SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
(AS PERMITTED BY RULE 14A-6(E)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-
12
Medi-Ject Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Medi-Ject Common Stock
----------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
2,900,000
----------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11(Set forth the amount on which the filing fee is
calculated and state how it was determined):
$4.2188 per share based on the average of the high and low prices for July 11,
2000
----------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$12,234,520
----------------------------------------------------------------------------
(5) Total fee paid:
$2,447.00
----------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------------
Notes:
MEDI-JECT CORPORATION
161 Cheshire Lane, Suite 100
Plymouth, Minnesota 55441
763-475-7700
, 2000
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Medi-Ject Corporation to be held at 10:00 a.m. on , November , 2000 at
the Medi-Ject offices located at 161 Cheshire Lane, Suite 100, Plymouth,
Minnesota 55441.
The following Notice of Annual Meeting and the Proxy Statement describe the
matters on which action will be taken. We will ask you to approve the terms of
a stock purchase agreement and the actions contemplated by such agreement, to
approve a proposed amendment to the articles of incorporation to increase the
authorized number of common and preferred shares, to approve the conversion of
Series C Convertible Preferred Stock into common stock, to approve the optional
conversion of the Series B Convertible Preferred Stock, to elect two members to
the Board of Directors, and to ratify the appointment of the independent
accountants. During the meeting, we will also review the activities of the past
year and items of general interest about Medi-Ject. The Board of Directors
unanimously recommends that you vote in favor of the six proposals.
Please review the "Risk Factors Regarding the Subsidiaries" on page 18.
Only shareholders of record at the close of business on October 20, 2000 are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
We hope you will join us on November , 2000 for our Annual Meeting.
Whether or not you plan to attend, please return your signed proxy as soon as
possible. Whether you own a few shares or many, your vote is important.
Thank you for your continued support of Medi-Ject.
Sincerely,
-------------------------------------
Franklin Pass, M.D.
Chairman, President and Chief
Executive Officer
MEDI-JECT CORPORATION
161 Cheshire Lane, Suite 100
Plymouth, Minnesota 55441
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Medi-Ject
Corporation will be held on , November , 2000 at 10:00 a.m. at the Medi-
Ject offices located at 161 Cheshire Lane, Plymouth, Minnesota 55441, to
consider and vote upon the following proposals:
(1) To approve the terms of a Stock Purchase Agreement dated as of July
14, 2000, as amended, (the "Purchase Agreement") by and among Medi-Ject,
Permatec Holding AG, ("Permatec"), Permatec Pharma AG ("Pharma"), Permatec
Technologie AG ("Technologie"), and Permatec NV ("NV") (Pharma, Technologie
and NV each a "Subsidiary" and collectively, the "Subsidiaries"), whereby
we purchase all of the outstanding capital stock of the Subsidiaries and as
consideration, we issue 2,900,000 shares of Medi-Ject common stock to
Permatec. Upon the closing of the transaction, (a) Permatec will own
approximately 67% of the outstanding Medi-Ject common stock; (b) Karl
Groth, Geoffrey Guy, M.D., Fred L. Shapiro, M.D. and Stanley Goldberg will
each resign from the position of director and the remaining directors will
fill the vacancies by appointing Dr. Jacques Gonella, Dr. Thomas M.
Rinderknecht, Professor Ubaldo Conte and Dr. Philippe Dro; (c) promissory
notes issued to Permatec will convert into shares of Medi-Ject Series C
Preferred Stock; and (d) we will amend our Second Amended and Restated
Articles of Incorporation, as amended to date, to change our name to
"Antares Pharma, Inc."
(2) To amend the Second Amended and Restated Articles of Incorporation,
as amended to date, to increase the number of authorized shares of Medi-
Ject common stock from 3,400,000 to 15,000,000 shares and the number of
authorized shares of Medi-Ject preferred stock from 1,000,000 to 3,000,000.
(3) To approve the future conversion of Medi-Ject Series C Preferred
Stock into Medi-Ject common stock.
(4) To approve the conversion of the Series B Convertible Preferred
Stock into shares of Medi-Ject common stock.
(5) To elect two members to the Board of Directors.
(6) To ratify the appointment of KPMG LLP as our independent auditors
for the year ending December 31, 2000.
(7) To transact such other business as may properly come before the
meeting or any adjournment thereof.
All shareholders of record on our transfer books as of the close of business
on October 20, 2000, will be entitled to vote at the meeting.
Your attention is directed to the enclosed proxy. Whether or not you intend
to be present at the meeting, please complete, sign and return the proxy in the
enclosed envelope.
By order of the Board of Directors,
-------------------------------------
Lawrence M. Christian
Secretary
Dated: , 2000
SUMMARY TERM SHEET FOR THE SHARE TRANSACTION
This summary term sheet for the Share Transaction highlights selected
information from the Proxy Statement regarding the Share Transaction
contemplated by the Purchase Agreement and may not contain all of the
information that is important to you as a Medi-Ject shareholder. Accordingly,
we encourage you to carefully read this entire document and the documents to
which we have referred you.
The Proposed Share Transaction (Page You are being asked to consider and
3)................................... vote upon a proposal to approve a
Purchase Agreement that provides for
the purchase of all of the stock of
three subsidiaries of Permatec. In
exchange, we will issue 2,900,000
shares of Medi-Ject common stock to
Permatec, resulting in a change in
control of Medi-Ject. The Purchase
Agreement and the actions relating to
such stock purchase and issuance are
collectively referred to as the "Share
Transaction."
The Parties to the Share Transaction We develop, manufacture and market
(Page 3)............................. medical devices, called jet injectors,
that allow people to self-inject drugs
without using a needle. We make a small
spring-action device and the attached
disposable plastic syringes that hold
the drug. These devices operate without
a needle at very high energy forces.
Recently, we developed a variation of
the jet injector by adding a very small
hidden needle.
Permatec, through its subsidiaries,
develops or improves technology for the
delivery of drug compounds. As niche
drug delivery technology companies,
Permatec's subsidiaries develop highly
specialized formulations to address the
need to deliver drugs through skin and
mucosa using patches, gels, fast-
dissolving tablets and transbuccal
tablets. Permatec's and its
subsidiaries' strategy is to license
their technology to development and
marketing partners through a
combination of license and development
agreements and research and development
collaborations.
Stock Purchase (Page 3).............. We will purchase all of the outstanding
stock of three Permatec subsidiaries:
Permatec Pharma AG, Permatec
Technologie AG and Permatec NV (the
"Subsidiaries").
As payment for the outstanding stock of
Issuance of Stock (Pages 3 and 27)... the Subsidiaries, we will issue
2,900,000 shares of Medi-Ject common
stock to Permatec. The 2,900,000 shares
will represent approximately 67% of the
issued and outstanding Medi-Ject common
stock.
In addition, upon closing of the Share
Transaction, promissory notes issued to
Permatec will automatically convert
into shares of Series C Convertible
Preferred
i
Stock. Such preferred stock will be
convertible into common stock at
Permatec's option. Based on the amounts
of the promissory notes as of September
25, 2000, if Permatec converts the
shares of preferred stock, it will own
a total of 75.3% of our outstanding
common stock. In the event we borrow
the maximum amount available from
Permatec of $4.5 million, it will own
78.3% of our outstanding common stock.
Dr. Gonella beneficially owns 96.9% of
the outstanding capital stock of
Permatec and accordingly will have the
ability to unilaterally approve most,
if not all, of Permatec and our
corporate actions, including the
election of directors and the
appointment of officers.
Advantages and Disadvantages of
Approving
the Share Transaction (Page 26)..... The advantages of the Share Transaction
are that it gives us an opportunity to
continue operations and the potential
to maximize shareholder value.
The disadvantage of the Share
Transaction is that the current
shareholders will be diluted. The Share
Transaction results in Permatec (and
indirectly, Permatec's majority
shareholder Dr. Jacques Gonella)
becoming the majority shareholder of
Medi-Ject with the ability to
unilaterally approve corporate actions.
