<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NO. 333-37159
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IOMED, INC.
(NAME OF ISSUER IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
UTAH 2834 87-0441272
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3385 WEST 1820 SOUTH
SALT LAKE CITY, UTAH 84104
(801) 975-1191
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACE OF BUSINESS)
------------------------
NED M. WEINSHENKER, PH.D.
CHIEF EXECUTIVE OFFICER
3385 WEST 1820 SOUTH
SALT LAKE CITY, UTAH 84104
(801) 975-1191
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. GORDON HANSEN, ESQ. RODD M. SCHREIBER, ESQ.
ROBERT C. DELAHUNTY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
SCOTT R. CARPENTER, ESQ. 333 WEST WACKER DRIVE
PARSONS BEHLE & LATIMER CHICAGO, ILLINOIS 60606
201 SOUTH MAIN STREET, SUITE 1800 (312) 407-0700
SALT LAKE CITY, UTAH 84111
(801) 532-1234
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH A DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1997
- --------------------------------------------------------------------------------
1,700,000 COMMON SHARES
LOGO
All of the 1,700,000 Common Shares offered hereby are being sold by IOMED,
Inc. (the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Company's Common Shares. It is currently estimated that
the initial public offering price will be between $11.00 and $13.00 per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Company has applied to list
the Common Shares for quotation on the Nasdaq National Market under the symbol
"IOMD."
Elan Corporation, plc, through certain affiliates, has agreed to purchase
directly from the Company, in private placement transactions which will be
completed concurrently with the closing of the Offering, 833,333 Common Shares
(subject to adjustment under certain circumstances) for approximately $10.2
million and approximately $5.1 million of Common Shares at a price per share
equal to the initial public offering price hereunder. Simultaneously with such
purchases, the Company will repay $15.3 million in notes, including interest,
previously issued to Elan. See "Transactions Related to the Offering,"
"Business -- Collaborative Relationships and Licenses" and "Certain
Transactions."
------------------------
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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===================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------
Per share $ $ $
- ---------------------------------------------------------------------------------------------------
Total(3) $ $ $
===================================================================================================
</TABLE>
(1) Excludes the issuance of warrants to the Representatives of the Underwriters
(the "Representatives") to purchase, after the first anniversary of the date
hereof, up to an aggregate of 170,000 Common Shares at an exercise price
equal to (i) 125% of the initial public offering price set forth above after
the first anniversary of the date of this Prospectus and (ii) 150% of the
initial public offering price set forth above after the third anniversary of
the date of this Prospectus. Holders of such warrants have been granted
certain registration rights under the Securities Act of 1933, as amended,
with respect to the securities issuable upon exercise of such warrants. In
addition, the Company has granted the Representatives a nonaccountable
expense allowance of $245,000. The Company has agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $917,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 255,000 Common Shares, on the same terms as set forth above,
solely to cover over-allotments, if any. If all such shares are purchased,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Common Shares offered by the Underwriters are subject to prior sale,
receipt and acceptance by them and subject to the right of the Underwriters to
reject any order in whole or in part and certain other conditions. It is
expected that delivery of such Common Shares will be made by EVEREN Clearing
Corp. through the facilities of the Depository Trust Company, New York, New York
on or about , 1997.
EVEREN SECURITIES, INC.
HANIFEN, IMHOFF INC.
WEDBUSH MORGAN SECURITIES
<PAGE> 3
[INSIDE FRONT COVER]
[GRAPHICS DEPICTING THE COMPANY'S PRODUCTS.]
The "Prototype" device shown above has not been approved by the United States
Food and Drug Administration (the "FDA") or any other regulatory authority for
sale in the United States or elsewhere in the world. There can be no assurance
that this Prototype will be successfully developed by the Company or approved by
the FDA or any foreign regulatory authority on a timely basis, if ever. See
"Risk Factors -- Uncertainty of Government Regulation."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE
COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus, including information under "Risk Factors." Throughout this
Prospectus, except where the context otherwise requires, reference to the
"Company" means the Company and its subsidiaries. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual operating results may differ significantly from the results discussed in
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THE COMPANY
INTRODUCTION
IOMED, Inc. (the "Company") develops, manufactures and commercializes
controllable drug delivery systems using iontophoretic technology. Iontophoresis
is a non-invasive method of enhancing and controlling the transport of
water-soluble ionic drugs into and through the skin using a low level electrical
current. The Company's proprietary iontophoretic drug delivery systems allow
rapid onset and cessation of therapeutic action, as well as programmable dose
control. The systems enable caregivers to monitor and control the onset of drug
effectiveness and maintain, reduce or cease drug administration once a desired
therapeutic effect is observed. Additionally, the Company is developing systems
designed to permit patient control and selfadministration. The programming
feature also enables caregivers to customize dosing patterns to meet each
patient's specific needs. The flexibility of the Company's proprietary systems
provides therapeutic control not possible with many alternative drug delivery
methods, including oral tablets and capsules, injections, inhalants, and passive
transdermal patches. The Company's systems may also increase bioavailability,
safety and patient comfort.
BUSINESS STRATEGY
The Company's primary business goal is to establish its proprietary
iontophoretic drug delivery systems as a cost effective preferred means of
delivering a wide range of drugs. The Company's strategy for achieving this goal
includes (i) pursuing product development of drug delivery systems for
off-patent drugs with known safety and efficacy; (ii) entering into
collaborative relationships with pharmaceutical companies for the delivery of
new chemical entities and proprietary drugs; (iii) broadening the market
penetration and potential applications of the Company's existing delivery
systems; (iv) enhancing the Company's technology platform through internal
research and development; (v) pursuing new technology through in-licensing and
acquisitions; and (vi) retaining control of the manufacturing revenue stream.
COMPANY PRODUCTS
The Company currently markets two products, an iontophoretic system used to
deliver dexamethasone sodium phosphate ("Dexamethasone"), a corticosteriod used
in the treatment of acute local inflammation, and an iontophoretic system used
to deliver Iontocaine, a proprietary drug used for local dermal anesthesia. The
iontophoretic drug delivery systems the Company currently markets are comprised
of a reusable programmable dose controller which is used to direct the
electrical current to control drug dosing and a pair of proprietary disposable
electrodes, one containing the drug and one serving as a grounding electrode to
complete the electrical circuit through the skin. The drug delivery electrode
may be applied to the patient's skin at a local treatment site (such as for
joint or tendon soreness or to induce local dermal anesthesia), or at any
suitable site on the body for systemic drug delivery. When an electrical current
with the same positive or negative electric charge as the drug is applied to the
drug electrode, the drug is repelled from the electrode and into and through the
skin.
Dexamethasone. The Company's acute local inflammation product is a system
used principally by physical therapists and professional athletic trainers for
the delivery of Dexamethasone. Since it was
3
<PAGE> 5
introduced in 1979, the Company's product has been used in over 10 million
patient applications for the treatment of acute inflammatory conditions such as
tendonitis (e.g. tennis elbow, golfers elbow and achilles tendonitis), bursitis
and carpal tunnel syndrome. More than 8 million of these applications have
occurred since 1990, when the Company introduced its present family of gel
electrodes for use with its microprocessor controlled dose controller. The
product is currently marketed to the physical therapy market as a device, under
a 510(k) pre-market notification by the United States Food and Drug
Administration ("FDA"), for use in connection with delivering ions of soluble
salts or other drugs. Recently, the FDA determined that all future iontophoretic
drug delivery systems will be required to go through the New Drug Application
process with the specific drug that is to be delivered. In order to address the
new regulatory framework and to broaden the clinical basis for the treatment of
acute local inflammation using the Company's iontophoretic delivery system for
Dexamethasone, the Company has filed an Investigational New Drug application
with the FDA and has initiated clinical studies to establish formally the safety
and efficacy of its drug delivery system for Dexamethasone. If the clinical
trials are successful and the Company receives regulatory approval, the Company
believes it will be able to actively promote the iontophoretic delivery of
Dexamethasone to general and family practice physicians, orthopedists,
neurologists and sports and industrial medicine clinics. The Company believes
the ability to promote iontophoresis with Dexamethasone will enhance its ability
to establish its delivery system for Dexamethasone as a primary treatment option
for acute local inflammatory conditions.
Iontocaine. The Company's iontophoretic delivery system was approved by the
FDA in January 1996 for use in inducing local dermal anesthesia, and the Company
began marketing the product in early 1997. Iontocaine is the first drug with
labeling specifically for iontophoretic delivery. In addition, Iontocaine is
approved for use only with the Company's drug delivery systems. The Iontocaine
product provides needle-free, long lasting local dermal anesthesia up to six
times more rapidly and up to three times deeper than can be achieved using
topical anesthetic creams. The Company is initially marketing its Iontocaine
delivery system under the name Numby Stuff to pediatric hospitals in the United
States for use in connection with inducing local dermal anesthesia prior to
pediatric intravenous starts, blood draws, lumbar punctures and other similar
invasive procedures. Numby Stuff was recently awarded the Seal of Acceptance by
the Alliance of Children's Hospitals ("ACH") in recognition of the significant
therapeutic benefits it offers in the practice of pediatric medicine. Under ACH
policy, the Company is required to pay ACH a royalty if it promotes Numby Stuff
using the Seal of Acceptance. The Company satisfied ACH's royalty requirement by
issuing ACH warrants to acquire 44,791 Common Shares. In addition, in
conjunction with the grant by ACH of the Seal of Acceptance, the Company sold an
ACH affiliate 37,202 Common Shares. The Company plans to extend its marketing
efforts for Iontocaine to include pediatric clinics, non-pediatric hospitals,
and office based physician practices for use in connection with numerous
therapeutic applications, including blood draws and minor dermatological
procedures. The Company is also evaluating the use of Iontocaine in connection
with gynecological procedures requiring dermal or mucosal anesthesia. The use of
Iontocaine for mucosal applications will require additional FDA approval.
Many pharmaceutical compounds, including peptides and oligonucleotides,
have physical and chemical properties consistent with delivery by iontophoresis.
Therefore, the Company believes its technology may be applicable to a number of
other compounds and therapeutic applications. The Company is also independently
developing a number of iontophoretic drug delivery systems for other
indications, including conscious sedation, tocolysis (the remission of pre-term
labor), and postoperative and chronic pain control.
COLLABORATIVE RELATIONSHIPS
Novartis. In July 1995, the Company entered into a research and development
agreement with Ciba Pharmaceuticals Corporation, a predecessor to Novartis
Pharmaceuticals Corporation ("Novartis"), an affiliate of Novartis Pharma, A.G.,
the international pharmaceutical company formed as a result of the merger of
Ciba-Geigy Corporation and Sandoz Corporation in 1997. The collaboration was
formed to evaluate the development of iontophoretic drug delivery systems for a
number of Novartis compounds for use in several therapeutic applications. The
joint effort is currently directed toward the development of a delivery system
for
4
<PAGE> 6
a compound to treat osteoporosis. The Company believes this system could enter
Phase I clinical trials during 1998.
In connection with the collaboration, Novartis purchased a 20% equity
interest in Dermion, Inc. ("Dermion"), a subsidiary of the Company that conducts
most of its research and development activities. The Company, Dermion and
Novartis amended the terms of their collaborative arrangement. Under the terms
of the amendment, effective November 1, 1997, Novartis exchanged its interest in
Dermion for 238,541 Common Shares of the Company and warrants to acquire under
certain conditions and through November 1, 2002, an additional 18,750 Common
Shares at an exercise price of $21.60 per share. As a result, Dermion became a
wholly-owned subsidiary of the Company. Pursuant to the agreements, Novartis is
required to pay for research costs under the program and to make milestone
payments upon the successful completion of certain later stage development
objectives. In addition, the Company granted Novartis a perpetual,
non-exclusive, royalty bearing license to the Company's iontophoretic technology
as well as certain rights with respect to future technology developed or
acquired by the Company.
Elan. In March 1997, the Company entered into agreements with Elan
Corporation, plc and certain of its affiliates (collectively, "Elan"), an
international developer and manufacturer of advanced drug delivery technologies.
The agreements provide the Company with exclusive, worldwide licenses to certain
of Elan's iontophoretic drug delivery technology, including over 250 issued and
47 pending United States and foreign patents, as well as a significant body of
know-how and clinical study results. The Company believes the Elan technology
significantly expands its iontophoretic technology platform, enhances its
competitive position and better positions the Company to shorten the development
horizon of its iontophoretic drug delivery systems, including the miniaturized,
integrated, wearable systems currently under development by the Company. The
Company acquired the Elan technology by issuing two promissory notes, a $10.0
million note and a $5.0 million note (the "Elan Notes"). Under the agreement
with Elan, Elan will purchase directly from the Company, in private placement
transactions which will be completed concurrently with the closing of the
Offering, 833,333 Common Shares (subject to adjustment under certain
circumstances) for approximately $10.2 million and approximately $5.1 million of
Common Shares at a price per share equal to the initial public offering price
hereunder (425,000 shares assuming an initial public offering price of $12.00
per share) (collectively, the "Elan Shares"). Simultaneously with such
purchases, the Company will repay the Elan Notes, including interest thereon.
The Company was incorporated in Utah in 1974 as Motion Control, Inc. In
1987, the Company merged with JMW Acquisition Corporation, and the name of the
merged entity was changed to IOMED, Inc. All references to the Company include
the Company's predecessor entities, as well as Dermion. The Company's principal
executive offices are located at 3385 West 1820 South, Salt Lake City, Utah
84104, and its telephone number is (801) 975-1191.
IOMED, Dermion, Phoresor, Iontocaine, Anestrode, TransQ, Numby Stuff and
the Company's logo are registered trademarks of the Company or are marks in
which the Company claims trademark rights. This Prospectus also includes
references to trademarks of companies other than the Company.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered.................... 1,700,000 shares
Common Shares to be outstanding after the
Offering............................... 6,360,204 shares(1)
Use of Proceeds.......................... For research and development; preclinical and
clinical studies; expansion of sales and marketing
capabilities; consolidation and equipping of Company
facilities; and working capital and other general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol... IOMD
</TABLE>
- ---------------
(1) Based on Common Shares outstanding as of November 1, 1997. Includes the sale
of the Elan Shares (1,258,333 Common Shares, assuming an initial public
offering price of $12.00 per share) concurrently with the closing of the
Offering and the mandatory conversion of 28,800 Series C Preferred Shares
into 28,800 Common Shares in connection with the closing of the Offering.
Excludes (i) 339,512 Common Shares issuable upon exercise of options granted
pursuant to the Company's stock option plans, at a weighted average exercise
price of $4.80 per share; (ii) 312,500 Common Shares reserved for future
grants of options or awards under the Company's stock option plans; (iii)
170,000 Common Shares issuable upon exercise of warrants to be issued to the
Representatives at an initial exercise price of $15.00 per share, assuming
an initial offering price of $12.00 per share (the "Representatives'
Warrants"); and (iv) 169,791 Common Shares issuable upon exercise of other
outstanding warrants, at a weighted average exercise price of $18.04 per
share. The number of Elan Shares is dependent upon the initial public
offering price. See "Transactions Related to the Offering,"
"Management -- Employee Benefit Plans -- Stock Option Plans," "Certain
Transactions," "Description of Capital Shares," and "Underwriting."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
----------------------------------------- ------------------------
1995 1996 1997 1996 1997
----------- ---------- ------------ ---------- ----------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenues........................... $ 6,964 $ 9,238 $ 9,283 $ 2,462 $ 2,500
Operating costs and expenses:
Cost of products sold.................. 3,369 3,138 3,338 821 893
Research and development............... 1,467 1,099 1,488 391 375
Selling, general and administrative.... 3,338 3,283 3,501 769 1,061
Non-recurring charges.................. -- 430(1) 15,059(2) -- --
----------- ---------- ------------ ---------- ----------
Total costs and expenses........ 8,174 7,950 23,386 1,981 2,329
----------- ---------- ------------ ---------- ----------
Income (loss) from operations............ (1,210) 1,288 (14,103) 481 171
Interest expense......................... 32 9 242 1 287
Interest income and other, net........... 120 167 291 58 91
Minority interest........................ -- (17) 23 44 11
Income tax expense (benefit)............. (173) (79) 5 20 --
----------- ---------- ------------ ---------- ----------
Income (loss) from continuing
operations............................. (949) 1,542 (14,082) 474 (36)
Income from discontinued operations, net
of income taxes(3)..................... 290 201 44 (7) --
----------- ---------- ------------ ---------- ----------
Net income (loss)........................ $ (659) $ 1,743 $ (14,038) $ 467 $ (36)
=========== ========== ============ ========== ==========
PER COMMON SHARE DATA(4):
Income (loss) from continuing
operations............................. $ (0.46) $ 0.48 $ (4.48) $ 0.14 $ (0.01)
Income from discontinued operations...... 0.14 0.06 0.01 -- --
----------- ---------- ------------ ---------- ----------
Net income (loss)........................ $ (0.32) $ 0.54 $ (4.47) $ 0.14 $ (0.01)
=========== ========== ============ ========== ==========
Shares used in computing per share
amounts................................ 2,090 3,222 3,140 3,282 3,150
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
-------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 5,910 $ 23,965
Total assets................................................................ 8,469 26,524
Long-term obligations, including current portion............................ 16,247(6) --
Accumulated deficit......................................................... (21,574) (21,574)
Shareholders' equity (deficit).............................................. (9,527) 25,684
</TABLE>
- ---------------
(1) Costs incurred in connection with the settlement of certain trade dress
litigation. See Note 3 of the Notes to Consolidated Financial Statements.
(2) Reflects the write-off of certain in-process research and development
(including related transaction costs) purchased from Elan. See Note 3 of the
Notes to Consolidated Financial Statements.
(3) Discontinued operations include the operating results (exclusive of any
corporate allocations and net of applicable income taxes) of the Company's
prosthetics division, which was sold in December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) See Note 1 of the Notes to Consolidated Financial Statements for information
concerning the computation of per share amounts.
(5) Adjusted to reflect the following: (i) the issuance and sale of 1,700,000
Common Shares offered hereby, at an assumed initial public offering price of
$12.00 per share and the receipt of the net proceeds therefrom; (ii) the
sale of the Elan Shares to Elan and the simultaneous repayment of the Elan
Notes, including interest thereon, concurrently with the closing of the
Offering; (iii) the mandatory conversion of the outstanding Series C
Preferred Shares into 28,800 Common Shares concurrently with the closing of
the Offering; and (iv) the exchange of Novartis' 20% equity interest in
Dermion for 238,541 Common Shares, which was effected November 1, 1997. See
"Transactions Related to the Offering" and "Use of Proceeds."
(6) Reflects (i) $15,527,000 in notes, including accrued interest, issued to
Elan; and (ii) $720,000 in redeemable, convertible preferred shares. See
"Business -- Collaborative Relationships and Licenses."
Unless otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters over-allotment option; (ii) reflects the
1-for-4.8 reverse split of the Company's Common Shares effective November 7,
1997; and (iii) reflects the mandatory conversion of the outstanding Series C
Preferred Shares into 28,800 Common Shares concurrently with the closing of the
Offering.
7
<PAGE> 9
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE
PURCHASING THE COMMON SHARES OFFERED HEREBY. PROSPECTIVE INVESTORS ARE CAUTIONED
THAT THE STATEMENTS IN THIS SECTION THAT ARE NOT DESCRIPTIONS OF HISTORICAL
FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE IDENTIFIED IN THIS
SECTION, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The
Company earned modest profits in each of the fiscal years 1988 through 1990, and
experienced losses from operations in fiscal years 1991 through 1995, due
primarily to increased investment in product development, clinical studies, and
increased sales and marketing activity. The Company again earned a profit from
operations in fiscal year 1996, but experienced a substantial loss from
operations in fiscal year 1997 primarily due to the write-off of purchased
in-process research and development. The Company had an accumulated deficit of
$21.6 million as of September 30, 1997. The Company intends to substantially
expand its research and development and marketing efforts in the near future
and, therefore, does not anticipate being profitable in the near term. The
Company's ability to achieve and sustain profitability will depend on its
ability to achieve market acceptance, and successfully expand sales of its
existing products, as well as successfully complete the development of, receive
regulatory approvals for, and successfully manufacture and market, its products
under development, as to which there can be no assurance. In addition, the
Company may be required to give away or substantially discount its current or
future products in order to stimulate demand, either of which events could have
a material adverse effect on the Company's business, financial condition and
results of operations. The success of the Company's current products and
products under development may also depend on the timing of new product
introductions by the Company relative to its competitors and other factors. As a
result of the foregoing, no assurance can be given that the Company will become
profitable on a sustained basis, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF MARKET ACCEPTANCE AND LIMITED MARKET PENETRATION. The
Company has generated only limited revenues, primarily from sales to physical
therapists of its drug delivery system for dexamethasone sodium phosphate
("Dexamethasone") for the treatment of acute local inflammation. The Company
began marketing Iontocaine, its proprietary local dermal anesthetic product, in
January 1997 and has generated only limited revenues from that product to date.
For the Company to be successful, its products will need to achieve broad market
acceptance by the medical profession. The Company's products use a method of
active transdermal drug delivery which, to date, has not gained significant
market penetration, and no assurance can be given that the Company's current or
future products will ever achieve broad market acceptance. Medical professionals
will not use or prescribe the Company's products unless they determine they are
a preferable alternative to products currently available on the market. The
Company believes recommendations and endorsements by influential medical
professionals may be essential for market acceptance of its products, but there
can be no assurance the Company will be able to obtain any such recommendations
or endorsements. In addition, the adoption of new pharmaceutical products is
greatly influenced by health care administrators, inclusion in hospital
formularies and reimbursement by third party payors. No assurance can be given
that health care administrators, hospitals or third party payors will accept the
Company's products on a large scale or on a timely basis, if at all, or that the
Company will be able to obtain labeling for its products which facilitate their
market acceptance or use. In addition, unanticipated side effects or unfavorable
publicity concerning any of the Company's products, or any other product
incorporating technology similar to that used in the Company's products, could
have an adverse effect on the Company's ability to commercialize its products or
achieve market acceptance. The occurrence of any such event could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Products and Products Under Development"
and "Business -- Sales and Distribution."
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT; CLINICAL TRIALS. Two of the
primary components of the Company's business strategy are to develop and
commercialize iontophoretic drug delivery systems for new and existing drugs and
to develop additional applications for its existing products. The Company will
be
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<PAGE> 10
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new products and applications. Product revenues
may not be realized from the sale of any such products for several years, if at
all. The Company can give no assurance that its product development efforts,
either alone or in collaboration with other parties, will ever be successfully
completed, that it can obtain required regulatory approvals of its products,
that products under development can be manufactured at acceptable cost or with
appropriate quality, or that its products can be marketed successfully.
Before seeking regulatory approval for the commercial sale of its products,
the Company must demonstrate through preclinical studies and clinical trials
that those products are safe and effective for use in the target indications.
The rate of completion of the Company's clinical trials is dependent upon, among
other things, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the study. There can be no assurance the Company will be able to
obtain the patient enrollment it needs to complete its clinical trials in a
timely manner, if at all. The results the Company obtains from preclinical
studies and early clinical trials may not be indicative of results it will
obtain in large-scale testing, and there can be no assurance the Company's
clinical trials will demonstrate sufficient safety and efficacy for it to obtain
the requisite regulatory approvals, or that those clinical trials will result in
additional marketable products. Clinical trials are also often conducted with
patients having advanced stages of disease. During the course of treatment,
these patients can die, suffer undesired side effects or suffer other adverse
medical effects for reasons that may not be related to the pharmaceutical agent
or drug delivery system being tested, any of which can have an adverse effect on
clinical trial results. A number of companies in the pharmaceutical industry
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials, as a result of such adverse effects. The
use of any product the Company develops may produce undesirable side effects
that could result in the interruption, delay or suspension of clinical trials,
or the failure to obtain United States Food and Drug Administration ("FDA") or
other regulatory approval for targeted indications. If the Company's products
under development are not shown to be safe and effective in clinical trials, the
resulting delays in developing other compounds and conducting related
preclinical testing and clinical trials, as well as the need for additional
financing to complete such testing and trials, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Products and Products Under Development,"
"Business -- Manufacturing" and "Business -- Government Regulation."
RELIANCE ON COLLABORATIVE PARTNERS. The Company's strategy is to enter into
arrangements with corporate partners, licensors, licensees and other parties for
the development, clinical testing, manufacture, marketing or commercialization
of certain of its products or products in development. The Company currently has
a collaborative arrangement with Novartis Pharmaceuticals Corporation
("Novartis"), an affiliate of Novartis Pharma A.G., the international
pharmaceutical company formed as a result of the merger of Ciba-Geigy
Corporation and Sandoz Corporation in 1997. The collaboration was formed to
evaluate the potential for effective delivery by iontophoresis of several
Novartis compounds covering a range of therapeutic applications.
Collaborative partners in the development of medical drugs and devices
generally have the right to pursue parallel development of other products which
may compete with the products of the other collaborative partner, and to
terminate their agreements without significant penalty under certain conditions.
Any parallel development by a collaborative partner of the Company of alternate
drug delivery systems, development by a partner rather than by the Company of
components of the delivery system, preclusion from entering into competitive
arrangements, failure to obtain timely regulatory approvals, premature
termination of an agreement, or a decision by a collaborative partner not to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's success may depend upon, among other things, the skills,
experience and efforts of the Company's collaborative partners' employees who
are responsible for the collaborative project, such partners' commitment to the
arrangement, and the financial condition of such partners, all of which are
beyond the control of the Company. If one or more of the Company's collaborative
partners defaulted on their obligations
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<PAGE> 11
under their collaborative agreements, the Company could be forced to engage in
litigation to enforce those obligations (which could be time consuming and
costly) or seek to enter into agreements with other parties upon similar terms.
There can be no assurance the Company will be able to enforce the terms of its
collaborative arrangements through litigation, and there can be no assurance
that, if forced to terminate its current collaborative arrangements, the Company
would be able to enter into other contractual arrangements with other parties on
terms which would not be materially different from the terms of its current
collaborative arrangements.
A significant portion of the Company's research and development resources
has been devoted to its contractual research and development efforts with
Novartis. Since 1995, Novartis has funded a substantial portion of the total
research and development costs of the Company. The amount and timing of
resources to be devoted by Novartis in accomplishing the objectives of its
collaborative development effort with the Company are not within the control of
the Company, and there can be no assurance that Novartis will continue its
collaborative development with the Company beyond the current term of the
agreement, which has been extended through December 31, 1998. Either party can
terminate the collaboration upon six months prior written notice. There also can
be no assurance that Novartis will perform its obligations as expected or that
it will not pursue other existing or alternative technologies in preference to
products it is developing with the Company or that it will not terminate the
collaboration prior to its expiration. In addition, in connection with this
collaboration, the Company granted Novartis a perpetual, non-exclusive, royalty
bearing license to the Company's iontophoretic technology which will survive the
termination of the collaboration. The license to Novartis, though non-exclusive,
may make it more difficult for the Company to enter into new collaborations,
which could have a material adverse effect on the Company. Further, other than
in collaboration with Novartis, the Company has agreed that during the term of
the agreement and for a period of up to two years thereafter, the Company will
not develop any product in certain Novartis fields, as defined in the agreement,
without Novartis' consent. There can be no assurance that Novartis will not
terminate its agreement with the Company and independently develop products
using the licensed technology, including products which may compete directly
with those currently marketed or under development by the Company. If Novartis
terminates its agreement with the Company, the Company's business, financial
condition and results of operations could be materially and adversely affected.
In connection with the establishment of the Novartis collaboration, the
Company formed Dermion, Inc. ("Dermion") to perform the Company's research and
development activities and Novartis acquired a 20% equity interest in Dermion.
The Company, Dermion and Novartis recently amended the terms of their
relationships. Under these amendments (the "1997 Amendments"), effective
November 1, 1997, Novartis exchanged its 20% equity interest in Dermion for
238,541 Common Shares and warrants to acquire up to an additional 18,750 Common
Shares at an exercise price of $21.60 per share. Novartis can currently exercise
one-third of the warrants, and its right to exercise the remaining warrants will
vest, as to an additional one-third in each instance, at the time it agrees, if
ever, to provide research and development funding under the parties' agreements
for each of 1999 and 2000. In addition, under the agreement with Novartis, the
Company is restricted in its ability to sell or otherwise dispose of the assets
or control of Dermion through March 1998, and Novartis has a right of first
offer to acquire either the Company's interest in Dermion or Dermion's business
and assets in the event of any proposed change of control of Dermion during the
remainder of the term of the Novartis research and development agreement and for
one year thereafter.
The Company has also agreed that, during the term of the agreement with
Novartis and for a period of five years thereafter, the Company will negotiate
in good faith to license to Novartis rights to any iontophoretic drug delivery
technologies developed or acquired by the Company but which are not covered
under the existing license agreements (the "Second Generation Technology").
Further the Company has agreed to negotiate such additional licenses prior to
entering into any agreement to license or otherwise transfer any rights to such
Second Generation Technology to a third party. Under the 1997 Amendments, the
parties agreed to treat the technology acquired by the Company from Elan
Corporation, plc and its affiliates ("Elan") as Second Generation Technology.
Accordingly, the Company intends to negotiate with Novartis to license such
technology to Novartis prior to initiating efforts to negotiate any rights to
such technology with any third party. See "Business -- Collaborative
Relationships and Licenses."
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Although the Company anticipates it will enter into additional
collaborative arrangements with other parties in the future, there can be no
assurance the Company will be able to negotiate any such additional
collaborative arrangements on terms which are acceptable to the Company, if at
all. In addition, the technology license and rights to future licenses granted
to Novartis may make it more difficult for the Company to find collaborative
partners for its product development programs. To the extent the Company chooses
not, or is not able, to establish such collaborations, it could experience
significantly increased business risk and capital requirements in the
development, clinical testing, manufacturing, marketing and commercialization of
its products. The Company could also encounter significant delays in introducing
products into markets or find that the development, manufacture or sale of
proposed products in such markets is adversely affected by the absence of those
collaborative arrangements.
Under an agreement with a prior collaborative partner, Laboratoires
Fournier S.C.A. ("Laboratoires Fournier"), the Company has agreed, among other
things, not to pursue the development of a fentanyl-based iontophoretic drug
delivery system for chronic pain or sedation, or a hydromorphone-based
iontophoretic drug delivery system for the treatment of acute post-operative
pain, until the second quarter of calendar year 1998. See "Business -- Products
and Products Under Development."
INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE. The drug delivery,
pharmaceutical and biotechnology industries are highly competitive and rapidly
evolving, with significant developments expected to continue at a rapid pace.
The first pharmaceutical product to reach the market in a therapeutic area or
using a certain drug delivery technology generally obtains and maintains a
significant market share relative to later entrants to the market. The Company's
success will depend on its ability to maintain a competitive position and
develop new products and technologies for efficient and cost effective drug
delivery. The Company's products will compete with other formulations of drugs
and with other drug delivery systems, including oral dosage forms, infusions,
injections, inhalants, and transmucosal, transnasal and transdermal products.
There can be no assurance any of the Company's products will have advantages
that will be significant enough to cause medical professionals to prefer or even
use them. New drugs or further development of alternative drug delivery methods
may provide greater therapeutic benefits for a specific drug or indication, or
may offer comparable performance at lower cost, than that offered by the
Company's iontophoretic drug delivery systems, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Many competitors, including public and private corporations, academic
institutions, governmental agencies and other public and private research
organizations, are involved in the development of drug delivery systems,
including the development of competing iontophoretic, similar
electrotransport-related or other drug delivery technologies. Many of these
competitors have substantially greater financial, technical, research and other
resources, are more experienced in research and development, manufacturing,
pre-clinical and clinical testing, and obtaining regulatory approvals, and are
larger, more established and have substantially larger marketing and service
organizations than the Company. In addition, these competitors may offer broader
product lines than the Company, have greater name recognition than the Company,
and offer discounts as a competitive tactic. Accordingly, the Company's
competitors may succeed in developing competing technologies, and obtaining FDA
approval or gaining market share for products, more rapidly than the Company.
Many of these competitors currently have drug delivery products that are
approved or in development. There can be no assurance the Company's competitors
will not succeed in developing or marketing products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's products obsolete or noncompetitive. There can also
be no assurance the Company will have the financial resources, technical or
management expertise or manufacturing or support capability to compete in the
future. See "Business -- Competition."
The Company has licensed certain rights to its iontophoretic drug delivery
technologies to other parties, including Alza Corporation ("Alza"), Laboratoires
Fournier and Novartis, that may become or are direct competitors of the Company.
These companies could compete with the Company for contracts with the Company's
collaborative partners and could also develop iontophoretic drug delivery
systems that will compete directly with many of those currently marketed or
being developed by the Company. See "Business -- Collaborative Relationships and
Licenses."
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RELIANCE ON THIRD PARTY DISTRIBUTION; LIMITED SALES AND MARKETING
EXPERTISE. The Company presently markets its drug delivery systems for the
treatment of acute local inflammation primarily to physical therapists through a
nationwide system of dealers. The Company intends to market its local dermal
anesthesia products in the United States hospital market through sales personnel
who work directly for the Company, and anticipates that it will also use a third
party or collaborative partner to market its current and future products. See
"Business -- Sales and Distribution."
The majority of the dealers the Company uses in the distribution of its
drug delivery systems for acute local inflammation are principally involved in
the distribution of electrotherapy equipment and other rehabilitation related
products to physical therapists and related physician specialists. The Company's
product does not represent a primary source of revenue for many of those
dealers. As a result, there can be no assurance those dealers will invest
adequate resources in the sale and promotion of the Company's products, sell
other products developed by the Company or even continue to sell the Company's
products.
In cases where the Company intends to market its products using direct
sales personnel, such as with its drug delivery system for the inducement of
local dermal anesthesia, it will need to hire, train and supervise those
personnel. The Company has limited experience in marketing and sales, and only
recently began to recruit a marketing staff and sales force. The Company will
need to expend additional funds and management resources to assemble, train and
oversee a marketing and sales staff. There can be no assurance the Company can
successfully recruit, hire or retain personnel, nor can there can be any
assurance the Company will be able to maintain its relationships with the
marketing, sales and distribution resources it currently employs. There can also
be no assurance that the cost of establishing and maintaining a sales and
marketing staff will be justifiable in light of product revenues. If the
Company's marketing resources fail to perform in accordance with the Company's
expectations, the Company may be required to obtain or develop alternate
marketing, sales and distribution capabilities or seek other methods of
distributing its products. There can be no assurance the Company would be able
to do so or that the Company's sales and marketing efforts will be successful.
See "Business -- Sales and Distribution."
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's ability to
commercialize many of the products it has under development will depend, in
part, on its or its licensors' ability, both in the United States and in other
countries, to obtain patents, enforce those patents, preserve trade secrets and
operate without infringing on the proprietary rights of third parties. As of
October 1, 1997, the Company owned or had rights to 60 issued United States
patents, 15 pending United States patents, 245 issued foreign patents and 47
pending foreign patents.
The patent positions of drug delivery, pharmaceutical and biotechnology
companies are highly uncertain and involve complex legal and factual questions.
There can be no assurance the patents currently owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products, or that other companies will not
be issued patents that may prevent the sale of Company products or require
licensing and the payment of significant fees or royalties by the Company.
Furthermore, there can be no assurance any of the Company's products or methods
will be patentable, will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain
licenses, defend infringement actions or challenge the validity of those patents
in court. There can be no assurance a license will be available to the Company,
if at all, on terms and conditions acceptable to the Company, or that the
Company will prevail in any patent litigation. Patent litigation is costly and
time consuming, and there can be no assurance the Company will have or will
devote sufficient resources to pursue such litigation. If the Company does not
obtain a license under such patents, is found liable for infringement or is not
able to have such patents declared invalid, the Company may be liable for
significant monetary damages, may encounter significant delays in bringing
products to market or may be precluded from participating in the manufacture,
use, or sale of products or methods of treatment protected by such patents.
There can be no assurance the pending patent applications licensed to or owned
by the Company will result in issued patents, patent protection will be secured
for any particular technology, any patents that have been or may be issued to
the Company or its
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licensors will be valid or enforceable or that the Company's patents will
provide meaningful protection to the Company.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on confidential information to maintain its competitive position, there
can be no assurance other parties may not independently develop the same or
similar information. The Company seeks to protect trade secrets and proprietary
knowledge in part through confidentiality agreements with its employees,
consultants, advisors and collaborators. These agreements may not effectively
prevent disclosure of the Company's confidential information and may not provide
the Company with an adequate remedy in the event of unauthorized disclosure of
such information. If the Company's employees, scientific consultants or
collaborators develop inventions or processes independently that may be
applicable to the Company's products under development, disputes may arise about
ownership of proprietary rights to those inventions and processes. Those
inventions and processes will not necessarily become the Company's property, but
may remain the property of those persons or their employers. Protracted and
costly litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. The Company's failure to obtain or maintain patent
and trade secret protection, for any reason, could have a material adverse
effect on the Company's business, financial position and results of operations.
The Company may engage in collaborations, sponsored research agreements,
and other arrangements with academic researchers and institutions that have
received or may receive funding from United States government agencies. As a
result of these arrangements, the United States government or other parties may
have rights in certain inventions developed during the course of the performance
of such collaborations and agreements as required by law or such agreements.
Several legislative bills affecting patent rights have been introduced in the
United States Congress. These bills address various aspects of patent law,
including publication, patent term, re-examination, subject matter and
enforceability. It is not certain whether any of these bills will be enacted
into law or what form such new laws may take. Accordingly, the effect of such
potential legislative changes on the Company's intellectual property is
uncertain. See "Business -- Patents and Proprietary Rights."
In August 1993, the United States Patent and Trademark Office ("PTO")
issued a patent to Alza covering the iontophoretic delivery of fentanyl. A
similar patent application in Europe has thus far been rejected, although the
Company believes Alza has appealed that rejection. The United States patent was
the subject of a reexamination by the PTO and all of the substantive claims
within the patent were also rejected, but Alza has appealed that rejection to
the United States Board of Patent Appeals and Interferences. There can be no
assurance Alza will not be successful in one or both of its appeals. Therefore,
if the Company develops a drug delivery system for fentanyl and if Alza is
successful in its appeal, the Company would be required to obtain a license from
Alza to market any iontophoretic drug delivery system it develops for fentanyl
in the United States. There can be no assurance such a license would be
available on terms acceptable to the Company, if at all. If the Company cannot
obtain such license, the Company will be required to discontinue its product
development programs using fentanyl. See "Business -- Products and Products
Under Development."
NEED TO MANAGE EXPANDING OPERATIONS. If the Company is successful in
achieving market acceptance of its products, it will be required to expand its
operations, particularly in the areas of research and development, sales and
marketing and manufacturing. As the Company expands its operations in these
areas, those expansions will likely result in new and increased responsibilities
for management personnel and place significant strain on the Company's
management, operating and financial systems and other resources. To accommodate
any such growth and compete effectively, the Company will be required to
implement improved information systems, procedures and controls, and to expand,
train, motivate and manage its work force. The Company's future success will
depend to a significant extent on the ability of its current and future
management personnel to operate effectively both independently and as a group.
There can be no assurance the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The further
development and commercialization of the Company's products and technology will
require a commitment of substantial funds to conduct research and development
activities, including preclinical and clinical studies, to expand distribution
and hire additional sales and marketing personnel and to expand and develop
manufacturing capabilities. Although the Company believes that the net proceeds
of the Offering, together with existing cash balances and cash generated from
operations, will be sufficient to fund the operations of the Company for
approximately the next two years, the Company may be required or elect to raise
additional capital before that time. The Company's actual capital requirements
will depend on many factors, including but not limited to, the costs and timing
of the Company's research and development activities, the number and type of
clinical tests the Company is required to conduct in seeking approval of its
products from governmental agencies, the success of the Company's development
efforts, the costs and timing of the expansion of the Company's sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, the Company's ability to maintain existing
collaborative relationships and enter into new collaborative relationships,
competing technological and market developments, the progress of the Company's
commercialization efforts and the commercialization efforts of the Company's
distributors, the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims and other intellectual property rights,
developments related to regulatory and third party reimbursement issues, and
other factors.
To satisfy its capital requirements, the Company may seek to raise funds
through public or private financings, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. Failure to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such financing, if
required, will be available on terms satisfactory to the Company, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAINTY OF GOVERNMENT REGULATION. The research, development,
manufacture and marketing of the Company's products are extensively regulated by
the FDA, which requires its approval of drugs and medical devices before they
can be marketed in the United States. Similar approvals are also required from
other regulatory bodies in virtually every developed foreign country before the
Company's products may be marketed in such countries. The regulatory processes
established by these government agencies are lengthy, expensive and uncertain.
In addition, once approval is obtained, that approval may be withdrawn for a
manufacturer's failure to comply with regulatory standards, because of
unforeseen problems related to product safety or as a result of the retroactive
application of changes in the law.
The Company has received approval from the FDA on its New Drug Application
("NDA") for Iontocaine, and the FDA has allowed the Company to market its
electrical dose controllers and electrode products for use with ions of soluble
salts or other drugs under the FDA's 510(k) regulations governing medical
devices. However, the FDA has publicly stated that it intends to require
manufacturers of iontophoretic devices to obtain pre-market approval ("PMA") of
marketed devices currently used with drugs not specifically labeled for
iontophoretic delivery, which would include the Company's dose controller for
use with ions of soluble salts or other drugs, such as Dexamethasone. The FDA's
1994 strategy document states that the enactment of the modified regulatory
procedure was a "high priority" and that the agency intended to publish a
proposed regulation requiring such PMAs in 1996. The agency to date has not
published such a regulation.
If the FDA calls for PMAs, the Company would be required to have a PMA
accepted for filing by the FDA within 90 days after the date of the final
regulation. There can be no assurance that the Company would be able to complete
necessary clinical studies and otherwise prepare and file a PMA within that
period or that any data and information submitted in a PMA would be adequate to
support FDA approval. The Company's failure to submit a PMA and have it accepted
for filing by the FDA within the required timeframe could result in the Company
being required to cease commercial distribution of the Phoresor for use with
ions of soluble salts or other drugs, including Dexamethasone. Upon timely
filing of a PMA, the Company believes (based on
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<PAGE> 16
the FDA's announced position as to certain other devices) that the FDA would
permit continued commercial distribution of the Company's dose controller for
use with Dexamethasone during the time necessary to review the PMA. There can be
no assurance, however, that the FDA would do so, nor can any assurance be given
that the FDA would approve a PMA filed by the Company. The FDA also could
condition PMA approval upon approval of an NDA permitting Dexamethasone to be
labeled for use with the Company's dose controller. If the Company were required
to cease commercial distribution of its iontophoretic drug delivery products for
use with Dexamethasone pending approval of a PMA or NDA, the Company's business,
financial conditions and results of operations could be adversely affected. The
Company will be required to obtain further FDA approvals before it may promote
or otherwise market or label any of its present or future drug delivery products
for use with other named drugs. There can be no assurance that such approvals
will be granted, and the process of obtaining them could be extensive,
time-consuming and costly. The time required to obtain FDA approval after filing
an NDA is uncertain and frequently takes several years. Further, the Company has
not yet filed NDAs on any drug other than Iontocaine. In the course of the
practice of medicine, medical practitioners legally can use the Company's
iontophoretic devices for the delivery of Dexamethasone even though the Company
has not filed an NDA for that therapeutic indication and even though the Company
is not permitted to label or promote its device for use with Dexamethasone. The
FDA may require that the Company conduct clinical trials and obtain NDA approval
for the iontophoretic delivery of Dexamethasone using the Company's dose
controllers and electrodes for the treatment of acute local inflammation in
order for the Company to continue to market its products for that therapeutic
indication. There can be no assurance that such clinical trials, if conducted,
would be successful in establishing safety and efficacy or that NDA approval
could be obtained.
There can be no assurance any future products developed by the Company will
prove to be safe and effective or meet all of the applicable regulatory
requirements necessary to be marketed. Data obtained from testing activities can
be susceptible to varying interpretations which could delay, limit or prevent
required regulatory approvals. In addition, the Company may encounter delays or
denials of approval based on a number of factors, including future legislation,
administrative action or changes in FDA policy made during the period of product
development and FDA regulatory review. The Company may encounter similar delays
in foreign countries. Furthermore, approval may entail ongoing requirements for,
among other things, post-marketing studies. Even if a product developer obtains
regulatory approval, a marketed product, its manufacturer and its manufacturing
facilities and pertinent operations are subject to extensive regulation and
periodic inspections. Discovery of previously unknown problems with a product,
manufacturer or facility could result in FDA sanctions, restrictions on a
product or manufacturer, or an order to withdraw and/or recall a specific
product from the market. There can also be no assurance that changes in the
legal or regulatory framework or other subsequent developments will not result
in the limitation, suspension or revocation of regulatory approvals granted to
the Company. Such events, were they to occur, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is also required to comply with FDA regulations for
manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing
process and overall product quality. Foreign regulatory agencies have similar
manufacturing standards. Ongoing compliance with these standards and with
labeling, adverse event reporting and other applicable regulatory requirements
is monitored through periodic inspections and market surveillance by federal,
state and local government agencies and by comparable agencies in other
countries. Any third parties manufacturing the Company's products or supplying
materials or components for such products may also be subject to the foregoing
requirements. If the Company, its management or its third party manufacturers
fail to comply with applicable regulations regarding these manufacturing
practices, the Company could be subject to a number of sanctions, including
fines, injunctions, civil penalties, delays, suspensions or withdrawals of
market approval, seizures or recalls of products, operating restrictions and, in
some cases, criminal prosecutions. See "Business -- Government Regulation."
Under the FDA's regulations, when a manufacturer changes or modifies a
device for which it has received a 510(k) clearance, it is required to obtain an
additional 510(k) clearance for the modified device if the modification
significantly affects the safety or efficacy of the device, or if the
modification results in a
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major change in intended use. In such cases, the manufacturer is expected to
make the initial determination as to whether the modification is of a kind that
would require a new 510(k) clearance. The FDA's regulations provide only limited
guidance in making this determination. The FDA has cleared the Company's
electrical dose controller and electrode kits for marketing under a 510(k)
clearance. Since obtaining its 510(k) clearances, the Company has made
modifications to its products. Based on the checklist developed by the FDA to
assist manufacturers in determining whether they are required to obtain a 510(k)
clearance for a modified device, the Company has determined that a new 510(k)
submission was not required in connection with the commercial introduction of
such products. However, there can be no assurance that the FDA will not require
the Company to obtain additional 510(k) clearances with respect to those
products. If the FDA requires the Company to submit a new 510(k) notice for any
device modification, the Company may be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA.
The Company may be subject to certain user fees that the FDA is authorized
to collect under the Prescription Drug User Fees Act of 1992 for certain drugs.
This act expired on September 30, 1997 and legislation to reauthorize it has
been enacted by the Congress. It must be signed by the President to become law.
Because of the known safety and efficacy profile of Dexamethasone and other
approved drugs for which the Company may seek NDA approval for iontophoretic
delivery, the clinical trials and other studies may not be as lengthy or
extensive as would be required for unapproved new drugs that are subject to full
NDA requirements. This strategy, however, depends upon the Company's ability to
obtain a contractual right to reference the safety and efficacy data for such
drugs contained in approved NDAs held by other entities. The Company has
obtained a right to reference safety and efficacy data for Dexamethasone. There
can be no assurance that the Company will be able to obtain a right of reference
for all unapproved drugs that may be used for iontophoretic delivery. The
Company's failure to obtain a right of reference to safety and efficacy data for
any drug for which the Company would like to obtain approval for iontophoretic
delivery could result in the Company being required to independently satisfy any
requirements regulatory agencies may impose with respect to such references,
which could delay the Company's use of such drug or increase the Company's
costs. See "Business -- Government Regulation."
DEPENDENCE ON SINGLE SOURCES OF SUPPLY. A key material used in many of the
Company's current electrode products is available only from a single supplier.
In addition, the Company obtains Iontocaine from Abbott Laboratories under a
contract expiring in December 1998. The Company believes that, if necessary,
alternative sources can be developed or alternate materials can be substituted
for each of these single-sourced materials. Although the Company has not
experienced difficulty acquiring these materials on commercially reasonable
terms and in sufficient quantities to maintain required production levels, no
assurance can be given that price increases or interruptions in the supply of
these materials will not occur in the future or that the Company will not have
to seek alternate suppliers or obtain substitute materials, which may require
additional product validations and regulatory submissions. Any significant price
increase, interruption of supply, inability to secure an alternate source or
qualify a substitute material could have a material adverse effect on the
Company's ability to manufacture its products or to obtain or maintain
regulatory approval of its products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's current dose controllers are manufactured under contract with
a third party electronics manufacturer. The Company has not experienced any
difficulty in obtaining adequate supplies of this product from the manufacturer,
but there can be no assurance that an interruption in supply will not occur in
the future or, if there is an interruption in supply, that the Company would be
able to identify, qualify and validate an alternate source of supply within a
reasonable period of time or that such an interruption would not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."
LIMITED MANUFACTURING EXPERIENCE. The Company manufactures its
iontophoretic drug delivery electrodes in quantities sufficient to satisfy its
current level of product sales. To meet anticipated increases in sales, the
Company may need to increase its production significantly beyond its present
manufacturing capacity.
16
<PAGE> 18
Accordingly, the Company may be required to increase its manufacturing
capacities or to contract with another party to manufacture its products. There
can be no assurance the Company can successfully increase its capacity on a
profitable basis, or contract with another party on terms acceptable to the
Company, if at all.
The Company's manufacturing process is labor intensive and, therefore,
significant increases in production volume will likely require changes in both
product and process design in order to facilitate increased automation in the
Company's production processes. There can be no assurance such changes in
products or processes or efforts to automate all or portions of the Company's
manufacturing process will be successful or that manufacturing or quality
control problems will not arise as the Company increases production volumes of
its existing products or begins production of new products, any of which events
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes its facilities operate in accordance with the Quality
System Regulations currently prescribed by the FDA and in substantial compliance
with ISO 9001 and CE Mark standards. The Company has Good Manufacturing
Practices ("GMP") audits conducted by a qualified, independent organization on a
regular basis and recently obtained its official ISO 9001, and CE Mark
certification. There can be no assurance the Company will be able to maintain
such compliance, particularly if the scale of the Company's manufacturing
operations increases. See "Use of Proceeds," "Business -- Manufacturing" and
"Business -- Government Regulation."
POTENTIAL HEALTH CARE REFORM. Political, economic and regulatory influences
are subjecting the health care industry in the United States to fundamental
changes. The Company anticipates the United States Congress, state legislatures
and the private sector will continue to review and assess alternative health
care delivery and payment systems. Potential approaches that have been
considered include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, the creation of large insurance purchasing
groups, price controls and other fundamental changes to the health care delivery
system. The Company believes the legislative debate will continue in the future,
and that market forces will demand reduced costs. The Company cannot predict
what impact the adoption of any future federal or state health care reform
measures, private sector reform or other market forces may have on its business,
either currently or in the future. Even the existence of pending health care
reform could have a material adverse impact on the Company by making it
difficult to raise capital or establish collaborative relationships. See
"Business -- Government Regulation."
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT. The Company's ability to
commercialize its products successfully will depend in part on the extent to
which reimbursement for the costs of those products and related treatments will
be available from government health administration authorities, private health
insurers and other organizations in the United States and in foreign markets
where the Company's products will be sold and used. Third party payors can
affect the pricing or relative attractiveness of the Company's products by
regulating the reimbursement they provide on the Company's or competing products
or therapies. There can be no assurance such reimbursement will continue at
present levels, if at all. Furthermore, significant uncertainty exists as to the
reimbursement status of new health care products. There can be no assurance
third party coverage will be available for the Company's future products at
levels necessary for commercial success. Domestic and foreign government and
third party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products. If adequate coverage and reimbursement levels are not provided by such
government and third party payors for uses of the Company's products, the market
acceptance of those products could be adversely affected. Given the recent
efforts to control and reduce health care costs in the United States and in
foreign markets, there can be no assurance the currently available levels of
reimbursement will continue to be available in the future for the Company's
existing products or products under development.
Effective October 1, 1991, the Health Care Financing Administration adopted
new regulations providing for the treatment of capital related costs for medical
products. Under the regulations, providers are reimbursed for those capital
costs on a per diagnosis basis at fixed rates unrelated to actual costs.
Equipment costs generally are not reimbursed separately, but are included in a
single, fixed rate, per patient reimbursement. These regulations are being
phased in over a 10 year period and, although the full implications of the
17
<PAGE> 19
regulations cannot yet be known, the Company believes the new regulations may
place more pressure on hospital operating margins, causing them to limit capital
expenditures. The Company is unable to predict what adverse impact on the
Company, if any, additional government regulations, legislation or initiatives
or changes by other payors affecting reimbursement or other matters that may
influence decisions to obtain medical devices may have.
RETENTION AND ATTRACTION OF KEY EMPLOYEES. The Company is highly dependent
on its ability to continue to attract and retain qualified scientific,
managerial and manufacturing personnel. There is intense competition for
qualified personnel in the Company's area of activity, and there can be no
assurance the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. Loss of the
services of or the failure to recruit qualified scientific, managerial or
manufacturing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
carry key-man insurance with respect to any of its executives or employees. See
"Business -- Employees" and "Management."
RISK OF PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE. The testing,
marketing and sale of drug delivery and related pharmaceutical products for use
in humans involves unavoidable risks. The use of the Company's products in
clinical trials and the sale of its products upon approval may expose the
Company to potential product liability resulting from the use of such products.
In addition, the existence of a product liability claim could have an adverse
effect on the Company's sales of that product, could result in a recall of that
product or require a change in the indications for which it may be used. Product
liability insurance in the Company's industry is expensive and difficult to
obtain.
Although the Company currently has product liability insurance with an
annual limit of $1,000,000 per occurrence and $1,000,000 in the aggregate, there
can be no assurance the existing coverage is adequate. The Company will seek to
maintain and appropriately increase its insurance coverage as its product sales
increase and the clinical development of its new product applications progress.
There can be no assurance, however, that the Company will be able to maintain
its current levels of insurance on acceptable terms, will be able to secure
increased coverage as the commercialization of its products proceeds or that any
particular level of insurance will provide adequate protection against potential
liabilities. The obligation to pay any product liability claim brought against
the Company which is in excess of the Company's insurance coverage could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF SHARE PRICE. Prior
to the Offering, there has been no market for the Common Shares, and there can
be no assurance an active trading market will develop or, if one does develop,
that it will be maintained. The public offering price of the Common Shares
offered hereby will be determined by negotiations between the Company and the
representatives of the Underwriters. For a description of the factors to be
considered in determining the public offering price, see "Underwriting." The
market price of the Common Shares, like that of the common shares of many other
drug delivery, pharmaceutical, biotechnology, medical device and other high
technology companies, is likely to be highly volatile. Factors such as
fluctuations or volatility in the Company's operating results, announcements of
technological innovations, results of clinical trials or new commercial products
by the Company or competitors, regulatory developments in the United States or
foreign countries, changes in the current structure of health care financing and
payment systems, developments in or disputes regarding patent or other
proprietary rights, general market conditions, economic and other external
factors may have a significant effect on the market price of the Common Shares.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE. Sales of substantial amounts of Common Shares (including shares issuable
upon exercise of outstanding options and warrants) in the public market after
the Offering could adversely affect the market price of the Common Shares. Such
sales could also make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. Upon completion of the Offering, the Company will
have outstanding an aggregate of 6,360,204 Common Shares. In addition, the
Company has reserved for issuance 679,303 shares issuable upon exercise of
outstanding options and warrants. The 1,700,000 Common Shares offered hereby
will be freely transferable without restriction or further registration
18
<PAGE> 20
under the Securities Act of 1933, as amended (the "Securities Act"), except for
shares which may be acquired by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining Common Shares held
by existing shareholders are "restricted securities" as that term is defined in
Rule 144. Restricted securities may be sold in the public market only if they
are registered or if they qualify for exemption from registration under Rules
144 or 701 or other provisions of the Securities Act. Pursuant to certain
"lock-up" agreements, the Company's directors, officers and certain of its
shareholders who collectively hold an aggregate of 4,560,934 Common Shares,
together with the Company, have agreed, for a period of 180 days following the
date of this Prospectus, not to offer, pledge, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, directly or indirectly, any
Common Shares without the prior written consent of EVEREN Securities, Inc.
