-----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, QnZLazrts/paxKt5JUk9yIt3Iz9pvn+zoQUaH/rnTvY+riU/jTTnQo7TfLPdS/UA ZeDZvv2tGPaDtW844I/JIw== 0000950131-97-002276.txt : 19970401 0000950131-97-002276.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950131-97-002276 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20945 FILM NUMBER: 97570155 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 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from __________ to __________ Commission file number 0-20945 ------- MEDI-JECT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1350192 - ---------------------------------- ---------------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification Number) 1840 Berkshire Lane, Minneapolis, Minnesota 55441 ------------------------------------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (612) 553-1102 ------------- SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT; Common Stock, $.01 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 19, 1997 was approximately $33,058,228 (based upon the last reported sale price of $4.75 per share on March 19, 1997 on the Nasdaq National Market). The number of shares outstanding of the registrant's common stock as of March 19, 1997: 6,959,627. DOCUMENTS INCORPORATED BY REFERENCE Pursuant to General Instruction G, certain responses in Part III are incorporated herein by reference to information contained in the Company's definitive Proxy Statement for its 1996 annual meeting to be filed on or before April 30, 1997. 1 FORWARD LOOKING STATEMENTS: Certain statements included in this From 10-K are "forward looking statements" as defined in the Private Securities Litigation Reform Act of of 1995 and are subject to risks and uncertainties. Factors that may affect future results and performance are set forth in Exhibit 99, "Cautionary Statements", which was filed with the United States Securities and Exchange Commission an exhibit to this Form 10-K. PART I Item 1. BUSINESS GENERAL Medi-Ject Corporation ("Medi-Ject" or the "Company) 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 six and one half 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. Medi-Ject is a Minnesota corporation, incorporated in February 1979. The Company's offices are located at 1840 Berkshire Lane, Minneapolis, Minnesota 55441; telephone (612) 553-1102. 2 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 patches, controlled release oral delivery methods and inhalation devices. In Western Europe, pharmaceutical and medical products companies 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. 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. 3 The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin. In the United States, over 3.2 million people inject insulin for the treatment of diabetes, resulting in an estimated 2.3 billion injections annually, and the Company believes that the number of insulin injections will increase with time as the result of new diabetes management approaches which recommend more frequent use. Other parenteral drugs that are 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. PRODUCTS AND TECHNOLOGY Current Needle-Free Injection Systems The Company's current Medi-Jector system, the Medi-Jector Choice, was introduced in December 1996 and consists of a coil spring mechanism, a dosage meter, multi-use disposable needle-free syringe and a plastic adapter. This injector is used by arming the spring mechanism, filling the needle-free syringe 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 needle-free syringe 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. Needle-free syringes need to be replaced after 14 injections. 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. The first lightweight Medi-Jector system, the Medi-Jector EZ system, was introduced by the Company in 1987. Although the Medi-Jector EZ system provided significant advantages over previous needle-free injection systems, it was fabricated from stainless steel parts, which are expensive to manufacture. In July 1995, the Company introduced the Medi-Jector VI system which replaced the stainless steel body of the Medi-Jector EZ system with a composite plastic body. This change will allow the Company to reduce manufacturing costs as unit volumes increase. The composite body also provides a natural lubricity which reduces friction and therefore the effort required to arm the coil spring. The Medi-Jector Choice system was introduced in December 1996, has a multi-use disposable needle-free syringe which has replaced the steel front end chamber of the Medi-Jector VI model. 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 further 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. 4 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, five ounces in weight and 30% smaller in diameter than the Medi-Jector Choice system) and may result in more comfortable injections. Multi-Use Disposable Needle-Free Syringes. The Company replaced the steel front-end chamber of the Medi-Jector VI system with a multi-use disposable plastic front-end chamber in December 1996. The Company believes that one of the reasons its previous generations of needle-free injection systems have not gained widespread market acceptance was the inconvenience of cleaning the systems every two weeks. The disposable front-end chamber has eliminated the need to perform this cleaning process and has increased the ease of use. In addition, use of this needle-free syringe will allow the Company to further reduce the manufacturing costs of the Medi-Jector system. Each needle-free syringe is labeled for use for 14 injections. The retail selling price of the Medi-Jector Choice unit (excluding the needle-free syringe) is $399. The total annual cost to the end user of needle-free syringes and related supplies is anticipated to be $260 per year (based upon an average of two injections per day). Although the total cost to use the Medi-Jector Choice system over time is higher than with previous models that do not require needle- free syringes, the Company believes that the lower initial purchase price and increased ease of use of the Medi-Jector Choice system will encourage more individuals to make the initial investment in the injector and consequently increase market acceptance. In addition, the Company plans to introduce a single-use disposable needle- free syringe for use with its new generation of pen-like injectors. The Company believes that the single-use disposable needle-free syringe will be priced competitively but at a premium compared to disposable syringes, and that it will offer users sterility and increased convenience. The needle-free syringes to be used with the Medi-Jector Choice system do not require special disposal. Because a needle-free syringe cannot pierce the skin, the risk of cross-infection from discarded needle-free syringes 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 $401,000, $1,195,000 and $2,585,000 on research and development efforts during fiscal years 1994, 1995 and 1996, respectively. Of these amounts, approximately $470,000, $921,000 and $1,854,000, 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. 5 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 benefited 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 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, one company has introduced an intra-urethereal prostaglandin E\1\ applicator. The Company believes that its needle-free injection technology may provide yet an additional 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. 6 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. The Company believes that administration of these drugs would benefit from needle-free injection systems. As a result, the Company, in collaboration with Teva Pharmaceutical Industries, Ltd., is developing a needle-free delivery system for the drug Copaxone, which is administered by daily injection. Approximately 100,000 individuals in the United States are candidates for treatment. 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. 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.
COMPANY MARKET VOLUME AND TYPE OF INJECTION ------- ------ ---------------------------- Becton Dickinson and Company (1)..... Insulin 0.5 ml subcutaneous Ferring NV........................... Growth Hormone 0.5 ml subcutaneous (Worldwide except United States, Canada, Japan and Korea) JCR Pharmaceuticals Co., Ltd......... Growth Hormone 0.5 ml subcutaneous (Japan) Bio-Technology General Corporation... Growth Hormone 0.5 ml subcutaneous (United States) Schwarz Pharma AG.................... Prostaglandin E\1\ 1.0 ml intrapenile (Erectile Dysfunction) GeneMedicine, Inc.................... Gene Therapy 0.5 ml intramuscular Teva Pharmaceutical Industries, Ltd.. Copaxone(R) 1.0 ml subcutaneous (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 needle-free syringes for any indication. 7 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 three United States patents relating to the drug vial adapter, the disposable syringe and the gas spring injector, one United States design patent relating to the appearance of the Medi-Jector system and has eight United States patent applications pending, one Patent Cooperation Treaty application and one Taiwanese patent application relating to the gas spring energy source and aspects of its use. Much of the Company's technology is being developed on its behalf by independent outside contractors. To protect the rights of its proprietary know- how and technology, Company policy requires all employees and consultants with access to proprietary information to execute confidentiality agreements prohibiting the disclosure of confidential information to anyone outside of the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such individuals while devoted to Company sponsored activities. Companies with which the Company has entered into development agreements have the right to certain technology developed in connection with such agreements. The Company has obtained the rights to certain technology and has made milestone payments to the inventors of certain core technology. MANUFACTURING The Company operates a manufacturing facility in compliance with current Good Manufacturing Procedures ("GMP") established by the Food and Drug Administration ("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. 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. 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. 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 to initiate new efforts to enlist diabetes nurse educators 8 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 $400, and disposable components for the system cost approximately $250 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. 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 product sold by Health-Mor resembles an earlier version of the Medi-Jector system and sells for more than $600. Vitajet has recently introduced a product which incorporates a disposable needle-free syringe and is similar to the Medi- Jector Choice. 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. Even though the Company expects the needle-free injection market to expand, improvements continue to be made in needle syringes, including syringes with hidden needles and pen-like needle injectors. The Company expects that it will compete with existing needle injection methods as well as new needle injection methods yet to be developed. GOVERNMENT REGULATION The Company's products and manufacturing operations are subject to extensive government regulations, both in the United States and abroad. In the United States, the FDA administers the FDA Act and has adopted regulations, including those governing the introduction of new medical devices, the observation of certain standards and practices with respect to the manufacturing and labeling of medical devices, the maintenance of certain records and the reporting of device-related deaths, serious injuries and certain malfunctions to the FDA. Manufacturing facilities and certain Company records are also subject to FDA inspections. The FDA has broad discretion in enforcing the FDA Act and the regulations thereunder, and noncompliance can result in a variety of regulatory steps ranging from warning letters, product detentions, device alerts or field corrections to mandatory recalls, seizures, injunctive actions and civil or criminal actions or penalties. Drug delivery systems such as the Company's injectors may be approved or cleared for sale as a medical device or may be evaluated as part of the drug approval process in connection with a new drug application ("NDA"). To the extent permitted under the FDA Act and current FDA policy, the Company intends to seek the required approvals and clearance for the use of its new injectors, as modified for use in specific drug applications such as gene therapy, 9 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. 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 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. 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, the Medi-Jector system to administer Bio-Technology General's human growth hormone in April 1996, and the Medi-Jector Choice system in October 1996. The Company expects in the future to submit 510(k) notifications with regard to further device design improvements and uses with additional drug therapies. 10 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. 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 also 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. Sales of medical devices outside of the United States are subject to foreign legal and regulatory requirements. The Company's injection 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. The Company is currently attempting to obtain the right to affix the CE Mark prior to such time. EMPLOYEES As of December 31, 1996, the Company employed 36 full-time employees. 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. 11 Item 2. DESCRIPTION OF PROPERTY. The Company leases approximately 9,000 square feet of office, manufacturing and warehouse space in Plymouth, a suburb of Minneapolis, Minnesota. The lease will terminate in April 1997. Subsequent to December 31, 1996, the Company executed a lease for a new facility with 22,968 square feet of office, manufacturing and warehouse space. The new facility is also located in Plymouth, Minnesota. The lease expiration date is April 15, 2002. The Company believes its new facility will be sufficient to meet its requirements through such time. Item 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of shareholders during the quarter ended December 31, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- Franklin Pass, M.D.... 60 President, Chief Executive Officer and Chairman of the Board of Directors Mark S. Derus......... 41 Vice President, Finance, Chief Financial Officer and Secretary Todd Leonard.......... 37 Vice President, Business Development Peter Sadowski, Ph.D.. 49 Vice President, Product Development Robert Kreb........... 49 Vice President, Sales and Marketing
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 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 served as Vice President, Sales and Marketing from April 1996 until Robert Kreb joined the Company in October, 1996, at which time he reassumed the title and exclusive role as Vice President of Business Development. From 1991 to 1993, Mr. Leonard served as a Senior Licensing Specialist in the Office of Technology Transfer at the National Institutes of Health. 12 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. Robert Kreb, joined Medi-Ject in October 1996 as Vice President, Sales and Marketing. Prior to joining the Company, he was with Chiron Diagnostics from 1994 to 1996, most recently as Senior Regional Sales Manager. Prior to that he spent 20 years in various sales, marketing management, as well as business development positions with companies such as Hybritech (Eli Lilly), Johnson & Johnson and Proctor & Gamble. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: MEDJ. The following table sets forth the per share high and low sales prices of the Company's common stock for its initial period of trading, following the initial public offering of its common stock on October 2, 1996. Sales prices are as reported by the Nasdaq national market.
