PROGRAM SYSTEM PROPERTY in any such (***) - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -16- developed. No PROGRAM FUNDS, however, shall be spent on the development of a device for such use. 5.2 In the event the efforts of MEDI-JECT to develop such a (***) are successful, MEDI-JECT hereby grants to BECTON a right of first refusal to evaluate and negotiate for rights to such SYSTEM, including the exclusive right to sell and use such SYSTEM, subject to the following conditions: A. MEDI-JECT shall notify BECTON in writing of the completed development of prototypes for a (***) and shall provide BECTON with such information and data as may be necessary to allow BECTON to evaluate the prototype of the new device, including at least two (2) functional models of such a device; B. BECTON shall have (***) after receiving such notification and functional models from MEDI-JECT to evaluate the new device, including the right to conduct focus groups, market research and/or preliminary clinical studies, with BECTON agreeing to share the results of its evaluation with MEDI-JECT; and C. If BECTON desires to exercise its right of first refusal, it shall do so in writing not later than (***) after receiving such notification and models from MEDI-JECT. Failure to provide such notice in a timely manner shall result in a forfeiture of such right of first refusal as to the (***) so noticed. 5.3 Upon receipt of notice that it intends to exercise its right of first refusal, BECTON and MEDI-JECT shall negotiate, in good faith and in an expeditious - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -17- manner, terms and conditions satisfactory to both parties under which MEDI-JECT would manufacture and supply such NEEDLELESS INJECTORS for (***) exclusively to BECTON, and BECTON would exclusively manufacture and sell DISPOSABLES for use therewith, unless otherwise agreed to by the parties. 5.4 So long as BECTON shall have the rights of first refusal granted to it under this Article, MEDI-JECT shall not mortgage, grant, assign, license or otherwise convey any right, title or interest in any INTELLECTUAL PROPERTY in, or any rights or interest to sell, distribute or otherwise provide, (***) to any third party. 5.5 If the parties are unable to agree on the terms and conditions of an agreement within a period of (***) after receiving the notice and models provided for under Paragraph 5.2(A), MEDI-JECT shall be (***); it being understood that any such rights granted to a third party to such (***) shall in no way conflict with or diminish the rights granted to BECTON under of this Agreement, including but not limited to those set forth in Article IV. (***). ARTICLE VI - EXECUTIVE COMMITTEE 6.1 BECTON and MEDI-JECT each shall appoint two (2) people to serve on an Executive Committee. The Executive Committee is created for the purposes of facilitating and exercising the respective rights of the parties under this Agreement. Except as provided elsewhere in this Agreement, the members of the Executive Committee shall have no fiduciary duty to each other. The purpose of the Executive Committee shall be: (i) to monitor progress of the OPEN DEVELOPMENT - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -18- PROGRAM, to determine whether the timetables and milestones for the OPEN DEVELOPMENT PROGRAM and any acceptance criteria for NEEDLELESS INJECTORS and DISPOSABLES have been met; (ii) to determine whether to expand the scope of the OPEN DEVELOPMENT PROGRAM to include OPEN ARCHITECTURE SYSTEMS for drugs other than insulin or to include development of enhanced or improved SYSTEMS; (iii) to determine whether an OPEN ARCHITECTURE SYSTEM or CLOSED ARCHITECTURE SYSTEM should be developed for a particular drug, class of drugs, or drugs for a particular indication, as set forth in Paragraph 3.1 above; (iv) to set forth in writing the PLAN, as defined in Paragraph 3.3 above, for the development of CLOSED ARCHITECTURE SYSTEMS; (v) to appoint persons to such committees to carry out any projects and programs as the Executive Committee shall deem appropriate and (vi) to attempt to resolve any and all disputes as may arise under or relate to this Agreement. 6.2 The Executive Committee shall meet at such times and places as are mutually agreed upon, preferably at each other's principal place of business on an alternating basis, but in any event not less than quarterly. Each party shall bear its own costs in attending Executive Committee meetings. Each party shall have the right to replace its members of the Executive Committee on notice to the other party. Persons not members of the Executive Committee may be invited to attend Committee meetings in the discretion of the Executive Committee. Decisions of the Executive Committee shall be by majority. -19- 6.3 In the event that either party becomes aware of the availability of any third party INTELLECTUAL PROPERTY relating to NEEDLELESS INJECTORS or DISPOSABLES (other than such INTELLECTUAL PROPERTY required pursuant to Paragraph 2.2 and 2.3), either alone or in conjunction with the sale of that third party's business or assets, the parties shall bring such information to the attention of the Executive Committee. (***). 