Following the lock-up periods, approximately 1,903,533 Common Shares will be
eligible for sale in the public market without restriction under Rule 144(k) and
an additional 79,808 Common Shares will be eligible for sale subject to certain
volume, manner of sale and other restrictions of Rule 144. All restricted shares
held by existing shareholders of the Company not subject to lock-up agreements
will be eligible for immediate sale in the public market without restriction
under Rule 144(k). In addition, holders of stock options or warrants exercisable
for an aggregate of approximately 220,227 Common Shares have entered into
agreements prohibiting the sales of the underlying Common Shares for 180 days
following the date of this Prospectus. See "Principal Shareholders," "Shares
Eligible for Future Sale" and "Underwriting."
POTENTIAL DILUTION; ABSENCE OF DIVIDENDS. The initial public offering price
will be substantially higher than the tangible book value per Common Share.
Investors purchasing Common Shares in the Offering will therefore incur an
immediate and substantial dilution in tangible book value. In addition,
investors purchasing Common Shares in the Offering will incur additional
dilution to the extent outstanding stock options and warrants are exercised. The
Company has not paid any cash dividends since inception and does not anticipate
paying cash dividends in the foreseeable future. See "Dividend Policy" and
"Dilution." If the initial public offering price is less than $12.00 per share,
the number of Common Shares that Elan will have the right to purchase for the
$10.2 million will be equal to $10.2 million divided by the initial public
offering price. As a result of any issuance to Elan of shares in excess of
833,333, investors in the Offering will own a lower percentage of the total
Common Shares outstanding after the closing of the Offering. See "Transactions
Related to the Offering" and "Certain Transactions."
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING. The Company's
management will retain broad discretion as to the allocation of a significant
portion of the net proceeds of the Offering. As a result of that discretion, the
Company's management could allocate the proceeds of the Offering to uses which
the shareholders may not deem desirable. In addition, there can be no assurance
the proceeds can or will be invested to yield an appropriate return. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CONTROL BY EXISTING SHAREHOLDERS. Following the Offering, the Company's
directors, executives and principal shareholders will beneficially own
approximately 66.7% of the outstanding Common Shares. Accordingly, if such
persons act in concert, they will have the power to elect the Company's
directors and, subject to certain limitations, effect or preclude fundamental
corporate transactions involving the Company. This concentration of ownership
may have the effect of delaying or preventing a change of control of the
Company. See "Principal Shareholders" and "Description of Capital Shares."
ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION; UTAH
LAW AND CERTAIN OF THE COMPANY'S AGREEMENTS. Certain provisions of the Company's
Articles of Incorporation, as amended, and the provisions of the Utah Revised
Business Corporation Act may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which shareholders might otherwise receive a premium
for their shares over then-current market prices. The Company's Articles of
Incorporation provide, among other things, for a classified Board of Directors,
and provide that members of the Board of Directors may be removed only for cause
upon the affirmative vote of the holders of at least two-thirds of the Common
Shares. The Company's Board of Directors is also authorized to issue Preferred
Shares and, in connection with any such issuance, determine the price, rights,
preferences
19
<PAGE> 21
and privileges of those shares without further vote or action by the Company's
shareholders. Any such Preferred Shares may have other rights, including
economic rights, which are senior to the Common Shares and, as a result, the
issuance of such Preferred Shares could have a material adverse effect on the
market value of the Common Shares. See "Description of Capital Shares."
Certain of the provisions of a cross-license agreement between the Company
and Alza may have the effect of deferring, delaying or preventing a change in
control of the Company, a merger involving the Company or the assignment or
transfer of certain technologies of the Company. Under the agreement, the
Company and Alza, among other things, exchanged non-exclusive, royalty free
rights to certain patented technologies which each party believed to be of
significant strategic importance to the potential technological success of many
iontophoretic drug delivery applications. Both parties are prohibited from
assigning their rights under the agreement to certain named companies or any
other entity that derives more than 50 percent of its income from the
development, licensing and/or sale of drug delivery systems to other
pharmaceutical companies without first receiving the consent of the other party.
Restrictions imposed on the Company's ability to assign its rights under this
agreement may limit the Company's ability to capitalize on the commercial and
other economic potential of these technologies through a technology license,
asset sale, merger, combination or similar transaction, and could have an
adverse effect on the market value of the Common Shares. See
"Business -- Collaborative Relationships and Licenses."
ENVIRONMENTAL MATTERS. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds. These materials, and their use, disposal and handling,
are extensively regulated by federal, state and local government authorities.
Although the Company believes its safety procedures for handling and disposing
of such materials comply in all material respects with the standards prescribed
by state and federal regulations, the risk of accidental environmental
contamination or personal injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages and any such liability could exceed the resources of the
Company. There can be no assurance the Company will not be required to incur
significant costs to comply with such environmental and health and safety laws
and regulations in the future, particularly if the Company develops additional
manufacturing or research facilities and capacity. See "Business -- Government
Regulation."
FORWARD-LOOKING STATEMENTS. Certain statements under the headings
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and elsewhere in this Prospectus constitute "forward-looking
statements" within the meaning of the rules and regulations promulgated by the
Securities and Exchange Commission. Such forward-looking statements may be
identified by the use of terminology such as "may," "will," "expect,"
"anticipate," "intend," "designed," "estimate," "should," or "continue" or the
negatives thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These risks, uncertainties and other factors
include, among other things, the following: the Company's sporadic history of
profitability and the continuing uncertainty of its profitability; the Company's
ability to develop and introduce new products; the uncertainty of market
acceptance of the Company's new and existing products and their market
penetration to date; the uncertainties related to the Company's product
development programs; the Company's reliance on collaborative partners and
licenses; the Company's limited sales, marketing and distribution experience and
current dependence on distributors; the risks associated with obtaining
governmental approval of the Company's products; the highly competitive industry
in which the Company operates and the rapid pace of technological change within
that industry; the uncertainty of patented and proprietary technology protection
and the Company's reliance on such patented and proprietary technology
(including reliance on technology licensed from third parties); changes in or
failure to comply with governmental regulation, the uncertainty of third party
reimbursement for the Company's products; the Company's dependence on key
employees; general economic and business conditions and other factors referenced
in this Prospectus.
20
<PAGE> 22
TRANSACTIONS RELATED TO THE OFFERING
In March 1997, the Company entered into a series of agreements with Elan
pursuant to which the Company acquired certain in-process research and
development programs, including exclusive world-wide rights to certain
iontophoretic patents, know-how and clinical data (the "Elan Agreements"). The
Company acquired the Elan technology by issuing Elan two promissory notes, a
$10.0 million note and a $5.0 million note (collectively, the "Elan Notes"),
together with a warrant to purchase 104,166 Common Shares at an exercise price
of $21.60 per share and agreed to pay Elan royalties on any net revenues derived
by the Company from its products.
Concurrently with the closing of the Offering, Elan will purchase directly
from the Company, in private placement transactions (i) 833,333 Common Shares
(subject to adjustment under certain circumstances) for approximately $10.2
million (the amount outstanding under the $10.0 million note) and (ii)
approximately $5.1 million of Common Shares at a price per share equal to the
initial public offering price hereunder (425,000 shares assuming an initial
public offering price of $12.00 per share) (collectively, the "Elan Shares").
Simultaneously with such purchases, the Company will repay the Elan Notes,
including interest thereon. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Collaborative
Relationships and Licenses," "Certain Transactions," "Description of Capital
Shares -- Warrants" and "Underwriting."
If the initial public offering price of the Common Shares is less than
$12.00 per share, the number of Common Shares that Elan will have the right to
purchase for the approximately $10.2 million (the amount outstanding under the
$10.0 million note) will be equal to that amount divided by the initial offering
price. If, as a result of Elan's purchase of the Elan Shares, Elan's aggregate
interest in the Common Shares exceeds 19.9% of the outstanding Common Shares,
Elan may elect to receive non-voting preferred shares to the extent of such
excess. Any such preferred shares would rank pari passu with the Common Shares,
and would be non-voting and convertible into Common Shares on a one-for-one
basis initially. See "Certain Transactions."
Effective November 1, 1997, the Company, Novartis and Dermion amended the
terms of their contractual relationships. Among other things, Novartis exchanged
its 20% interest in Dermion for 238,541 Common Shares and warrants to acquire an
additional 18,750 Common Shares at an exercise price of $21.60 per share. See
"Business -- Collaborative Relationships and Licenses" and "Description of
Capital Shares -- Warrants."
21
<PAGE> 23
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be approximately $18.1
million ($20.9 million if the Underwriters' exercise the over-allotment option
in full) at an assumed initial public offering price of $12.00 per Common Share.
The Company intends to use approximately $11.8 million of the net proceeds from
the Offering to conduct research and development activities. The balance of the
net proceeds (approximately $6.3 million) will be used to expand the Company's
sales and marketing capabilities and to consolidate and equip its facilities, as
well as for working capital or other general corporate purposes. The Company may
also use a portion of the net proceeds from the Offering for the in-licensing or
acquisition of technologies, businesses or products that are complementary to
those of the Company, although no specific acquisitions are being negotiated as
of the date hereof, and no portion of the net proceeds has been allocated for
any such acquisition. Pending such uses, the Company intends to invest the
proceeds of the Offering in short term, investment grade, interest-bearing
securities. See "Transactions Related to the Offering" and "Certain
Transactions."
Elan has agreed to purchase in private placement transactions concurrently
with the closing of the Offering the Elan Shares for approximately $15.3
million. Simultaneously with such purchases, the Company will repay the Elan
Notes, including interest thereon. See "Transactions Related to the Offering"
and "Certain Transactions."
The actual amount expended and the timing of the use of the net proceeds of
the Offering for each purpose set forth in the preceding paragraph may vary
significantly depending upon a number of factors, including the costs and timing
of the Company's research and development activities, the number and type of
clinical tests the Company is required to conduct in seeking approval of its
products from governmental agencies, the success of the Company's developmental
efforts, the costs and timing of the expansion of the Company's sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, the Company's ability to maintain existing
collaborative relationships and enter into new collaborative relationships,
competing technological, market and patent developments, the progress of the
Company's commercialization efforts and the commercialization efforts of the
Company's distributors and co-marketers, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
intellectual property rights, developments related to regulatory and third party
reimbursement issues, and other factors. The Company's management will retain
broad discretion as to the allocation of a significant portion of the net
proceeds of the Offering. See "Risk Factors -- Management Discretion Over
Proceeds of the Offering."
22
<PAGE> 24
CAPITALIZATION
The following table sets forth (a) the actual capitalization of the Company
as of September 30, 1997 (giving effect to the 1-for-4.8 reverse split) and (b)
the pro forma capitalization of the Company as adjusted to reflect (i) the
issuance and sale of 1,700,000 Common Shares offered hereby, at an assumed
initial public offering price of $12.00 per share and the receipt of the net
proceeds therefrom; (ii) the sale of the Elan Shares to Elan and the
simultaneous repayment of the Elan Notes, including interest thereon,
concurrently with the closing of the Offering; (iii) the mandatory conversion of
the outstanding Series C Preferred Shares into 28,800 Common Shares concurrently
with the closing of the Offering; and (iv) the exchange of Novartis' 20% equity
interest in Dermion for 238,541 Common Shares, which was effected November 1,
1997. The number of the Elan Shares is dependent upon the initial public
offering price. See "Transactions Related to the Offering" and "Certain
Transactions."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
-------------------------------
PRO FORMA AS
ACTUAL ADJUSTED
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including accrued interest(2)..................... $ 15,527 --
Minority interest................................................. 909 --
Redeemable, convertible Series C Preferred Shares, no par value,
28,800 shares issued and outstanding, actual; no shares issued
and outstanding, pro forma as adjusted.......................... 720 --
Shareholders' equity:
Common Shares, no par value; 3,134,392 shares issued and
outstanding, actual; 6,360,066 shares issued and outstanding,
pro forma as adjusted........................................ 12,047 47,258
Accumulated deficit............................................. (21,574) (21,574)
--------- ----------
Total shareholders' equity (deficit).............................. (9,527) 25,684
--------- ----------
Total capitalization.............................................. $ 7,629 $ 25,684
========= ==========
</TABLE>
- ---------------
(1) Excludes (i) 339,512 Common Shares issuable upon exercise of options granted
pursuant to the Company's stock option plans, at a weighted average exercise
price of $4.80 per share; (ii) 312,500 Common Shares reserved for future
grants of options or awards under the Company's stock option plans; (iii)
170,000 Common Shares issuable upon exercise of warrants to be issued to the
Representatives at an initial exercise price of $15.00 per share, assuming
an initial public offering price of $12.00 per share (the "Representatives'
Warrants"); and (iv) 169,791 Common Shares issuable upon exercise of other
outstanding warrants, at a weighted average exercise price of $18.04 per
share. See "Management -- Employee Benefit Plans -- Stock Option Plans,"
"Certain Transactions," "Description of Capital Shares" and "Underwriting."
(2) Reflects $15,527,000 in notes, including accrued interest, issued to Elan.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends and does not
intend to pay any cash dividends on its Common Shares for the foreseeable
future.
23
<PAGE> 25
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 (giving effect to the 1-for-4.8 reverse split), was $7,483,000, or $1.61
per share. Pro forma net tangible book value per share is equal to total
tangible assets of the Company, less total pro forma liabilities, divided by the
pro forma number of Common Shares outstanding, giving effect to (i) the sale of
the Elan Shares to Elan and the simultaneous repayment of the Elan Notes,
including interest thereon, concurrently with the closing of the Offering; (ii)
the mandatory conversion of the outstanding Series C Preferred Shares into
28,800 Common Shares concurrently with the closing of the Offering; and (iii)
the exchange of Novartis' 20% equity interest in Dermion for 238,541 Common
Shares, which was effected November 1, 1997. Without taking into account any
other changes in pro forma net tangible book value after September 30, 1997
other than to give effect to the issuance and sale of the 1,700,000 Common
Shares offered hereby at an assumed initial public offering price of $12.00 per
share and the receipt of the net proceeds therefrom, the pro forma net tangible
book value of the Company as of September 30, 1997 would have been approximately
$25,684,000, or $4.04 per share. This represents an immediate increase in pro
forma net tangible book value of $2.43 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $7.96 per share to
investors in the Common Shares offered hereby. The number of the Elan Shares is
dependent upon the initial public offering price, See "Transactions Related to
the Offering" and "Certain Transactions." The following table illustrates the
per share dilution in net tangible book value to investors in the Offering
assuming the foregoing:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of
September 30, 1997..................................... $ 1.61
Increase per share attributable to new investors.......... 2.43
------
Pro forma net tangible book value per share after
Offering.................................................. 4.04
------
Dilution per share to new investors......................... $ 7.96
======
</TABLE>
The following table sets forth, on the pro forma basis as of September 30,
1997, the differences between the existing shareholders on a pro forma basis and
the new investors with respect to the number of Common Shares purchased from the
Company, the total consideration paid and the average price paid per share
(before deducting estimated underwriting discounts and commissions and estimated
expenses of the Offering):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 4,660,066 73% $29,203,000 59% $ 6.27
New Investors....................... 1,700,000 27% 20,400,000 41% 12.00
--------- --- ----------- ---
Total............................. 6,360,066 100% $49,603,000 100%
========= === =========== ===
</TABLE>
The foregoing tables assume no exercise of any options or warrants
subsequent to September 30, 1997. As of September 30, 1997, there were (i)
339,512 Common Shares issuable upon exercise of options granted pursuant to the
Company's stock option plans, at a weighted average exercise price of $4.80 per
share; (ii) 312,500 Common Shares reserved for future grants of options or
awards under the Company's stock option plan; (iii) 170,000 Common Shares
issuable upon exercise of the Representatives' Warrants at an initial exercise
price of per share; and (iv) 169,791 Common Shares issuable upon exercise of
other outstanding warrants, at a weighted average exercise price of $18.04 per
share. See "Management -- Employee Benefit Plans -- Stock Option Plan," "Certain
Transactions," "Description of Capital Shares" and "Underwriting."
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The financial information set forth below with respect to the Company's
consolidated statements of operations for each of the years in the three year
period ended June 30, 1997, and with respect to the Company's consolidated
balance sheets at June 30, 1996 and 1997, are derived from the consolidated
financial statements of the Company included elsewhere herein that have been
audited by Ernst & Young LLP, independent certified public accountants, and is
qualified by reference to such consolidated financial statements and notes
related thereto. The financial data for the three month periods ended September
30, 1997 and 1996 are derived from the unaudited consolidated financial
statements of the Company included elsewhere herein and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth herein. The
results for the three months ended September 30, 1997, are not necessarily
indicative of the results to be expected for the full year. The following
selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Product Sales...................... $ 6,980 $ 6,991 $ 6,964 $ 6,829 $ 7,483 $ 1,813 $ 1,997
Contract research revenues,
royalties and license fees....... -- -- -- 2,409 1,800 649 503
-------- -------- -------- -------- --------- -------- --------
Total revenues................... 6,980 6,991 6,964 9,238 9,283 2,462 2,500
OPERATING COSTS AND EXPENSES:
Cost of products sold.............. 4,124 3,499 3,369 3,138 3,338 821 893
Research and development........... 1,984 1,665 1,467 1,099 1,488 391 375
Selling, general and
administrative................... 4,338 3,307 3,338 3,283 3,501 769 1,061
Non-recurring charges.............. 459(1) -- -- 430(2) 15,059(3) -- --
-------- -------- -------- -------- --------- -------- --------
Total costs and expenses......... 10,905 8,471 8,174 7,950 23,386 1,981 2,329
-------- -------- -------- -------- --------- -------- --------
Income (loss) from operations........ (3,925) (1,480) (1,210) 1,288 (14,103) 481 171
Interest expense..................... 152 39 32 9 242 1 287
Interest income and other, net....... 45 102 120 167 291 58 91
-------- -------- -------- -------- --------- -------- --------
Income (loss) from continuing
operations before income taxes and
minority interest.................. (4,032) (1,417) (1,122) 1,446 (14,054) 538 (25)
Minority interest.................... -- -- -- (17) 23 44 11
Income tax expense (benefit)......... (143) (264) (173) (79) 5 20 --
-------- -------- -------- -------- --------- -------- --------
Income (loss) from continuing
operations......................... (3,889) (1,153) (949) 1,542 (14,082) 474 (36)
Income from discontinued
operations(4)...................... 241 444 290 201 44 (7) --
-------- -------- -------- -------- --------- -------- --------
Net income (loss).................... $ (3,648) $ (709) $ (659) $ 1,743 $ (14,038) $ 467 $ (36)
======== ======== ======== ======== ========= ======== ========
PER COMMON SHARE AMOUNTS(5):
Income (loss) from continuing
operations......................... $ (2.77) $ (0.62) $ (0.46) $ 0.48 $ (4.48) $ 0.14 $ (0.01)
Income from discontinued
operations......................... 0.17 0.24 0.14 0.06 0.01 -- --
-------- -------- -------- -------- --------- -------- --------
Net income (loss).................... $ (2.60) $ (0.38) $ (0.32) $ 0.54 $ (4.47) $ 0.14 $ (0.01)
======== ======== ======== ======== ========= ======== ========
Shares used in computing per share
amounts............................ 1,404 1,875 2,090 3,222 3,140 3,282 3,150
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 1,350 $ 2,541 $ 1,861 $ 4,507 $ 6,346 $ 5,213 $ 5,910
Total assets......................... 4,593 5,501 4,770 7,251 8,664 7,816 8,469
Long-term obligations, including
current portion.................... 332 3,263 3,099 44 15,242(6) 33 15,527(6)
Redeemable, convertible preferred
shares............................. 2,380 2,308 2,235 1,270 900 900 720
Accumulated deficit.................. (7,875) (8,584) (9,243) (7,500) (21,538) (7,032) (21,574)
Shareholders' equity (deficit)....... (250) (945) (1,592) 3,992 (9,491) 4,762 (9,527)
</TABLE>
- ---------------
(1) Costs incurred in connection with the issuance of debt and equity securities
in private financing transactions.
(2) Costs incurred in connection with the settlement of certain trade dress
litigation. See Note 3 of the Notes to Consolidated Financial Statements.
(3) Reflects the write-off of certain in-process research and development
(including related transaction costs) purchased from Elan. See Note 3 of the
Notes to Consolidated Financial Statements.
(4) Discontinued operations include the operating results (exclusive of any
corporate allocations and net of applicable income taxes) of the Company's
prosthetics division, which was sold in December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) See Note 1 of the Notes to Consolidated Financial Statements for information
concerning the computation of per share amounts.
(6) Reflects $15,240,000 and $15,527,000 in notes, including accrued interest,
issued to Elan at June 30, 1997 and September 30, 1997, respectively.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Selected Consolidated
Financial Data" and the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and other parts of
this Prospectus contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
The Company develops, manufactures and commercializes controllable drug
delivery systems using iontophoretic technology. The majority of the Company's
revenues has been generated through the sale of its iontophoretic drug delivery
products in the physical therapy market for use in the delivery of Dexamethasone
and contract research revenues from the Company's collaboration with Novartis.
The Company recently introduced its local dermal anesthesia products into the
market place and, to date, has not realized significant revenue from the sales
of such products. Since its inception, the Company has generally incurred
operating losses and it expects to incur additional operating losses over the
next several years as a result of anticipated costs associated with a
significant increase in internally funded research, development and clinical
trial activities relating to new applications for its iontophoretic drug
delivery technologies, development of a dedicated sales force and the
consolidation and equipping of its facilities. As of September 30, 1997, the
Company's accumulated deficit was approximately $21.6 million. The Company's
ability to achieve and sustain profitability will depend on its ability to
achieve market acceptance and successfully expand sales of its existing
products, as well as successfully complete the development of, receive
regulatory approvals for, and successfully manufacture and market, its products
under development, as to which there can be no assurance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues. Product sales increased 10% from $1.8 million in the three months
ended September 30, 1996 to $2.0 million in the three months ended September 30,
1997. The increase can be attributed to higher sales of the Company's
iontophoretic drug delivery products for the treatment of local inflammatory
conditions resulting from overall market growth in this segment.
Contract research revenues, royalties and license fees decreased 23% from
$649,000 in the three months ended September 30, 1996 to $503,000 in the three
months ended September 30, 1997. This decrease can be attributed to the
Company's receipt of a milestone payment pursuant to its research and
development agreement with Novartis during the three months ended September 30,
1996.
Costs of Products Sold. Costs of products sold increased 9% from $821,000
in the three months ended September 30, 1996 to $893,000 in the three months
ended September 30, 1997, reflecting increased material and labor costs
associated with higher unit sales volume.
Research and Development Expense. Research and development expenditures
decreased 4% from $391,000 in the three months ended September 30, 1996 to
$375,000 in the three months ended September 30, 1997. This decrease reflects
differences in the timing of certain expenditures on the Company's internally
financed product development projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 38%, from $769,000 in the three months ended
September 30, 1996 to $1.1 million in the three months ended September 30, 1997.
The increase to the current period can be attributed primarily to the
recruiting, personnel and other sales and marketing costs associated with the
Company's continued investment in the market introduction of Numby Stuff. In
addition, the Company realized increased costs associated with routine
maintenance and prosecution of the patent portfolio acquired from Elan.
26
<PAGE> 28
Other Costs and Expenses. Interest expense increased from $1,000 in the
three months ended September 30, 1996 to $287,000 in the three months ended
September 30, 1997. This increase can be attributed to the recognition of
non-cash interest expense on $15.0 million in notes issued to Elan in connection
with the Elan Agreements. Interest income and other miscellaneous income was
$58,000 in the three months ended September 30, 1996, compared to $91,000 in the
three months ended September 30, 1997, reflecting interest earnings on higher
average invested cash balances during the current period.
The Company has substantial net operating loss carryforwards which, under
the current "change of ownership" rules of the Internal Revenue Code, may be
subject to substantial annual limitation. Income taxes for the three months
ended September 30, 1996 reflect the Company's effective income tax rate for
fiscal 1997. No income tax expense was recognized for the three months ended
September 30, 1997, which reflects management's estimate of its fiscal 1998 tax
position.
Income (loss) from Continuing Operations. Income from continuing operations
of $474,000 in the three months ended September 30, 1996 compares to a loss from
continuing operations of $36,000 in the three months ended September 30, 1997.
The decrease in fiscal 1997 can be attributed to the receipt of the milestone
payment from Novartis in the prior year, non-cash interest charges on the Elan
indebtedness and the Company's investment in the sales and marketing of Numby
Stuff.
FISCAL YEARS ENDED JUNE 30, 1996 AND 1997
Revenues. Product sales increased 10% from $6.8 million in fiscal 1996 to
$7.5 million in fiscal 1997. This increase can be attributed to increased sales
of the Company's iontophoretic drug delivery products for the treatment of local
inflammatory conditions resulting from the first full year of sales of the
Company's newly introduced electrode kits for this market segment.
Contract research revenues, royalties and license fees decreased 25% from
$2.4 million in fiscal 1996 to $1.8 million in fiscal 1997. During fiscal 1996,
the Company entered into a research and development agreement with Novartis to
develop proprietary iontophoretic drug delivery systems for Novartis drugs.
Pursuant to the agreement, the Company received contract research revenues and
other payments of $1.4 million and $1.8 million, respectively, in fiscal 1996
and 1997. In addition, in fiscal 1996, the Company received a one-time license
fee of $1.0 million. Contract research revenues received during fiscal 1997 and
1996 pursuant to the Novartis agreement covered a substantial portion of the
Company's research and development expenses.
Costs of Products Sold. Costs of products sold increased 6% from $3.1
million in fiscal 1996 to $3.3 million in fiscal 1997, reflecting increased
costs attributable to higher material and labor costs resulting from higher unit
sales volume. Costs of products sold decreased slightly as a percent of product
sales due to productivity gains which were offset, in part, by increased costs
associated with new product introductions.
Research and Development Expense. Research and development expenditures
increased 36%, from $1.1 million in fiscal 1996 to $1.5 million in fiscal 1997.
The increase reflects increased costs of personnel and other expenditures
associated with the development programs conducted under the Novartis agreement,
as well as research and development expenditures on the Company's internally
financed product development projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6%, from $3.3 million in fiscal 1996 to $3.5
million in fiscal 1997. The increase in fiscal 1997 can be attributed to the
recruiting, personnel and other sales and marketing costs associated with the
Company's market introduction of Numby Stuff. The increase was offset, in part,
by decreases in general and administrative expenses.
Non-Recurring Charges. In March 1997, the Company entered into the Elan
Agreements, pursuant to which the Company acquired certain rights to Elan's
in-process research and development relating to iontophoretic drug delivery,
including issued and pending United States and foreign patents, know-how and
clinical data. As a result of this transaction, the Company recorded a
non-recurring charge of approximately $15.1 million.
27
<PAGE> 29
During fiscal 1996, the Company recorded a non-recurring charge of $430,000
for costs incurred in connection with the settlement of a trade-dress
infringement suit brought by a competitor of the Company relating to a newly
developed series of the Company's electrode kits for the treatment of acute
local inflammation (the "Litigation").
Other Costs and Expenses. Interest expense increased from $9,000 in fiscal
1996 to $242,000 in fiscal 1997. This increase can be attributed to the
recognition of non-cash interest expense on $15.0 million in notes issued to
Elan in connection with the Elan Agreements. Interest income and other
miscellaneous income was $167,000 in fiscal 1996, compared to $291,000 in fiscal
1997, reflecting interest earnings on higher average cash balances during fiscal
1997.
The Company has substantial net operating loss carryforwards. Income taxes
in both periods reflect estimated alternative minimum tax liabilities, offset by
the recognition of future tax benefits resulting from the allocation of income
tax expense, at statutory rates, to the pre-tax income of the Company's
discontinued operations.
Income (loss) from Continuing Operations. Income from continuing operations
of $1.5 million in fiscal 1996 compares to a loss from continuing operations of
$14.1 million in fiscal 1997. Excluding the non-recurring charges in both fiscal
years, income from continuing operations decreased from $2.0 million in fiscal
1996 to $1.0 million in fiscal 1997. The decrease in fiscal 1997 can be
attributed primarily to the one time $1.0 million license fee the Company
received from Novartis in fiscal 1996.
FISCAL YEARS ENDED JUNE 30, 1995 AND 1996
Revenues. Product sales decreased 3% from $7.0 million in fiscal 1995 to
$6.8 million in fiscal 1996. Sales increases during fiscal 1996 were offset by
the full year effect of the loss of sales resulting from the acquisition, during
fiscal 1995, of several of the Company's key product distributors by a major
competitor in the physical therapy market. Sales in fiscal 1996 were also
negatively impacted by the Litigation, which delayed the launch of the newly
developed series of electrode kits for the treatment of acute local
inflammation. During fiscal 1996, the Company realized $1.4 million in revenues
from contract research and development services and a one-time $1.0 million
license fee in connection with its research and development agreement with
Novartis, offsetting the decrease in product sales in fiscal 1996.
Cost of Products Sold. Costs of products sold decreased 9% from $3.4
million in fiscal 1995 to $3.1 million in fiscal 1996. This improvement was
attributed to increased manufacturing efficiencies and lower materials costs
resulting from the use of new materials and sources of supply and reductions in
manufacturing overhead.
Research and Development Expense. Research and development expense
decreased 27% from $1.5 million in fiscal 1995 to $1.1 million in fiscal 1996.
Research and development expense during fiscal 1996 consisted primarily of
expenditures relating to the Company's research programs with Novartis, which,
in the aggregate, were lower than the research and development expenditures in
fiscal 1995. The Company's research and development expenditures in fiscal 1995
included costs relating to the Company's NDA filing for the approval of
Iontocaine, as well as expenditures relating to the Company's collaborative
development projects with Laboratoires Fournier.
Non-Recurring Charges. The Company recorded a non-recurring charge of
$430,000 during fiscal 1996 for costs incurred in connection with the
Litigation.
Other Costs and Expenses. Interest expense decreased from $32,000 in fiscal
1995 to $9,000 in fiscal 1996 due to the lower average principal balance due
under the Company's term loan. Interest income and other miscellaneous income
was $120,000 in fiscal 1995, compared to $167,000 in fiscal 1996, primarily due
to interest earnings on higher average cash balances from operating cash flows,
and the Company's sale to Novartis of a 20% interest in Dermion in fiscal 1996.
The Company has substantial net operating loss carryforwards. The credit
provision for income taxes in fiscal 1996 reflects the recognition of future tax
benefits resulting from the allocation of income tax expense, at
28
<PAGE> 30
statutory rates, to the pre-tax income of the Company's discontinued operations,
offset, in part, by estimated alternative minimum tax liabilities. The credit
provision for income taxes in fiscal 1995 reflects the recognition of future tax
benefits resulting from the allocation of income tax expense, at statutory
rates, to the pre-tax income of the Company's discontinued operations.
Income (loss) from Continuing Operations. The loss from continuing
operations of $949,000 in fiscal 1995 compares to income from continuing
operations of $1.5 million in fiscal 1996. Excluding the non-recurring charge in
fiscal 1996, the difference is attributable primarily to the Company's receipt,
in fiscal 1996, of contract research and development revenues and a $1.0 million
one-time license fee in connection with the Company's research and development
agreement with Novartis.
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 1996, the Company funded its operating losses primarily
through private equity financing, convertible debt arrangements, capital lease
financing, and collateralized bank loans. Beginning in fiscal 1996, the
Company's operating and research activities have been internally funded,
primarily as a result of the research and development revenues and license fees
the Company has received from Novartis.
As of September 30, 1997, the Company had cash and cash equivalents
totaling approximately $5.9 million. Cash in excess of immediate requirements is
invested in a manner which is intended to maximize liquidity and return while
minimizing investment risk, and, whenever possible, the Company seeks to
minimize the potential effects of concentration of credit risk.
In the three month period ended September 30, 1996, the Company generated
$829,000 of cash from operating activities compared to a use of cash of
approximately $194,000 in the three month period ended September 30, 1997. This
decrease in cash flow is due to the Company's net loss for the current period,
as discussed above, and to changes in working capital during the three month
period ended September 30, 1997. The Company generated approximately $1.0
million of cash from operating activities during fiscal 1997, compared to $2.2
million in fiscal 1996. The decrease can be attributed primarily to the one-time
license fee received from Novartis in fiscal 1996 and an increased net
investment in working capital in fiscal 1997. In fiscal 1996, the Company
generated cash of $2.2 million from operating activities, compared to a use of
cash of $298,000 in fiscal 1995. The transition to generating cash in fiscal
1996 can be attributed to the research and development funding and the one-time
license fee the Company received from Novartis in fiscal 1996. During fiscal
1995, the Company's investment in finished goods inventory increased in
preparation for the launch of a new electrode kit for local inflammation and
accrued liabilities increased due to the reserve established for the estimated
costs of the Company's planned facilities consolidation.
Historically, the Company's operations have not been capital intensive and,
therefore, its investment in property, plant and equipment during the periods
presented has not been significant. The Company anticipates however, that its
investment in facilities and equipment will increase in the future, due to the
Company's desire to consolidate its manufacturing, administrative and research
and development facilities and the need to increase the automation of its
electrode manufacturing processes to meet higher expected sales volumes. The
Company's expenditures for equipment and furniture were $156,000, $316,000 and
$231,000 in each of the fiscal years ended June 30, 1995, 1996 and 1997,
respectively.
During fiscal 1997, the Company generated $255,000 in cash from the private
placement of its Common Shares. During fiscal 1996, the Company generated $1.0
million ($892,000, net of related expenses) in cash from the sale of a 20%
equity interest in Dermion to Novartis. See "Transactions Related to the
Offering."
The Company expects to continue to incur substantial costs associated with
the expansion of its research and development activities, including clinical
trials, development of a dedicated sales force and consolidating and equipping
its facilities. The Company anticipates that the net proceeds of the Offering,
together with existing cash balances and cash generated from operations
(including funding from Novartis) will be sufficient to fund the operations of
the Company for approximately the next two years. However, the Company may be
required or elect to raise additional capital before that time. The Company's
actual capital requirements will
29
<PAGE> 31
depend on many factors, some of which are outside the Company's control. See
"Risk Factors -- Future Capital Needs; Uncertainty of Additional Funding" and
"Use of Proceeds."
Concurrently with the closing of the Offering, Elan has agreed to purchase
the Elan Shares directly from the Company, in private placement transactions,
for approximately $15.3 million. Simultaneously with Elan's purchase of such
shares, the Company will repay the Elan Notes, including interest thereon. See
"Transactions Related to the Offering," "Certain Transactions" and Note 7 of the
Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS
Prior to January 1997, the Company provided state-of-the-art prosthetics
products to amputees throughout the United States, Canada and Western Europe
through its Motion Control division. Motion Control's principal products were
the Utah Artificial Arm and the ProControl II, advanced myolectric prostheses
for above and below the elbow amputees.
In December 1996, the Company sold the assets of the Motion Control
division for $1.0 million and granted the purchaser an exclusive, worldwide
license and sublicense to the patents, trademarks, know-how and other
intellectual property of the Company relating to the Motion Control products.
Under the terms of that sublicense agreement, the Company will receive license
fees and royalties on future sales of the Motion Control products. There was no
significant gain or loss recognized on the sale. The results of operations of
the Motion Control division, exclusive of any corporate allocations, are
reported as discontinued operations in the consolidated financial statements for
all periods presented. See Note 4 of the Notes to the Consolidated Financial
Statements.
30
<PAGE> 32
BUSINESS
INTRODUCTION
The Company develops, manufactures and commercializes controllable drug
delivery systems using iontophoretic technology. Iontophoresis is a non-invasive
method of enhancing and controlling the transport of water-soluble ionic drugs
into and through the skin using a low level electrical current. The Company's
proprietary iontophoretic drug delivery systems allow rapid onset and cessation
of therapeutic action, as well as programmable dose control. The systems enable
caregivers and patients to control the onset of drug effectiveness and maintain,
reduce or cease drug administration once a desired therapeutic effect is
observed. The programming feature also enables caregivers to customize dosing
patterns to meet each patient's specific needs. The Company is developing
systems designed to enable patient monitoring and control. The flexibility of
the Company's proprietary systems provides therapeutic control not possible with
many alternative drug delivery methods, including oral tablets and capsules,
injections, inhalants and passive transdermal patches. The Company's systems may
also increase bioavailability, safety and patient comfort.
The Company markets two products, an iontophoretic system used to deliver
Dexamethasone and an iontophoretic system used to deliver Iontocaine. Since it
was introduced in 1979, the Company's system for the delivery of Dexamethasone
has been used primarily by physical therapists and athletic trainers in over 10
million patient applications for the treatment of acute local inflammatory
conditions such as tendonitis, tennis elbow and carpal tunnel syndrome. More
than 8 million of these applications have occurred since 1990, when the Company
introduced its present family of gel electrodes for use with its microprocessor
controlled dose controller. The Company's system to deliver Iontocaine provides
needle-free, long-lasting local dermal anesthesia up to six times more rapidly
and up to three times deeper than can be achieved using topical anesthetic
creams. The Company is initially marketing its Iontocaine product under the
brand name Numby Stuff in pediatric hospitals in the United States. The Company
is also developing a number of iontophoretic drug delivery systems for other
indications, including conscious sedation, tocolysis, post operative and chronic
pain control, and osteoporosis.
BACKGROUND ON DRUG DELIVERY SYSTEMS
A wide variety of drug delivery methods is currently available in the
market, although not all drugs can be delivered by all routes of administration.
For certain applications, there are clinical benefits in providing rapid onset
of therapeutic action and the minimum drug dosage necessary to achieve the
desired effect. In all applications, drug delivery should be convenient, cost
effective and as non-invasive as possible.
Conventional Oral Methods. Conventional oral drug dosage forms, such as
pills and capsules, are the most common types of drug delivery. These methods
offer ease of administration and low cost-per-use, but their application is
often limited by inconvenient dosage intervals and less than optimal
bioavailability (due to degradation of the drug in the gastro intestinal tract
("GI tract") and the liver) and efficacy. In addition, conventional oral dosage
forms often produce higher initial drug levels than are required to achieve the
desired therapeutic effects, thereby increasing the risk of side effects and
lower than therapeutically optimal levels of the drug as it is metabolized and
cleared from the body. More frequent administration of lower doses can sometimes
mitigate this problem, but can also increase cost, inconvenience and patient
noncompliance.
Injection Methods. Injectable drug dosage forms generally provide rapid
onset of action and offer many of the same advantages as conventional oral drug
dosage methods. Like conventional oral dosage forms, however, they often produce
higher initial drug levels than are required to achieve the desired therapeutic
effect, thereby increasing risk of side effects. Injectable drug delivery
methods require caregiver administration and have the added disadvantage of
using needles as a delivery path into the body, raising the possibility of
needle stick injuries, as well as risk of infection to the caregiver and the
patient. The use of needles also increases patient anxiety due to the pain of
injection.
Controlled Release Methods. Controlled release drug delivery systems
attempt to overcome many of the limitations inherent in conventional drug
delivery methods by maintaining a more consistent and appropriate drug level in
the bloodstream. Sustained release oral dosage forms are designed to release the
active
31
<PAGE> 33
ingredients of the drug into the body at either a predetermined point in time or
at a predetermined rate over an extended period of time, but they generally do
not provide rapid onset of action and may not achieve optimal bioavailability.
Passive transdermal patches allow absorption of drugs through the skin and
generally provide a convenient method of administering drugs at a steady rate
over an extended period of time, but onset of action may take hours after
application and absorption of the drug may continue for hours after the patch is
removed, which can increase side effects. Additionally, because human skin is an
effective barrier, most drug formulations will not passively permeate the skin
in therapeutic quantities. Continuous infusion pumps introduce drugs directly
into the body, thereby providing rapid onset of action, and may offer variable
controlled dosing. Infusion therapy requires insertion of a needle, however,
and, therefore, can be painful and threatening to the patient. The use of
infusion pumps also increases the risk of infection and generally requires
medical professionals for safe administration, which may significantly increase
costs.
Pulmonary and Nasal Methods. Both pulmonary (inhalation) delivery and nasal
sprays are designed to provide rapid onset of action or to deliver drugs that
are not orally bioavailable. Pulmonary delivery has the disadvantage of variable
drug amounts reaching the alveoli of the lungs, therefore making it difficult to
control the bioavailability of the dose. Nasal sprays can cause irritation in
some patients and can be difficult to administer in variable intranasal
conditions. In addition, the dose of the product cannot be controlled by the
patient over a period of time, and patients and caregivers may have difficulty
maintaining the desired therapeutic effect.
Other. Many existing and emerging pharmaceutical compounds, such as
biotechnology-derived oligonucleotides, peptides and other macromolecular drugs,
cannot be effectively administered by traditional non-invasive methods and are,
therefore, administered only by injection or infusion. Oral delivery of such
molecules is generally inefficient due to the rapid breakdown of the molecules
during digestion and the natural impermeability of the GI tract to larger
molecules. The skin is even less permeable to macromolecules than the GI tract,
which the Company believes is the primary reason passive transdermal delivery of
those molecules using patch technology has not been successful to date.
IONTOPHORETIC DRUG DELIVERY AND ITS ADVANTAGES
Iontophoretic drug delivery systems are designed to overcome many of the
limitations associated with many other drug delivery methods. Iontophoresis is
an active method of transdermal drug delivery in which water-soluble, ionized
(electrically charged) drugs are transported through the skin for local or
systemic therapeutic applications by applying a low level, external electrical
current. The amount of drug delivered through the skin is proportional to the
total electrical charge applied (which is a function of time and current).
Therefore, it is possible to program the system's electrical current levels to
control more precisely the desired drug dose, delivery rate and the pattern of
delivery.
Iontophoretic drug delivery systems are generally comprised of a power
supply which is used to control drug dose (the "dose controller") and a pair of
electrodes, one containing the drug and one serving as a grounding electrode to
complete the electrical circuit through the skin. The drug electrode consists of
a matrix which contains the drug solution, a conductive element which
distributes the electric current through the drug matrix, an electrical
connector that links the electrode to the dose controller, and an adhesive layer
that attaches the electrode to the body. The grounding electrode consists of
similar components, but without the drug solution. The drug delivery electrode
is applied to the patient's skin at a local treatment site (such as for joint or
tendon soreness or to induce local dermal anesthesia), or at any suitable site
on the body for systemic drug delivery. The grounding electrode is applied to
the skin a short distance away from the drug electrode. As is shown in the
following illustration, when an electric current with the same positive or
negative electric charge as the drug is applied to the drug electrode, the drug
is repelled from the electrode and into the skin in the same way as like poles
of two magnets repel each other. Although the Company's currently marketed
products consist of discrete components, the Company has begun the development
of more advanced systems which integrate all components in a single miniaturized
patch.
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[Graphic depicting iontophoretic drug delivery system in operation]
The Company believes that, for certain applications, iontophoretic drug
delivery systems may offer several advantages over other drug delivery methods,
including:
Broad Applicability. A substantial number of the drugs on the market and in
development today are, the Company believes, ionic and water-soluble and,
therefore, may be amenable to delivery by iontophoresis. In addition,
iontophoretic drug delivery systems may be applicable to a significantly broader
range of pharmaceutical compounds, including larger drug molecules such as
peptides and oligonucleotides, than passive transdermal drug delivery methods.
Increased Convenience and Compliance. Iontophoretic drug delivery systems
are easy to use and offer simple, needle-free administration that eliminates the
inconvenience of frequent dosing, and may, if successfully developed and
approved by applicable regulatory authorities, permit patient
self-administration.
Programmable Control of Drug Delivery. The rate, timing and pattern of drug
delivery using an iontophoretic drug delivery system can be controlled by
varying the electrical current applied to the system's electrodes. The benefits
of this ability to control the drug's delivery include the following:
- Rapid Onset of Action -- The speed with which a drug delivery system can
provide efficacious blood levels of the target drug determines the onset
of therapeutic action. Iontophoretic drug delivery systems allow many
drugs to pass directly through the skin into underlying tissue and the
bloodstream at a rate that is significantly more rapid than oral or
passive transdermal delivery methods. Research has shown that certain
drugs can be delivered by iontophoresis more than 10 to 1,000 times
faster than drug delivery by passive transdermal patches.
- Rapid Cessation of Administration -- In certain applications, it is
desirable that drug delivery cease once the desired effect has been
obtained. Iontophoretic drug delivery systems allow rapid cessation of
drug delivery since absorption of water-soluble drugs from the skin into
bloodstream ceases rapidly after the current is turned off or the drug
electrode is removed from the skin.
- Variable Dose Control -- Iontophoretic drug delivery systems may be
designed to offer precision controlled dosing that can be customized for
desired therapeutic profiles or for individual patient needs, including
baseline and/or bolus dosing.
- Patient Controlled Dosing -- Iontophoretic drug delivery systems may be
designed to offer active patient control or intervention in the dosing
regimen, while at the same time incorporating programmed lock-outs for
added safety and dose monitoring capability.
- Dose-to-Effect -- Iontophoretic drug delivery systems allow caregivers
or patients to monitor the onset of drug effectiveness and maintain,
progressively reduce or cease drug administration once a desired
therapeutic effect is observed.
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THE COMPANY'S IONTOPHORETIC SYSTEMS
While the fundamentals of iontophoresis have been understood for decades,
the technology has become commercially practicable as a method for delivering
drugs only recently as a result of advances in electronics, materials science
and electrochemistry. These advances have led to the development of more
efficient and adaptable drug containment electrodes and more reliable, compact
and programmable dose controllers. The Company has developed iontophoretic drug
delivery systems which incorporate dose controllers and electrodes that have
enhanced performance characteristics, which the Company believes are adaptable
to a number of clinical settings and therapeutic applications, and which the
Company believes are cost effective in a number of therapeutic applications. The
Company's current iontophoretic drug delivery systems are not designed to
facilitate patient self-administration, but drug delivery systems currently
being developed by the Company may allow patients significant control over the
administration of certain drugs.
In March 1997, the Company entered into an agreement with Elan to obtain an
exclusive, worldwide license to the commercial exploitation of certain
technology developed by Elan in the field of iontophoretic drug delivery and
certain other electro-transport fields. The acquisition of the Elan technology
is intended to speed the development and commercialization of products using the
combined technologies, including the miniaturized integrated, wearable systems
currently under development by the Company. The Company also believes its
competitive position in relation to other companies engaged in the development
of iontophoretic drug delivery systems has been significantly enhanced by Elan's
broad base of United States and foreign patents, in-depth body of in vitro drug
transport data and in vivo animal and human clinical data, in addition to other
proprietary know-how.
Dose Controllers. The Company's dose controllers generate the low-level
electrical current needed for iontophoretic drug delivery. The Company presently
markets a compact, fully portable dose controller, the Phoresor, that offers
durable microprocessor control, enhanced user interface, versatile programmable
dosing capability, autocalculating treatment time (based on electrical current
settings and selected dose) and constant current output (by automatically
adjusting voltage to compensate for variations in the electrical resistance of
the skin). The Phoresor incorporates a microprocessor, other electronic
circuitry, on-board software that monitors and controls the rate of current
flow, and an easy-to-use control panel. The Company has also developed, and
anticipates marketing in the near future, a new dose controller for specific use
with its pediatric local dermal anesthetic product. See "Business -- Products
and Products Under Development -- Local Dermal Anesthesia." The Company's next
generation of dose controllers, both stand-alone and wearable miniaturized
versions, are being designed to include many of the same features as the
Company's current dose controllers. Depending on the therapeutic application,
the new generation dose controllers may be designed to allow bolus dosing
capability and programming (using a physician's or pharmacist's key) to adjust
dosing to match desired delivery profiles or patterns.
In a clinical setting for short treatment durations, the battery and dose
controller are housed in a discrete, reusable, table-top unit connected to a
pair of disposable, single-use electrodes to which drug solution is added
immediately prior to application to the patient. This technology is used in the
Company's current products. For longer term or chronic applications or
patient-administered therapy outside the clinical setting, the Company is
developing iontophoretic drug delivery systems in which the battery, dose
controller and electrodes will be combined in a small patch applied to the skin
as a single, integrated unit. The electronic components may be reusable, with
replaceable or rechargeable batteries and single-use, disposable drug and
grounding electrodes, or the entire unit may be disposable after a single use.
The drug may be added to the electrode drug pad during manufacturing, or may be
stored separately in the system and introduced into the drug containment pad
immediately before use by means of proprietary, integrated hydration devices
developed by the Company.
Electrodes. Electrode design is critical to successful delivery of a drug
by iontophoresis. The Company's electrodes incorporate patented and proprietary
design innovations which the Company believes offer significant advantages to
both patients and health care providers. The Company's proprietary electrode
technology includes patented polymer hydrogels which absorb drug solutions in
seconds, becoming soft and pliable so as to conform better to the body and to be
comfortable to the patient. The Company's electrode
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technology also employs special silver and silver chloride inks to distribute
electric current evenly from the dose controller to the electrodes and control
possible changes in acidity and alkalinity (pH changes) which can occur during
iontophoresis, thereby preventing possible drug instability or unacceptable skin
irritation.
BUSINESS STRATEGY
The Company's primary business goal is to establish its proprietary
iontophoretic drug delivery systems as a preferred, cost effective means of
delivering a wide range of drugs. To achieve this goal, the Company uses its
multi-disciplinary expertise in pharmacology and drug formulation, regulatory
and product testing, microelectronics, electrochemistry, polymer chemistry and
adhesives. The Company's strategy for achieving this goal includes the following
principal elements:
Develop Systems for Off-Patent Drugs. The Company intends to continue the
independent development of proprietary iontophoretic drug delivery systems for
off-patent drugs with known safety and efficacy and for which the Company
believes its drug delivery technology may be cost competitive with and offer
advantages over other drug delivery methods. The Company believes that, by
developing proprietary products based on currently approved off-patent drugs,
rather than new chemical entities ("NCEs"), it can reduce regulatory and
development risks and shorten the product development cycle for certain
products. See "Risk Factors -- Uncertainty of Government Regulation" and
"Business -- Government Regulation."
Enter into Collaborative Relationships. In order to gain access to NCEs and
other proprietary drugs, and to reduce the costs and risks associated with the
development of iontophoretic drug delivery systems for such compounds, the
Company intends to enter into collaborative relationships with pharmaceutical
and other biotechnology companies whose drugs could benefit from the Company's
iontophoretic drug delivery technology. The Company has entered into a
collaborative development agreement with Novartis for the purpose of evaluating
the potential for the development of iontophoretic drug delivery systems for a
number of Novartis compounds for several therapeutic applications. In
collaboration with Novartis, the Company is currently developing an
iontophoretic drug delivery system to deliver a drug for the treatment of
osteoporosis.
Increase Market Penetration of Existing Products. In order to leverage the
capabilities of its direct and dealer sales forces, the Company intends to enter
into collaborative sales and marketing relationships with other parties that
have specific expertise in markets targeted by the Company. In general, the
Company intends to use collaborative sales and marketing relationships in the
sale and distribution of its products to the general physician, international
and specialty markets, including the podiatric, orthopedic and chiropractic
markets.
In addition, the Company is actively seeking to expand the commercial
potential of its local anesthesia and acute inflammation products by pursuing
new applications. The Company will continue to conduct (i) marketing studies
aimed at expanding the use of its delivery system for Iontocaine to a broader
range of procedures and (ii) clinical trials to further establish the safety and
efficacy of iontophoresis for the treatment of local inflammation using
Dexamathasone or for use in other specific procedures.
Broaden Technology Platform. The Company intends to enhance its proprietary
iontophoretic technology base principally through internal research and
development. The Company will also pursue additional iontophoretic and other
complementary products and technologies owned or developed by third parties, on
a case-by-case basis, through in-licensing or acquisition.
Control Product Manufacturing Processes. The Company intends to maintain
control over the manufacture of its electrode kits in order to retain control
over the quality of its products and capture a larger portion of the product
revenue stream when third parties are involved in the marketing of the product.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Company currently has product development programs at various stages of
development for acute local inflammation, local dermal anesthesia, remission of
pre-term labor, conscious sedation, pain control and osteoporosis. The following
table lists the therapeutic applications of the principal products developed or
currently under development by the Company. This table is qualified in its
entirety by reference to the more
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detailed descriptions set forth elsewhere in this section. There can be no
assurance that any products or products under development listed below, other
than those currently approved by or cleared for marketing by the FDA, will be
developed successfully or approved in a timely manner at all, or even if
developed or approved, be successfully manufactured or marketed. See "Risk
Factors." In addition, the status of development indicated below does not
necessarily indicate the order in which the products shown may be approved by
the FDA. See "Business -- Government Regulation" for description of phases of
clinical development.
<TABLE>
<CAPTION>
APPLICATION THERAPEUTIC AGENT PRODUCT STATUS
- --------------------------------- ----------------------- ------------------------------
<S> <C> <C>
Acute local inflammation Dexamethasone Currently marketed(1)
Local dermal anesthetic Iontocaine Currently marketed
Pain control Hydromorphone Phase II clinicals(2)
Conscious sedation Fentanyl Phase I clinicals(3)
Local mucosal anesthetic Iontocaine Preclinical
Remission of pre-term labor Terbutaline Preclinical
Osteoporosis Novartis compound(4) Preclinical
</TABLE>
- ---------------
(1) Currently marketed under a 510(k) clearance for use with "ions of soluble
salts or other drugs." The Company is developing Phase III protocols and
intends to file an NDA in the future, as is currently required by the FDA.
See "Business -- Government Regulation."
(2) Initial Phase II clinical studies were conducted by Elan. The Company
acquired the rights to the data from those studies under the Elan
Agreements. The Company will be required to conduct expanded Phase II and
Phase III clinical trials. The Company does not intend to pursue development
of a hydromorphone product until the second quarter of calendar year 1998.
(3) The Company has conducted, or participated in the conduct of, two
independent human blood level studies for the iontophoretic delivery of
fentanyl. The Company does not intend to pursue development of a fentanyl
product until the second quarter of calendar year 1998. See "Risks
Factors -- Dependence on Patents and Proprietary Technology."
(4) Under development pursuant to an agreement with Novartis. See
"Business -- Collaborative Relationships and Licenses."
ACUTE LOCAL INFLAMMATION
Acute local inflammatory conditions resulting from exercise, sports
injuries, trauma or repetitive motion disorders are among the leading types of
injuries occurring in the workplace and among physically active adults. The most
common of these injuries include tendonitis, bursitis, carpal tunnel syndrome
and epicondylitis (tennis elbow). Generally, patients suffering from these
conditions are initially treated with oral nonsteroidal anti-inflammatory drugs
("NSAIDS") for a period of up to fourteen days. Although steroid injections are
generally more effective than NSAIDS, medical professionals usually avoid
steroid injections in all but severe cases because of the negative side effects
that can accompany bolus needle injections of corticosteroids into an inflamed
joint or tendon, including risk of infection, tissue distortion, tendon
weakening and tendon rupture. If patients do not respond to treatment with
NSAIDS, the physician generally has two options -- refer the patient to a
physical therapist, or proceed with injection of anti-inflammatory steroids such
as Dexamethasone. Based on market data with respect to the number of
corticosteroid injections for acute inflammation as well as data gathered by the
Company in a survey it conducted of 54 physical therapy clinics around the
United States with respect to the number of patients that visit physical therapy
clinics for acute inflammation, the Company estimates that the total potential
retail market in the United States for the sale of iontophoretic drug delivery
systems to clinicians to treat acute local inflammatory conditions is in excess
of $400 million. In addition, the Company estimates that current total retail
sales into this market by the Company and its competitors are under $30 million.
The Company believes iontophoretic delivery of Dexamethasone provides
significant advantages over other current treatment regimens for acute local
inflammation. The Company believes iontophoresis eliminates many of the risks
and inconvenience associated with bolus steroid injections, avoids the systemic
side effects of oral steroids and eliminates the significant incidence of GI
tract side effects of orally
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administered NSAIDS. The Company believes iontophoresis also increases
therapeutic efficacy by bypassing metabolism by the liver, by reducing the
possibility of overdosing, and by providing localized delivery at the target
site without trauma. As a result, the Company believes that it may be
advantageous to introduce the iontophoretic delivery of Dexamethasone into the
initial treatment regimen for acute local inflammation. The Company believes
that earlier treatment with Dexamethasone has the potential to significantly
increase the rate of patient recovery and, in doing so, reduce the overall cost
of patient treatment.