HIGH LOW ---- --- Stock Prices - Fourth Quarter 1996 $6 $3 1/8
HOLDERS. As of March 19, 1997, there were 158 holders of record of the Company's common stock, with another estimated 654 shareholders whose stock is held by nominees or broker dealers. DIVIDENDS. The Company has not paid or declared any cash dividends in the past five years. The Company has no intention of paying cash dividends in the foreseeable future. 13 Item 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- ------ (unaudited) STATEMENT OF OPERATIONS DATA: Sales................................ $ 1,058 $ 1,058 $ 1,518 $ 1,654 $ 1,838 Licensing and product development.... -- 125 470 $ 921 1,854 ------- ------- ------- ------- -------- Revenues........................... 1,058 1,183 1,988 2,575 3,692 ------- ------- ------- ------- -------- Cost of sales........................ 356 409 631 1,049 1,136 Research and development............. -- 146 401 1,195 2,585 General and administrative........... 462 615 1,118 1,237 1,397 Sales and marketing.................. 349 485 878 887 1,019 ------- ------- ------- ------- -------- Operating expenses................. 1,167 1,655 3,028 4,368 6,137 ------- ------- ------- ------- -------- Net operating loss................... (109) (472) (1,040) (1,793) (2,446) Net other income (expense)........... (50) (28) (26) (89) 207 ------- ------- ------- ------- -------- Net loss............................. $ (159) $ (500) $(1,066) $(1,882) $ (2,239) ======= ======= ======= ======= ======== Net loss per common share (1), (2)..... $(0.46) $(0.39) ======= ======== Weighted average number of common shares (1), (2)................. 4,087 5,803
AT DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- ------ (unaudited) BALANCE SHEET DATA: Cash and cash equivalents............ $ 55 $ 649 $ 646 $ 36 $ 11,039 Working capital (deficit)............ (37) 197 108 (650) 11,187 Total assets......................... 267 894 1,361 1,240 12,956 Long-term liabilities, less current maturities........................... 363 190 299 136 8 Accumulated deficit.................. (5,846) (6,353) (7,419) (9,302) (11,540) Total shareholders' equity (deficit)... (329) 119 252 (74) 12,120
(1) Net loss per common share and weighted average common shares outstanding for 1995 are computed on the basis described in Note 1 of the Notes to Financial Statements. (2) Due to significant capital structure changes, earnings per common share and weighted average common shares outstanding for 1992, 1993 and 1994 are not presented. In addition, the Company has not paid any dividends since inception. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 14 1995, and an innovative needle-free injection technology that is the subject of eight United States patent applications. RESULTS OF OPERATIONS Year Ended December 31, 1995 Compared to Year Ended December 31, 1996 Revenues increased from approximately $2,575,000 in 1995 to approximately $3,692,000 in 1996, an increase of approximately 43%. This increase was primarily due to development and licensing fee income, which increased by approximately $933,000 or 101% to approximately $1,854,000 in 1996. Sales of injectors, parts, supplies and repairs increased by 11% from approximately $1,654,000 in 1995 to approximately $1,838,000 in 1996. This change was attributable to an increase in the number of injectors sold in 1996 (3,110 in 1995 and 3,338 in 1996) and also from increased sales of parts and supplies and revenue from repairs. The average price per injector decreased from $397 in 1995 to $385 in 1996 as a result of increased sales through distributors. The increase in licensing and product development fee income was primarily the result of the execution of an agreement with Becton Dickinson in January 1996 (the "Becton Dickinson Agreement"). The Company expects that licensing and 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 from approximately $1,049,000 in 1995 to approximately $1,136,000 in 1996 an increase of 8%. The increase was due to increased unit sales, partially offset by a decrease in unit manufacturing costs. Research and development expenses increased from approximately $1,195,000 in 1995 to approximately $2,585,000 in 1996, an increase of approximately $1,390,000 or 116%. This increase in spending was caused by a greater number of development projects that were underway in 1996, including the Company's collaboration with Becton Dickinson, which is being funded in large part by Becton Dickinson under the Becton Dickinson Agreement and the Company's initial public offering. General and administrative expenses increased from approximately $1,237,000 in 1995 to approximately $1,397,000 in 1996, an increase of approximately 13%. The principal components of this increase included higher executive compensation, increased support salaries, and higher legal expenses related to the negotiation of the Becton Dickinson Agreement. Sales and marketing expenses increased by 15% from approximately $887,000 in 1995 to approximately $1,019,000 in 1996. This increase is primarily the result of expenses associated with additional management personnel, higher travel expenses and increased expenses related to the creation of new sales literature and other materials. Interest and other income increased from approximately $16,000 in 1995 to approximately $239,000 in 1996, an increase of approximately $223,000. This increase is attributable to increased interest earnings on higher cash reserves on hand during 1996, following the sale of equity securities to Becton Dickinson, Ethical Holdings and the Company's initial public offering. Year Ended December 31, 1994 Compared to Year Ended December 31, 1995 Revenues increased from approximately $1,988,000 in 1994 to approximately $2,575,000 in 1995, 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 from approximately $1,518,000 in 1994 to approximately $1,654,000 in 1995, an increase of approximately 9%. This increase was attributable to an increase in the number of injectors sold, from 2,636 in 1994 to 3,110 in 1995, largely for use with human growth hormone, and 15 an increase of approximately $126,000 in sales of parts, supplies and repairs offset by a decrease in the average unit selling price of $465 in 1994 to $397 in 1995. Licensing and product development fees increased from $470,000 in 1994 to approximately $921,000 in 1995, 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 from approximately $631,000 in 1994 to approximately $1,049,000 in 1995, 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 from approximately $401,000 in 1994 to approximately $1,195,000 in 1995, 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 from approximately $1,118,000 in 1994 to approximately $1,237,000 in 1995, an increase of approximately 11%. This increase related primarily to increased salary and employee benefits expenses and expenses relating to a larger support staff. Sales and marketing expenses increased from approximately $878,000 in 1994 to approximately $887,000 in 1995, an increase of approximately 1%. Interest and other income remained relatively constant at approximately $16,000 in both 1994 and 1995. Interest and other expense increased from approximately $42,000 in 1994 to approximately $106,000 in 1995, 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. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short term investments which totaled approximately $11,039,000 at December 31, 1996, increased from approximately $36,000 on December 31, 1995. The increase is primarily a result of two major stock offerings and certain option exercises during the year which resulted in net proceeds to the the Company of approximately $14,000,000. During the year ended December 31, 1996, cash used to fund operating activities was approximately $2,642,000. The major components of this amount included a net loss of approximately $2,238,000 and an aggregate increase of approximately $484,000 in receivables, inventories and prepaid expenses, a net decrease of approximately $91,000 in accounts payable, accruals and deferred income, offset by depreciation totaling approximately $179,000. Cash used in investing activities was approximately $1,864,000. The components of this amount were net purchases of marketable securities totaling approximately $1,457,000 and additions to fixed assets of approximately $297,000, and an additional investment in patent rights totaling approximately $110,000. Net cash provided by financing activities of approximately $14,045,000, resulted primarily from the Company's initial public offering in October 1996, which generated net proceeds of approximately $10,600,000. Other significant financing activities during the year included a private stock offering totaling $3,125,000 to Becton Dickinson, and an option exercise by Ethical Holdings totaling $812,500. The Company reduced its indebtedness, under notes and leases payable by approximately $575,000 during the year. The Company expects that it will report a net loss for the year ending December 31, 1997 as it continues to incur marketing and development costs related to bringing future generations of its products to market. The Company believes that the capital available to the Company at December 31, 1996 plus the expected product sales and revenues from various development and licensing agreements will provide sufficient cash to fund expected losses and meet other cash usage needs until such time as it generates positive cash flow. The Company can provide no assurance, however, that it will ever become profitable or that cash available will be sufficient to meet its needs. 16 Item 8. FINANCIAL STATEMENTS. MEDI-JECT CORPORATION INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report......................................................... 18 Balance Sheets as of December 31, 1995 and 1996...................................... 19 Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996........ 20 Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996...................................................................... 21 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... 22 Notes to Financial Statements........................................................ 23
17 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Medi-Ject Corporation: We have audited the accompanying balance sheets of Medi-Ject Corporation (the Company) as of December 31, 1995 and 1996, 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, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medi-Ject Corporation as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 21, 1997 18 MEDI-JECT CORPORATION BALANCE SHEETS
DECEMBER 31, -------------------------- 1995 1996 ---------- ------------ ASSETS Current Assets: Cash and cash equivalents...................................... $ 35,817 $ 9,575,240 Marketable securities.......................................... 0 1,464,277 Accounts receivable, less allowances for doubtful accounts of $4,125 and $12,983, respectively.............................. 176,240 537,755 Inventories.................................................... 280,229 351,330 Prepaid expenses and other assets.............................. 35,508 86,589 ----------- ------------ 527,794 12,015,191 ----------- ------------ Equipment, furniture and fixtures, net.............................. 477,026 595,590 ----------- ------------ Patent rights....................................................... 235,288 345,010 ----------- ------------ $ 1,240,108 $ 12,955,791 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............................................... $ 243,281 $ 353,456 Accrued expenses and other liabilities......................... 398,232 331,446 Deferred revenue............................................... 148,563 14,019 Capital lease obligations - current maturities................. 45,534 32,747 Notes payable - current maturities............................. 342,457 96,097 ----------- ------------ 1,178,067 827,765 ----------- ------------ Long-term liabilities: Capital leases, less current maturities........................ 40,109 8,350 Notes payable, less current maturities......................... 96,097 0 ----------- ------------ 136,206 8,350 ----------- ------------ Shareholders' equity (deficit): Series B convertible preferred stock: $.01 par; authorized 3,046,459 shares: 2,090,633; and 0 issued and outstanding at December 31, 1995 and 1996, respectively................... 20,906 -- Series A convertible preferred stock: $.01 par; authorized 1,218,584 shares: 1,103,867; and 0 issued and outstanding at December 31, 1995 and 1996, respectively...................... 11,039 -- Common Stock: $0.01 par; authorized 12,947,449 shares: 218,864 and 6,925,636 issued and outstanding at December 31, 1995 and 1996, respectively...................... 2,189 69,256 Additional paid-in capital..................................... 9,193,600 23,590,887 Accumulated deficit............................................ (9,301,899) (11,540,467) ----------- ------------ Total shareholders' equity (deficit).......................... (74,165) 12,119,676 ----------- ------------ Commitments (Notes 6 and 13) $ 1,240,108 $ 12,955,791 =========== ============
See accompanying notes to financial statements. 19 MEDI-JECT CORPORATION STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Revenues: Sales ......................................... $1,517,660 $1,653,869 $1,837,704 Licensing & product development................ 470,000 920,937 1,854,100 ---------- ---------- ---------- 1,987,660 2,574,806 3,691,804 ---------- ---------- ---------- Operating Expenses: Cost of sales.................................. 630,628 1,048,937 1,136,272 Research and development....................... 401,382 1,195,435 2,584,806 General and administrative..................... 1,118,326 1,236,681 1,397,338 Sales and marketing............................ 877,522 886,792 1,019,077 ---------- ---------- ---------- 3,027,858 4,367,845 6,137,493 ---------- ---------- ---------- Net operating loss................................ (1,040,198) (1,793,039) (2,445,689) ---------- ---------- ----------- Other income (expense): Interest and other income...................... 15,916 16,486 239,055 Interest and other expense..................... (42,180) (105,906) (31,934) ---------- ---------- ----------- (26,264) (89,420) 207,121 ---------- ---------- ----------- Net loss.......................................... $(1,066,462) $(1,882,459) $(2,238,568) ========== ========== =========== Net loss per common share......................... -- -- $ (.39) =========== Weighted average common shares outstanding.................................... -- -- 5,803,346 Proforma net loss per common share (unaudited) (Note 1)........................... -- $ (.46) -- =========== Proforma weighted average common shares outstanding (unaudited) (Note 1................ -- 4,087,360 --
See accompanying Notes to Financial Statements 20 MEDI-JECT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK ----------------------------------------------------------------------- SERIES C SERIES B SERIES A ---------------------- --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ---------- --------- -------- -------- --------- Balance, December 31, 1993.......................... -- $ -- 761,615 $ 7,616 1,103,867 $ 11,039 Common stock: Shares issued as compensation.................. -- -- Shares issued for cash......................... -- -- -- -- -- -- Series B: Exercise of stock options...................... -- -- 552,171 5,522 -- Shares issued for cash......................... -- -- 175,172 1,752 -- -- Offering costs................................. -- -- -- -- -- -- Net Loss............................................ -- -- -- -- -- -- -------- --------- --------- --------- ----------- -------- Balance, December 31, 1994.......................... -- -- 1,488,958 14,890 1,103,867 11,039 Common stock: Exercise of stock options...................... -- -- -- -- -- -- Series B: Exercise of stock options...................... -- -- 228,483 2,284 -- -- Shares issued for cash......................... -- -- 373,192 3,732 -- -- Offering costs................................. -- -- -- -- -- -- Amendments to investor option agreement........ -- -- -- -- -- -- Net Loss............................................ -- -- -- -- -- -- -------- --------- --------- --------- ----------- -------- Balance, December 31, 1995.......................... -- -- 2,090,633 20,906 1,103,867 11,039 Conversion of Series A to common stock.......................................... -- -- -- -- (1,103,867) (11,039) Conversion of note payable........................ -- -- -- -- -- -- Shares issued for reverse stock split............. -- -- 43 -- -- -- Series B: Exercise of stock options and conversion of note payable................................ -- -- 380,808 3,808 -- -- Series C: Shares issued for cash......................... 761,615 7,616 -- -- -- -- Offering costs................................. -- -- -- -- -- -- Series E: Warrant issued for cash....................... -- -- -- -- -- -- Common stock: Issued common stock pursuant to the company's initial public offering.............. -- -- -- -- Offering costs.................................... -- -- -- -- -- -- Underwriter's warrant............................. -- -- -- -- -- -- Conversion of Series C to common stock.............. (761,615) (7,616) -- -- -- -- Conversion of Series B to common stock............. -- -- (2,471,484) (24,714) -- -- Issuance of Series B anti-dilution shares........... -- -- -- -- -- -- Net loss.......................................... -- -- -- -- -- -------- --------- --------- --------- ----------- -------- Balance, December 31, 1996.......................... -- $ -- -- $ -- -- $ -- ======== ========= ========= ========= =========== ======== ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED --------------------------- SHARES AMOUNT CAPITAL DEFICIT TOTAL ------------ ------------ ------------ --------- ----------- Balance, December 31, 1993........................ 177,598 $ 1,776 $ 6,451,269 $(6,352,978) $ 118,722 Common stock: Shares issued as compensation................ 37,310 373 2,029 -- 2,402 Shares issued for cash....................... 2,814 28 200 -- 228 Series B: Exercise of stock options.................... -- -- 719,478 -- 725,000 Shares issued for cash....................... -- -- 548,248 -- 550,000 Offering costs............................... -- -- (77,863) -- (77,863) Net Loss.......................................... -- -- -- (1,066,462) (1,066,462) ---------- ---------- ----------- ------------ ------------- Balance, December 31, 1994........................ 217,722 2,177 7,643,361 (7,419,440) 252,027 Common stock: Exercise of stock options.................... 1,142 12 1,548 -- 1,560 Series B: Exercise of stock options.................... -- -- 347,716 -- 350,000 Shares issued for cash....................... -- -- 1,221,268 -- 1,225,000 Offering costs............................... -- -- (65,383) -- (65,383) Amendments to investor option agreement...... -- -- 45,090 -- 45,090 Net Loss.......................................... -- -- -- (1,882,459) (1,882,459) ---------- ---------- ----------- ------------ ------------- Balance, December 31, 1995........................ 218,864 2,189 9,193,600 (9,301,899) (74,165) Conversion of Series A to common stock........................................ 1,103,867 11,039 -- -- -- Conversion of note payable...................... 30,465 305 99,695 -- 100,000 Shares issued for reverse stock split........... 589 5 (5) -- -- Series B: Exercise of stock options and conversion of note payable.............................. -- -- 809,822 -- 813,630 Series C: Shares issued for cash....................... -- -- 2,992,384 -- 3,000,000 Offering costs............................... -- -- (236,022) -- (236,022) Series E: Warrant issued for cash..................... -- -- 125,000 -- 125,000 Common stock: Issued common stock pursuant to the company's initial public offering............ 2,200,000 22,000 12,078,000 -- 12,100,000 Offering costs.................................. -- -- (1,470,419) -- (1,470,419) Underwriter's warrant........................... -- -- 220 -- 220 Conversion of Series C to common stock............ 761,615 7,616 -- -- -- Conversion of Series B to common stock........... 2,471,484 24,714 -- -- -- Issuance of Series B anti-dilution shares......... 138,752 1,388 (1,388) -- -- Net loss.......................................... -- -- -- (2,238,568) (2,238,568) ---------- ---------- ----------- ------------ ------------- Balance, December 31, 1996........................ 6,925,636 $ 69,256 $23,590,887 $(11,540,467) $12,119,676 ========== ========== =========== ============ =============