6.4 During the term of this Agreement, in the event that either party becomes aware of the availability of any third party INTELLECTUAL PROPERTY relating to needleless, transdermal injection of parenteral drugs other than as provided in Paragraph 6.3, either alone or in conjunction with the sale of that third party's business or assets, the parties shall bring such information to the attention of the Executive Committee. Although the Executive Committee may discuss whether it would be desirable for the parties to acquire such INTELLECTUAL PROPERTY as provided in Paragraph 6.3, each party shall be free to acquire and use such INTELLECTUAL PROPERTY independently from, and without limitation or encumbrance under, this Agreement. ARTICLE VII -- COMMERCIALIZATION AND ROYALTIES 7.1 BECTON will use reasonably diligent efforts to commercialize the OPEN ARCHITECTURE SYSTEMS on a world-wide basis. 7.2 BECTON shall pay to MEDI-JECT the following royalties on NET SALES of ROYALTY-BEARING DISPOSABLES with the applicable royalty rate to be - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -20- determined by annual worldwide NET SALES of ROYALTY-BEARING DISPOSABLES: Annual Worldwide Sales Revenue Royalty ------------------------------ ------- (***) (***) 7.3 (***). 7.4 Each party owing royalties or any other payment hereunder or any SUPPLY AGREEMENT (the "paying party") shall keep complete and accurate records of the NET SALES and COST OF GOODS SOLD of DISPOSABLES and/or NEEDLELESS INJECTORS, as applicable, and all data necessary for the computation of payment or other calculation made hereunder or thereunder. However, the paying party shall have no duty of trust or other fiduciary relationship with the other party (the "receiving party") regarding the maintenance of the books of account or the calculation and reporting of royalties and other calculations and payments hereunder. 7.5 Royalty payments hereunder, when due, shall be made on or before the last business day of May, August, November and February of each year for the sales of the ROYALTY-BEARING DISPOSABLES and/or NEEDLELESS INJECTORS, as the case may be, during the preceding quarterly periods ending on the last day of March, June, September and December, respectively. Such payments shall be accompanied by a statement showing the NET SALES and such other particulars as are necessary for an account of the payments to be made pursuant to this - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -21- Agreement. Payment of the amount due shall accompany such statement, which shall be deemed to be true and correct unless objected to and audited in accordance with Paragraph 7.7 below. 7.6 All royalties and other payments hereunder or under any SUPPLY AGREEMENT shall be payable by the paying party to the receiving party in United States dollars by a check or checks drawn to the order of the receiving party. To the extent sales may have been made by the paying party in a foreign country, such royalty payments shall be made in United States dollars on the basis of conversion, from the currency of such foreign country, in the case of BECTON, at the rate recited in the report entitled "Rates of Exchange" issued monthly by BECTON's International Finance Department which provides spot exchange rates for each foreign country where sales were made, or in the case of MEDI-JECT, according to its then standard procedures for such conversions, which standard procedures shall utilize a publicly available bank exchange rate or other published exchange rate (e.g., The Wall Street Journal), on the last business day of the calendar quarter when the sales occurred, and shall be paid at the time and in the manner set forth above, provided, however, that royalties based on sales in any foreign country shall be payable to the receiving party only after deducting for exchange and all other charges due foreign governments, including withholding taxes, arising from the origin and transmittal of such royalties, and further provided that the foregoing is subject to the right of the paying party to make payment of royalties in any country where the -22- currency is blocked and where legal conversion of the currency billed cannot be made into United States dollars by depositing such royalty payments in the receiving party's name in a bank designated by the receiving party within such country. 7.7 The receiving party, at its own expense, shall have the right for a period of (***) after receiving any report from the paying party to nominate an independent Certified Public Accountant ("CPA") reasonably acceptable to the paying party, who shall have access to the paying party's records during reasonable business hours for the purpose of verifying the payments or other calculations made under this Agreement, but this right may not be exercised more than once in any calendar year, and the CPA shall disclose to the receiving party only information relating to the accuracy of the payment report or other calculations and the payments made in accordance with this Agreement. The failure of the receiving party to request verification of any payment report during said (***) period shall be considered acceptance of the accuracy of such report and the paying party shall have no obligation to maintain any records pertaining such report beyond said (***) period. ARTICLE VIII - CONFIDENTIALITY OBLIGATIONS 8.1 Subject to the rights and licenses