Commercial Products. The Company pioneered the commercial introduction of
an iontophoretic drug delivery system for the treatment of local acute
inflammation in 1979. The product is used principally by physical therapists
(under a doctor's prescription) and has been administered in over 10 million
patient treatments for the iontophoretic delivery of Dexamethasone. More than 8
million of these treatments occurred since 1990, when advancements in electrode
technology made by the Company led to the introduction of its present family of
gel electrodes for use with its microprocessor controlled dose controller. The
Company's system for the delivery of Dexamethasone is also used by athletic
trainers and physical therapists serving a number of professional athletes,
including professional golfers and tennis players, men's and women's olympic ski
teams and professional football, basketball and hockey teams. The Company
believes that iontophoretic drug delivery systems are accepted in the
rehabilitation marketplace due to their ease of use, non-invasiveness,
recognized efficacy and lack of side effects.
The Company currently markets four different electrode kits in three
different configurations and continues to develop additional electrode kits and
configurations for application in different segments of the acute local
inflammation market. The Company's existing electrode kits, as well as those it
has under development, are designed to be user friendly and to offer clinicians
a broad range of electrode sizes, formats, configurations and price ranges.
Products Under Development. Currently, due to limited labeling of
Dexamethasone, neither the Company nor its competitors has the requisite
regulatory approval to specifically promote the use of iontophoretic drug
delivery systems for the delivery of Dexamethasone. The Company believes that
its inability to do so limits its ability to market its system, particularly to
the physician market. The Company further believes that to market iontophoretic
drug delivery systems for a specific drug and therapeutic indication the FDA
requires that each new drug/device combination be approved through an NDA
process. Therefore, in order to expand the Company's sales of its delivery
systems into the physician market as a first line treatment for acute local
inflammation, the Company has filed an investigational new drug ("IND")
application with the FDA under which it intends to establish the safety and
efficacy of its current drug delivery system for Dexamethasone. Upon completion
of the protocol design, the Company intends to select appropriate clinical sites
and initiate clinical studies in support of filing an NDA (or an appropriate
drug/ device combination marketing application seeking FDA approval to label a
formulation of Dexamethasone for use with the Company's Phoresor for treatment
of acute local inflammatory conditions. The Company believes that because of the
known safety and efficacy profile of Dexamethasone and the acute nature of the
conditions to be treated in these studies, the duration of the studies and the
required follow-up periods may not be as extensive as would be required for a
NCE. See "Risk Factors -- Uncertainty of Government Regulation."
The Company believes the approval of an NDA (if obtained) will allow the
Company to actively promote the iontophoretic delivery of Dexamethasone to
general and family practice physicians, orthopedists, neurologists and sports
and industrial medicine clinics. The Company believes this could significantly
enhance the Company's ability to establish its delivery system for Dexamethasone
as a primary treatment option for acute local inflammatory conditions. The
Company also believes that, with an approved NDA to complement its device, many
physicians who refer their patients for physical therapy will do so with a
specific prescription for iontophoresis using the Company's proprietary drug
delivery system.
LOCAL DERMAL ANESTHESIA
Medical care providers have long recognized the importance of the
management of pain, including pain associated with certain minimally invasive
medical procedures such as needle injections; venous access (including
phlebotomies and intravenous catherizations); lumbar punctures; and local
dermatological,
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gynecological and urological procedures such as wart and mole removal, LOOP/LETZ
procedures, biopsies (including fine needle, punch, excisional, shave and
cervical biopsies), Mohs procedures and vasectomies. To address this concern,
local dermal anesthetics are widely used in medical practice.
The primary means of administering local dermal anesthetics is by needle
injection, which has the benefit of being fast, effective and long lasting.
However, the fear and pain associated with the needle stick, especially on the
extremities or on other sensitive areas such as the face, vulva and cervix is
compounded by the sting associated with virtually all injectable local
anesthetics. These factors increase patient discomfort and anxiety. In addition,
the local tissue distortion which typically accompanies injections may cause
procedural difficulty for the physician. New topical analgesic formulations have
recently been introduced into the market and are gaining widespread acceptance,
especially in pediatric hospitals and clinics and in pediatric dermatology.
These topical formulations avoid many of the pitfalls of anesthetic injections,
but they generally require significant advance preparation since they require
one to two hours to obtain anesthesia. Even when topical formulations are given
adequate time to achieve anesthesia, they anesthetize only to a maximum depth of
3 to 5 mm. The time required to achieve therapeutic anesthesia and the depth of
anesthesia make these formulations less suitable or impractical for many
potential applications. The Company believes that the growing interest in these
products, in spite of their clinical limitations, is a positive indication of
the market's desire for an effective, needle-free local dermal anesthetic.
Commercial Products. The Company's Iontocaine brand of lidocaine HCl 2% and
epinephrine 1:100,000 is FDA approved under an NDA and is specifically labeled
for use with the Company's Phoresor and its proprietary, single use, disposable
electrode kits. The Iontocaine delivery system was shown to be safe and
effective in double blinded, placebo controlled, randomized studies in over 400
adult and pediatric patients. Based on these studies, the Company filed an NDA
with the FDA and received labeling to use the system for all procedures
requiring local dermal anesthesia.
Using the Company's product, clinicians can administer needle-free, long
lasting (up to two hours) local dermal anesthesia up to a depth of 10 mm in
approximately ten minutes. The Company believes the ability to provide painless
local dermal anesthesia up to three times deeper than topical formulations, in
85% less time, could make the Company's products a preferred drug delivery
method for many existing applications where topical anesthetic creams are
currently employed, and that the product will provide a means of painlessly
inducing local dermal anesthesia for a broader range of medical procedures where
the use of such creams is not practical.
A leading concern among patients, parents and health care professionals is
the control of pain in the practice of children's medicine, including the pain
associated with needle insertions. With the growing acceptance of topical
anesthetic creams in the pediatric hospital setting, the Company believes there
is a large potential market for an iontophoretic drug delivery system targeted
toward pediatrics. Accordingly, the Company has focused its initial local dermal
anesthesia product launch into the pediatric market under the brand name Numby
Stuff. Numby Stuff, which the Company launched in January of 1997, currently
consists of the Phoresor, the Company's line of proprietary, single use,
disposable electrode kits and Iontocaine, all in a brightly colored, child
friendly product package. Numby Stuff is currently being used to induce local
dermal anesthesia prior to pediatric intravenous starts, blood draws and other
invasive procedures, and the Company believes it provides a cost effective
alternative to the leading topical product. The Company estimates that pediatric
intravenous starts, blood draws and other invasive procedures are performed more
than 20 million times in the United States each year.
Numby Stuff was recently reviewed by the new product review committee of
the Alliance of Children's Hospitals ("ACH"), a subsidiary of the Child Health
Investment Corporation ("CHIC"), a consortium of 36 of the leading free standing
children's hospitals in the United States. In December 1996, the committee
awarded Numby Stuff ACH's "Seal of Acceptance," a recognition that is reserved
for products which ACH believes offer significant clinical therapeutic benefits
in the practice of pediatric medicine. Numby Stuff is one of only 24 products
used in pediatric hospitals that bear the ACH Seal of Acceptance. Under ACH
policy, the manufacturer of any product awarded the Seal of Acceptance is
generally required to pay ACH a royalty in order to use the Seal of Acceptance
in promoting its products. In December 1996, the Company issued ACH
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a warrant, exercisable through December 1, 2003, to acquire 44,791 Common Shares
at an exercise price of $8.88 per share in lieu, and as payment in full, of that
royalty. At CHIC's request, the Company also sold CHIC 37,202 Common Shares for
$250,000. CHIC maintains a venture fund to make investments in medical products
companies. In conjunction with the awarding of the Seal of Acceptance, ACH will
provide continued support and endorsement for Numby Stuff and will assist the
Company in introducing the product to pharmacy directors and other clinical
specialties within its member hospitals.
Products Under Development. The Company has developed a working prototype
of a preprogrammed, fixed dose, dose controller with push-button operation for
use as part of the Numby Stuff product. The Company is currently working with
its third party supplier to develop manufacturing specifications for the new
dose controller, and expects to initiate manufacturing and marketing of the dose
controller in fiscal 1998. The Company believes that the new dose controller's
anticipated pricing and simplified operation will further enhance the
marketability and use of Numby Stuff.
In order to achieve greater market acceptance of its Iontocaine product in
pediatric markets, the Company supports evaluations conducted by doctors and
other medical personnel for the use of its anesthetic product prior to a wide
variety of painful medical procedures. The Company is currently conducting or
planning two studies evaluating the use of Numby Stuff prior to lumbar punctures
and circumcisions in pediatric patients. Depending on the results of these
studies, the Company may develop new electrode kits which specifically address
these opportunities. The Company also believes, in addition to the pediatric
market, the adult hospital market represents additional opportunities for
growth. The Company believes that it could service the adult hospital market by
making minor modifications in its product image and by using its existing sales
force. For example, according to published studies, there are over 250 million
venous catheters inserted each year, of which a large percentage are inserted in
adult patients.
The Company also believes Iontocaine, together with the Phoresor and
adaptations of its existing electrode designs, can be successfully used to
induce effective local dermal or mucosal anesthesia prior to certain
gynecological procedures. The Company believes the effective, rapid, painless,
needle-free anesthesia provided by the Company's drug delivery technology would
increase patient comfort. In general, the Company believes the promotion of the
Company's systems for use in connection with gynecological procedures involving
mucosal membranes would require additional FDA approval, most likely in the form
of a supplement to the Company's existing Iontocaine NDA. The Company does not
believe gynecological procedures involving the vulva would require additional
FDA approval. The Company has performed preliminary studies which indicate that
its anesthetic system may significantly reduce or eliminate the pain of vulvar
biopsies. The Company has already tested prototype electrodes which are
specifically designed for this application. There are approximately 50 million
pap smears performed each year in the United States, of which the Company
estimates approximately 2.5 million require follow-up procedures that could
benefit from non-invasive local dermal anesthesia. The majority of these
procedures are performed by a relatively small number of gynecologists who are
mainly located in high density population areas that are also the major centers
for the Company's pediatric marketing efforts. See "Risk Factors -- Uncertainty
of Government Regulation."
REMISSION OF PRE-TERM LABOR
Pre-term birth is a leading cause of neonatal morbidity and mortality. Each
year in the United States alone, 10% of all births are premature resulting in
more than 400,000 babies being born before completing 37 weeks of gestation. The
cost of neonatal intensive care required for pre-term babies exceeds $5.0
billion a year in the United States. The Company believes prolonging pregnancies
threatened by pre-term delivery by even a few days may result in improved
clinical outcomes, which could represent an important opportunity for
significant medical, economic and social benefits.
The Company estimates that each year a significant number of patients in
the United States who are at risk for or experience pre-term labor and pre-term
birth are placed on one or more forms of tocolytic drug therapy. Tocolysis is
the clinical term for the remission of labor. Although many of these therapies
are not specifically FDA approved, the medical literature indicates that they
have been successful in a large number of
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patients. The Company believes the number of patients placed on various
tocolytic drug therapies will rise with the increased use of ambulatory external
tocodynamometers and the advance of other new diagnostic techniques and products
used to identify patients at risk. These advances in diagnostics should aid in
identifying asymptomatic pregnant women.
A typical therapeutic program for a pregnant woman who is experiencing
acute episodes of pre-term labor consists of intravenous ("IV") infusions of
magnesium sulfate in the hospital. After a period of 12 to 24 hours of
successful tocolysis, the patient is then switched to oral terbutaline sulfate
tablets and released. Usually, after two to three weeks, the therapeutic effects
of oral terbutaline are lost and the patient must be readmitted to the hospital
to begin the treatment cycle again. If symptoms persist, the patient is often
placed on an injectable form of terbutaline sulfate by means of a subcutaneous
infusion pump. Although not approved by the FDA for this indication,
subcutaneous infusion terbutaline therapy has been found to be effective in
controlling pre-term labor and avoiding the loss of therapeutic efficacy
experienced with oral dosing. Subcutaneous infusion terbutaline therapy can last
for a over a month, with a mean treatment period of approximately three weeks,
and costs approximately $1,500 to $2,000 per week. Those costs include pump
rental, drugs, disposable infusion kits and central monitoring and home visits
by a skilled medical professional.
Products Under Development. The Company is evaluating a system for
delivering terbutaline using iontophoresis. Based on in vitro feasibility
testing it has conducted, the Company believes terbutaline may be delivered by
iontophoresis in therapeutic quantities. The Company intends to seek NDA
approval for the delivery of terbutaline for remission and pre-term labor using
its iontophoretic drug delivery system. It has prepared a protocol for a Phase I
blood level study, has received Institutional Review Board approval and expects
to initiate that study by the end of 1997. The Company believes that an
iontophoretic drug delivery system for terbutaline could offer an alternative
treatment regimen to oral terbutaline therapies with all of the benefits of home
infusion therapy. The Company also believes an iontophoretic system may have
substantial advantages over subcutaneous infusion therapy, including being less
expensive to produce and service than standard infusion therapy devices,
potentially providing greater patient comfort (since the electrodes could be
placed at various sites on the body) and being non-invasive, thereby eliminating
the risk of infection and reducing the need for frequent intervention by a
skilled medical professional.
Since the general pharmacology and toxicology of terbutaline are well
known, and because the Company believes this is an area of significant interest
within both the FDA and the medical community, the Company believes that, if its
Phase I blood level studies are successful, it may be able to progress more
rapidly into Phase III studies in at-risk, pregnant women than would be possible
for an NCE. Due to the nature of the condition being treated, the Company
believes the clinical trials should be of relatively short duration and will
have a clearly defined endpoint. See "Risk Factors -- Uncertainty of Government
Regulation."
CONSCIOUS SEDATION
Many patients, especially children, experience extreme anxiety before the
start of invasive or painful medical procedures, during stressful diagnostic
tests such as endoscopies, magnetic resonance imaging, and CT scans, and before
and during certain dental and emergency room procedures. Invasive methods of
premedication and sedation, such as intramuscular ("IM") injections or IV
administration of analgesics or sedatives, can cause anxiety. Clinicians have
long sought alternative, non-invasive methods of premedication. Despite the
absence of approved labeling for safety and efficacy for oral administration,
clinicians widely use injectable drugs and drug combinations mixed with flavored
syrups for off-label oral administration in children. Since 1994, clinicians
have also been able to use fentanyl for conscious sedation using an oral
transmucosal delivery system. Oral administration may require up to five times
the amount of drug recommended for injection because of decreased
bioavailability, but is used because the alternative of IV or IM injections are
counterproductive to the goal of relieving anxiety. Based on market data, the
Company estimates that annual worldwide sales of the top two products used for
conscious sedation are approximately $950 million.
Products Under Development. The safety and efficacy of fentanyl as a drug
to induce conscious sedation are well known. Data from two human blood level
studies with fentanyl conducted by the Company and a
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former collaborative partner show that it may be possible for therapeutic
quantities of fentanyl to be delivered by iontophoresis. Therefore, the Company
believes it could represent a viable drug for inducing conscious sedation using
the Company's iontophoretic drug delivery systems. As a result of an existing
contractual obligation with its former collaborative partner, the Company has
agreed not to pursue development of a fentanyl conscious sedation product until
the second quarter of calendar year 1998. Further, the Company's ability to
market a product in the United States using fentanyl may also be limited by
certain litigation now before the PTO. See "Risk Factors -- Dependence on
Patents and Proprietary Technology" and "Business -- Collaborative Relationships
and Licenses."
PAIN MANAGEMENT
The Company estimates that of the 24 million surgeries performed each year
in the United States, 75%, or 18 million, result in moderate to severe post
operative pain. In addition, there are currently 9.1 million cancer patients in
the United States. Each year roughly 6.6 million patients with cancer are
treated for pain and of these 65% to 80%, experience moderate to severe pain. In
recent years, there has been a growing awareness that many patients, especially
the terminally ill, do not receive adequate analgesic therapy for their pain.
Sales of prescription narcotics in the United States to treat pain were
approximately $1.0 billion in 1996 and according to market reports the market is
estimated to grow at a rate of approximately 10.5% per year. Factors
contributing to this growth rate include more relaxed policies for narcotic
administration and the introduction of drug delivery systems that make
administration safer, more controllable and convenient.
Morphine is the most commonly prescribed drug for the management of severe
pain in critically ill patients in the United States. Morphine and hydromorphone
are the most widely used parenteral pain medications for home use because they
are relatively safe, effective and have relatively short half lives.
Hydromorphone is a more potent, highly soluble analog of morphine, which is the
standard against which other analgesics are generally measured.
The Company believes that iontophoretic delivery systems for narcotic
analgesics for the treatment of post operative and chronic pain control could
offer significant benefits over existing methods of delivery, including infusion
pumps, transdermal patches and transmucosal products. To provide effective pain
relief, a morphine injection is generally administered every four hours.
Repeated injection or continuous infusion of morphine is expensive because the
methods of administration consume substantial hospital staff time or require
daily visits by a health care provider to a patient receiving home infusion
therapy. An iontophoretic system has the potential to offer all of the benefits
of an infusion pump, including the ability to closely match the delivery profile
with rapid onset and cessation of action characteristics and to provide control
of baseline delivery with bolus dose capability for acute episodes of pain, but
without the need to use needles. The Company believes an iontophoretic delivery
system for pain management may also be more convenient and less expensive, since
the rental of costly infusion pumps and intervention by a skilled medical
professional may not be required. Passive transdermal patches offer convenience
and reduced costs, but they take four to eight hours before effective analgesia
is achieved and take hours or even days for the drug depot to clear from the
skin after the patch is removed. In addition, passive transdermal patches do not
offer precise baseline dosing from patient to patient and do not address the
need for bolus dosing required to address acute episodes of pain.
Products Under Development. The Company believes an iontophoretic delivery
system for hydromorphone may be a favorable alternative to the administration of
morphine by infusion for acute post operative pain and for chronic pain in the
hospice or home care setting. Hydromorphone is approximately ten times more
potent than morphine and has added therapeutic advantages, including lower
incidence of nausea and vomiting (which frequently accompanies the
administration of morphine), and more effective analgesia with no stupefying and
minimal hypnotic effects. Through the Elan Agreements, the Company obtained
rights to prototype wearable iontophoretic drug delivery systems for the
delivery of hydromorphone and to the preclinical, Phase I and limited Phase II
clinical data generated by Elan in testing the device. The Company believes the
additional clinical trials necessary to market this product may be of relatively
short duration in comparison to an NCE, since hydromorphone's safety and
efficacy profile is well known and the clinical endpoints are both well
established and easy to measure. See "Risk Factors -- Uncertainty of Government
Regulation."
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In addition to a system for the delivery of hydromorphone, the Company
believes a market exists for an iontophoretic drug delivery system for fentanyl,
a narcotic analgesic more potent than hydromorphone, which has been used
primarily during surgery. The Company conducted a preliminary blood level study
using fentanyl and, using data from that study, designed advanced electrodes
which a former collaborative partner used in a subsequent fentanyl human blood
level test. These studies demonstrated that fentanyl can be delivered by
iontophoresis to achieve the delivery rates and blood levels necessary for pain
control.
Due to its short half-life in the body, injectable fentanyl is not
generally used for the treatment of moderate to severe post-operative or chronic
pain. However, the increased use of home infusion therapy and the development of
a passive transdermal patch have demonstrated that fentanyl can be delivered at
therapeutic levels, making the drug suitable for new indications not previously
possible with injections. The Duragesic transdermal fentanyl patch, which was
developed by Alza and is marketed by Janssen Pharmaceuticals, was introduced in
1992 and had annual worldwide sales of $205 million in 1996.
As a result of an existing contractual obligation with its former
collaborative partner, the Company has agreed not to pursue development of a
fentanyl pain product until the second quarter of calendar year 1998. Further,
the Company's ability to market a product using fentanyl in the United States
may be limited by certain litigation before the PTO. See "Risk
Factors -- Dependence on Patents and Proprietary Technology" and
"Business -- Collaborative Relationships and Licenses."
OSTEOPOROSIS
Osteoporosis is a progressive disease that affects more than 25 million
people in the United States, most commonly post-menopausal women. The financial
costs associated with osteoporosis exceed $10 billion each year. Novartis and
the Company believe the overall therapeutic profile of the osteoporosis drug
currently under development may be optimized or enhanced through the use of an
iontophoretic drug delivery system. As a result, they have entered into an
agreement for the development by the Company of an iontophoretic drug delivery
system using the drug for the treatment of osteoporosis. The drug is currently
scheduled to enter Phase I clinical trials in 1998. See
"Business -- Collaborative Relationships and Licenses."
OTHER POTENTIAL PRODUCT APPLICATIONS
The Company has an active program of identifying and developing
iontophoretic drug delivery products for various therapeutic indications where
the Company believes there is a potential market need, where a suitable
water-soluble ionic drug is available and where that drug can be delivered
through iontophoresis in therapeutic quantities on a cost-competitive basis. The
Company has identified certain drugs and therapeutic indications as potential
product opportunities, and has undertaken preliminary steps toward verifying the
market need and technical feasibility of iontophoretic delivery of those drugs.
In addition, through the Elan Agreements, the Company acquired certain
in-process research and development, including exclusive world-wide rights for
the commercial exploitation of certain iontophoretic patents, know-how and
clinical data. The Elan technology includes in vitro feasibility studies
conducted on 64 drugs (including several peptide drugs), in vivo blood level
animal studies on 18 of those drugs and human blood level studies on nine of
those drugs. See "Business -- Products and Products Under
Development -- Osteoporosis."
As part of its continuing product development program, the Company will
evaluate the feasibility of iontophoretic delivery of biotechnology derived
peptides, small proteins and oligonucleotides for applications where existing
drug delivery systems have significant limitations. The Company also intends to
examine the use of its iontophoretic system to deliver anti-emetics to treat
postsurgical nausea and vomiting induced by or secondary to chemotherapy,
surgery, migraine headache or AIDS.
COLLABORATIVE RELATIONSHIPS AND LICENSES
A principal component of the Company's commercial strategy is to develop
products, where appropriate, in collaboration with established pharmaceutical
companies or other strategic partners. These collaborative partners may provide
proprietary drugs, technology, financial resources, research and pharmaceutical
manufacturing capabilities or marketing infrastructure to aid in the development
and commercialization of the
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Company's products and potential future products. Depending on the availability
of financial, marketing and scientific resources and other factors, the Company
may also license or cross license its technology or products to others and
retain profit sharing, royalty, manufacturing, co-marketing, co-promotion or
similar rights. Any such arrangements could limit the Company's flexibility in
pursuing alternatives for the development or commercialization of its products.
The Company has entered into the following collaborative relationships and
license arrangements:
Novartis Agreement. In July 1995 as amended in March 1996, the Company
entered into various research and development agreements (the "R&D Agreements")
with the ethical pharmaceuticals division of Ciba-Geigy Corporation ("Ciba") to
evaluate the feasibility of delivering a number of Ciba compounds for several
therapeutic applications utilizing the Company's iontophoretic drug delivery
technologies, including certain of its existing iontophoretic devices. In
connection with the R&D Agreements, the Company formed Dermion to conduct the
Company's iontophoretic drug delivery research and development activities other
than those relating to the Company's current products, and Ciba then acquired a
20% equity interest in Dermion. In 1997, Ciba was merged with Sandoz Corporation
to form Novartis Pharma A.G.
Under the 1997 Amendments, effective November 1, 1997, Novartis exchanged
its 20% equity interest in Dermion for 238,541 Common Shares and warrants to
acquire an additional 18,750 Common Shares at an exercise price of $21.60 per
share. Novartis may currently exercise one-third of the warrants, and will
obtain the right to exercise an additional one-third of the warrants in each
instance, when it agrees to provide research and development funding at a
minimum level of $1.5 million per year under the R&D Agreements for each of the
calendar years 1999 and 2000. The warrants, once exercisable, may be exercised
at any time through November 1, 2002.
In connection with the R&D Agreements, the Company and Dermion granted
Novartis perpetual non-exclusive, royalty bearing licenses to the Company's
iontophoretic technology. Further, other than in collaboration with Novartis,
the Company has agreed that, during the term of the agreement (and, under
certain circumstances, for a period of up to two years thereafter), the Company
will not develop any product in certain Novartis fields, as defined in the
agreement, without Novartis' consent.
Pursuant to the R&D Agreements, as amended, Novartis will provide Dermion
with research funding through December 31, 1998 for the continued development of
proprietary iontophoretic drug delivery systems to deliver Novartis compounds
and has the option to renew the research and funding for successive one year
periods. Presently, Dermion is devoting the majority of its research and
development efforts to the development of these systems and products for
Novartis compounds. One of the compounds covered by the R&D Agreements is
scheduled to enter Phase I clinical trials during 1998. The R&D Agreements may
be terminated by Novartis or the Company at any time on at least six months'
notice.
The R&D Agreements, as amended, require Novartis to pay Dermion milestone
payments in connection with products developed for Novartis by Dermion, based on
the successful completion of certain later stage development objectives.
Additionally, Novartis is required to pay Dermion royalties on sales by Novartis
of products and systems developed by Dermion. No such sales have yet occurred
and no royalties have been received by Dermion.
The Company has also agreed that, during the term of the agreement with
Novartis and for a period of five years thereafter, the Company will negotiate
in good faith to license to Novartis rights to any iontophoretic drug delivery
technologies developed or acquired by the Company but which are not covered
under the existing license agreements (the "Second Generation Technology").
Further, the Company has agreed to negotiate such additional licenses prior to
entering into any agreement to license or otherwise transfer any rights to such
Second Generation Technology to a third party. Under the 1997 Amendments, the
parties agreed to treat the Elan technology acquired by the Company as Second
Generation Technology. Accordingly, the Company intends to negotiate with
Novartis to license such technology to Novartis prior to initiating efforts to
negotiate any rights to such technology with any third party. Under the R&D
Agreements, as amended, the parties agreed that they will jointly own the
technology developed in the collaboration.
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The Company's agreements with Novartis contain contractual restrictions on
any change of control of Dermion (either through the sale of IOMED's stock in
Dermion or through the sale by Dermion of its securities, assets or business).
Through March 1998, any such change of control is prohibited and, during the
remaining term of the R&D Agreements, and for one year thereafter, Novartis has
a right of first offer to purchase Iomed's interest in Dermion or the assets of
Dermion in the event of any proposed change of control of Dermion. The right of
first offer does not extend to any overall change of control transaction
involving IOMED, such as the sale by IOMED of its securities or assets, or a
merger or consolidation. See "Risk Factors -- Reliance on Collaborative
Partners."
Elan Agreements. Effective March 1997, the Company entered into the Elan
Agreements. Under the Elan Agreements, the Company acquired exclusive, worldwide
licenses to certain of Elan's iontophoretic drug delivery technologies,
including know-how and over 250 issued and 47 pending United States and foreign
patents. In exchange for those rights, the Company paid Elan $15.0 million
through the issuance to Elan of the Elan Notes, issued Elan warrants to
purchase, through December 1, 2003, 104,166 Common Shares of the Company at a
price of $21.60 per share, and agreed to pay Elan a royalty on net revenues
derived by the Company from the licensing or sale of its products. See
"Transactions Related to the Offering" and "Certain Transactions."
Alza Agreement. Alza has developed competitive iontophoretic drug delivery
technology and is, by its published reports, undertaking to develop products
that may be competitive with the Company's products. As a result of the
uncertainty of the Company's and Alza's respective patent rights for certain
iontophoretic delivery technologies, in 1993, the Company entered into a
cross-license agreement with Alza. Under the agreement, the companies, among
other things, exchanged non-exclusive, royalty free rights to certain patented
technologies which each party believed to be of significant strategic importance
to the potential technological success of many iontophoretic drug delivery
applications. One patent sublicensed by Alza to the Company under the agreement
bears a nominal royalty rate if used. Both parties are prohibited from assigning
their rights under the agreement to certain named companies or any other entity
that derives more than 50 percent of its income from the development, licensing
and/or sale of drug delivery systems to other pharmaceutical companies without
first receiving the consent of the other party. Restrictions imposed on the
Company's ability to assign its rights under this agreement may have the effect
of prohibiting a sale of the Company to such named companies, or may otherwise
limit the Company's ability to capitalize on the commercial and other economic
potential of these technologies. The Company does not believe these restrictions
inhibit its existing business development strategy. See "Risk
Factors -- Anti-Takeover Provisions of the Company's Articles of Incorporation;
Utah Law and Certain of the Company's Agreements."
University of Utah Agreement. In 1974, the Company entered into a licensing
agreement with the University of Utah Research Foundation (the "University").
Under the agreement, which was amended in 1993, the Company obtained an
exclusive license to certain iontophoretic drug delivery and prosthetic
technologies developed at the University. Under the terms of the amended
license, the Company is obligated to pay the University a royalty on all sales
of its iontophoretic drug delivery products through the year 2007. In December
1996, the Company sold the assets comprising its prosthetic technologies
operations to Fillauer, Inc. and, in connection with that sale, sublicensed its
rights in the prosthetic technologies covered by the license to Fillauer, Inc.
Fillauer Agreements. Prior to January 1997, the Company provided
state-of-the-art prosthetics products to amputees throughout the United States,
Canada and Western Europe through its Motion Control division. Motion Control's
principal products were the Utah Artificial Arm and the ProControl II advanced
myolectric prostheses for above and below the elbow amputees.
In December 1995, the Company sold the assets of its prosthetics
technologies operations to Fillauer, Inc. for $1.0 million and granted Fillauer
an exclusive, worldwide license and sublicense to the patents, trademarks,
know-how and other intellectual property of the Company relating to its
prosthetics products. Under the terms of the sublicense agreement, the Company
will receive license fees and royalties on future sales of such products.
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Laboratoires Fournier Agreement. In July 1993, the Company entered into an
agreement with Laboratoires Fournier, a private French pharmaceutical company,
for the joint research and development of wearable integrated iontophoretic
systems, with primary effort devoted to the development of systems for the
treatment of acute post operative pain and patient controlled analgesia. The
companies subsequently concluded that certain United States patents issued to
Alza for the iontophoretic delivery of fentanyl and its analogs after the
Company and Laboratoires Fournier had entered into their agreement posed a
potential barrier to the commercial viability of the proposed system in the
United States. As a result, the Company elected to suspend development efforts
in the area. In February 1996, the parties terminated their collaborative
research and development activities and amended their initial agreement. In
connection with the termination of their collaborative efforts the Company
issued Laboratoires Fournier 337,837 Common Shares in satisfaction of a $3.0
million loan Laboratoires Fournier had made to the Company. Under the amended
agreements, both companies have rights to all jointly developed iontophoretic
technologies and know-how, and Laboratoires Fournier has a limited non-exclusive
license to the Company's previously existing proprietary iontophoretic
technologies. The Company also agreed not to pursue development of delivery
systems for systemic pain control, including conscious sedation and pain
management, for a two year period ending February 1998.
MANUFACTURING
The Company manufactures, tests, inspects, packages and ships its products
from an approximately 18,000 square foot leased manufacturing facility located
in Salt Lake City, Utah. The Company's manufacturing activities primarily relate
to its manufacture of electrode kits. The Company does not manufacture or
repackage any drugs or compounds used in its delivery systems and outsources the
manufacture and assembly of its Phoresor dose controllers.
The Company and certain of its suppliers are required to comply with FDA
regulations governing manufacturing practices, including the Quality System
Regulation, which mandate controls for product design, control and quality. The
Company believes it is in compliance with the Quality System Regulation. The
Company recently received its ISO 9001 and CE Mark certifications, which are
standards imposed by certain European countries on drug and medical devices
manufacturers. The Company has good manufacturing practices audits conducted on
a regular basis.
Manufacture of Electrodes. The Company's iontophoretic drug delivery
electrode kits are manufactured and assembled using several proprietary
materials, processes and production technologies developed by the Company in
conjunction with its equipment and material suppliers. The Company assembles its
electrodes from internally manufactured components and outsourced components
that are manufactured by third parties to the Company's specifications. Each of
the Company's existing electrode kits is assembled on a separate production
line. The key components of the Company's electrodes are the rehydratable drug
containment pads (which use either the Company's multi-laminate hydrogel or its
gel sponge technologies), and silver and silver/silver chloride conductive
elements.
The Company manufactures the rehydratable drug containment pads used in its
electrodes. These pads are manufactured, using the Company's proprietary
processes, from multiple layers of a polymer material or from a sponge material
impregnated with a hydrogel. The silver and silver/silver chloride conductive
elements used in the Company's electrodes are manufactured for the Company to
its specifications by a third party. The Company has manufactured internally all
of the electrodes it has sold, and believes its electrode manufacturing capacity
can be expanded to meet its needs for the foreseeable future.
The Company has adopted a "team" approach on its electrode assembly lines
and, by changing the production flow process and automating certain production
steps, was able to reduce manufacturing personnel from 70 in 1992 to 26 persons
in 1997, thereby reducing per unit production costs while increasing product
lines and production levels. The Company intends to use a portion of the
proceeds of the Offering for capital equipment to further automate the assembly
and packaging of the Company's electrodes, to increase capacity and to reduce
costs. See "Use of Proceeds."
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Manufacture of Dose Controllers. The Company's patented Phoresor
iontophoretic dose controllers employ a variety of sub-assemblies and components
that are designed or specified by the Company, including certain
microprocessors, circuit boards, on-board software, electrical lead wires and
control panels. These components and subassemblies are typically manufactured
for the Company by third parties, which then ship them to a contract
manufacturer for final assembly, testing and inspection in accordance with the
Company's specifications. The Company's manufacturing activities for the
Phoresor dose controllers are limited to design, labeling, inspection and
packaging.
The Company's second and third generation dose controllers are in various
stages of design, research, and development and may require additional clearance
or PMA approval from the FDA prior to marketing. The Company, alone or in
conjunction with its development partners, will design the products and, in
combination with its suppliers, will manufacture and assemble prototypes and
clinical quantities. Upon completion of the design, specifications and testing,
the Company intends to subcontract the manufacture and assembly of all
commercial quantities of its dose controllers to electronics companies that
specialize in such work. See "Risk Factors -- Uncertainty of Government
Regulation."
The Company purchases certain components and materials used in its products
from single source suppliers pursuant to existing purchase orders and
agreements. See "Risk Factors -- Dependence on Single Sources of Supply."
SALES AND DISTRIBUTION
The Company's marketing strategy is to position its proprietary
iontophoretic drug delivery products in the marketplace as the preferred means
of drug delivery for a wide range of drugs. The strategy employs the use of
multiple sales and distribution channels, including (i) a network of medical
supply dealers; (ii) a direct sales force; and (iii) collaborative marketing
partners. The Company intends to use these distribution channels, both singly
and, for certain products, in combination, to maximize the Company's marketing
resources.
Local Inflammation Products. The Company has historically targeted its
sales efforts for its drug delivery system for acute local inflammatory
conditions to the rehabilitative medicine, physical therapy and related
specialty markets. The Company employs a nationwide distribution network
consisting of approximately 50 durable medical equipment and physician supply
dealers to sell and distribute its products in those markets. This dealer
network is supported by the Company's six regional sales managers and four
internal customer service representatives. In addition to the Company's sales
and distribution efforts for its local inflammation products in the United
States, it maintains marketing and sales activities in international markets,
including Europe, Scandinavia, Australia, South Korea, Singapore and Hong Kong.
These sales are made primarily through independent distributors operating in
those countries.
The Company intends to expand its marketing efforts by expanding and
improving its existing product lines and expanding its sales and distribution
capabilities into new segments of the inflammation market (including the
podiatry, chiropractic and primary care physician markets) through the use of
additional specialty dealers. In order to enhance its marketing efforts, the
Company is pursuing an NDA for its acute local inflammation drug delivery system
for Dexamethasone. The Company believes an NDA, if approved, will allow it to
actively promote this product and will enhance the Company's ability to
establish the Dexamethasone product as a primary treatment option for acute
local inflammation conditions.
Local Dermal Anesthetic Products. In 1997, the Company launched an
iontophoretic drug delivery system for Iontocaine. The Company has initially
targeted its sales efforts for the product in the pediatric hospital market
under the name Numby Stuff. In order to access this market, the Company intends
to hire a direct sales staff of approximately 40 persons over the next four
years to market Numby Stuff. To date, the Company has hired and trained seven
sales agents, and intends to hire and train the remaining 33 sales
representatives by the end of 1999. There can be no assurance the Company will
be able to recruit and hire such personnel successfully within such time frame,
or at all. The Company also intends to expand its marketing efforts for its
Iontocaine products for other applications and to the general physician office
and international markets through the use of collaborative marketing partners.
In addition, under the terms of the
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Company's agreements with ACH, ACH has agreed to assist the Company in
introducing Numby Stuff to pharmacy directors and other clinical specialties
within ACH member hospitals. ACH has also agreed to provide the Company with
other marketing and sales assistance, including access to certain marketing data
developed by ACH.
Products Under Development. The Company is developing a number of
iontophoretic drug delivery systems for other therapeutic indications, including
remission of pre-term labor, conscious sedation, post operative and chronic pain
control and osteoporosis. If any of these products is successfully developed and
approved by the FDA, the Company would market those products in the hospital
market through its direct sales force and to the physician office, international
and other specialty markets through one or more collaborative marketing
partnerships.
PATENTS AND PROPRIETARY RIGHTS
The Company's iontophoretic drug delivery technologies include patents,
trademarks, trade secrets and other proprietary know-how. These technologies are
used in various combinations in the testing, evaluation and formulation of
optimal ionic drug solutions and in the research, development, design and
manufacture of microprocessor controlled power supplies and iontophoretic
electrodes which are specifically designed and constructed for particular
therapeutic applications.
The Company has implemented a policy of actively patenting and maintaining
as trade secrets and proprietary information all inventions and technologies
which it believes are important to its business operations. The Company
generally seeks patent protection for its key proprietary technologies and
technological products in the United States, Canada, Europe and Japan. The
Company also relies on a number of trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. The Company's patent committee meets regularly to
review and make recommendations to the Company's management regarding patent and
invention issues.
As of October 1, 1997, the Company held or had rights to utilize 60 United
States patents and 245 foreign patents relating to its iontophoretic drug
delivery technology, and has (or has the rights to utilize) 15 pending patent
applications in the United States and 47 pending patent applications in foreign
countries for that technology. The Company also owns or has licensed rights to
three issued and one pending United States patent governing the design and
manufacture of certain myoelectric prosthetic devices, including the Utah
Artificial Arm, which it has sublicensed to a third party in connection with the
sale of the Company's Motion Control division in December 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The medical products industry has recently seen extensive litigation
regarding patents and other intellectual property rights. Intellectual property
litigation is expensive and time consuming and, if decided adversely to a party,
can result in substantial loss or diversion of revenues for, and could have a
material adverse effect on the business operations of, the losing litigant.
There can be no assurance the pending patent applications filed by the Company
will be approved by appropriate governmental agencies, or that the Company's
issued or pending patents will not be challenged or circumvented by its
competitors. There can also be no assurance the Company will not become a party
to intellectual property right litigation and its concomitant adverse effects.
Further, there can be no assurance infringement claims will not be asserted by
other parties in the future against the Company, or that, in such event, the
Company would prevail or be able to obtain licenses on reasonable terms if it
did not prevail in those infringement claims. Adverse determinations in any
litigation could subject the Company to significant liabilities and/or require
the Company to obtain licenses from third parties. If the Company is unable to
obtain necessary licenses or is unable to develop or implement alternative
technology, it could be unable to manufacture and sell the affected products.
Any of these outcomes could have a material adverse effect on the Company's
business financial condition and results of operations.
In August of 1993, the PTO issued a patent to Alza relating to the
iontophoretic delivery of fentanyl. Alza's subsequent patent request in Europe
has been denied, and its United States patent was reexamined by the PTO. In the
reexamination, all of the substantive claims that Alza made in the original
patent relating to
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fentanyl and its analogs were denied. Alza has appealed the PTO's decision and,
as a result, there can be no assurance Alza will not regain its patent position.
If Alza is successful in its appeal of the PTO's decision, and if the Company
proceeds in the development of an iontophoretic fentanyl product, the Company
may be required to obtain a license from Alza Corporation to market an
iontophoretic drug delivery system for fentanyl in the United States. There can
be no assurance the Company would be able to obtain a license on terms which are
acceptable to the Company, if at all. See "Risk Factors -- Dependence on Patents
and Proprietary Technology."
In addition to its patented technology, the Company relies on trade
secrets, technical know-how and continuing invention to maintain its competitive
position and products. The Company works actively to foster continuing
technological innovation by its employees and consultants in order to maintain
its competitive position, and has taken security measures to protect its trade
secrets and periodically explores ways to further enhance its trade secret
security. The Company requires each of its employees and consultants to execute
an intellectual property and invention agreement. The agreement generally
provides that all inventions, designs, formulas, works of authorship,
compositions of matter and discoveries made, conceived of or developed by the
individual and all confidential information disclosed or made know to the
individual during the term of his or her relationship with the Company will be
assigned to and remain the exclusive property of the Company and that it will be
maintained as confidential and not disclosed to third parties at any time except
under specified circumstances. The agreements also prohibit the employee or
consultant from directly or indirectly competing with the Company during the
term of their relationship with the Company and from recruiting the Company's
employees on behalf of competitors after the termination of that relationship.
There can be no assurance these measures will provide adequate protection for
the Company's trade secrets or other proprietary information. There can also be
no assurance the Company's competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets.
The Company engages in a number of collaborative relationships with third
parties. Under the terms of these relationships, the Company has agreed to act
as the licensor or licensee of certain technology and to engage in a number of
research and development activities relating to that technology or to the
development of iontophoretic drug delivery systems. Under these arrangements,
Alza and Laboratoires Fournier have obtained licenses to certain of the
Company's proprietary iontophoretic technologies. These companies will compete
with the Company for contracts with collaborative partners and are independently
developing iontophoretic drug delivery systems that will compete directly with
many of the products currently being developed by the Company. See "Risk
Factors -- Reliance on Collaborative Partners," "Business -- Collaborative
Relationships and Licenses" and "Business -- Competition."
GOVERNMENT REGULATION
The research, development, manufacture, and marketing of both drugs and
medical devices, including the Company's iontophoretic drug delivery systems,
are subject to extensive regulation by the FDA in the United States and by
comparable authorities in other foreign countries. These national agencies and
other federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising, promotion and
reporting requirements related to product injury of the Company's products. The
regulations applicable to the Company's products may change as the presently
limited number of approved iontophoretic drug delivery products increases and
regulators acquire additional experience in this area. The FDA has broad
authority to enforce the medical devices and drug regulations and laws, and
noncompliance can result in a variety of regulatory responses ranging from
warning letters and mandatory product recalls to civil or criminal actions and
penalties. See "Risk Factors -- Uncertainty of Government Regulations."
The Company's iontophoretic drug delivery products involve a medical device
component, thereby subjecting such products to compliance with the FDA's
regulations governing medical devices. Where such medical devices are labeled
for use with a specific pharmaceutical product for a specific therapeutic
indication, they are subject to the FDA's regulations governing both medical
devices and pharmaceutical products. The Company believes that most, if not all,
of its future iontophoretic drug delivery systems will involve a pharmaceutical
component or specific labeling for use with a pharmaceutical product.
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Products regulated as medical devices may not be commercially distributed
in the United States unless they have been cleared or approved by the FDA, or
unless they are otherwise exempted from the FDA's regulations. Currently, there
are two methods for obtaining FDA clearance or approval of medical devices.
Devices deemed to pose less risk are placed in class I (general controls) or
class II (general and special controls) and qualify for 510(k) notification, a
procedure under sec. 510(k) of the Federal Food, Drug, and Cosmetic Act (the
"FDC Act"). In order for a device to qualify under the sec. 510(k) notification
procedure, the manufacturer must, among other things, establish that the product
to be marketed is substantially equivalent in intended use and safety and
effectiveness to another legally marketed class I or class II device or to a
"preamendment" class III device (as defined below) for which FDA has not called
for PMAs. In such cases, marketing of the product may commence when the FDA
issues a letter finding that there is a substantial equivalence to the legally
marketed device. The FDA may require, in connection with a 510(k) notification,
the manufacturer to provide the FDA with test results from animal studies and/or
human clinical trials. The Company believes that it typically takes between four
and 12 months to obtain a 510(k) clearance, but it can take longer.
A 510(k) clearance is also required when the manufacturer makes changes or
modifications to a cleared device that could significantly affect safety or
effectiveness, or where there is a major change or modification in the intended
use of a cleared device. In such cases, the manufacturer is the party which
initially determines if the change or modification is of a kind or nature that
would necessitate a new 510(k) notification. The FDA's regulations provide only
limited guidance in making such determinations. The FDA has cleared the
Company's electrical dose controller and electrode kits for marketing under a
510(k) clearance. Since obtaining its 510(k) clearances, the Company has made
modifications to its products. Based on the checklist developed by the FDA to
assist manufacturers in determining whether they are required to obtain a 510(k)
clearance for a modified device, the Company has determined that a new 510(k)
submission was not required in connection with the commercial introduction of
such products. However, there can be no assurance that the FDA will not require
the Company to obtain additional 510(k) clearances with respect to those
products. If the FDA requires the Company to submit a new 510(k) notice for any
device modification, the Company may be prohibited from marketing the modified
device until the 510(k) notice is cleared by the FDA.
A medical device that does not qualify for the 510(k) clearance is placed
in class III, which is reserved for devices deemed by the FDA to pose the
greatest risk (e.g., life-sustaining, life supporting or implantable devices, or
devices that are not substantially equivalent to a legally marketed class I or
II device). The manufacturer of such a device must file a PMA application under
sec. 515 of the Drug Act. A PMA application generally requires a much more
complex submission than a 510(k) notification and typically requires a showing
that the device is safe and effective based on extensive and costly preclinical
and clinical testing, as well as information about the device and its components
regarding, among other things, manufacturing, labeling and promotion. Upon
submission, the FDA determines if the PMA application is sufficiently complete
to permit substantive review and, if so, the application is accepted for filing.
The FDA then commences an in-depth review of the PMA application, which the
Company believes can last from one to three years, or even longer. Even after
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process.
A preamendment class III device is one that was on the market before May
28, 1976. A device that is substantially equivalent to a preamendment class III
device can be brought to market through the 510(k) process until the FDA either
calls for the submission of PMA applications or downclassifies the device to
class I or II. Manufacturers of preamendment class III devices that the FDA
retains in class III must submit PMA applications 90 days after the publication
of a final regulation calling for PMAs. In such event, a PMA must be submitted
even if the device has already received 510(k) premarket clearance. On the other
hand, if the FDA downclassifies a preamendment class III device to class I or
II, a PMA application is not required and such devices may continue to be
marketed through the 510(k) process.
An even more lengthy and complex regulatory framework applies to the
labeling and marketing of specific drugs for use with an iontophoresis device.
The activities required before a pharmaceutical product may be marketed in the
United States primarily begin with preclinical testing. Preclinical tests
include extensive laboratory evaluation of product chemistry and other end
points and animal studies to assess the
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potential safety and efficacy of the product as formulated. Almost all
preclinical studies pertinent to drug approval are regulated by the FDA under a
series of regulations called the Good Laboratory Practice (GLP) regulations.
Violations of these regulations can, in some cases, lead to invalidation of the
studies, requiring such studies to be replicated.
If the drug is subject to full NDA requirements, FDA approval process
entails (i) conducting preclinical laboratory and animal testing to enable FDA
authorization of an IND application, (ii) initial IND clinical studies to define
safety and dose parameters, (iii) well controlled IND clinical trials to
demonstrate product safety and efficacy, and (iv) submission to the FDA of an
NDA. Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
drug. Human clinical trials are typically conducted in three sequential phases.
Phase I trials normally consist of testing the product in a small number of
healthy volunteers for safety and pharmacokinetic parameters using single and
multiple dosing regimens. In Phase II trials, the manufacturer evaluates safety,
initial efficacy, and dose ranging of the product for specific indications in a
somewhat larger patient population. Phase III trials typically involve expanded
testing for safety and clinical efficacy in a broad patient population at
multiple clinical testing centers. The manufacturer must also submit a clinical
plan, or "protocol," accompanied by the approval of the institution
participating in the trials, to the FDA prior to commencing each clinical trial
and must obtain the informed consent of subjects in the clinical trial. The FDA
may order the temporary or permanent discontinuation of clinical trials at any
time. All the results of the preclinical and clinical studies on a product are
then submitted to the FDA in the form of an NDA for review. In responding to an
NDA, the FDA may grant marketing approval, require additional testing and/or
information, or deny the application altogether. The process of obtaining FDA
approval for a new product through the IND/NDA process may take several years
and typically involves the expenditure of substantial resources.
The Company may be subject to certain user fees that the FDA is authorized
to collect under the Prescription Drug User Fees Act of 1992 for certain drugs.
This act expired on September 30, 1997 and legislation to reauthorize it has
been enacted by the Congress. It must be signed by the President to become law.
Because of the known safety and efficacy profile of Dexamethasone and other
approved drugs for which the Company may seek NDA approval for iontophoretic
delivery, the clinical trials and other studies may not be as lengthy or
extensive as would be required for unapproved new drugs that are subject to full
NDA requirements. This strategy, however, depends upon the Company's ability to
obtain a contractual right to reference in the Company's NDA application of the
safety and efficacy data for such drugs in approved NDAs held by other
companies. The Company has obtained a right to reference safety and efficacy
data for Dexamethasone. There can be no assurance that the Company will be able
to obtain a right of reference for all unapproved drugs that may be used for
iontophoretic delivery. The Company's failure to obtain a right of reference to
safety and efficacy data for any drug for which the Company would like to obtain
approval for iontophoretic delivery could have a material adverse effect on the
Company's business, financial condition and results of operations.
The regulatory status of iontophoresis devices is also complex. The FDA has
classified them as class II devices eligible for marketing through 510(k)
premarket clearance when intended for use with a drug whose labeling bears
adequate directions for the device's use with that drug. However, if an
iontophoresis device is intended for use with a drug that is not labeled for use
with the device, the FDA considers the iontophoresis device to be a preamendment
class III device. This status means that the device at present can be marketed
through a 510(k) clearance, but it remains subject to a call for PMAs.
In an April 1994 document setting forth the FDA's strategy for addressing
preamendment class III devices, the FDA indicated that preamendment class III
iontophoresis devices were among fifteen "high priority" devices that presented
an unreasonably high risk to public health because significant issues of safety
and/or effectiveness were not being resolved or, to the agency's knowledge, had
little probability of being resolved. The FDA indicated that these devices were
not considered candidates for downclassification and were very likely to be
required to be subject to PMAs. This process would involve two steps. First, the
FDA would publish a proposed regulation to require PMAs for iontophoresis
devices having preamendment
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class III status. After a comment period, FDA would then publish a final
regulation imposing the requirement. The FDA's strategy document stated the
agency's intent to publish a proposed regulation requiring PMAs for preamendment
class III iontophoresis devices in 1996. The agency, to date, has not published
such a regulation.
The Company's Phoresor received 510(k) clearance in 1990 as a preamendment
class III device labeled for use with ions of soluble salts or other drugs. In
1995, the FDA approved an NDA for Iontocaine to be used as a local anesthetic
and delivered iontophoretically by the Phoresor, which effectively moved the
Phoresor into class II for this intended use. Unlike Iontocaine, Dexamethasone
does not have an NDA approval allowing it to be labeled for iontophoretic
delivery. Thus, the Company's Phoresor is a preamendment class III device when
used with Dexamethasone (or any drug other than Iontocaine). No assurance can be
given that the Company will ever obtain an approved NDA for the iontophoretic
delivery of Dexamethasone. The Company's failure to obtain FDA approval of an
NDA for Dexamethasone could have a material adverse effect on the Company's
business financial condition and results of operations.
If the FDA calls for PMAs for preamendment class III iontophoresis devices,
the Company would be required to have a PMA accepted for filing by the FDA
within 90 days after the date of the final regulation calling for PMAs. There
can be no assurance that the Company would be able to complete necessary
clinical studies and otherwise prepare and file a PMA within the prescribed time
period, or that any data and information submitted in a PMA would be adequate to
support approval. The Company's failure to submit a PMA and have it accepted for
filing by the FDA within the required timeframe could result in the Company
being required to cease commercial distribution of the Phoresor for use with
Dexamethasone. Upon timely filing of a PMA, the Company believes (based on FDA's
announced position as to certain other preamendment class III medical devices)
that the FDA would permit continued commercial distribution of the Phoresor for
use with Dexamethasone during the time necessary to review the PMA. There can be
no assurance, however, that the FDA would permit such continued commercial
distribution pending review of a PMA for the device, nor can any assurance be
given that the FDA would approve a PMA filed by the Company. The FDA also could
condition PMA approval upon approval of an NDA permitting Dexamethasone to be
labeled for use with the Phoresor. If the Company were required for any length
of time to cease commercial distribution of the Phoresis System for use with
Dexamethasone, the Company's business, financial condition and results of
operations would be materially and adversely affected pending approval of a PMA
or NDA.
The FDA also regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate current GMP compliance, including compliance with the Quality System
Regulation (for devices) and the current GMP regulations (for drugs). The FDA's
GMPs require, among other things, that (i) the manufacturing process be
regulated and controlled by the use of written procedures, and (ii) the ability
to produce products which meet the manufacturer's specifications be validated by
extensive and detailed testing at various steps of the manufacturing process.
These regulations also require investigation of any deficiencies in the
manufacturing process, the products produced, or record keeping. The FDA
monitors compliance with these requirements by requiring manufacturers to
register their manufacturing facilities with the FDA and by conducting periodic
FDA inspections of those facilities. If an FDA inspector observes conditions
that might be in violation of GMP requirements, the manufacturer is generally
required to correct those conditions or explain them satisfactorily. If a
manufacturer fails to adhere to GMP requirements, the devices manufactured by
the manufacturer could be considered to be manufactured in violation of the FDC
Act and the manufacturer could be subject to FDA enforcement action that could
include fines, plant closure, or a recall of the Company's product.
Agencies similar to the FDA regulate medical devices and pharmaceutical
products in most developed foreign countries, whereas some other countries allow
unregulated marketing of such devices and products. The Company will be required
to meet the regulations of any foreign country where it markets its products.
There can be no assurance any of the Company's future products will receive FDA
clearance or similar clearance in foreign countries. It is also possible that
regulations governing the manufacture and sale of the Company's products could
change in the future. The Company cannot predict the impact of any such changes
on its business. See "Risk Factors -- Government Regulation."
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Various aspects of the Company's business and operations are also regulated
by a number of other governmental agencies including the Drug Enforcement
Agency, U.S. Department of Agriculture, the Environmental Protection Agency, the
Occupational Safety and Health Administration as well as by other federal, state
and local authorities. In addition, international sales are regulated by
numerous foreign authorities. Unanticipated changes in existing regulatory
requirements, failure of the Company to comply with such requirements or
adoption of new requirements could have a material adverse effect on the
Company. There can be no assurance the Company will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operations.
COMPETITION
The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments expected to
continue at a rapid pace. The Company's success will depend upon maintaining a
competitive position and developing products and technologies for efficient and
cost effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems, including other
iontophoretic delivery systems. The Company believes its products will compete
on the basis of quality, efficacy, cost, convenience, safety and patient
compliance, but there can be no assurance any of the Company's products will
have advantages significant enough to cause medical professionals to adopt their
use. New drugs or further developments in alternative drug delivery methods may
provide greater therapeutic benefits for a specific drug or indication, or may
offer comparable performance at lower cost than those offered by the Company's
iontophoretic systems.
The Company is aware of many other competitors in the general field of drug
delivery, including competitors developing injectable or implantable drug
delivery systems, oral drug delivery technologies, passive transdermal systems,
oral transmucosal systems and intranasal and inhalation systems. The Company is
also aware of other companies that have developed or are currently developing
iontophoretic and other electrotransport drug delivery systems. There can be no
assurance that developments by these parties or others will not render the
Company's products or technologies uncompetitive or obsolete. Many of the
Company's existing or potential competitors have substantially greater research
and development capabilities, experience, manufacturing, marketing, financial,
and managerial resources than the Company. Accordingly, the Company's
competitors may succeed in developing competing technologies, obtaining FDA
approval or gaining market share for products more rapidly than the Company, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Both Alza and Empi, Inc. ("Empi") are engaged in the development and/or
marketing of iontophoretic devices. Alza is undertaking the development of
iontophoretic drug delivery systems, but does not currently market any
iontophoretic products. Empi is the Company's primary competitor in the
treatment of acute local inflammation in the physical therapy market and, the
Company estimates, controls a majority of the retail iontophoresis market for
that indication.