See accompanying notes to financial statements 21 MEDI-JECT CORPORATION STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1994 1995 1996 -------------- ------------- ----------- Cash flows from operating activities: Net loss................................................. $(1,066,462) $(1,882,459) $(2,238,568) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............................................. 36,945 85,960 178,526 Interest on marketable debt securities................... 0 0 (7,417) Shares issued as compensation............................ 2,402 -- -- Amendments to investor option agreement.................. -- 45,090 -- Changes in operating assets and liabilities: Accounts receivable..................................... (20,639) (86,937) (361,515) Inventories............................................. (121,547) (109,368) (71,101) Prepaid expenses and other assets....................... 3,542 (23,190) (51,081) Accounts payable........................................ 16,854 83,263 110,175 Accrued liabilities..................................... 90,026 107,193 (66,786) Deferred revenue........................................ 66,250 38,563 (134,544) ----------- ----------- ----------- Net cash used in operating activities......................... (992,629) (1,741,885) (2,642,311) ----------- ----------- ----------- Cash flows from investing activities: Purchases of marketable securities....................... 0 0 (1,456,860) Purchases of equipment, furniture and fixtures........... (256,622) (120,392) (297,090) Purchase of patent rights................................ -- (235,288) (109,722) ----------- ----------- ----------- Net cash used in investing activities......................... (256,622) (355,680) (1,863,672) ----------- ----------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations.......... (26,729) (42,138) (44,546) Proceeds from issuance of common stock................... 228 1,560 12,101,130 Proceeds from issuance of convertible preferred stock.... 1,275,000 1,575,000 3,812,500 Warrants issued.......................................... -- -- 125,220 Proceeds from issuance of notes payable.................. 100,000 125,000 187,500 Principal payments on notes payable...................... (24,967) (106,324) (429,957) Offering costs........................................... (77,863) (65,383) (1,706,441) ----------- ----------- ----------- Net cash provided by financing activities..................... 1,245,669 1,487,715 14,045,406 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.......... (3,582) (609,850) 9,539,423 Cash and cash equivalents: Beginning of year........................................ 649,249 645,667 35,817 ----------- ----------- ----------- End of year.............................................. $ 645,667 $ 35,817 $ 9,575,240 =========== =========== ===========
See accompanying Notes to Financial Statements. 22 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business The Company is primarily a manufacturer and 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. The Company completed an initial public offering ("IPO") of 2,200,000 shares of its common stock on October 2, 1996. Simultaneously with the closing date of the IPO, all outstanding shares of preferred stock (consisting of 2,471,484 shares Series B, and 761,615 shares Series C) were automatically converted into an aggregate of 3,371,851 shares of common stock. The conversion of the Company's preferred stock to common stock, as described herein, has been reflected in the balance sheet at December 31, 1996. 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. Net Loss Per Share Net loss per common share is computed based upon the weighted average number of common shares outstanding. The unaudited pro forma net loss per common share information included in the statement of operations for the year ended December 31, 1995 reflects the impact of the conversion of all Preferred Shares retroactively as of the date of issuance of the Preferred Shares. Also, pursuant to the Securities and Exchange Commission regulations, all common and Preferred Shares issued and options and warrants granted by the Company during the 12-month period preceding the initial filing date of the October 1996 public offering have been included in the year end and pro forma calculation of weighted average common and common equivalent shares outstanding as if they were outstanding for all periods presented using the treasury stock method and an offering price of $5.50 per share. Cash Equivalents The Company considers highly liquid debt instruments with original maturities of ninety days or less to be cash equivalents. Marketable Securities The Company accounts for its marketable debt securities in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company's marketable debt securities are classified as available-for-sale. However, because the original maturities of the Company's debt securities are less than one year, they are reported at amortized cost which approximates fair value. 23 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 Inventories Inventories are stated at the lower of cost or market. Cost is determined on the 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 ranging from 3 to 10 years. Sales Recognition Sales and related costs are recognized upon shipment of product to customers. Sales are recorded net of provisions for returns and discounts. Licensing and Product Development Revenue Recognition Licensing and product development revenue is recognized when underlying performance criteria for payment have been met and the Company has an unconditional right to such payment. Depending on a license or product development agreement's terms, recognition criteria may be satisfied upon achievement of milestones, passage of time, or product sales by the licensee. Payments received by the Company in excess of amounts earned are classified as deferred revenue. Stock-Based Compensation Compensation expense for stock incentives granted to employees and directors is recognized in accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees." Pro forma effects on net loss and loss per share are provided as if the fair value based method defined in Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," has been applied. 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. 24 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 Concentration of Credit Risk Financial instruments that may subject the Company to concentration of credit risk consist principally of marketable debt securities investments and trade accounts receivable. Risks related to marketable securities purchased are mitigated by the limitations established in the Company's investment policy. This policy requires strong issuer credit ratings and limits the amount of credit exposure from any one issuer or industry. For trade accounts receivable, risks are mitigated by the large number of individual customers, long-standing credit relationships with major distributors and a satisfactory financial evaluation of distributors carrying substantial credit balances. 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. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Fair Value of Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. 2. INVENTORIES Inventories consist of the following:
December 31, ---------------------------- 1995 1996 ---------- ---------- Raw material................... $ 145,603 $ 175,251 Work-in-process................ 80,663 119,575 Finished goods................. 53,963 56,504 ---------- ---------- $ 280,229 $ 351,330 ========== ==========
25 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 3. EQUIPMENT, FURNITURE, FIXTURES Equipment, furniture and fixtures consisted of the following:
December 31, ---------------------------------- 1995 1996 --------------- --------------- Office equipment.............................................. $ 262,847 $ 404,811 Production equipment.......................................... 753,319 822,477 Displays...................................................... 11,296 11,296 Less Accumulated Depreciation................................. (550,436) (642,994) --------- --------- $ 477,026 $ 595,590 ========= =========
4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consisted of the following:
December 31, --------------------------------- 1995 1996 --------------- ----------- Product warranty and returns.................................. $ 71,620 $ 86,436 Payroll....................................................... 29,787 37,828 Patent rights obligation...................................... 96,500 -- Other......................................................... 200,325 207,182 --------- --------- Other......................................................... $ 398,232 $ 331,446 ========= =========
5. NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31, -------------------------- 1995 1996 ----------- ----------- 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.................................. 213,554 96,097 Unsecured note payable to shareholder/director, with interest at 12% payable monthly, Convertible into 30,465 shares of common stock......................................... 100,000 -- ----------- ----------- 438,554 96,097 Current maturities..................................................... (342,457) (96,097) ----------- ----------- Notes payable, less current maturities................................. $ 96,097 -- ========= ===========
On January 25, 1996, the Company converted an unsecured note payable totaling $312,500 (of which $125,000 was outstanding at December 31, 1995) into 190,404 shares of common stock. In addition, the holder of the debt purchased an additional 190,404 shares of common stock for proceeds of $500,000 in connection with a stock option exercise. On February 29, 1996 an unsecured note payable to a shareholder totaling $100,000, which was outstanding at December 31, 1995, was converted into 30,465 shares of common stock. 26 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. In February, 1997, the Company executed a five year lease for a new facility, (See note 13). Rent expense incurred for the years ended December 31, 1994, 1995 and 1996 was $102,306, $107,616 and $101,139, respectively. The Company is also obligated under noncancelable leases classified as capital leases. The leases call for aggregate monthly payments of $4,302 with various expiration dates through September 1999. Equipment, furniture, and fixtures include $326,186 and $282,186 of cost and $221,341 and $221,409 of accumulated amortization as of December 31, 1995 and 1996, respectively, related to these leases. Future minimum lease payments are as follows as of December 31, 1996:
CAPITAL OPERATING LEASES LEASES -------- --------- 1997............................................................ $ 36,570 $ 27,236 1998............................................................ 7,070 -- 1999............................................................ 2,412 -- -------- -------- 46,052 $ 27,236 ======== Amount representing interest (at rates from 12% to 20.9%)....... (4,955) -------- Present value of minimum capital lease payments............. 41,097 Current maturities.............................................. (32,747) -------- Obligations under capital leases less current maturities.... $ 8,350 ========
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, 1996 and, accordingly, no income taxes were provided. Effective tax rates differ from statutory federal income tax rates in the years ended December 31, 1996, 1995, and 1994 as follows:
1994 1995 1996 ------- ------- ------- Statutory federal income tax rate........... (34.0)% (34.0)% (34.0)% Valuation allowance increase................ 36.0 36.0 39.8 State income taxes, net of federal benefit.. (2.0) (2.0) (2.0) Research and experimentation credit......... -- -- (1.6) Other....................................... -- -- (2.2) ------ ------ ------ 0.0% 0.0% 0.0% ====== ====== ======
27 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 Deferred taxes as of December 31, 1995 and 1994 consist of the following:
1995 1996 ---- ---- Deferred tax assets: Inventory reserve................ $ 72,100 $ 21,000 Net operating loss carryforward.. 3,123,600 4,012,000 Research credit carryforward..... 117,000 152,000 Other............................ 27,300 45,000 ----------- ----------- 3,340,000 4,230,000 Less valuation allowance........... (3,340,000) (4,230,000) ----------- ----------- $ 0 $ 0 =========== ===========
At December 31, 1996, the Company had net operating loss carryforwards ("NOL") of approximately $11,100,000 for federal income tax purposes, which begin to expire in 1997. Additionally, the Company had research credit carryforwards of approximately $152,000, which begin to expire in 1997. As a result of the 1996 equity changes as described in Note 8, the net operating loss will be subject to annual limitation as defined by Section 382 of the Internal Revenue Code. The annual limitation for utilization of the net operating loss carryforwards is approximately $750,000. Subsequent and future equity changes could further limit the net operating losses available. 8. SHAREHOLDERS' EQUITY Initial Public Offering On October 2, 1996, the Company completed an initial public offering ("IPO") of its common stock. In this offering 2,200,000 common shares were sold at a price of $5.50 per share. As a consequence of this offering, and in accordance with the terms of each of the various series of preferred stock that the Company had outstanding prior to the IPO, all series of preferred shares then outstanding and rights to acquire preferred shares were automatically converted into common stock or rights to purchase common stock Authorized Shares At December 31, 1996, the total number of shares authorized for all classes of stock was 13,709,064 shares: 12,947,449 common shares and 761,615 preferred shares unissued and undesignated as to class. Series A Preferred 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. Stock Options and Warrants The Company has issued options and warrants for common stock to various officers, directors, employees, lenders and others. These options and warrants have exercise prices ranging from $0.79 to $6.60 per share and expire from January 1997 to January 2006. 28 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 As of December 31, 1995 the Company had 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, was exercised in full on February 29, 1996. The exercise price was $1.64 per share for 190,404 shares and $2.63 for the remaining 190,404 shares, all of which were converted to shares of common stock in connection with the Company's IPO. 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. The Company's stock option plans allow for grant of options to officers, directors, and employees to purchase up to 995,050 shares of common stock at exercise prices not less than 100% of fair market value on the dates of grant. The term of the options may not exceed tens years and vest in varying periods. Stock option and warrant activity is summarized as follows:
NUMBER WEIGHTED OF AVERAGE SHARES PRICES ----------- ---------- Outstanding at December 31, 1993..................................... 1,043,282 $ 1.41 Granted............................................................ 124,995 1.61 Exercised.......................................................... (152,323) 1.31 Canceled........................................................... (7,236) 29.42 ----------- ---------- Outstanding at December 31, 1994..................................... 1,008,718 1.43 Granted............................................................ 214,776 3.16 Exercised.......................................................... (229,627) 1.45 Canceled........................................................... (2,057) 3.28 ----------- ---------- Outstanding at December 31, 1995..................................... 991,810 1.84 Granted............................................................ 2,942,915 5.61 Exercised.......................................................... (381,380) 1.64 Canceled........................................................... (19,959) 1.75 ----------- ---------- Outstanding at December 31, 1996..................................... 3,533,386 $ 5.03 =========== ==========
As of December 31, 1995 and 1996, 406,931 and 828,498 options and 584,879 and 2,704,888 warrants were outstanding, respectively. At December 31, 1996, the range of exercise prices and weighted-average remaining contractual life of outstanding options and warrants was $.79 - $6.60 and 8 years, respectively. At December 31, 1995 and 1996, currently exercisable options and warrants aggregated 238,240 and 419,875 options and 584,879 and 2,704,888 warrants, respectively and the weighted-average exercise price of those options and warrants was $1.84 and $5.03, respectively. The per share weighted-average fair value of stock options granted during 1995 and 1996 is estimated as $.95 and $4.16, respectively on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1995 and 1996: expected volatility of 0 and 106 for 1995 and 1996, respectively, risk-free interest rate of 6.0%, expected dividends of $0 and expected lives of 2.5 to 7.5 years for both years. 29 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, the Company's net loss and loss per share would have increased by approximately $97,000 or $.03 per share in 1995 and $375,000, or $.08 per share in 1996. Proforma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. 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, 1994, 1995, and 1996. 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, 1994, 1995, and 1996 was $67,785, $62,515 and $30,919, respectively. Cash paid for taxes during the years ended December 31, 1994, 1995 and 1996 was $300 in each year. During 1996, notes payable of $125,000 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 5%, 18% and 18% of sales for the years ended December 31, 1994, 1995, and 1996, respectively. Foreign sales by geography were as follows:
1994 1995 1996 -------- -------- -------- Europe (primarily Germany)...... $ 14,960 $301,277 $356,838 Other........................... 146,469 319,379 221,653 -------- -------- -------- Total....................... $161,429 $620,656 $578,491 ======== ======== ========
Other consists mainly of sales to Asia. 30 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 12. BECTON DICKINSON ARRANGEMENT On January 25, 1996, the Company sold 761,615 shares of common 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 common stock with an exercise price of $4.60. Warrants for 1,904,037 shares of common stock were also granted at an exercise price of $5.91 for initial consideration of $125,000. The Becton Dickinson option and warrant agreements each expire on the tenth anniversary of the agreement. In connection with the sale of equity to Becton Dickinson, 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. 13. SUBSEQUENT EVENTS On February 11, 1997, the Company executed a lease for a new office and manufacturing facility. The new facility consists of a total of 22,968 square feet of space and is located in Plymouth, Minnesota, near the Company's existing offices. The lease term is for 60 months at an average of $14,355 per month. 31 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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 statement 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. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the headings "Election of Directors" and "Compliance with Section16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 1997 is incorporated by reference. Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information as to executive officers of the Company is set forth in Part 1 of the Form 10-K under separate caption. Item 11. EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 1997 is incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 1997 is incorporated by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the heading "Certain Relationships And Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 1997 is incorporated by reference. 32 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements - see Part II (2) Financial Statement Schedule - All schedules have been ommitted because they are not applicable or not required or because the information is included in the financial statements or the notes thereto. (3) Management Contracts - see list of Exhibits (b) Reports on Form 8-K There were no reports filed on Form 8-K for the fourth quarter of 1996. (c) Exhibits 3.1 Second Amended and Restated Articles of Incorporation of the Company.(a) 3.2 Second Amended and Restated Bylaws of the Company.(a) 4.1 Form of Certificate for Common Stock.(a) 4.2 Stock Warrant, dated January 25, 1996, issued to Becton Dickinson and Company.(a) 4.3 Stock Option, dated January 25, 1996, issued to Becton Dickinson and Company.(a) 4.4 Warrant, dated March 24, 1995, issued to Robert Fullerton.(a) 4.5 Warrant, dated March 24, 1995, issued to Michael Trautner.(a) 4.6 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company (filed herewith as Exhibit 10.7).(a) 10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments thereto.(a) 10.2 Promissory Note, dated August 29, 1994, issued to Fred Shapiro.(a) 10.3 Security Agreement, dated September 30, 1994, by and between the Company and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership.(a) 10.4 Promissory Note, dated September 30, 1994, issued to Kelsey Lake Limited Partnership.(a) 10.5 Promissory Note, dated September 30, 1994, issued to Kerry Lake Company, a Limited Partnership.(a)