Our Board of Directors'
Recommendation
A committee of the disinterested
to You (Page 27)............... directors of the Board of Directors has
determined, by unanimous written
consent, that the Share Transaction is
fair to and in the best interests of
Medi-Ject and its shareholders and has
approved and adopted the Share
Transaction. Based on the determination
of that committee and the Board's
consideration, the Board of Directors
recommends shareholder approval of the
Share Transaction.
The Annual Meeting (Page 1)..........
The Annual Meeting will be held on
, November , 2000 at 10:00 a.m.
at our office located at 161 Cheshire
Lane, Suite 100, Plymouth, Minnesota.
Approval of the Share Transaction
requires the affirmative vote of the
holders of a majority of the
outstanding Medi-Ject common stock
present, in person or by proxy, and
entitled to vote on that item of
business at a meeting at which a quorum
is present.
You are entitled to vote at the Annual
Meeting if you owned shares of Medi-
Ject common stock on October 20, 2000,
the record date for the Annual Meeting.
As of the record date, 1,427,149 shares
of Medi-Ject common stock were
outstanding and the holders of such
stock are entitled to vote at the
Annual Meeting.
ii
Procedure for Voting (Page 1)........ You may vote by either: completing and
returning the enclosed proxy card or by
attending the Annual Meeting. If you
complete and return the enclosed proxy
card but later wish to revoke it, you
must take one of the following actions:
(1) file with the Secretary of Medi-
Ject a written, later-dated notice of
revocation; (2) send a later-dated
proxy card relating to the same shares
to the Secretary of Medi-Ject at or
before the Annual Meeting; or (3)
attend the Annual Meeting and file a
signed written termination of the proxy
with an officer of Medi-Ject.
Attendance at the Annual Meeting will
not in and of itself constitute the
revocation of a proxy.
Rules of the Nasdaq Stock Market Under the Nasdaq Stock Market rules, we
(Page 30)............................ must obtain shareholder approval for
this Share Transaction because the
issuance of the 2,900,000 shares of
Medi-Ject common stock results in a
change of control of the company.
Dissenters' Rights (Page 30)......... Holders of Medi-Ject common stock will
not have dissenters' rights under
Minnesota law in the Share Transaction.
Board of Directors (Page 28)......... Immediately prior to or at the closing,
Karl Groth, Geoffrey Guy, M.D., Fred L.
Shapiro, M.D. and Stanley Goldberg will
resign from our Board of Directors and
the remaining directors will appoint
Dr. Jacques Gonella, Dr. Thomas M.
Rinderknecht, Professor Ubaldo Conte
and Dr. Philippe Dro to fill the
vacancies.
Other Agreements (Page 28)........... In connection with the Share
Transaction, a number of other
documents will be required to be in
effect. The agreements include:
. Registration Rights Agreement
. Employment Agreement with Franklin
Pass, M.D.
. Escrow Agreement
. Lock-Up Agreements with certain
employees
Representations and Warranties (Page We made to Permatec and the
27).................................. Subsidiaries and Permatec and the
Subsidiaries made to us,
representations and warranties,
standard in this type of transaction
including:
. corporate organization,
capitalization
. financial statements
. title to assets
. contracts
iii
. legal compliance
. tax matters
. employee benefits
. environmental matters
Covenants (Page 27).................. We made covenants and agreements, and
Permatec and the Subsidiaries made
covenants and agreements, standard in
these types of transactions and, in
addition, each party made the following
agreements to:
. use commercially reasonable efforts
to raise at least $7,000,000 in a
private placement (Permatec with the
assistance of Medi-Ject)
. prepare a written business plan for
the combined business of Medi-Ject
and the Subsidiaries (Permatec with
assistance of Medi-Ject)
. search for a new chief executive
officer of Medi-Ject (Permatec with
the assistance of Medi-Ject)
Closing Conditions (Page 28)......... A number of conditions must be
satisfied prior to the stock purchase
and stock issuance. The conditions to
each party's obligations to perform the
Purchase Agreement include:
. receipt of all necessary consents or
approvals
. the closing of the private placement
financing upon the completion of the
transaction
The conditions to our obligations to
perform the Purchase Agreement include:
. the Subsidiaries having aggregate
cash reserves or cash equivalents of
at least one million Swiss Francs on
the closing date
. the execution by us of an Employment
Agreement with Franklin Pass, M.D.
The conditions to Permatec's and the
Subsidiaries' obligations to perform
the Purchase Agreement include:
. the execution by us of an Employment
Agreement with Franklin Pass, M.D.
. Karl Groth, Geoffrey Guy, M.D., Fred
L. Shapiro, M.D. and Stanley
Goldberg shall each have resigned
from our Board of Directors and
Dr. Jacques Gonella, Dr. Thomas M.
Rinderknecht, Professor Ubaldo Conte
and Dr. Philippe Dro shall have been
appointed as directors
iv
. our receipt of a consent to the
transaction or waiver of fees from
each of: Elan Corporation, plc, Bio-
Technology General Corp, Becton
Dickinson and Grayson & Associates
. the execution of an amendment to or
replacement of the License and
Development Agreement with Elan
Corporation, plc.
. our execution of Lock-Up Agreements
with certain of our employees
Termination (Page 29)................ The Purchase Agreement may be
terminated at any time prior to closing
by:
. the mutual written consent of us and
Permatec
. either party if the mutual
conditions have not been satisfied
by November 30, 2000, except if such
conditions were not met solely as a
result of the action or inaction of
the party seeking to terminate
. us if Permatec and the Subsidiaries
did not satisfy their conditions by
November 30, 2000, except if such
conditions were not met solely
because of our action or inaction
. Permatec if we did not satisfy our
conditions by November 30, 2000,
except if such conditions were not
met solely because of Permatec's
action or inaction
Effect of Termination (Page 29)...... If terminated, the Purchase Agreement
will be void and of no further force or
effect, except that:
. the Confidentiality Agreement dated
April 21, 1999 between the parties
will continue to be effective in
accordance with its terms
. if the closing does not occur due to
Permatec's failure to satisfy its
conditions, the period in which we
must repay the promissory notes to
Permatec will be extended for an
additional three month period
. no party will be relieved from
liability for any breach of the
Purchase Agreement
. the agreements contained in the
provision regarding the effect of
termination shall survive
Indemnification and Escrow (Page In the Purchase Agreement, we,
29).................................. Permatec, and the Subsidiaries make and
agree to a number of representations,
warranties, covenants and obligations.
If a party suffers any damages
resulting from another party's breach
of its representations, warranties,
covenants or obligations, the party
may, for a six-month
v
period from the closing date, seek
indemnification from the breaching
party. The claims must exceed a $50,000
deductible for a party to be liable.
Each party's liability is limited to
the value of 580,000 shares. Such
limitation, however, will not apply to
damages resulting from any Subsidiary's
fraud or willful or intentional
misrepresentation or intentional or
willful breach.
In accordance with an escrow agreement,
Permatec will place 580,000 shares of
Medi-Ject common stock into an escrow
account.
As an exception to the above limits,
Permatec is obligated to indemnify us
without limit as to time or amount with
respect to liabilities of the Permatec
subsidiaries which are not being
acquired by us in the Share Transaction
and with respect to the share ownership
of Permatec NV.