Currently, no other company markets an iontophoretic system for the
inducement of local anesthesia. The Company's iontophoretic system for
delivering Iontocaine for the inducement of local dermal anesthesia will
therefore primarily compete with traditional methods of delivering local dermal
anesthetics by needle injection or will be used in circumstances where either no
anesthesia is used, due to the pain associated with the needle injection
(including needle injections themselves), or where topical anesthetic creams are
used. The most effective and widely used topical anesthetic cream, EMLA, is
manufactured and sold by Astra Corporation, a large Swedish pharmaceutical
company. There can be no assurance that the Company can effectively compete with
these products or any other drug delivery systems. See "Risk
Factors -- Uncertainty of Market Acceptance and Limited Market Penetration" and
"Risk Factors -- Intense Competition and Rapid Technological Change."
FACILITIES
The Company maintains leased administrative, manufacturing and research
office space at two facilities. The Company's principal executive offices and
manufacturing facility, which consists of approximately
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18,000 square feet of useable space, are located at 3385 West 1820 South in Salt
Lake City, Utah. Its research facility, which consists of approximately 8,000
square feet of useable space, is located at 1290 West 2320 South in Salt Lake
City, Utah. These facilities are leased to the Company until December 31, 1999
and December 31, 1997, respectively. The Company is currently negotiating an
extension of the lease on its research and development facilities. The Company
believes its existing facilities are adequate and suitable for its present needs
and that additional space will be available as needed.
EMPLOYEES
The Company has assembled a team of medical-products managers and
scientists with considerable experience in iontophoresis, encompassing all of
the key disciplines which the Company believes are necessary to further the
development and implementation of the Company's business.
As of September 1, 1997, the Company had 73 full-time employees, 6 of whom
hold doctorate degrees. Six others hold advanced business or technical degrees.
Of the Company's 73 full-time employees on September 1, 1997, 14 were engaged in
research and development, 35 in manufacturing and quality control, and 24 in
marketing and general administration. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good. See "Risk
Factors -- Retention and Attraction of Key Employees."
LEGAL PROCEEDINGS
The Company is not involved in, nor is it aware of, any litigation or
impending litigation.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The current executive officers, directors, and key employees of the Company
are:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ----------------------------------------------------
<S> <C> <C>
Ned M. Weinshenker, Ph.D. 55 President, Chief Executive Officer and Director;
President and Chief Executive Officer, Dermion
W. Tim Miller 46 Executive Vice President, Sales and Marketing and
General Manager, Clinical Systems
Thomas M. Parkinson, Ph.D. 60 Vice President, Research and Development; General
Manager, Dermion
Robert J. Lollini 43 Vice President, Finance, Chief Financial Officer and
Secretary; Vice President, Secretary and Treasurer,
Dermion
James R. Weersing 58 Chairman of the Board of Directors
John W. Fara, Ph.D. 54 Director
Michael T. Sember 47 Director
Steven P. Sidwell 57 Director
Peter J. Wardle 62 Director
Warren Wood 66 Director
Timothy B. Lucas 34 Director of National Sales
Craig S. Lewis 37 Director of Anesthesia Project
Jamal S. Yanaki 37 Director of Operations
Mary A. Crowther 46 Director of Administration and Finance
</TABLE>
NED M. WEINSHENKER, PH.D. has served as a director of the Company since
1990 and served as Chairman of the Board of Directors between November 1990 and
January 1992. Dr. Weinshenker was appointed to serve as the Company's Chief
Executive Officer in 1992. In 1993, he was also appointed to serve as the
Company's President. Dr. Weinshenker also serves as President and Chief
Executive Officer of Dermion. Dr. Weinshenker's previous work experience
encompasses twenty years in the pharmaceutical and biotechnology fields,
including senior positions at three drug delivery companies. Between 1986 and
1990, Dr. Weinshenker was a principal in MBW Management, a venture capital firm.
Dr. Weinshenker was President of Churchill Oaks Consulting, a consultant to
pharmaceutical and biotechnology companies, from 1983 to 1986. He served as Vice
President of Research & Development at Sequus, Inc., a drug delivery company,
between 1982 and 1983. He served as Vice President of Research at Dynapol, Inc.,
a chemical technology company, from 1972 to 1982. He was Director of Physical
Sciences at Alza, a large drug delivery company, between 1970 and 1972. Dr.
Weinshenker currently serves as a director of CyDex, Inc., a drug delivery
company. Dr. Weinshenker received a Bachelor of Science in Chemistry from the
Polytechnic Institute of Brooklyn and a Ph.D. in Organic Chemistry from the
Massachusetts Institute of Technology. Dr. Weinshenker also spent a year at
Harvard University as a National Institutes of Health Postdoctoral Fellow.
W. TIM MILLER has served as Executive Vice President, Sales and Marketing
and General Manager, Clinical Systems since joining the Company in 1994. Between
1991 and 1994, Mr. Miller was the President and Chief Executive Officer of
Sharpe Endosurgical Corporation, a company that designs, manufactures, and
markets specialty endosurgical instruments. From 1990 to 1991, Mr. Miller was a
partner in Kansas Creative Devices, a medical device design firm. Between 1986
and 1990, Mr. Miller was a Vice President and General Manager of the Diagnostics
Division of Marion Laboratories, where he led the sales efforts for a variety of
diagnostic products including the 10 Minute Strep Throat ID System. Prior to
1986, Mr. Miller held senior sales positions with American Home Products
Corporation and American Hospital Supply Corporation. Mr. Miller previously
served as a director of the American Social Health Association and the
Biomedical Marketing Association. Mr. Miller received a Bachelor of Science
degree in Life Science from Southern Indiana University.
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THOMAS M. PARKINSON, PH.D. joined the Company in 1991 and presently serves
as Vice President, Research and Development and General Manager, Dermion. Prior
to joining the Company he was Vice President of Research and Development for
Sequus, Inc., where he was responsible for biopharmaceutics, clinical testing,
and developing regulatory strategy for new liposome drug delivery systems. Prior
to that, Dr. Parkinson was Director of Medical Affairs for Collagen Corporation,
a chemical technology company, and Vice President of Dynapol, Inc., a chemical
technology company. From 1968 to 1974 he also was head of the Atherosclerosis
Research Section of Upjohn Company, a pharmaceutical manufacturer, where he
developed Colestid, Upjohn's first cholesterol-lowering drug. Dr. Parkinson
received a Bachelor of Science degree in Chemistry from Providence College and a
Ph.D. in Biochemistry and Medical Sciences from the University of Florida
College of Medicine.
ROBERT J. LOLLINI has served as Vice President, Finance, Chief Financial
Officer and Secretary since joining the Company in 1993. Mr. Lollini also serves
as Vice President, Secretary and Treasurer, Dermion. Between 1989 and 1992, Mr.
Lollini worked for R.P. Scherer Corporation, an international drug delivery
company, as Vice President, Finance, Chief Financial Officer and Secretary, and
between 1981 and 1989, as its Corporate Controller and Chief Accounting Officer
and various other management capacities. Between 1978 and 1981, Mr. Lollini was
with the accounting firm of Arthur Andersen & Co. Mr. Lollini is a Certified
Public Accountant and received a Bachelor of Arts degree in Accounting from
Michigan State University and an MBA in Finance/Economics from the University of
Detroit.
JAMES R. WEERSING has served as Chairman of the Company's Board of
Directors since 1992, and has been a director of the Company since 1987. Mr.
Weersing has been Managing General Partner of MBW Management, Inc., a venture
capital firm, since 1983. Mr. Weersing also serves as a director of Ventana
Medical Systems, Inc., a medical diagnostics company. Mr. Weersing received a
Bachelor of Science degree in Mechanical Engineering and an MBA degree from
Stanford University.
JOHN W. FARA, PH.D. has served as a director of the Company since 1992. Dr.
Fara has served as the President and Chief Executive Officer of DepoMed, Inc., a
pharmaceutical company, since 1996. Dr. Fara also serves as a director of two
other companies, PediaPharm, Inc. and Cooks Pharma, Inc. From 1990 to 1996, Dr.
Fara was President and Chief Executive Officer of Anergen, Inc., a biotechnology
company. Dr. Fara received a Bachelor of Science degree in Pharmacy from the
University of Wisconsin and a Ph.D. in Physiology from the University of
California, Los Angeles.
MICHAEL T. SEMBER has served as a director of the Company since May of
1997. Mr. Sember is Vice President of Planning, Investments and Development for
Elan. Prior to joining Elan, Mr. Sember was with Marion Merrell Dow, Inc. from
1973 to 1991 and, prior to that, Marion Laboratories. Mr. Sember also serves as
a director of both Acorda Therapeutics, Inc., a pharmaceutical company, and the
Georgia Biomedical Partnership, an industry trade organization, and as Chairman
and Chief Executive Officer of Targon Corporation, a joint venture company of
Elan and CYTOGEN Corp. Mr. Sember received a Bachelor of Science from the
University of Pittsburgh and an MBA from Rockhurst College.
STEVEN P. SIDWELL has served as a director of the Company since 1993. Mr.
Sidwell has served as the Executive Vice President of SensorMedics, Inc., a
cardiopulmonary diagnostic device manufacturer and a subsidiary of
ThermoElectron, Inc, since 1996. Mr. Sidwell served as the Vice President of
Operations and as Executive Vice President for SensorMedics between 1991 and
1996. Mr. Sidwell received a Bachelor of Science degree in Chemical Engineering
from Purdue University and an MBA from the Wharton School at the University of
Pennsylvania.
PETER J. WARDLE has served as a director of the Company since 1987. Mr.
Wardle has been a General Partner of Newtek Ventures, a venture capital company,
since 1983. Mr. Wardle also serves as a director of Laser Diagnostic
Technologies, a biotechnology company, Microbar, Inc., a software company, IES
Technologies Corporation, a software company and Sensys Instruments Corporation,
a semiconductor company. Mr. Wardle received a Bachelor of Arts degree in
History and Economics from Dartmouth College.
WARREN WOOD has served as a director of the Company since 1996. In 1996 Mr.
Wood retired as Chairman of the Board of Directors, President and Chief
Executive Officer of Cabot Medical Corporation, a
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medical device company, a position he held since 1983. Mr. Wood received a
Bachelor of Science in Electrical Engineering from the University of Washington.
TIMOTHY B. LUCAS joined the Company in 1992 and presently serves as the
Director of National Sales for the Company's local inflammation products. From
1989 to 1991, Mr. Lucas served in various national and regional sales capacities
with the Nortech Division of Medtronic, Inc., a manufacturer of external
neuromuscular stimulators. Prior to joining Medtronic, Mr. Lucas was a Field
Sales Manager with SePro Healthcare, Inc., a manufacturer of orthopedic
products. Mr. Lucas received a Bachelor of Science degree in Marketing from York
College of Pennsylvania.
CRAIG S. LEWIS joined the Company in 1997 as Director of Anesthesia Project
to direct the market introduction of the Company's local dermal anesthesia
product line. Between 1996 and 1997, Mr. Lewis was Global Marketing Director,
Patient Care Division for Zimmer, Inc., a manufacturer of orthopedic products.
Between 1995 and 1996, Mr. Lewis was Director of Marketing for Seabrook Medical
Systems, Inc., a manufacturer of temperature management therapy products. From
1994 to 1995, Mr. Lewis was the Director of Client Business Development for
On-Target Media, Inc., a company which develops media displays for medical
practitioners. From 1991 to 1994, Mr. Lewis held various pharmaceutical sales,
product management and marketing positions with Marion Merrell Dow, Inc. Mr.
Lewis received a Bachelor of Science degree in Business and Finance from the
University of Cincinnati and an MBA degree from Xavier University.
JAMAL S. YANAKI joined the Company in 1992 and presently serves as the
Director of Operations. From 1992 to 1997, Mr. Yanaki was Director of
Engineering and Quality. Between 1990 and 1992, Mr. Yanaki was a Senior Process
Development Engineer for Coherent, Inc., a manufacturer of medical lasers. Prior
to 1990, Mr. Yanaki worked as a process development engineer for the Lifescan
Division of Johnson and Johnson Corp., a manufacturer of blood glucose
monitoring systems. Mr. Yanaki received a Bachelor of Science degree in
Chemistry from Loyola University of Chicago and a Masters degree in Chemical
Engineering from the Colorado School of Mines.
MARY A. CROWTHER joined the Company in 1979 and presently serves as
Director of Finance and Administration. During her 18 years with the Company,
Ms. Crowther has served in various management capacities in the areas of
administration, accounting, information systems, risk management, treasury and
human resources. Ms. Crowther received a Bachelor of Science degree in Business
Administration from Westminster College.
BOARD OF DIRECTORS AND OTHER INFORMATION
The Company's Articles of Incorporation provide for a classified Board of
Directors consisting of three classes, as nearly equal in number as possible.
The directors in each class serve staggered three year terms. The class three
directors (consisting of Messrs. Wardel and Wood) serve until 1998, the class
two directors (consisting of Mr. Sidwell and Dr. Fara) serve until 1999, and the
class one directors (consisting of Messrs. Weersing and Sember and Dr.
Weinshenker) serve until 2000. At each annual meeting of the shareholders of the
Company, the successors to the class of directors whose term expires at such
meeting will be elected to hold office for a term expiring at the annual meeting
of shareholders held in the third year following the year of their election. The
Company's Articles of Incorporation provide that directors may be removed only
for cause and only by the affirmative vote of the holders of two-thirds of the
Common Shares entitled to vote.
BOARD OF DIRECTORS' COMMITTEES
The Board of Directors has established four committees, the Executive
Committee, Audit Committee, Compensation Committee and Special Committee. Each
of these committees is responsible to the full Board of Directors, and its
activities are subject to approval of the Board of Directors. The Executive
Committee is charged with overseeing the operations of the Company, and
generally has all of the authority of the full Board of Directors, between
regularly scheduled meetings of the full Board of Directors. The Executive
Committee is comprised of Mr. Weersing, Dr. Weinshenker and Mr. Wardle. The
Audit Committee reviews the scope and results of the annual audit of the
Company's consolidated financial statements conducted by the
56
<PAGE> 58
Company's independent accountants, the scope of other services provided by the
Company's independent accountants, proposed changes in the Company's financial
and accounting standards and principles, and the Company's policies and
procedures with respect to its internal accounting, auditing and financial
controls. The Audit Committee also examines and considers other matters relating
to the financial affairs and accounting methods of the Company, including the
selection and retention of the Company's independent accountants. The Audit
Committee is comprised of Mr. Weersing, Dr. Fara and Mr. Sidwell. The
Compensation Committee administers the Company's compensation programs, reviews
and recommends to the Board of Directors compensation arrangements for senior
Company management and directors, and performs such other duties as may from
time to time be determined by the Board of Directors. In addition, the
Compensation Committee is responsible for administering the Company's stock
option plans. The Compensation Committee is comprised of Mr. Weersing, Dr. Fara
and Mr. Wardle. There are no interlocking relationships, as described by the
Securities and Exchange Commission, between the Compensation Committee members.
The Special Committee is charged with overseeing the actions to be taken by the
Company with respect to the Offering, and generally has all of the authority of
the full Board of Directors on issues relating to the Offering. The Special
Committee is comprised of Dr. Weinshenker, Mr. Weersing and Mr. Wood. See
"Employee Benefit Plans."
DIRECTOR COMPENSATION
Directors are not paid any cash compensation for attendance at directors'
meetings or for attending or participating on any committee. Directors are
reimbursed, however, for any reasonable out-of-pocket expenses they incur in
connection with attendance at meetings. In addition, all non-employee directors
are eligible to participate in the Company's stock option plans. Upon the
approval of the Board of Directors, certain non-employee directors have been
granted non-qualified options to purchase Common Shares. Dr. Fara and Messrs.
Sidwell and Wood have received options to purchase 6,250, 5,208 and 4,166 Common
Shares, respectively. The option grants vest over a four-year period. All such
options are exercisable at an exercise price equal to the fair market value of
the Common Shares on the date of grant (as adjusted for stock splits and similar
transactions), and are subject to certain vesting schedules. The number of
shares subject to any such grants, and the exercise price(s) of the stock
underlying those grants, are determined by the Compensation Committee and
approved by the Board of Directors.
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<PAGE> 59
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by the
Company's Chief Executive Officer and the four other most highly compensated
executive officers whose total salary and bonus exceeded $100,000 (collectively,
the "Named Executive Officers") during the fiscal year ended June 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Ned M. Weinshenker, Ph.D. ................................ $189,000 $25,000 $ 5,000
President, Chief Executive Officer and Director;
President, Chief Executive Officer, Dermion
W. Tim Miller............................................. $152,000 $25,000 $ 11,000(2)
Executive Vice President, Sales and Marketing and
General Manager, Clinical Systems
Thomas M. Parkinson, Ph.D. ............................... $115,000 $25,000 $ 5,000
Vice President, Research and Development;
General Manager, Dermion
Robert J. Lollini......................................... $145,000 $25,000 $ 5,000
Vice President, Finance, Chief Financial Officer and
Secretary;
Vice President, Secretary and Treasurer, Dermion
Timothy B. Lucas.......................................... $119,000 $16,000 $ 12,000(3)
Director of National Sales
</TABLE>
- ---------------
(1) Represents premiums on group term life insurance and medical and dental
insurance.
(2) Also includes principal and interest payment of $6,000 due on a $25,000
bridge loan made by the Company to Mr. Miller in connection with his
relocation, and which was forgiven by the Company.
(3) Also includes automobile reimbursement of $7,000.
STOCK OPTION GRANTS
There were no options granted to the Named Executive Officers during the
fiscal year ended June 30, 1997.
FISCAL YEAR-END OPTION VALUES
The following table provides information regarding the number and value of
options held by the Named Executive Officers on June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ned M. Weinshenker, Ph.D. ................. 41,615 15,469 $ 106,019 $ 9,333
W. Tim Miller.............................. 29,774 17,101 $ 55,000 $25,000
Thomas M. Parkinson, Ph.D. ................ 28,906 6,510 $ 105,583 $ 4,667
Robert J. Lollini.......................... 29,340 12,326 $ 52,000 $ 8,000
Timothy B. Lucas........................... 2,693 3,557 $ 3,870 $ 2,130
</TABLE>
- ---------------
(1) For purposes of determining the values of the options held by the Named
Executive Officers, the Company has assumed that the Common Shares
underlying the options had a value of $6.72 per share on June 30, 1997,
which is the estimated fair market value the Board of Directors attributed
to the Common Shares in March, 1997, in connection with certain grants of
options under the Company's stock option plans. The option value is based on
the difference between the fair market value of the shares on June 30, 1997,
and the option exercise price per share, multiplied by the number of Common
Shares subject to the option.
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<PAGE> 60
LIMITATIONS OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the personal liability of
directors and officers for monetary damages to the maximum extent permitted by
Utah law. Under Utah law, such limitations include monetary damages for any
action taken or failed to be taken as an officer or director except for (i)
amounts representing a financial benefit to which the person is not entitled,
(ii) liability for intentional infliction of harm on the corporation, or its
shareholders, (iii) unlawful distributions, or (iv) an intentional violation of
criminal law. The Articles of Incorporation also provide that the Company will
indemnify its directors and officers against any damages arising from their
actions as agents of the Company, and that the Company may similarly indemnify
its other employees and agents. The Company is also empowered under its Articles
of Incorporation to enter into indemnification agreements with its directors and
officers.
The Company's Bylaws provide that, to the full extent permitted by the
Company's Articles of Incorporation and the Utah Revised Business Corporation
Act, the Company will indemnify (and advance expenses to) the Company's
officers, directors and employees in connection with any action, suit or
proceeding (civil or criminal) to which those persons are made party by reason
of their being a director, officer or employee.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification by the
Company would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which would result in a claim for such
indemnification.
EMPLOYEE BENEFIT PLANS
Stock Option Plans. The Company has adopted and approved two incentive
compensation plans. The Company's 1988 Stock Option Plan (the "Stock Option
Plan") was approved and adopted by the Company's Board of Directors in April
1988 and was approved by its shareholders in November 1988. The Company's 1997
Share Incentive Plan (the "Share Incentive Plan") was approved and adopted by
the Company's Board of Directors in October 1997 and was approved by its
shareholders in November 1997. The Stock Option Plan and Share Incentive Plan
provide for grants to employees, officers, directors and consultants of both
non-qualified stock options and "incentive stock options" (within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")). The
Share Incentive Plan also provides for the grant of certain other incentive
compensation, including stock awards, stock appreciation rights, dividend
equivalent rights, performance-based awards and cash bonus rights. The purpose
of the Stock Option Plan and Share Incentive Plan is to attract and retain the
best available personnel to the Company and to encourage stock ownership by the
Company's employees, officers, directors and consultants in order to give them a
greater personal stake in the success of the Company.
A total of 520,833 Common Shares were reserved for issuance under the Stock
Option Plan. As of November 1, 1997, options to purchase a total of 135,679
Common Shares had been exercised, options to purchase a total of 339,512 Common
Shares at a weighted average exercise price of $4.80 per share were outstanding,
and 45,642 Common Shares remained available for future option grants or awards.
A total of 312,500 Common Shares were reserved for issuance under the Share
Incentive Plan. The Board of Directors has not granted any options for, or
issued any Common Shares under, the Share Incentive Plan.
The Stock Option Plan is administered by the Compensation Committee, which
determines and designates the recipients of the options, the dates the options
are granted, the number of Common Shares subject to the options, option prices,
vesting terms, fair market value of the Common Shares, duration of the options
and whether any options granted to employees are to be incentive stock options
or non-qualified options.
The exercise price of all options granted under the Stock Option Plan must
be at least 100% of the fair market value of the Common Shares on the grant
date. The term of an option may not exceed ten years from the date of grant.
With respect to any participant who owns shares possessing more than 10% of the
voting power of all classes of shares of the Company, the exercise price of any
option granted must be at least 110% of the fair market value of the Common
Shares on the grant date and the term of such option may not exceed
59
<PAGE> 61
five years. No incentive options may be granted to a participant which, when
aggregated with all other incentive options granted to that participant, would
have an aggregate fair market value in excess of $100,000 becoming exercisable
in any calendar year.
No option may be transferred by the optionee other than by will or the laws
of descent and distribution. During the lifetime of an optionee, only the
optionee may exercise an option. An option is exercisable on or after each
vesting date in accordance with the terms set forth in the option agreement.
Incentive options are exercisable only during the optionee's employment by the
Company, and for a period of up to 90 days after the termination of the
optionee's employment.
The Share Incentive Plan is also administered by the Compensation
Committee, which in general is responsible for determining the type, amount and
terms of any consideration awarded to a recipient. Under the Share Incentive
Plan, any options granted to a recipient are exercisable in accordance with the
terms of the agreement governing the grant. If the option is an incentive stock
option, those terms must be consistent with the requirements of the Code, as
amended, and applicable regulations, including the requirement that the option
price not be less than the fair market value of the Common Shares on the date of
the grant. If the option is not an incentive stock option, the option price may
be any price determined by the Compensation Committee.
In addition to incentive stock options and non-incentive stock options, the
Compensation Committee may award other types of incentive compensation under the
Share Incentive Plan. Such additional incentive compensation can include stock
awards, stock appreciation rights (which entitle the holder of the right upon
exercise thereof to receive payment from the Company of an amount equal in value
to the excess of the fair market value of the Company's Common Shares on the
date of exercise over the fair market value of the Company's Common Shares on
the date of grant or, if granted in connection with an option, the option price
per share under the option to which the stock appreciation right relates), cash
bonuses, performance-based awards (which are intended to qualify as
performance-based compensation under sec. 162(m) of the Code) and Common Shares
which are subject to a purchase agreement between the Company and the
prospective recipient.
401(k) Plan. In 1990, the Company adopted a deferred compensation plan
under sec. 401(k) of the Code (the "401(k) Plan"). Each full-time employee who
has completed at least one year of service with the Company and has reached age
21 is eligible to make pre-tax elective deferral contributions of up to 20% of
their total compensation per plan year, subject to a specified maximum
contribution as determined by the Internal Revenue Service. The Company matches
the employee's contribution on a formula of $0.25 to the dollar, not to exceed
three percent of the employee's gross annual compensation. The vesting schedule
of the employer match is 33 1/3% per year, over three years. Any potential
forfeitures of the Company's portion of the contribution that do not become
vested are reallocated to the remaining employees in the 401(k) Plan based on
their account balance as a percentage of the whole.
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<PAGE> 62
CERTAIN TRANSACTIONS
In July 1995, the Company entered into a research and development agreement
with the predecessor to Novartis. The collaboration was formed to evaluate the
potential for development of iontophoretic drug delivery systems for a number of
Novartis compounds for several therapeutic applications. In connection with the
collaboration, Novartis purchased a 20% equity interest in Dermion. Pursuant to
the R&D Agreements, as amended, Novartis is required to pay research costs under
the program and to make milestone payments if Dermion successfully completes
certain objectives. The R&D Agreements may be terminated by either party for any
reason upon six months notice. In addition, the Company granted Novartis a
perpetual, non-exclusive, royalty-bearing license to certain of the Company's
iontophoretic technology, as well as certain rights with respect to future
technology developed or acquired by the Company. In addition, the Company agreed
to certain limitations on its ability to develop products in certain Novartis
fields. Novartis also shares rights to all technology jointly developed pursuant
to the collaboration.
Effective November 1, 1997, the Company, Dermion and Novartis amended the
terms of their relationship by entering into the 1997 Amendments. Under the 1997
Amendments, Novartis exchanged its 20% equity interest in Dermion for 238,541
Common Shares and warrants to acquire 18,750 Common Shares at an exercise price
of $21.60 per share. One-third of Novartis' warrants are currently exercisable.
Another one-third will be exercisable if Novartis commits to provide research
and development funding under the R&D Agreements for 1999. The balance will be
exercisable if Novartis commits to such funding for the year 2000. See
"Business -- Collaborative Relationships and Licenses."
In March 1997, the Company entered into the Elan Agreements, an exclusive,
worldwide license to certain of Elan's iontophoretic drug delivery technology,
including over 250 issued and 47 pending United States and foreign patents, as
well as a significant body of know-how and preclinical and clinical study
results. The Company acquired the Elan technology by issuing Elan two promissory
notes, a $10.0 million note and a $5.0 million note. The Company also issued a
warrant to Elan to acquire 104,166 Common Shares at $21.60 per share and agreed
to pay Elan a royalty on the net revenues derived from sales of all of the
Company's products. The promissory notes each bear interest at the rate of prime
plus 1% (9 1/2% as of June 30, 1997), and the $5.0 million note is secured by
the technology rights the Company acquired in the transaction. Concurrently with
the closing of the Offering, Elan will acquire, directly from the Company in
private placement transactions, approximately 833,333 Common Shares (subject to
adjustment as described below) for approximately $10.2 million (the amounts
outstanding under the $10.0 million note) and approximately $5.1 million of
Common Shares at a price per share equal to the initial public offering price
hereunder. Simultaneously with such purchases, the Company will repay the Elan
Notes, including interest thereon. If the initial public offering price
hereunder is less than $12.00 per share, the number of Common Shares that Elan
will have the right to purchase for the approximately $10.2 million (the amounts
outstanding under the $10.0 million note) will be equal to approximately $10.2
million divided by the initial public offering price hereunder. If, as a result
of Elan's purchase of the Elan Shares, Elan's aggregate interest in the Common
Shares exceeds 19.9% of the outstanding Common Shares, Elan may elect to receive
non-voting preferred shares of the Company to the extent of such excess. Any
such preferred shares would rank pari passu with the Common Shares, be
non-voting and convertible into Common Shares initially on a one-for-one basis.
See "Risk Factors -- Potential Dilution; Absence of Dividends" and "Transactions
Related to the Offering."
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<PAGE> 63
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Shares as of November 1, 1997, and
as adjusted to reflect the issuance and sale of the 1,700,000 Common Shares
offered hereby, the sale of the Elan Shares in private placement transactions
concurrently with the closing of the Offering (1,258,833 Common Shares assuming
an initial public offering price of $12.00 per share) by (i) all those persons
or entities known by the Company to be beneficial owners of 5% or more of its
outstanding Common Shares ("5% Shareholders"), (ii) each director and each of
the Named Executive Officers and (iii) all directors and Named Executive
Officers as a group. The data presented are based on information provided to the
Company by the Named Executive Officers, the Company's directors and its 5%
Shareholders. See "Transactions Related to the Offering" and "Certain
Transactions."
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED
NUMBER OF ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) PRIOR TO OFFERING AFTER OFFERING
------------------------------------------------- --------- ----------------- --------------
<S> <C> <C> <C>
5% SHAREHOLDERS
Elan International Services, Ltd.(2)........... 104,166 3.0.% 21.1%
102 St. James Court
Flatts Smiths FL04 Bermuda
Newtek Ventures................................ 618,431 18.3% 9.7%
500 Washington Street, Suite 720
San Francisco, CA 94111
MBW Venture Partners, LP(3).................... 610,692 18.1% 9.6%
350 Second Street, Suite 8
Los Altos, CA 94022
Laboratoires Fournier, S.C.A................... 338,802 10.0% 5.3%
42, rue de Longvic 21300
Chenove France
Stephen C. Jacobsen............................ 264,166 7.8% 4.2%
274 South 1200 East
Salt Lake City, UT 84102
Novartis Pharmaceuticals Corporation(4)........ 244,791 7.3% 3.8%
59 Route 10
East Hanover, NJ 07936-1080
Utah Ventures.................................. 224,377 6.7% 3.5%
423 Wakara Way, Suite 206
Salt Lake City, UT 84108
CIT Group/Venture Capital, Inc................. 208,333 6.2% 3.3%
650 CIT Drive
Livingston, NJ 07039-5795
Vadex-Panama, S.A.............................. 208,333 6.2% 3.3%
PO Box 60040
Palo Alto, CA 94306-0040
DIRECTORS
James R. Weersing(5)........................... 2,760 * *
Ned M. Weinshenker, Ph.D.(6)................... 64,838 1.9% 1.0%
John W. Fara, Ph.D.(7)......................... 5,642 * *
Steven P. Sidwell(8)........................... 5,208 * *
Peter J. Wardle(9)............................. 0 * *
Warren Wood(10)................................ 902 * *
Michael T. Sember(11).......................... 0 * *
NAMED EXECUTIVE OFFICERS
W. Tim Miller(12).............................. 36,197 1.1% *
Thomas M. Parkinson, Ph.D(13).................. 30,648 1.0% *
Robert J. Lollini(14).......................... 35,416 1.1% *
Tim Lucas(15).................................. 4,973 * *
Executive Officers and directors as a group
(11 persons)(16)............................ 186,584 5.3% 2.9%
</TABLE>
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<PAGE> 64
- ---------------
* Less than 1%.
(1) Assumes 3,373,072 Common Shares issued and outstanding as of November 1,
1997. The inclusion herein of any Common Shares as beneficially owned does
not constitute an admission of beneficial ownership of those shares. Unless
otherwise indicated, each person listed has sole investment and voting
power with respect to the shares listed. In accordance with the rules of
the Securities and Exchange Commission, each person is deemed to
beneficially own any shares issuable upon exercise of share options or
warrants held by such person that are currently exercisable or that become
exercisable within 60 days after November 1, 1997, and any reference in
these footnotes to shares subject to share options or warrants held by the
person in question refers only to such shares.
(2) Elan International Services, Ltd. is a subsidiary of Elan. Includes 104,166
Common Shares subject to outstanding warrants. "Percentage Beneficially
Owned After the Offering" reflects the purchase of the Elan Shares
(1,258,333 Common Shares assuming an initial public offering price of
$12.00 per share) in private placement transactions, concurrently with the
closing of the Offering. See "Transactions Related to the Offering,"
"Business -- Collaborative Relationships and Licenses" and "Certain
Transactions."
(3) Includes 140,459 Common Shares held of record by Michigan Investment Fund,
LP, MBW Venture Partners, LP and Michigan Investment Fund, LP which are
managed, and assumed to be controlled, by MBW Management, Inc.
(4) Includes 6,250 Common Shares subject to warrants held by Novartis
Pharmaceuticals Corporation.
(5) Includes Common Shares held in the name of a revocable trust for which Mr.
Weersing serves as co-trustee along with his spouse. Mr. Weersing is a
general partner of MBW Management, Inc. Mr. Weersing disclaims beneficial
ownership of the shares beneficially owned by MBW Management, Inc. and its
affiliates.
(6) Includes 19,786 Common Shares held in the name of a pension plan over which
Dr. Weinshenker holds investment control. Includes 45,052 Common Shares
subject to options held by Dr. Weinshenker.
(7) Includes 5,642 Common Shares subject to options held by Dr. Fara.
(8) Includes 5,208 Common Shares subject to options held by Mr. Sidwell.
(9) Mr. Wardle is a general partner of Newtek Ventures, but disclaims
beneficial ownership of the Common Shares held by Newtek Ventures.
(10) Includes 902 Common Shares subject to options held by Mr. Wood.
(11) Mr. Sember is an executive officer of Elan. Mr. Sember disclaims any
beneficial ownership of shares owned beneficially by Elan.
(12) Includes 35,503 Common Shares subject to options held by Mr. Miller.
(13) Includes 30,648 Common Shares subject to options held by Dr. Parkinson.
(14) Includes 33,159 Common Shares subject to options held by Mr. Lollini.
(15) Includes 3,307 Common Shares subject to options held by Mr. Lucas.
(16) Includes 159,421 Common Shares subject to options.
DESCRIPTION OF CAPITAL SHARES
The authorized capital of the Company consists of 100 million Common
Shares, without par value and 10 million Preferred Shares, also without par
value. As of November 1, 1997, 3,373,072 Common Shares and 28,800 Series C
Redeemable Preferred Shares were outstanding. The Series C Preferred Shares will
be converted into 28,800 Common Shares concurrently with the closing of the
Offering. An additional 339,512 Common Shares may be issued upon the exercise of
outstanding share options, and an additional 169,791 shares may be issued upon
the exercise of outstanding warrants. As of November 1, 1997, there were
approximately 147 holders of record of the Common Shares.
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<PAGE> 65
COMMON SHARES
Subject to preferences that may be applicable to any then outstanding
Preferred Shares, holders of Common Shares are entitled to receive, ratably,
such dividends as may be declared by the Board of Directors out of funds legally
available therefore. In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Shares are entitled to share ratably in all
assets remaining after the payment of liabilities and the liquidation preference
of any then outstanding Preferred Shares. Holders of Common Shares have no
preemptive rights and no right to convert their Common Shares into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Shares. All outstanding Common Shares are, and all Common Shares to be
outstanding upon completion of the Offering will be, fully paid and
nonassessable. The holders of Common Shares are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. The
Company has not paid, and does not intend to pay, cash dividends on the Common
Shares for the foreseeable future.
PREFERRED SHARES
As of November 1, 1997, there were 28,800 Series C Preferred Shares issued
and outstanding. The Series C Preferred Shares are subject to mandatory
conversion, on a share-for-share basis, into Common Shares upon the closing of
an initial public offering and will be converted in connection with the closing
of the Offering.
The Board of Directors will have the authority to issue Preferred Shares in
one or more series and to affix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences and the number of shares
constituting any series, without any further vote or action by the shareholders.
The issuance of Preferred Shares in certain circumstances may have the effect of
delaying or preventing a change in control of the Company. The issuance of
Preferred Shares with voting and conversion rights may adversely affect the
voting power and rights of the holders of Common Shares.
WARRANTS
The Company has issued four warrants which, in the aggregate, entitle the
holders thereof to acquire 169,791 Common Shares. On November 1, 1997, the
Company issued Novartis warrants to acquire, through November 1, 2002, 18,750
Common Shares at an exercise price of $21.60 per share. One-third of the
Novartis warrants are currently exercisable. Another one-third of the warrants
are exercisable if Novartis agrees to certain funding commitments under its
agreements with the Company for 1999, and the other one-third of the warrants is
exercisable if Novartis makes such funding commitments for the year 2000. Under
the Elan Agreements, Elan was issued a warrant to acquire, through April 19,
2002, 104,166 Common Shares at an exercise price of $21.60 per share. On
December 1, 1996, the Company issued ACH a warrant to acquire, through December
1, 2003, 44,791 Common Shares at an exercise price of $8.88 per share. On June
25, 1992, the Company issued a warrant to Silicon Valley Bank to acquire,
through June 24, 2002, 2,083 Common Shares at an exercise price of $4.80 per
share.
In connection with the closing of the Offering, the Company has agreed to
issue to the Representatives, warrants to purchase, after the first anniversary
of the date hereof, an aggregate of 170,000 Common Shares at a price per share
equal to (i) 125% of the initial public offering price set forth on the cover
page of this Prospectus after the first anniversary of the date of this
Prospectus or (ii) 150% of the initial public offering price set forth on the
cover page of this Prospectus after the third anniversary of the date of this
Prospectus. The Representatives's Warrants expire on the fifth anniversary of
the date of this Prospectus.
ANTI-TAKEOVER EFFECT OF UTAH LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION
The Company's Articles of Incorporation require that any action required or
permitted to be taken by shareholders of the Company must be effected at a duly
called annual or special meeting of shareholders. Utah law provides that any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if one or more consents in
writing, setting forth the action
64
<PAGE> 66
to be taken, are signed by the holders of outstanding shares having at least the
minimum number of votes that would be necessary to take the action at a meeting
at which all shares entitle to vote on the matter were present and voted. This
provision generally applies to all Utah corporations formed after 1992 and all
Utah corporations formed before 1992 that have amended their articles of
incorporation to provide for actions by consent. The Company is not entitled to
take advantage of that consent provision because it was formed prior to 1992 and
its shareholders have not amended its Articles of Incorporation to allow consent
actions. Special meetings of the shareholders of the Company may be called only
by the Board of Directors, the Chief Executive Officer of the Company or by any
person or persons holding shares representing at least 10% of the outstanding
capital stock. See "Management -- Executive Officers, Directors and Key
Employees."
Utah has adopted legislation which is designed to delay the ultimate
success of a hostile tender offer for shares of a public company until that
tender offer has been approved by a majority of the shareholders. The
legislation applies to all corporations which have not opted out of its
provisions and which have more than 100 shareholders, maintain their principal
place of business or principal office in the State of Utah and where either 10%
or more of the corporation's shareholders reside in Utah or more than 10% of its
outstanding shares are owned by Utah residents. Under the terms of the Company's
Bylaws, the Company has opted out of these provisions.
The Company's Articles of Incorporation provide for the division of the
Board of Directors into three classes, as nearly equal in size as possible, with
staggered three year terms. See "Management." In addition, the Articles of
Incorporation provide that directors may be removed only for cause and only by
an affirmative vote of the holders of two-thirds of the Common Shares entitled
to vote. Further, any vacancy on the Board of Directors, however occurring,
including by reason of an increase in the number of persons comprising the Board
of Directors, may only be filled by vote of a majority of the directors then in
office. These provisions could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of the Company.
REGISTRATION RIGHTS
Pursuant to the Elan Agreements, at any time following the Offering, Elan
has the right, on not more than two occasions and subject to certain
limitations, to require the Company to use its best efforts to register under
the Securities Act the Elan Shares (1,258,333 Common Shares, assuming an initial
public offering price of $12.00 per share) and the 104,166 Common Shares it may
acquire upon exercising its warrant. The Elan Agreements also provide that, if
the Company proposes to file a registration statement under the Securities Act
with respect to an offering by the Company. Elan will be entitled to include all
or part of its shares in that registration, subject to the right of the managing
underwriter to exclude shares from registration to the extent their inclusion
would adversely affect the marketing of the shares to be sold. In connection
with the Offering, Elan has agreed not to sell or otherwise dispose of its
shares for a period of 180 days following the Offering. See "Shares Eligible for
Future Sale."
Under the Company's original agreements with Novartis, Dermion had certain
obligations with respect to registering the Dermion shares previously held by
Novartis. Under the terms of the 1997 Amendments, subject to certain exceptions
and limitations, after 180 days following the effective date of the Offering,
the holders of the lesser of (i) 52,083 Common Shares purchased pursuant to the
1997 Amendments (the "1997 Amendments Shares") or (ii) 75% of all 1997
Amendments Shares may require, on not more than two occasions, that the Company
use its best efforts to file a registration statement under the Securities Act
covering the resale of any such 1997 Amendments Shares. If the Company registers
any Common Shares under the Securities Act, either for its own account or for
the account of any other shareholders, the Company is required to notify the
holders of the 1997 Amendments Shares, and subject to certain limitations is
required to include in such registration the 1997 Amendments Shares requested by
such holders to be included therein. In connection with the Offering, the
holders of the 1997 Amendments Shares have agreed not to sell or otherwise
dispose of their shares for a period of 180 days following the Offering.
Under the terms of an agreement between the Company and CHIC, an affiliate
of CHCA, if the Company proposes to register any of its securities under the
Securities Act other than on Forms S-1 or S-8
65
<PAGE> 67
relating to an employee benefit plan, and other than on Form S-4, any holder of
at least 10,416 Common Shares issuable upon conversion of the warrant issued to
CHIC and any holder of 10,416 Common Shares acquired by CHIC pursuant to the
CHIC agreement, will be entitled to include such shares in that registration,
subject to the right of the managing underwriter to exclude any of such shares
from such registration to the extent that their inclusion would adversely affect
the marketing of the shares to be sold. In connection with the Offering, CHIC
has agreed not to sell or otherwise dispose of its shares for a period of 180
days following the Offering. See "Shares Eligible for Future Sale."
Under the terms of the stock purchase agreement (the "CIT Agreement")
between the Company and the CIT Group/Venture Capital, Inc., subject to certain
exceptions and limitations, after 180 days following the effective date of the
Offering, the holders of at least 208,333 Common Shares purchased pursuant to
the CIT Agreement (the "CIT Shares") may require, on not more than one occasion
within a 12-month period, that the Company use its best efforts to file a
registration statement under the Securities Act covering the resale of any such
CIT Shares. If the Company registers any Common Shares under the Securities Act,
either for its own account or for the account of any other shareholders prior to
March 8, 2000, the Company is required to notify the holders of the CIT Shares
and, subject to certain limitations, is required to include in such registration
the CIT Shares requested by such holders to be included therein. In connection
with the Offering, the holders of the CIT Shares have agreed not to sell or
otherwise dispose of their shares for a period of 180 days following the
Offering.
Under a preferred stock purchase agreement (the "Preferred Investors
Agreement"), between the Company and Newtek Ventures, MBW Venture Partners,
Michigan Investment Fund, Utah Ventures, Cordis Corporation, and certain other
investors (collectively, the "Preferred Investors"), subject to certain
exceptions and limitations, after 180 days following the effective date of the
Offering, the holders of at least Common Shares purchased pursuant to the
Preferred Investors Agreement may require, on not more than two occasions, that
the Company use its best efforts to file a registration statement under the
Securities Act covering the resale of any such Preferred Investor's Shares. If
the Company registers any Common Shares under the Securities Act, either for its
own account or for the account of any other shareholders prior to March 8, 2000,
the Company is required to notify the holders of the Preferred Investors Shares,
and subject to certain limitations is required to include in such registration
the Preferred Investors Shares requested by such holders to be included therein.
In connection with the Offering, certain of the Preferred Investors have agreed
not to sell or otherwise dispose of their shares for a period of 180 days
following the Offering. In addition, pursuant to the Preferred Investors
Agreement, all of the Preferred Investors are prohibited from selling or
otherwise disposing of their shares for a period of 90 days following the
Offering.
Under the terms of the stock purchase agreement (the "Common Investors
Agreement") between the Company and each of Newtek Ventures, MBW Venture
Partners, Michigan Investment Fund, and Vadex-Panama, S.A. (collectively, the
"Common Investors"), subject to certain exceptions and limitations, after 180
days following the effective date of the Offering, the holders of at least
Common Shares purchased pursuant to the Common Investors Agreement (the "Common
Investors Shares") may require, on not more than one occasion within a 12-month
period, that the Company use its best efforts to file a registration statement
under the Securities Act covering the resale of any such Common Investor's
Shares. If the Company registers any Common Shares under the Securities Act,
either for its own account or for the account of any other shareholders prior to
February 19, 2001, the Company is required to notify and, subject to certain
limitations, at the request of the holder of Common Investors Shares is required
to include in such registration the Common Investors Shares requested to be
included therein. In connection with the offering, the Common Investors have
agreed not to sell or otherwise dispose of their shares for a period of 180 days
following the Offering. See "Shares Eligible for Future Sale."
The Company has also granted certain demand and piggy-back registration
rights to the Representatives with respect to the 170,000 Common Shares issuable
upon exercise of the Representatives' Warrants. See "Underwriting."
66
<PAGE> 68
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. will be the transfer agent and
registrar for the Common Shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 6,360,204 Common Shares. In addition, the Company has reserved for
issuance 679,303 shares issuable upon exercise of outstanding options and
warrants, including the Representatives' Warrants. The 1,700,000 Common Shares
offered hereby will be freely transferable without restriction or further
registration under the Securities Act, except for shares which may be acquired
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining Common Shares held by existing shareholders are
"restricted securities" as that term is defined in Rule 144. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for exemption from registration under Rules 144 or 701 under the
Securities Act or otherwise. Pursuant to certain "lock-up" agreements, the
Company's directors, officers and certain of its shareholders who collectively
hold an aggregate of 4,560,934 Common Shares, together with the Company, have
agreed, for a period of 180 days following the date of this Prospectus, not to
offer, pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any Common Shares without the
prior written consent of EVEREN Securities, Inc. Following the lock-up periods,
approximately 1,903,533 Common Shares will be eligible for sale in the public
market without restriction under Rule 144(k) and an additional 79,808 Common
Shares will be eligible for sale subject to certain volume, manner of sale and
other limitations under Rule 144. Of the approximately 76,418 restricted shares
held by existing shareholders of the Company not subject to lock-up agreements,
all such Common Shares will be eligible for immediate sale in the public market
without restriction under Rule 144(k). In addition, holders of stock options or
warrants exercisable for an aggregate of approximately 220,227 Common Shares
have entered into agreements prohibiting sale of the underlying Common Shares
for 180 days following the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding Common Shares
(63,602 shares immediately after the Offering) or (ii) the average weekly
trading volume in the Common Shares during the four calendar weeks preceding
such sale, subject to the filing of a Form 144 with respect to such sale and
certain other limitations and restrictions. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, would be entitled to sell such shares under Rule 144(k)
without regard to the volume, manner of sale and other limitations described
above.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permit non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding-period,
volume-limitation or notice provisions of Rule 144 and permit affiliates to sell
their Rule 701 shares without having to comply with the Rule 144 holding period
restrictions, in each case commencing 90 days after the date of this Prospectus.
The holders of 4,036,010 Common Shares and warrants to purchase 337,708
Common Shares have certain registration rights. See "Description of Capital
Shares -- Registration Rights."
67
<PAGE> 69
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom EVEREN Securities, Inc.
is acting as representative (the "Representatives"), have severally agreed to
purchase, and the Company has agreed to sell to the Underwriters, the following
respective number of Common Shares.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------- ----------------
<S> <C>
EVEREN Securities, Inc.......................................
Hanifen, Imhoff Inc..........................................
Wedbush Morgan Securities....................................
----------------
Total.............................................. 1,700,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all Common Shares offered hereby if any such
shares are purchased.
The Underwriters propose to offer the Common Shares to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow to selected dealers and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the public offering of the Common Shares, the offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exerciseable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 255,000 Common Shares at the initial public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the Offering. To the extent
the option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of Common Shares set forth next to such Underwriter's name
in the preceding table bears to the total number of shares listed in the table.
The Company has agreed to issue to the Representatives warrants to
purchase, after the first anniversary of the date hereof, up to an aggregate of
170,000 Common Shares, at a price equal to (i) 125% of the initial public
offering price set forth on the cover page of this Prospectus after the first
anniversary of the date of this Prospectus or (ii) 150% of the initial public
offering price set forth on the cover page of this Prospectus after the third
anniversary of the date of this Prospectus. Holders of the Representatives'
Warrants have been granted certain demand and piggy-back registration rights
under the Securities Act with respect to the securities issuable upon exercise
of the Representatives' Warrants. See "Description of Shares -- Registration
Rights" and "Shares Eligible For Future Sale." The Representatives' Warrants
expire on the fifth anniversary of the date of this Prospectus.
The Company has also granted the Representatives a nonaccountable expense
allowance of $245,000.
The offering of the Common Shares is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of Common Shares in whole
or in part.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Shares in the open market to cover syndicate short positions
or to stabilize the price of the Common Shares. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members in the
Offering, if the syndicate repurchases previously distributed Common Shares in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the
68
<PAGE> 70
Common Shares above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain employees of the Company and
certain other shareholders have agreed that they will not, without the prior
written consent of EVEREN Securities, Inc., offer, sell or otherwise dispose of
any Common Shares, options or warrants to acquire Common Shares or securities
exchangeable for or convertible into Common Shares for a period of 180 days
after the day of this Prospectus. The Company has agreed that it will not,
without the prior written consent of EVEREN Securities, Inc., offer, sell,
contract, grant any option to purchase or otherwise dispose of any Common
Shares, options or warrants to acquire Common Shares or securities exchangeable
for or convertible into Common Shares for a period of 180 days after the date of
this Prospectus, except for securities issued under its Stock Option Plan or
Share Incentive Plan, the Elan Agreements or upon exercise of currently
outstanding stock options or warrants. See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
included in the Offering will be determined by negotiations between the Company
and the Representatives. Among the factors considered in determining such price
will be the history of and prospects for the Company's business and the industry
in which it competes, an assessment of the Company's management and the present
state the Company's development, its past and present operations and financial
performance, the prospects for future earnings of the Company, the present state
of the Company's research and development programs, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the Company competes and in related or comparable industries,
and the current prevailing condition in the securities markets, including
current market valuations of publicly traded companies that are comparable to
the Company.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Parsons Behle & Latimer, Salt Lake City, Utah. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois, which
will rely on the opinion of Parsons Behle & Latimer with respect to certain
matters regarding Utah law.
EXPERTS
The financial statements at June 30, 1996 and 1997, and for each of the
three years in the period ended June 30, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance on such report given
upon the authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Dependence on Patents and Proprietary Technology" and
"Business -- Patents and Proprietary Rights" have been reviewed and approved by
Workman, Nydegger & Seeley, patent counsel for the Company, as experts on such
matters, and are included herein in reliance upon that review and approval.
69
<PAGE> 71
ADDITIONAL INFORMATION
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities and Exchange Act of
1934, as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish to its shareholders annual
reports containing financial statements audited by an independent public
accounting firm and will make available copies of quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
The Company has filed with the Commission, Washington, D.C., 20549, a
Registration Statement (which term shall include all amendments, exhibits and
schedules thereto) on Form S-1 under the Securities Act with respect to the
Common Shares offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at N.W.,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
70
<PAGE> 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
IOMED, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors...................................................... F-2
Consolidated Balance Sheets at June 30, 1997 and 1996............................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995............................................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended June
30, 1997, 1996 and 1995.......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and
1995............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets at September 30, 1997 and June 30, 1997....... F-18
Condensed Consolidated Statements of Operations for the Three Months Ended September
30, 1997 and 1996................................................................ F-19
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September
30, 1997 and 1996................................................................ F-20
Notes to Condensed Consolidated Financial Statements................................ F-21
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
IOMED, Inc.
We have audited the accompanying consolidated balance sheets of IOMED, Inc. as
of June 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the three
years in the period ended June 30, 1997. 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 consolidated financial position of IOMED, Inc. at
June 30, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
August 4, 1997, except for
Note 15 as to which the date
is November 7, 1997
F-2
<PAGE> 74
IOMED, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 4,507,000 $ 6,346,000
Accounts receivable, less allowance for doubtful accounts of
$76,000 in 1996 and $28,000 in 1997......................... 1,054,000 1,189,000
Inventories.................................................... 1,162,000 714,000
Prepaid expenses............................................... 5,000 12,000
----------- ------------
Total current assets................................... 6,728,000 8,261,000
Equipment and furniture, net..................................... 477,000 385,000
Other assets..................................................... 46,000 18,000
----------- ------------
Total Assets........................................... $ 7,251,000 $ 8,664,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 118,000 $ 171,000
Accrued liabilities............................................ 952,000 944,000
Current portion of long-term obligations....................... 44,000 2,000
----------- ------------
Total current liabilities.............................. 1,114,000 1,117,000
Commitments
Minority interest................................................ 875,000 898,000
Redeemable, convertible preferred shares, no par value;
10,000,000 authorized; issued and outstanding shares of all
series 38,800 in 1996 and 36,000 in 1997....................... 1,270,000 900,000
Subordinated, convertible debt................................... -- 15,240,000
Shareholders' equity (deficit):
Common shares, no par value; 100,000,000 shares authorized;
issued and outstanding 2,925,056 shares in 1996 and
3,134,392 shares in 1997.................................... 11,492,000 12,047,000
Accumulated deficit............................................ (7,500,000) (21,538,000)
----------- ------------
Total shareholders' equity (deficit)................... 3,992,000 (9,491,000)
----------- ------------
Total liabilities and shareholders' equity (deficit)... $ 7,251,000 $ 8,664,000
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
IOMED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Product sales.......................................... $6,964,000 $6,829,000 $ 7,483,000
Contract research revenue, royalties and license
fees................................................ -- 2,409,000 1,800,000
--------- ---------- ------------
Total revenues................................. 6,964,000 9,238,000 9,283,000
Operating costs and expenses:
Cost of products sold.................................. 3,369,000 3,138,000 3,338,000
Research and development............................... 1,467,000 1,099,000 1,488,000
Selling, general and administrative.................... 3,338,000 3,283,000 3,501,000
Non-recurring charges.................................. -- 430,000 15,059,000
--------- ---------- ------------
Total costs and expenses....................... 8,174,000 7,950,000 23,386,000
--------- ---------- ------------
Income (loss) from operations............................ (1,210,000) 1,288,000 (14,103,000)
Interest expense......................................... 32,000 9,000 242,000
Interest income and other, net........................... 120,000 167,000 291,000
--------- ---------- ------------
Income (loss) from continuing operations before income
taxes and minority interest............................ (1,122,000) 1,446,000 (14,054,000)
Minority interest........................................ -- (17,000) 23,000
Income tax expense (benefit)............................. (173,000) (79,000) 5,000
--------- ---------- ------------
Income (loss) from continuing operations................. (949,000) 1,542,000 (14,082,000)
Income from discontinued operations, net of income
taxes.................................................. 290,000 201,000 44,000
--------- ---------- ------------
Net income (loss)........................................ $ (659,000) $1,743,000 $(14,038,000)
========= ========== ============
Income (loss) per common share amounts:
Income (loss) from continuing operations................. $ (.46) $ .48 $ (4.48)
Income from discontinued operations...................... .14 .06 .01
--------- ---------- ------------
Net income (loss)........................................ $ (.32) $ .54 $ (4.47)
--------- ---------- ------------
Shares used in computing per share amounts............... 2,090,007 3,222,496 3,140,054
========= ========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
IOMED, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK*
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1994..................... 2,032,741 $ 7,639,000 $ (8,584,000) $ (945,000)
Stock options exercised.................... 14,930 9,000 -- 9,000
Conversion of redeemable, convertible
preferred shares........................ 1,380 3,000 -- 3,000
Net loss................................... -- -- (659,000) (659,000)
---------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1995..................... 2,049,051 7,651,000 (9,243,000) (1,592,000)
Stock options exercised.................... 43,974 23,000 -- 23,000
Conversion of redeemable, convertible
preferred shares........................ 494,193 895,000 -- 895,000
Conversion of subordinated debt............ 337,838 2,923,000 -- 2,923,000
Net income................................. -- -- 1,743,000 1,743,000
---------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1996..................... 2,925,056 11,492,000 (7,500,000) 3,992,000
Stock options exercised.................... 6,483 5,000 -- 5,000
Conversion of redeemable, convertible
preferred shares........................ 165,651 300,000 -- 300,000
Sale of common shares for cash............. 37,202 250,000 -- 250,000
Net loss................................... -- -- (14,038,000) (14,038,000)
---------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1997..................... 3,134,392 $12,047,000 $(21,538,000) $(9,491,000)
=========== =========== ============ ===========
</TABLE>
- ---------------
* Adjusted to reflect 1-for-4.8 reverse stock split and elimination of par
value -- see Note 15.