33 10.6 Loan Agreement, dated as of December 22, 1995, by and between Ethical Holdings plc and the Company, including the related Promissory Note, dated December 22, 1995, issued to Ethical Holdings plc.(a) 10.7 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company.(a) 10.8 * Employment Agreement, dated as of January 3, 1995, between the Company and Franklin Pass, MD.(a) 10.9 * Employment Agreement, dated as of January 3, 1995, between the Company and Mark Derus.(a) 10.10 * Employment Agreement, dated as of January 3, 1995, between the Company and Todd Leonard.(a) 10.11 * Employment Agreement, dated as of January 3, 1995, between the Company and Peter Sadowski.(a) 10.12 * 1993 Stock Option Plan.(a) 10.13 * Form of incentive stock option agreement for use with 1993 Stock Option Plan.(a) 10.14 * Form of nonqualified stock option agreement for use with 1993 Stock Option Plan.(a) 10.15 * 1996 Stock Option Plan, with form of stock option agreement.(a) 10.16 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and the Company, dated February 1, 1994, relating to the Company's Non-Voting Series B Convertible Preferred Stock.(a) 10.17 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and the Company, dated December 28, 1993, relating to the Company's Series B Convertible Preferred Stock.(a) 10.18 Preferred Stock Purchase Agreement between Calvert Social Venture Partners, L.P. and the Company, dated November 29, 1993, relating to the Company's Series B Convertible Preferred Stock.(a) 10.19 Form of Preferred Stock Purchase Agreement relating to the Company's Series B Convertible Preferred Stock.(a) +10.20 Development and License Agreement between Becton Dickinson and Company and the Company, effective January 1, 1996.(a) 10.21 Office-Warehouse lease with Carlson Real Estate Company, dated February 11, 1997. 16.1 Letter Regarding Change in Certifying Accountant.(a) 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule 99 Cautionary Statement
34 * Indicates management contract or compensatory plan or arrangement. (a) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-6661), filed with the Securities and Exchange Commission on October 1, 1996. + Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibit 10.20 were deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment, which was subsequently granted by the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on March 31, 1997. MEDI-JECT CORPORATION /s/ Franklin Pass --------------------- Franklin Pass, MD President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities indicated on March 31, 1997. SIGNATURE TITLE --------- ----- President, Chief Executive Officer and Director ________________________ Franklin Pass, M.D. (principal executive officer) Vice President of Finance, Chief Financial Officer ________________________ Mark S. Derus (principal financial and accounting officer) Director ________________________ Louis C. Cosentino Director ________________________ Kenneth Evenstad Director ________________________ Geoffrey Guy Director ________________________ Norman Jacobs Director ________________________ Fred Shapiro, M.D. Director ________________________ Peter Sjostrand 35 EX-10.12 2 OFFICE & WAREHOUSE LEASE Exhibit 10:12 OFFICE-WAREHOUSE LEASE DATE: February 11, 1997 PARTIES: CARLSON REAL ESTATE COMPANY, A MINNESOTA LIMITED PARTNERSHIP "Landlord" MEDI-JECT CORPORATION, A MINNESOTA CORPORATION "Tenant" AGREEMENT: In consideration of the following terms and conditions, the parties agree as follows: 1. BASIC LEASE PROVISIONS AND DEFINITIONS. 1.1 STREET ADDRESS OF PREMISES: 161 Cheshire Lane, Suite 100, Plymouth, Minnesota 55441. 1.2 LANDLORD'S NOTICE ADDRESS: 111 Cheshire Lane, Suite 700, Minnetonka, MN 55305. 1.3 TENANT'S NOTICE ADDRESS: 161 Cheshire Lane, Suite 100, Plymouth, Minnesota, 55441 1.4 COMPLEX: The office-warehouse project commonly known as Carlson Business Center North, shown on Exhibit "B" and legally described on Exhibit "A", attached. Landlord shall have the right from time to time to add land and buildings to the Complex. 1.5 PREMISES: Approximately 22,968 rentable square feet of space, as depicted on Exhibit "B," attached, together with all appurtenances thereto. The Premises is located within a single story building commonly known as "Building No. VI", and legally described as Lot 3, Block 1, Carlson Business Center North according to the recorded plat thereof, and situate in Hennepin County, Minnesota (the "Building") of the Complex. 1.6 TERM: Five (5) Lease Years. 1.7 PRO RATA SHARE: A fraction, the numerator of which is the number of rentable square feet in the Premises and the denominator of which is the number of rentable square feet in the Complex, in each case as reasonably determined in the first instance by Landlord. 1.8 OPERATING EXPENSES: Defined in Section 8. Landlord estimates that Operating Expenses for the first calendar year shall be Seventy-Eight Cents ($.78) per rentable square foot of the Premises. 1.9 REAL ESTATE TAXES: Defined in Section 8. Landlord estimates that Real Estate Taxes for the first calendar year shall be Thirty-Five Cents ($.35) per rentable square foot of the Premises. 1.10 LEASE YEAR: The twelve (12) full calendar month period commencing on the Commencement Date and each anniversary thereof, unless the Commencement Date does not fall on the first day of a month in which event the first Lease Year shall commence on the first day of the month immediately following the month in which the Commencement Date occurs. Each subsequent Lease Year shall commence on the anniversary of the first Lease Year. The first Lease Year shall include any initial partial calendar month. 1.11 Annual Base Rent: Year P.S.F. Amount ---- ------ ------ 1 $7.00 $160,776.00 2 $7.25 $166,518.00 3 $7.50 $172,260.00 4 $7.75 $178,002.00 5 $8.00 $183,744.00 1.12 Monthly Installment: Year P.S.F. Amount ---- ------ ------ 1 $7.00 $13,398.00 2 $7.25 $13,876.50 3 $7.50 $14,355.00 4 $7.75 $14,833.50 5 $8.00 $15,312.00
1.13 Additional Rent: All additional payment obligations of Tenant, including but not limited to Operating Expenses, Real Estate Taxes and any other charges or fees and any cost incurred by Landlord on behalf of Tenant. 1.14 Security Deposit: Nine Thousand Five Hundred and 00/100 Dollars ($9,500.00). 1.15 Common Area: Defined in Section 6. 1.16 Delivery Date: The date which is sixty (60) days from the later of (a) the date the lease is fully executed and delivered, or (b) the date Tenant's construction plans are approved by Tenant. 1.17 Commencement Date: April 15, 1997. 1.18 Termination Date: The last day of the Fifth (5th) Lease Year following the Commencement Date. 1.19 Permitted Use: General office, warehouse, technical assembly, and light manufacturing. 2. PREMISES. Subject to the terms and conditions herein contained, Landlord hereby leases the Premises to Tenant, and Tenant hereby accepts and leases the Premises from Landlord for the Term, unless sooner terminated pursuant to any provision hereinafter set forth. 3. RENT PAYMENT. 3.1 Amount And Manner. Tenant shall pay to Landlord Annual Base Rent in advance in equal Monthly Installments, without setoff or demand, on the first day of each calendar month during the Term of this Lease. Monthly Installments for any fractional month at the commencement or expiration of the Term shall be prorated based upon a thirty (30) day month. Monthly Installments of Annual Base Rent, Operating Expenses and Real Estate Taxes shall be payable by Tenant to Landlord at the address set forth in Section 1.2, above, or at such other place as Landlord shall hereinafter designate in writing. At the written request of Landlord, Tenant agrees to take such action and execute such documents as Landlord shall deem necessary or desirable to cause the timely automatic direct transfer from Tenant's bank account of funds necessary to make all of the payments required under the terms of this Lease. Notwithstanding anything to the contrary contained herein, in the event Landlord withdraws an amount of money in excess of the amount then due for the Monthly Installment of Annual Base Rent or Additional Rent under the terms herein (collectively, "Tenant's Monetary Obligation"), Tenant shall have the right to terminate the automatic direct transfer, upon thirty (30) days written notice to Landlord. In the event 2 Landlord withdraws an amount in excess of Tenant's Monetary Obligation, Landlord shall immediately pay such overdraft amount to Tenant. 3.2 LATE FEES. If any Monthly Installment is not received by Landlord on or before the fifth (5th) day of the applicable calendar month, Tenant agrees to pay Landlord an additional sum equal to two percent (2%) of the total amount overdue, including Monthly Installments of Annual Base Rent, and Additional Rent. Said charge is intended to defray Landlord's interest and administrative expenses, and Tenant acknowledges that such charge represents a fair and reasonable estimate of such expenses, and shall be due and payable for each full or partial calendar month that any Monthly Installment and/or Additional Rent remains unpaid. Further, Landlord shall be entitled to charge a fee of $25.00, to cover its administrative expense, each time a check from Tenant is returned by a bank for insufficient funds. 3.3 INTEREST. In addition to the late charges referred to above, which are intended to defray Landlord's costs resulting from late payments, any late payment of a Monthly Installment or Additional Rent shall, at Landlord's option, bear interest from the due date of any such payment to the date same is paid at sixteen percent (16%) per annum or the maximum lawful rate that Landlord may charge to Tenant under applicable laws, whichever is less. Acceptance of any late charge and/or interest shall not constitute a waiver of Tenant's default with respect to the overdue sum or prevent Landlord from exercising any of its other rights and remedies under this Lease. 3.4 REMEASURE. In the event it is determined that the Premises are comprised of more or less than the rentable square footage stated in Section 1.5, as certified by a contractor or architect reasonably satisfactory to Landlord, the parties agree to enter into a supplemental agreement setting forth the actual rentable square footage of the Premises, as well as, any changes to Tenant's Base Annual Rent and/or Additional Rent. 4. LANDLORD'S WORK; TENANT'S ACCEPTANCE OF PREMISES. Landlord shall, at its sole cost and expense, complete the work described in the attached Exhibit "C" ("Landlord's Work") and the tenant improvements, if any, described on Exhibit "D" (the "Tenant Improvements"). All of Landlord's Work and the Tenant Improvements shall be performed in accordance with Exhibits "C" and "D" attached hereto, in a good and workmanlike manner, utilizing new and first grade materials; shall be in conformity with all applicable federal, state and local laws, ordinances, regulations, building codes, and fire regulations; shall comply with any applicable insurance requirements for the Complex; and shall be substantially completed before May 1, 1997. Tenant's taking possession of the Premises shall be conclusive evidence of Tenant's receipt of the Premises. Tenant shall have thirty (30) days from the Commencement Date to submit to Landlord, its punch list and Landlord shall, thereafter, use diligent efforts to perform such work as may be necessary to complete same in an expeditious manner. 5. OPERATION AND USE OF PREMISES. 5.1 USE. Tenant shall use the Premises for the Permitted Use set forth in Section 1.19 and no other purpose. 5.2 LEGAL COMPLIANCE. Tenant shall, at its expense, comply with all laws, governmental orders, regulations, rules, local ordinances regarding (a) any of the Permitted Uses described in Section 1.19, (b) the condition of the Premises to the extent Tenant is responsible therefor pursuant to this Lease, (c) improvements and equipment constructed in or installed upon the Premises by Tenant including, but not limited to, warehouse racking. Upon receipt of any notice of noncompliance, Tenant shall promptly notify Landlord in writing. Landlord shall comply with all laws, governmental orders, regulations, rules and local ordinances relating to: (i) the Common Areas, (ii) the initial construction of Landlord's Work, and (iii) the exterior surfaces, structural elements, foundation and roof of the Building, and the costs and expenses associated with such compliance by Landlord shall be included in Operating Expenses. 5.3 OBJECTIONABLE MATERIAL. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, nor take any other action which would constitute a 3 nuisance or endangers any other tenants of the Complex or interfere with the use of the respective premises. Without Landlord's prior written consent, Tenant shall not receive, store, or otherwise handle any product, material or merchandise which is hazardous, toxic, explosive or highly flammable other than reasonable quantities thereof incidental to the conduct of Tenant's business which are stored, used and disposed of in compliance with all applicable legal requirements. Tenant shall promptly provide to Landlord a detailed list of such materials used in the conduct of Tenant's business. Outside storage of any type of equipment, property or materials by Tenant, its agents, employees, customers or suppliers shall be permitted only with the prior written consent of Landlord. Tenant shall store all rubbish within the Premises and, at Tenant's expense, arrange for the regular collection of rubbish and janitorial services. 5.4 RULES AND REGULATIONS. Landlord reserves the right from time to time to adopt and amend reasonable, non-discriminatory rules and regulations concerning use of the Common Area and Premises, with which Tenant agrees to comply ("Rules and Regulations"). A copy of the current Rules and Regulations is attached as Exhibit "E". Landlord shall provide Tenant with a written copy of any additional rule or regulation thirty (30) days prior to implementation of same. 5.5 INSURANCE RISK. Without Landlord's consent, Tenant shall not use the Premises in any way which could increase insurance rates, or disallow any sprinkler or other credits, or invalidate any policy of insurance with respect to the Premises, Building or Complex or Tenant's operations therein. 6. COMMON AREA. The term "Common Area" means the entire area designed for common use or benefit within the Complex, including the parking lot, landscaped and vacant areas, and sidewalks. The Common Area shall at all times be subject to the exclusive control and management of Landlord and may be expanded, contracted, improved or changed by Landlord from time to time as deemed desirable. Subject to the Rules and Regulations, the Common Area is hereby made available to Tenant and its employees, agents, customers, and invitees for their reasonable nonexclusive use in common with other tenants of the Complex, their employees, agents, customers, invitees, and to Landlord for the purposes for which constructed. Tenant shall not in any manner obstruct the Common Area. Landlord shall have the right to change the area, location, and arrangement of the Common Area; to enter into, modify, and terminate easements and other agreements pertaining to the use and maintenance of the Common Area, to close all or any portion of the Common Area to such extent as may be necessary; to add or remove improvements; and to do and perform such other acts in and to these areas and improvements as Landlord shall determine to be advisable with a view to the improvement and convenient use thereof. In no event shall Landlord obstruct the ingress or egress to the Building or Complex or reduce the number of parking stalls below the number required by local code or ordinance. No exhibit attached to this Lease nor any other materials provided by Landlord shall constitute a warranty or agreement as to the configuration of the Building or Complex or the occupants thereof. Landlord shall not materially or substantially obstruct the visibility of Tenant's exterior signage without the consent of Tenant, which shall not be unreasonably withheld, delayed or conditioned. 7. MAINTENANCE OBLIGATIONS. 7.1 LANDLORD'S RESPONSIBILITIES. Landlord shall keep the Common Area, exterior surfaces, structural elements, foundation and roof of the Building in good order and repair and the expense of such activities shall be an Operating Expense. Notwithstanding the foregoing, Landlord shall not be required to make any repairs which become necessary as a result of any act or omission of Tenant, its agents, representatives, contractors, employees or customers. 7.2 TENANT'S RESPONSIBILITIES. Throughout the Term of this Lease, Tenant shall be obligated, at its sole cost and expense, to keep and maintain the Premises and all heating, air conditioning (including but not limited to motors, compressors, coils, heat exchanges, etc.), plumbing, doors, windows, locks, electrical facilities and fixtures therein in good, safe and working order, condition and repair. Tenant shall maintain a written contract for the regular maintenance of the HVAC equipment with a contractor satisfactory to Landlord. Tenant 4 shall provide Landlord with a copy of the contract within ten (10) days after it is fully executed and shall provide Landlord with a copy of all reports and recommendation for service issued by the contractor. Tenant agrees to replace and renew, with like kind and quality, any parts of the Premises, except for those portions of the Premises which are Landlord's responsibility hereunder, that may become too worn to be repaired, so that, at all times, the Premises shall be in good, safe and working order, condition and repair. Tenant shall not permit waste to the Premises. However, there shall be no obligation on the part of Tenant to comply with any laws which may require structural alterations, or additions, unless made necessary by any act, work, use or omission by Tenant. 