Name Change (Page 29)................ Upon the closing of the Share
Transaction, we will change our name to
Antares Pharma, Inc.
vi
TABLE OF CONTENTS
Proxy Statement............................................................. 1
Available Information....................................................... 2
Incorporation of Certain Documents by Reference............................. 2
Forward Looking Statements.................................................. 2
The Share Transaction Proposal.............................................. 3
Summary of the Share Transaction.......................................... 3
The Purchase Agreement.................................................... 3
Purchase of Subsidiaries' Stock and Issuance of Medi-Ject Common Stock;
Change of Control........................................................ 3
The Parties to the Share Transaction...................................... 3
Medi-Ject............................................................... 3
Permatec Holding AG and the Subsidiaries................................ 4
Risk Factors Regarding the Subsidiaries................................... 18
Background and Medi-Ject's Reasons for the Share Transaction.............. 23
Advantages and Disadvantages of Approving the Share Transaction........... 26
Terms of the Purchase Agreement........................................... 27
Purchase of Subsidiaries' Stock and Issuance of Medi-Ject Common Stock.. 27
Board of Directors...................................................... 27
The Closing............................................................. 27
Representations and Warranties.......................................... 27
Covenants and Agreements................................................ 27
Conditions.............................................................. 28
Conversion of Permatec Notes............................................ 28
Registration Rights Agreement........................................... 28
Lock-Up Agreements...................................................... 29
Indemnification and Escrow Agreement.................................... 29
Termination............................................................. 29
Fees and Expenses....................................................... 29
Change of Name............................................................ 29
Interests of Certain Persons in Matters to be Acted Upon.................. 30
Vote Required; Quorum..................................................... 30
No Dissenters' Rights..................................................... 30
Existing Shareholders; Impact on Market Value of Medi-Ject Common Stock
and Dilution of Medi-Ject Common Stock and Related Risks................. 31
Accounting Treatment of the Share Transaction............................. 31
Federal Income Tax Consequences of the Share Transaction.................. 31
Regulatory Approval....................................................... 31
No Fairness Opinion....................................................... 32
Past Contacts, Transactions or Negotiations............................... 32
Financial Information..................................................... 33
Summary of Historical and Pro Forma Financial Information............... 33
Selected Historical and Pro Forma Data as of December 31, 1999 and June
30, 2000............................................................... 33
Permatec Selected Historical Condensed Financial Data................. 33
Management's Discussion and Analysis of Financial Conditions and
Results of Operations of Permatec.................................... 34
Medi-Ject Corporation Selected Historical Condensed Financial Data.... 38
vii
Selected Unaudited Pro Forma Condensed Combined Financial Data......... 39
Unaudited Pro Forma Condensed Combined Financial Statements............ 41
Notes to the Unaudited Pro Forma Condensed Combined Financial Data..... 45
The Amendment to the Articles of Incorporation Proposal.................... 47
Summary of the Proposed Amendment........................................ 47
Our Current Capital Structure............................................ 47
Background and Reasons for the Proposed Amendment........................ 47
The Impact of Approval or Disapproval of the Proposal.................... 48
The Text of the Proposed Amendment....................................... 49
The Series C Stock Conversion Proposal..................................... 50
General.................................................................. 50
Background and Reasons to Approve........................................ 50
The Series B Stock Conversion Proposal..................................... 52
General.................................................................. 52
Background and Reasons to Approve........................................ 52
The Election of Directors Proposal......................................... 54
Report of the Compensation Committee on Executive Compensation............. 57
Certain Relationships and Related Transactions............................. 59
Security Ownership of Certain Beneficial Owners and Management............. 60
Executive Compensation..................................................... 61
The Ratification of the Appointment of Auditors Proposal................... 65
Other Matters.............................................................. 65
Solicitation............................................................. 65
Compliance with Section 16(a) of the Securities Exchange Act of 1934..... 65
Other Matters at Annual Meeting.......................................... 65
Annual Report and Incorporation by Reference............................. 66
Proposals of Shareholders.................................................. 66
Financial Statements of Permatec........................................... F-1
Permatec Holding AG Consolidated Financial Statements (Audited).......... F-2
Permatec Holding AG Consolidated Financial Statements (Unaudited)........ F-17
Annex A--Stock Purchase Agreement dated as of July 14, 2000 by and among
Medi-Ject Corporation, Permatec Holding AG, Permatec Pharma AG, Permatec
Technologie AG and Permatec NV............................................ A-i
Annex B--First Amendment of Stock Purchase Agreement....................... B-1
viii
PROXY STATEMENT OF
MEDI-JECT CORPORATION
161 Cheshire Lane, Suite 100
Plymouth, Minnesota 55441
----------------
Annual Meeting of Shareholders
to be held November , 2000
This Proxy Statement is furnished in connection with the solicitation of
proxies by our Board of Directors to be used at our Annual Meeting of
Shareholders to be held on November , 2000. The approximate date on which
this Proxy Statement and accompanying proxy were first sent or given to
shareholders was , 2000. If you sign and return a proxy in the form
enclosed with this Proxy Statement, you may later revoke it by (1) giving
written notice to the Secretary of Medi-Ject, (2) by sending in or appearing at
the Annual Meeting with a later-dated proxy or (3) by attending the Annual
Meeting and filing a signed notice of termination of the proxy with an officer
(attendance alone is not enough to revoke the proxy). Unless the proxy is
revoked, the shares represented by the proxy will be voted at the meeting and
at any adjournment or adjournments in the manner specified. If no direction is
made, the proxy will be voted for Proposals 1-6 described in this Proxy
Statement. Only shareholders of record at the close of business on October 20,
2000 will be entitled to vote at the meeting or any adjournment or adjournments
thereof.
Each item of business properly presented at a meeting of shareholders
generally must be approved by the affirmative vote of the holders of a majority
of the voting power of the shares present, in person or by proxy, and entitled
to vote on that item of business. If a broker does not have discretionary
authority as to certain shares to vote on a particular matter, those shares
will not be considered as present and entitled to vote with respect to that
matter. Votes cast by proxy or in person at the Annual Meeting of Shareholders
will be tabulated by the election inspectors appointed for the meeting and such
inspectors will determine whether or not a quorum is present. The election
inspectors will treat abstentions as shares that are present and entitled to
vote for purposes of determining the presence of a quorum and in tabulating
votes cast on proposals presented to shareholders for a vote but as unvoted for
purposes of determining the approval of the matter from which the shareholder
abstains. Consequently, an abstention will have the same effect as a negative
vote.
As of the close of business on the record date, October 20, 2000, 1,427,149
shares of Medi-Ject common stock, were outstanding. Each share of Medi-Ject
common stock is entitled to one vote. Cumulative voting is not permitted.
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement or the documents
incorporated herein by reference in connection with the solicitations made
hereby and, if given or made, such information or representation should not be
relied upon as having been authorized by us or by Permatec. This Proxy
Statement does not constitute the solicitation of a proxy in any jurisdiction
to or from any person to whom or from whom it is unlawful to make any such
solicitation in such jurisdiction. The delivery of this Proxy Statement shall
not, under any circumstances, create any implication that there has not been
any change in the information set forth herein or in the affairs of us or
Permatec since the date of this Proxy Statement.
As used in this Proxy Statement, unless the context otherwise requires, the
terms "the Company," "Medi-Ject," "us," and "we" refer to Medi-Ject
Corporation.
1
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and file reports, proxy
statements and other information with the SEC. You may inspect and copy the
reports, proxy statements and other information at the SEC's Public Reference
Room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional SEC offices: 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of the material
at prescribed rates from the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The SEC also maintains a World Wide Web site at
http://www.sec.gov which contains reports, proxy and information statements,
and other information regarding registrants that file electronically with the
SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated by reference into this Proxy
Statement and are being delivered to shareholders along with this Proxy
Statement:
1. Our Annual Report on Form 10-KA for the year ended December 31, 1999, filed
on October , 2000;
2. Our Quarterly Report on Form 10-QA for the quarter ended March 31, 2000,
filed on October , 2000; and
3. Our Quarterly Report on Form 10-QA for the quarter ended June 30, 2000,
filed on October , 2000.
We are also incorporating by reference additional documents, if any, we file
with the SEC from the date of this Proxy Statement to the date of the Annual
Meeting. Any statement in this document or in a document incorporated or deemed
to be incorporated by reference in this document will be deemed to be modified
or superceded for purposes of this document to the extent that a statement
contained in this document or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein, modifies
or supercedes the earlier statement. Any statement so modified or superceded
shall not be deemed, except as so modified or superceded, to constitute a part
of this Proxy Statement.
FORWARD LOOKING STATEMENTS
Certain statements included in this Proxy Statement and in the documents
incorporated by reference are "forward looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties. Each of Medi-Ject, Permatec and the Subsidiaries have based
these statements on each of their expectations about future events and the
anticipated effect of the Share Transaction described in this Proxy Statement.