See accompanying notes.
F-5
<PAGE> 77
IOMED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ (659,000) $1,743,000 $(14,038,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 570,000 400,000 267,000
Write-off of in-process research and development....... -- -- 15,059,000
Non-cash interest expense.............................. -- -- 240,000
Minority interest and other non-cash charges........... (17,000) (9,000) 34,000
Changes in assets and liabilities:
Accounts receivable................................. (6,000) (122,000) (444,000)
Inventories......................................... (317,000) 186,000 (196,000)
Prepaid expenses and other assets................... (22,000) 9,000 (6,000)
Trade accounts payable.............................. (96,000) (41,000) 53,000
Other current liabilities........................... 249,000 83,000 25,000
---------- ---------- ------------
Net cash provided by (used in) operating activities...... (298,000) 2,249,000 994,000
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of discontinued operations............ -- -- 1,000,000
Purchases of equipment and furniture..................... (156,000) (316,000) (231,000)
---------- ---------- ------------
Net cash provided by (used in) investing activities...... (156,000) (316,000) 769,000
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares.................. 9,000 23,000 255,000
Proceeds from sale of minority interest.................. -- 892,000 --
Payments on term loans................................... (165,000) (132,000) (39,000)
Redemptions of redeemable preferred shares............... (70,000) (70,000) (70,000)
Other.................................................... -- -- (70,000)
---------- ---------- ------------
Net cash provided by (used in) financing activities...... (226,000) 713,000 76,000
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents..... (680,000) 2,646,000 1,839,000
Cash and cash equivalents at beginning of year........... 2,541,000 1,861,000 4,507,000
---------- ---------- ------------
Cash and cash equivalents at end of year................. $1,861,000 $4,507,000 $ 6,346,000
========== ========== ============
Supplemental disclosures of cash flow information
Cash paid for interest................................... $ 32,000 $ 9,000 $ 2,000
Cash paid for income taxes............................... -- -- $ 61,000
Supplemental schedule of non-cash investing and financing
activities
Issuance of subordinated, convertible debt for purchase
of in-process research and development................. -- -- $ 15,000,000
Preferred shares converted to common shares.............. $ 3,000 $ 895,000 300,000
Subordinated debt converted to common shares............. -- 2,923,000 --
</TABLE>
See Accompanying Notes.
F-6
<PAGE> 78
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
IOMED, Inc., a Utah corporation (the "Company"), develops, manufactures and
commercializes controllable drug delivery systems using iontophoresis
technology.
Discontinued Operations
On December 31, 1996, the Company sold the assets of its Motion Control
Division, which was engaged in the research, development, manufacture and sale
of advanced myoelectric prosthetic devices. Accordingly, the consolidated
statements of operations for the years ended June 30, 1996 and 1995 have been
restated to present the results of operations of the Motion Control Division as
a discontinued operation (see Note 4).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 80% owned subsidiary, Dermion, Inc. ("Dermion"). Dermion was formed in
April 1996 to conduct advanced research and development of iontophoretic drug
delivery systems on its own behalf and on behalf of third party clients. The
remaining 20% interest of Dermion is reflected as minority interest in the
accompanying financial statements. All significant intercompany transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers all highly-liquid investments with maturities of
three months or less, when purchased, to be cash equivalents.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents and trade accounts
receivable. Cash and cash equivalents are held in federally insured financial
institutions or invested in high grade short-term commercial paper issued by
major United States corporations. The Company sells its products primarily to,
and has trade accounts receivable with, independent durable medical equipment
dealers in the United States and abroad. Less than 10% of product sales are to
foreign customers. As a general policy, collateral is not required for accounts
receivable; however, the Company maintains an allowance for losses based upon
expected collections of accounts receivable. Additionally, customers' financial
condition and credit worthiness are regularly evaluated and historical losses
have not been material. During the periods presented, none of the Company's
customers accounted for more than 10% of net product sales. Accordingly, the
Company considers concentrations of credit risk with respect to trade accounts
receivable to be low.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consisted of the following
and, at June 30, 1996, included $613,000 in inventory associated with the
Company's discontinued operations:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
---------- --------
<S> <C> <C>
Raw materials...................................... $ 862,000 $568,000
Work-in-progress................................... 72,000 31,000
Finished goods..................................... 228,000 115,000
---------- --------
$1,162,000 $714,000
========== ========
</TABLE>
F-7
<PAGE> 79
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Equipment and Furniture
Equipment and furniture are stated at cost. Depreciation and amortization
is computed using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the term of the lease
or the useful life of the improvements, whichever is shorter. Equipment and
furniture consisted of the following and, at June 30, 1996, included $50,000 in
equipment net of accumulated depreciation associated with the Company's
discontinued operations:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Manufacturing equipment........................... $ 1,961,000 $ 1,896,000
Office and research and development equipment..... 1,294,000 1,381,000
Leasehold improvements............................ 632,000 608,000
---------- ----------
3,887,000 3,885,000
Less accumulated depreciation and amortization.... (3,410,000) (3,500,000)
---------- ----------
$ 477,000 $ 385,000
========== ==========
</TABLE>
Revenue Recognition
Revenues on product sales are generally recognized upon shipment. Contract
research revenue and license fees are recognized as earned.
Patent Development Costs
In connection with its research and development efforts, the Company incurs
certain costs in the preparation, application, filing, maintenance and defense
of patents and trademarks. Where such costs primarily relate to patents and
trademarks covering technologies or products which are under development or in
the early stages of commercialization, the Company expenses such costs as
incurred.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under APB 25,
because the exercise price of the Company's share options equals the market
price of the underlying shares on the date of grant, the Company does not
recognize any compensation expense.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings (Loss) Per Share
The Company's net income (loss) per share is based upon the weighted
average number of common shares outstanding during the periods. Common share
equivalents (stock options, warrants, convertible
F-8
<PAGE> 80
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred shares and convertible debt), as determined using the treasury stock
method, have been excluded from the computations in those periods where their
inclusion would have an antidilutive effect. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83, shares and equivalent
shares issued by the Company at prices below the assumed public offering price
during the twelve-month period prior to the proposed offering have been included
in the calculation as if they were outstanding for all periods presented (using
the treasury stock method and using the assumed midpoint of the initial public
offering price range).
New Accounting Pronouncements
In 1997, the FASB issued three new statements, SFAS No. 128-Earnings per
Share, SFAS No. 130-Reporting Comprehensive Income and SFAS No. 131-Disclosures
about Segments of an Enterprise and Related Information. As of June 30, 1997,
these statements were either not effective or not yet adopted by the Company.
The Company believes the new standards will not have a material impact on the
Company's financial statements.
Estimates
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 at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform to the financial statement presentation included herein.
2. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
In March 1997, the Company entered into agreements with Elan Corporation,
plc ("Elan"), an international developer of advanced drug delivery systems, to
obtain an exclusive, worldwide license for the commercial development of certain
of Elan's in-process research and development in the field of iontophoretic drug
delivery, including both issued and pending patents, know-how and clinical data.
Pursuant to the agreements, the Company paid Elan a one time fee of $15,000,000,
issued warrants to purchase up to 500,000 common shares at a price of $21.60 per
share and agreed to pay Elan certain royalties on net revenues derived from
sales of its iontophoretic drug delivery products. Both the number and share
price of the warrants are subject to adjustment for certain corporate
transactions. Payment of the fee was funded by the issuance of two subordinated
convertible notes to Elan in an aggregate principal amount of $15,000,000 (See
Notes 3 and 7).
3. NON-RECURRING CHARGES
The intended clinical applications, as well as alternative future
applications, of the technologies purchased from Elan (see Note 2) are in the
early stages of research, design and clinical development, subject to numerous
technological, regulatory, and commercial risks and, therefore, represent
in-process research and development. Accordingly, during fiscal 1997, the
Company recorded a non-recurring charge of $15,059,000 reflecting the write-off
of the in-process research and development purchased, including the fee and
related transaction costs.
During fiscal 1996, a suit was filed against the Company by a competitor
alleging, among other things, that a recently introduced product of the Company
infringed upon the competitor's trade dress. In February 1996, a federal court
granted the plaintiff's request for a preliminary injunction. Thereupon, the
F-9
<PAGE> 81
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company entered into a settlement agreement with the plaintiffs. The total costs
incurred in connection with the suit were approximately $430,000, which amount
includes legal fees, court costs and damages paid to the plaintiff, legal fees
incurred by the Company and inventory rework costs. The settlement agreement
will not have any material impact on the Company's ability to continue to
manufacture and sell its products, including the new product which gave rise to
the litigation.
4. DISCONTINUED OPERATIONS
In December 1996, the Company sold the assets of its Motion Control
Division, which was engaged in the research, development, manufacture and sale
of myoelectric prosthetic devices. In addition, the Company granted a worldwide,
exclusive license to certain patent rights covering the products manufactured by
the division to the purchaser. Proceeds from the sale were $1,000,000 and the
Company is entitled to receive royalties on future product sales of the
purchaser. There was no significant gain or loss recognized on the sale.
Included in accounts receivable at June 30, 1996 is $351,000 associated with the
Company's discontinued operations. The results of operations of the Motion
Control Division prior to its sale have been classified as discontinued
operations in the accompanying statements of operations. No interest expense has
been allocated to discontinued operations and both federal and state income
taxes have been calculated and allocated based upon statutory rates. A summary
of the results of discontinued operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------------
1995 1996 1997
---------- ---------- --------
<S> <C> <C> <C>
Net product sales....................... $2,081,000 $2,186,000 $957,000
Income taxes............................ $ 173,000 $ 120,000 $ 26,000
Income from discontinued operations..... $ 290,000 $ 201,000 $ 44,000
</TABLE>
5. INVESTMENTS IN MARKETABLE DEBT SECURITIES
Debt securities are classified as held-to-maturity when the Company has the
intent and ability to hold the security to maturity. Held-to-maturity securities
are stated at amortized cost, adjusted for amortization of premiums and
accretion of discounts to maturity, which approximates quoted fair market
values. Such amortization as well as interest earned is included in interest
income. As of June 30, 1996 and 1997, all investments were classified as
held-to-maturity and consisted of United States corporate securities totaling
$3,757,000 and $4,635,000, respectively, and are included with cash and cash
equivalents.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Payroll and related benefits........................... $431,000 $436,000
Accrued facilities costs............................... 146,000 69,000
Professional fees...................................... 70,000 126,000
Warranty............................................... 76,000 10,000
Other.................................................. 229,000 303,000
-------- --------
$952,000 $944,000
======== ========
</TABLE>
In 1995, the Company's board of directors approved management's plan to
consolidate the Company's operating facilities. Under the plan, certain office
facilities currently under lease through December 1999 have been left idle.
Accordingly, the Company recorded charges and accrued facilities costs in the
amount of $180,000 and $53,000 in 1995 and 1996, respectively, which represents
the total committed lease obligation for
F-10
<PAGE> 82
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the idle space, plus estimated maintenance and construction costs. At June 30,
1997, approximately $69,000 of these charges remained in accrued liabilities.
7. SUBORDINATED, CONVERTIBLE DEBT
In connection with the purchase of in-process research and development from
Elan (see Note 2), the Company issued two promissory notes to Elan, the A Note
and the B Note, in the amount of $10,000,000 and $5,000,000, respectively. Both
notes are subordinated to any existing or future indebtedness incurred to
finance working capital or the purchase of fixed assets in the normal course of
business. The carrying value of these notes approximates fair market value since
interest rates are based upon current market rates.
The A Note accrues interest at prime plus one percent (9.5% at June 30,
1997), payable at maturity. Upon the completion of an initial registered public
offering of common shares or in any event on April 1, 1999, the note, together
with all accrued interest thereon, will be exchanged for common shares of the
Company. If the triggering event is an initial registered public offering, the
Company will issue 833,333 common shares, as adjusted for certain corporate
transactions, in exchange for the note. If an initial public offering is not
previously consummated, then on April 1, 1999, in exchange for the indebtedness
under the A Note, the Company will issue shares at an exchange price of $12.00
per share, which exchange price is subject to adjustment under certain
conditions.
The B Note accrues interest at prime plus one percent (9.5% at June 30,
1997). The B Note plus any accrued and unpaid interest thereon will become due
and payable immediately upon the completion of an initial registered public
offering of common shares. If not pre-paid pursuant to an initial registered
public offering or otherwise, the B Note, becomes due and payable in five equal
installments of principal of $1,000,000 on each of the fifth, sixth, seventh,
eighth and ninth anniversaries of the note, together, in each case with any
accrued and unpaid interest thereon.
In June 1993, the Company entered into a research and development agreement
with Laboratoires Fournier, a French pharmaceutical company ("Fournier") to
collaborate in the joint development and commercialization of certain drug
delivery systems. In connection with this transaction, in July 1993, the Company
borrowed $3,000,000 ($2,923,000, net of debt issuance costs) from Fournier
pursuant to a subordinated, convertible note. In March 1996, the companies
reached a mutual agreement to terminate their collaborative development efforts.
Among other things, the agreement provided for the conversion of the $3,000,000
subordinated, convertible note, at a conversion rate of $8.88 per share, into
337,838 common shares.
8. COMMITMENTS
The Company leases space and certain equipment under noncancellable
operating lease agreements that expire at various dates through December 1999.
Rental expense for such leases was $225,000, $227,000 and $218,000 for the years
ended June 30, 1995, 1996 and 1997, respectively. It is generally expected that,
in the normal course of business, operating leases that expire will be renewed
or replaced by other leases with similar terms. Future minimum lease payments
under noncancellable operating leases (with initial or remaining lease terms in
excess of one year) at June 30, 1997 were $86,000.
9. ROYALTY AGREEMENTS
The Company is the licensee under a royalty agreement with the University
of Utah Research Foundation. This agreement provides for the payment of
royalties to the licensor based upon net sales of the products under royalty
until the year 2006. Royalty expense in each of the three years in the period
ended June 30, 1997 was not material.
F-11
<PAGE> 83
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE, CONVERTIBLE PREFERRED SHARES
In connection with a reorganization of the Company in fiscal 1988, the
Company issued 878,254 shares of $.001 par value redeemable convertible
preferred shares in three series; Series A, Series B and Series C. Pursuant to
the terms of such preferred shares, the Series A shares were redeemed in equal
installments beginning in July 1992 through July 1996 at a redemption price of
$25.00 per share and the Series B shares (828,254 shares with a carrying value
of $1,500,000) were converted prior to July 15, 1996 into common shares on a
share for share basis at the equivalent of $1.811 per share.
The Series C preferred shares outstanding as of June 30, 1997 are comprised
of 36,000 shares with an aggregate redemption value of $900,000. The Series C
preferred shares are redeemable at $25.00 per share in five equal annual
installments beginning in July 1997. Unless converted to common shares,
mandatory redemption requirements on the Series C preferred shares are $180,000
annually from 1998 through 2002. The Company may redeem all or part of the
preferred shares to the extent of its unreserved and unrestricted retained
earnings at any time prior to the required redemption dates.
Prior to redemption, each share of the Series A, B and C preferred shares
either are, or were, as applicable, convertible on a share for share basis, at
the option of the holder, into common shares. The conversion ratio is subject to
adjustment based on the issue price of additional shares, options, or rights to
common shares issued. Each outstanding preferred share will automatically
convert to one common share upon the sale of common shares of the Company
pursuant to a registration statement under the Securities Act of 1933, the
public offering price of which is not less than $5.4331 per share and which
results in gross proceeds to the Company of at least $5,000,000.
Each share of the Series A, B and C preferred shares has a voting right
equal to one vote for each common share into which the preferred share could be
converted as outlined above. The holders of the preferred shares have voting
rights and powers equal to those of the holders of common shares and vote with
the holders of common shares and not as a separate class. Under no circumstances
are the holders of any series of preferred shares entitled to vote separately on
any matter.
Dividends are non-cumulative and are to be paid on the preferred shares
only as authorized by the Board of Directors. In the event of liquidation of the
Company, each outstanding preferred share converts into one common share. No
dividend (other than a dividend payable solely in common shares) may be declared
or paid on common shares unless an equal or greater dividend per share has first
been declared and paid on each preferred share. Each preferred share, regardless
of its series, must be paid the same dividend per share. No dividends have been
declared or paid to date.
11. RESEARCH & DEVELOPMENT
In July 1995, the Company entered into an interim research and development
agreement with Ciba-Geigy Corporation ("Ciba"), an affiliate of a Swiss
pharmaceutical company, to evaluate the feasibility of delivering certain Ciba
compounds using the Company's iontophoretic drug delivery technologies. In March
1996, this interim agreement was superseded by a long-term research and
development agreement with Ciba. In conjunction with the research and
development agreement, the Company formed Dermion, a wholly-owned subsidiary
established to conduct advanced iontophoretic drug delivery systems development.
The Company contributed cash, fixed assets and non-exclusive licenses to certain
technology, valued at a historical cost of approximately $1,300,000 to Dermion,
in exchange for common shares. Concurrently, Ciba acquired a 20% equity interest
in Dermion for $1,000,000 in cash. Pursuant to a separate shareholder's
agreement, Ciba is entitled to a premium of up to $1,250,000 in the event of a
change in control of Dermion.
Ciba-Geigy Corporation and Sandoz Corporation merged and, as a result,
formed Novartis Pharmaceuticals Corporation.
F-12
<PAGE> 84
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Currently, the term of the agreement extends through December 31, 1998. The
agreement automatically renews for additional one year terms, unless terminated,
by either party, with written notice six months prior to any anniversary date.
During the term of the research and development agreement, Novartis is obligated
to provide Dermion with research funding for the development of proprietary
iontophoretic drug delivery systems designed to deliver Novartis compounds.
Also, during the term of the agreement, Novartis has certain rights to the
Company's technologies for certain specific therapeutic indications using
Novartis proprietary drugs or specified generic compounds. The agreement further
provides that Dermion will be entitled to milestone payments upon the
achievement of certain performance targets and to future royalties on Novartis'
sales of products developed pursuant to the research. Dermion is currently
devoting the majority of its research and development capabilities to the
development of these systems for Novartis. Research funding payments and license
fees paid pursuant to the agreement with Novartis totaled $2,409,000 and
$1,750,000, respectively, in fiscal years ended June 30, 1996 and 1997. As of
June 30, 1997, the Company had a receivable, in the amount of $301,000, due from
Novartis, for research services rendered, which is included in accounts
receivable in the accompanying balance sheet.
12. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) savings plan for its full-time
employees. The Company makes a matching contribution based on a percentage of
the contributions of participating employees. The Company contributed
approximately $24,000 during each of the years ended June 30, 1995 and 1996 and
approximately $19,000 during fiscal 1997.
13. INCOME TAXES
Deferred taxes result from differences in the carrying value of various
assets and liabilities between income tax reporting and financial reporting
purposes. These differences arise from differing depreciation methods, and other
reserves that are deductible in different periods for tax and financial
reporting purposes.
The approximate tax effect of temporary differences, net operating loss
carryforwards and tax credit carryforwards as of June 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $1,602,000 $ 1,515,000
Book in excess of tax depreciation............... 307,000 264,000
Book in excess of tax amortization............... -- 5,502,000
Tax credit carryforwards......................... 525,000 577,000
Reserves......................................... 326,000 265,000
Other............................................ -- --
----------- -----------
Total deferred tax assets.......................... 2,760,000 8,123,000
Valuation allowance................................ (2,760,000) (8,123,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
There were no significant deferred tax liabilities in 1996 or 1997. The
valuation allowance increased by $5,363,000 during the fiscal year.
F-13
<PAGE> 85
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were no deferred income tax provisions in any of the years presented.
Significant components of the provision for income taxes attributable to
continuing operations are as follows.
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ------
<S> <C> <C> <C>
Current:
Federal................................... $(158,000) $(72,000) $5,000
State..................................... (15,000) (7,000) --
--------- -------- ------
Total current provision..................... $(173,000) $(79,000) $5,000
========= ======== ======
</TABLE>
The reconciliation of income taxes at the statutory United States federal
income tax rate and the Company's effective income tax rate attributable to
continuing operations is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
United States statutory rate (percentage)........... (34.0)% 34.0% (34.0)%
State tax, net of federal tax benefit............... (3.3)% 3.3% (3.3)%
Credits............................................. (8.1)% (1.7)% (0.4)%
Effect of NOL carryforward and valuation
allowance......................................... 27.3% (42.0)% 37.3%
Other............................................... 2.7% 0.9% 0.4%
----- ---- -----
Effective income tax rate (percentage).............. (15.4)% (5.5)% --%
===== ==== =====
</TABLE>
As of June 30, 1997, the Company had approximately $4,147,000 in federal
and state net operating loss carryforwards, and $577,000 in federal tax credit
carryforwards, that expire from 2001 through 2012. Utilization of the Company's
net operating loss and credit carryforwards is limited to the future taxable
income of the Company. Under the "change of ownership" provisions of the
Internal Revenue Code, utilization of these net operating loss and credit
carryforwards may be subject to substantial annual limitation.
14. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the Plan) for which 520,833
common shares have been reserved. The Plan allows grants of incentive options
and nonqualified options to purchase common shares at a price that is not less
than the fair market value on the date of grant. The option price and dates the
options become exercisable and expire are determined by the Board of Directors
on an option-by-option basis.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value of these options was estimated at the date
of grant using a Minimum Value option pricing model with the following weighted
average assumptions for fiscal years ended June 30, 1996 and 1997: risk-free
interest rate of approximately 6.4% and 6.3%; dividend yield of 0%; and a
weighted-average expected life of the option of 6 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Because the effect of
SFAS No. 123-Accounting for Stock Based Compensation is prospective, the initial
impact on pro forma net income (loss) may not be representative of compensation
expense in future years. The effect on the Company's pro forma results for each
of the fiscal years ended June 30, 1996 and 1997 was not material (less than
$0.05 per share).
F-14
<PAGE> 86
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity, and related information for the years
ended June 30, 1995, 1996, and 1997 follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 272,031 -- 293,620 $3.41 328,610 $4.51
Granted................................. 60,729 -- 84,271 6.19 15,417 6.72
Exercised............................... (14,930) -- (43,974) 0.48 (6,483) 1.01
Canceled................................ (24,210) -- (5,307) 4.37 (7,163) 4.18
------- ------- -------
Outstanding at end of year.............. 293,620 -- 328,610 $4.51 330,381 $4.70
======= ======= =======
Exercisable at end of year.............. 173,833 -- 175,416 $3.64 220,706 $4.13
Weighted-average fair value of options
granted during the year............... -- $ 1.97 $ 2.11
</TABLE>
Exercise prices for options outstanding as of June 30, 1997 ranged from
$0.38 to $6.72. The weighted average remaining contractual life of the options
is 6 years. Below are the segregated ranges of exercise prices as of June 30,
1997:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
----------------------------------------
<S> <C> <C> <C>
$0.38-0.72 $2.16-3.60 $4.80-6.72
---------- ----------
Options outstanding.................................. 20,313 49,876 260,192
Weighted-average exercise price of options
outstanding........................................ $ 0.58 $ 2.83 $ 5.38
Weighted-average remaining contractual life of
options outstanding................................ 2 years 4 years 7 years
Options exercisable.................................. 20,313 49,876 150,517
Weighted-average exercise price of options
exercisable........................................ $ 0.58 $ 2.83 $ 4.99
</TABLE>
The Company has issued three warrants which entitle the holders thereof to
acquire common shares of the Company. In March 1997, the Company issued a
warrant to Elan to acquire up to 140,166 shares for an exercise price of $21.60
per share. In December 1996, the Company issued a warrant to the Alliance of
Children's Hospitals, Inc. to acquire up to 44,791 shares for an exercise price
of $8.88 per share. In June 1995, the Company issued a warrant to the Silicon
Valley Bank to acquire up to 2,083 shares for an exercise price of $4.80 per
share. The warrants expire in April 2002, December 2003 and June 2002,
respectively.
15. SUBSEQUENT EVENTS
Initial Public Offering
On October 3, 1997, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission pursuant to which the Company
intends to consummate an initial public offering of newly issued common shares.
Reverse Stock Split
On November 7, 1997, pursuant to a vote of the shareholders, the Company
effected a one for 4.8 reverse share split for each common and preferred share
then outstanding and amended and restated its Articles of Incorporation and
Corporate Bylaws. Among other things, these amendments changed the par value of
the Company's common shares from $0.001 per share to no par value common shares;
increased the number of authorized common shares from 40,000,000 shares to
100,000,000 shares; and increased the number of
F-15
<PAGE> 87
IOMED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
authorized preferred shares from 4,215,618 shares to 10,000,000 shares. For
comparative purposes, all share amounts in the accompanying financial statements
and related footnotes have been retroactively restated to reflect the effects of
the reverse stock split and the increases in the authorized shares of the
Company's common and preferred shares.
Novartis Exchange Agreement
Effective November 1, 1997, the Company entered into an Exchange Agreement
with Novartis Pharmaceuticals Corporation. Among other things, the Exchange
Agreement provided for the exchange of Novartis' 20% minority interest in
Dermion, the Company's research and development subsidiary, for 238,541 common
shares of the Company and warrants to purchase, under certain conditions,
through November 1, 2002 an additional 18,750 common shares at a price equal to
$21.60 per share, making Dermion a wholly owned subsidiary of Iomed, Inc. In
addition, the Company and Novartis amended their research and development
agreement to, among other things, expand Iomed's rights to conduct research and
development in areas other than in the areas of acute local inflamation and
local dermal anesthesia.
F-16
<PAGE> 88
IOMED, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
F-17
<PAGE> 89
IOMED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER
30,
JUNE 30, 1997
1997 ------------
------------ (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 6,346,000 $ 5,910,000
Accounts receivable........................................... 1,189,000 1,291,000
Inventories................................................... 714,000 719,000
Prepaid expenses.............................................. 12,000 15,000
------------ ------------
Total current assets.................................. 8,261,000 7,935,000
Equipment and furniture, net.................................... 385,000 388,000
Other assets.................................................... 18,000 146,000
------------ ------------
Total Assets.......................................... $ 8,664,000 $ 8,469,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable........................................ $ 171,000 $ 214,000
Accrued liabilities........................................... 944,000 626,000
Current portion of long-term obligations...................... 2,000 -
------------ ------------
Total current liabilities............................. 1,117,000 840,000
Commitments
Minority interest............................................... 898,000 909,000
Redeemable, convertible preferred shares........................ 900,000 720,000
Subordinated, convertible debt.................................. 15,240,000 15,527,000
Shareholders' equity (deficit):
Common shares................................................. 12,047,000 12,047,000
Accumulated deficit........................................... (21,538,000) (21,574,000)
------------ ------------
Total shareholders' equity (deficit).................. (9,491,000) (9,527,000)
------------ ------------
Total liabilities and shareholders' equity
(deficit)........................................... $ 8,664,000 $ 8,469,000
============ ============
</TABLE>
See accompanying notes.
F-18
<PAGE> 90
IOMED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Product sales...................................................... $1,813,000 $1,997,000
Contract research revenue, royalties and license fees.............. 649,000 503,000
---------- ----------
Total revenues............................................. 2,462,000 2,500,000
Operating costs and expenses:
Cost of products sold.............................................. 821,000 893,000
Research and development........................................... 391,000 375,000
Selling, general and administrative................................ 769,000 1,061,000
---------- ----------
Total costs and expenses................................... 1,981,000 2,329,000
---------- ----------
Income from operations............................................... 481,000 171,000
Interest expense..................................................... 1,000 287,000
Interest income and other, net....................................... 58,000 91,000
---------- ----------
Income (loss) from continuing operations before income taxes and
minority interest.................................................. 538,000 (25,000)
Minority interest.................................................... 44,000 11,000
Income tax expense................................................... 20,000 --
---------- ----------
Income (loss) from continuing operations............................. 474,000 (36,000)
Loss from discontinued operations, net of income taxes............... (7,000) --
---------- ----------
Net income (loss).................................................... $ 467,000 $ (36,000)
========== ==========
Income (loss) per common share amounts:
Income (loss) from continuing operations............................. $ 0.14 $ (0.01)
---------- ----------
Income (loss) from discontinued operations........................... -- --
---------- ----------
Net income (loss).................................................... $ 0.14 $ (0.01)
---------- ----------
Shares used in computing per share amounts........................... 3,281,712 3,149,522
========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE> 91
IOMED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 467,000 $ (36,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization..................................... 88,000 57,000
Interest expense.................................................. -- 287,000
Minority interest losses and other non-cash charges............... 44,000 11,000
Changes in assets and liabilities:
Accounts receivable............................................ 315,000 (102,000)
Inventories.................................................... (218,000) (5,000)
Prepaid expenses and other assets.............................. 2,000 (131,000)
Trade accounts payable......................................... 149,000 43,000
Other current liabilities...................................... (18,000) (318,000)
---------- ----------
Net cash provided by (used in) operating activities................. 829,000 (194,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture................................ (46,000) (60,000)
---------- ----------
Net cash provided by (used in) investing activities................. (46,000) (60,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares............................. 4,000 --
Payments on term loans.............................................. (11,000) (2,000)
Redemptions of redeemable preferred shares.......................... (70,000) (180,000)
---------- ----------
Net cash provided by (used in) financing activities................. (77,000) (182,000)
---------- ----------
Net increase (decrease) in cash and cash equivalents................ 706,000 (436,000)
Cash and cash equivalents at beginning of period.................... 4,507,000 6,346,000
---------- ----------
Cash and cash equivalents at end of period.......................... $5,213,000 $5,910,000
========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE> 92
IOMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
IOMED, Inc., a Utah Corporation (the "Company"), develops, manufactures and
commercializes controllable drug delivery systems using proprietary
iontophoretic technology. Iontophoresis is a method of enhancing and controlling
the transport of drugs through the skin utilizing a low level electrical
current.
Discontinued Operations
On December 31, 1996, the Company sold the assets of its Motion Control
Division, which was engaged in the research, development, manufacture and sale
of advanced myoelectric prosthetic devices. Accordingly, the consolidated
statement of operations for the three months ended September 30, 1996 presents
the results of operations of the Motion Control Division as a discontinued
operation. There were no remaining assets or liabilities related to discontinued
operations reflected in the financial statements as of September 30, 1997 or
June 30, 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 80% owned subsidiary Dermion, Inc. ("Dermion.") Dermion was formed in
April 1996 to conduct advanced research and development of iontophoretic systems
on its own behalf and on behalf of third party clients. All significant
intercompany transactions and accounts have been eliminated.
Basis of Presentation
In the opinion of management, the accompanying condensed consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of September 30, 1997
and the results of its operations and cash flows for the three month periods
ended September 30, 1997 and 1996. The operating results for the interim periods
are not necessarily indicative of the results for a full year. These statements
should be read in conjunction with the Company's audited consolidated financial
statements for the year ended June 30, 1997, included elsewhere in this
prospectus.
Earnings (Loss) Per Share
The Company's net income (loss) per share is based upon the weighted
average number of common shares outstanding during the periods. Common stock
equivalents (stock options, warrants, convertible preferred stock and
convertible debt), as determined using the treasury stock method, have been
included in such computations for the three month period ended September 30,
1996 and, except as noted below, have been excluded from the computations in the
three month period ended September 30, 1997 where their inclusion would have an
antidilutive effect.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, shares and equivalent shares issued by the Company at prices
below the assumed public offering price during the twelve-month period
immediately prior to the proposed public offering have been included in the
calculation of earnings per share (using the treasury stock method and using the
midpoint of the initial public offering range), as if they had been outstanding
for all periods presented, including periods in which such securities have an
antidilutive effect. Additional SAB No. 83 shares included in the computation of
per share amounts were 15,130 and 52,332 for the three month periods ended
September 30, 1997 and 1996, respectively.
F-21
<PAGE> 93
IOMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consisted of the following at
September 30, 1997 and June 30, 1997:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
--------- --------------
<S> <C> <C>
Raw materials....................................... $ 568,000 $557,000
Work-in-progress.................................... 31,000 22,000
Finished goods...................................... 115,000 140,000
-------- --------
$714,000 $719,000
======== ========
</TABLE>
3. DISCONTINUED OPERATIONS
In December 1996, the Company sold the assets of its Motion Control
Division which was engaged in the research, development, manufacture and sale of
myoelectric prosthetic devices. In addition, the Company granted a worldwide,
exclusive license to certain patent rights covering the products manufactured by
the division to the purchaser. Proceeds from the sale were $1,000,000 and the
Company is entitled to receive royalties on future product sales of the
purchaser. There was no significant gain or loss recognized on the sale. The
results of operations of the Motion Control Division prior to its sale have been
classified as discontinued operations in the accompanying statements of
operations. No interest expense has been allocated to discontinued operations
and both federal and state income taxes have been calculated and allocated based
upon statutory rates. A summary of the results of discontinued operations is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
Net product sales......................................... $391,000
Income tax expense (benefit).............................. $ (4,000)
Income (loss) from discontinued operations................ $ (7,000)
</TABLE>
4. SUBSEQUENT EVENTS
Initial Public Offering
On October 3, 1997, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission pursuant to which the Company
intends to consummate an initial public offering of newly issued common shares.
Reverse Stock Split
On November 7, 1997, pursuant to a vote of the shareholders, the Company
effected a one for 4.8 reverse share split for each common and preferred share
then outstanding and amended and restated its Articles of Incorporation and
Corporate Bylaws. Among other things, these amendments changed the par value of
the Company's common shares from $0.001 per share to no par value common shares;
increased the number of authorized common shares from 40,000,000 shares to
100,000,000 shares; and increased the number of authorized preferred shares from
4,215,618 shares to 10,000,000 shares. For comparative purposes, all share
amounts in the accompanying financial statements and related footnotes have been
retroactively restated to reflect the effects of the reverse stock split and the
increases in the authorized shares of the Company's common and preferred shares.
F-22
<PAGE> 94
IOMED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Novartis Exchange Agreement
Effective November 1, 1997, the Company entered into an Exchange Agreement
with Novartis Pharmaceuticals Corporation. Among other things, the Exchange
Agreement provided for the exchange of Novartis' 20% minority interest in
Dermion, the Company's research and development subsidiary, for 238,541 common
shares of the Company and warrants to purchase, under certain conditions,
through November 1, 2002, an additional 18,750 common shares at a price equal to
$21.60 per share, making Dermion a wholly owned subsidiary of Iomed, Inc. In
addition, the Company and Novartis amended their research and development
agreement to, among other things, expand Iomed's rights to conduct research and
development in areas other than in the areas of acute local inflamation and
local dermal anesthesia.
F-23
<PAGE> 95
[INSIDE BACK COVER]
[GRAPHICS DEPICTING THE COMPANY'S PRODUCTS]
<PAGE> 96
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON IS AUTHORIZED IN CONNECTION
WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
Transactions Related to the Offering... 21
Use of Proceeds........................ 22
Capitalization......................... 23
Dividend Policy........................ 23
Dilution............................... 24
Selected Consolidated Financial Data... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Business............................... 31
Management............................. 54
Certain Transactions................... 61
Principal Shareholders................. 62
Description of Capital Shares.......... 63
Shares Eligible for Future Sale........ 67
Underwriting........................... 68
Legal Matters.......................... 69
Experts................................ 69
Additional Information................. 70
Index to Financial Statements.......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
PROSPECTUS , 1997
- ------------------------------------------------------
1,700,000 COMMON SHARES
LOGO
------------------------------
EVEREN SECURITIES, INC.
HANIFEN, IMHOFF INC.
WEDBUSH MORGAN SECURITIES
- ------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Shares being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 8,712
NASD Filing Fee................................................... 3,375
National Market Listing Fee....................................... 33,000
Printing and Engraving Expenses................................... 200,000
Legal Fees and Expenses........................................... 250,000
Accounting Fees and Expenses...................................... 125,000
Blue Sky Qualification Fees and Expenses.......................... 15,000
Transfer Agent and Registrar Fees and Expenses.................... 5,000
Other Non-Accountable Underwriting Expense........................ 245,000
Miscellaneous..................................................... 31,913
--------
Total................................................... $917,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the personal liability of
directors and officers for monetary damages to the maximum extent permitted by
Utah law. Under Utah law, such limitations include monetary damages for any
action taken or failed to be taken as an officer or director except for (i)
amounts representing a financial benefit to which the person is not entitled,
(ii) liability for intentional infliction of harm on the Corporation or its
shareholders, (iii) unlawful distributions, or (iv) an intentional violation of
criminal law. The Articles of Incorporation also provide that the Company will
indemnify its directors and officers against any damages arising from their
actions as agents of the Company, and that the Company may similarly indemnify
its other employees and agents. The Company is also empowered under its Articles
of Incorporation to enter into indemnification agreements with its directors and
officers.
The Company's Bylaws provide that, to the full extent permitted by the
Company's Articles of Incorporation and the Utah Revised Business Corporation
Act, the Company will indemnify (and advance expenses to) the Company's
officers, directors and employees in connection with any action, suit or
proceeding (civil or criminal) to which those persons are made party by reason
of their being a director, officer or employee). Any such indemnification will
be in addition to the advancement of expenses.
The terms of the Company's Stock Option Plan provide that, to the fullest
extent permitted by the Company's Articles of Incorporation and Bylaws and by
Utah law, no member of the committee which administers the plan will be liable
for any action or omission taken with respect to the plan or any options issued
thereunder. The Plan also provides that no member of the Board of Directors will
be liable for any action or determination made in good faith with respect to the
Plan or any option granted thereunder.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any pending or threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.
II-1
<PAGE> 98
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has entered into five transactions in the past three years
involving the issuance of its securities under certain transactional exemptions
of the Securities Act of 1933.
On February 20, 1996, the Company issued to Laboratoires Fournier 337,837
Common Shares in conversion and satisfaction of a non-interest bearing
$3,000,000 promissory note sold to Laboratoires Fournier in 1993. On November
29, 1996, the Company issued 37,202 Common Shares to CHIC, an affiliate of CHCA,
for a total purchase price of $250,000. In connection with that transaction, on
December 1, 1996, the Company also issued to ACH, a subsidiary of CHCA, a
warrant to acquire up to 44,791 Common Shares at an exercise price of $8.88 per
share. In March 1997, the Company issued two promissory notes (one for $10.0
million and the other for $5.0 million) to Elan and delivered to Elan a warrant
to purchase 104,166 Common Shares in connection with the purchase of certain
technology from Elan. Effective November 1, 1997, the Company issued Novartis
238,541 Common Shares and warrants to acquire 18,750 Common Shares in connection
with the exchange by Novartis of its 20% equity interest in Dermion for an
equity position in the Company pursuant to the provisions of the 1997
Amendments.
In connection with each of these isolated issuances of the Company's
securities, each purchaser of those securities represented and warranted to the
Company that it (i) was aware that the securities had not been registered under
federal securities laws, (ii) acquired the securities for its own account for
investment purposes and not with a view to or for resale in connection with any
distribution for purposes of the federal securities laws, (iii) understood that
the securities would need to be indefinitely held unless registered or an
exemption from registration applied to a proposed disposition, (iv) was aware
that the certificate representing the securities would bear a legend restricting
their transfer, and (v) was aware that there was no public market for the
securities. The Company believes that, in light of the foregoing, and in light
of the sophisticated nature of each of the acquirers, the sale of the Company's
securities to the respective acquirers did not constitute the sale of an
unregistered security in violation of the federal securities laws and
regulations by reason of the exemption provided under sec. 4(2) of the
Securities Act, and the rules and regulations promulgated thereunder.
Concurrently with the closing of the Offering, Elan will acquire, directly
from the Company in private placement transactions, approximately 833,333 Common
Shares (subject to adjustment as described below) for approximately $10.2
million (the amount outstanding under the $10.0 million note) and approximately
$5.1 million of Common Shares at a price per share equal to the initial public
offering price hereunder. Simultaneously with such purchase, the Company will
repay the Elan Notes, including interest thereon. If the initial public offering
price hereunder is less than $12.00 per share, the number of Common Shares that
Elan will have the right to purchase for approximately $10.2 million (the amount
outstanding under the $10.0 million note) will be equal to approximately $10.2
million divided by the initial public offering price hereunder. Elan has
represented in the Elan agreements that it is aware that those Common Shares
will not be registered under federal securities laws, will acquire those Common
Shares for its own account and for investment purposes, understands that the
Common Shares will need to be held indefinitely unless registered or an
exemption from registration applies to any proposed disposition, and that the
certificates representing the shares will bear a restrictive legend. In light of
the foregoing, the Company believes that the acquisition of the approximately
833,333 Common Shares (subject to adjustment under certain circumstances) and
the approximately $5.1 million of Common Shares at a price per share equal to
the initial public offering price hereunder in private placement transactions
will not constitute the sale of an unregistered security in violation of federal
securities law by reason of the exemption provided under sec. 4(2) of the
Securities Act.
II-2
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- ----------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
4.1 Reference is made to Exhibit 3.1
4.2* Specimen of Common Share Certificate
5.1* Opinion of Parsons Behle & Latimer
10.1** Lease between the Company and Hayter Properties, Inc., dated September 1,
1997
10.2*** License Agreement between the Company and Elan International Services, Ltd.,
dated April 14, 1997
10.3*** License Agreement between the Company and Drug Delivery Systems, Inc., dated
April 14, 1997
10.4** Promissory Note issued by the Company to Elan International Management,
Ltd., in the principal amount of $10,000,000, dated April 14, 1997
10.5** Promissory Note issued by the Company to Elan International Management,
Ltd., in the principal amount of $5,000,000, dated April 14, 1997
10.6*** Note Purchase and Warrant Agreement among the Company, Elan International
Services, Ltd. And Elan International Management, Ltd. dated April 14, 1997
10.7** Warrant issued to Elan International Services, Ltd., dated April 14, 1997
10.8** Registration Rights Agreement between the Company and Elan International
Services, Ltd., dated April 14, 1997
10.9** Asset Acquisition Agreement between the Company and Fillauer, Inc., dated
December 27, 1996
10.10*** License Agreement between the Company and Fillauer, Inc., dated December 26,
1996.
10.11** Warrant issued to Alliance of Children's Hospitals, Inc., dated December 1,
1996
10.12** Stock Purchase Agreement between the Company and Child Health Investment
Corporation, dated November 29, 1996
10.13*** Manufacturing Agreement between the Company and KWM Electronics Corporation,
dated November 1, 1996
10.14*** Contribution Agreement between the Company and Dermion, Inc., dated March
29, 1996
10.15*** Patent License Agreement between the Company and Dermion, Inc., dated March
29, 1996
10.16*** Research and Development Agreement among the Company, Dermion, Inc. and
Ciba-Geigy Corporation, dated March 29, 1996
10.17** Stock Purchase Agreement among the Company, Dermion, Inc. and Ciba-Geigy
Corporation, dated March 29, 1996
10.18** Stockholders' Agreement among the Company, Dermion, Inc. and Ciba-Geigy
Corporation, dated March 29, 1996
10.19*** Agreement between the Company and Laboratoires Fournier S.C.A., dated
February 20, 1996
10.20*** Agreement between the Company and ALZA Corporation, dated July 28, 1993
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- ----------------------------------------------------------------------------
<S> <C>
10.21*** Supply Agreement between the Company and Abbot Laboratories, Inc., dated
April 27, 1993
10.22** Stock Purchase Agreement between the Company and The CIT Group/Venture
Capital, Inc., dated March 8, 1993
10.23** Stock Purchase Agreement between the Company and certain investors, dated
February 19, 1993
10.24*** License Agreement between the Company and the University of Utah Research
Foundation, dated October 1, 1992
10.25** Warrant issued to Silicon Valley Bank, dated June 25, 1992
10.26 Company 1997 Share Incentive Plan
10.27** Preferred Stock Purchase Agreement between the Company, Newtek Ventures, MBW
Venture Partners, Michigan Investment Fund, Utah Ventures, Cordis
Corporation, Ian R.N. Bund, James R. Weersing and Robert J. Harrington,
dated August 4, 1987
10.28 Exchange Agreement among the Company, Novartis Pharmaceuticals Corporation
and Dermion, Inc., dated November 1, 1997
10.29 Warrant to Purchase Shares of Common Stock in favor of Novartis
Pharmaceuticals Corporation, dated November 1, 1997
10.30 First Amendment of Research & Development Agreement among the Company,
Novartis Pharmaceuticals Corporation and Dermion, Inc. dated November 1,
1997.
10.31**** Supply Agreement between the Company and Luitpold Pharmaceuticals,
Inc./American Regent Laboratories, Inc. dated December 4, 1994
11.1 Statement re computation of earnings per share
21.1** Schedule of Subsidiaries
23.1 Consent of Parsons Behle & Latimer
23.2 Consent of Ernst & Young LLP
23.3 Consent of Workman Nydeggar & Seeley
24.1** Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
*** Confidential portions omitted and previously filed separately with the
Commission.
**** Confidential portions omitted and filed herewith
(B) FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules are included as part of the
Consolidated Financial Statements.
II-4
<PAGE> 101
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Salt Lake City, State of Utah on the
18th day of November, 1997.
IOMED, Inc.
/s/ NED M. WEINSHENKER
--------------------------------------
By: Ned M. Weinshenker, Ph.D.
Its: Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ned M. Weinshenker, and Robert J.
Lollini, and each of them, his attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him in any and all capacities, to
sign any and all amendments (including posteffective amendments) to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully as to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------ ----------------
<S> <C> <C>
/s/ NED M. WEINSHENKER President, Chief October 3, 1997
- ----------------------------------------------- Executive Officer and
Ned M. Weinshenker Director (Principal
Executive Officer)
/s/ ROBERT J. LOLLINI Vice President and Chief October 3, 1997
- ----------------------------------------------- Financial Officer
Robert J. Lollini (Principal Financial and
Accounting Officer)
/s/ JAMES R. WEERSING Chairman of the Board of October 3, 1997
- ----------------------------------------------- Directors
James R. Weersing
/s/ JOHN W. FARA Director October 3, 1997
- -----------------------------------------------
John W. Fara, Ph.D.
/s/ PETER J. WARDLE Director October 3, 1997
- -----------------------------------------------
Peter J. Wardle
/s/ STEVEN P. SIDWELL Director October 3, 1997
- -----------------------------------------------
Steven P. Sidwell
/s/ WARREN WOOD Director October 3, 1997
- -----------------------------------------------
Warren Wood
Director October 3, 1997
- -----------------------------------------------
Michael T. Sember
</TABLE>
II-6
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ------------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement....................................
3.1 Amended and Restated Articles of Incorporation of the Company.....
3.2 Amended and Restated Bylaws of the Company........................
4.1 Reference is made to Exhibit 3.1..................................
4.2* Specimen of Common Share Certificate..............................
5.1* Opinion of Parsons Behle & Latimer................................
10.1** Lease between the Company and Hayter Properties, Inc., dated
September 1, 1997.................................................
10.2*** License Agreement between the Company and Elan International
Services, Ltd., dated April 14, 1997..............................
10.3*** License Agreement between the Company and Drug Delivery Systems,
Inc., dated April 14, 1997........................................
10.4** Promissory Note issued by the Company to Elan International
Management, Ltd., in the principal amount of $10,000,000, dated
April 14, 1997....................................................
10.5** Promissory Note issued by the Company to Elan International
Management, Ltd., in the principal amount of $5,000,000, dated
April 14, 1997....................................................
10.6*** Note Purchase and Warrant Agreement among the Company, Elan
International Services, Ltd. And Elan International Management,
Ltd. dated April 14, 1997.........................................
10.7** Warrant issued to Elan International Services, Ltd., dated April
14, 1997..........................................................
10.8** Registration Rights Agreement between the Company and Elan
International Services, Ltd., dated April 14, 1997................
10.9** Asset Acquisition Agreement between the Company and Fillauer,
Inc., dated December 27, 1996.....................................
10.10*** License Agreement between the Company and Fillauer, Inc., dated
December 26, 1996.................................................
10.11** Warrant issued to Alliance of Children's Hospitals, Inc., dated
December 1, 1996..................................................
10.12** Stock Purchase Agreement between the Company and Child Health
Investment Corporation, dated November 29, 1996...................
10.13*** Manufacturing Agreement between the Company and KWM Electronics
Corporation, dated November 1, 1996...............................
10.14*** Contribution Agreement between the Company and Dermion, Inc.,
dated March 29, 1996..............................................
10.15*** Patent License Agreement between the Company and Dermion, Inc.,
dated March 29, 1996..............................................
10.16*** Research and Development Agreement among the Company, Dermion,
Inc. and Ciba-Geigy Corporation, dated March 29, 1996.............
10.17** Stock Purchase Agreement among the Company, Dermion, Inc. and
Ciba-Geigy Corporation, dated March 29, 1996......................
10.18** Stockholders' Agreement among the Company, Dermion, Inc. and Ciba-
Geigy Corporation, dated March 29, 1996...........................
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ------------------------------------------------------------------ ------------
<C> <S> <C>
10.19*** Agreement between the Company and Laboratoires Fournier S.C.A.,
dated February 20, 1996...........................................
10.20*** Agreement between the Company and ALZA Corporation, dated July 28,
1993..............................................................
10.21*** Supply Agreement between the Company and Abbot Laboratories, Inc.,
dated April 27, 1993..............................................
10.22** Stock Purchase Agreement between the Company and The CIT
Group/Venture Capital, Inc., dated March 8, 1993..................
10.23** Stock Purchase Agreement between the Company and certain
investors, dated February 19, 1993................................
10.24*** License Agreement between the Company and the University of Utah
Research Foundation, dated October 1, 1992........................
10.25** Warrant issued to Silicon Valley Bank, dated June 25, 1992........
10.26 Company 1997 Share Incentive Plan.................................
10.27** Preferred Stock Purchase Agreement between the Company, Newtek
Ventures, MBW Venture Partners, Michigan Investment Fund, Utah
Ventures, Cordis Corporation, Ian R.N. Bund, Jamers R. Weersing
and Robert J. Harrington, dated August 4, 1987....................
10.28 Exchange Agreement among the Company, Novartis Pharmaceuticals
Corporation and Dermion, Inc., dated November 1, 1997.............
10.29 Warrant to Purchase Shares of Common Stock in favor of Novartis
Pharmaceuticals Corporation, dated November 1, 1997...............
10.30 First Amendment of Research & Development Agreement among the
Company, Novartis Pharmaceuticals Corporation and Dermion, Inc.
dated November 1, 1997.
10.31**** Supply Agreement between the Company and Luitpold Pharmaceuticals,
Inc./American Regent Laboratories, Inc. dated December 4, 1994.
11.1 Statement re computation of earnings per share....................
21.1** Schedule of Subsidiaries..........................................
23.1 Consent of Parsons Behle & Latimer................................
23.2 Consent of Ernst & Young LLP......................................
23.3 Consent of Workman Nydeggar & Seeley..............................
24.1** Power of Attorney (see signature page)............................
27.1 Financial Data Schedule...........................................
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
*** Confidential portions omitted and previously filed separately with the
Commission
**** Confidential portions omitted and filed herewith
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
IOMED, INC.
ARTICLE I
The name of the corporation is Iomed, Inc.
ARTICLE II
The purposes for which the Corporation is organized are:
A. To engage in the business of the design, development,
manufacture and sale (i) of medical products, and (ii) other devices and
products of any nature whatsoever.
B. To engage in all other businesses related to the foregoing.
C. In addition to the foregoing purposes, the Corporation may
engage in any and all other lawful acts that, presently or in the future, may
legally be performed by a corporation organized under the laws of the State of
Utah.
ARTICLE III
A. Authorized Shares. The corporation is authorized to issue two
classes of shares to be designated, respectively, "Common Shares," and
"Preferred Shares." The total number of shares the Corporation is authorized to
issue is 110,000,000. The authorized number of Common Shares is 100,000,000, and
the authorized number of Preferred Shares is 10,000,000. The preferences,
limitations and relative rights of each class of shares, and the express grant
of authority to the board of directors to amend these articles of incorporation
to divide the Preferred Shares into series, to establish and modify the
preferences, limitations and relative rights of each Preferred Share, and to
otherwise impact the capitalization of the corporation, are set forth below.
<PAGE> 2
B. Common Shares.
1. Voting Rights. Except as otherwise expressly provided by
law or in this Article III, each outstanding Common Share shall be entitled to
one vote on each matter to be voted on by the shareholders of the Corporation;
2. Liquidation Rights. Subject to any prior or superior
rights of liquidation as may be conferred upon any Preferred Shares, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of Common Shares then
outstanding shall be entitled to receive all of the assets and funds of the
Corporation remaining and available for distribution. Such assets and funds
shall be divided among and paid to the holders of Common Shares, on a pro rata
basis, according to the number of shares of held by them;
3. Dividends. Dividends may be paid on the outstanding
Common Shares as and when declared by the board of directors, out of funds
legally available therefor; provided, however, no dividends shall be made with
respect to the Common Shares until all preferential dividends required to be
paid or set apart for any Preferred Shares have been paid or set apart; and
4. Residual Rights. All rights accruing to the outstanding
shares of the corporation not expressly provided for to the contrary herein or
in the corporation's bylaws or in any amendment hereto or thereto shall be
vested in the Common Shares.
C. Preferred Shares. The board of directors, without shareholder
action, may amend the corporation's articles of incorporation, pursuant to the
authority granted to the board of directors by the Utah Revised Business
Corporation Act, Utah Code Ann. Section16-10a-101 (the "Act"), to do any of the
following:
1. Preferences. Designate and determine, in whole or in
part, the preferences, limitations and relative rights of the Preferred Shares,
within the limits set forth in the Act;
2. Series. Create one or more series of Preferred Shares,
fix the number of shares of each such series, and designate and determine, in
whole or part, the preferences,
-2-
<PAGE> 3
limitations and relative rights of each series of Preferred Shares, within the
limits set forth in the Act;
3. Changes in Rights. Alter or revoke the preferences,
limitations and relative rights granted to or imposed upon the Preferred Shares
(before the issuance of any Preferred Shares) or upon any wholly unissued series
of Preferred Share; and
4. Increase in Series. Increase or decrease the number of
shares constituting any series of Preferred Shares, the number of shares of
which was originally fixed by the board of directors, either before or after the
issuance of shares of the series, provided that the number may not be decreased
below the number of shares of such series then outstanding, or increased above
the total number of authorized Preferred Shares available for designation as a
part of such series.
ARTICLE IV
A. Voting Generally. Unless otherwise provided in these Articles of
Incorporation, or in the Act, every shareholder entitled to vote shall have the
right to vote his shares for the election of the directors of the Corporation,
but no shareholder shall have the right to accumulate its votes for the election
of the directors.
B. Directors.
1. Number. The number of directors of the Corporation shall
be set by the Bylaws, but shall not be less than three or more than ten. The
initial board of directors to be elected in 1997 shall be comprised of seven
directors.
2. Classes. The board of directors shall be divided into
three groups, Classes One, Two and Three. No one class shall have more than one
director more than any other class. If a fraction is contained in the quotient
arrived at by dividing the designated number of directors by three, then, if
such fraction is one-third, the extra director shall be a member of Class One
and if such fraction is two-thirds, one of the extra directors shall be a member
of Class One and one of the extra directors shall be a member of Class Two,
unless otherwise provided from time to time by resolution adopted by the board
of directors.
-3-
<PAGE> 4
3. Terms. Each director shall serve for three years, until the
third annual meeting following the annual meeting at which such director was
elected; provided, that each initial director in Class One shall serve for a
term ending on the date of the annual meeting in 2000; each initial director in
Class Two shall serve for a term ending on the date of the annual meeting in
1999; and each initial director in Class Three shall serve for a term ending on
the date of the annual meeting in 1998. The term of each director shall be
always subject to the election and qualification of his successor and to his
earlier death, resignation or removal.
4. Removal. Directors of the Corporation may be removed only for
cause by the affirmative vote or written consent of the holders of at least
two-thirds of the shares of the Corporation entitled to vote thereon.
5. Vacancies. Any vacancy in the board of directors including a
vacancy from an enlargement of the board, shall be filled by a vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall be elected
to hold office until the next election of the class for which such director
shall have been chosen, subject to the election and qualification of his
successor and to his earlier death, resignation or removal.