8. OPERATING EXPENSES AND REAL ESTATE TAXES. Landlord and Tenant hereby agree that it is the intention of the parties that this Lease shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the Annual Base Rent specified in Section 1. In addition to the Monthly Installments of Annual Base Rent, Tenant shall pay on a monthly basis as Additional Rent during the term hereof all costs and expenses of every kind relating to the Premises, including but not limited to utilities, janitorial services and Tenant's Pro Rata Share of "Operating Expenses," which shall mean the costs and expenses incurred by Landlord in managing, cleaning, operating, maintaining, repairing and insuring the Complex and the real property described on Exhibit "A" and the amortized cost over the anticipated useful life of (but not the entire capitalized cost of): (i) equipment used in maintenance; and (ii) capital improvements necessary to preserve or maintain the Complex and all improvements to the real property on which the Complex is situated or required by any law, rule, regulation or order of any governmental or quasi-governmental authority. Operating Expenses shall include, but not be limited to, the total cost incurred for fire and extended coverage and liability insurance premiums due and payable with respect to the entire Complex; water; sewer; gardening, lawn and landscape care; paving maintenance, repair and replacement; snow removal; line painting; sign maintenance; exterior maintenance and repair, including roofs and building exteriors; security equipment and services and the costs of personnel and contractors to implement said services; and Landlord's management fees and administrative costs, all subject to the Operating Expense exclusions set forth in Exhibit "G". In addition, Tenant shall pay on a monthly basis as additional rent during the term hereof its Pro Rata Share of the real estate taxes and installments of special assessments levied or assessed with respect to the Building ("Real Estate Taxes") in the applicable year. In the event of any refund of Real Estate Taxes with respect to a year for which Tenant has paid its Pro Rata Share of Real Estate Taxes, Landlord shall provide copies of documentation evidencing the amount of such refund and, in Landlord's discretion, either promptly pay to Tenant its Pro Rata Share of the amount of the refund after deduction of Landlord's costs incurred in obtaining such refund, or apply such amount as a credit against Tenant's future monthly installments of its Pro Rata Share of Real Estate Taxes. Tenant's Pro Rata Share of Operating Expenses and Real Estate Taxes shall be paid by Tenant in monthly installments in such amounts as are estimated and billed by Landlord at the beginning of each twelve (12) month period commencing and ending on dates designated by Landlord, each installment being due on the first day of each calendar month. If at any time during such twelve (12) month period, it shall appear that Landlord has materially underestimated or overestimated Operating Expenses or Real Estate Taxes, Landlord may reestimate Tenant's Pro Rata Share of Operating Expenses and Real Estate Taxes and may bill Tenant for any deficiency or credit Tenant for any surplus which may have accrued during such twelve (12) month period and thereafter the monthly installment payable by Tenant shall also be adjusted. Within one hundred (100) days after the end of each such twelve (12) month period, Landlord shall deliver to Tenant a statement of Operating Expenses and Real Estate Taxes for such twelve (12) month period and the monthly installments paid or payable shall be adjusted between Landlord and Tenant, and each party hereby agrees that Tenant shall pay Landlord or Landlord shall credit Tenant' s account (or, if such adjustment is at the end of the term, pay Tenant), within thirty (30) days of receipt of such statement, the amount of any excess or deficiency in Tenant's Pro Rata Share of Operating Expenses and Real Estate Taxes paid by Tenant to Landlord during such twelve (12) month period. Failure of Landlord to provide the statement called for hereunder within the time prescribed shall not relieve Tenant from its obligations hereunder, but no such statement increasing Tenant's obligations shall be effective if more than one hundred eighty (180) days delinquent. Tenant shall have the right from time to time (but not exceeding once in any 12 month period) to examine books and records relating to Operating Expenses, including the right to conduct audits at Tenant's expense. Such examinations and audits shall be performed at Landlord's offices during normal business hours, on reasonable prior written notice to Landlord, and Tenant's payments shall be adjusted 5 accordingly. In the event said audit discloses a total deviation in excess of five (5%) percent, or more, of the actual Operating Expenses, Landlord shall pay the cost of said audit. In no event shall Tenant employ any person, firm or entity to perform the rights of Tenant hereunder who is paid on a contingency fee basis. 9. REPAIRS-ALTERATIONS. Tenant shall not damage the Premises and shall not permit waste to the Premises. Tenant shall not make any improvements, additions or alterations to the Premises, or install any equipment which defaces the Building interior or exterior or negatively affects the structural or mechanical components of the Building, without the prior written consent of Landlord. Subject to Section 22.3, Landlord may condition Landlord's approval on removal of such machinery, equipment, improvements, additions or alterations at Tenant's expense upon the termination of this Lease. Tenant shall pay for any repairs necessary as a result of removal of any such machinery, equipment, improvements, additions or alterations. Notwithstanding the foregoing, Tenant may make minor interior, non-structural alterations and improvements without the consent of Landlord. If plans and specifications are prepared for any such work, Tenant shall furnish a copy of such plans and specifications to Landlord. Without regard to any other limitations on Tenant's removal obligations contained elsewhere in this Lease, Landlord may, in Landlord's sole discretion, require Tenant to remove any improvements, additions or alterations to the Premises which were made without Landlord's prior written consent, but Landlord shall not have the right of reentry or lease termination solely by reason of any minor, non-structural alterations or improvements made without Landlord's consent. 10. UTILITIES AND OTHER SERVICES. Tenant shall pay for all utilities (including, without limitation, gas and electricity) and janitorial services furnished to the Premises. In the event that Landlord determines, in Landlord's reasonable discretion, that Tenant's water usage is disproportionally high compared with other tenants in the Complex, Landlord may charge Tenant directly for such excess consumption. Landlord shall not be liable for damages for failure of heat, hot or cold water, air conditioning, sewer service, electric current, gas, or any other service by reason of breakdown of plant, equipment, or apparatus, shut-down of any thereof for necessary repairs or alterations or due to unavailability of fuel, water or any other substance or utility, war, civil disturbance, strike, lockout, fire, flood, casualty, governmental regulations, or other conditions beyond Landlord's reasonable control. 11. LANDLORD'S ACCESS. Upon one business day's prior notice, except in an emergency, Landlord may enter the Premises during the Term hereof at all reasonable hours for the purpose of inspection, verifying Tenant's compliance with this Lease or making repairs or improvements to the Premises or any other portion of the Building, or for the purpose of exhibiting the same to prospective purchasers, brokers, lenders or others, or during the last six (6) months of the Term or any Renewal Term, prospective tenants. In an emergency Landlord may enter the Premises at any time without notice to take such action as Landlord deems to be prudent or necessary. 12. INDEMNITY AND NON-LIABILITY. 12.1 INDEMNITY. Tenant shall defend, indemnify and hold harmless Landlord, and Landlord's employees and agents, from and against any and all claims arising from Tenant's use of the Premises, Building or Complex, or from the conduct of Tenant's business or from any activity, work, or thing done, permitted, or suffered by Tenant in or about the Premises or the Building or Complex and shall further defend, indemnify and hold harmless, Landlord and Landlord's employees and agents, from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease or arising from any negligence of Tenant, or any of Tenant's agents, contractors, or employees, and from and against all costs, reasonable attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. In the event any action or proceeding is brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Notwithstanding any foregoing provisions hereof to the contrary, Tenant shall have no obligation to indemnify Landlord from and against any claims directly resulting from Landlord's negligent actions or omissions. 6 Landlord shall defend, indemnify and hold harmless Tenant, and Tenant's employees and agents, from and against any and all claims arising from the conduct of Landlord's business in connection with the Building or Complex, or from any activity, work, or thing done, permitted, or suffered by Landlord in or about the Building or Complex and shall further defend, indemnify and hold harmless, Tenant and Tenant's employees and agents, from and against any and all claims arising from any breach or default in the performance of any obligation on Landlord's part to be performed under the terms of this Lease or arising from any negligence of Landlord, or any of Landlord's agents, contractors, or employees, and from and against all costs, reasonable attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. In the event any action or proceeding is brought against Tenant by reason of any such claim, Landlord, upon notice from Tenant, shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. Notwithstanding any foregoing provisions hereof to the contrary, Landlord shall have no obligation to indemnify Tenant from and against any claims directly resulting from Tenant's negligent actions or omissions. 12.2 Waiver. Tenant, as a material part of the consideration to Landlord for this Lease, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises arising from any cause except to the extent caused by the negligence or willful misconduct of Landlord. Tenant hereby waives all claims in respect thereof against Landlord. 12.3 Liens. Tenant shall have no power to do any act, or to make any contract, that may create, or be the foundation for, any lien against the Premises, the Building or the Complex, or any portion thereof, and, should any such lien be filed due to actions or omissions of Tenant, Tenant, at its own cost and expense, shall bond for or discharge the same within ten (10) business days after the filing thereof. 12.4 Non-liability. Unless directly resulting from facilities controlled by Landlord and from Landlord's negligent act or omission and Tenant has notified Landlord, Landlord shall not be liable to Tenant for any damage occasioned by: plumbing, electrical, gas, water, steam or other utility pipes, systems, and facilities, or by the bursting, stopping, leaking or running of any tank, washstand, closet or waste or other pipes in or about the Premises or Building by water being upon or coming through the roof, or any skylight, vent, trapdoor or otherwise or arising from any act or omission of any third party or any tenant of the Complex, its agents, contractors or employees. 13. INSURANCE. 13.1 Liability Coverage. Tenant shall, at its expense, obtain and keep in force during the term of this Lease, including any renewal term, a commercial general liability insurance policy with a combined single limit of not less than $2,000,000 covering bodily injury to one or more persons and property damage with deductibles in an amount reasonably satisfactory to Landlord. All policies of insurance required to be provided hereunder by Tenant shall be issued by insurer(s) licensed and qualified to do business in the State of Minnesota, with a current A.M. Best Company rating of at least AVII. The policy shall name Landlord as an additional insured and any Mortgagee (as defined in Section 17) and shall cover the entire Complex. Tenant shall increase its liability coverage as may be reasonably requested by Landlord, if Landlord presents evidence that customary insurance coverage limits for similar facilities in the Twin Cities market area have increased. The establishment of insurance requirements shall not limit the liability of Tenant under this Lease. Landlord shall, as a portion of Operating Expenses, obtain and keep in force with a financially responsible insurance company, during the Term, including any renewal term, a commercial general liability insurance policy with a combined single limit of not less than $3,000,000 covering bodily injury to one or more persons and property damage, and worker's compensation insurance as required by statute. Landlord shall, upon written request of Tenant, deliver certificates of insurance evidencing the existence and amounts of the coverages required hereunder. 13.2 Certificates. Tenant shall deliver to Landlord certificates of insurance, making specific reference to the Complex and the Premises, evidencing the existence and amounts of the policy of insurance 7 required pursuant to this Section 13, as well as the deductibles. No such policy shall be nonrenewable, cancelable or subject to material reduction of coverage or other material modification except after thirty (30) days' prior written notice to Landlord. Tenant shall, at least thirty (30) days prior to the expiration of such policy, furnish Landlord with renewals or "binders" thereof. Any failure of Tenant to obtain, maintain, or provide copies or certificates of any insurance required hereunder shall constitute a material and continuing breach of this Lease. 13.3 Property Coverage. Tenant shall maintain in effect, with a financially responsible insurance company, policies of property insurance covering for the full insurable value of all improvements (other than those described in Exhibit "D"), additions or alterations to the Premises made without Landlord's written consent, and all of Tenant's machinery, equipment, furniture, fixtures and personal property. Such policies of insurance shall provide protection for Tenant against all casualties included under standard insurance industry practices within the classification of "Fire and Extended Coverage" and shall contain a waiver of subrogation releasing Landlord from all claims and liabilities arising from or caused by any hazard covered by Tenant's property insurance. The proceeds from said insurance shall be used to repair or reconstruct such insured property to the extent required under Section 15 of this Lease. Landlord shall, as a portion of Operating Expenses as defined in Section 8 of this Lease, maintain in effect, with a financially responsible insurance company, policies of property insurance covering the Complex including Landlord's Work as described in Exhibit "C" and Tenant's Improvements as described in Exhibit "D," (other than the property required to be insured by Tenant in the preceding paragraph, and other tenant improvements and tenant property) on a replacement cost basis. 13.4 Release. Notwithstanding anything apparently to the contrary elsewhere in this Lease, Landlord and Tenant each hereby mutually release and relieve the other from all claims and liabilities arising from or caused by any hazard covered by property insurance on the Premises or covered by property insurance in connection with property on or activities conducted in or about the Premises or Complex or covered by the property insurance required hereunder, regardless of the cause of the damage or loss, provided that this release shall apply only to the extent that such loss is covered by such property insurance. Tenant and Landlord shall, at the earlier of the date of obtaining insurance coverages or the Commencement Date, give notice to the insurance carriers involved that the foregoing mutual waiver of liability and subrogation is contained in this Lease. 14. ASSIGNMENT AND SUBLETTING. 14.1 Landlord Consent. Tenant shall not cause or permit, by operation of law or otherwise, any assignment, sublease, encumbrance, or transfer (a "Transfer") of this Lease or any estate or interest herein without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. It shall be reasonable for Landlord to withhold consent in the event the proposed assignee's use of the Premises is different from that of Tenant, or, if the proposed assignee's financial status fails to meet Landlord's criteria for any tenant leasing space of similar size and quality. Any conversion of a corporation or partnership to a limited liability corporation or limited liability partnership, shall be deemed to be an assignment which shall require Landlord's consent. If Tenant wishes to transfer any of its rights, Tenant shall submit in writing to Landlord (a) the name and legal composition of the proposed assignee, subtenant or other transferee (a "Transferee"); (b) the nature of the business proposed to be carried on in the Premises; (c) the terms and provisions of the proposed Transfer; (d) such financial and other information concerning the proposed Transferee as Landlord may reasonably request; (e) the form of the proposed assignment, sublease or other agreement governing the proposed Transfer, and (f) a written notice that failure of Landlord to respond to Tenant's request within ten (10) business days shall be deemed an approval. Within ten (10) business days after Landlord receives all such information it shall notify Tenant whether it approves such Transfer or if it elects to proceed under Section 14.3 - Landlord's Right to Space. In no event may Tenant publicly advertise or offer all or any portion of the Premises for assignment or sublease without Landlord's prior written consent and in no event at a rental less than that then sought by Landlord for a direct lease (non-sublease) of comparable space in the Complex. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection 8 with any proposed Transfer. Attempted assignment or subletting without Landlord's prior written consent shall constitute a material breach of this Lease. Failure of Landlord to respond within ten (10) business days after receipt of all of the information listed above shall be deemed approval by Landlord of the proposed Transfer. Neither this Lease nor any estate thereby created shall pass to any trustee or receiver in bankruptcy or any assignee for the benefit of creditors, or by operation of law. In the event that Landlord shall consent to a subletting of all or any portion of the Premises under a sublease which obligates the subtenant to pay a rental at a rate in excess of Tenant's Annual Base Rent as set forth in Section 1.11, above, then Landlord and Tenant shall each be entitled to receive fifty (50%) percent of the excess rental as paid by the subtenant. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to assign or sublet the Premises without Landlord's consent to any affiliate, subsidiary, or parent of Tenant, or to any corporation or partnership with a comparable net worth who purchases all or substantially all of the assets of Tenant. In addition, in the event the stock of Tenant or Tenant's parent company is traded on a nationally recognized stock exchange or over the counter market, the sale or other transfer of said stock shall neither be deemed a Transfer hereunder nor require Landlord's consent or approval. 14.2 No Release of Tenant. No consent by Landlord to any Transfer shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether occurring before or after such consent, assignment, subletting or other Transfer, and the Transferee shall be jointly and severally liable with Tenant for the payment of rent (or, in the case of sublease, rent in the amount set forth in the sublease) and for the performance of all other terms and provisions of this Lease. The consent by Landlord to any Transfer shall not relieve Tenant or any such Transferee from the obligation to obtain Landlord's express prior written consent to any subsequent Transfer. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any Transfer. 14.3 Landlord's Right to Space. Notwithstanding any of the above provisions of this Section 14 to the contrary, if Tenant notifies Landlord that it desires to enter into a Transfer and such Transfer requires Landlord's consent, Landlord, in lieu of consenting to such Transfer, may elect to terminate this Lease (in the case of an assignment or a sublease of the entire Premises), or to terminate this Lease as it relates to the space proposed to be subleased by Tenant (in the case of a sublease of less than the entire Premises). In such event, this Lease (or portion thereof) will terminate on the effective date of the proposed Transfer, and Landlord may lease such space to any party, including the prospective Transferee identified by Tenant. 15. DAMAGE OR DESTRUCTION. 15.1 Damage to Premises Covered by Insurance. If the Premises are damaged or destroyed by fire or other casualty insurable under standard fire and extended coverage insurance (the "Event") so as to become partially or totally untenantable, the Premises shall be repaired and restored by Landlord and Tenant with due diligence. The repairs shall commence as soon as reasonably possible following the Event. Landlord's obligation to repair and restore shall be limited to the restoration of the building structure and the work designated as Landlord's Work in Exhibits "C" and Tenant Improvements in Exhibit "D" and Tenant shall be obligated to restore the remainder of the Premises. If the Premises are damaged or destroyed to the extent that the cost of the restoration would exceed 25% of the amount it would have cost to replace the Premises in their entirety at the time such damage or destruction occurred, and if the unexpired portion of the Term of this Lease shall be one year or less on the date of the damage or destruction, then Landlord may elect to terminate this Lease by giving notice to Tenant of its election to do so within 60 days after such occurrence. If Landlord exercises such right, then this Lease shall cease as of the date of such notice and all rent and other charges payable by Tenant shall pro-rated as of that date. 15.2 Damage to Premises not Covered by Insurance. If the Premises shall at any time be damaged or destroyed by a casualty not insurable under standard fire or extended coverage insurance so as to become partially or totally untenantable, then Landlord shall have the right to either repair and restore the work designated as Landlord's Work in Exhibits "C" and "D" as it relates to the Premises or to terminate this Lease. Such election shall be made by Landlord upon notice to Tenant within 60 days after the occurrence of such casualty. If Landlord 9 elects to restore its work, such work shall not exceed what is required to restore the Premises to a condition substantially similar to that at the time of the original delivery of the Premises to Tenant and, then Tenant shall be required to repair with diligence the remainder of the Premises. If Landlord elects to terminate this Lease, this Lease shall terminate 60 days after the date of the occurrence of such casualty and all rent shall be pro-rated as of such date of termination. 