The words or phrases "will likely result," "look for," "may result," "will
continue," "is anticipated," "expect," "project," or similar expressions are
intended to identify forward looking statements, and are subject to numerous
known and unknown risks and uncertainties. Although we believe the expectations
reflected in our forward-looking statements are reasonable, we cannot assure
you that these expectations will be achieved. Our actual results may differ
materially from what we currently expect. Factors that may affect future
results and performance with respect to Medi-Ject are set forth in "The Share
Transaction Proposal--Background and Reasons for the Share Transaction" herein
and in Exhibit 99, "Cautionary Statements", which was filed with the SEC as an
exhibit to Form 10-K, December 31, 1996. Factors that may affect future results
and performance of the Subsidiaries are set forth on page 18 of this Proxy
Statement. Upon the closing of the Share Transaction, if approved, the factors
relating to the Subsidiaries may affect future results and performance of Medi-
Ject.
2
THE SHARE TRANSACTION PROPOSAL
(PROPOSAL 1 ON PROXY CARD)
SUMMARY OF THE SHARE TRANSACTION
The following discussion is only a summary of the material terms of the
Stock Purchase Agreement appended as Annex A to this Proxy Statement, as
amended (see Annex B) (collectively, the "Purchase Agreement") and the related
actions (the Purchase Agreement and the related actions are referred to
collectively as the "Share Transaction") and is qualified in its entirety by
reference to the Purchase Agreement. To understand the Share Transaction, you
should read this entire document carefully, including the annex and other
documents to which we have referred you. See "Available Information" and
"Incorporation of Certain Documents by Reference" for more details.
THE PURCHASE AGREEMENT
We entered into the Purchase Agreement with Permatec Holding AG, Permatec
Pharma AG, Permatec Technologie AG (each of the foregoing, a company organized
under the laws of Switzerland), and Permatec NV (a company organized under the
laws of the Netherlands, Antilles) (Permatec Pharma AG, Permatec Technologie AG
and Permatec NV, each a "Subsidiary" and collectively, the "Subsidiaries"). See
"Parties to the Share Transaction" below for a description of Permatec and the
Subsidiaries.
PURCHASE OF SUBSIDIARIES' STOCK AND ISSUANCE OFMEDI-JECT COMMON STOCK; CHANGE
OF CONTROL
Pursuant to the Purchase Agreement, we will purchase all of the outstanding
shares of each Subsidiary (the "Subsidiaries' Stock"). In exchange, we will
issue 2,900,000 shares of Medi-Ject common stock to Permatec. Upon the
issuance, Permatec will own approximately 67% of the outstanding shares of the
Medi-Ject common stock. Permatec has two other subsidiaries that it is in the
process of dissolving. All liabilities and benefits relating to those two
subsidiaries will remain with Permatec and will not be part of our acquisition
of the Subsidiaries. Permatec will remain in existence after the closing of the
Share Transaction.
THE PARTIES TO THE SHARE TRANSACTION
Information about us contained in this proxy statement was provided by us.
Information about Permatec and the Subsidiaries contained in the proxy
statement was provided by Permatec.
. Medi-Ject Corporation
161 Cheshire Lane, Suite 100
Plymouth, Minnesota 55441
Telephone Number: 612-475-7700
We develop, manufacture and market novel medical devices, called jet
injectors, that allow people to self-inject drugs without using a needle. We
make a small spring-action device and the attached disposable plastic syringes
to hold the drug. Recently, we developed a variation of the jet injector by
adding a very small hidden needle. We are able to greatly reduce the energy
needed for injection and successfully build small disposable injectors. Many
people find our injectors to be less threatening than ordinary needles and
syringes, yet the market for such devices remains small. We believe that the
key to widespread market acceptance of our injectors depends upon continued
improvements in technology and improved awareness among pharmaceutical
companies, healthcare professionals and consumers. As part of our effort to
encourage the broader use of needle-free injector systems for injectable drugs
other than insulin, we began entering into technology and product license
agreements to sell injector systems. Primarily, we have used the licensing and
development income from these agreements to fund increased product development
efforts.
3
. Permatec Holding AG and the Subsidiaries
Gewerbestrasse 18
4123 Allschwil, Switzerland
Telephone Number: 011 41-61-486-4141
General
Permatec and its Subsidiaries' business consists of developing new, or
improving existing, technology for the delivery of drug compounds. As a niche
drug delivery technology company, Permatec, through its Subsidiaries, develops
highly specialized formulations to address the need to deliver drugs through
skin and mucosa using patches, gels, fast-dissolving tablets and transbuccal
tablets. The strategy of Permatec and the Subsidiaries is to license its
technology to development and marketing partners through a combination of
license and development agreements, as well as research and development
collaborations.
The versatile technologies developed by the Subsidiaries can be applied to
various active compounds and indications. These developments are conducted
either on behalf of third parties (pharmaceutical companies) or as proprietary
developments funded by Permatec.
The Subsidiaries have developed technologies and patent portfolios
encompassing four main areas: patches, gels, fast dissolving tablets and
transbuccal tablets. These technologies may have application in several
important therapeutic markets: hormone replacement therapy, the treatment of
osteoporosis, the treatment of central nervous system conditions, and
cardiovascular therapy. This technology mix spans innovative new formulations,
some with long development time and clinical uncertainties such as gels and
transbuccal systems, as well as improved traditional formulations like patches
or fast-dissolving tablets, with shorter time to market and a well-established
regulatory process.
Permatec is a Swiss holding company whose principal wholly owned
subsidiaries consist of Permatec Pharma AG (Switzerland), Permatec Technologie
AG (Switzerland) and Permatec NV (Netherlands Antilles). Permatec, organized in
1997, is privately held by five shareholders and conducts all of its business
through its Subsidiaries. Permatec's principal corporate offices are located at
Gewerbestrasse 18, 4123 Allschwil, Switzerland, telephone (011 41-61-486-4141),
which is in the Basel area of Switzerland, an important pharmaceutical center
in Europe. Another subsidiary of Permatec Holding, Permatec Laboratorios SA
("Permatec Argentina"), was initially founded in December 1993 and became
operational at the end of November 1995 as part of the JAGO group. JAGO was a
Swiss drug delivery company that was sold in 1996 by its founder, Dr. Jacques
Gonella, the principal shareholder of Permatec Holding, to SkyePharma, a United
Kingdom company traded on the London Stock Exchange and NASDAQ Stock Market. As
part of the JAGO group transaction, SkyePharma had an option to acquire
Permatec Argentina, but did not exercise this option. Permatec Argentina
subsequently became a wholly owned subsidiary of Permatec in 1997. On the same
date Permatec acquired 98% of the outstanding shares of Permatec France, SA,
Permatec Pharma, Permatec Technologie and Permatec NV were also acquired by
Permatec in 1997. Permatec has taken steps to commence the liquidation of
Permatec Argentina and Permatec France and has transferred Permatec Argentina's
assets to Permatec Pharma and Permatec France's assets will be transferred to
Permatec. Permatec Pharma, Permatec Technologie and Permatec NV are
collectively referred to in this portion of the Proxy Statement as the
"Subsidiaries."
Industry and Market
The Subsidiaries operate in the drug delivery segment of the pharmaceutical
industry. Companies in this segment generally bring technology and know-how to
their partners in the area of drug formulation through licensing and
development agreements. Well-established companies in the industry are ALZA in
the United States and Elan, SkyePharma and Eurand in Europe. Today, many of the
established companies in the industry are evolving from being pure drug
delivery companies to becoming fully integrated pharmaceutical operations.
Increasingly, the trend has been for delivery companies to mature from research
companies to product
4
development and product marketing companies, as innovative drug delivery
systems are commercialized and companies integrate manufacturing and marketing
functions to increase sales revenues.
According to one report focusing on the drug delivery industry, the drug
delivery market in 1997 totaled $27 billion and was predicted to grow to $57
billion by 2002. A separate study of April 1999 by Theta Reports, a
publication of PJB Medical Publications, Inc., covering infusion products and
drug delivery markets, reports the total worldwide market in 1998 at $36.6
billion and projects the market to grow to $70.3 billion by 2002.
Drug delivery companies generally fall into one of three groups:
Generalist, Pharmaceutical or Specialist.
