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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
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MEDI-JECT CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1350192
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
1840 Berkshire Lane, Minneapolis, Minnesota 55441
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (612) 553-1102
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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 _____
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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.
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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.
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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.
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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.
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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.
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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.
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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.
<TABLE>
<CAPTION>
COMPANY MARKET VOLUME AND TYPE OF INJECTION
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<S> <C> <C>
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)
</TABLE>
(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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Stock Prices - Fourth Quarter 1996 $6 $3 1/8
</TABLE>
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
<PAGE>
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 8. FINANCIAL STATEMENTS.
MEDI-JECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
17
<PAGE>
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
<PAGE>
MEDI-JECT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---------- ------------
<S> <C> <C>
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
=========== ============
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
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 --
</TABLE>
See accompanying Notes to Financial Statements
20
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------
SERIES C SERIES B SERIES A
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
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.......................... -- $ -- -- $ -- -- $ --
======== ========= ========= ========= =========== ========
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
---------------------------
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
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
========== ========== =========== ============ =============
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996
-------------- ------------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
22
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw material................... $ 145,603 $ 175,251
Work-in-process................ 80,663 119,575
Finished goods................. 53,963 56,504
---------- ----------
$ 280,229 $ 351,330
========== ==========
</TABLE>
25
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
3. EQUIPMENT, FURNITURE, FIXTURES
Equipment, furniture and fixtures consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
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
========= =========
</TABLE>
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
--------------- -----------
<S> <C> <C>
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
========= =========
</TABLE>
5. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
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 --
========= ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
27
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Deferred taxes as of December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE
SHARES PRICES
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Europe (primarily Germany)...... $ 14,960 $301,277 $356,838
Other........................... 146,469 319,379 221,653
-------- -------- --------
Total....................... $161,429 $620,656 $578,491
======== ======== ========
</TABLE>
Other consists mainly of sales to Asia.
30
<PAGE>
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
<PAGE>
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.
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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
<TABLE>
<S> <C>
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)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
34
<PAGE>
* 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
<PAGE>
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.
<PAGE>
<TABLE>
1.11 Annual Base Rent:
Year P.S.F. Amount
---- ------ ------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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
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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
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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
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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
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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:
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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
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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
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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
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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
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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
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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.
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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
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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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
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
</TABLE>
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
<PAGE>
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
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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.
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 35817 9575240
<SECURITIES> 0 1464277
<RECEIVABLES> 180365 550738
<ALLOWANCES> 4125 12983
<INVENTORY> 280229 351330
<CURRENT-ASSETS> 527794 12015191
<PP&E> 1027462 1238584
<DEPRECIATION> 550436 642994
<TOTAL-ASSETS> 1240108 12955791
<CURRENT-LIABILITIES> 1178067 827765
<BONDS> 136206 8350
<COMMON> 2189 69256
0 0
31945 0
<OTHER-SE> (108299) 12050420
<TOTAL-LIABILITY-AND-EQUITY> 1240108 12955791
<SALES> 1653869 1837704
<TOTAL-REVENUES> 2591292<F1> 3930859<F1>
<CGS> 1048937 1136272
<TOTAL-COSTS> 3318908 4991221
<OTHER-EXPENSES> 45090 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 60816 41934
<INCOME-PRETAX> (1882459) (2238568)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1882459) (2238568)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1882459) (2238568)
<EPS-PRIMARY> (.36) (.43)
<EPS-DILUTED> (.36) (.43)
<FN>
<F1> Includes interest income of $16486 for PE 12-31-95 and $239055 for PE
12-31-96.
</FN>
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