15.3 Destruction of the Complex. If all or any portion of the Complex shall be damaged or destroyed by fire or other cause (regardless of whether the Premises may be affected thereby) to the extent that the cost of restoration thereof would exceed 25% of the amount it would have cost to replace the Complex in its entirety at the time such damage or destruction occurred, then Landlord may elect to repair that portion of the Complex owned by Landlord within a reasonable time after such damage or destruction, provided that Landlord shall not be obligated to expend for such rebuilding and repairing an amount in excess of the insurance proceeds recovered or recoverable as a result of such damage or destruction, or Landlord may elect to terminate this Lease upon 30 days notice to Tenant, which notice shall be given, if at all, within 60 days after the date of such occurrence. In the event of such termination, this Lease shall cease 30 days after such notice is given and all rent shall be pro-rated as of that date. 15.4 Rent Abatement. If the Premises are damaged or destroyed and Tenant is prevented from occupying and does not occupy the Premises or any part thereof for ten (10) consecutive business days, Annual Base Rent and other charges hereunder shall be abated during any period in which such damage or destruction continues to materially interfere with the operation of Tenant's business in the Premises. Rent abatement shall be Tenant's sole right against Landlord by reason of such damage or destruction and such abatement shall apply only during the period commencing with such damage or destruction and ending 30 days after Landlord substantially completes its repairs or when Tenant reopens the Premises for business, whichever is earlier. 15.5 Destruction Cancellation. In the event the Premises shall be damaged or destroyed by fire or otherwise so as to become partially or totally untenantable, during the last year of the Term or any extension term hereof, either party shall have the option to terminate this Lease as of the date of such damage or destruction by written notice to the other party given within three (3) months following the date of such damage or destruction and this Lease shall then be terminated and rent and all other charges shall cease as of the date of the occurrence of such damage or destruction. 16. EMINENT DOMAIN. Except as may be otherwise agreed to by Landlord and Tenant as provided in this Section, if all of the Premises, or such portion of the Premises as renders the remainder impractical for the Permitted Use, are taken by any public authority under the power or threat of eminent domain or by private purchase in lieu thereof, then the term of this Lease shall cease as of the date possession shall be taken by such public authority, and Landlord shall make a pro rata refund of any Annual Base Rent that may have been paid in advance. In the event that less than the entire Complex is so taken and the Premises are not in that portion of the Complex so taken and provided the Premises are not rendered untenantable thereby, then this Lease shall terminate only at the option of Landlord. In the event that only a part of the Premises is so taken and the parties agree that this Lease shall not so terminate, there shall be a pro rata reduction in Annual Base Rent for the period following such taking, and all other terms and provisions hereof shall remain in full effect. All damages awarded for any such taking shall belong to and be the property of Landlord for diminution in value to this leasehold or to the fee of the Premises; provided, however, that Landlord shall not be entitled to any portion of the award made to Tenant for loss of business, depreciation to and cost of removal of stock and fixtures. 17. MORTGAGEE PROTECTION. 17.1 Subordination of Lease. This Lease shall be subject and subordinate at all times to the lien of any existing mortgage and other financing documents and the lien of any mortgages and other financing documents that hereafter may be made a lien upon the Building and the real property upon which it is situated; provided, however, that the secured party named in each such mortgage or other financing document (a "Mortgagee") shall agree to recognize this Lease in the event of foreclosure if Tenant is not then in default and if Tenant agrees to attorn to such Mortgagee as Landlord under this Lease. In the event a Mortgagee elects to have 10 this Lease a prior encumbrance, then and in such event upon Mortgagee notifying Tenant to that effect, this Lease shall be deemed a prior encumbrance whether this Lease is dated prior or subsequent to the date of Mortgagee's encumbrance. Within fifteen (15) business days following Landlord's request, Tenant will execute and deliver any certificates of subordination and other documents desirable to effect the purpose of this Section 17.1; provided, however, that each Mortgagee shall agree to recognize this Lease in the event of foreclosure if Tenant is not then in default. 17.2 INSURANCE. Whenever under this Lease policies of insurance or bonds are to be provided for the benefit of Landlord, the same shall, at the option of Landlord, be made payable to and shall secure Landlord and/or any Mortgagee. 17.3 ESTOPPEL CERTIFICATE. Tenant shall, within ten (10) days following a request from Landlord, execute and deliver to Landlord an Estoppel Certificate in such form and content as reasonably requested by Landlord, attesting to the terms and condition of this Lease and the compliance to date of Landlord with the terms and conditions of this Lease and such other matters as reasonably requested by Landlord concerning the tenancy of Tenant under this Lease. In the event that Tenant asserts any default by Landlord, Tenant shall set forth such alleged default or defaults upon the said certificate in detail and attest to the fact that those listed defaults are the only defaults by Landlord hereunder. 17.4 MORTGAGEE'S PERFORMANCE. Tenant agrees to give to any Mortgagee(s), by certified mail, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing of the address of such Mortgagee, which notice shall state that it is given pursuant to this Section of the Lease and that copies of notices shall be sent to such Mortgagee. If Landlord shall have failed to cure such default within thirty (30) days from the effective date of such notice of default or such longer time as Landlord may be provided under this Lease, then the Mortgagee shall have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary to cure such default and this Lease shall not be terminated so long as such remedies are being diligently pursued. Upon written request of Tenant, Landlord shall provide Tenant with the name and address of each Mortgagee. 18. RELOCATION OF PREMISES. INTENTIONALLY DELETED. 19. SIGNAGE. Tenant, at its sole cost and expense, shall be permitted to place one building standard sign containing Tenant's name, within the sign band on the Building and within the lease lines of the Premises, the size and design of said sign to be in conformance with the building signage of the Complex. No other signage shall be displayed by Tenant without the prior written consent of Landlord. Tenant shall be responsible, at its sole cost and expense, to maintain, repair, and clean the signage, as is reasonably necessary. 20. ENVIRONMENTAL COMPLIANCE I. (a) Landlord represents, to the best of its knowledge, that on the Commencement Date, there is no Hazardous Material in the Complex or on the Premises in violation of any Environmental Law. Landlord hereby agrees that if at anytime during the term of this Lease, it should be determined that the Complex or Premises were contaminated with Hazardous Material on the Commencement Date of this Lease or thereafter because of any acts or omissions of Landlord or any other tenant in the Complex, Landlord agrees to indemnify and hold Tenant and Tenant's affiliates, shareholders, partners, directors, officers, employees and agents harmless from any and all losses, penalties, claims, liabilities, litigation, demands, defenses, suits, proceedings damages and obligations or expenses of any nature arising from or as a result of such contamination. II. Tenant represents, warrants, and covenants to Landlord that: (a) Tenant will cause the Premises at all times to be and remain in compliance with all applicable laws, ordinances, and regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment, including those statutes, laws, regulations, and 11 ordinances identified in subparagraph (f), all as amended and modified from time to time (collectively, "Environmental Laws"). Tenant agrees to obtain and keep in effect all governmental permits and approvals relating to the use or operations of the Premises required by applicable Environmental Laws, and Tenant agrees to comply with the terms of the same. (b) Tenant will not generate, manufacture, store, treat, transport, release, or dispose of "Hazardous Material," as that term is defined in subparagraph (f), on, in, under, about or from the Premises, Building or Complex, other than in such quantities as are required for the conduct of Tenant's permitted business, and other than those lawfully incorporated into the Premises, in keeping with good construction practices, as appropriate building materials, and then only in compliance with all Environmental Laws, health, safety, handling, reporting and disclosure laws, regulations and rules. Tenant shall promptly provide to Landlord upon written request, but not more often than once in any twelve month period unless Landlord has reasonable cause to believe that Tenant is not in compliance with this Section 20, a detailed list of such materials used in the conduct of Tenant's business or incorporated in the Premises, together with copies of all applicable permits related to such materials, if any. If any Hazardous Material (other than as permitted in the foregoing sentence) is found on the Premises, or if Tenant or any one of its employees, agents, contractors, suppliers or invitees causes, contributes to or aggravates any release or disposal of any Hazardous Material on, in, under or about the Premises, Building, or Complex, Tenant, at its own cost and expense will immediately take such action as is necessary to detain the spread of and remove the Hazardous Material to the complete satisfaction of Landlord and the appropriate governmental authorities. (c) Tenant will immediately notify Landlord and provide copies upon receipt of all written complaints, claims, citations, demands, inquiries, reports, or notices relating to Tenant's compliance with Environmental Laws. Tenant will, at its sole cost, promptly cure and have dismissed with prejudice any such action. Tenant will keep the Premises, Building and Complex free of any lien imposed pursuant to any Environmental Laws on account of Tenant's generation, manufacture, storage, treatment, transportation, release, or disposal of Hazardous Material. (d) If Tenant breaches or fails to comply with any of the foregoing warranties, representations, and covenants, Landlord may cause the removal (or other cleanup acceptable to Landlord) of any Hazardous Material (other than those expressly authorized herein) from the Premises, Building or Complex. The costs of such Hazardous Material removal and any other cleanup (including transportation and storage costs) will be additional rent under this Lease, whether or not a court or administrative agency has ordered the cleanup, due and payable on Landlord's demand. Tenant thereby grants Landlord, its employees, agents and contractors, access to the Premises to remove or otherwise clean up any Hazardous Material. Landlord, however, has no affirmative obligation under this Lease to remove or otherwise clean up any Hazardous Material, from the Premises, Building or Complex and nothing in this Lease will be construed as creating any such obligations. (e) Tenant agrees to indemnify, defend, and hold Landlord and Landlord's affiliates, shareholders, partners, directors, officers, employees and agents free and harmless from and against all losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, costs, judgments, suits, proceedings, damages (including consequential damages), disbursements, or expenses of any kind (including attorneys' and experts' fees and expenses and fees and expenses incurred in investigating, defending, or prosecuting any litigation, claim, or proceeding) that may at any time be imposed upon, incurred by, asserted, or awarded against Landlord or any of them in connection with or arising from or out of Tenant's obligations hereunder and under applicable Environmental Laws. The indemnifications contained in this Section 20 are the personal obligations of Landlord and Tenant and shall survive termination of this Lease. (f) For purposes of this Lease "Hazardous Material" means: 12 i. "Hazardous substances" or "toxic substances" as those terms are defined by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. #9601, et seq., or the Hazardous Materials Transportation Act, 49 U.S.C. # 1 80 1, et seq., both as amended to and after this date. ii. "Hazardous wastes," as that term is defined by the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. #6901, et seq., as amended to and after this date. iii. Any pollutant or contaminant or hazardous, dangerous, or toxic chemicals, materials, or substances within the meaning of any other applicable federal, state, or local law, regulation, ordinance, or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic, or dangerous waste substance or material, all as amended to and after this date. iv. Crude oil or any fraction of it that is liquid at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute). v. Any radioactive material, including any source, special nuclear, or by product material as defined at 42 U.S.C. #201 1, et seq., as amended to and after this date. vi. Asbestos in any form or condition. vii. Polychlorinated biphenyl's (PCB's) or substances or compounds containing PCB's. 21. DEFAULT. 21.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" by Tenant: (a) Tenant fails to make any Monthly Installment or Additional Rent payment when due. (b) Tenant fails to make any Monthly Installment or Additional Rent payments when due under this Lease two (2) or more times during any twelve (12) month period during the Term. (c) Tenant abandons the Premises; provided, however, that vacation of the Premises by Tenant, by itself, shall not constitute an Event of Default hereunder. (d) Tenant fails to comply with any of the provisions of Section 20 - Environmental Compliance. (e) Intentionally deleted. (f) Tenant fails, within ninety (90) days after the commencement of any proceedings against Tenant seeking relief under any reorganization, arrangement, consolidation, readjustment, liquidation, dissolution or similar arrangement or proceeding under any state or federal bankruptcy or other statute, law or regulation, to have such proceedings dismissed, or Tenant fails, within ninety (90) days after any appointment pursuant to any state or federal bankruptcy or other statute, law or regulation, without Tenant's consent or acquiescence, of any trustee, receiver or liquidator for the Premises, for Tenant or for all or any substantial part of Tenant's assets, to have such appointment vacated. (g) Tenant fails to perform or comply with any provision of this Lease other than those described in (a) through (f) above, and such failure is not cured within thirty (30) days after notice to Tenant or, if such failure cannot be cured within such thirty (30) day period, Tenant fails within such thirty (30) day period to commence, and thereafter diligently proceed with, all actions necessary to cure such failure as soon as 13 reasonably possible but in all events within ninety (90) days of such notice; provided, however, that if Landlord in its reasonable judgment determines that such failure cannot or will not be cured by Tenant within such ninety (90) days, then such failure shall constitute an Event of Default immediately upon such notice to Tenant. 21.2 REMEDIES. Upon the occurrence of an Event of Default, Landlord shall have the following remedies, which shall not be exclusive but shall be cumulative and shall be in addition to any other remedies now or hereafter allowed by law: (a) If Tenant shall have vacated or abandoned the Premises, Landlord may, without terminating this Lease, change the locks on the doors to the Premises and exclude Tenant therefrom. (b) Landlord may, upon notice to Tenant, terminate this Lease, or without notice to Tenant re-enter the Premises without terminating this Lease. No re-entry or taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a notice of such intention is given to Tenant (all other demands and notices of forfeiture or other similar notices being hereby expressly waived by Tenant). Upon the service of any such notice of termination, the Term of this Lease shall automatically terminate. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Premises, reasonable attorneys' fees, and the value at the time of such termination of any rent reserved in this Lease for the remainder of the term over the then reasonable rental value of the Premises for the remainder of such term, all of which amount shall be immediately due and payable from Tenant to Landlord. (c) Landlord may require that, upon any termination of the Lease or Tenant's right to possession without termination of this Lease, Tenant shall immediately surrender possession of the Premises to Landlord, vacate the same and remove all effects therefrom except those that may not be removed under other provisions of this Lease. If Tenant fails to surrender possession and vacate as aforesaid, Landlord may forthwith re-enter the Premises and expel and remove Tenant and any other persons and property therefrom, using such force as may be necessary, without being deemed guilty of trespass, eviction, conversion or forcible entry and without thereby waiving Landlord's rights to rent or any other rights given Landlord under this Lease or at law or in equity. If Tenant does not remove all effects from the Premises, Landlord may either declare such effects abandoned and dispose of the same in any reasonable manner without liability to Tenant or any other party, or remove any or all of such effects in any manner it shall choose and store the same without liability to Tenant. Tenant shall pay Landlord on demand, any reasonable expenses incurred in such removal and storage for any length of time during which the same shall be in Landlord's possession or in storage. (d) Landlord can continue this Lease in full force and effect, and the Lease will continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Annual Base Rent and Additional Rent when due. After Tenant's right to possession is terminated Landlord may enter the Premises and may make such alterations and repairs as it shall determine may be reasonably necessary to relet the Premises and Landlord may (but shall not be required to) relet the same or any part thereof upon such terms and conditions as Landlord in its sole discretion may deem advisable. Upon any reletting, all rentals received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than rent or other charges due under this Lease from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees, reasonable attorneys' fees and costs of such alterations and repairs; and third, to the payment of Annual Base Rent and Additional Rent and other charges due and unpaid hereunder. In no event shall Tenant be entitled to receive any surplus of any sums received by Owner on a reletting in excess of the rental and other charges payable hereunder. If such rentals and other charges received from such reletting during any month are less than those to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord upon demand. No act by Landlord allowed by this Section shall terminate this 14 Lease unless Landlord notified Tenant that Landlord elects to terminate this Lease. Landlord can terminate Tenant's right to possession of the Premises at any time. 21.3 RECEIPT OF MONIES. No receipt of monies by Landlord from or for the account of Tenant or from anyone in possession or occupancy of the Premises after the giving of any notice under this Lease, including, without limitation, a notice of termination of this Lease, shall reinstate, continue or extend the Term of this Lease or affect any notice given to Tenant prior to the receipt of such money. No payment by Tenant or receipt by Landlord of a lesser amount than the charges herein reserved shall be deemed to be other than on account of the earliest stipulated rent or other charges, nor shall any endorsement or statement on any check or on any letter accompanying any check be deemed to be an accord and satisfaction. Landlord shall not be deemed to have accepted payment made to a "lockbox" or other depository until ten (10) days after Landlord's actual receipt of the payment if, and only if, during said period Landlord did not refund or attempt to refund such payment. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. 21.4 BANKRUPTCY. If at any time there exists an act of bankruptcy, which shall include the filing by Tenant, or any guarantor of a petition in bankruptcy (including, without limitation, a petition for liquidation, reorganization or for adjustment of debts of an individual with regular income), the filing of any such petition against Tenant or any guarantor with such party failing to secure a discharge thereof within 30 days after the filing thereof, or Tenant or any guarantor becoming insolvent or admitting in writing an inability to pay its debts as they mature, or making an assignment for the benefit of creditors or petitioning for or entering into an arrangement with creditors or a custodian being appointed or taking possession of Tenant's or any guarantor's property whether or not a judicial proceeding is instituted, then this Lease at Landlord's option shall (if permitted by law) be terminated, in which event neither Tenant, any guarantor, nor any person claiming through or under Tenant or any guarantor or by virtue of any statute or court order shall be entitled to possession of the Premises. Landlord, in addition to the other rights and remedies given be this Lease or by virtue of any statute or rule of law, may retain as liquidated damages any rent or any monies received by Landlord from Tenant or others on behalf of Tenant. 21.5 LEGAL EXPENSES. In case suit shall be brought because of the breach of any agreement or obligation contained in this Lease on the part of Tenant or Landlord to be kept or performed, and a breach shall be established, the prevailing party shall be entitled to recover all expenses incurred therefor, including reasonable attorneys' fees and legal expenses. 21.6 LANDLORD'S RIGHT TO CURE DEFAULT. If Tenant fails to perform any agreement or obligation on its part to be performed under this Lease, Landlord shall have the right (but shall be under no obligation), if no emergency exists, to perform the same upon ten (10) days notice to Tenant, and, in any emergency, to perform the same immediately without notice or delay. For the purpose of curing Tenant's defaults as aforesaid, Landlord shall have the right to enter the Premises and Tenant shall within ten (10) days after demand reimburse Landlord for any reasonable costs incurred by Landlord to cure any of Tenant's defaults, including reasonable attorneys' fees. Except for gross negligence or willful misconduct by Landlord, Landlord shall not be liable for any loss, inconvenience, annoyance or damage resulting to Tenant or anyone holding under Tenant for any action taken by Landlord pursuant to this Section. Any act done by Landlord pursuant to this Section shall not constitute a waiver of any such default by Tenant or a waiver of any covenant, term or condition herein contained or the performance thereof. 21.7 RIGHTS AND REMEDIES. The rights and remedies given to Landlord and Tenant in this Lease are distinct, separate, non-exclusive and cumulative rights and remedies, in addition to every other remedy at law or in equity, and may be exercised concurrently. No delay or failure by Landlord or Tenant to insist upon the strict performance of any agreement, term, covenant or condition hereof, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent by Landlord during the continuance of any such breach, shall constitute a waiver of any such breach, agreement, term, covenant or condition. No waiver by Landlord of any breach (including recurrent failure to timely pay rent) by Tenant under this Lease or of any breach 15 by any other tenant under any other lease of any portion of the Complex shall affect or alter this Lease in any way whatsoever or be construed as a waiver of any subsequent breach. 21.8 SECURITY DEPOSIT. Tenant shall pay Landlord the Security Deposit, concurrently with the execution of this Lease, which sum shall be retained by Landlord as security for Tenant's full, timely and faithful performance of all of Tenant's obligations hereunder, including but not limited to the payment of Annual Base Rent, Operating Expenses and Real Estate Taxes. If Tenant fails to pay such amount or any other charges hereunder or otherwise defaults with respect to any provisions of this Lease, Landlord may, at its option, apply all or any portion of the Security Deposit to the payment thereof or for payment of any other sums for which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage that Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, deposit with Landlord an amount sufficient to restore the Security Deposit to the full amount stated in Section 1, above, and Tenant's failure to do so shall be a material breach of this Lease. Tenant shall not be entitled to any interest upon the Security Deposit, nor shall Landlord be required to segregate or hold the Security Deposit separate from Landlord's other funds, but shall carry such sum as a bookkeeping entry only. In the event that Tenant shall fully perform the covenants and provisions of this Lease, Landlord shall refund the Security Deposit, or the unused balance thereof, if any, to Tenant within thirty (30) days after the expiration or sooner termination of the term of this Lease. 21.9 DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default under this Lease until Tenant has given Landlord written notice (the "Cure Notice") specifying the nature of the default and unless Landlord does not cure the default within fifteen (15) days after receipt of the Cure Notice or within such reasonable time thereafter as may be necessary to cure the default where it is of such a character as to reasonably require more than fifteen (15) days to cure. If Landlord shall fail to cure a default within the time periods provided in the preceding sentence, and Landlord's Mortgagee, after having been timely given a copy of the Cure Notice, shall fail to cure a default within the time periods provided in Section 17.4 of this Lease, Tenant shall have the right to perform such cure itself and demand the reasonable, verifiable and direct cost thereof from Landlord. In the event that Landlord shall not reimburse Tenant for such costs, and a final judgment shall be entered therefor in favor of Tenant, Tenant shall have the right to offset the reasonable, verifiable and direct cost thereof, including reasonable attorney's fees, against the Monthly Installment of rent next coming due under this Lease; provided that such rights of self-help and offset shall be subject to the following terms and conditions: (a) Neither Landlord nor Mortgagee shall be construed to have failed to proceed with due diligence to the extent that any such failure is due to reasons of force majeure or delays caused by Tenant. (b) The Cure Notice shall state with specificity the nature and extent of each item of repair that Tenant believes should be performed, Tenant's estimate of the cost thereof, and the potential amount of offset. (c) Any offset effected hereunder shall be exercised through the delivery of written notice to Landlord and Landlord's Mortgagee specifying the amount of the offset and including, as attachments, copies of all invoices or other source documents reasonably necessary to verify the costs underlying such offset, which notice shall be delivered to Landlord and Landlord's Mortgagee on or before the date that Base Rent being offset is otherwise due. 22. SURRENDER OF POSSESSION. 22.1 CONDITION. At the expiration of the term hereof, Tenant shall surrender the Premises broom-clean in good condition and repair. 22.2 HOLDING OVER. If Tenant remains in possession of the Premises after the expiration of the term hereof without the execution of a new lease, it shall be occupying the Premises as a tenant from month-to-month, subject to all of the conditions of this Lease insofar as the same are applicable to a month-to-month 16 tenancy, except that the monthly rent payable by Tenant shall be an amount equal to 125% of the rate specified in Section 1.2. Tenant shall indemnify and hold Landlord harmless from and against all claims, liabilities, damages, costs or expenses, including reasonable attorneys' fees and costs of defending the same, incurred by Landlord and arising from Tenant's failure to timely surrender the Premises, including (i) any rent payable by or any loss, cost, or damages, including lost profits, incurred by any prospective tenant of the Premises, and (ii) Landlord's damages as a result of such prospective tenant rescinding or refusing to enter into the prospective lease of the Premises by reason of such failure to timely surrender the Premises. 22.3 FIXTURES. All partitions, wallcovering, ceilings, sinks, plumbing, floor covering, and other improvements within the Premises shall become the property of Landlord at the moment of completion of installation; provided, however, Landlord may direct Tenant to remove, at Tenant's sole cost and expense, any such improvements upon the termination of this Lease not previously approved by Landlord and any such other improvements reasonably required to be removed as indicated by Landlord at the time of Landlord's consent to same. Tenant shall retain ownership of all removable trade fixtures and machinery ("Tenant's Property") placed in the Premises by Tenant. Prior to the expiration of the Term, Tenant shall remove all Tenant's Property and repair any damages occasioned by such removal at Tenant's expense. Upon the failure of Tenant to remove Tenant's Property prior to expiration of the Term, all remaining Tenant's Property shall, at Landlord's election, be deemed abandoned by Tenant. 23. NOTICES. Whenever under this Lease provision is made for notice, such notice shall be in writing, and it shall be deemed sufficient notice and service if such notice is delivered personally or by a nationally-recognized overnight courier service providing proof of delivery or by U.S. registered mail or certified mail, postage prepaid, return receipt requested, to Tenant at the address set forth in Section 1.3 or the Landlord at its then current address for the payment of rent under this Lease. Any notice so sent shall be effective for all purposes at the time of personal delivery or one (1) day following deposit thereof in the U.S. mail. Either party may hereafter change the address for notice stated in Section 1, above, by notifying the other party in writing of the new address. 24. OCCUPANCY. If Landlord permits Tenant to occupy the Premises prior to the Commencement Date, such occupancy shall be governed by all of the terms and conditions of this Lease, including the requirement under Section 13 of this Lease to maintain insurance. However, Tenant shall not owe Landlord any sums for Annual Base Rent, Real Estate Taxes or Operating Expenses associated with the Premises during said early occupancy period. Except as specifically provided for herein, in the event Tenant is unable to enter into and occupy the Premises on the Commencement Date specified in Section 1.17, because the Premises are not ready for occupancy, Landlord shall not be liable for damages to Tenant. Annual Base Rent shall abate during the period Tenant is unable to occupy the Premises; and the Commencement Date shall automatically be redefined to mean the date Tenant occupies and conducts business in any portion of the Premises. Landlord and Tenant anticipate that the Delivery Date shall occur on or about April 1, 1997. Such Delivery Date is based on the Lease being fully executed and Tenant approving final construction plans for the Premises on or before February 14, 1997 (the "Plans"). In the event Tenant approves the Plans in accordance with the terms herein and the Lease is executed and delivered on or before February 14, 1997 and Landlord fails to deliver the Premises on or before the Delivery Date, then Landlord shall pay to Tenant, Five Hundred and 00/100 dollars ($500.00) for each and every day beyond the Delivery Date, provided such a delay is not caused by, or attributable to, Tenant. Landlord shall be allowed to add one (1) day to the Delivery Date, for each day that Tenant fails to approve such plans beyond the specific, individual date herein described for approval of the Plans and execution of the Lease. 25. JOINT AND SEVERAL LIABILITY. In the event that two or more individuals, corporations, partnerships or other entities (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each individual, corporation, partnership or other entity to perform all obligations hereunder shall be deemed to be joint and several. In like manner, in the event that Tenant shall be a partnership or other business 17 association, the members of which are, by virtue of statute, or general law, subject to personal liability, then and in that event, the liability of each such member shall be deemed to be joint and several. 26. QUIET ENJOYMENT. So long as Tenant is not in default under any of the covenants and agreements of this Lease, Tenant's quiet and peaceable enjoyment of the Premises shall not be disturbed by Landlord or by any person claiming by, through, or under Landlord. 27. BROKERAGE FEES. Tenant warrants that it has not incurred liability for any real estate brokerage fees or any other fees to any third party in connection with this Lease and in the event that any third party institutes legal action in an effort to recover brokerage fees, Tenant shall defend such action and indemnify and hold Landlord harmless from any related damages, liability or costs. 28. GENERAL. 28.1 CONSENT. Whenever under this Lease provision is made for Tenant to secure the consent of Landlord, such consent shall be in writing. The consent by either party to any act by the other party of a nature requiring consent shall not be deemed to constitute consent to any similar act. 28.2 LEASE NEGOTIATION. The submission of this Lease for examination does not constitute an offer, a reservation of or option for the Premises, and this Lease shall become effective only upon execution and delivery thereof by both parties. 28.3 NO MODIFICATION. This writing is intended by the parties as a final expression of their agreement and as a complete and exclusive statement of the terms thereof. No course of prior dealings between the parties or their officers, employees, agents or affiliates shall be relevant or admissible to supplement, explain or vary any of the terms of this Lease. No representations, understandings or agreements have been made or relied upon in the making of this Lease other than those specifically set forth herein. This Lease can be modified only by a writing signed by the party against whom the modification is enforceable. 28.4 SEVERABILITY. If any term or provision of this Lease, or any portion thereof, or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, then the remainder of this Lease and the application of such term or provision to persons or circumstances, other than those as to which it is held invalid or unenforceable, shall not be affected and shall be valid and be enforced to the fullest extent permitted by law. 28.5 THIRD PARTY BENEFICIARY. Nothing contained in this Lease shall be construed so as to confer upon any other party the rights of a third party beneficiary except rights contained herein for the benefit of Landlord's Mortgagee. 28.6 HEADINGS. The headings of the Sections and Subsections herein are for convenience only, and do not limit or construe the contents of such Sections and Subsections. 28.7 FORCE MAJEURE. Whenever a period of time is herein provided for either party to perform, said party shall not be responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, national emergency, acts of a public enemy, governmental restrictions, laws or regulations, or any other cause or causes, whether similar or dissimilar to those enumerated, beyond its reasonable control. This Section shall not excuse Tenant from the prompt payment of rent, additional rent, or any other payments required by the terms of this Lease. 28.8 PARTIES IN INTEREST. The terms, conditions, covenants and agreements herein contained shall inure to the benefit of and shall bind the parties hereto and their respective successors and permitted assigns. 18 28.9 WAIVER. No provisions of this Lease shall be deemed waived unless such waiver is in writing and signed. The waiver of any breach of any provision of this Lease shall not be deemed a waiver of such provision or of any subsequent breach of the same or any other provision of this Lease. No delay or omission in the exercise of any right or remedy shall impair such right or remedy or be construed as a waiver. Landlord's acceptance of any payment of rent due under this Lease shall not be deemed a waiver of any default by Tenant under this Lease, including Tenant's recurrent failure to timely make Monthly Installment or Additional Rent payments, and no endorsement or statement on any check or accompanying any check or payment shall be deemed an accord and satisfaction. 28.10 JURY TRIAL. INTENTIONALLY DELETED. 28.11 LIMITATION OF LIABILITY. Tenant acknowledges and agrees that the liability of Landlord under this Lease shall be limited to its interest in the Complex and any judgments rendered against Landlord shall be satisfied solely out of the proceeds of sale of its interest in the Complex. No personal judgment shall lie against Landlord upon extinguishment of its rights in the Complex and any judgment so rendered shall not give rise to any right of execution or levy against Landlord's assets. The provisions hereof shall inure to Landlord's successors and assigns including any Mortgagee. The foregoing provisions are not intended to relieve Landlord from the performance of any of Landlord's obligations under this Lease, but only to limit the personal liability of Landlord in case of recovery of a judgment against Landlord. 28.12 AUTHORITY. If Tenant is a corporation, partnership or other form of business entity, each of the persons executing this Lease on behalf of Tenant warrants and represents that Tenant is a duly organized and validly existing entity, that Tenant has full right and authority to enter into this Lease and the persons signing on behalf of Tenant are authorized to do so and have the power to bind Tenant to this Lease. Tenant shall provide Landlord upon request with evidence reasonably satisfactory to Landlord confirming the foregoing representations. 28.13 ATTORNEYS' FEES. In the event suit is brought for the recovery of the Premises, or any sum due hereunder, or because of any act which may arise out of possession of the Premises, the prevailing party shall be entitled to recovery of all costs incurred therein, including reasonable attorneys' fees. 28.14 NO PARTNERSHIP. Nothing contained in this Lease shall be interpreted as creating a partnership, joint venture, or relationship of principal and agent between Landlord and Tenant, it being understood that the sole relationship created hereby is one of landlord and tenant. 28.15 APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the laws of the State of Minnesota. 28.16 ENTIRE AGREEMENT. This Lease contains the entire understanding and agreement of the parties hereto. All prior negotiations, understandings and agreements between the parties have been incorporated herein and are superseded hereby. 28.17 ADDITIONAL TERMS. Additional terms to this Lease, if any, are attached as Exhibit "F." IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: CARLSON REAL ESTATE COMPANY, A MINNESOTA LIMITED PARTNERSHIP 19 By /s/ Dean A. Riesen ---------------------------------- Dean A. Riesen Its General Partner TENANT: MEDI-JECT CORPORATION, A MINNESOTA CORPORATION By Franklin Pass ----------------------------------- Its Chief Executive Officer ------------------------------- 20 TABLE OF CONTENTS