Generalist. Generalist companies are usually large drug delivery company
groups with diversified technologies and applications in different delivery
routes. They also often have their own manufacturing capabilities and sales
forces. Examples of these companies are ALZA (United States), ELAN
(Ireland), and Theratech (United States, acquired in 1999 by Watson Labs).
These companies usually favor one leading original technology as the
flagship of the company.
Pharmaceutical. These companies are traditional pharmaceutical
discoverers and distributors that invest in drug delivery company
technology within their research and development departments. Leiras
(Finland, acquired in 1996 by Schering AG of Germany), Hexal (Germany) and
Fournier, SA (France) are examples. They maintain this activity either as
part of research and development, as separate business units, or spin-off
the technology into a separate entity.
Specialists. These companies are focused on a particular technology or
delivery route. Examples are PowderJect, a UK based company with operations
in the United States, and Medi-Ject, a U.S. company. Both of these
companies specialize in the development of needle-free injection devices.
The Subsidiaries are specialist companies. The Subsidiaries specialize in
addressing the transdermal (through the skin) and transmucosal (through the
mucus membranes, generally in the mouth) delivery routes. The Subsidiaries
have developed several technology platforms in four main areas: patches and
gels for transdermal delivery, and fast dissolving tablets and transbuccal
tablets for transmucosal delivery.
Presently, the Subsidiaries' products address mainly the hormone
replacement therapy market. They are also exploring developing products that
have potential applications in other therapeutic markets, including
osteoporosis therapy, cardiovascular therapy, addiction therapy and central
nervous system therapy.
Hormone Replacement Therapy Market. According to one industry publication,
the worldwide hormone replacement therapy market is expected to grow to $4.0
billion by the year 2002. As of 1998, approximately 80% of the prescriptions
in the drug delivery market in the United States called for oral delivery and
approximately 15% of the prescriptions called for some method of transdermal
delivery. However, Permatec believes that the hormone replacement therapy
market appears to be shifting from oral delivery to some form of transdermal
administration of hormones. This trend is particularly clear in Europe, more
specifically in France, which is the leading country in the usage of
transdermal systems for hormone replacement therapy. According to an industry
report, in 1999 64.8% of the estradiol hormone replacement therapy for
menopausal women in France was administered either by patch (44.7%) or gel
(20.1%).
This segment of the pharmaceutical market is likely to expand in the future
due to three factors. First, new treatments are being developed for women
using a combination of estradiol and testosterone. These new treatments, in
combination with new delivery systems such as gels, are likely to increase
patient compliance. Second, the baby boomer female population is reaching the
menopausal age. Third, there is increasing awareness of the need for male
hormone replacement with testosterone during the andropause (age during which
the endogenous, i.e. natural, testosterone levels in men decrease) and in the
treatment of hypogonadism (deficiency or absence of endogeneous testosterone
in men--testosterone levels lower than 3 ng/ml).
5
Cardiovascular Therapy Market. The Subsidiaries do not presently have
products that address the cardiovascular therapy segment of the market;
however, the Subsidiaries' technology platforms have potential applications in
the cardiovascular field. In most developed countries, cardiovascular diseases
are the leading cause of death, despite tremendous progress made in the
treatment of the disease. According to industry data, in the United States
alone, approximately 70 million people have symptoms or findings (without
symptoms) pertaining to coronary artery disease. Additionally, hypertension
affects 60 million people in the United States. Cardiovascular therapies make
extensive use of drug delivery systems, and companies continue to seek improved
delivery methods. Transdermal systems have been used to deliver nitroglycerine
(a vasodilator for angina pectoris) and constitute half of the nitroglycerine
preparations. Sublingual (oral) preparations are also used to deliver
nitroglycerine. In the twelve-month period ending March 2000, the total
cardiovascular drug market was estimated to be $41 billion in the 12 major
pharmaceutical markets.
Osteoporosis Therapy Market. From a regulatory standpoint osteoporosis is
treated differently from hormone replacement therapy. Nevertheless, this
application is very close to hormone replacement therapy. The osteoporosis
indication requires additional clinical trials by pharmaceutical companies to
generate data to demonstrate the efficacy of the treatment and its impact on
bone preservation (bone density). Many of the established drug delivery
companies already have oral and transdermal products in the osteoporosis
therapy segment. However, new applications are being continually developed. The
Subsidiaries have several transdermal products under development that could be
suitable for this therapeutic segment.
According to an industry report, the osteoporosis market in the United
States and five major European markets is expected to double by 2006. The
osteoporosis market will be worth $5.7 billion and will have risen 106% in
sales from 1996 sales of $2.8 billion.
Addiction Therapy. In this segment, transdermal applications to treat
nicotine addiction from smoking are predominant. An approach to smoking
cessation is the nicotine transdermal patch, a skin patch that delivers a
relatively constant amount of nicotine to the person wearing it. The nicotine
patch is used to help people quit smoking by reducing withdrawal symptoms and
preventing relapse while undergoing behavioral treatment. The Subsidiaries are
not currently present in this important but extremely competitive segment. The
Subsidiaries' transdermal technology platforms have potential applications in
this therapeutic area, but the Subsidiaries are not currently funding any
projects or products for addiction therapy.
Central Nervous System Therapy Market. The treatment of motion or travel
sickness is currently the largest transdermal application in this segment.
Generally patches are the delivery method. This segment is still at an early
stage with some possible transdermal applications for the treatment of anxiety
disorders, Parkinson's disease and attention deficiency disorders. Permatec
currently is conducting clinical trials with an alprazolam patch for the
treatment of anxiety disorders. According to industry data, for the 12-month
period ending March 2000, the market for central nervous system products in the
12 leading pharmaceutical markets totaled $31 billion dollars.
Trends Affecting The Drug Delivery Industry
Based upon its experience in the industry, Permatec believes that several
significant trends in the healthcare industry have important implications for
drug delivery companies. After a drug loses patent protection, the branded
version of the drug often faces competition from generic alternatives. Permatec
expects producers of branded drugs losing patent protection to seek
differentiating characteristics for their products to defend against generic
competition. Permatec believes that pharmaceutical companies will adopt
innovative drug delivery technologies, such as fast-dissolve and taste-masking,
as an increasingly significant means to differentiate their branded products.
The increasing trend of pharmaceutical companies marketing directly to
consumers and recent focus on patient rights may also encourage the use of
innovative drug delivery technologies. In addition, there is also a
6
growing trend in the United States to provide patients with greater choice and
more patient-friendly forms of treatment. Permatec believes the trend toward
patient empowerment and patient rights may give consumers greater influence on
the type and dosage form of medication a physician will prescribe. Permatec
also believes that patient-friendly attributes, such as fast-dissolve and
taste-masking tablets, and easily applied gels and patches, will become a more
significant influence in pharmaceutical marketing.
The growth of managed care organizations has focused providers and payors on
using healthcare resources efficiently, including increasing the cost-
effectiveness of medical treatments. Permatec believes that patient non-
compliance with medicinal dosing regimens is widespread, and that such non-
compliance results in unnecessary costs to the healthcare system. Many managed
care plans and other insurers actively manage the costs of prescription drugs
for their clients by monitoring efficacy, quality, cost and compliance of
medications. Payors often encourage using therapies that improve patient
compliance, including those that use innovative drug delivery technologies.
Permatec believes these therapies will become more widespread.
Strategy and Development Plan
Permatec's goal is to become a leading drug delivery company with a
recognized technology base and an attractive client and project portfolio.
Through its research and development, the Subsidiaries' goal is to develop
innovative drug delivery technologies. The Subsidiaries seek to derive revenue
on their technology through licensing and development agreements and other
arrangements with their pharmaceutical company partners.
Permatec and the Subsidiaries believe that in the highly competitive
alternative drug delivery niche of the pharmaceutical market, the main way to
justify a good price, and to protect a competitive position, is through
additional therapeutic or pharmacological benefits. As a consequence of its
value-added approach, the Subsidiaries are making significant investments to
develop a broad, differentiated and defendable patent portfolio. Trademark
development is being used to give the different technologies an identity.