granted herein, any information, report, document or other materials (including, but not limited to, laboratory - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -23- notebooks, schematics, specifications, circuits, diagrams, specimens, samples, prototypes, models and data regardless of how stored) disclosed or provided to the other party during this Agreement which is of a trade secret, confidential, proprietary or like undisclosed nature or is identified as such ("CONFIDENTIAL INFORMATION"), shall be retained by the receiving party in confidence for the term of this Agreement and a five (5) year period thereafter and shall not be used except in connection with performance under this Agreement; provided, however, nothing in this Agreement shall in any way restrict the right of a receiving party to use, disclose, or otherwise deal with any information which (i) was already known to the receiving party at the time of disclosure as evidenced by written documents in the receiving party's possession prior to disclosure; or (ii) was generally available to the public or becomes publicly known through no wrongful act of the receiving party; or (iii) was received by the receiving party from a third-party who had a legal right to provide it; or (iv) was developed independently of knowledge of CONFIDENTIAL INFORMATION received by the receiving party from the disclosing party. 8.2 Upon termination or expiration of this Agreement or within thirty (30) days following a written request made at any time by a disclosing party, the receiving party shall return all CONFIDENTIAL INFORMATION, including all writings, models and the like supplied by the disclosing party, except that one copy of same may be retained for archival purposes. -24- 8.3 The receiving party agrees to exercise the same care and safeguards with respect to CONFIDENTIAL INFORMATION disclosed by the disclosing party as used to maintain the confidentiality of its own information of like character, but in no event less than a reasonable degree of care. 8.4 Nothing contained herein shall be construed, either expressly or implicitly, to grant to the receiving party any rights to the CONFIDENTIAL INFORMATION, including technology or license under any INTELLECTUAL PROPERTY now or hereinafter in existence, except as specifically provided herein. ARTICLE IX - INTELLECTUAL PROPERTY 9.1 Each party shall promptly disclose, in writing, to the other party all INTELLECTUAL PROPERTY made, developed, created, conceived or reduced to practice by any person(s), including any employee, agent or representative of the party as part of the OPEN DEVELOPMENT PROGRAM or CLOSED DEVELOPMENT PROGRAM, and all rights, title and interest to such INTELLECTUAL PROPERTY, shall be owned exclusively by and vest entirely in the parties, subject to the rights and licenses granted under this Agreement, as follows: (a) MEDI-JECT shall own all MEDI-JECT PROPERTY, PROGRAM DISPOSABLE PROPERTY and PROGRAM SYSTEM PROPERTY; and (b) BECTON shall own all BECTON PROPERTY. -25- 9.2 MEDI-JECT shall diligently file and prosecute patent applications covering, and shall maintain all LICENSED PATENTS granted under, MEDI-JECT PROPERTY in the United States and Patent Cooperation Treaty Countries. MEDI-JECT shall keep BECTON currently informed of the filing and progress of all material aspects of the prosecution of all such applications and of the issuance of patents, and shall consult with BECTON concerning any decisions which would affect the scope of any issued claims and other prosecutorial details, including the potential abandonment of any application. MEDI-JECT shall promptly inform BECTON of any additions, deletions or changes in the status of such LICENSED PATENTS. All actions taken by MEDI-JECT pursuant to this Paragraph 9.2 shall be at its own expense. 9.3 BECTON shall diligently file and prosecute patent applications covering, and shall maintain all LICENSED PATENTS granted under, BECTON PROPERTY and PROGRAM DISPOSABLE PROPERTY material to DISPOSABLES. BECTON shall keep MEDI- JECT currently informed of the filing and progress of all material aspects of the prosecution of all such applications and of the issuance of patents, and shall consult with MEDI-JECT concerning any decisions which would affect the scope of any issued claims and other prosecutorial details, including the potential abandonment of any application. BECTON shall promptly inform MEDI-JECT of any additions, deletions or changes in the status of such LICENSED -26- PATENTS. All actions taken by BECTON pursuant to this Paragraph 9.3 shall be at its own expense. 9.4 The parties shall mutually agree, through the Executive Committee, on whether and in which countries to file and prosecute patent applications covering, and to maintain LICENSED PATENTS granted under, PROGRAM SYSTEM PROPERTY. All such joint filings shall be made by counsel reasonably acceptable to the parties. Each party shall have the opportunity to review and comment on any such filings prior to submission and to discuss the strategy for the preparation, filing, prosecution, maintenance and defense of any patent applications covering the PROGRAM SYSTEM PROPERTY and any LICENSED PATENTS granted thereon. The parties shall share equally any out-of-pocket costs and expenses incurred with respect to such actions. 