1. Basic Lease Provisions and Definitions............1 2. Premises..........................................2 3. Rent Payment......................................3 4. Landlord's Work; Tenant's Acceptance of Premises..3 5. Operation and Use of Premises.....................3 6. Common Area.......................................4 7. Maintenance Obligations...........................5 8. Operating Expenses and Real Estate Taxes..........5 9. Repairs-Alterations...............................6 10. Utilities and Other Services......................7 11. Landlord's Access.................................7 12. Indemnity and Non-Liability.......................7 13. Insurance.........................................8 14. Assignment and Subletting.........................9 15. Damage or Destruction............................10 16. Eminent Domain...................................12 17. Mortgagee Protection.............................12 18. Relocation of Premises...........................13 19. Signage..........................................13 20. Environmental Compliance.........................13 21. Default..........................................16 22. Surrender of Possession..........................20 23. Notices..........................................21 24. Occupancy........................................21 25. Joint and Several Liability......................21 26. Quiet Enjoyment..................................21 27. Brokerage Fees...................................22 28. General..........................................22 Signatures.......................................24
EXHIBIT CITE A - Complex Legal Description Section 1.4 B - Premises and Building Site Plan Section 1.5 C - Landlord's Work Base Building Section 4 D - Tenant Improvements Section 4 E - Rules and Regulations Section 5.4 F - Additional Terms and Conditions Section 28.18 G - Operating Expense Exclusions EXHIBIT "A" COMPLEX LEGAL DESCRIPTION Lot 1, 2, 3, 4, and 5, Block 1, Carlson Business Center North, according to the recorded plat thereof, and situate in Hennepin County, Minnesota. - -------------------------------------------------------------------------------- EXHIBIT "B" PREMISES AND BUILDING SITE PLAN - -------------------------------------------------------------------------------- EXHIBIT "C" LANDLORD'S WORK "BASE BUILDING" The following work is to be done by Landlord or its agent(s) at Landlord's sole expense. 1. PARKING AREA. Landlord shall provide asphalt parking areas described in Exhibit "B." In no event shall parking at the Complex be less than three (3) parking stalls per 1,000 square feet of space. 2. BUILDING SHELL. Landlord shall provide the building shell in accordance with the following specifications: (a) Frame. Structural steel, pre-cast concrete and masonry. (b) Wall. Exterior walls to be unpainted exposed masonry. (c) Roof. (d) Exterior Door(s) and Windows. Per architectural plan. Window blinds shall be included on all windows. (e) Utilities. Water service lines to individual bays, electric service line to the utility room, sanitary sewer line extension to each bay. (f) Slab Floor. (No finishes) Machine trowelled. However, Landlord shall leave an area of the floor, (approximately ten feet (10') in width) unfinished to allow for plumbing finish work per tenant's plans ("Floor Space"). Finishing of Floor Space will be considered a tenant improvement. (g) Sprinkler System. Landlord shall install a sprinkler system. The number of heads and spacing shall be designed as if the Complex were completely open and undivided. Any revisions, additions, or relocations which the Tenant may desire to have done must be done in accordance with the requirements of the applicable rating bureau. All resulting revision work to be done on the sprinkler system must be performed at Tenant's expense. - -------------------------------------------------------------------------------- EXHIBIT "D" "TENANT IMPROVEMENTS" Landlord shall cause to be constructed, improvements to the Premises pursuant to the terms of the Lease and in accordance with final plans, specifications and working drawings prepared by Wirtanen, Clark, Larson Architects, dated ______________, 1997 and approved, in advance, by Tenant. Landlord agrees to contribute an amount not to exceed $380,000.00 toward the cost of Tenant Improvements. Any amount in excess of $380,000.00 shall be paid in a lump sum by Tenant as Additional Rent. Additionally, Landlord shall pay the reasonable cost of the preparation of Tenant's initial construction drawings. The cost of any changes made to the initial construction drawings shall be included as a Tenant Improvement. Landlord agrees that Tenant Improvements shall include items such as countertops, telephone wiring, and installation of a security system. EXHIBIT "E" RULES AND REGULATIONS To the extent these Rules and Regulations are inconsistent with the Lease and/or any of the other exhibits to the Lease, the terms of the Lease and other exhibits shall control. 1. Sidewalks, halls, passages and stairways shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from the Premises. 2. The Common Areas including, but not limited to, halls, passages, entrances, stairways, balconies and roof are not for the use of the general public, and Landlord shall in all cases have the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall threaten the safety, character, reputation or interests of the Complex and its tenants, provided, that nothing contained herein shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of its business unless such persons are engaged in illegal activities. 3. The sashes, sash doors, windows, glass lights and any lights or skylights that reflect or admit light into the halls or other places of the Building's common areas shall not be covered or obstructed. The toilet rooms, water and wash closets and other water apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage or damage, resulting from the violation of this rule shall be borne by the tenant who, or whose employee, agent or visitor, shall have caused it. 4. If Landlord, by a notice in writing to Tenant, shall object to any curtain, blind, shade or screen attached to, or hung in, or used in connection with, any window or door of the Tenant's Premises, such use of such curtain, blind, shade or screen shall be discontinued forthwith by Tenant. No awnings shall be permitted on any part of the Premises or the Building. 5. Tenant shall not place a load upon any floor of the Building which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. 6. Tenant shall not bring into or keep in or about the Building or the Complex any animals (except assistance dogs), birds or aquariums. 7. Tenant, upon the termination of the tenancy, shall deliver to Landlord all the keys of offices, rooms and toilet rooms which shall have been furnished Tenant or which Tenant shall have had made. 8. Tenant assumes full responsibility for protecting its space from theft, robbery and pilferage which includes keeping doors locked and windows and other means of entry to the Premises closed. 9. Tenant shall not make any room-to-room canvass to solicit business from other tenants in the Complex and shall not exhibit, sell or offer to sell, use, rent or exchange to retail customers in or from the Premises. 10. Tenant shall supervise all contractors, contractor's representatives and installation technicians, rendering any service to Tenant and Tenant shall be liable for damage caused or clean-up required in connection therewith. This provision shall apply to all work performed in the Building including installations of telephones, telegraph equipment, electrical devises and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building. 11. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operating of the Building's heating and air conditioning. 24 12. Tenant shall not do any cooking in the Premises or engage any coffee cart service except for incidental cooking (i.e. lunchroom microwaving, on-site coffee exclusively serving Tenant's employees). 13. No portion of the Premises or any other part of the Building shall at any time be used or occupied as sleeping or lodging quarters. 14. Tenant shall, and shall use reasonable efforts to cause its employees, agents, and invitees to, observe and comply with all driving and parking signs and markers on the property surrounding the Building. 15. Tenant shall give prompt notice to Landlord of any accidents to or defects in the Building, including, but not limited to, plumbing, electrical, mechanical, roofing, floors, glass, walls or doors. 16. The directories of the Building shall be used exclusively for the display of the name and location of the Building tenants. Any additional names requested by Tenant to be displayed in the directories must be approved by Landlord and, if approved, will be provided at the sole expense of Tenant. 17. Tenant shall clean its loading areas and front, side and other entrances on a regular and timely basis. If, after giving Tenant notice, Tenant has failed to clean its loading areas as provided herein, Landlord reserves the right to clean such areas at Tenant's expense. 18. Tenant shall use reasonable efforts to notify Landlord and provide copies to Landlord if Tenant uses the name of the Complex, other than as the address of Tenant's business, or if Tenant uses pictures of the Premises in advertising or other publicity. Tenant shall not, without the prior consent of Landlord, use pictures of the Complex in advertising or other publicity. 19. Tenant shall not be permitted to do any of the following without the prior consent of the Landlord: (a) Alter any lock or install a new or additional lock or any bolt on any door of the Premises, other than interior doors within the Premises. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock. (b) Store on any part of the property surrounding the Building any vehicles, product, equipment or any other property. (c) Install permanent or temporary signs on the Building or any part of the property surrounding the Building. (d) Place any lettering on doors or windows located in the Building. (e) Go upon the roof of the Building. (f) Attach, hang or use any curtains, blinds, shades or screens, other than those installed by Landlord, on any window or door of the Building, or remove any curtains, blinds, shades or screens; provided, however, that Tenant may, without the consent of Landlord, repair or replace existing curtains, blinds, shades or screens so long as such replacements are of the same color, size, quality and specifications as those originally installed by Landlord. 20. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building and the Complex, and for the preservation of good order therein. 25 - -------------------------------------------------------------------------------- EXHIBIT "F" ADDITIONAL TERMS AND CONDITIONS This Exhibit forms a part of the Lease dated February____, 1997, by and between Carlson Real Estate Company, a Minnesota Limited Partnership, Landlord, and Medi-ject Corporation, Tenant. The parties further agree as follows: 1. OPTION TO EXTEND At the expiration of the initial term of this Lease, if this Lease shall then be in full force and effect and Tenant shall have fully performed all of its terms and conditions, Tenant shall have the option to extend this Lease for an extended term of three (3) years, (the "Extended Term"), upon the same terms and conditions stated in this Lease, except that the annual fixed rent shall be at Landlord's then-prevailing fixed rental rate for similar available space in the Center; provided, however, that the annual fixed rent during the Extended Term shall not be less than that payable during the final year of the initial term of this Lease. In order to exercise the said option to extend, Tenant shall give Landlord written notice thereof not less than six (6) months prior to the expiration of the initial term. In the event that Tenant so notifies Landlord, but Landlord and Tenant fail to agree in writing not less than five (5) months prior to the expiration of the initial terms to the annual fixed rent payable during the Extended Term, Tenant's right to exercise the said option to extend shall be deemed to have expired and thereafter Tenant shall have no further right to extend the term of this Lease. 2. RIGHT OF FIRST OFFER At any point following the expiration or earlier termination of a lease for the Contiguous Space (as defined below) and provided Tenant is not in default and has performed all of its obligations hereunder, Tenant shall have the first opportunity to lease the contiguous space in the Building (the "Contiguous Space"), as crosshatched on the attached Exhibit "B", as such Contiguous Space becomes available for leasing during the term of this Lease (a "First Opportunity"), at the rental rates and upon such other terms and conditions, as are then being offered by Landlord to the general public for such space (the "Offer"). Landlord shall give Tenant as much advance notice of the availability of the Contiguous Space as is reasonably possible. Upon receipt of the Offer, Tenant shall have ten (10) business days in which to elect, in writing, whether to (a) lease the entire Contiguous Space, in which event the lease shall commence thirty (30) days after the subject space becomes vacant or thirty (30) days after Tenant's written election, whichever is later, or (b) provide Landlord with a written counter-offer stating, in reasonable detail, rental rates and other such terms and conditions under which Tenant would agree to lease the entire Contiguous Space (the "Counter-offer"). Upon receipt of the Counter-offer, Landlord shall have ten (10) business days in which to accept or reject, in writing, the Counter-offer. If Landlord accepts the Counter-offer, then the lease for the Contiguous Space shall commence thirty (30) days after Landlord's acceptance of the Counter-offer, upon the terms and conditions substantially identical to those contained in the Counter-offer. If Landlord rejects the Counter-offer, Landlord shall have the right to lease the Contiguous Space to a third party under the terms and conditions of either the Offer or Counter-offer. However, If Landlord rejects the Counter-offer and offers the Contiguous Space to another party on terms more favorable than those contained in the Counter-offer (the "Favorable Terms"), then Tenant shall have the right to lease the Contiguous Space and Landlord shall be required to deliver the Contiguous Space to Tenant on the Favorable Terms, within thirty (30) days of Tenant's acceptance of the Favorable Terms. In the event Tenant declines or fails to elect to lease the subject space, then the First Opportunity for the Contiguous Space shall automatically terminate. It is understood that no First Opportunity shall be construed to prevent any tenant in the Building from extending or renewing its lease. Each First Opportunity is personal to Tenant, and is not transferable. In the event of any assignment or subletting under this Lease all rights of Tenant under this Paragraph 2 shall automatically terminate and thereafter be null and void, except as may otherwise be agreed upon, in writing, by Landlord and Tenant. 26 3. TERMINATION RIGHT Tenant shall have the right to terminate this Lease effective as of the last day of the Forty-eighth (48th) Month of the Initial Term of this Lease, provided Tenant fully complies with the following: A. Tenant sends Landlord written notice of its intent to terminate on or before the end of the thirty-sixth (36th) month of the initial term of the Lease; B. Tenant pays Landlord the sum of $113,000.00, delivered with said notice; and C. Tenant is not in default under this Lease. 4. SIGNAGE ALLOWANCE. Landlord agrees to provide Tenant with One Thousand and 00/100 Dollars ($1,000.00) allowance for signage described in Section 19. - ------------------------------------------------------------------------------ EXHIBIT "G" OPERATING EXPENSE EXCLUSIONS 1. Leasing Costs. All costs primarily related to any leasing or re-leasing of the Complex. In the event the management company is responsible for leasing and re-leasing of the Complex, the management company shall not directly bill back such costs to Operating Expenses. 2. Financing Costs. Financing and refinancing costs, interest on debt or amortization payments on any mortgage or mortgages. 3. Penalties. All interest penalties incurred as a result of Landlord's failure to pay any costs as the same shall come due. 4. Improvements. Costs of renovating or improving tenant spaces, other than Common Areas. 5. Depreciation. Any charge for depreciation of any of the improvements. 6. Reimbursed Costs. Any items not otherwise excluded to the extent Landlord is reimbursed therefore by insurance or otherwise compensated, including direct reimbursement by any tenant, less the out-of-pocket cost of collection. 7. Costs Caused by Construction. Any expenses incurred during construction of the Building in excess of those that would be expended if construction were completed and the Building fully occupied. 8. Defective Construction. During the initial term of the Lease only, Landlord's expenses incurred in curing any clearly defective portion of Landlord's Work. 9. Disproportionate Utilities/HVAC. All costs and expenses resulting from the delivery to other tenants of utilities, electricity, or incremental heating, ventilation or air conditioning disproportionate to the size of such other tenant's premises, but only if the cost of such services is recoverable by Landlord. 10. Operation of Landlord's Business. All costs related to the settlement of disputes between Landlord and the tenants (other than Tenant) of the Complex. 11. Tenant Specific Cost. All material costs and expenses arising solely out of the specific needs or character of a particular tenant. 27 EX-23 3 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23 Independent Auditors' Consent The Board of Directors and Shareholders Medi-Ject Corporation: We consent to incorporation by reference in the Registration Statement (No. 333-20389) on Form S-8 of Medi-Ject Corporation of our report dated February 24, 1997, relating to the balance sheets of Medi-Ject Corporation as of December 31, 1995 and 1996, and the related statements of operations, shareholders' equity (defict) and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the annual report on Form 10-K of Medi-Ject Corporation. Minneapolis, Minnesota March 28, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 DEC-31-1996 35817 9575240 0 1464277 180365 550738 4125 12983 280229 351330 527794 12015191 1027462 1238584 550436 642994 1240108 12955791 1178067 827765 136206 8350 2189 69256 0 0 31945 0 (108299) 12050420 1240108 12955791 1653869 1837704 2591292 3930859 1048937 1136272 3318908 4991221 45090 0 0 0 60816 41934 (1882459) (2238568) 0 0 (1882459) (2238568) 0 0 0 0 0 0 (1882459) (2238568) (.36) (.43) (.36) (.43) Includes interest income of $16486 for PE 12-31-95 and $239055 for PE 12-31-96.
EX-99 5 CAUTIONARY STATEMENT EXHIBIT 99 ---------- CAUTIONARY STATEMENT Medi-Ject Corporation (the "Company"), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, from time to time, may make, in writing or orally, "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of the Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from those projected in such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a materials adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those which might be projected , forecast, estimated or budgeted by the Company in such forward-looking statement or statements: 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. HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has had a history of operating losses and, at December 31, 1996, had an accumulated shareholders' deficit of approximately $11,540,467. Net losses for the years ended December 31, 1994, 1995 and 1996 were $1,066,462, $1,882,459 and $2,213,563 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. 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. 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. 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. 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 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 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. 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. 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, 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. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company anticipates that its 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. 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, 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. 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. 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. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----