Innovation and Development. Patent protection is the main tool to bring
value to partner companies. The Subsidiaries' research and development team
works closely with business development members, who bring ideas from the
market, as well as from partners and customers. The Subsidiaries' researchers
are investigating new ways of administering drugs through the various natural
barriers. Most of the Subsidiaries' research staff has experience in the
development and/or in the production of pharmaceutical products. The
development staff is therefore extremely sensitive to the practical feasibility
of an idea. This is very important, as the ultimate objective is to apply the
technology to bring a product to the market.
The Subsidiaries are developing products and applying their various
technologies to known active substances as well as to new chemical entities
developed from a company's internal research activities. The formulation and
analytical development work is mainly carried out in the Basel research center.
The clinical studies and production are outsourced under the control of the
regulatory team. Depending on the compounds and workload, some projects are
internally funded and developed up to the filing of an application for approval
from a regulatory authority. Alternatively, projects are licensed at an earlier
stage to one or more partners who are responsible for the clinical and
regulatory aspects.
Licensing. The strategy of Permatec and the Subsidiaries is to license
technology and products at various stages of development to development and
marketing partners. The license structure usually includes up-front or
milestone payments, as well as royalties on future sales following regulatory
approval. The license agreement usually requires the Subsidiaries to develop
and finance the innovation up to a certain level: patent application, first
preliminary clinical studies or stability data.
Partner companies are utilizing drug delivery companies for two main
reasons. The first reason is to gain access to a technology that is currently
not available in-house. The second reason is to have access to additional
external resources. It is therefore important to realize that these companies
are taking a risk when putting sales
7
of their drug delivery technologies or new chemical entities in the hands of
small independent companies. The quality of the relationship between the two
teams, as well as the efficiency and swiftness of the development program, are
essential success factors.
Development agreements. Another source of revenue is the development of
projects financed by a partner. This is based on a Subsidiary's know-how and
addresses some ideas, questions or problems that the partner encounters in
delivering a new chemical entity or an existing drug. In that case, a
Subsidiary may use an existing patent or apply for new patents.
Depending on the work to be performed, the terms may range from a single
lump sum for a preliminary investigation, to an extensive development program
with an option to enter into a subsequent license agreement, with additional
milestone payments upon success.
Research and Development Collaboration. To gain access to innovation and new
ideas, Permatec and the Subsidiaries have established research and development
collaborations with scientific partners. Through these agreements Permatec and
the Subsidiaries have access to complimentary technologies (for example, taste
masking) and can increase the generation of innovative ideas.
Regulatory Affairs. The registration and approval process is a long and
uncertain process. The regulatory process has become more burdensome in the
past decade, due in part to the cost containment measures of the various health
systems worldwide. The Subsidiaries' specialized and flexible regulatory team
with expertise in European regulatory affairs, or alternatively a partner's
regulatory department, is continuously supporting the internal development
program. This is done in order to get the project as quickly and as efficiently
as possible through the hurdles of the regulatory process, thus reducing the
time to market. The Subsidiaries' team has more than 10 years experience in
this area.
In addition, the Subsidiaries' technology is based on so-called GRAS
("Generally Recognized as Safe") substances. This means that the toxicology
profile of the substance is known and that the product is already widely used.
The major benefit of this approach is that regulatory authorities usually will
not require additional toxicity studies because the substance is well known.
This can save money and time in development.
Products and Technology
The Subsidiaries' proprietary technologies enable their pharmaceutical
company partners to differentiate their products from competing products. In
addition to providing a competitive advantage in the marketplace, the
Subsidiaries' proprietary technologies also may enable its pharmaceutical
company partners to extend the product life cycles of their patented drug
compounds beyond existing patent expiration dates. Improving compliance also
can provide benefits to the healthcare system by enhancing therapeutic outcomes
and potentially reducing overall costs.
The Subsidiaries have developed several technology platforms in four main
areas: patches, gels, fast dissolving tablets and transbuccal tablets. The
Subsidiaries' current applications address therapies mainly in the hormone
replacement and central nervous system markets.
Patches. Patches are small adhesive structures applied on the skin. The
patch allows the diffusion of one or more active compounds through the skin
during an extended period of time. The most widely developed system is a
passive patch, but some devices also use electrical power to get substances
through the skin.
The skin is a barrier protecting the internal part of the body against any
external aggression (chemical, mechanical or microbial). The technical
challenge is to bring the active compound to the blood flow through the skin
barrier. Due to the structure of this barrier, only certain molecules are able
to pass through the barrier. The rest of the range of molecules are either
impossible to bring through the skin or require some help, i.e. penetration
enhancement, to reach the blood.
8
With the exception of active patches, which use external sources of power as
the driving force for skin permeation, patches are developed using one of two
different technologies: reservoir or matrix. The Subsidiaries' patches are
based only on the matrix system.
In a matrix patch, the active substance is solubilized, or dispersed, in an
adhesive polymer solution. The solution is used to coat a PET layer (the
backing layer). After drying, this polymer and layer can be applied on the skin
and release the active substance over a defined period of time with a pre-
defined release rate. The Subsidiaries' patches are currently being developed
for use with hormone replacement therapy treatments and central nervous system
disorder treatments. Reservoir patches generally represent the first generation
of patch systems. Reservoir patches place the active compound in a clear
solution separated by a membrane in contact with the skin.
Gels. Gels are generally well-known, but are often confused with creams,
which are normally used for topical treatment and not for transdermal purposes.
Gel formulations differentiate themselves from cream formulations in terms of
their cosmetic and pharmaceutical properties. Developing a gel to target the
permeation of a drug in significant enough amounts through the skin is a
challenge. This is especially true because the gel should often have certain
cosmetic properties (consistency, color, smell, etc.).
Gel formulations have to fulfill certain technical and pharmaceutical
constraints in addition to the legal requirements of every pharmaceutical
formulation. The formulation must be able to deliver one or two active
substances. Furthermore, the formulation must do this in an efficient way. For
this reason, the formulation can require the use of specific penetration
enhancers to reduce the applied amount of gel and reach therapeutically active
plasma levels. Without a proper formulation, the targeted plasma level is
either not achieved or can only be achieved with a very large quantity of gel.
The stability of a complex liquid-based formulation is often seen as a
potential source of regulatory problems.
Some gels are designed to deliver drugs to the bloodstream. An example is
the Subsidiaries' Combi Gel(TM) technology platform. This gel is designed to
deliver one or two active substances simultaneously. The formulation uses
penetration enhancers to increase the efficiency of the formulation. The
Subsidiaries' gels are currently being developed for use with hormone
replacement therapy treatments.
Fast-Dissolving Tablets. Several factors limit the administration of drugs
via the mouth: comfort, difficulty in swallowing, and pediatric and veterinary
applications. To address these problems the Subsidiaries developed EasyTec(TM),
a fast buccal disintegrating tablet, produced by means of direct compression.
EasyTec's matrix is composed of an acrylic polymer as the main agent of the
fast disintegration.
The EasyTec fast-dissolving tablet is an innovative development to address
the specific issue of water-free intake of a dry formulation. The tablet is
designed to offer a quick dissolution profile in the mouth; even without taking
water. Depending on the active substance and formulation, the disintegration
time can range from 5 seconds to 25 seconds with highly loaded tablets. The
Subsidiaries also have access to know-how in taste masking and sweetening
compounds. This is important, as the product will come in direct contact with
the buccal mucosa.
The Subsidiaries believe that the attributes of the EasyTec fast-dissolve
technology may enable patients in certain age groups or with limited ability to
swallow conventional tablets to receive medication in an oral dosage form that
is more convenient than traditional tablet-based oral dosages. EasyTec
incorporates taste-masked active drug ingredients into tablets that have the
following potential benefits:
. ease of administration;
. improved dosing compliance; and
. increased dosage accuracy compared to liquid formulations.
9
The EasyTec fast-dissolving tablets are currently being developed for use
with gastro-intestinal disorder treatments.
Transbuccal Tablets. The buccal mucosa is an extremely permeable and
vascularized tissue located in the mouth. Transbuccal tablets are designed to
target both the local administration of drugs, as well as the direct delivery
of the compound to the blood stream, while avoiding the first pass effect, i.e.
the elimination or metabolization of a drug by the liver.