6. Allocations of Directors Among Classes. In the event of any
increase or decrease in the authorized number of directors, (i) each director
then serving as such shall nevertheless continue as a director of the class of
which he is a member, and (ii) the newly created or eliminated directorship
resulting from such increase or decrease shall be apportioned by the board of
directors among the three classes of directors so as to ensure that no one class
has more than one director more than any other class. To the extent possible,
newly created directorships shall be added to those classes whose terms of
office are to expire at the latest dates following such allocation, and
eliminated directorships shall be subtracted from those classes whose terms of
offices are to expire at the earliest dates following such allocation, unless
otherwise provided from time to time by resolution adopted by the board of
directors.
7. Quorum; Action at Meeting. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. If at
any meeting of the directors
-4-
<PAGE> 5
there shall be less than such a quorum, a majority of those present may adjourn
the meeting. Every decision made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of
the board of directors unless a greater number is required by law, by the Bylaws
of the Corporation or by these Articles of Incorporation.
8. Amendments to this Article. The affirmative vote or
written consent of the holders of at least two-thirds of the shares of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article IV.
ARTICLE V
A. Indemnification. The Corporation shall, to the fullest extent
permitted by the Act, as the same may be amended and supplemented, indemnify all
directors, officers, employees and agents of the Corporation whom it shall have
the power to indemnify thereunder from and against any and all of the expenses,
liabilities, or other matters referred to therein or covered thereby. The
Corporation shall advance expenses to its directors, officers, employees and
agents to the full extent permitted by the Act, as the same may be amended or
supplemented. Such rights to indemnification or advancement of expenses shall
continue as to a person who has ceased to be a director, officer, employee or
agent of the Corporation, and shall inure to the benefit of the heirs,
executives and administrators of such persons. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement may be
entitled under any bylaw, agreement, vote of shareholders or of disinterested
directors or otherwise. The Corporation shall have the right to purchase and
maintain insurance on behalf of its directors, officers, employees or agents to
the full extent permitted by the Act, as the same may be amended or
supplemented.
B. Limitation of Directors Liability. To the fullest extent
permitted by section 841 of the Act or as it may hereafter be amended, or any
other applicable law as now in effect, a director of the corporation shall not
be personally liable to the corporation or its shareholders for monetary damages
for any action taken or any failure to take any action as a director. No
amendment or repeal of this Article V, nor the adoption of any provision in
these articles of incorporation
-5-
<PAGE> 6
inconsistent with this Article, shall eliminate or reduce the effect of this
Article, in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE VI
The names and addresses of the registered agent of the corporation are
as follows:
Robert C. Delahunty
Parsons Behle & Latimer
One Utah Center
201 South Main Street
Suite 1800
Salt Lake City, Utah 84145
The undersigned hereby accepts and acknowledges appointment as the registered
agent of the Corporation named above and confirms that he meets the requirements
of section 501 of the Act.
/s/ ROBERT C. DELAHUNTY
------------------------------------
Robert C. Delahunty
The foregoing Amended and Restated Articles of Incorporation of Iomed,
Inc. were duly approved by the shareholders of such corporation on October 7,
1997.
/s/ ROBERT J. LOLLINI
------------------------------
Secretary
-6-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
IOMED, INC.
ARTICLE 1.
OFFICES
1.1 Business Offices. The principal office of IOMED, Inc. (the
"Corporation") shall be located in the County of Salt Lake, State of Utah. The
Corporation may have such other offices, either within or without Utah, as the
Board of Directors of the Corporation may designate or as the business of the
Corporation may require from time to time.
1.2 Registered Office. The registered office of the Corporation
required to be kept by the Utah Revised Business Corporation Act (as it may be
amended from time to time, the "Act") shall be located within the State of Utah
and may be, but need not be, identical with the principal office. The address of
the registered office may be changed from time to time.
ARTICLE 2.
SHAREHOLDERS
2.1 Annual Meeting. The annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meting shall be held on the 22nd day of November
in each year, beginning with the year 1998, at the hour of 9:00 o'clock a.m., or
at such other date and time as shall be fixed by the Board of Directors or the
President. If the day fixed for the annual meeting shall be a legal holiday in
the State of Utah, or is a Saturday or Sunday, such meeting shall be held on the
next succeeding business day. If no annual meeting is held in accordance with
the foregoing provisions, the Board of Directors shall cause the meeting to be
held as soon thereafter as convenient. If no annual meeting is held in
accordance with the foregoing provisions, a special meeting may be held in lieu
of the annual meeting, and any action taken at that special meeting shall have
the same effect as if it had been taken at the annual meeting, and in such case
all references in these Bylaws to the annual meeting of the shareholders shall
be deemed to refer to such special meeting.
2.2 Special Meetings. Special meetings of the shareholders may be
called by the Chairman of the Board, the Chief Executive Officer or President or
the Board of Directors, and shall be called by the Chief Executive Officer or
the President at the written request of the holders of not less than one-tenth
of all the votes entitled to be cast on any issue proposed to be considered at
the meeting. Business transacted at any special meeting of the shareholders
shall be limited to matters relating to the purpose or purposes stated in the
notice of meeting.
2.3 Place of Meeting. The Board of Directors may designate any
place, either within or without the State of Utah, as the place of meeting for
any annual or any special meeting of
<PAGE> 2
the shareholders. If no designation is made by the directors, the place of
meeting shall be the principal office of the Corporation in the State of Utah.
2.4 Notice of Meeting.
(a) Content and Mailings Requirements. Written notice
stating the date, time and place of each annual or special shareholder meeting
shall be delivered no fewer than 10 nor more than 60 days before the date of the
meeting, either personally or by mail, by or at the direction of the President,
the Board of Directors, or other persons calling the meeting, to each
shareholder of record entitled to vote at such meeting and to any other
shareholder entitled by the Act or the Articles of Incorporation to receive
notice of the meeting. Notice of special shareholder meetings shall include a
description of the purpose or purposes for which the meeting is called.
(b) Effective Date. Written notice shall be deemed to be
effective at the earlier of: (1) when mailed, if addressed to the shareholder's
address shown in the Corporation's current record of shareholders; (2) when
received; (3) five days after it is mailed; or (4) on the date shown on the
return receipt if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee.
(c) Effect of Adjournment. If any shareholder meeting is
adjourned to a different date, time or place, notice need not be given of the
new date, time and place, if the new date, time and place is announced at the
meeting before adjournment. But if a new record date for the adjourned meeting
is or must be fixed, then notice must be given pursuant to the requirements of
this section to those persons who are shareholders as of the new record date.
2.5 Waiver of Notice.
(a) Written Waiver. A shareholder may waive any notice
required by the Act, the Articles of Incorporation or the Bylaws, by a writing
signed by the shareholder entitled to the notice, which is delivered to the
Corporation (either before or after the date and time stated in the notice) for
inclusion in the minutes or filing with the corporate records.
(b) Attendance at Meetings. A shareholder's attendance at a
meeting: (1) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting because of lack of
notice or effective notice; and (2) waives objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to considering
the matter when it is presented.
2.6 Record Date.
(a) Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
shareholders entitled to receive payment of any distribution, or in order to
make a determination of shareholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. Such record
2
<PAGE> 3
date shall not be more than 70 days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If no record
date is so fixed by the Board for the determination of shareholders entitled to
notice of, or to vote at, a meeting of shareholders, the record date for
determination of such shareholders shall be at the close of business on the day
before the first notice is delivered to shareholders. If no record date is fixed
by the Board for the determination of shareholders entitled to receive a
distribution, the record date shall be the date the board authorizes the
distribution. If no record date is fixed by the Board for the determination of
shareholders entitled to take action without a meeting, the record date shall be
the date the first shareholder signs a consent.
(b) Effect of Adjournment. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof unless the Board of Directors fixes a new record date, which it must do
if the meeting is adjourned to a date more than 120 days after the date fixed
for the original meeting.
2.7 Shareholder List. After fixing a record date for a shareholders'
meeting, the Corporation shall prepare a list of the names of its shareholders
entitled to be given notice of the meeting. The list must be arranged by voting
group and within each voting group by class or series of shares, must be
alphabetical within each class or series, and must show the address of, and the
number of shares held by, each shareholder. The shareholder list must be
available for inspection by any shareholder, beginning on the earlier of ten
days before the meeting for which the list was prepared or two business days
after notice of the meeting is given for which the list was prepared and
continuing through the meeting and any adjournment thereof. The list shall be
available at the Corporation's principal office or at a place identified in the
meeting notice in the city where the meeting will be held.
2.8 Shareholder Quorum and Voting Requirements.
(a) Quorum. Shares entitled to vote as a separate voting
group may take action on a matter at a meeting only if a quorum of those shares
exists with respect to that matter. Unless the Articles of Incorporation or the
Act provide otherwise, a majority of the votes entitled to be cast on the matter
by the voting group constitutes a quorum of that voting group for action on that
matter. Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
(b) Voting Groups. If the Articles of Incorporation or the
Act provide for voting by a single voting group on a matter, action on that
matter is taken when voted upon by that voting group. If the Articles of
Incorporation or the Act provide for voting by two or more voting groups on a
matter, action on that matter is taken only when voted upon by each of those
voting groups counted separately. Action may be taken by one voting group on a
matter even though no action is taken by another voting group entitled to vote
on the matter.
3
<PAGE> 4
(c) Shareholder Action. If a quorum exists, action on a
matter, other than the election of directors, by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless the Articles of Incorporation or the Act require a
greater number of affirmative votes. Directors are elected by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present.
2.9 Proxies. At all meetings of shareholders, a shareholder may vote
in person or by proxy which is executed in writing by the shareholder or which
is executed by his or her duly authorized attorney-in-fact. Such proxy shall be
filed with the Secretary of the Corporation or other person authorized to
tabulate votes before or at the time of the meeting. No proxy shall be valid
after 11 months from the date of its execution unless otherwise provided in the
proxy.
2.10 Voting of Shares. Unless otherwise provided in the Articles of
Incorporation or by applicable law, each outstanding share, regardless of class,
is entitled to one vote upon each matter submitted to a vote at a meeting of
shareholders. Except as provided by specific court order, no shares of the
Corporation owned, directly or indirectly, by a second corporation, domestic or
foreign, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting if a
majority of the shares entitled to vote for the election of directors of such
second corporation are held by the Corporation. The prior sentence shall not
limit the power of the Corporation to vote any shares, including its own shares,
held by it in a fiduciary capacity.
2.11 Meetings by Telecommunications. Any or all shareholders may
participate in an annual or special meeting by, or conduct the meeting through
the use of, any means of communication by which all shareholders participating
may hear each other during the meeting. A shareholder participating in a meeting
by this means is deemed to be present in person at the meeting.
2.12 Action Without a Meeting.
(a) Written Consent. Any action which may be taken at a
meeting of the shareholders may be taken without a meeting and without prior
notice if one or more consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shareholders entitled to vote with respect to the
subject matter thereof were present and voted. Action taken under this section
has the same effect as action taken at a meeting of shareholders and may be
described as such in any document.
(b) Post-Consent Notice. Unless the written consents of all
shareholders entitled to vote have been obtained, notice of any shareholder
approval without a meeting shall be given at least ten days before the
consummation of the action authorized by such approval to (i) those shareholders
entitled to vote who have not consented in writing, and (ii) those shareholders
not entitled to vote and to whom the Act requires that notice of the proposed
action be given. Any such notice must contain or be accompanied by the same
material that is required under the Act to
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be sent in a notice of meeting at which the proposed action would have been
submitted to the shareholders for action.
(c) Effective Date and Revocation of Consents. No action
taken pursuant to this section shall be effective unless all written consents on
which the Corporation relies for the taking of an action are received by the
Corporation within a 60-day period and not revoked. Such action is effective as
of the date the last written consent necessary to effect the action is received,
unless all of the written consents specify a later date as the effective date of
the action. If the Corporation has received written consents signed by all
shareholders entitled to vote with respect to the action, the effective date of
the action may be any date that is specified in all the written consents as the
effective date of the action. Any such writing may be received by the
Corporation by electronically transmitted facsimile or other form of
communication providing the Corporation with a complete copy thereof, including
a copy of the signatures thereto. Any shareholder giving a written consent
pursuant to this section may revoke the consent by a signed writing describing
the action and stating that the consent is revoked, provided that such writing
is received by the Corporation prior to the effective date of the action.
(d) Unanimous Consent for Election of Directors.
Notwithstanding subsection (a) of this section, directors may not be elected by
written consent unless such consent is unanimous by all shares entitled to vote
for the election of directors.
2.13 Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
Directors. Nomination for election to the Board of Directors of the Corporation
at a meeting of shareholders may be made by the Board of Directors or by any
shareholder of the Corporation entitled to vote for the election of Directors at
such meeting who complies with the notice procedures set forth in this Section
2.13. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days nor more than 90 days prior to such meeting; provided, however,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given to shareholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (a) as
to each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of the Corporation
which are beneficially owned by each such nominee, and (iv) any other
information concerning the nominee that must be disclosed as to nominees in
proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (including such person's written consent to be named as a
nominee and to serve as a Director if elected); and (b) as to the shareholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such shareholder and (ii) the class and number of shares of the
Corporation which are beneficially owned by such shareholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of such
proposed nominee to serve as a Director of the Corporation. The Chairman of the
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meeting may, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the foregoing procedure, and if he or
she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
2.14 Organization. The Chairman of the Board, or in his absence the
Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the shareholders to order,
and shall act as Chairman of such meeting; provided, however, that the Board of
Directors may appoint any shareholder to act as Chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the Corporation shall act
as Secretary at all meetings of the shareholders; but in the absence of the
Secretary at any meeting of the shareholders, the presiding officer may appoint
any person to act as Secretary of the meeting.
ARTICLE 3.
BOARD OF DIRECTORS
3.1 General Powers. The business and affairs of the Corporation
shall e managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the Corporation except as otherwise provided by
law, the Articles of Incorporation or these Bylaws. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
3.2 Number, Tenure and Qualifications. The authorized number of
Directors shall be not less than three nor more than ten; provided, however,
that if the Corporation has less than three shareholders entitled to vote for
the election of directors, the Board of Directors may consist of a number of
individuals equal to or greater than the number of those shareholders. The
current number of Directors shall be within the limits specified above, as
determined (or as amended from time-to-time) by resolution adopted by the
Directors. The number of Directors may be decreased at any time and from time to
time by a majority of the Directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of the shareholders by such shareholders as have the right to vote on
such election. Directors need not to be residents of Utah or shareholders of the
Corporation.
3.3 Classes of Directors. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one directors more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class I, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class I and one of the extra directors
shall be a member of Class II, unless otherwise provided form time to time by
resolution adopted by the Board of Directors.
3.4 Terms of Office. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
serve for a term ending on the date of the
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annual meeting of shareholders in 2000; each initial director in Class II shall
serve for a term ending on the date of the annual meeting of shareholders in
1999; and each initial director in Class III shall serve for a term ending on
the date of the annual meeting of shareholders in 1998; and further provided,
that the term of each director shall be subject to the election and
qualification of his or her successor and to his or her earlier death,
resignation or removal.
3.5 Allocation Among Classes for Increases or Decreases in Number.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he or she is a member and (ii) the newly created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to ensure that no one class has more than one director more than any other
class. To the extent possible, consistent with the foregoing, any newly created
directorships shall be added to those classes whose terms of office are to
expire at the latest dates following such allocation, and any newly eliminated
directorships shall be subtracted from those classes whose terms of offices are
to expire at the earliest dates following such allocation, unless otherwise
provided from time to time by resolution adopted by the Board of Directors.
3.6 Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of shareholders, for the purpose of appointing
officers and transacting such other business as may come before the meeting. The
Board of Directors may provide, by resolution, the time and place for the
holding of additional regular meetings without other notice than such
resolution.
3.7 Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the President or any Director. The person
authorized to call special meetings of the Board of Directors may fix any place
as the place for holding any special meeting of the Board of Directors.
3.8 Notice of Special Meetings. Notice of the date, time and place
of any special director meeting shall be given at least two days previously
thereto either orally or in writing. Oral notice shall be effective when
communicated in a comprehensive manner. Written notice is effective as to each
director at the earlier of: (a) when received; (b) five days after deposited in
the United States mail, addressed to the director's address shown in the records
of the Corporation; or (c) the date shown on the return receipt if sent by
registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the director. Any director may waive notice of any
meeting before or after the date and time of the meeting stated in the notice.
Except as provided in the next sentence, the waiver must be in writing and
signed by the director entitled to the notice. A director's attendance at or
participation in a meeting shall constitute a waiver of notice of such meeting,
unless the director at the beginning of the meeting, or promptly upon his
arrival, objects to holding the meeting or transacting business at the meeting
because of lack of or defective notice, and does not thereafter vote for or
assent to action taken at the meeting. Unless required by the Articles of
Incorporation, neither the business to be transacted at, nor the purpose of, any
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
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3.9 Quorum and Voting.
(a) Quorum. A majority of the number of directors prescribed
by resolution adopted pursuant to section 3.2 of these Bylaws, or if no number
is prescribed, the number in office immediately before the meeting begins, shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, unless the Articles of Incorporation require a greater number.
(b) Voting. The act of the majority of the directors present
at a meeting at which a quorum is present when the vote is taken shall be the
act of the Board of Directors unless the Articles of Incorporation require a
greater percentage.
(c) Presumption of Assent. A director who is present at a
meeting of the Board of Directors or a committee of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless:
(1) the director objects at the beginning of the meeting, or promptly upon his
or her arrival, to holding or transacting business at the meeting and does not
thereafter vote for or assent to any action taken at the meeting; (2) the
director contemporaneously requests that his or her dissent or abstention as to
any specific action be entered in the minutes of the meeting; or (3) the
director causes written notice of his or her dissent or abstention as to any
specific action be received by the presiding officer of the meeting before its
adjournment or to the Corporation immediately after adjournment of the meeting.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
3.10 Meetings by Telecommunications. Any or all directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
3.11 Action Without a Meeting. Any action required or permitted to be
taken by the Board of Directors at a meeting may be taken without a meeting if
all the directors consent to such action in writing. Action taken by written
consent is effective when the last director signs the consent, unless, prior to
such time, any director has revoked a consent by a signed writing received by
the Corporation, or unless the consent specifies a different effective date. A
signed consent has the effect of an action taken at a meeting of directors and
may be described as such in any document.
3.12 Resignation. A director may resign at any time by giving a
written notice of resignation to the Corporation. Such a resignation is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date, and the acceptance of such recognition shall
not be necessary to make it effective.
3.13 Removal. Directors of the Corporation may be removed only for
cause y the affirmative vote of the holders of two-thirds of the capital shares
of the Corporation issued and outstanding and entitled to vote.
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3.14 Vacancies. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, shall
be filled only by vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected for the unexpired term of his or her predecessor in
office, and a director chosen to fill a position resulting from an increase in
the number of directors shall hold office until the next election of the class
for which such director shall have been chosen, subject to the election and
qualification of his or her successor and to his or her earlier death,
resignation or removal.
3.15 Compensation. By resolution of the Board of Directors, each
director may be paid his or her expenses, if any, of attendance at each meeting
of the Board of Directors and may be paid a stated salary as director or a fixed
sum for attendance at each meeting of the Board of Directors or both. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
3.16 Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the Act, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it. Each such committee shall keep minutes and make
such reports as the Board of Directors may from time to time request. Except as
the Board of Directors may otherwise determine, any committee may make rules for
the conduct of its business, but unless otherwise provided by the directors or
in such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these By-Laws for the Board of Directors.
ARTICLE 4.
OFFICERS
4.1 Number. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer, and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries, each of whom shall be appointed by the
Board of Directors. The Board of Directors may appoint such other officers and
assistant officers as may be deemed appropriate. If specifically authorized by
the Board of Directors, an
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officer may appoint one or more officers or assistant officers. The same
individual may simultaneously hold more than one office in the Corporation.
4.2 Appointment and Term of Office. The officers of the Corporation
shall be appointed by the Board of Directors for a term as determined by the
Board of Directors. The designation of a specified term does not grant to the
officer any contract rights, and the Board can remove the officer at any time
prior to the termination of such term. If no term is specified, the officer
shall hold office until he or she resigns, dies or until he or she is removed in
the manner provided in section 4.3 of these bylaws.
4.3 Removal. Any officer or agent may be removed by the Board of
Directors at any time, with or without cause. Such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Appointment
of an officer or agent shall not of itself create contract rights.
4.4 Resignation. Any officer may resign at any time, subject to any
rights or obligation under any existing contracts between the officer and the
Corporation, by giving notice to the president or board of directors. An
officer's resignation shall be effective when received by the Corporation,
unless the notice specifies a later effective date, and the acceptance of such
resignation shall not be necessary to make it effective.
4.5 Authority and Duties of Officers. The officers of the
Corporation shall have the authority and shall exercise the powers and perform
the duties specified below and as may be additionally specified by the Board of
Directors or these Bylaws, except that in each event each officer shall exercise
such powers and perform such duties as may be required by law:
(a) President. The President shall, subject to the control
of the Board of Directors, in general supervise and control all of the business
and affairs of the Corporation. Unless there is a Chairman of the Board, the
President shall, when present, preside at all meetings of the shareholders and
of the Board of Directors. The President may sign, with the Secretary or any
other proper officer of the Corporation thereunto authorized by the Board of
Directors, certificates for shares of the Corporation and deeds, mortgages,
bonds, contracts, or other instruments which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed. In general, the President shall
perform all duties incident to the office of President and such other duties as
may be prescribed by the Board of Directors from time to time.
(b) Vice-President. Any Vice-president (or if there is more
than one, each vice-president) shall assist the President and shall perform such
duties as may be assigned to him or her by the President or by the Board of
Directors. If appointed, in the absence of the President or in the event of his
or her death, inability or refusal to act, the Vice-President (or in the event
there is more than one vice-president, the vice-presidents in the order
designated at the time of their election, or in the absence of any designation,
then in the order of their appointment) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject
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to all the restrictions upon the President. (If there is no Vice-president, then
the Treasurer shall perform such duties of the President.)
(c) Secretary. The Secretary shall: (i) keep the minutes of
the proceedings of the shareholders, the Board of Directors and any committees
of the Board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these Bylaws or as
required by law; (iii) be custodian of the corporate records; (iv) when
requested or required, authenticate any records of the Corporation; (v) keep a
register of the post office address of each shareholder which shall be furnished
to the Secretary by such shareholder; (vi) sign with the President, or a
Vice-president, certificates for shares of the Corporation, the issuance of
which shall have been authorized by resolution of the Board of Directors; (vii)
have general charge of and responsibility to perform all accounting functions
for the Corporation and will maintain all of the stock transfer books of the
Corporation; and (viii) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned by the
President or by the Board of Directors. Assistant secretaries, if any, shall
have the same duties and powers, subject to the supervision of the Secretary.
(d) Treasurer. The Treasurer shall: (i) have charge and
custody of and be responsible for all funds and securities of the Corporation;
(ii) receive and give receipts for moneys due and payable to the Corporation
from any source whatsoever, and deposit all such moneys in the name of the
Corporation in such banks, trust companies, or other depositories as shall be
selected by the Board of Directors; and (iii) in general, perform all of the
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned by the President or by the Board of Directors. If required
by the Board of Directors, the Treasurer shall give a bond for the faithful
discharge of his or her duties in such sum and with such surety or sureties as
the Board of Directors shall determine. Assistant treasurers, if any, shall have
the same powers and duties, subject to the supervision of the Treasurer.
4.6 Salaries. The salaries of the officers shall be fixed from time
to time by the Board of Directors.
ARTICLE 5.
INDEMNIFICATION OF DIRECTORS, OFFICERS,
AGENTS AND EMPLOYEES
5.1 Indemnification of Directors. The Corporation shall indemnify
and advance expenses to the directors of the Corporation to the fullest extent
permitted by applicable law. Without limiting the generality of the foregoing,
the Corporation shall indemnify the directors of the Corporation in all cases in
which a corporation may indemnify a director under section 16-10a-902 of the
Act. The Corporation shall consider and act expeditiously as possible upon any
and all requests by a director for indemnification or advancement of expenses.
5.2 Indemnification of Officers, Agents and Employees Who Are Not
Directors. The Board of Directors may indemnify and advance expenses to any
officer, employee or agent of
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the Corporation who is not a director of the Corporation to any extent
consistent with public policy, as determined by the general or specific actions
of the Board of Directors.
5.3 Insurance. By action of the Board of Directors, notwithstanding
any interest of the directors in such action, the Corporation may purchase and
maintain liability insurance on behalf of a person who is or was a director,
officer, employee, fiduciary or agent of the Corporation, against any liability
asserted against or incurred by such person in that capacity or arising from
such person's status as a director, officer, employee, fiduciary or agent,
whether or not the Corporation would have the power to indemnify such person
under the applicable provisions of the Act.
ARTICLE 6.
SHARES
6.1 Issuance of Shares. The Corporation may issue the number of
capital shares authorized by the Articles of Incorporation. The issuance or sale
by the Corporation of any its authorized capital shares shall be made only upon
authorization by the Board of Directors, unless otherwise provided by statute.
The Board of Directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the Corporation,
including cash, promissory notes, services performed, contracts or arrangements
for services to be performed, or other securities of the Corporation. Shares
shall be issued for such consideration as shall be fixed from time to time by
the Board of Directors.
6.2 Certificates for Shares.
(a) Content. Shares may but need not be represented by
certificates in such form as determined by the Board of Directors and stating on
their face, at a minimum, the name of the Corporation and that it is formed
under the laws of the State of Utah, the name of the person to whom issued, and
the number and class of shares and the designation of the series, if any, the
certificate represents. Such certificates shall be signed (either manually or by
facsimile) by the President or a Vice-president and by the Secretary or an
assistant secretary and may be sealed with a corporate seal or a facsimile
thereof. Each certificate for shares shall be consecutively numbered or
otherwise identified.
(b) Shareholder List. The name and address of the person to
whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the Corporation.
(c) Transferring Shares. All certificates surrendered to the
Corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed, or mutilated
certificate, a new one may be issued therefor upon such terms and indemnity to
the Corporation as the board of directors may prescribe.
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6.3 Shares Without Certificates. The Board of Directors may
authorize the issuance of some or all of the shares without certificates. Within
a reasonable time after the issuance or transfer of shares without certificates,
the Corporation shall send the shareholder a written statement of the
information required on certificates under section 6.2 of these bylaws.
6.4 Registration of the Transfer of Shares. Registration of the
transfer of shares of the Corporation shall be made only on the stock transfer
books of the Corporation. In order to register a transfer, the record owner
shall surrender the shares to the Corporation for cancellation, properly
endorsed by the appropriate person or persons with reasonable assurances that
the endorsements are genuine and effective. Unless the Corporation has
established a procedure by which a beneficial owner of shares held by a nominee
is to be recognized by the Corporation as the owner, the person in whose name
shares stand in the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
ARTICLE 7.
MISCELLANEOUS
7.1 Inspection of Records by Shareholders and Directors. A
shareholder or director of a Corporation is entitled to inspect and copy, during
regular business hours at the Corporation's principal office, any of the records
of the Corporation required to be maintained by the Corporation under the Act,
if such person gives the Corporation written notice of the demand at least five
business days before the date on which such a person wishes to inspect and copy.
The scope of such inspection right shall be as provided under the Act.
7.2 Corporate Seal. The Board of Directors may provide a corporate
seal which may be circular in form and have inscribed thereon any designation
including the name of the Corporation, the state of incorporation, and the words
"Corporate Seal."
7.3 Amendments. The Corporation's Board of Directors may amend or
repeal the Corporation's Bylaws at any time unless:
(a) the Articles of Incorporation or the Act reserve this
power exclusively to the shareholders in whole or part; or
(b) the shareholders, in adopting, amending or repealing a
particular bylaw, provide expressly that the Board of Directors may not amend or
repeal that bylaw; or
(c) the bylaw either establishes, amends or deletes a
greater shareholder quorum or voting requirement.
Any amendment which changes the voting or quorum requirement for the
Board must meet the same quorum requirement and be adopted by the same vote and
voting groups required to take action under the quorum and voting requirements
then in effect or proposed to be adopted, whichever are greater.
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7.4 Fiscal Year. The fiscal year of the Corporation shall be
established by the Board of Directors.
7.5 Control Shares. The provisions of the Control Shares
Acquisitions Act, as set forth in Section 61-6-1, et. seq., of the Utah Code
Annotated shall not apply to control share acquisitions of shares of the
Corporation.
/s/ ROBERT J. LOLLINI
------------------------------
Secretary
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EXHIBIT 10.26
1997 SHARE INCENTIVE PLAN
IOMED, Inc., a Utah corporation, (the "Company") adopts this Share
Incentive Plan (the "Plan"), effective November 7, 1997.
1. PURPOSE. The purpose of this Plan is to enable the Company to attract and
retain the services of and provide performance incentives to (1) selected
employees, officers and directors of the Company or of any subsidiary of the
Company ("Employees") and (2) selected nonemployee agents, consultants, advisors
and independent contractors of the Company or any subsidiary.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below and in
paragraph 13, the shares to be offered under the Plan shall consist of the
common shares the Company ("Common Shares"), and the total number of Common
Shares that may be issued under the Plan shall not exceed 1,500,000 shares, all
of which may be issued pursuant to the exercise of options granted pursuant to
the Plan. The shares issued under the Plan may be authorized and unissued shares
or reacquired shares or shares acquired in the market. If any award granted
under the Plan expires, terminates or is canceled, the unissued shares subject
to such award shall again be available under the Plan and if shares which are
awarded under the Plan are forfeited to the Company or repurchased by the
Company, that number of shares shall again be available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan (as amended and restated) shall become
effective on the date adopted by the Board of Directors. Awards may be
granted and shares may be awarded or sold under the Plan at any time after
the effective date and before termination of the Plan.
(b) DURATION. The Plan shall continue in effect for a period of 10 years from
the date adopted by the Board of Directors, subject to earlier termination by
the Board of Directors. The Board of Directors may suspend or terminate the
Plan at any time, except with respect to awards then outstanding under the
Plan. Termination shall not affect the terms of any outstanding awards.
4. ADMINISTRATION.
(a) BOARD OF DIRECTORS. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to
time the individuals to whom awards shall be made, the amount of the awards
and the other terms and conditions of the awards. Subject to the provisions
of the Plan, the Board of Directors may from time to time adopt and amend
rules and regulations relating to the administration of the Plan, advance the
lapse of any waiting period, accelerate any exercise date, waive or modify
any restriction applicable to shares (except those restrictions imposed by
law) and make all other determinations in the judgment of the Board of
Directors necessary or desirable for the administration of the Plan. The
interpretation and construction of the provisions of the Plan and related
agreements by the Board of Directors shall be final and
<PAGE> 2
conclusive. The Board of Directors may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any related
agreement in the manner and to the extent it shall deem expedient to carry
the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) COMMITTEE. The Board of Directors may delegate to a committee of the
Board of Directors (the "Committee") any or all authority for administration
of the Plan. If authority is delegated to a Committee, all references to the
Board of Directors in the Plan shall mean and relate to the Committee except
(i) as otherwise provided by the Board of Directors and (ii) that only the
Board of Directors may amend or terminate the Plan as provided in paragraphs
3 and 14.
(c) OFFICER. The Board of Directors or the Committee, as applicable, may
delegate to an executive officer of the Company authority to administer those
aspects of the Plan that do not involve the designation of individuals to
receive awards or decisions concerning the timing, amounts or other terms of
awards. No officer to whom administrative authority has been delegated
pursuant to this provision may waive or modify any restriction applicable to
an award to such officer under the Plan.
5. TYPES OF AWARDS; ELIGIBILITY. The Board of Directors may, from time to time,
take the following actions, separately or in combination, under the Plan: (i)
grant Incentive Stock Options, as defined in section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), as provided in paragraph 6; (ii) grant
options other than Incentive Stock Options ("Non-Statutory Stock Options") as
provided in paragraph 6; (iii) award stock as provided in paragraph 7; (iv) sell
shares subject to restrictions as provided in paragraph 8; (v) grant stock
appreciation rights as provided in paragraph 9; (vi) grant cash bonus rights a
provided in paragraph 10; (vii) grant Performance-based Rights as provided in
paragraph 11 and (viii) grant foreign qualified awards as provided in paragraph
12. Any such awards may be made to Employees, including Employees who are
officers or directors, and to other individuals described in paragraph 1 whom
the Board of Directors believes have made or will make an important contribution
to the Company or any subsidiary of the Company; provided, however, that only
employees of the Compny shall be eligible to receive Incentive Stock Options
under the Plan. The Board of Directors shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to each
individual to whom an award is made. Unless otherwise determined by the Board of
Directors with respect to an award, each option, stock appreciation right, cash
bonus right or performance-based right granted pursuant to the Plan by its terms
shall be nonassignable and nontransferable by the recipient, either voluntarily
or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the recipient's domicile at the time of
death. No fractional shares shall be issued in connection with any award. In
lieu of any fractional shares, cash may be paid in an amount equal to the value
of the fraction or, if the Board of Directors shall determine, the number of
shares may be rounded downward to the next whole share. No Employee may be
granted options or stock appreciation rights under the Plan for more than an
aggregate of 300,000 Common Shares in any consecutive three-year period.
6. OPTION GRANTS. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option price,
the period of the option,
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the time or times at which the option may be exercised and whether the option is
an Incentive Stock Option or a Non-Statutory Stock Option and any other terms of
the grant, all of which shall be set forth in an option agreement between the
Company and the optionee. In the case of Incentive Stock Options, all terms
shall be consistent with the requirements of the Code and applicable
regulations. Upon the exercise of an option, the number of shares reserved for
issuance under the Plan shall be reduced by the number of shares issued upon
exercise of the option less the number of shares surrendered or withheld in
connection with the exercise of the option and the number of shares surrounded
or withheld to satisfy withholding obligations in accordance with paragraph 17.
7. STOCK AWARDS. The Board of Directors may award shares under the Plan as stock
bonuses or otherwise. The aggregate number of shares that may be awarded
pursuant to this provision shall not exceed 100,000 shares. Shares awarded
pursuant to this paragraph shall be subject to the terms, conditions, and
restrictions determined by the Board of Directors. The Board of Directors may
require the recipient to sign an agreement as a condition of the award, but may
not require the recipient to pay any monetary consideration other than amounts
necessary to satisfy tax withholding requirements. The agreement may contain any
terms, conditions, restrictions, representations and warranties required by the
Board of Directors. The certificates representing the shares awarded shall bear
any legends required by the Board of Directors. Upon the issuance of a stock
award, the number of shares available for issuance under the Plan shall be
reduced by the number of shares issued less the number of any shares surrendered
to satisfy withholding obligations in accordance with paragraph 17.
8. PURCHASED SHARES. The Board of Directors may issue shares under the Plan for
such consideration (including promissory notes and services) as determined by
the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. All
shares issued pursuant to this paragraph 8 shall be subject to a purchase
agreement, which shall be executed by the Company and the prospective recipient
of the shares prior to the delivery of certificates representing such shares to
the recipient. The purchase agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of Directors.
The certificates representing the shares shall bear any legends required by the
Board of Directors. Upon the issuance of purchased shares, the number of shares
available for issuance under the Plan shall be reduced by the number of shares
issued less the number of any shares surrendered to satisfy withholding
obligations in accordance with paragraph 17.
9. STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted under the Plan by the
Board of Directors, subject to such rules, terms, and conditions as the Board
of Directors prescribes.
(b) EXERCISE. Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal in
value to the excess of the fair market value on the date of grant (or, in the
case of a stock appreciation right granted in connection with an option, the
excess of the fair market value of one Common Share of the Company over the
option price per shares under the option to which the
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stock appreciation right relates), multiplied by the number of shares
covered by the stock appreciation right or the option, or portion thereof,
that is surrendered. Payment by the Company upon exercise of a stock
appreciation right may be in Common Shares valued at fair market value, in
cash, or partly in Common Shares and partly in cash, all as determined by
the Board of Directors. The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may impose any
conditions upon the exercise of a stock appreciation right or adopt rules
and regulations from time to time affecting the rights of holders of stock
appreciation rights. Such rules and regulations may govern the right to
exercise stock appreciation rights granted thereafter. Upon the exercise of
a stock appreciation right for shares, the number of shares available for
issuance under the Plan shall be reduced by the number of shares issued less
the number of any shares surrendered or withheld to satisfy withholding
obligations in accordance with paragraph 17. Cash payments of stock
appreciation rights shall not reduce the number of Common Shares available
for issuance under the Plan.
10. CASH BONUS RIGHTS. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock awarded
or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to rules, terms and conditions as
the Board of Directors may prescribe. The payment of a cash bonus shall not
reduce the number of Common Shares available for issuance under the Plan. A
cash bonus right granted in connection with an option will entitle an
optionee to a cash bonus when the related option is exercised (or terminates
in connection with the exercise of a stock appreciation right related to the
option) in whole or in part if, in the sole discretion of the Board of
Directors, the bonus right will result in a tax deduction that the Company
has sufficient taxable income to use. A cash bonus right granted in
connection with a stock award pursuant to paragraph 7 or purchase of stock
pursuant to paragraph 8 will entitle the recipient to a cash bonus payable
when the stock award is awarded or the shares are purchased or restrictions,
if any, to which the stock is subject lapse. If the stock awarded or the
shares purchased are subject to restrictions and are repurchased by the
Company or forfeited by the holder, the cash bonus right granted in
connection with the stock awarded or shares purchased shall terminate and
may not be exercised.
11. PERFORMANCE-BASED AWARDS. The Board of Directors may grant awards intended
to qualify as performance-based compensation under section 162(m) of the
Code and the regulations thereunder ("Performance-based Awards").
Performance-based Awards shall be denominated at the time of grant either in
Common Shares ("Stock Performance Awards") or in dollar amounts ("Dollar
Performance Awards"). Payment under a Stock Performance Award or a Dollar
Performance Award shall be made, at the discretion of the Board of
Directors, subject to the limitations set forth in paragraph 2, in Common
Shares ("Performance Shares"), or in cash or any combination thereof.
Performance-based Awards shall be subject to the following terms and
conditions:
(a) AWARD PERIOD. The Board of Directors shall determine the period of time
for which a Performance-based Award is made (the "Award Period").
(b) PERFORMANCE GOALS AND PAYMENT. The Board of Directors shall establish in
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<PAGE> 5
writing objectives ("Performance Goals") that must be met by the Company or
any subsidiary, division or other unit of the Company ("Business Unit")
during the Award Period as a condition to payment being made under the
Performance-based Award. The Performance Goals for each award shall be one
or more targeted levels of performance with respect to one or more of the
following objective measures with respect to the Company or any Business
Unit: earnings, earnings per share, stock price increases, total shareholder
return (stock price increase plus dividends), return on equity, return on
assets, return on capital, economic value added, revenues, operating income,
cash flows or any of the foregoing (determined according to criteria
established by the Board of Directors). The Board of Directors shall also
establish the number of Performance Shares or the amount of cash payment to
be made under a Performance-based Award if the Performance Goals are met or
exceeded, including the fixing of a maximum payment (subject to paragraph
11(d)). The Board of Directors may establish other restrictions to payment
under a Performance-based Award, such as a continued employment requirement,
in addition to satisfaction of the Performance Goals. Some or all of the
Performance Shares may be issued at the time of the award as restricted
shares subject to forfeiture in whole or in part if Performance Goals, or if
applicable, other restrictions are not satisfied.
(c) COMPUTATION OF PAYMENT. During or after an Award Period, the performance
of the Company or Business Unit, as applicable, during the period shall be
measured against the Performance Goals. If the Performance Goals are not
met, no payment shall be made under a Performance-based Award. If the
Performance Goals are met or exceeded, the Board of Directors shall certify
that fact in writing and certify the number of Performance Shares earned or
the amount of cash payment to be made under the terms of the
Performance-based Award.
(d) MAXIMUM AWARDS. No participant may receive Stock Performance Awards in
any fiscal year under which the maximum number of shares issuable under the
award, when aggregated with the shares issuable under any awards made in the
immediately preceding two fiscal years, exceeds 300,000 shares or Dollar
Performance Awards in any fiscal year under which the maximum amount of cash
payable under the award, when aggregated with the amount of cash payable
under awards made in the immediately preceding two fiscal years, exceeds an
aggregate of $600,000.
(e) EFFECT ON SHARES AVAILABLE. The payment of a Performance-based Award in
cash shall not reduce the number of Common Shares available for issuance
under the Plan. The number of Common Shares available for issuance under the
Plan shall be reduced by the number of shares issued upon payment of an
award, less the number of shares surrendered or withheld to satisfy
withholding obligations.
12. FOREIGN QUALIFIED GRANTS. Awards under the Plan may be granted to such
Employees and such other persons described in paragraph 1 residing in foreign
jurisdictions as the Board of Directors may determine from time to time. The
Board of Directors may adopt such supplements to the Plan as may be necessary to
comply with the applicable laws of such foreign jurisdictions and to afford
participants favorable treatment under such laws; provided, however, that no
award
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shall be granted under any such supplement with terms that are more beneficial
to the participants than the terms permitted by the Plan.
13. CHANGES IN CAPITAL STRUCTURE.
(a) STOCK SPLITS; STOCK DIVIDENDS. If the number of outstanding Common
Shares of the Company is hereafter increased or decreased or changed into
or exchanged for a different number or kind of shares or other securities
of the Company by reason of any stock split, combination of shares or
dividend payable in shares, recapitalization or reclassification,
appropriate adjustment shall be made by the Board of Directors in the
number and kind of shares available for grants under the Plan. In addition,
the Board of Directors shall make appropriate adjustment in the number and
kind of shares as to which outstanding options, or portions thereof then
unexercised, shall be exercisable, so that the optionee's proportionate
interest before and after the occurrence of the event is maintained.
Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the
issuance of fractional shares, and any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by
the Board of Directors. Any such adjustments made by Board of Directors
shall be conclusive.
(b) MERGERS, REORGANIZATIONS, ETC. The Board of Directors may include such
terms and conditions, including without limitation, provisions relating to
acceleration in the event of a change in control, as it deems appropriate
in connection with any award under the Plan with respect to a merger,
consolidation, plan of exchange, acquisition of property or stock,
separation, reorganization or liquidation to which the Company or a
subsidiary is a party or a sale or all or substantially all of the
Company's assets (each, a "Transaction"). Notwithstanding the foregoing, in
the event of a Transaction, the Board of Directors shall, in its sole
discretion and to the extent possible under the structure of the
Transaction, select one or the following alternatives for treating
outstanding Incentive Stock Options or Non-Statutory Stock Options under
the Plan:
(i) Outstanding options shall remain in effect in accordance with their
terms.
(ii) Outstanding options shall be converted into options to purchase
stock in the company that is surviving or acquiring company in the
Transaction. The amount, type of securities subject thereto and
exercise price of the converted options shall be determined by the
Board of Directors of the Company, taking into account the relative
values of the companies involved in the Transaction and the exchange
rate, if any, used in determining shares of the surviving corporation
to be issued to holders of shares of the Company. Unless otherwise
determined by the Board of Directors, the converted options shall be
vested only to the extent that the vesting requirements relating to
options granted hereunder have been satisfied.
(iii) The Board of Directors shall provide a 30-day period prior to the
consummation of the Transaction during which outstanding options may be
exercised to the extent then exercisable, and upon the expiration of
such 30-day
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period, all unexercised options shall immediately terminate.
The Board of Directors may, in its sole discretion, accelerate
the exercisability of options so that they are exercisable in
full during such 30-day period.
(c) DISSOLUTION OF THE COMPANY. In the event of the dissolution of the
Company, options shall be treated in accordance with paragraph
13(b)(iii).
(d) RIGHTS ISSUED BY ANOTHER CORPORATION. The Board of Directors may
also grant options, stock appreciation rights, performance units, stock
bonuses and cash bonuses and issue restricted stock under the Plan
having terms, conditions and provisions that vary from those specified
in this Plan provided that any such awards are granted in substitution
for, or in connection with the assumption of, existing options, stock
appreciation rights, stock bonuses, cash bonuses, restricted stock and
performance units granted, awarded or issued by another corporation and
assumed or otherwise agreed to be provided for by the Company pursuant
to or by reason of a Transaction.
14. AMENDMENT OF PLAN. The Board of Directors may at any time, and from time to
time, modify or amend the Plan in such respects as it shall deem advisable
because of changes in the law while the Plan is in effect or for any other
reason. Except as provided in paragraphs 9, 10 and 13, however, no change in an
award already granted shall be made without the written consent of the holder of
such award.
15. APPROVALS. The obligations of the Company under the Plan are subject to the
approval of state and federal authorities or agencies with jurisdiction in the
matter. The Company will use its best efforts to take steps required by state or
federal law or applicable regulations, including rules and regulations of the
Securities and Exchange Commission and any stock exchange on which the Company's
shares may then be listed, in connection with the grants under the Plan. The
foregoing notwithstanding, the Company shall not be obligated to issue or
deliver Common Shares under the Plan if such issuance or delivery would violate
applicable state or federal securities laws.
16. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award pursuant to
the Plan shall (i) confer upon any Employee any right to be continued in the
employment of the Company or any subsidiary or interfere in any way with the
right of the Company or any subsidiary by whom such Employee is employed to
terminate such Employee's employment at any time, for any reason, with or
without cause, or to decrease such Employee's compensation or benefits, or (ii)
confer upon any person engaged by the Company any right to be retained or
employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
17. TAXES. Each participant who has received an award under the Plan shall, upon
notification of the amount due, pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local withholding requirements. If the
participant fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the participant including
salary, subject to applicable law. With the consent of the Board of Directors, a
participant may satisfy this withholding obligation, in whole or in part, by
having the
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Company withhold from any shares to be issued that number of shares that would
satisfy the amount due or by delivering Common Shares to the Company to satisfy
the withholding amount.
18. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall
have no rights as a shareholder with respect to any Common Shares until the date
of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
Approved by the Board of Directors: October 24, 1997.
------------
Approved by the Shareholders: November 7, 1997
------------
By: /s/ ROBERT J. LOLLINI
----------------------------------
Secretary of IOMED, Inc.
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EXHIBIT 10.28
EXCHANGE AGREEMENT
THIS AGREEMENT is made and shall be effective as of the 1st day of
November, 1997, by and among Iomed, Inc., a Utah corporation ("Iomed"), Novartis
Pharmaceuticals Corporation, a Delaware corporation and the successor to the
ethical pharmaceuticals business of Ciba-Geigy Corporation ("Novartis"), and
Dermion, Inc., a Delaware corporation ("Dermion"). Each of Iomed, Novartis and
Dermion are referred to herein individually as a "Party", and are referred to
collectively herein as the "Parties".
RECITALS:
A. Iomed and Novartis are the sole shareholders, and collectively own
100%, of the issued and outstanding equity securities of Dermion.
B. Iomed, Novartis and Dermion are Parties to that certain Research and
Development Agreement, dated as of March 29, 1996 (the "R&D Agreement").
C. In connection with the R&D Agreement, and the acquisition by Novartis
of its interest in Dermion, the Parties entered into a Stock Purchase Agreement,
dated March 29, 1996 (the "Stock Purchase Agreement"), and a Stockholders'
Agreement, dated March 29, 1996 (the "Stockholders Agreement").
D. In part to facilitate a possible initial public offering by Iomed,
the Parties have agreed to restructure their business relationship in the manner
set forth in this Agreement.
AGREEMENT:
NOW THEREFORE, in consideration of the foregoing Recitals and the
covenants and agreements set forth herein, together with other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties agree as follows:
1. Exchange of Securities. By the execution of this Agreement,
Novartis herewith sells, assigns, transfers and sets over unto Iomed all of
Novartis' right, title and interest in and to 200,000 shares of the issued and
outstanding common stock of Dermion (the "Dermion Shares") solely in exchange
for 1,145,000 duly and validly authorized and issued, fully paid,
non-assessable, voting common shares of Iomed (the "Exchange Shares"). By the
execution of this Agreement, Iomed accepts the transfer of the Dermion Shares
solely in exchange, and as payment in full for the Exchange Shares.
2. Amendment of the Stock Purchase Agreement. Upon the effective
date of this Agreement, the provisions of paragraph 3.02 and of paragraph
4.01(a) of the Stock Purchase
<PAGE> 2
Agreement shall terminate and cease to be effective, such that Iomed shall have
no liability to Novartis for any "Loss" (as such term is defined in the Stock
Purchase Agreement) asserted against, resulting to, imposed upon or incurred or
suffered by Novartis or any assignee or successor of Novartis as a result of or
rising out of any breach of any representation or warranty made or given by
Iomed or Dermion in the Stock Purchase Agreement. As of the effective date of
this Agreement, all of the duties and obligations of the Parties under the Stock
Purchase Agreement have been fulfilled, and no Party has any further duty or
obligation to any other Party thereunder.
3. Termination of the Stockholders' Agreement. Upon the effective
date of this Agreement, the Stockholders' Agreement shall completely terminate,
by the mutual agreement of the Parties, and shall be of no further force or
effect. No Party shall have any liability or obligation to any of the other
Parties under the Stockholders' Agreement as the result of or in connection with
the Stockholders' Agreement, any breach thereof, or the termination thereof.
4. Amendment of the Research and Development Agreement. Upon the
execution of this Agreement, the Parties shall execute and deliver a First
Amendment of Research and Development Agreement, substantially in the form
attached hereto as Exhibit "A" (the "Amendment"), in order to completely amend
and restate certain of the terms, conditions and provisions of the R&D
Agreement.
5. Deliveries.
(a) Upon the execution and delivery of this Agreement, Iomed
shall deliver to Novartis a certificate representing the Exchange Shares.
(b) Upon the execution and delivery of this Agreement,
Novartis shall deliver to Iomed the certificate or certificates representing the
Dermion Shares duly endorsed in blank, or accompanied by duly executed stock
powers.
(c) Upon the execution and delivery of this Agreement, the
Parties shall execute and deliver counterpart originals of the Amendment, in
substantially the form attached hereto as Exhibit "A".
(d) Upon the execution and delivery of this Agreement, Iomed
shall deliver to Novartis the "Warrant" called for by paragraph 12 hereof.
6. Representations and Warranties of Iomed. Iomed represents and
warrants to Novartis that the statements contained in this paragraph 6 are
correct and complete as of the date of this Agreement, except as set forth in
the Disclosure Schedule delivered by Iomed to Novartis prior to the execution
and delivery of this Agreement (the "Disclosure Schedule").
(a) Iomed is a corporation duly organized, validly existing
and in good standing under the laws of the State of Utah. Iomed is duly licensed
or qualified to do business,
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and is in good standing under the laws of each state in which Iomed is required
to be so licensed or qualified, except where the lack of such qualification
would not have a material adverse effect on the financial condition of Iomed.
Iomed has the corporate power and authority to own or lease its properties,
rights and assets and to conduct its business as now conducted and as presently
proposed to be conducted.
(b) Iomed has full corporate power and authority to enter into
this Agreement and the Amendment, and to carry out the transactions contemplated
hereby and thereby. All corporate action on the part of Iomed necessary to
authorize the execution, delivery and performance by Iomed of this Agreement and
the Amendment, and the consummation of the transactions contemplated hereby and
thereby, has been taken. This Agreement has, and the Amendment, when executed
and delivered in accordance with this Agreement will have been, duly and validly
authorized, executed and delivered by Iomed, and each constitutes a valid and
binding obligation of Iomed, enforceable against Iomed in accordance with its
respective terms, subject to bankruptcy, insolvency, reorganization, moratorium
and similar laws of general applicability relating to or effecting creditors
rights and to general equitable principals.
(c) The execution, delivery and performance by Iomed of this
Agreement, the R&D Agreement and of the Amendment do not and will not (i)
violate or breach the Articles of Incorporation or Bylaws of Iomed, (ii) violate
or conflict with any applicable law, (iii) violate, breach, cause a default
under or otherwise give rise to a right of termination, cancellation or
acceleration with respect to (presently, with the giving of notice or the
passage of time) any material agreement, contract or instrument to which Iomed
is a party or by which its assets are bound, or (iv) result in the creation or
imposition of any lien, pledge, mortgage, claim, charge or encumbrance upon any
of the assets of Iomed.
(d) Assuming the accuracy of Novartis' representations and
warranties in paragraph 8 hereof, no consent, authorization, license, permit,
registration or approval of, or exemption or other action by any governmental
authority or other person as required in connection with Iomed's execution and
delivery of this Agreement or of the Amendment, or with the performance by Iomed
of its obligations hereunder or thereunder, except, in each case, where any such
consent, authorization, license, permit, registration or approval has been
obtained and remains in full force and effect.
(e) The authorized capital stock of Iomed consists of
40,000,000 shares of common stock, of which 15,040,455 shares are issued and
outstanding, and 4,215,618 shares of preferred stock of which 138,240 shares are
issued and outstanding. 50,000 common shares and 4,077,378 preferred shares of
Iomed are held in treasury. The issued and outstanding shares of common stock
and preferred stock of Iomed are held of record by the persons and entities set
forth in paragraph 6(e) of the Disclosure Schedule. Upon the consummation of the
transactions contemplated by this Agreement, 16,185,455 common shares and
138,240 preferred shares will be issued and outstanding. The Exchange Shares
will, upon issuance pursuant to the terms of this Agreement, be duly and validly
authorized and issued, fully paid and non-assessable. Except as set forth in
paragraph 6(e) of the Disclosure Schedule, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
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<PAGE> 4
rights, exchange rights or other contracts or commitments that could require
Iomed to issue, sell or otherwise cause to become outstanding any of its capital
stock. There are no outstanding or authorized stock appreciation, phantom stock,
profit participation or similar rights with respect to Iomed.
(f) Dermion is the only subsidiary of Iomed (the
"Subsidiary").
(g) Iomed and the Subsidiary have good title to, or a valid
leasehold interest in, the real property and material tangible assets which they
use regularly in the conduct of their businesses.
(h) Attached hereto as Exhibit "B" are the audited,
consolidated balance sheets and statements of income, changes in stockholders'
equity and cash flow as of and for the fiscal years ended June 30, 1997, June
30, 1996, and June 30, 1995 for Iomed (collectively, the "Financial
Statements"). The Financial Statements (including the Notes thereto) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby and present fairly the financial condition of Iomed as
of such dates and the results of operations of Iomed for such periods.
(i) Since the date of the audited, consolidated balance sheets
and statements of income, changes in stockholders' equity and cash flow as of
and for the fiscal year of Iomed ended June 30, 1997, as included in the
Financial Statements, there has not been any material adverse change in the
financial condition of Iomed.
(j) Iomed and the Subsidiary have complied with all applicable
laws, including rules, regulations, codes, plans, injunctions, judgments,
orders, decrees, ruling and charges thereunder (of federal, state, local and
foreign and all agencies thereof), except where the failure to comply would not
have a material adverse effect upon the financial condition of Iomed and the
Subsidiary taken as a whole.
(k) Each of Iomed and the Subsidiary has filed all income tax
returns that it was required to file, and has paid all income taxes shown
thereon as owing, except where the failure to file income tax returns or to pay
income taxes would not have a material adverse effect on the financial condition
of Iomed and the Subsidiary taken as a whole, or except where such income taxes
are being contested in good faith.
(l) There is no action, suit, proceeding or known
investigation pending or currently threatened against Iomed or the Subsidiary
that questions the validity of this Agreement, the R&D Agreement (or any
agreement entered into in connection therewith), or the Amendment, or the right
of Iomed to issue the Exchange Shares or to consummate the transactions
contemplated hereby or thereby. Additionally, there is no action, suit,
proceeding or known investigation pending or currently threatened against Iomed
or the Subsidiary that might result, either individually or in the aggregate, in
any material adverse change in the assets, business, properties, prospects of
financial condition of the Iomed and the Subsidiary.
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<PAGE> 5
(m) There is no strike or labor dispute or, to the best of
Iomed's knowledge, union organization activities pending or threatened between
Iomed and its employees. None of Iomed's employees belong to any union or
collective bargaining unit. To the best of its knowledge, Iomed has complied, in
all material respects, with all federal and state equal employment opportunity
and other laws related to employment. Iomed is not a party to or bound by any
currently effective employment contract, deferred compensation agreement, profit
sharing plan, pension plan, retirement plan or agreement, or other employee
compensation agreement, other than Iomed's 1988 Incentive Stock Option Plan (a
complete and correct copy of which has heretofore been delivered to Novartis)
and options granted thereunder. Iomed is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with Iomed or with Dermion.