9.5 OPEN ARCHITECTURE SYSTEMS shall bear such trademarks and trade names as BECTON may choose, and BECTON shall be the owner of all right, title and interest in any such trademarks and trade names so used (with BECTON being responsible to obtaining at its cost all registrations worldwide for such trademarks and trade names). BECTON shall be responsible for and shall own all copyrights in any labels, marketing materials, publications and other written documentation created for use in connection with the distribution, marketing and sale of OPEN ARCHITECTURE SYSTEMS. -27- 9.6 Upon request, each party shall execute and deliver to the other party all descriptions, applications, assignments and other documents and instruments necessary or proper to carry out the provisions of this Agreement without further compensation; and the parties shall cooperate with and assist each other or their nominees in all reasonable ways and at all reasonable times, including, but not limited to, testifying in all legal proceedings, signing all lawful papers and in general performing all lawful acts reasonable, necessary or proper, to aid the other party in obtaining, maintaining, defending and enforcing all lawful patent, copyright, trade secret, know-how and the like in the United States and elsewhere. 9.7 Upon termination or expiration of this Agreement, or any of the rights granted to BECTON hereunder, for any reason, BECTON has (***), or (***), together with the right to grant sublicenses, and thereafter such property shall be (***) for purposes of any licenses or sublicenses granted to MEDI-JECT or others under this Agreement. BECTON shall exercise such right by providing written notice to MEDI-JECT within ninety (90) days of such termination or expiration. - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -28- ARTICLE X - PATENT LITIGATION 10.1 BECTON and MEDI-JECT shall promptly notify the other as soon as either becomes aware of any infringement, actual or threatened, of any of the INTELLECTUAL PROPERTY licensed hereunder, including those with respect to the LICENSED PATENTS. 10.2 MEDI-JECT shall have the primary right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to infringement of any (***), by counsel of its own choice, and BECTON shall have the right, at its own expense, to be represented by counsel of its own choice. If MEDI-JECT fails to bring an action or proceeding within (***) after having knowledge or notice of such infringement, BECTON shall have the right to bring and control any such action by counsel of its own choice and MEDI-JECT shall have the right to be represented in such action by counsel of its own choice, at its own expense. If one party brings any such action or proceeding, the second party agrees to be joined as a party plaintiff and to give the first party reasonable assistance and authority to file and prosecute the suit; provided that the party bringing suit shall indemnify the joined party against any and all costs and other awards against the parties, including attorneys' fees. The party bringing suit hereunder shall be entitled to retain any damages or other monetary awards recovered in favor of the parties. 10.3 BECTON shall have the right, but not the obligation, to institute, prosecute and control any action or proceeding with respect to infringement of any - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -29- (***), by counsel of its own choice. MEDI-JECT agrees it may be joined as a party plaintiff, and if so, it may be represented by counsel of its own choice; provided that BECTON shall indemnify MEDI-JECT against any and all costs and other awards against the parties, including attorneys' fees. If BECTON fails to bring an action or proceeding in any particular country within (***) after having knowledge or notice of such infringement and MEDI-JECT is obligated hereunder to (***), MEDI-JECT's (***) in such country shall be (***). 10.4 The parties shall discuss whether to institute and prosecute any action or proceeding with respect to infringement of any (***). Unless the parties otherwise agree, each party shall be entitled to institute, prosecute and control any action or proceeding with respect to such infringement (with the other party having the right to participate in such action) and shall take such action as may be necessary to allow the other party to proceed. If one party brings any such action or proceeding, the second party agrees to be joined as a party plaintiff and to give the first party reasonable assistance and authority to file and prosecute the suit; provided that the party bringing suit shall indemnify the joined party against any and all costs and other awards against the parties, including attorneys' fees. The party bringing suit hereunder shall be entitled to retain any damages or other monetary awards recovered in favor of the parties; provided, however, that if the parties bring suit jointly, such damages and monetary awards shall be shared equally by the parties, - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -30- after reimbursement of each party's out-of-pocket costs and expenses with respect to such suit. ARTICLE XI - REGULATORY MATTERS 11.1 Upon finalization of any OPEN DEVELOPMENT SYSTEM developed hereunder, MEDI-JECT and BECTON shall jointly conduct (or cause to be conducted) such clinical trials as may be necessary or deemed advisable to obtain clearance to market and sell such SYSTEMS in such countries in the world as the parties may agree upon. MEDI-JECT and BECTON shall jointly design the content, claims and timing of all trials conducted, and shall provide each other access to all data and documentation collected or prepared in support of such trials and access to all communications and filings sent to or received from any regulatory agency. The costs of such trials shall be borne equally by the parties; provided, however, BECTON shall contribute, without charge, an amount of DISPOSABLES sufficient to conduct such trials, and MEDI-JECT shall contribute, without charge, an amount of NEEDLELESS INJECTORS sufficient to conduct such trials. Each party agrees to use reasonably diligent efforts to file for and obtain regulatory approval for such OPEN DEVELOPMENT SYSTEMS in such agreed countries. 11.2 Clinical trials for each CLOSED DEVELOPMENT SYSTEM, developed pursuant to a CLOSED DEVELOPMENT PROGRAM shall be handled in accordance with terms of each Contract associated therewith. -31- ARTICLE XII - TERMINATION 12.1 Unless sooner terminated, this Agreement and the rights and licenses granted hereunder shall continue in effect until the later of (a) the end of (***) years after conclusion of the initial OPEN DEVELOPMENT PROGRAM or (b) the life of the last to expire of the LICENSED PATENTS. 12.2 For a period of three (3) years following the EFFECTIVE DATE or prior to MEDI-JECT receiving FDA approval for an OPEN ARCHITECTURE SYSTEM, whichever is shorter, BECTON shall have the right to terminate this Agreement, without cause, on six (6) months advance written notice. Thereafter, BECTON shall have the right to terminate this Agreement, without cause, on twelve (12) months advance written notice. If BECTON terminates this Agreement without cause and if any DISPOSABLES for OPEN or CLOSED ARCHITECTURE SYSTEMS have been developed hereunder as of the date of such termination, BECTON shall negotiate in good faith, terms and conditions reasonably necessary to enable MEDI-JECT to arrange an alternative source of such DISPOSABLES, including upon MEDI-JECT's request, the continued supply of such DISPOSABLES by BECTON for a period of time not to exceed (***), and BECTON shall grant to MEDI-JECT, and hereby does grant (effective only upon such termination pursuant to this Paragraph 12.2), a non- exclusive license (with right of sublicense) under BECTON PROPERTY, PROGRAM DISPOSABLE PROPERTY and PROGRAM SYSTEM PROPERTY to make, have - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -32- made, use, sell and import such DISPOSABLES for use with OPEN ARCHITECTURE SYSTEMS, CLOSED ARCHITECTURE SYSTEMS or (***), and to the extent that such DISPOSABLES are ROYALTY-BEARING DISPOSABLES, MEDI-JECT shall pay a (***) royalty on NET SALES of such ROYALTY-BEARING DISPOSABLES. 12.3 In the event of any breach of a material term of this Agreement by either party, including non-performance under the OPEN DEVELOPMENT PROGRAM, and such breach cannot be cured or otherwise addressed by action of the Executive Committee, the non-breaching party shall have the right to terminate this Agreement on sixty (60) days written notice, in addition to any other legal or equitable remedies available to such non-breaching party. 12.4 If BECTON terminates this Agreement pursuant to Paragraph 12.3 as a result of a material breach by MEDI-JECT (***) and if any NEEDLELESS INJECTORS have been developed hereunder as of the date of such termination, the following shall apply: (a) If MEDI-JECT has materially breached (***), with respect to the use or sale of (***) and MEDI-JECT and BECTON have entered into a SUPPLY AGREEMENT with respect to such NEEDLELESS INJECTORS, MEDI-JECT shall continue to supply, and BECTON shall continue to purchase, such NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS pursuant to the terms of such SUPPLY AGREEMENT, and (***); - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -33- (b) If MEDI-JECT has materially breached (***), with respect to (1) the use or sale of (***) or (2) the manufacture, use or sale of (***), MEDI-JECT shall (***), and (***) and, if BECTON has not exercised its rights under (***) and BECTON, (***), shall (***) for (***), (i) the manufacture, use or sale of which is covered in the country where the NEEDLELESS INJECTOR is manufactured or sold, by a VALID CLAIM of any LICENSED PATENT or (ii) manufactured or sold in any country in which the FDA or applicable regulatory authority requires the labelling of such NEEDLELESS INJECTOR for use with a DISPOSABLE covered by any of the LICENSED PATENTS; or (c) (1) If MEDI-JECT has materially breached (***), with respect to the manufacture, use or sale of (***) or by (***) and (2) unless BECTON has waived or otherwise its rights under (***), MEDI-JECT shall (***), and if BECTON has not exercised its rights under (***), and BECTON, (***), shall (***), (i) the manufacture, use or sale of which is covered in the country where the NEEDLELESS INJECTOR is manufactured or sold, by a VALID CLAIM of any LICENSED PATENT or (ii) manufactured or sold in any country in which the FDA or applicable regulatory authority requires the labelling of such NEEDLELESS INJECTOR for use with a DISPOSABLE covered by any of the LICENSED PATENTS. 