The Subsidiaries are developing a dual formulation technology able to
simultaneously release two active compounds. One is to be administered through
the buccal mucosa. The second would be released in the mouth for local action
or absorption at the stomach level like a classical oral tablet. This
technology platform has applications in various therapeutical areas. However
the Subsidiaries are not currently funding any development projects applying
this technology.
The following chart lists the delivery methods that the Subsidiaries are
currently developing, the indication those methods treat, the development stage
of the particular product and an estimated timeline for approval and licensing
or distribution.
10
- --------------------------------------------------------------------------------
Product Indication Development Stage Timeline
- --------------------------------------------------------------------------------
Estradiol Patch Hormone Manufacturing Filed in the first
Replacement agreement in place European country
Therapy (for the with a European in the second
treatment of manufacturer for quarter of 1999.
menopause) the supply of Approval is
patches to expected in the
partners. The second quarter of
patch has 2001.
extensive
pharmaco-kinetic,
clinical and
technical data as
well as stability
data over more
than two years.
- --------------------------------------------------------------------------------
Combi Patch Hormone Feasibility and Anticipate
Estradiol+NETA Replacement preliminary human entering the
(Norethindrone Therapy (for the pharmacokinetic clinical phase
Acetate) treatment of study have been upon signing an
menopause) completed agreement with a
development
partner.
- --------------------------------------------------------------------------------
Combi Patch
Estradiol+Levonorgestrel
Hormone Feasibility and Anticipate
Replacement preliminary human production of both
Therapy (for the pharmacokinetic clinical batches
treatment of study have been and registration
menopause) completed batches upon
signing an
agreement with a
development
partner.
- --------------------------------------------------------------------------------
Alprazolam patch Depression/Anxiety Feasibility and Anticipate
and CombiGel preliminary human entering clinical
pharmacokinetic phase upon signing
study have been an agreement with
completed a development
partner.
- --------------------------------------------------------------------------------
Estradiol CombiGel Hormone Preliminary human Investigational
Replacement pharmacokinetic new drug
Therapy study completed application filing
for the treatment
of hypogonadism in
men anticipated by
end of 2000
- --------------------------------------------------------------------------------
NETA Single gel Hormone Feasibility stage Anticipate
Replacement is completed entering the
Therapy clinical phase
upon signing an
agreement with a
development
partner.
- --------------------------------------------------------------------------------
Testosterone Hypogonadism (men),Feasibility and Investigational
CombiGel Hormone preliminary human new application
Replacement pharmacokinetic filing for the
Therapy (women) study completed treatment of
hypogonadism in
men anticipated by
end of 2000
- --------------------------------------------------------------------------------
Estradiol NETA Hormone Phase I to be Clinical trials
CombiGel Replacement completed by end scheduled for
Therapy of first quarter first quarter of
2001 2001 and filing in
first half of 2003
- --------------------------------------------------------------------------------
Estradiol Hormone Feasibility and Anticipate
Levonorgestrel Replacement preliminary human entering the
CombiGel Therapy pharmacokinetic clinical phase
study completed upon signing an
agreement with a
development
partner.
- --------------------------------------------------------------------------------
Estradiol Testo Hormone Feasibility Anticipate
CombiGel Replacement completed, as well entering the
Therapy as preliminary clinical phase
human upon signing an
pharmacokinetic agreement with a
study. development
partner.
- --------------------------------------------------------------------------------
Progesterone Hormone Feasibility Anticipate
CombiGel Replacement studies being entering the
Therapy concluded clinical phase
upon signing an
agreement with a
development
partner
- --------------------------------------------------------------------------------
Easy Tec(TM) Diarrhea Production-scale Submission of the
Loperamide Tablet batches technical
anticipated by documentation to
September 2000 and the health
pivotal authorities to
pharmacokinetic obtain marketing
study to verify if approval scheduled
the same plasma for second quarter
levels are of 2001.
obtained as the
reference product
is scheduled for
first quarter of
2001
- --------------------------------------------------------------------------------
Ibuprofen 200 mg Pain Relief Feasibility stage Anticipate
Tablet is completed entering the
clinical phase
upon signing an
agreement with a
development
partner.
- --------------------------------------------------------------------------------
11
Research and Development
Expenditures by Permatec and the Subsidiaries on research and development in
the years ended December 31, 1999, 1998 and 1997 were $ 1.647 million, $ 1.750
million and $ 0.796 million, respectively. As of September 1, 2000, the
Subsidiaries' collective research and development department currently has a
staff of 11 employees consisting of 2 pharmacists, 1 engineer, 4 technicians, 2
scientists and 2 external clinical and regulatory personnel, many of whom have
significant experience in the drug-delivery or pharmaceutical industries.
Licensing and Development Agreements.
Currently, the Subsidiaries obtain revenue by licensing their technology to
their partners, who then develop and market the commercial applications for the
technology. Alternatively, the Subsidiaries enter into development agreements
with other partners to develop specific delivery vehicles for the partner's
pharmaceutical treatments. In addition, the Subsidiaries have entered into
collaborative arrangements with other parties. During 1999 Permatec received
more than 10% of its revenue from each of Solvay and Segix.
The Subsidiaries' business development efforts focus on entering into
development, licensing and manufacturing supply agreements with pharmaceutical
companies. The Subsidiaries' agreements generally provide that the
collaborating pharmaceutical company is responsible for marketing and
distributing the developed products either worldwide, or in specified markets
or territories. The Subsidiaries' collaborative agreements typically begin with
a product development phase. If successful, this phase may be followed by a
development and license option agreement for the development of product
prototypes. The Subsidiaries will subsequently enter into license and
manufacturing supply agreements to address commercialization of products.
Alternatively, they may develop product prototypes internally and enter
directly into a development, manufacturing or license agreement for
commercialization of those products.
The Subsidiaries currently manufacture commercial products for one
pharmaceutical company that incorporates their proprietary technologies. To
date, Permatec has received less than 1% of its revenue from sales of products
including royalties. All revenue resulted from product development fees and
licensing revenue for development activities.
Existing Licensing Agreements. The table below sets forth the partner,
product brand name, market segment and technology for each major licensing
agreement.
- --------------------------------------------------------------------------------
PHARMACEUTICAL COMPOUND MARKET SEGMENT TECHNOLOGY
COMPANY PARTNER
- --------------------------------------------------------------------------------
Solvay (The NETA/Estradiol Hormone Combi-gel
Netherlands) Replacement
Therapy
- --------------------------------------------------------------------------------
Segix (Italy) Estradiol Hormone Patch
Replacement
Therapy
- --------------------------------------------------------------------------------
Sigmapharma/ Estradiol Hormone Patch
Novaquimica Replacement
(Brazil) Therapy
- --------------------------------------------------------------------------------
Recalcine (Chile) Estradiol Hormone Patch
Replacement
Therapy
- --------------------------------------------------------------------------------
Lab Chile (Chile) Estradiol Hormone Patch
Replacement
Therapy
- --------------------------------------------------------------------------------
BioSante (US) Progestogen/Estradiol/
Testosterone
Hormone Combi-gel and
Replacement Patch
Therapy
- --------------------------------------------------------------------------------
12
. BIOSANTE (US). On June 13, 2000, Permatec entered into an exclusive license
for the United States, Canada, and several other countries, for gel
combinations and patches including Progestogen/Estradiol and testosterone.
Under the agreement, BioSante would make milestone payments based upon
achievement of milestones. In addition, upon commencement of distribution,
Permatec will receive a royalty on sales of products by BioSante (depending
upon regulatory approval). Finally, Permatec also received an initial
payment of $1,000,000 upon executing the agreement related to prior
development activities performed by Permatec, a portion of which will be
credited against future royalty payments. Other than the initial payment, no
other material payments have been made to Permatec under this agreement.
Permatec has also entered into a supply agreement with BioSante. Under the
supply agreement, Permatec agrees to manufacture, or have manufactured,
BioSante's total requirements for the products covered under the license
agreement. This agreement terminates on a country by country, product by
product basis, upon the later of (i) the last patent to expire covering the
licensed product, or (ii) the tenth anniversary of the first commercial sale
of products incorporating the licensed technology.