(n) Neither Iomed nor Dermion is in violation of any
applicable statute, law or regulation relating to the environment or to
occupational health and safety, except for such non-compliance as would not have
a material adverse effect on the financial condition of Iomed and the Subsidiary
taken as a whole. Additionally, neither Iomed nor the Subsidiary has received
any written notice, report or other information regarding any actual or alleged
violation of applicable statutes, laws or regulations relating to the
environment or to occupational health and safety, or any liabilities or
potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations
relating to Iomed or the Subsidiary or their facilities arising under statutes,
laws or regulations relating to the environment or occupational health and
safety, the subject of which would have a material adverse effect on the
financial condition of Iomed and the Subsidiary taken as a whole.
(o) Iomed and Dermion are the owners or licensees of the
"Iomed Technology" and the "Dermion Technology", respectively (as such terms are
defined in the R&D Agreement), and Iomed is the licensee of the "Elan
Technology" (as such term is defined in the Amendment). Iomed and Dermion have
the right to utilize such technologies in the manner set forth in the R&D
Agreement and the Amendment. There are no existing defaults under the Alza
License, the University of Utah License, or the Elan License (as such terms are
defined in the R&D Agreement and the Amendment), or events which, with notice or
lapse of time or both, would constitute a default by Iomed or Dermion, or to the
best of Iomed's knowledge, by any other party to such licenses. Except as set
forth in paragraph 6(o) of the Disclosure Schedule, neither Iomed nor Dermion
has assigned or conveyed any interest in the Dermion Technology, the Iomed
Technology or the Elan Technology which is inconsistent with the rights granted
under the R&D Agreement and the Amendment and, to the best knowledge of Iomed,
the practice of the Dermion Technology, the Iomed Technology and the Elan
Technology by Dermion and Iomed in connection with their respective business
activities does not infringe any rights of third parties. Iomed is not aware
that any third party is infringing any Dermion Technology, any Iomed Technology
or any Elan Technology. With respect to all "Patent Rights" (as such term is
defined in the R&D Agreement) constituting the Dermion Technology, the Iomed
Technology or the Elan Technology which were prosecuted by Iomed, such Patent
Rights have been prosecuted in good faith, and Iomed has no reason to believe
that any patent included within the Dermion Technology, the Iomed Technology or
the Elan Technology would be invalid or would be held to be unenforceable by a
court of competent jurisdiction.
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(p) Iomed understands that its representations and warranties
set forth herein shall be deemed material and to have been relied upon by
Novartis. No representation or warranty by Iomed or Dermion in this Agreement,
and no written statement contained in any document, certificate or other writing
delivered by Iomed to Novartis in connection with this Agreement contains any
untrue statement of material fact, or omits a material fact necessary to make
the statements herein or therein, in light of the circumstances under which they
were made, not misleading.
7. Representations and Warranties of Dermion. Dermion represents
and warrants to Novartis that the statements contained in this paragraph 7 are
correct and complete as of the date of this Agreement.
(a) Dermion is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Dermion is duly
licensed or qualified to do business and is in good standing under the laws of
each state in which Dermion is required to be so licensed or qualified, except
where the lack of such qualification would not have a material adverse effect on
the financial condition of Dermion. Dermion has the corporate power and
authority to own or lease its properties, rights and assets and to conduct its
business as now conducted or presently proposed to be conducted.
(b) Dermion has full corporate power and authority to enter
into this Agreement and the Amendment, and to carry out the transactions
contemplated hereby and thereby. All corporate action on the part of Dermion
necessary to authorized the execution, delivery and performance by Dermion of
this Agreement and the Amendment, and the consummation of the transactions
contemplated hereby and thereby, has been taken. This Agreement has, and the
Amendment when executed and delivered in accordance with this Agreement will
have been, duly and validly authorized, executed and delivered by Dermion, and
each constitutes a valid and binding obligation of Dermion, enforceable against
Dermion in accordance with its respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general applicability
relating to or effecting creditors rights and to general equitable principals.
(c) The authorized capital stock of Dermion consists of 4
million shares of common stock, of which 1 million are issued and outstanding,
800,000 of which are owned of record by Iomed and 200,000 of which are owned or
record by Novartis, and 1 million shares of preferred stock, none of which are
issued and outstanding. Upon the consummation of the transactions contemplated
by this Agreement, 1 million shares of common stock will be issued and
outstanding, all of which will be owned of record by Iomed. All such issued and
outstanding common shares have been duly and validly authorized and issued, are
fully paid and non-assessable.
(d) Assuming the execution and delivery of this Agreement by
all of the Parties, and its enforceability against Iomed and Novartis, the
execution, delivery and performance by Dermion of this Agreement, the R&D
Agreement and the Amendment do not
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<PAGE> 7
and will not (i) violate or breach the Certificate of Incorporation or Bylaws of
Dermion, (ii) violate on conflict with any applicable law, (iii) violate,
breach, cause a default under or otherwise give rise to a right of termination,
cancellation or acceleration with respect to (presently, with the giving of
notice or the passage of time) any material agreement, contract or instrument to
which Dermion is a party or by which its assets are bound, or (iv) result in the
creation or imposition of any lien, pledge, mortgage, claim, charge or
encumbrance upon any of the assets of Dermion.
8. Representations and Warranties of Novartis. Novartis
represents and warrants to Iomed and to Dermion that the statements contained in
this paragraph 8 are correct and complete as of the date of this Agreement.
(a) Novartis is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) Novartis has full corporate power and authority to enter
into this Agreement and the Amendment and to carry out the transactions
contemplated hereby and thereby. All corporate action on the part of Novartis
required to authorize the execution, delivery and performance of this Agreement
and of the Amendment, and the consummation of the transactions contemplated
hereby and thereby, has been taken. This Agreement and the Amendment have been
duly and validly authorized, executed and delivered by Novartis and each
constitutes a valid and binding obligation of Novartis enforceable against it in
accordance with its respective terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability relating to
or effecting creditors rights and to general equitable principals.
(c) The execution, delivery and performance by Novartis of
this Agreement, the R&D Agreement and the Amendment do not and will not (i)
violate or breach the Certificate of Incorporation or Bylaws of Novartis, (ii)
violate or conflict with any applicable law, (iii) violate, breach, cause a
default under or otherwise give rise to a right of termination, cancellation or
acceleration with respect to (presently, with the giving of notice or the
passage of time) any material agreement, contract or instrument to which
Novartis is a party or by which any of its assets is bound, or (iv) result in
the creation or imposition of any lien, pledge, mortgage, claim, charge or
encumbrance upon any assets of Novartis.
(d) No consent, authorization, license, permit, registration
or approval of or exemption or other action by any governmental authority or
other person is required in connection with Novartis' execution and delivery of
this Agreement or of the Amendment, or with the performance by Novartis of its
obligations hereunder or thereunder, except in each case where any such consent,
authorization, license, permit, registration or approval has been obtained and
remains in full force and effect.
(e) Subject to and assuming the correctness and accuracy of
the representations and warranties made by Dermion and Iomed in Sections
2.01(a)-(g) of the Stock Purchase Agreement, Novartis is the sole owner of the
Dermion Shares and has not pledged,
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<PAGE> 8
hypothecated or otherwise encumbered the Dermion Shares. Upon the effective date
of this Agreement and the delivery of the Dermion Shares to Iomed as required by
paragraph 5(b) hereof, the Dermion Shares shall be free of liens and
encumbrances of every type, nature or description.
(f) Novartis is acquiring the Exchange Shares for investment
for its own account and not with a view to, or for re-sale in connection with,
any public distribution, and understands that the Exchange Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the representations of
Novartis set forth herein.
(g) Novartis is an accredited investor, as defined in Rule
501(a) of Regulation D of the Securities and Exchange Commission under the
Securities Act. As such, Novartis represents that it is experienced in
evaluating and investing in securities of companies in the development stage and
acknowledges that Novartis is able to fend for itself, can bear the economic
risk of an investment in the Exchange Shares and has such knowledge and
experience in financial and business matters, that Novartis is capable of
evaluating the merits and risks of the investment in and ownership of the
Exchange Shares.
(h) Novartis understands and agrees that the Exchange Shares
may not be sold, transferred or otherwise disposed of without registration under
the Securities Act or an exemption therefrom, and that in the absence of an
effective Registration Statement covering the Exchange Shares, or an available
exemption from registration under the Securities Act, the Exchange Shares must
be held indefinitely. In particular, Novartis is aware that the Exchange Shares
constitute "Restricted Securities" as defined in Rule 144 promulgated under the
Securities Act and may not be sold pursuant to such Rule unless all of the
conditions of that Rule are met. Novartis agrees that the certificate or
certificates representing the Exchange Shares may bear such restrictive legends
as may be deemed necessary or appropriate by the Board of Directors of Iomed, in
order to denote and clarify their status as Restricted Securities.
(i) Novartis understands that its representations and
warranties set forth herein shall be deemed material and to have been relied
upon by Iomed and Novartis. No representation or warranty by Novartis in this
Agreement, and no written statement contained in any document, certificate or
other writing delivered by Novartis to Iomed or Dermion in connection with this
Agreement contains any untrue statement of material fact, or omits a material
fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
9. Disclaimer of Implied Warranties and Representations;
Survival.
(a) Except as otherwise expressly set forth herein, each
Party, in entering into this Agreement, has relied solely upon the
representations and warranties set forth in this Agreement and the Schedules and
Exhibits hereto and the information referred to herein as having been supplied
by one to the others, and there are no representations, warranties,
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<PAGE> 9
covenants or agreements, express or implied, made by any Party to any other
Party in connection with the transactions contemplated hereby other than as set
forth in this Agreement and/or such Schedules and Exhibits.
(b) The representations and warranties of Iomed set forth in
paragraphs 6(h) and 6(o) hereof shall survive the execution of this Agreement
and the consummation of the transactions contemplated hereby and any examination
or investigation of the Parties for a period of two (2) years following the
effective date of this Agreement. All other representations and warranties of
the Parties, as set forth in paragraphs 6, 7 and 8 hereof, shall indefinitely
survive the consummation of the transactions contemplated herein and any
examination or investigation of the Parties.
10. Indemnification.
(a) Subject to the provisions of this paragraph 10, Iomed and
Dermion shall jointly and severally indemnify, defend and hold harmless Novartis
from and against any and all loss, claim, liability, damage, cost and expense
(including reasonable attorneys' fees and expenses) (hereinafter referred to as
a "Loss") asserted against, resulting to, imposed upon or incurred or suffered
by Novartis or any permitted assignee or successor of Novartis as a result of or
arising out of any of the following:
(i) The material breach of any of representation or
warranty of Iomed or Dermion set forth in this Agreement or in any Schedule or
Exhibit to this Agreement; or
(ii) The material breach or nonfulfillment by Iomed or
Dermion of any of the covenants or agreements of Iomed or Dermion contained in
this Agreement.
(b) Subject to the provisions of this paragraph 10, Novartis
shall indemnify, defend and hold harmless Iomed and Dermion from and against any
and all Loss asserted against, resulting to, imposed upon or incurred or
suffered by Iomed or Dermion or any of their successors or assigns as a result
of or arising out of any of the following:
(i) The material breach of any of the representations or
warranties of Novartis set forth in this Agreement or in any Schedule or Exhibit
to this Agreement; or
(ii) The material breach or nonfulfillment by Novartis of
any of the covenants or agreements of Novartis contained in this Agreement.
(c) Each indemnified Party hereunder agrees that upon its
obtaining knowledge of facts indicating that there may be a basis for a claim
for indemnity under the provisions of this Agreement, including receipt by it of
notice of any demand, assertion, claim, action, or proceeding, judicial or
otherwise, by any third party (such third party actions being
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<PAGE> 10
collectively referred to hereinafter as a "Claim"), with respect to any matter
as to which it may be entitled to indemnity under the provisions of this
Agreement, it will give notice thereof in writing to the indemnifying Party or
Parties within a reasonable time after obtaining such knowledge, together with a
statement of such information respecting any of the foregoing as it shall then
have. The indemnifying Party or Parties shall be obligated to indemnify the
indemnified Party or Parties notwithstanding failure to give such notice in a
timely manner, except if and to the extent that the indemnifying Party or
Parties are materially prejudiced by any delay in delivering, or non-delivery
of, such notice.
(d) The indemnifying Party or Parties are entitled at its or
their cost and expense to contest and defend by all appropriate legal
proceedings any Claim with respect to which it or they are called upon to
indemnify the indemnified Party or Parties under the provisions of this
Agreement; provided, however, that notice of the intention to so contest shall
be delivered by the indemnifying Party or Parties to the Indemnified Party or
Parties within thirty (30) days after the indemnifying Party or Parties become
aware of such Claim (or within such shorter period of time as may be necessary
to avoid prejudice to the rights of the indemnified Party or Parties hereunder).
Any such contest may be conducted in the name and on behalf of the indemnifying
Party or Parties or the indemnified Party or Parties, as may be appropriate.
Such contest shall be conducted by attorneys employed by the indemnifying Party
or Parties, but the indemnified Party or Parties shall have the right to
participate in such proceedings and to be represented by attorneys of its or
their own choosing at its or their cost and expense. If the indemnified Party or
Parties join in any such contest, the indemnifying Party or Parties shall have
full authority to determine all action to be taken with respect thereto. If
after such opportunity, the indemnifying Party or Parties do not elect to
contest any such Claim, the indemnifying Party or Parties shall be bound by the
result obtained with respect thereto by the indemnified Party or Parties and the
indemnified Party or Parties shall be entitled to abandon the contesting of the
Claim or to settle or compromise the Claim, and the indemnifying Party or
Parties shall be bound by all actions of the indemnified Party or Parties with
respect to such Claim. At any time after the commencement of defense of any
Claim by the indemnifying Party or Parties, the indemnifying Party or Parties
may notify the indemnified Party or Parties in writing of the abandonment of
such contest or of the payment or compromise by the indemnifying Party or
Parties of the asserted Claim, whereupon such action shall be taken; provided,
however, that the sole relief provided is monetary damages that are paid in full
by the indemnifying Party or Parties; provided, further, that the indemnified
Party or Parties may determine that the contest should be continued, and shall
so notify the indemnifying Party or Parties in writing within fifteen (15) days
of such notice from the indemnifying Party or Parties. In the event that the
indemnified Party or Parties determine that the contest should be continued (and
provided the timing of the notice condition has been met and the sole relief
provided is monetary damages that are paid in full by the indemnifying Party or
Parties), the indemnifying Party or Parties shall be liable hereunder only to
the extent of the lesser of (i) the amount which the other Party or Parties to
the contested Claim had agreed to accept in payment or compromise as of the time
the indemnifying Party or Parties made its or their request therefor to the
indemnified Party or Parties, or (ii) such amount for which the indemnifying
Party or Parties may be liable with respect to such Claim by reason of the
provisions hereof. Notwithstanding the foregoing, if the indemnified Party or
Parties determine in good faith that there is a reasonable probability that an
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action regarding a Claim either (i) may materially and adversely affect it or
its affiliates other than as a result of monetary damages, or (ii) will
substantially impair its ability to continue to conduct its business as
previously conducted, the indemnified Party or Parties may, by notice to the
indemnifying Party or Parties, assume the exclusive right to defend, compromise
or settle such action, but the indemnifying Party or Parties shall not be bound
by any determination of an action so defended or any compromise or settlement
thereof effected without its consent (which shall not be unreasonably withheld
or delayed). All of the foregoing are subject to the rights of any indemnified
Party's or Parties' insurance carrier which is defending any such above
proceedings.
(e) If requested by the indemnifying Party or Parties, the
indemnified Party or Parties agree to cooperate with the indemnifying Party or
Parties and its or their counsel in contesting any Claim which the indemnifying
Party or Parties elect to contest or, if appropriate and not inconsistent with
the reasonable commercial interests of the indemnified Party or Parties, in
making any counterclaim against the person asserting the Claim, or any
cross-complaint against any person and further agrees to take such other action
as reasonably may be requested by an indemnifying Party or Parties to reduce or
eliminate any Loss or expense for which the indemnifying Party or Parties would
have responsibility, but the indemnifying Party or Parties will reimburse the
indemnified Party or Parties for any expenses incurred by it or them in so
cooperating or acting at the request of the indemnifying Party or Parties.
(f) The indemnifying Party or Parties shall pay to the
indemnified Party or Parties in cash the amount of any Losses to which the
indemnified Party or Parties may become entitled by reason of the provisions of
this Agreement, such payment to be made within fifteen (15) days after any such
amount of Losses if finally determined either by mutual agreement of the Parties
hereto or pursuant to the judgment of a court of competent jurisdiction. Any
Claim for which indemnification occurs hereunder shall be, to the extent
appropriate, assigned to the indemnifying Party or Parties.
11. Registration Rights and Procedure.
(a) Definitions. For purposes of this paragraph 11 the
following terms shall have the meanings set forth below.
Act. The term "Act" means the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
Common Stock. The term "Common Stock" means the common stock,
$.001 par value per share of Iomed.
Exchange Act. The term "Exchange Act" means the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
Form S-3. The term "Form S-3" means such form under the Act
as in effect on the date hereof or any registration form under the Act
subsequently adopted by the SEC
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which permits inclusion or incorporation of substantial information by reference
to other documents filed by Iomed with the SEC.
Holder. The term "Holder" means Novartis and any other person
or entity that acquires any Registrable Securities in compliance with paragraphs
11(j) hereof.
Initial Public Offering. The term "Initial Public Offering"
means the first registered underwritten public offering of Iomed's Common Stock
that generates aggregate proceeds to Iomed (net of underwriting discounts and
commissions but prior to other offering expenses payable by Iomed) of at least
$10,000,000 at a price per share of at least $1.00 (adjusted to reflect
subsequent stock dividends, stock splits and the like).
Initiating Holders. The term "Initiating Holders" means any
Holder or Holders of not less than the lesser of (i) Two Hundred Fifty Thousand
(250,000) shares of Registrable Securities (as adjusted for stock splits,
combinations and the like) and (ii) seventy-five percent (75%) of all shares of
Registrable Securities then held by the Holders.
Registrable Securities. The term "Registrable Securities"
means (i) the Exchange Shares (ii) any Common Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issues as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, the Exchange Shares, and (iii) any Common Stock, and any
Common Stock issuable upon the conversion, exercise or exchange of the Warrant
issued to Novartis pursuant to paragraph 12 hereof; excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which
its rights under this paragraph 11 are not assigned in the manner permitted by
this Agreement; provided, however, that such shares of Common Stock shall only
be treated as Registrable Securities if and so long as they have not been sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction or pursuant to Rule 144 under the Act.
Registration Participants. The term "Registration
Participants" means those persons and entities, other than Novartis, to which
Iomed has (pursuant to valid and binding agreements entered into prior to the
effective date hereof) granted rights to require Iomed to register under the
Act, certain shares of Common Stock, or to participate in registrations by Iomed
of common shares of Common Stock for its own account.
(b) Demand Registrations.
(i) In case Iomed shall receive from Initiating Holders,
at any time after one hundred eighty (180) days following the first registered
public offering of Iomed's Common Stock, regardless of whether such offering is
the Initial Public Offering, a written request that Iomed effect any
registration under the Act, qualification or compliance with respect to all of
the Registrable Securities then held by such Initiating Holders, or any portion
thereof the sale of which is reasonably expected to yield gross proceeds to the
Initiating Holders of at least $2,000,000, Iomed will:
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(A) give written notice of the proposed registration,
qualification or compliance to all other Holders, and to all Registration
Participants who hold similar demand registration rights, within ten (10) days
after receipt thereof; and
(B) use its diligent best efforts to effect, as soon
as practicable, all such registrations, qualifications and compliances as may be
so requested and as would permit or facilitate the sale and distribution of all
of the Registrable Securities held by such Initiating Holders, together with all
of the Registrable Securities of any Holder and all eligible Common Stock held
by any Registration Participant who joins in such request in a written request
received by Iomed within thirty (30) days after such written notice is given;
provided, that Iomed shall not be obligated to take any action to effect any
such registration, qualification, or compliance pursuant to this paragraph
11(b):
(w) In any particular jurisdiction in which Iomed
would be required to execute a general consent to service of process, to
register as a dealer, or to cause any officer or employee of Iomed to register
as a salesman in effecting such registration, qualification or compliance;
(x) Within one hundred eighty days (180)
immediately following the effective date of any registration statement
pertaining to an underwritten public offering of securities of Iomed;
(y) After Iomed has effected two (2) "demand"
registrations pursuant to this paragraph 11(b).
(z) If Iomed shall furnish to the Initiating
Holders a certificate signed by the Chief Executive Officer of Iomed stating
that in the good faith judgment of the Board of Directors it would be seriously
detrimental to a material transaction then being pursued by Iomed or its
stockholders for a registration statement to be filed in the near future, then
Iomed's obligation to use its best efforts to register, qualify or comply under
this paragraph 11(b) shall be deferred for a period not to exceed ninety (90)
days from the date of receipt of written request from the Initiating Holders;
provided, however, that Iomed shall only be entitled to such deferral one (1)
time with respect to each registration pursuant to this paragraph 11(b).
(ii) Subject to the foregoing, Iomed will use its best
efforts to file a registration statement covering the Registrable Securities as
soon as practicable after receipt of the request or requests of the Initiating
Holders.
(iii) The Initiating Holders shall include in their
request made pursuant to this paragraph 11(b) the name, if any, of the
underwriter or underwriters that such Initiating Holders would propose, with the
consent of Iomed (which consent shall not be unreasonably withheld), to employ
in connection with the public offering proposed to be made pursuant to the
registration requested, and Iomed shall include such information in the written
notice referred to in paragraph 11(b)(i)(A). The right of any Holder or
Registration Participant to
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registration pursuant to this paragraph 11(b) shall be conditioned on such
person's participation in such underwriting and the inclusion of such person's
Registrable Securities, or eligible Common Stock, in the underwriting. Iomed
shall (together will all Holders and Registration Participants proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting in the manner set forth above. Notwithstanding
any other provision of this paragraph 11(b), if the underwriter advises the
Initiating Holders, in writing, that marketing factors require a limitation of
the number of shares to be underwritten, then the Initiating Holders shall so
advise all Holders of Registrable Securities and all Registration Participants,
and the total number of shares of Common Stock that may be included in the
registration and underwriting, as determined by the underwriters, shall be
allocated among all Holders and Registration Participants in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities and
eligible Common Stock requested to be registered by such Holders and
Registration Participants (or in such other manner as the Holders and
Registration Participants requesting registration may elect in a written notice
to Iomed signed by all such Holders and Registration Participants). No
Registrable Securities or other shares of Common Stock excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration.
(c) Company Registration.
(i) If at any time, or from time to time, Iomed shall
determine to register any of its securities, either for its own account or for
the account of a security holder or holders, other than (A) a registration on
Form S-8 relating solely to employee benefit plans, or a registration on Form
S-4 relating solely to an SEC Rule 145 transaction, or a registration on any
other form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities, (B) a registration pursuant to paragraph 11(b) hereof,
or (C) the Initial Public Offering (provided that at least ninety percent (90%)
of the securities sold therein are sold for the account of Iomed and that any
selling shareholders acquired their shares in their capacity as employees of
Iomed or its Affiliates), Iomed will:
(x) promptly give to each Holder written notice
thereof; and
(y) include in such registration, and in any
underwriting involved therein, all the Registrable Securities specified in any
written request or requests by any Holder or Holders received by Iomed within
thirty (30) days after such written notice is given on the same terms and
conditions as the Common Stock, if any, otherwise being sold through the
underwriter in such registration.
(ii) If the registration of which Iomed gives notice is
for a registered public offering involving an underwriting, Iomed shall so
advise the Holders as a part of the written notice given pursuant to paragraph
11(c)(i). In such event the right of any Holder to registration pursuant to this
paragraph 11(c) shall be conditioned upon such Holder's
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participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. Iomed
and all Holders proposing to distribute their Registrable Securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by Iomed.
(iii) Notwithstanding any other provisions of this
paragraph 11(d), if the underwriter determines in good faith that marketing
factors require a limitation of the number of shares to be underwritten, and
gives written notice thereof to Iomed or the Holders, the underwriter may limit
the total number of shares of Common Stock to be included in the registration
and underwriting. Iomed shall so advise all Holders of Registrable Securities
which would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Common Stock that may be included in registration and
underwriting (in addition to those specified in the notice given pursuant to
paragraph 11(c)(i)(x) above) shall be allocated among all of the Holders and the
Registration Participants who have elected to have Common Stock included in the
registration pro rata among such Holders and such Registration Participants on
the basis of the number of shares of Common Stock held by such persons. No
Registrable Securities or other shares of Common Stock excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration.
(d) Expenses of Registration. All expenses incurred in
connection with any registration, qualification or compliance pursuant to this
paragraph 11, including without limitation, all registration, filing and
qualification fees, printing expenses, escrow fees, fees and disbursements of
counsel for Iomed and the reasonable fees and disbursements of one counsel to
the selling stockholders, accounting fees and expenses, and expenses of any
special audits incidental to or required by such registration, shall be borne by
Iomed; provided, however, that Iomed shall not be required to pay underwriters'
discounts or commissions relating to Registrable Securities.
(e) Registration Procedures. If and whenever Iomed is
required by the provisions of this paragraph 11 to use its best efforts to
effect the registration of any of the Registrable Securities under the Act,
Iomed will, as expeditiously as possible:
(i) Prepare and file with the SEC a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably and customarily necessary to permit the successful marketing of such
securities, or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs.
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Act; and to
keep such registration statement effective for that period of time specified in
paragraph 11(e)(i) hereof.
(iii) Furnish to each Holder participating in the
registration such number of prospectuses and preliminary prospectuses in
conformity with the requirements of the
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<PAGE> 16
Act, and such other documents as such Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities
being sold by such Holder.
(iv) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(v) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(vi) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this paragraph 11, on the
date that such Registrable Securities are delivered to the underwriters for sale
in connection with a registration pursuant to this paragraph 11, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (x) an opinion, dated on such
date, of the counsel representing Iomed for the purposes of such registration,
in form and substance as is customarily given to the underwriters in an
underwritten public offering, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (y) a letter dated
such date, from the independent certified public accountants of Iomed, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities.
(vii) Use its best efforts to register or qualify the
Registrable Securities covered by such registration statements under such other
securities or blue sky laws of such jurisdictions as each such selling Holder of
Registrable Securities shall reasonably request and do any and all other acts
and things which may be necessary or desirable to enable such Holder to
consummate the public sale or other disposition in such jurisdictions, provided
that Iomed shall not be required in connection therewith or as a condition
thereto to qualify to do business or file a general consent to service of
process in any such jurisdictions.
(viii) Give the Holders requesting registration of
Registrable Securities pursuant to this paragraph 11, their underwriters, if
any, and their respective counsel and accountants, the opportunity to review,
and to reasonably participate in the preparation of, any registration statement,
each prospectus included therein or filed with the SEC, and each amendment
thereof or supplement thereto, and (subject to reasonable and customary
obligations of confidentiality) will give each of them such access to its books
and records and such opportunities to discuss the business, finances and
accounts of the Company and its subsidiaries with its officers, directors and
the independent public accountants who have certified its
16
<PAGE> 17
Financial Statements as shall be necessary, in the reasonable judgment of such
Holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Act.
(ix) Provide a transfer agent and registrar for all
Registrable Securities covered by such registration not later than the effective
date of the registration statement with respect to such Registrable Securities.
(x) Use its best efforts to list all Registrable
Securities covered by the registration statement on any securities exchange on
which any of the Registrable Securities are then listed.
(f) Indemnification.
(i) Iomed agrees to indemnify and hold harmless each
Holder of Registrable Securities with respect to which a registration statement
has been filed under the Act pursuant to this paragraph 11, each of such
Holder's partners, officers, directors, employees, agents and advisors, each
underwriter of any of the Registrable Securities included in such registration
statement, and each person, if any, who controls any such Holder or underwriter
within the meaning of the Act of the Exchange Act (hereinafter referred to as
the "Holder-Underwriters"), as follows:
(A) against any and all loss, liability, claim (joint
or several), damage and expense whatsoever arising out of any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement (or any amendment thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading, or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any final prospectus
(or any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading, unless
such untrue statement or omission or such alleged untrue statement or omission
was made in reliance upon and in conformity with written information furnished
to Iomed by any Holder-Underwriter expressly for use in such registration
statement (or any amendment thereto) or such final prospectus (or any amendment
or supplement thereto);
(B) against any and all loss, liability, claim,
damage and expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission or any such alleged
untrue statement or omission, if such settlement is effected with the written
consent of Iomed; and
(C) against any and all legal or other expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense
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<PAGE> 18
is not paid under clause (A) or (B) above, which expenses under this clause (C)
shall be paid by Iomed as incurred.
(ii) Iomed shall be notified in writing of any matter
potentially giving rise to a claim under this paragraph 11(f) within a
reasonable time after the assertion thereof, but failure to so notify Iomed
shall not relieve Iomed from any liability which it may have pursuant to this
indemnity agreement or otherwise, except if and to the extent that Iomed is
materially prejudiced by such delay. In case of any such notice, Iomed shall be
entitled to participate at its expense in the defense, or if it so elects within
a reasonable time after receipt of such notice, to assume the defense of any
suit brought to enforce any such claim (unless in the Holder-Underwriter's
reasonable judgment a conflict of interest between such Holder-Underwriter and
Iomed may exist in respect of such claim); but if it so elects to assume the
defense, such defense shall be conducted by counsel chosen by it and reasonably
acceptable to the Holder-Underwriter or Holder-Underwriters. In the event that
Iomed elects to assume the defense of any such suit and retain such counsel, the
Holder-Underwriter or Holder-Underwriters shall have the right to retain
separate counsel to participate in such proceedings, but at the sole cost and
expense of the Holder-Underwriters. No indemnifying party shall consent to entry
of any judgment or enter into any settlement of any pending or threatened
proceeding in respect of which an indemnified Party is or could have been a
Party and indemnity could have been sought under this paragraph11(f) which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified Party of a release from all liability in respect
to such claim or litigation without the consent of the indemnified Party.
(iii) Each Holder severally agrees that it will indemnify
and hold harmless Iomed, each officer, director, employee agent and advisor of
Iomed, each person, if any, who controls Iomed within the meaning of the Act,
each underwriter of Registrable Securities included in any registration
statement which has been filed under the Act pursuant to this paragraph 11, and
each person, if any, who controls such underwriter within the meaning of the
Act, against any and all Loss, liability, claim, damages and expense described
in paragraph 11(f)(i) above, up to the amount of the gross proceeds actually
received from the offering by such Holder, but only with respect to statements
or omissions, or alleged statements or omissions made in such registration
statement (or any amendment thereto) or final prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to Iomed by such Holder expressly for use in such registration
statement (or any amendment thereto) or such final prospectus (or any amendment
or supplement thereto). In case any action shall be brought against Iomed or any
person so indemnified pursuant to the provisions of this paragraph 11(f)(iii)
and in respect of which indemnity may be sought against any Holder, the Holders
from whom indemnity is sought shall have the rights and duties given to Iomed,
and Iomed and the other persons so indemnified shall have the rights and duties
given to the persons entitled to indemnification by the provisions of paragraph
11(f)(ii) above.
(g) Information by Holder. The Holder or Holders of
Registrable Securities included in any registration shall furnish to Iomed such
information regarding such Holder or Holders, and the distribution proposed by
such Holder or Holders, as Iomed may
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<PAGE> 19
reasonably request in writing and as shall be required in connection with any
registration qualification or compliance referred to in this paragraph 11.
(h) Sale Without Registration. If at the time of any transfer
(other than a transfer not involving a change in beneficial ownership) of any
Registrable Securities, such Registrable Securities shall not be registered
under the Act, Iomed may require, as a condition of allowing such transfer, that
the Holder or transferee furnish to Iomed (A) such information as is necessary
in order to establish that such transfer may be made without registration under
the Act, and (B) (if the transfer is not made in compliance with Rule 144) at
the expense of the Holder or transferee, an opinion of counsel reasonably
satisfactory to Iomed in form and substance to the effect that such transfer may
be made without registration under the Act.
(i) Rule 144 Reporting. With a view to making available to
the Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, Iomed agrees to use its best efforts to:
(i) Make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety (90)
days after the effective date of the first registration statement filed by Iomed
for an offering of its Common Stock to the general public; and
(ii) File with the SEC in a timely manner all reports and
other documents required of Iomed under the Act and the Exchange Act.
(j) Transfer of Registration Rights. The rights to cause
Iomed to register securities granted by Iomed under paragraphs 11(b), 11(c) and
11(d) hereof may be assigned in writing by any Holder of Registrable Securities
to a transferee or assignee of not less than five hundred thousand (500,000)
shares of the Registrable Securities (as appropriately adjusted from time to
time for stock splits and the like); provided, that such transfer may otherwise
be effected in accordance with the terms of this Agreement and applicable
securities laws; and provided further, that Iomed is given written notice by
such Holder of Registrable Securities at the time of or within a reasonable time
after said transfer, stating the name and address of said transferee or assignee
and identifying the securities with respect to which such registration rights
are being assigned.
(k) "Market Stand-Off" Agreement.
(i) If requested by the underwriters of the Initial
Public Offering and in connection with the following registration pursuant to
paragraph 11(c), the Holders shall not sell or otherwise transfer or dispose of
any Registrable Securities held by them during the one hundred eighty (180) day
period following the effective date of such registration statement of Iomed
filed under the Act; provided, that (A) such agreement shall not apply to any
shares of Registrable Securities that are included in such public offering in
accordance with the terms hereof and (B) all executive officers and directors of
Iomed, and all persons who own more than ten percent (10%) of the issued and
outstanding shares of capital stock of Iomed, enter into
19
<PAGE> 20
similar agreements. Iomed may impose stop-transfer instructions with respect to
the Registrable Securities subject to the foregoing restriction until the end of
said one hundred eighty (180) day period.
(ii) If requested by an underwriter in any registration
pursuant to paragraph 11(b), Iomed shall not sell or otherwise transfer or
dispose of any shares of its capital stock during the one hundred eighty (180)
day period following the effective date of a registration statement of Iomed
filed under the Act, except for sales by Iomed (A) pursuant to registrations on
Form S-4 or S-8 (or any successor or similar forms thereto), or (B) in
connection with a bona fide acquisition or strategic alliance transaction.
(l) No Impairment. Iomed herewith covenants and agrees that
it will not utilize or employ any of its rights under this paragraph 11, or take
any other voluntary action, which is intended to interfere with, impair or
unreasonably restrict the rights granted to Novartis by this paragraph 11 to
cause the registration of its Registerable Securities in the manner contemplated
hereby, but will, at all times and in good faith, assist Novartis in its efforts
to cause the registration of its Registerable Securities in the manner and under
the circumstances contemplated by this paragraph 11.
12. Stock Purchase Warrant. In connection with the agreement by
Novartis to enter into the Amendment in the manner contemplated by paragraph 4
hereof, Iomed shall issue to Novartis, upon the effective date of this
Agreement, a Warrant to Purchase Shares of Common Stock, in substantially the
form attached hereto as Exhibit "C" (the "Warrant"), which shall entitle
Novartis to purchase a total of ninety thousand (90,000) authorized but
previously unissued common shares of Iomed. All common shares of Iomed, if any,
which are acquired by Novartis through the exercise of its rights under the
Warrant shall be deemed to constitute "Registrable Securities" as such term is
defined in paragraph 11 hereof.
13. Notices. Any notice which is required or permitted to be
given to a Party shall be deemed to have been given only if such notice is
reduced to writing and delivered personally, or by United States mail with
postage pre-paid and return receipt requested, or by telecopier (Fax)
transmission, or by overnight courier to the Party in question as set forth
below:
If to Iomed
or to Dermion: Iomed, Inc.
3385 West 1820 South
Salt Lake City, Utah 84104
Attn: President
Fax: (801) 972-9072
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<PAGE> 21
If to Novartis: Novartis Pharmaceuticals Corporation
59 Route 10
East Hanover, New Jersey 07936-1080
Attn: Vice President, Business Development
and Licensing
Fax: (973) 503-6056
With a copy to: Novartis Pharmaceuticals Corporation
59 Route 10
East Hanover, New Jersey 07936-1080
Attn: General Counsel
Fax: (973) 503-6477
Any Party may change its address by giving notice of such change in the manner
set forth herein. Any notice given to a Party by mail or by overnight courier
shall be deemed delivered two days following the date upon which it is deposited
in the U.S. mail, with postage pre-paid and return receipt requested, or
delivered to the courier, as the case may be, addressed to the Party in question
as set forth herein. Any notice given to a Party by Fax shall be deemed
effective on the date it is actually transmitted to the Party in question at the
Fax number specified herein, by confirmed transmission; provided, that if such
transmission is not confirmed prior to 5:00 p.m., local time of the Party to
which such notice is transmitted, on a business day, such transmission shall be
deemed delivered on the next business day.
14. Assignment. This Agreement shall inure to the benefit of and
shall be binding upon the Parties and their respective successors and permitted
assigns. No Party may assign this Agreement, or delegate its duties or
obligations hereunder, without the prior written consent of the other Parties,
which consent may not be unreasonably withheld or delayed.
15. Entire Agreement. This Agreement, including the Exhibits
hereto (which are incorporated herein by reference) supersedes any prior
understandings or agreements, whether written or oral, among the Parties in
regard to the subject matter hereof, and contains the entire agreement among the
Parties in regard to subject matter hereof. Neither this Agreement nor the
Amendment may be changed or modified orally, but only by an agreement, in
writing, signed by all of the Parties.
16. Savings Clause. Should any part or provision of this
Agreement be rendered or declared invalid by reason of any state or federal law,
or by decree of a court of competent jurisdiction, the invalidation of such part
or provision shall not invalidate the remaining part or provisions of this
Agreement, and such remaining parts and provisions shall remain in full force
and effect.
17. Waiver. Neither the failure nor delay on the part of any
Party to exercise any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right or
privilege preclude any other further exercise thereof or of any other right or
privilege.
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<PAGE> 22
18. Remedies. Should default occur in the performance of any of
the obligations set forth herein, the non-defaulting Party or Parties shall be
entitled to obtain an injunction compelling the specific performance of this
Agreement, in addition to any damages which may result from such default. The
defaulting Party or Parties shall pay to the non-defaulting Party or Parties, in
addition to any damages which may arise as the result of such default, all costs
and expenses (including reasonable attorneys fees) incurred by the
non-defaulting Party or Parties in seeking or obtaining the cure of such
default.
19. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, without giving
effect to the choice of law rules thereof.
20. Counterparts. This Agreement may be executed in three or more
counterparts, each of which shall be a binding agreement, but all of which
together shall constitute but one document.
21. Publicity. No Party shall publicize, advertise, announce or
publicly describe the terms of this Agreement or the transactions contemplated
hereby to any third party, except with the prior consent of the other Parties,
which consent shall not be unreasonably withheld or delayed. Notwithstanding the
foregoing, (i) Iomed shall have the right to describe this Agreement in any
filings which it is required to make with the Securities & Exchange Commission
in connection with any registered public offering of its securities (including
without limitation Iomed's Initial Public Offering and any offering permitted or
required pursuant to paragraph 11 hereof); provided, however, that Iomed shall
provide the other Parties with the opportunity to review and comment upon such
materials (as they relate to the description of this Agreement and the
transactions contemplated hereby) prior to such filing, and (ii) each Party
shall have the right to disclose the terms of this Agreement and the
transactions contemplated hereby to its affiliates, consultants, attorneys,
accountants and other representatives subject to a non-disclosure commitment by
such persons or entities.
IN WITNESS WHEREOF, the Parties have caused this Exchange Agreement to
be executed by their duly authorized representatives as of the date first herein
written.
Iomed:
Iomed, Inc.
By: /s/ NED M. WEINSHENKER
----------------------------------------
Ned M. Weinshenker,
President and Chief Executive Officer
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Dermion:
Dermion, Inc.
By: /s/ Robert J. Lollini
---------------------------------------
Robert J. Lollini, Secretary
Novartis:
Novartis Pharmaceuticals Corporation.
By: [SIG]
---------------------------------------
Its:
--------------------------------------
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<PAGE> 1
EXHIBIT 10.29
NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. NO SALE OR DISPOSITION OF THIS WARRANT OR OF ANY SHARES OF
STOCK ISSUED PURSUANT HERETO MAY BE EFFECTED WITHOUT (i) AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF
COUNSEL FOR THE HOLDER, SATISFACTORY IN FORM AND CONTENT TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A
NO-ACTION LETTER REASONABLY SATISFACTORY TO THE COMPANY FROM THE
SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUESTED, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
IOMED, INC.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
THIS CERTIFIES THAT, for value received, Novartis Pharmaceuticals
Corporation, a Delaware corporation ("Novartis"), or its assigns (collectively,
a "Holder") is entitled to subscribe for and purchase up to 90,000 shares (as
adjusted pursuant to Paragraph 4 hereof, the "Shares") of the fully paid and
nonassessable common stock, par value $.001 (the "Common Stock"), of IOMED,
INC., a Utah corporation (together with its successors and assigns, the
"Company"), at the price of $4.50 per Share (such price, and such other price as
shall result, from time to time, from the adjustments specified in Paragraph 4
hereof, is herein referred to as the "Warrant Price"), subject to the provisions
and upon the terms and conditions hereinafter set forth.
1. Term. As to 30,000 Shares, the purchase right represented by this
Warrant is exercisable, in whole or in part, at any time, and from time to time,
from and after November 1, 1998 and until 5:00 p.m. Mountain Time on November 1,
2002 (the "Expiration Date"). As to an additional 30,000 Shares, the purchase
right represented by this Warrant shall become exercisable, in whole or in part,
at any time, and from time to time to and including the Expiration Date, from
and after the date that Novartis agrees to provide funding under the terms of
that certain Research & Development Agreement, dated March 29, 1996, as amended
from time to time (the "R&D Agreement"), for the calendar year 1999 in an amount
equal to at least $1.5 million. As to the final 30,000 Shares, the purchase
right represented by this Warrant shall become exercisable, in whole or in part,
at any time, and from time to time to and including the Expiration Date, from
and after the date upon which Novartis agrees to provide funding under the R&D
Agreement for the calendar year 2000 in an amount equal to at least $1.5
million. To the extent not exercised at 5:00 p.m. Mountain Time on the
Expiration Date, this Warrant shall completely and automatically terminate and
expire, and thereafter it shall be of no force or effect whatsoever.
2. Method of Exercise; Payment; Issuance of New Warrant.
(a) The purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the
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<PAGE> 2
notice of exercise form attached hereto as Exhibit "A" duly executed) at the
principal office of the Company and by the payment to the Company of an amount,
in cash or other immediately available funds, equal to the then applicable
Warrant Price per Share multiplied by the number of Shares then being purchased.
(b) The person or persons in whose name(s) any certificate(s)
representing shares of Common Stock shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall be
treated for all purposes as the record holder(s) of, the Shares represented
thereby (and such Shares shall be deemed to have been issued) immediately prior
to the close of business on the date or dates upon which this Warrant is
exercised. Upon any exercise of the rights represented by this Warrant,
certificates for the Shares purchased shall be delivered to the holder hereof as
soon as possible and in any event within thirty days of receipt of such notice
and payment, and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised, shall also be issued to the
holder hereof as soon as possible and in any event within such thirty day
period.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized, fully paid and nonassessable, and will be free
from all taxes, liens and charges with respect to the issue thereof. During the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of the
issue upon exercise of the purchase rights evidenced by this Warrant, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification, Merger, Etc. In case of (i) any
reclassification, reorganization, change or conversion of securities of the
class issuable upon exercise of this Warrant (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any merger or consolidation of the
Company with or into another corporation (other than a merger or consolidation
with another corporation in which the Company is the acquiring and the surviving
corporation and which does not result in any reclassification or change of
outstanding securities issuable upon exercise of this Warrant), or (iii) any
sale of all or substantially all of the assets of the Company, then the Company,
or such successor or purchasing corporation, as the case may be, shall duly
execute and deliver to the holder of this Warrant a new Warrant or a supplement
hereto (in form and substance reasonably satisfactory to the holder of this
Warrant), so that the holder of this Warrant shall have the right to receive, at
a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Common Stock
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, reorganization, change, conversion, merger or consolidation by
a holder of the number of shares of Common Stock then purchasable under this
Warrant. Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Paragraph 4. The provisions of this subparagraph 4(a) shall similarly apply to
successive reclassifications, reorganizations, changes, mergers, consolidations
and transfers.
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<PAGE> 3
(b) Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its Common Stock, (i) in the case of a subdivision, the Warrant Price
shall be proportionately decreased and the number of Shares purchasable
hereunder shall be proportionately increased, and (ii) in the case of a
combination, the Warrant Price shall be proportionately increased and the number
of Shares purchasable hereunder shall be proportionately decreased.
(c) Stock Dividends. If the Company at any time while this
Warrant is outstanding and unexpired shall (i) pay a dividend with respect to
Common Stock payable in Common Stock, or (ii) make any other distribution with
respect to Common Stock (except any distribution specifically provided for in
the foregoing subparagraphs (a) and (b)) of Common Stock, then the Warrant Price
shall be adjusted, from and after the date of determination of shareholders
entitled to receive such dividend or distribution to a price determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately prior to such dividend or
distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution. Upon each adjustment in the Warrant Price pursuant to this
Paragraph 4(c), the number of Shares of Common Stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
(d) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Paragraph 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holder of this
Warrant against impairment.
5. Notice of Adjustments. Whenever the Warrant Price or the number
of Shares purchasable hereunder shall be adjusted pursuant to Paragraph 4
hereof, the Company shall prepare a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated. Such certificate shall be signed
by its chief financial officer and shall be delivered to the holder of this
Warrant.
6. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor based on the fair market
value of the Common Stock on the date of exercise as reasonably determined in
good faith by the Company's Board of Directors.
7. Compliance with Securities Act; Disposition of Warrant or Shares
of Common Stock.
(a) Compliance with Securities Act. The holder of this Warrant,
by acceptance hereof, agrees that this Warrant and the Shares to be issued upon
exercise hereof are being acquired for investment and that such holder will not
offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon
exercise hereof except under circumstances which will not result in a violation
of applicable securities laws. Upon exercise of this Warrant, unless the Shares
being
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<PAGE> 4
acquired are registered under the Securities Act of 1933, as amended (the
"Act"), or an exemption from the registration requirements of such Act is
available, the holder hereof shall confirm in writing, by executing the form
attached as Schedule 1 to Exhibit "A" hereto, that the Shares so purchased are
being acquired for investment and not with a view toward distribution or resale
(other than pursuant to and in accordance with the rights of the Holder
described in paragraph 9 hereof). This Warrant and all Shares issued upon
exercise of this Warrant (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT RELATED THERETO,
(ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY IN FORM AND
CONTENT TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED,
(iii) RECEIPT OF AN APPROPRIATE NO-ACTION LETTER REASONABLY
SATISFACTORY TO THE COMPANY FROM THE SECURITIES AND EXCHANGE
COMMISSION TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED, OR
(iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE
WARRANT UNDER WHICH THIS SECURITY WAS ISSUED."
(b) Disposition of Warrant or Shares. With respect to any offer,
sale or other disposition of this Warrant or any Shares acquired pursuant to the
exercise of this Warrant prior to registration of such Shares, the holder hereof
and each subsequent holder of this Warrant agrees to give written notice to the
Company prior thereto, describing briefly the manner thereof, together with a
written opinion of such holder's counsel, if requested by the Company, to the
effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal or
state law then in effect) of this Warrant or such Shares and indicating whether
or not under the Act certificates for this Warrant or such Shares to be sold or
otherwise disposed of require any restrictive legend as to applicable
restrictions on transferability in order to insure compliance with the Act.
Promptly upon receiving such written notice and reasonably satisfactory opinion,
if so requested, the Company, as promptly as practicable, shall notify such
holder that such holder may sell or otherwise dispose of this Warrant or such
Shares, all in accordance with the terms of the notice delivered to the Company.
If a determination has been made pursuant to this subparagraph (b) that the
opinion of counsel for the holder is not reasonably satisfactory to the Company,
the Company shall so notify the holder promptly after such determination has
been made. Notwithstanding the foregoing, this Warrant or such Shares may be
offered, sold or otherwise disposed of in accordance with Rule 144 as
promulgated under the Act ("Rule 144"), provided that the Company shall have
been furnished with such information as the Company may reasonably request to
provide a reasonable assurance that the provisions of Rule 144 have been
satisfied. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144) shall bear a legend as to
the applicable restrictions on transferability in order to insure compliance
with the Act, unless in the aforesaid opinion of counsel for the holder, such
legend is not required in order to insure compliance with the Act. The Company
may issue stop transfer instructions to its transfer agent in connection with
such restrictions.
8. Rights as Shareholders. No holder of this Warrant, as such, shall
be entitled to vote or receive dividends or be deemed the holder of Shares or
any other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any right to vote
for the election of directors or upon any matter submitted to shareholders at
any meeting thereof, or
4
<PAGE> 5
to receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
9. Registration Rights. The Shares received by the Holder of this
Warrant upon the exercise of the purchase rights hereunder are entitled to
certain Registration Rights as set forth in that certain Exchange Agreement, of
even date herewith, among the Company, Novartis and Dermion, Inc. (the "Exchange
Agreement"). The Company specifically agrees that if, following the exercise of
the purchase rights hereunder, the Holder does not hold a sufficient number of
"Registrable Securities" (as such term is defined in the Exchange Agreement) to
enable the Holder to meet the gross proceeds requirement which is prerequisite
to a demand registration, as set forth in paragraph 11(b)(i) of the Exchange
Agreement, then such gross proceeds requirement shall be waived by the Company
in connection with any demand registration request made by the Holder pursuant
to paragraph 11(b) of the Exchange Agreement covering all Shares purchased by
the Holder pursuant to the exercise of its rights under this Warrant; provided,
however, that such waiver shall apply only if (i) the Company may utilize "Form
S-3" (as such term is defined in the Exchange Agreement) in connection with such
registration, and (ii) the Holder shall enter into an agreement with the Company
(which shall be reasonably satisfactory, in both form and content, to both
parties) pursuant to which the Holder shall agree to be responsible for and to
pay one-half of all expenses associated with such registration for which the
Company would otherwise be responsible pursuant to the provisions of paragraph
11(d) of the Exchange Agreement.
10. Representations and Warranties. The Company represents and
warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms;
(b) The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable;
(c) The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Company's Articles of
Incorporation, as amended, or by-laws, and do not and will not constitute a
default under, any indenture, mortgage, contract or other instrument of which
the Company is a party or by which it is bound.
11. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by both the Company and the holder of this Warrant.
12. Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall (a)
be in writing, (b) be delivered personally or sent by mail or overnight courier
to the intended recipient to each such holder at its address as shown on the
books of the Company or to the Company at the address indicated therefor on the
signature page of this Warrant, unless the recipient has given notice of another
address, and (c) be effective on receipt if delivered personally, two (2)
business days after dispatch if mailed, and one business day after dispatch if
sent by overnight courier service.
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<PAGE> 6
13. Transferability. Subject to the satisfaction of all of the
provisions of paragraph 7 thereof, the Holder hereof may transfer this
Warrant at any time, but only in whole and not in part.
14. Lost Warrants. The Company covenants to the Holder hereof that
upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon receipt of a bond or indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company will make and deliver a
new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant.
15. Descriptive Headings. The descriptive headings of the several
sections and paragraphs of this Warrant are inserted for convenience only and do
not constitute a part of this Warrant.
16. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Utah, without giving effect to the choice of law rules thereof.
IOMED, INC.
By: /s/ NED M. WEINSHENKER
--------------------------------------
Ned M. Weinshenker,
President and Chief Executive Officer
Address:
3385 West 1820 South
Salt Lake City, Utah 84104
Dated effective November 1, 1997.
6
<PAGE> 7
EXHIBIT "A"
NOTICE OF EXERCISE
To: IOMED, INC.
1. The undersigned hereby elects to purchase ____ shares of Common
Stock of IOMED, INC. pursuant to the terms of the attached Warrant, and tenders
herewith full payment of the purchase price of such shares, in cash or other
immediately available funds.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
--------------------------------------------
(Name)
--------------------------------------------
--------------------------------------------
(Address)
3. The undersigned represents that, except in connection with the
exercise by the undersigned of certain Registration Rights granted to the
undersigned by Iomed, the aforesaid shares are being acquired for the account of
the undersigned for investment and not with a view to, or for resale in
connection with, the distribution thereof and that the undersigned has no
present intention of distributing or reselling such shares. In support thereof,
the undersigned has executed an Investment Representation Statement attached
hereto as Schedule 1.
--------------------------------------------
(Signature)
--------------------------------------------
(Date)
7
<PAGE> 8
SCHEDULE 1
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: IOMED, INC.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to and agrees with
the Company as follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933 ("Securities
Act").
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be
held indefinitely unless subsequently registered under the Securities Act or
unless an exemption from registration is otherwise available. Moreover, the
Purchaser understands, except as set forth in that certain Exchange Agreement,
dated November 1, 1997, among the Company, Dermion, Inc. and Novartis
Pharmaceuticals Corporation, that the Company is under no obligation to register
the Securities. In addition, the Purchaser understands that the certificate
evidencing the Securities will be imprinted with the legend referred to in the
Warrant under which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144,
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: The availability of certain public information about the
Company; the resale occurring not less than one year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934) and the amount
8
<PAGE> 9
of securities being sold during any three-month period not exceeding the
specified limitations stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, the Purchaser may be precluded from selling the Securities under
Rule 144 even if the one-year minimum holding period had been satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 are not satisfied and the provisions of Rule 144(k) do
not apply, registration under the Securities Act, compliance with Regulation A,
or some other registration exemption will be required; and that, notwithstanding
the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
(g) If all or any portion of the Warrant Price for the Securities is
paid by the Purchaser through the delivery of common shares of the Company owned
by the Purchaser, such common shares are free and clear of all liens and
encumbrances of every type and nature.
Purchaser:
--------------------------------------------
Date:___________________, 19_____
9
<PAGE> 1
EXHIBIT 10.30
EXHIBIT "A"
FIRST AMENDMENT
OF
RESEARCH & DEVELOPMENT AGREEMENT
THIS AGREEMENT is made and shall be effective as of the 1st day of
November, 1997, by and among Iomed, Inc., a Utah corporation ("Iomed"), Novartis
Pharmaceuticals Corporation, a Delaware corporation and the successor to the
ethical pharmaceuticals business of Ciba-Geigy Corporation ("Novartis"), and
Dermion, Inc., a Delaware corporation ("Dermion"). Each of Iomed, Novartis and
Dermion are referred to herein individually as a "Party", and are referred to
collectively herein as the "Parties".
RECITALS:
A. Iomed, Novartis and Dermion are the parties in interest to that
certain Research and Development Agreement, dated as of March 29, 1996 (the "R&D
Agreement").
B. Pursuant to the terms of that certain Exchange Agreement among
the Parties, of even date herewith (the "Exchange Agreement"), Iomed, Dermion
and Novartis have agreed to enter into this Agreement in order to amend certain
of the terms, conditions and provisions of the R&D Agreement.
C. The Parties intend that this Agreement shall satisfy their
respective duties and obligations under paragraph 4 of the Exchange Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing Recitals, the
execution and delivery by the Parties of the Exchange Agreement, and the
covenants and agreements set forth herein, together with other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties agree as follows:
1. References to Ciba-Geigy Corporation. The R&D Agreement is hereby
amended by deleting therefrom, in each instance at which it appears, the term
"Ciba", or any other reference to Ciba-Geigy Corporation, and substituting
therefore in each such instance the term "Novartis" or an appropriate reference
to Novartis Pharmaceuticals Corporation.
2. Use of Defined Terms. All capitalized terms used in this
Agreement which are not otherwise defined herein shall have the meaning assigned
to such terms in the R&D Agreement.
3. Numbering of Sections. The internal numbering sequence of the R&D
Agreement is herewith modified and amended, as necessary, in order to reflect
the additions and deletions to the R&D Agreement provided for by this Agreement.
<PAGE> 2
4. Amendment of Defined Terms. The Definition of the term
"Products," as set forth in Article I of the R&D Agreement is modified and
amended to read in its entirety as follows:
" "Product". Shall mean a System developed by Dermion or Iomed
and Novartis pursuant to this Agreement for delivery of any Drug
specified by the parties."