12.5 If MEDI-JECT terminates this Agreement pursuant to (***) and if any DISPOSABLES have been developed hereunder as of the date of such termination, BECTON shall negotiate in good faith, terms and conditions reasonably necessary to - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -34- enable MEDI-JECT to arrange an alternative source of such DISPOSABLES, including upon MEDI-JECT's request, the continued supply of such DISPOSABLES by BECTON for a period of time not to exceed (***), and BECTON shall (***), and to the extent that (***), MEDI-JECT shall (***). In addition, upon any such termination, (a) (***), shall be (***), pursuant to the (***) and (b) the licenses granted to MEDI-JECT pursuant to Paragraph 3.5 shall continue as provided therein. 12.6 Upon any termination or expiration of this Agreement, the parties shall retain their respective ownership rights under the BECTON PROPERTY, MEDI- JECT PROPERTY, PROGRAM DISPOSABLE PROPERTY or PROGRAM SYSTEM PROPERTY, subject to the provisions of Paragraphs 3.5, 4.3, 4.4, 5.5, 9.7, 12.2, 12.4 or 12.5, to the extent that such provisions are in effect as of, or as a result of, such termination. 12.7 In the event MEDI-JECT has not filed with the FDA an application for clearance to distribute or sell a NEEDLELESS INJECTOR for an OPEN ARCHITECTURE SYSTEM prior to (***), MEDI-JECT shall (***), subject to the terms of Paragraph 8 in Exhibit C below. 12.8 All rights and licenses granted under or pursuant to this Agreement are, and shall otherwise be deemed to be, for the purposes of Paragraph 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Paragraph 101(52) of the Bankruptcy Code. The parties agree that each party, as a - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. -35- licensee hereunder, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. 12.9 Termination of this Agreement for any reason shall not affect the rights or obligations of any party accrued prior to termination. In addition, upon any termination of this Agreement, each party shall be entitled to any rights and remedies such party may have at law and in equity. Termination or expiration of this Agreement shall not relieve the parties of their respective rights and obligations under Article VIII [Confidentiality], Article IX [Intellectual Property], and with respect to any royalties owing after such termination, Article VII [Commercialization and Royalties]. Termination of this Agreement shall not terminate the parties' respective rights and licenses under Paragraph 3.5, 4.3, 4.4, 5.3, 9.7, 12.2, 12.4 or 12.5 to the extent that such rights and licenses are in effect as of or as a result of such termination. 12.10 Termination of any OPEN DEVELOPMENT PROGRAM or CLOSED DEVELOPMENT PROGRAM shall not affect the continuation of any other OPEN DEVELOPMENT PROGRAM or CLOSED DEVELOPMENT PROGRAM hereunder or the continuation of this Agreement. ARTICLE XIII - MISCELLANEOUS 13.1 Each party represents and warrants to the other party that it is duly authorized to enter into this Agreement and become bound by all of its terms and -36- conditions, and further represents and warrants that nothing in this Agreement will contravene or conflict with any Article of Incorporation, by-law, rule, regulation, order, statute, agreement or other writing by which it may be bound or held accountable. 13.2 Nothing in this Agreement shall be deemed or construed as creating any agency or partnership between or among the parties. The parties shall not conduct their activities hereunder in such manner as to make it appear to third parties that they have formed a partnership. No person not a party to this Agreement, including any employees or agents or any party to this Agreement, shall have or acquire any rights by reason of the parties having entered into this Agreement. 13.3 This Agreement and any of its individual terms shall be amended, modified, waived, superseded or canceled only by a writing duly authorized and signed by both parties. The delay or failure of any party at any time or times to require performance of any term shall in no manner affect that party's rights at a later time to enforce the same. 13.4 This Agreement, including Exhibits A-C, which are hereby incorporated herein by reference, contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings, negotiations and agreements whether written or oral. -37- 13.5 This Agreement shall be binding upon and inure to the benefit of the parties and their respective legal representatives, successors and permitted assigns. This Agreement shall not be assigned by either party without the prior written consent of the other party, unless such assignment is to a wholly-owned subsidiary of a party in which case only written notice need be provided. 13.6 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. 13.7 Any notice permitted or required under this Agreement shall be deemed given upon receipt when hand-delivered or sent by United States Postal Service Express Mail when addressed to: If to BECTON: President Becton Dickinson Advanced Injection Systems 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 with a copy to: General Counsel Becton Dickinson and Company 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 If to MEDI-JECT: President MEDI-JECT Corporation 1840 Berkshire Lane Minneapolis, Minnesota 55441 with a copy to: J. Andrew Herring, Esq. Dorsey & Whitney P.L.L.P. 220 South Sixth Street Minneapolis, Minnesota 55402 -38- 13.8 This Agreement (and any SUPPLY AGREEMENTS executed hereunder) shall be governed by and construed in accordance with Minnesota law (excluding its choice of law rules). The parties agree to submit any disputes arising hereunder or thereunder first to the Executive Committee. If the Executive Committee is unable to resolve such dispute, the parties shall submit such dispute to non- binding mediation, to be performed over a period not to exceed five days by a professional mediation service reasonably acceptable to the parties. If the dispute is not resolved by such mediation, the parties may exercise their rights to any legal or equitable remedy available; provided, however that the exclusive jurisdiction and venue for any such disputes shall be the state and federal courts located in (a) Minneapolis, Minnesota, if BECTON brings suit against MEDI-JECT or (b) Bergen County, New Jersey, if MEDI-JECT brings suit against BECTON. 13.9 If any term or condition of this Agreement is or is found to be invalid or unenforceable in any country or countries, the remaining terms and conditions shall remain in full force and effect, and the parties agree to amend or construe the invalid or unenforceable terms or conditions of this Agreement in such manner so as to render them valid and enforceable giving due regard to the intent of the parties. In the event that cannot be done and the invalid or unenforceable term or condition is material to this Agreement, the parties agree to renegotiate the entire Agreement with respect to that country. -39- 13.10 If the parties determine that a filing or notification with the European Economic Commission is necessary or useful to affect the intent of this Agreement within the European Economic Community, the parties shall cooperate, at their own expense, in the preparation and filing of such documents. Having intended to become bound by the terms and conditions of this Agreement, the parties acknowledge entering into this Agreement as evidenced by their duly authorized signatures set forth below. MEDI-JECT CORPORATION BECTON, DICKINSON AND COMPANY BY: /s/ Franklin Pass BY: /s/ Raymond P. Ohlmuller ------------------------- ----------------------------- ITS: President and CEO ITS: Vice President and Secretary ------------------------ ---------------------------- -40- EXHIBIT A (***) - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. A-1 EXHIBIT B SUPPLY AGREEMENT TERMS 1. Terms defined in the DEVELOPMENT AND LICENSE AGREEMENT shall be incorporated by reference in each SUPPLY AGREEMENT. 2. MEDI-JECT shall manufacture and supply NEEDLELESS INJECTORS to BECTON and BECTON shall manufacture and supply for itself DISPOSABLES. 3. Assuming MEDI-JECT meets the cost targets set forth in Exhibit A, BECTON will pay a transfer price to MEDI-JECT on NEEDLELESS INJECTORS FOR OPEN ARCHITECTURE SYSTEMS, sold to it by MEDI-JECT equal to the (***) for such (***), (***). If MEDI-JECT does not meet the cost targets set forth in Exhibit A, the parties shall negotiate in good faith a reasonable transfer price for such NEEDLELESS INJECTORS, with the intent that such transfer price shall provide each of MEDI-JECT and BECTON with (***). 4. The term of each SUPPLY AGREEMENT shall be the later of (a) (***) years from the first commercial sale of the applicable OPEN ARCHITECTURE SYSTEM or (b) the life of the last to expire of the LICENSED PATENTS covering such OPEN ARCHITECTURE SYSTEM. 5. Each SUPPLY AGREEMENT shall include customary and reasonable provisions relating to ordering, delivery, shipment, inspection and payment. The parties shall mutually negotiate and agree in good faith on the quantity of NEEDLELESS INJECTORS to be supplied to BECTON during the first year of each - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. B-1 SUPPLY AGREEMENT. In addition, thereafter, BECTON shall submit to MEDI-JECT, on a quarterly basis, rolling annual forecasts, prepared in good faith, of its reasonably anticipated orders for NEEDLELESS INJECTORS for the applicable OPEN ARCHITECTURE SYSTEM. In addition, in order to permit MEDI-JECT to plan its manufacturing needs appropriately, the parties shall negotiate in good faith the terms of the initial purchase order (i.e. quantity and delivery date) of NEEDLELESS INJECTORS for each OPEN ARCHITECTURE SYSTEM. 