5. Amendment of Paragraph 3.1(c). Paragraph 3.1(c) of the R&D
Agreement is hereby modified and amended to read in its entirety as follows:
"(c) Updates. If Ciba desires at any time during the Exclusivity
Period to update Schedule 3.1(a) in order to include a new
therapeutic field (the "proposed Ciba Field"), or at any time during
the term of this Agreement to update Schedule 3.1(b) to include a
new Ciba Proprietary Drug (such Drug, together with the associated
Specified Indication, the "Proposed Ciba Proprietary Drug"), it
shall notify Iomed and Dermion in writing, which notice shall
contain (i) in the case of a Proposed Ciba Field, a certification
that such Proposed Ciba Field satisfies the condition set forth in
either clause (i) or clause (ii) of Section 3.1(a) hereof, or (ii)
in the case of a Proposed Ciba Proprietary Drug, a certification
that such Proposed Ciba Proprietary Drug satisfies the condition set
forth in Section 3.1(b) hereof. Such Proposed Ciba Field or Proposed
Ciba Proposed Proprietary Drug shall automatically and without
further action by any party hereto become a Ciba Field or a Ciba
Proprietary Drug, as the case may be, and be treated as such for all
purposes of this Agreement immediately upon receipt by Dermion of
such written notice; provided, however, that if Iomed or Dermion
has, prior to their receipt of such notice and in compliance with
the terms of this Agreement (including without limitation Section
3.3 hereof), independently or pursuant to an agreement with any
other Person (a "Third Party Agreement") undertaken research,
development, manufacture, distribution or sale of any System to
deliver a Drug in the Proposed Ciba Field or the Proposed Ciba
Proprietary Drug for treatment of the Specified Indication, neither
the rights of Iomed and Dermion nor such Third Party Agreement shall
be subject to this Article 3."
6. Amendment of Paragraph 3.2. Paragraph 3.2 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"3.2 Exclusivity. Neither Iomed nor Dermion shall conduct, have
conducted or fund any research or development activity with
2
<PAGE> 3
respect to, or manufacture, distribute or sell (whether
independently or on behalf of a third party) any System for
delivery of any Drug in a Novartis Field during the Exclusivity
Period or any Novartis Proprietary Drug for treatment of the
Specified Indication during the term of this Agreement, except
(i) pursuant to the Program in accordance with this Agreement, or
(ii) outside the scope of the Program, subject to compliance with
Section 3.3."
7. Amendment of Section 3.3. Section 3.3 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"3.3 Development of Systems for or by Iomed or Dermion Outside
the Program.
(a) Notice of Proposed Systems. In the event that during the
Exclusivity Period Iomed or Dermion determines to develop a
System (including any Abandoned Product) outside the scope of the
Program, either pursuant to a third party offer (a "Third Party
Offer") to develop a System, or otherwise (a "Proposed System"),
Dermion or Iomed, as the case may be, shall give notice of the
Proposed System to the Committee (the "Notice"). The Notice shall
include at least the therapeutic field of the drug to be
delivered pursuant to the Proposed System (the "Proposed Field"),
as well as such other information as is relevant to the Proposed
System, provided, that if the Proposed System is to be developed
pursuant to a Third Party Offer, Iomed or Dermion shall not be
required to disclose to the Committee the name of such third
party, the specific drug for which the System is to be developed
(unless such drug is a Novartis Proprietary Drug, in which case
such drug, as well as whether the indication proposed to be
treated thereby is the Specified Indication with respect to such
drug, shall be disclosed) or any other information that Iomed or
Dermion determines, in its good faith judgment, should not be
disclosed to Novartis because of confidentiality or competitive
concerns (other than the therapeutic field, which must in any
event be disclosed).
(b) Proposed Systems in a Novartis Field. If the Proposed
Field is in whole or in part a Novartis Field, Iomed, Dermion or
both, as the case may be, shall be prohibited from pursuing the
development of the Proposed System during the Exclusivity Period
without the prior written consent of Novartis, which may be given
or withheld in the sole discretion of Novartis.
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<PAGE> 4
(c) Proposed Systems for Novartis Proprietary Drugs. If the
Proposed System relates to the delivery of a Novartis Proprietary
Drug for treatment of the Specified Indication, Novartis shall
have the right during the term of this Agreement to elect to have
Iomed or Dermion develop a Product for such Novartis Proprietary
Drug for treatment of the Specified Indication for it pursuant to
the Program instead of the Proposed System. If Novartis so
elects, it shall give notice thereof to the Committee within
fifteen (15) Business Days of receipt by the Committee of the
Notice, in which case Iomed and Dermion shall be prohibited
during the term of this Agreement from developing the Proposed
System for treatment of the Specified Indication, subject to the
last sentence of this Section 3.3(c). The development of any such
Product for a Novartis Proprietary Drug for treatment of the
Specified Indication pursuant to the Program shall be pursuant to
this Agreement or an amendment to this Agreement (provided, that,
other than providing for incremental costs to be paid by Novartis
and incremental personnel, facilities and resources to be
provided by Dermion, such amendment shall be on the same terms
and conditions as this Agreement). If Novartis fails to give such
notice within such fifteen (15) Business Day period, or if
activities with respect to developing a Product for the Novartis
Proprietary Drug for treatment of the Specified Indication
pursuant to the Program have not commenced within ninety (90)
days of receipt by the Committee of the Notice (other than as a
result of any acts or omissions of Iomed or Dermion), Iomed or
Dermion, as the case may be shall be free to pursue the
development of the Proposed System for treatment of the Specified
Indication outside the scope of the Program, provided, that if
activities with respect to developing such Proposed System for
treatment of the Specified Indication outside the scope of the
Program have not commenced within ninety (90) days after
expiration of such fifteen (15) Business Day period or such
ninety (90) day period, as the case may be, any activities by
Iomed or Dermion with respect to such Proposed System shall
thereafter be subject to compliance with this Section 3.3.
(d) Other Proposed Systems. If the Proposed Field is not a
Novartis Field and if the Drug proposed to be delivered pursuant
to the Proposed System is not a Novartis Proprietary Drug for
treatment of the Specified Indication, Iomed or Dermion, as the
case may be, may freely develop the Proposed System either
independently or for a third party (which development may be
exclusively for the benefit of Iomed or Dermion or pursuant to an
4
<PAGE> 5
agreement under which Iomed or Dermion, as appropriate, grants
exclusive licenses to such third party)."
8. Amendment of Section 3.4. Section 3.4 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"3.4 Development of Abandoned Products. Dermion or Iomed shall be
entitled to pursue research concerning and development of
Abandoned Products outside the scope of the Program, provided,
that (i) any such activity shall be subject to compliance with
Section 3.3, (ii) Patent Rights covering the Drug for which such
Abandoned Product was being developed or such drug's manufacture
or use shall have expired, and (iii) Dermion or Iomed, as the
case may be, shall reimburse Novartis in accordance with the next
sentence for all costs and expenses previously incurred in
conducting Program activities with respect to such Abandoned
Product. In reimbursement of such costs and expenses incurred
with respect to any Abandoned Product, Dermion or Iomed shall pay
to Novartis (i) within thirty (30) days after giving Notice
pursuant to Section 3.3(a) with respect to the proposed
development by Dermion or Iomed of such Abandoned Product, all
such costs and expenses up to a maximum amount of $250,000, and
(ii) within thirty (30) days of receipt thereof, fifty percent
(50%) of all revenues received by Dermion or Iomed with respect
to such Abandoned Product (including revenue from sales of and
fees and/or royalties received with respect to such Abandoned
Product) up to the amount of such costs and expenses not
reimbursed pursuant to clause (i)."
9. Amendment of Section 3.5. Section 3.5 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"3.5 Development of Systems for or by Novartis.
(a) Systems for the Delivery of Novartis Proprietary Drugs.
In the event that during the term of this Agreement Novartis
determines to develop a System for a Novartis Proprietary Drug
for treatment of the Specified Indication, it shall give notice
thereof to the Committee (a "Novartis Proposed Proprietary
System"). Dermion shall have the right to elect to develop such
Novartis Proposed Proprietary System for treatment of the
Specified Indication as a Product pursuant to the Program. If
Dermion so elects, it shall give notice thereof to the Committee
within fifteen (15) Business Days of receipt by the Committee of
such notice, in which case Novartis shall be prohibited during
the
5
<PAGE> 6
term of this Agreement from developing the Novartis Proposed
Proprietary System for treatment of the Specified Indication
outside the scope of the Program, subject to the last sentence of
this Section 3.5(a). The development of a Novartis Proposed
Proprietary System for treatment of the Specified Indication as a
Product pursuant to the Program shall be pursuant to this
Agreement or an amendment to this Agreement (provided, that,
other than providing for incremental costs to be paid by Novartis
and incremental personnel, facilities and resources to be
provided by Dermion, such amendment shall be on the same terms
and conditions as this Agreement). If Dermion fails to give such
notice within such fifteen (15) Business Day period, or if
activities with respect to developing a Product for the Novartis
Proprietary Drug for treatment of the Specified Indication have
not commenced within ninety (90) days of receipt by the Committee
of such notice (other than as a result of any acts or omissions
of Novartis), Novartis shall be free to pursue the development of
the Novartis Proposed Proprietary System for treatment of the
Specified Indication outside the scope of the Program, provided,
that if activities with respect to developing such Novartis
Proposed Proprietary System for treatment of the Specified
Indication outside the scope of the Program have not commenced
within ninety (90) days after the expiration of such fifteen (15)
Business Day period or such ninety (90) day period, as the case
may be, any activities by Novartis with respect to such Novartis
Proposed Proprietary System shall thereafter be subject to
compliance with this Section 3.5(a).
(b) Other Systems. If during the term of this Agreement
Novartis makes the determination to engage a third party (other
than Dermion) to develop a System for a Drug owned, licensed or
manufactured by Novartis (other than a Novartis Proprietary Drug
for treatment of the Specified Indication, which shall be covered
by Section 3.5(a) above) (a "Novartis Proposed System"), prior to
initiating discussions with such third party, Novartis shall
notify Dermion and Iomed in writing. Novartis agrees for a period
of thirty (30) days from such notice (the "Novartis Standstill
Period"), (i) to negotiate in good faith with Dermion or Iomed to
reach an agreement under which Dermion or Iomed will develop the
Novartis Proposed System for Novartis either pursuant to this
Agreement or an amendment to this Agreement (provided, that,
other than providing for incremental costs to be paid by Novartis
and incremental personnel, facilities and resources to be
provided by Dermion or Iomed, such amendment shall be on the same
terms and conditions as this
6
<PAGE> 7
Agreement), and (ii) Novartis shall not negotiate with or enter
into a binding agreement with any third party for the development
of such Novartis Proposed System. If, upon expiration of the
Novartis Standstill Period, Novartis and either Dermion or Iomed
have not reached an agreement with regard to the development of
the Novartis Proposed System, Novartis shall be free to negotiate
with and to enter into an agreement with a third party to develop
the Novartis Proposed System. Notwithstanding the foregoing, this
Section 3.5(b) shall not apply to any Novartis Proposed System to
the extent that discussions regarding the development of such
Novartis Proposed System are initiated by a third party.
(c) No Other Restrictions. Notwithstanding any other
provision of this Agreement, Novartis shall be free to pursue the
development of any System (including any Novartis Proposed
System) independently without the assistance of a third party at
any time without complying with Section 3.5(b) or any other
provision of this Agreement (other than Section 3.5(a) which
shall apply only in the case of a Novartis Proposed Proprietary
System), and without any other restriction or limitation of any
kind."
10. Amendment of Section 4.3. Section 4.3 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"4.3 Ownership and Use of Jointly Developed Technology.
(a) Ownership of Jointly Developed Technology. Subject to
Section 4.3(b), Dermion, Iomed and Novartis shall jointly hold
all right, title and interest in and to all Jointly Developed
Technology. Except as otherwise provided in this Agreement,
Novartis, Iomed and Dermion may each freely practice and
otherwise exploit any and all Jointly Developed Technology
without the consent of, and without any obligation (including
without limitation any obligation to pay royalties or other
amounts, or to render an accounting) to any of the other parties.
Dermion, Iomed and Novartis shall each cause its employees and
others performing Program activities on its behalf (including, in
the case of Dermion, Program Employees, and in the case of
Novartis, Novartis Personnel) (its "Scientists") to execute
agreements (i) assigning world-wide rights to all Jointly
Developed Technology made or developed by such Scientists to
Dermion, Iomed and Novartis, jointly, and (ii) agreeing to
cooperate with Dermion, Iomed and Novartis in obtaining patent
protection with respect thereto (including by executing such
documents as may be required by any patent office in connection
with a related patent application
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<PAGE> 8
or patent). Each of Dermion, Iomed and Novartis shall cause its
Scientists promptly to disclose to such party, and shall
thereafter promptly disclose to the other parties and the
Committee, the conception or reduction to practice of any Jointly
Developed Technology that it believes has a reasonable likelihood
of receiving patent protection.
(b) Limitations on Use of Jointly Developed Technology by
Dermion and Iomed. Notwithstanding the rights of Dermion, Iomed
and Novartis as joint owners of Jointly Developed Technology
pursuant to Section 4.3(a), any use of Jointly Developed
Technology by Dermion, Iomed and Novartis shall be subject to
Article 3 hereof.
11. Amendment of Section 4.4. Section 4.4 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"4.4 Transfer of Jointly Developed Technology. During the term of
this Agreement, and for a period of three (3) years after the
effective date of termination thereof (such term and period, the
"Technology Transfer Restriction Period"), Dermion, Iomed and
Novartis shall not sell, assign, transfer or convey (for purposes
of this Section 4.4, "Assign") all right, title and interest in
or to any item of Jointly Developed Technology without the prior
written consent of the other parties, except (i) to a successor
to substantially all of the business of Dermion, Iomed or
Novartis, as the case may be, whether by merger, consolidation,
stock sale, asset sale or otherwise, (ii) in the case of
Novartis, to any Person other than a Prohibited Transferee, or
(iii) in the case of Dermion and Iomed, to any Person other than
for use in connection with the research, development,
manufacture, distribution or sale of Systems for delivery of
drugs in any of the Novartis Fields (as defined from time to time
in accordance with Section 3.1(a)), it being a condition
precedent to any Assignment of Jointly Developed Technology
pursuant to this clause (iii) that Dermion or Iomed obtain the
agreement of such Person not to so use during the Technology
Transfer Restriction Period the Jointly Developed Technology to
be Assigned; provided, however, that notwithstanding any other
provision of this Section 4.4, in the event that Dermion or Iomed
Assigns any Jointly Developed Technology to a Prohibited
Transferee (which Assignment by its terms shall require the
Assignee to give notice to Dermion or Iomed of subsequent
Assignments by such Prohibited Transferee), and such Prohibited
Transferee subsequently Assigns such Jointly Developed Technology
to another Prohibited Transferee, Dermion
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<PAGE> 9
or Iomed, as the case may be, shall promptly give Novartis notice
of such subsequent Assignment, in which case the restriction set
forth in clause (ii) above shall, as of the date of such
subsequent Assignment, terminate and thereafter be of no further
force or effect."
12. Amendment of Section 4.5. Section 4.5 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"4.5 Patents and Patent Applications.
(a) Initial Filings. Each party shall promptly disclose to
the Committee the conception or reduction to practice of any
Jointly Developed Technology that the disclosing party believes
has a reasonable likelihood of receiving patent protection.
Promptly after such disclosure, the Committee shall meet (in
person or by teleconference) to discuss such Jointly Developed
Technology, including (i) whether to proceed with a patent
application with respect thereto and (ii) the jurisdictions in
which such patent application should be filed. In the event that
the Committee elects to file a patent application with respect to
any Jointly Developed Technology, Novartis shall be responsible
therefor (unless the Committee determines that Dermion or Iomed
should file such patent application (which determination shall
not be a Novartis Matter)) (the party filing such patent
application being referred to in this Section 4.5 as the
"Responsible Party"). The Responsible Party shall (i) give the
other parties an opportunity to review the text of any such
application promptly (with consideration of all applicable filing
deadlines) before filing and (ii) promptly supply the other
parties with a copy of the application as filed, together with
notice of its filing date and serial number. Unless otherwise
agreed by the parties, the Responsible Party shall be responsible
for the initial filing of any such patent application and the
subsequent prosecution and maintenance of the application and any
resulting patents.
(b) Foreign Filings. Within a reasonable period of time
(which the parties shall use reasonable efforts to ensure is no
more than nine (9) months) following the filing date of a patent
application pursuant to Section 4.4(a), the Committee shall
determine whether to abandon such application without
replacement, abandon and refile such application, proceed with
such application only in the country of filing, or use such
application (e.g. as the basis for a claim of priority under the
Paris Convention) for corresponding applications in other
countries.
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<PAGE> 10
Dermion, Iomed and Novartis shall consult together to ensure
that, so far as practicable, the texts of applications filed in
different jurisdictions contain the same information and claim
the same scope of protection.
(c) Patent Prosecution and Maintenance. The Responsible
Party shall diligently prosecute and maintain, using commercially
reasonable practices, patent applications and patents with
respect to Jointly Developed Technology for which it is
responsible, and promptly provide the other party with copies of
all relevant documentation with respect thereto. The Responsible
Party shall use patent counsel and other professional advisors of
its own selection, reasonably acceptable to the other party. The
Committee shall periodically review the status of patents and
patent applications constituting Jointly Developed Technology,
including whether the prosecution and/or maintenance of each such
patent or patent application should be continued.
(d) Authority. The Responsible Party shall have the sole and
exclusive authority to prosecute and maintain the patent
application and patent for which it is responsible, including the
right to amend and cancel claimed subject matter, as may be
reasonably appropriate or desirable in the view of the
Responsible Party, but shall consult in good faith with the other
parties regarding such prosecution and maintenance with respect
to Jointly Developed Technology for which it is responsible, and
will promptly provide the other parties with a copy of all
relevant documentation with respect thereto. The other parties
shall cooperate with the Responsible Party, including providing
the Responsible Party with access to such information as may be
reasonably necessary to permit such prosecution and maintenance,
and signing, or causing to have signed, such documents as may be
necessary or appropriate in connection therewith. Prior to
abandoning any such patent application or patent, the Responsible
Party shall offer the same to the other parties for prosecution
or maintenance, as the case may be. The costs, if any, of such
cooperation shall be Prosecution Costs subject to Section 4.4(e).
(e) Prosecution Costs. Dermion, Iomed and Novartis shall
bear all Prosecution Costs equally, provided, that Dermion's
share of such Prosecution Costs shall not exceed $50,000 per
patent application (not including any Premium payable pursuant to
Section 4.5(f)).
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<PAGE> 11
(f) Independent Filing. In the event that after
consideration thereof the Committee elects not to file a patent
application in any jurisdiction with respect to any Jointly
Developed Technology, any of Dermion, Iomed or Novartis shall be
entitled to file a patent application in such jurisdiction with
respect to such Jointly Developed Technology (an "Independent
Filing"). In such event, the party making the Independent Filing
shall bear all Prosecution Costs with respect to such patent
application and shall own all right, title and interest in and to
any Patent Rights arising or resulting from such Independent
Filing. Notwithstanding the foregoing, the other parties may
within one (1) year of the filing date elect to join the filing
party in such Independent Filing, in which case (i) such other
parties shall pay to the filing party such other party's share of
Prosecution Costs incurred by the filing party to date in
connection with such Independent Filing plus an amount equal to
twenty percent (20%) (a "Premium") of all such Prosecution Costs,
(ii) all Patent Rights arising or resulting from such filing
shall be deemed Jointly Developed Technology for all purposes
under this Agreement, and (iii) thereafter all of the other
provisions of this Section 4.5 shall apply to such patent
application (with the filing party serving as the Responsible
Party).
13. Amendment of Section 4.6(b). Section 4.6(b) of the R&D Agreement
is hereby modified and amended to read in its entirety as follows:
"(b) Jointly Developed Technology. Promptly upon receipt of
any Infringement Notice relating to Infringement of Jointly
Developed Technology, the Committee shall meet to determine
appropriate action to take with respect to such Infringement (the
"Committee's Determination"), including (i) whether the parties
should prosecute such Infringement jointly, whether any party
should prosecute such Infringement independently, or whether no
action should be taken by the parties with respect to such
Infringement, (ii) in the event that the Committee determines to
prosecute such Infringement jointly, the party or parties to have
primary responsibility therefor (the "Responsible Party(ies)"),
(iii) allocation among the parties of expenses to be incurred
with respect to the prosecution of such Infringement, (iv)
allocation among the parties of any damages recovered in respect
of such Infringement, and (v) any other matter deemed relevant by
the Committee in respect of such Infringement. With respect to
any joint prosecution, the Responsible Party(ies) shall take such
action, as deemed appropriate, whether by action,
11
<PAGE> 12
suit, proceeding or otherwise, in accordance with the Committee's
Determination to prevent or eliminate the Infringement and to
collect damages with respect thereto. Except as set forth below,
all costs and expenses incurred by any party in connection with
the Infringement shall be borne by the parties in accordance with
the Committee's Determination. Except as set forth below, damages
recovered by any party in such action, suit or proceeding in
connection with such Infringement shall be apportioned among the
parties in accordance with the Committee's Determination. In the
event that the Committee is unable to make a determination
mutually acceptable to the parties as to how to proceed with
respect to such Infringement, any party shall be entitled to
prosecute such Infringement in its own name and on its own
behalf, in which case such party shall bear all costs and
expenses incurred by it in connection with prosecuting such
Infringement and shall retain all damages recovered in respect
thereof."
14. Amendment of Section 4.7. Section 4.7 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"4.7 Infringement of Third Party Rights.
(a) Notice. If Dermion, Iomed or Novartis shall become aware
of any Infringement Action with regard to the manufacture, use or
sale of any System incorporating (or developed or manufactured
through processes incorporating) Jointly Developed Technology,
the party aware shall promptly notify the other parties of the
same and fully disclose, to its knowledge, the basis therefor.
(b) Infringement Actions with respect to Products. If the
Infringement Action relates to a Product incorporating (or
developed or manufactured through processes incorporating)
Jointly Developed Technology, the parties shall jointly
compromise or defend the Infringement Action on such basis and on
such terms as the parties shall mutually agree. In such event the
parties shall cooperate fully with respect to the compromise or
defense of such Infringement Action, and each party shall keep
the other fully informed as to the status of such Infringement
Action. If, in connection with such Infringement Action, Dermion,
Iomed or Novartis is required to obtain a Third Party License in
order to make, have made, use or sell Products incorporating (or
developed or manufactured through processes incorporating)
Jointly Developed Technology, such Third Party License shall be
obtained for the benefit of all of Dermion, Iomed and Novartis,
and all
12
<PAGE> 13
rights under such Third Party License shall be held jointly by
the parties. All Settlement Costs incurred by the parties with
respect to such Infringement Action shall be borne eighty percent
(80%) by Novartis and twenty percent (20%) by Iomed or Dermion.
(c) Infringement Actions with respect to Other Systems. If
the Infringement Action relates to a System incorporating (or
developed or manufactured through processes incorporating)
Jointly Developed Technology, which System is not a Product
developed pursuant to the Program, the Committee shall meet to
determine appropriate action to take with respect to such
Infringement Action, including (i) whether the parties should
compromise or defend such Infringement jointly or whether a
particular party should compromise or defend such Infringement
independently, (ii) in the event that the Committee determines to
compromise or defend such Infringement Action jointly, the party
or parties to have primary responsibility therefor, (iii)
allocation among the parties of expenses to be incurred with
respect to the compromise or defense of such prosecution, (iv)
allocation among the parties of rights under any Third Party
License obtained in connection with such Infringement Action, and
(v) any other matter deemed relevant by the Committee in respect
of such Infringement Action. In the event that the Committee is
unable to make a determination mutually acceptable to the parties
as to how to proceed with respect to such Infringement Action,
any party shall be entitled to compromise or defend such
Infringement Action in its own name and on its own behalf, in
which case such party shall bear all Settlement Costs incurred by
it in connection with compromising or defending such Infringement
Action and shall retain sole ownership of all rights under any
Third Party License obtained by it in connection with such
Infringement Action."
15. Amendment of Section 5.2. Section 5.2 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"5.2 License from Novartis. Novartis hereby grants to Dermion and
to Iomed during the term of this Agreement a non-exclusive,
royalty-free, license under the Patent Rights included in the
Novartis Technology to make, have made, use and sell Products in
the Territory pursuant to the Program. In addition to the
foregoing, Novartis hereby grants to Dermion and to Iomed during
the term of this Agreement a non-exclusive license to practice
the Know-How included in the Novartis Technology in the Territory
pursuant to the Program. All rights to Novartis Technology
(including Patent
13
<PAGE> 14
Rights and Know-How) granted to Dermion and to Iomed pursuant to
this Agreement shall terminate upon the effective date of
termination of this Agreement, and neither Dermion nor Iomed
shall have any right, title or interest in such Novartis
Technology thereafter."
16. Amendment of Section 5.3(a). Section 5.3(a) of the R&D Agreement
is hereby modified and amended to read in its entirety as follows:
"(a) Dermion and Iomed. Notwithstanding any other provision
of this Agreement, neither Dermion nor Iomed shall sublicense the
rights granted to it under Section 5.2 (except to the
other)without the prior written consent of Novartis, which
Novartis may give or withhold in its sole discretion.
Notwithstanding the foregoing, Dermion and Iomed each shall have
the right to license to the other, without restriction (other
than that any such license shall impose upon the licensee the
same restrictions as are applicable to the licensor under this
Agreement), any right or license granted to it by Novartis
pursuant to this Agreement."
17. Amendment of Section 5.4. Section 5.4 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"5.4 Transfers of Second Generation Technology by Dermion and
Iomed. If at any time during the term of this Agreement and for a
period of five (5) years after the effective date of termination
thereof, Dermion or Iomed obtains any Patent Rights covering
Second Generation Technology (as defined below), Dermion or
Iomed, as the case may be, shall notify Novartis in writing of
such event. Dermion and Iomed agree that for a period of thirty
(30) days from such notice (the "Dermion/Iomed Standstill
Period"), (i) Dermion or Iomed, as the case may be, will
negotiate in good faith with Novartis to reach an agreement to
license the Second Generation Technology to Novartis on terms and
conditions acceptable to the parties, and (ii) Dermion or Iomed,
as the case may be, shall not negotiate or enter into a binding
agreement with any third party to Transfer the Second Generation
Technology, provided, that clause (ii) of this sentence shall
only apply during the term of this Agreement. If, upon expiration
of the Dermion/Iomed Standstill Period, Novartis and either
Dermion or Iomed, as appropriate, have not reached an agreement
for the license of such Second Generation Technology to Novartis,
Dermion or Iomed, as the case may be, shall be free to Transfer
such Second Generation Technology to any third party. In
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<PAGE> 15
addition, if Novartis and Dermion or Iomed, as the case may be,
have reached an agreement for a license, Dermion or Iomed, as the
case may be, shall also be free to Transfer such Second
Generation Technology to any third party to the extent permitted
under the terms of the license from Dermion or Iomed, as the case
may be, to Novartis. Notwithstanding the foregoing, Dermion or
Iomed, as the case may be, shall not be required to enter into a
license with Novartis if and to the extent that the terms of such
license would, in the good faith judgment of Dermion or Iomed on
advice of counsel, violate the terms of any agreement between
Dermion or Iomed, as the case may be, and any third party then in
effect. As used in this Section 5.4, "Second Generation
Technology" shall mean any technology (including Patent Rights
and Know-How), other than Improvements to Dermion Technology or
IOMED Technology, developed by Dermion or Iomed that is
applicable or potentially applicable to the development of
Systems. If any transaction is covered by both this Section 5.4
and Section 8.4 below, the terms of Section 8.4 shall exclusively
govern such transaction. The parties specifically agree that all
technology to which Iomed has acquired a license pursuant to
those Agreements, dated April 14, 1997, between Iomed and Drug
Delivery Systems, Inc. (an affiliate of Elan Corporation plc)
shall constitute "Second Generation Technology" under this
paragraph 5.4; provided that the Dermion/Iomed Standstill Period
in respect to such technology shall commence upon December 1,
1997."
18. Elimination of Section 5.5. From and after the effective date of
this Agreement, Section 5.5 of the R&D Agreement, entitled "Future IOMED
Licenses" shall be deemed to be entirely deleted and removed therefrom, and
shall have no further force or effect.
19. Amendment of Section 8.2. Section 8.2 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"8.2 Unrestricted Iomed Areas. No provision of this Agreement
shall be deemed or construed to restrict Iomed's right, on its
own behalf and not for a third party, to conduct research and
development with respect to or to develop Systems for Drugs used
in the treatment of acute inflammation or for the inducement of
local anesthesia."
20. Amendment of Section 8.3(a). Section 8.3(a) of the R&D Agreement
is hereby modified and amended to read in its entirety as follows:
15
<PAGE> 16
"(a) Covenant Against a Change of Control of Dermion. Iomed
and Dermion covenant and agree that until March 29, 1998, without
the prior written consent of Novartis, they shall not cause or
approve a Change of Control of Dermion. The provisions of this
paragraph 8.3(a) shall not restrict Iomed's right to issue debt
or equity securities, to engage or participate in a merger or
consolidation (whether or not it is the surviving corporation in
such transaction), to sell all or substantially all of its
assets, or to engage in any similar transaction or series of
transactions. For the purpose of this Section 8.3 and Section 8.4
hereof, the transfer of Dermion's assets to Iomed, whether by
dividend or other means, and subsequent sale or other conveyance
of those assets to a third-party (other than as part of a
transaction described in the immediately preceding sentence)
shall constitute a Change of Control of Dermion."
21. Amendment of Section 8.4. Section 8.4 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"8.4 Right of First Offer.
(a) Offer. If at any time the Board of Directors of Dermion
proposes to enter into or approve a transaction or series of
related transactions which, if consummated, would result in a
Change of Control of Dermion (a "Transaction"), then it shall
promptly forward to Novartis a written notice (an "Offer Notice")
offering to enter into a Transaction with Novartis and specifying
the purchase price (the "Proposed Purchase Price") and other
terms and conditions under which it would enter into such
Transaction with Novartis (the offer made in any such Offer
Notice, the "Offer"). Novartis shall have sixty (60) days after
its receipt of an Offer Notice (the "Acceptance Period") to
provide written notice to Dermion of its acceptance of the Offer.
Additionally, if the Board of Directors of Iomed proposes to
enter into or approve either a sale or similar transfer of the
Dermion Shares held by Iomed or the sale of the assets employed
by Dermion in its business (other than in a transaction or series
of transactions of the type described in the immediately
following sentence of this Section 8.4(a)), and if such
transaction would result in a Change in Control of Dermion, Iomed
shall provide Novartis with written notice of the type described
in the first sentence of this Section 8.4(a), and Novartis shall
have offer rights, in regard to the transaction or series of
transactions described in such notice, as set forth in hereunder
this Section 8.4, as if the
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<PAGE> 17
proposed transaction by Iomed constituted a "Transaction" by
Dermion. Notwithstanding any provision or interpretation of this
Agreement to the contrary, a "Transaction" shall not be deemed to
include any sale by Iomed of its debt or equity securities, any
merger or consolidation involving Iomed, or the sale by Iomed of
all or substantially all of its assets.
(b) Response to Offer. If Novartis accepts the Offer, it
shall be obligated to consummate such Transaction at the price
and other terms specified in the Offer Notice within one hundred
twenty (120) days after the acceptance of the Offer, subject to
negotiation of a definitive acquisition agreement containing
representations and warranties, covenants, conditions to closing
and such other terms and conditions customary for agreements of
its type. If Novartis rejects the Offer (or otherwise fails to
forward an acceptance of the Offer prior to the expiration of the
Acceptance Period), Dermion shall, for a period of two hundred
seventy (270) days after expiration of the Acceptance Period,
have the right to consummate a Transaction of the type described
in the Offer Notice only at a price greater than ninety percent
(90%) of the Proposed Purchase Price and on such other terms and
conditions more favorable to it than those offered to Novartis
(unless Novartis consents to such lower price or other terms and
conditions, which consent shall not be unreasonably withheld, it
being understood that Novartis' withholding of consent based on
its desire to consummate a Transaction at such lower price or
other terms and conditions shall be deemed reasonable); provided,
however, that in the event that a Transaction has not been
consummated within such two hundred seventy (270) day period,
then any proposed future Transaction shall continue to be subject
to this Section 8.4.
(c) Survival. The offer rights of Novartis described in this
Section 8.4 shall survive any termination of this Agreement for a
period of twelve (12) months from the effective date of such
termination; provided, however, that if for any annual period
during the term hereof the amount of funding which Novartis is
required to provide to Dermion under this Agreement represents
less than 50% of Dermion's operating budget for such annual
period, the offer rights of Novartis hereunder shall terminate
and this paragraph 8.4 shall permanently cease to be effective."
17
<PAGE> 18
22. Amendment of Section 9.3. Section 9.3 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"9.3 Survival Upon Termination. The parties agree that their
respective rights and obligations pursuant to Sections 2.4(f),
2.5(e), 3.1-3.3 (to the extent of the Exclusivity Period),
4.1-4.4, 4.6, 4.7, 5.1, 5.3(b), 5.4, 6.3-6.6, 7.4, 8.1, 8.3, 8.4,
(subject to the limitation set forth in Section 8.4(c)), 9.3-9.5,
9.6, 9.7, 9.8, 10.1, 10.2, 11.1 and 11.10 shall survive
termination of this Agreement for any reason, and a non-breaching
party shall have the right to seek monetary or injunctive relief
upon any material breach by the other parties of such provisions,
provided that such rights and obligations shall in any event
terminate on the tenth (10th) anniversary of the effective date
of termination of this Agreement."
23. Amendment of Section 11.2. Section 11.2 of the R&D Agreement is
hereby modified and amended to read in its entirety as follows:
"11.2 Publicity. Except after consultation with the other
parties, no party shall publicize, advertise, announce or
publicly describe to any Governmental Authority or other Person,
the terms of this Agreement, the parties hereto or the
transactions contemplated hereby, except as required by
Applicable Law or as required pursuant to this Agreement. In the
event that Dermion or IOMED on the one hand or Novartis on the
other is requested or required pursuant to Applicable Law by any
Governmental Authority to disclose to any Governmental Authority
or other Person any terms of this Agreement, the party subject to
such request or requirement shall provide the other with prompt
written notice of such request or requirement so that the other
party may seek a protective order or other appropriate remedy or
waive compliance with the provisions of this Agreement. If, in
the absence of a protective order or other remedy or the receipt
of a waiver by the other party, the party being requested or
required to disclose such terms of this Agreement is nonetheless
legally compelled to disclose such terms, it may, without
liability hereunder, disclose only that portion of this Agreement
which it is legally compelled to disclose. Notwithstanding the
provisions of this paragraph 11.2, Iomed shall have the right, in
connection with any public offering of its securities, to
disclose the terms and conditions of this Agreement and to file
this Agreement with the Securities and Exchange Commission to the
extent recommended by its legal counsel; provided that such
disclosure or filing is reviewed and approved by
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<PAGE> 19
Novartis, which approval shall not be unreasonably withheld or
delayed."
24. Amendment of Certain Provisions of Section 11.6. Those
provisions of Section 11.6 of the R&D Agreement which set forth the addresses
and telecopier numbers of the Parties are hereby modified and amended to provide
as follows:
If to Iomed or Dermion:
Iomed, Inc.
3385 West 1820 South
Salt Lake City, Utah 84104
Attn: Chief Executive Officer
Tel: 801-972-1191
Fax: 801-972-9072
If to Novartis:
Novartis Pharmaceuticals Corporation
59 Route 10
East Hanover, New Jersey 07936-1080
Attn: Vice President, Business Development
and Licensing
Fax: (973) 503-6056
With a copy to:
Novartis Pharmaceuticals Corporation
59 Route 10
East Hanover, New Jersey 07936-1080
Attn: General Counsel
Tel: (973) 503-5230
Fax: (973) 503-6477
25. Further Assurances. The Parties shall each take and perform such
additional acts, including the execution and delivery of instruments and
documents, and shall do all such other things as may be reasonably necessary to
implement and document the modifications and amendments of the R&D Agreement
contemplated by this Agreement.
26. Confirmation and Ratification of the R&D Agreement. Each Party
herewith ratifies and confirms the R&D Agreement, as specifically modified and
amended by paragraphs 1 through 24 of this Agreement, as their valid and binding
legal agreement and obligation, and confirm that the R&D Agreement, as
specifically modified and amended by paragraphs 1 through 24 hereof, remains
enforceable against each such Party in accordance with its terms.
19
<PAGE> 20
27. Dispute Resolution. Any controversy, claim or dispute among the
Parties concerning this Agreement or the breach hereof or the subject matter
hereof, shall be resolved and finally settled by arbitration in accordance with
the provisions of Section 11.1 of the R&D Agreement.
28. Governing Law. This Agreement, and the modifications to the R&D
Agreement contemplated hereby, shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the conflicts
of laws provisions thereof.
29. Entire Agreement. This Agreement contains the entire agreement
and understanding of the Parties in regard to the amendment and modification of
the R&D Agreement, and supersedes any prior understandings and agreements,
whether written or oral, among the Parties in regard to the amendment and
modification of the R&D Agreement.
30. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original instrument, but all of
which, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have caused this First Amendment of
Research and Development Agreement to be executed by their duly authorized
representatives as of the date first herein written.
IOMED:
Iomed, Inc.
By: /s/ Ned M. Weinshenker
------------------------------------------
Ned M. Weinshenker,
President and Chief Executive Officer
DERMION:
Dermion, Inc.
By: /s/ Robert J. Lollini
------------------------------------------
Robert J. Lollini, Secretary
NOVARTIS:
Novartis Pharmaceutical Corporation
By: [SIG]
------------------------------------------
Its:
-----------------------------------------
20
<PAGE> 1
Exhibit 10.31
SUPPLY AGREEMENT
This Agreement is made this 4 day of DEC, 1994 by and between Iomed, Inc.
("Iomed"), 1290 West 2320 South, Salt Lake City, Utah 84119 and Luitpold
Pharmaceuticals, Inc./American Regent Laboratories Inc., ("American Regent Inc.
or Luitpold") 1 Luitpold Drive, Shirley, NY 11967. Iomed and American Regent
Inc. or Luitpold, for the purposes of this Agreement, may be referred to jointly
as the "Parties".
Iomed desires to purchase its requirements of Dexamethasone 0.4% injection,
USP, from American Regent Inc. and American Regent Inc. agrees to sell to Iomed
its requirements of such Product. Iomed will market the Product for use in
conjunction with Iomed's Iontophoretic Delivery System.
Therefore, in consideration of the premises and the mutual promises and
agreements contained herein, Iomed and American Regent Inc. agree as follows:
1. Product.
For purposes of this Agreement, the term "Product" shall mean Dexamethasone
Sodium Phosphate 0.4% injection, USP, packaged on 30ml SVP fliptop containers
(ANDA#87-440) and labeled for iontophoretic administration with Iomed's
Iontophoretic Delivery System. A single 30ml SVP fliptop container of Product is
referred to as a "Unit" for the purposes of this Supply Agreement.
2. Custom Product Development.
Promptly after the execution of this Agreement, the Parties shall undertake
to develop a custom labeled packaged product suitable for marketing with Iomed's
Iontophoretic Delivery System and suitable for manufacturing on American Regent
Inc.'s standard packaging equipment for fliptop containers. The Parties shall
use their reasonable best efforts to successfully complete the product
development and to obtain U.S. Food and Drug Administration ("FDA") marketing
approval of the Product. It is understood and agreed that
<PAGE> 2
there is no guarantee that the product development will be successful and no
representation or warranty of any kind is given by either party that a
marketable Product will result from the development.
3. American Regent Inc.'s Responsibilities.
The objective of the product development shall be for American Regent Inc.
to assist Iomed as required in obtaining regulatory approval for sale of the
Product. The Product will then be manufactured by American Regent Inc. and sold
to Iomed for resale by Iomed. American Regent Inc. shall have the following
development responsibilities:
a. Manufacture at American Regent Inc.'s plant, ***** Units of Product (at
a price of *****/Unit to Iomed) for use in clinical studies to be carried out by
Iomed to support FDA filings for device and drug labeling approvals.
b. Provide authorization to Iomed to reference Luitpold's Abbreviated New
Drug Application (#87-440), as appropriate for Pre-market Approval submissions
by Iomed. Assist Iomed, as reasonably requested, in preparation of regulatory
submissions for the Product and provide such other assistance as Iomed may
reasonably require.
c. Using American Regent Inc.'s graphics studio, typeset final label and
carton copy from artwork provided by Iomed and generate proofs and negatives
suitable for printing.
4. Iomed's Regulatory Submissions.
Iomed agrees that American Regent Inc. shall have the right to copies of
Iomed's proposed Pre-market Approval submissions. Iomed further agrees that
American Regent Inc. shall participate with Iomed in responding to questions
from the FDA regarding regulatory submissions applicable to the Product. Iomed
shall respond to questions relating to its device and the clinical studies.
American Regent Inc. shall respond to questions relating to the Product.
<PAGE> 3
5. Manufacture and Supply of Product.
5.1 Purchase and Sale of Product - Iomed Requirements. During the term
of this Agreement and pursuant to the terms and conditions hereof, American
Regent Inc. agrees to manufacture, sell and deliver Product exclusively to
Iomed and Iomed agrees to purchase its total requirements of Product from
American Regent Inc.
5.2 Orders and Delivery Variances. Unless otherwise agreed to by the
Parties, an order quantity, if any, shall be in multiples of ***** Units
and in quantities not less than ****** Units. The maximum order quantity
shall be ******* Units per month. The maximum and minimum order sizes may
be adjusted from time to time by written agreement of the Parties. Delivery
of Product by American Regent Inc. may vary from quantities ordered by
Iomed by plus or minus *** percent *****. Such deliveries shall be in full
compliance with this Agreement.
5.3 Manufacture of Product.
5.3.1 Luitpold shall manufacture Product in accordance with the
Product Specifications for American Regent Inc., Product Number
4930-25. Such Product Number may be modified from time to time by
Luitpold. The Product shall be labeled by American Regent Inc. in
accordance with FDA approved label copy and as mutually approved by
the Parties.
5.3.2 Luitpold's quality control procedures and in-plant quality
control checks on the production of Product for Iomed shall be applied
in the same manner as those procedures and checks are applied to
products manufactured for sale directly by American Regent Inc. as
American Regent Inc. products. Luitpold shall provide a certificate of
analysis with each shipment of Product.
5.3.3 Iomed shall have a period of ************* days from the
date of receipt to inspect and reject any shipment of Product on the
grounds that it does not conform with the Product Specifications.
Iomed shall have the right to return any Product which does not
conform. All or part of any shipment may be held for Luitpold's
disposition if found to be not in conformance with the Product
Specifications, provided Luitpold confirms
<PAGE> 4
such nonconformance through generally accepted quality control
procedures. Luitpold shall have ********** days from the
effective date of rejection (written notice) by Iomed in which to
confirm nonconformance. Failure to confirm within such **********
day period shall constitute agreement with Iomed's rejection of
Product. Luitpold may, at its discretion, send Product to an
independent third party for analysis of conformance. After Luitpold
confirms nonconformance, Luitpold shall have a period of **********
days to replace such nonconforming Product. Replacement with
conforming Product shall be Iomed's sole and exclusive remedy for any
nonconforming Product delivered hereunder. Shipment of rejected
Product to American Regent Inc. and shipment of replacement Product to
Iomed shall be at American Regent Inc.'s expense and by the carrier
designated by American Regent Inc.
5.3.4 American Regent Inc. hereby approves placement of a
descriptive private label with Iomed's trademark and/or Iomed's
trademark on the Product. Any material changes to the descriptive
label must be approved by American Regent Inc. prior to implementing
such changes.
5.4 Price and Payment
5.4.1 Product shall be delivered by American Regent Inc. at
prices set forth in Exhibit A of this Agreement. The prices are based
on standard American Regent Inc. packaging components with custom
Iomed print copy as approved by American Regent Inc. for
manufacturability.
5.4.2 American Regent Inc. shall invoice Iomed upon delivery of
Product. *****
5.4.3 Any federal, state, county or municipal sales or use tax,
excise or similar charge, or any other tax assessment (other than that
assessed against income), license or other
<PAGE> 5
charge lawfully assessed and normally charged on the manufacture,
sale or transportation of Product sold pursuant to this Agreement
shall be paid by Iomed.
5.5 Delivery.
Product shall be delivered to Iomed, or an Iomed designee, F.O.B.
plant and title shall pass to Iomed at such point.
5.6 Orders and Forecasts.
5.6.1 American Regent Inc. and Iomed shall cooperate fully in
estimating and scheduling production for the first firm order to be
placed by Iomed. The first firm order shall cover a period of three
(3) consecutive calendar months, Thereafter, firm orders shall be
placed monthly and shall cover the next succeeding third month. At the
time Iomed places its firm monthly orders, Iomed shall provide to
American Regent Inc. Iomed's estimate of its monthly requirements for
the next succeeding nine (9) calendar month period. It is the intent
that at all times American Regent Inc. shall have in hand firm monthly
orders covering the current three (3) calendar month period and
Iomed's estimates of its monthly requirements for the next succeeding
nine (9) calendar month period.
5.6.2 Each Iomed purchase order for Product shall be governed by
the terms of this Agreement and none of the provisions of such
purchase order shall be applicable except those specifying quantity
ordered, delivery dates, shipping instructions and invoice
information.
5.7 Guarantees and Warranties.
5.7.1 Luitpold guarantees to Iomed that Product delivered to
Iomed pursuant to this Agreement shall, at the time of delivery, not
be adulterated or misbranded within the meaning of the Federal Food,
Drug, and Cosmetic Act, as amended, or within the meaning of any
applicable state or municipal law in which the definitions of
adulteration and misbranding are substantially the same as those
contained in the Federal Food, Drug, and Cosmetic Act, as such Act and
such laws are constituted and effective at the time of
<PAGE> 6
delivery and will not be an article which may not under the provisions
of Sections 404 and 505 of such Act be introduced into interstate
commerce.
5.7.2 Luitpold warrants that Product delivered to Iomed pursuant
to this Agreement shall conform with the Product Specifications and
shall have been manufactured pursuant to current Good Manufacturing
Practice, as prescribed by regulations promulgated by the FDA. ****
5.7.3 ****
<PAGE> 7
6. Term and Termination.
6.1 This Agreement shall commence on the date first above written and
the initial term shall expire on January 1, 2005. Thereafter, the term
shall continue automatically until terminated. This agreement may be
terminated on January 1, 2005 or at anytime thereafter upon not less than
one hundred eighty (180) day's prior written notice from one party to the
other. Iomed may terminate this Agreement at any time by giving American
Regent Inc. one hundred eighty (180) days prior written notice if Iomed
discontinues sale of its Iontophoretic Delivery System for the Product.
6.2 Either party may terminate this Agreement by giving to the other
sixty (60) days prior written notice as follows:
a. Upon the bankruptcy or the insolvency of the other party; or
b. Upon the breach of any warranty or any other material
provision of this Agreement by the other party if the breach is not
cured within sixty (60) days after written notice thereof to the party
in default.
6.3 Termination, expiration, cancellation or abandonment of this
Agreement through any means and for any reason shall not relieve the
Parties of any obligation accruing prior thereto and shall be without
prejudice to the rights and remedies of either party with respect to any
antecedent breach of any of the provisions of this Agreement.
7. Force Majeure.
Any delay in the performance of any of the duties or obligations of either
party hereto (except the payment of money) shall not be considered a breach of
this Agreement and the time required for performance shall be extended for a
period equal to the period of such delay, provided that such delay has been
caused by or is the result of any acts of God; acts of the public enemy;
insurrections; riots; embargoes; labor disputes, including strikes, lockouts,
job actions, or boycotts; fires; explosions; floods; shortages of material or
energy; or other
<PAGE> 8
unforeseeable causes beyond the control and without the fault or negligence of
the party so affected. The party so affected shall give prompt notice to the
other party of such cause, and shall take whatever reasonable steps are
necessary to relieve the effect of such cause as rapidly as possible.
8. Confidential Information.
8.1 It is recognized by the Parties that during the term of this
Agreement the Parties may exchange Confidential Information. Each party
agrees not to disclose to any third person Confidential Information
received from the other party and not to use Confidential Information
received from the other party, except as authorized by the disclosing
party. For purposes of this Agreement, Confidential Information shall
include all information disclosed hereunder in writing and identified as
being confidential or if disclosed orally is reduced to writing within
thirty (60) days of oral disclosure and identified as being confidential,
except any portion thereof which:;
a. is known to the recipient before receipt thereof under this
Agreement;
b. is disclosed in good faith to the recipient after acceptance
of this Agreement by a third person lawfully in possession of such
information and not under an obligation of nondisclosure;
c. is or becomes part of the public domain through no fault of
the recipient;
d. is developed by the recipient independently of and without
reference to Confidential Information; or
e. is required by law to be disclosed.
Notwithstanding the above, nothing contained in this Agreement
shall preclude Iomed or America Regent Inc. from utilizing
Confidential Information as may be necessary in prosecuting patent
rights of the Parties, or obtaining governmental marketing approvals,
or in manufacturing Product pursuant to this Agreement. The
obligations of the Parties relating to Confidential Information shall
expire three (3) years after the termination of this Agreement.
Page 8 of 13
<PAGE> 9
9. Independent Contractors.
The relationship of Iomed to American Regent Inc. established by this
Agreement is that of an independent contractor. Nothing contained in the
Agreement shall be construed to constitute Iomed as a partner, agent or joint
venturer with American Regent Inc. or as a participant in a joint or common
undertaking with American Regent Inc.
10. Notices
All notices hereunder shall be delivered personally or by registered or
certified mail, postage prepaid, to the following addresses of the respective
Parties:
American Regent Inc.
1 Luitpold Drive
Shirley, NY 11967
Attention: Mary Jane Helenek, VP Sales & Marketing
With copy to: Fred Pratt, VP of Manufacturing
Iomed, Inc.
1290 West 2320 South
Salt Lake City, Utah 84119
Attention: General Manager, Rehabilitative Medicine
With copy to: Vice President Operations
Notices shall be effective upon receipt if personally delivered, or on the
third business day following the date of mailing. A party may change its address
listed above by written notice to the other party.
<PAGE> 10
11. Applicable Law.
This Agreement shall be construed, interpreted and governed by the laws of
the State of New York, except for choice of law rules.
12. Assignment.
Neither party shall assign this Agreement or any part thereof without the
prior written consent of the other party; provided, however, American Regent
Inc. may assign this Agreement to a wholly-owned subsidiary and either party,
without such consent, may assign or sell the same in connection with the
transfer or sale of substantially its entire business to which this Agreement
pertains or in the event of its merger or consolidation with another company.
Any permitted assignee shall assume all obligations of its assignor under this
Agreement. No assignment shall relieve any party of responsibility for the
performance of any accrued obligation which such party then has hereunder.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the Parties
concerning the subject matter hereof and supersedes all written or oral prior
agreements or understandings with respect thereto. No course of dealing or usage
of trade shall be used to modify the terms hereof.
14. Severability.
This Agreement is subject to the restrictions, limitations, terms and
conditions of all applicable laws, governmental regulations, approvals and
clearances. If any term or provision of this Agreement shall for any reason be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other term or provision, to
the extent the same shall have been held to be invalid, illegal or
unenforceable, had never been contained herein.
<PAGE> 11
15. Waiver - Modification of Agreement.
No waiver or modification of any of the terms of this Agreement shall be
valid unless in writing and signed by authorized representatives of both
Parties. Failure by either party to enforce any rights under this Agreement
shall not be construed as a waiver of such rights nor shall a waiver by either
party in one or more instances be construed as constituting a continuing waiver
or as a waiver in other instances.
16. Product Recalls.
If (a) any government authority issues a request, directive or order that
the Product be recalled, or (b) a court of competent jurisdiction orders such a
recall, or (c) Iomed or American Regent Inc. reasonably determine after
consultation with the other that the Product should be recalled, the Parties
shall take all appropriate corrective actions. If such recall results from any
course or event for which American Regent Inc. is responsible, American Regent
Inc. shall be responsible for the expenses of recall. In all other cases, Iomed
shall be responsible for the expenses of recall. For the purposes of this
Agreement, the expenses of recall shall include, without limitation, the
reasonable expenses of notification and destruction or return of the recalled
Product and the costs for the Product recalled which shall be equal to the
purchase price paid for such Product. The Parties intending to be bound by the
terms and conditions hereof have caused this Agreement to be signed by their
fully authorized representatives on the date first above written.
17. Product Liability.
Both Luitpold and Iomed will maintain product liability insurance for the
Product of not less than **********.
The parties intending to be bound by the terms and conditions hereof have
caused this Agreement to be signed by their fully authorized representatives on
the date first above written.
<PAGE> 12
IOMED. INC. LUITPOLD PHARMACEUTICALS, INC.
AMERICAN REGENT LABORATORIES INC.
By: /s/ Ned M. Weinshenker By: /s/ Ralph Lange
----------------------- ----------------
Dr. Ned M. Weinshenker Mr. Ralph Lange
President & CEO President & CEO
Date: November 22, 1994 Date: Dec 4 1994
----------------- ----------
<PAGE> 1
EXHIBIT 11.1
IOMED, INC.
STATEMENTS RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Average shares outstanding*... 2,037,675 2,629,619 3,109,423 3,066,077 3,134,392
Dilutive common stock
equivalents:
Conversion of preferred
stock.................... -- 224,819 -- 63,464 --
Conversion of convertible
debt..................... -- 239,071 -- -- --
Exercise of options and
warrants................. -- 76,655 -- 99,839 --
SAB 83 Shares................. 52,332 52,332 30,631 52,332 15,130
---------- ---------- ----------- ---------- ----------
Total shares............. 2,090,007 3,222,496 3,140,054 3,281,712 3,149,522
========== ========== =========== ========== ==========
Net income (loss)............. $ (659,000) $1,743,000 $(14,038,000) $ 467,000 $ (36,000)
========== ========== =========== ========== ==========
Earnings (loss) per share..... $ (.32) $ .54 $ (4.47) $ .14 $ (0.01)
========== ========== =========== ========== ==========
</TABLE>
- ---------------
* Share and per share amounts have been retroactively adjusted to reflect the
1-for-4 8/10 reverse stock split effected on November 7, 1997.
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF COUNSEL
The undersigned hereby consents to the reference to the firm of Parsons
Behle & Latimer under the caption "Legal Matters" in the second amendment to the
registration statement on Form S-1/D filed with the Securities and Exchange
Commission by Iomed, Inc.
/S/ PARSONS BEHLE & LATIMER
--------------------------------
Parsons Behle & Latimer
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
August 4, 1997, except for Note 15 as to which the date is November 7, 1997,
with respect to the consolidated financial statements included in Amendment No.
2 to the Registration Statement (Form S-1 No. 333-37159) and related prospectus
of IOMED, Inc. for the registration of 1,700,000 shares of its common stock.
/s/ Ernst & Young LLP
Salt Lake City, Utah
November 14, 1997
<PAGE> 1
Exhibit 23.3
Consent of Workman, Nydegger & Seeley
The undersigned hereby consents to the reference to the firm of Workman,
Nydegger & Seeley under the caption "Experts" in the second amendment to
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission by Iomed, Inc.
WORKMAN, NYDEGGER & SEELEY
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 6,346,000
<SECURITIES> 0
<RECEIVABLES> 1,217,000
<ALLOWANCES> (28,000)
<INVENTORY> 714,000
<CURRENT-ASSETS> 8,261,000
<PP&E> 3,885,000
<DEPRECIATION> 3,500,000
<TOTAL-ASSETS> 8,664,000
<CURRENT-LIABILITIES> 1,117,000
<BONDS> 15,240,000
900,000
0
<COMMON> 12,047,000
<OTHER-SE> (21,538,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,664,000
<SALES> 7,483,000
<TOTAL-REVENUES> 9,283,000
<CGS> 3,338,000
<TOTAL-COSTS> 8,327,000
<OTHER-EXPENSES> 15,059,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,000
<INCOME-PRETAX> (14,077,000)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (14,082,000)
<DISCONTINUED> 44,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,038,000)
<EPS-PRIMARY> (4.47)
<EPS-DILUTED> (4.47)
</TABLE>