6. (a) If, for any reason, MEDI-JECT cannot meet BECTON's reasonable requirements (whether by virtue of quantities ordered or other reason) for such NEEDLELESS INJECTORS, subject to the terms of this Paragraph 6, MEDI-JECT shall designate a third party to manufacture such NEEDLELESS INJECTORS on its behalf for supply to BECTON; with such third party manufacturer to be acceptable to BECTON, which acceptance shall not be unreasonably withheld. The term of such third party manufacturing arrangement shall be mutually agreed by MEDI-JECT and such third party and MEDI-JECT shall be entitled to recommence manufacture of such NEEDLELESS INJECTORS upon a showing, reasonably acceptable to BECTON, of its ability to provide a consistent supply of such NEEDLELESS INJECTOR as necessary to meet BECTON's reasonably anticipated requirements therefor. (b) If MEDI-JECT is unable to designate a third party to manufacture such NEEDLELESS INJECTORS in quantities sufficient to meet BECTON's reasonable requirements, or if a third party so designated fails to meet such requirements over a period of (***), then BECTON shall have the (***), and - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. B-2 BECTON, (***), shall (***), (i) the manufacture, use or sale of which is covered in the country where the NEEDLELESS INJECTOR is manufactured or sold, by a VALID CLAIM of any LICENSED PATENT or (ii) manufactured or sold in any country in which the FDA or applicable regulatory authority requires the labelling of such INJECTOR for use with a DISPOSABLE. (c) Notwithstanding the foregoing, BECTON shall not be entitled to invoke the provisions of this Paragraph 6, unless such unfilled quantities are within the forecast required by Paragraph 5 above, and such failure lasts for a period of more than (***). In addition, upon (***) written notice to BECTON and a showing, reasonably acceptable to BECTON, of its ability to provide a consistent supply of such NEEDLELESS INJECTOR as necessary to meet BECTON's reasonably anticipated requirements therefor, MEDI-JECT will have the option to: (1) allow BECTON to continue to manufacture such NEEDLELESS INJECTORS on a non-exclusive basis until such time as (***); in which case MEDI-JECT shall also be entitled to supply NEEDLELESS INJECTORS to BECTON; or (2) reimburse BECTON for (***) and, upon the expiration of such notice period, BECTON shall no longer be entitled to manufacture such NEEDLELESS INJECTORS hereunder. 7. Termination of any SUPPLY AGREEMENT shall not result in termination of the DEVELOPMENT AND LICENSE AGREEMENT. - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. B-3 8. If BECTON terminates any SUPPLY AGREEMENT without cause, BECTON shall negotiate, in good faith, terms and conditions reasonably necessary to enable MEDI-JECT to arrange an alternative source of the DISPOSABLES subject to such SUPPLY AGREEMENT, including upon MEDI-JECT's request the continued supply of such DISPOSABLES by BECTON for a period of time (***), and BECTON shall grant to MEDI-JECT, and hereby does grant (effective only upon such termination), a non- exclusive license under BECTON PROPERTY, PROGRAM DISPOSABLE PROPERTY and PROGRAM SYSTEM PROPERTY to make, have made, use, sell and import such DISPOSABLES for use in OPEN ARCHITECTURE SYSTEMS, CLOSED ARCHITECTURE SYSTEMS or (***), and to the extent that such DISPOSABLES are ROYALTY-BEARING DISPOSABLES, MEDI-JECT shall pay a (***) royalty on NET SALES of such ROYALTY-BEARING DISPOSABLES. 9. MEDI-JECT shall indemnify, defend and hold harmless BECTON, its directors, officers, employees and agents, against any judgments, fees, expenses, liability, costs, awards or damages arising from or incidental to any product liability or other suit, claim, demand or action (including infringement of the INTELLECTUAL PROPERTY rights of others) brought as a consequence of the sale and/or use of NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS sold to BECTON hereunder, whether BECTON, either jointly or severally, is named as a party defendant in such action. 10. BECTON shall indemnify, defend and hold harmless MEDI-JECT, its directors, officers, employees and agents, against any judgments, fees, expenses, - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. B-4 liability costs, awards or damages arising from or incidental to any product liability or other suit, claim, demand or action (including infringement of the INTELLECTUAL PROPERTY rights of others) brought as a consequence of the sale and/or use of DISPOSABLES sold by BECTON hereunder whether MEDI-JECT, either jointly or severally, is named as a party defendant in such action. 11. In the event an action is brought against either or both MEDI-JECT and BECTON alleging infringement of the INTELLECTUAL PROPERTY rights of another by the sale and/or use of NEEDLELESS INJECTORS for OPEN ARCHITECTURE SYSTEMS, (***). 12. MEDI-JECT and BECTON shall each warrant to the other that it shall comply with all documentation and other requirements, rules and regulations of the Food and Drug Administration ("FDA") necessary to permit production of NEEDLELESS INJECTORS and DISPOSABLES, respectively, under FDA's Good Manufacturing Practices, and shall comply with all requirements, rules and regulations of any other agency or body having regulatory authority over the manufacture, distribution or sale of OPEN ARCHITECTURE SYSTEMS, and MEDI-JECT and BECTON shall each further warrant to the other it shall obtain IS 9002 certification for their manufacturing facilities and operations prior to commercial production of NEEDLELESS INJECTORS or DISPOSABLES, respectively, hereunder. - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. B-5 EXHIBIT C Third Party Agreements (***) Ferring (hGH) (MJ-6) JCR (hGH) (MJ-6) Gene Medicine (gene therapy) (MJ-6) BioTechnology General (hGH) (MJ-6) Schwarz Pharma (PGE\\1\\) (CAS) (***) (***) (***) - -------------------- (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. C-1 EX-23.1 5 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 September 24, 1996 -----END PRIVACY-ENHANCED MESSAGE-----