. SOLVAY (The Netherlands). On June 6, 1999, Permatec entered into an
exclusive license agreement for Europe for the NETA/Estradiol Combi-gel.
Milestone payments are split over four years and represent an aggregate of
$5 million (depending on achievement of milestones). In addition, upon
commencement of product distribution, Permatec will receive a 5% royalty on
sales (depending upon regulatory approval). This agreement expires on a
country by country basis upon the later of expiration of the last patent
covered, or fifteen years.
. SEGIX (Italy). On March 18, 1999, Permatec entered into an exclusive license
agreement for Permatec's 7-day Estradiol patch for Italy. Under the terms of
the agreement, Segix will make $500,000 in milestone payments (depending on
achievement of milestones), and upon commencement of product distribution, a
5% royalty on sales (depending upon regulatory approval). This agreement
expires upon the expiration of the last of the patents effective in the
territory covered by the agreement.
. SIGMA PHARMA/NOVAQUIMICA (Brazil). On March 30, 1998, Permatec signed a non-
exclusive license agreement with Novaquimica for the 7-day Estradiol patch.
The agreement incorporated two milestone payments of $40,000 (depending on
achievement of milestones) and a supply agreement of transdermal patches at
a price of $0.70 per patch, the equivalent of a 6% royalty (depending upon
regulatory approval). This agreement applies in perpetuity to any licensed
products which are sold by Sigma Pharma.
. RECALCINE (Chile). On December 29, 1998, Permatec entered into a non-
exclusive license agreement for the 7-day Estradiol patch for Chile, and an
exclusive license for the Estradiol patch for Bolivia and Ecuador. The terms
of the agreement include $40,000 in milestone payments (depending on
achievement of milestones) and the equivalent of a 5% royalty on any product
sales (depending upon regulatory approval). This agreement applies in
perpetuity to any licensed products which are sold by Recalcine.
. LAB CHILE (Chile). On February 16, 1998, Permatec entered into a non-
exclusive license agreement for the 7-day Estradiol patch for Chile. The
terms include milestone payments of $30,000 (depending on achievement of
milestones) and the equivalent of a 5% royalty on any product sales
(depending upon regulatory approval). This agreement applies in perpetuity
to any licensed products which are sold by Lab Chile.
Development Agreements. In July 1999, Permatec Technologie entered into a
development agreement with Farmasierra, a Spanish pharmaceutical company, for
the pharmaceutical development (formulation and scale-up) and production of
Easy Tec(TM) tablets. During the term of the agreement, Farmasierra has an
option to acquire the exclusive right and license to manufacture, market,
distribute and sell Easy Tec(TM) Loperamide tablets in Spain. The agreement
includes two milestone payments totaling $71,675 and, upon commencement of
product distribution, a royalty of 5% on net sales. Farmasierra has an option
to acquire an exclusive license and extend the agreement. The agreement will
expire upon the later of (i) fifteen years after the first product launch, or
(ii) upon the expiration of the last of the patents effective in the territory.
13
Competition
The drug delivery field is characterized by rapid and significant
technological change and significant competition. Several of the Subsidiaries'
competitors, including ALZA and Elan, among others, have substantially greater
capital resources, research and development teams and facilities than the
Subsidiaries do, and these competitors also have a broader and more diversified
line of products and technologies. As more traditional pharmaceutical companies
seek to differentiate their products through innovative drug delivery
techniques, the Subsidiaries anticipate that competition in the field will
increase, including competition from the traditional pharmaceutical companies,
all of which have substantially greater capital resources, research and
development teams and facilities than Permatec does.
Intellectual Property
As appropriate during the research and development cycle, the Subsidiaries
actively seek protection for their products and proprietary information by
means of worldwide patents and trademarks. Permatec currently holds 29 patents
worldwide and has 45 patent applications being considered.
The Subsidiaries' current patch technology is protected by two patents. The
first core patent relates to the transdermal administration of Estradiol and
has been granted in most of the Subsidiaries' target countries, including the
United States, the European Union, Australia, New Zealand, South Africa and
Taiwan. Patents are still pending in Canada and Korea. The second patent has
been granted in Italy, New Zealand and South Africa and is pending in all of
the remaining countries where the first patent has been filed and in Israel,
and relates to an innovative formulation for controlled transdermal
administration.
The Subsidiaries' current gel technology is protected by patents granted in
the United States, Italy, New Zealand and South Africa. Patents are pending in
the European Union, Canada, Australia, Japan, Korea and Taiwan.
The Subsidiaries' Easy Tec(TM) quick-dissolving tablet technology is
protected by one patent that is pending in France, Europe, Canada, Australia,
the United States, New Zealand, Israel, South Korea, Argentina, South Africa,
Taiwan and Japan.
The Subsidiaries' Bucco Adhesive tablet (a transbuccal tablet) is protected
by one patent that is pending in France, Europe, Canada, Australia, the United
States, New Zealand, Israel, South Korea, Argentina, South Africa, Taiwan and
Japan.
The Subsidiaries also protect the rights of their proprietary know-how and
technology through confidentiality agreements with employees, consultants and
their partners. The agreements with employees and consultants also require
disclosure and assignment of discoveries and inventions to the Subsidiaries. In
addition, the Subsidiaries' partners have the right to certain technology
developed in connection with such agreements.
The Subsidiaries have also registered, or filed registration applications
for, a variety of trademarks to protect the names of its technology platforms.
14
- --------------------------------------------------------------------------------
Registered Owner :
Permatec Technologie AG Registered Owner :
Permatec Technologie
AG
Trademark Country Status Trademark Country Status
Combi Gel Argentina Pending Permagel Argentina Pending
- --------------------------------------------------------------------------------
Permagel Argentina Pending
Combi Gel France Registered Permagel France Registered
- --------------------------------------------------------------------------------
Permagel SwitzerlandRegistered
Combi Gel U.S.A. Pending Permagel U.S.A. Pending
- --------------------------------------------------------------------------------
Permatec Argentina Pending
Combi Patch Argentina Pending Permatec Argentina Pending
- --------------------------------------------------------------------------------
Permatec France Registered
Combi Patch France Registered Permatec U.S.A. Pending
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Combi Patch U.S.A. Pending
Government Regulation
- --------------------------------------------------------------------------------
The design, development, testing, manufacturing, marketing, and in some
cases pricing, of pharmaceutical products are intensely regulated by
governmental regulatory agencies, including the U.S. Food and Drug
Administration ("FDA") in the United States, and comparable regulatory
authorities in other countries. Under the United States Food, Drug and Cosmetic
Act, "new drugs" must obtain clearance from the FDA before they lawfully can be
marketed in the United States. Applications for marketing clearance must be
based on extensive clinical and other testing, the cost of which is very
substantial. Approvals (sometimes including pricing approvals) are required
from health regulatory authorities in foreign countries before marketing of
pharmaceutical products may commence in those countries. Requirements for
approval may differ from country to country, and can involve additional
testing. There can be substantial delays in obtaining required clearances from
both the FDA and foreign regulatory authorities after applications are filed.
Even after clearances are obtained, further delays may be encountered before
the products become commercially available in countries requiring pricing
approvals. Non-compliance with applicable requirements can result in fines and
other judicially imposed sanctions, including the initiation of product
seizures, import restrictions, injunctive actions and criminal prosecutions
based on products or manufacturing practices that violate statutory
requirements. In addition, informal administrative remedies can involve
requests to recall violative products, as well as the refusal of the government
to enter into supply contracts or to approve new drug applications ("NDAs") or
other pre-market approval applications until manufacturing procedures or other
alleged deficiencies are brought into compliance. The FDA also has the
authority to withdraw approval of drugs in accordance with statutory due
process procedures.
Easy Take France Registered
- --------------------------------------------------------------------------------
Easy Tec France Registered
- --------------------------------------------------------------------------------
Easy Tec SwitzerlandRegistered
Product development generally involves all of the following steps which are
required by the regulatory process:
. preclinical development, during which initial laboratory development and
in vitro and in vivo testing takes place;
. submission to the FDA of an investigational new drug application, which
must become effective before human clinical studies may begin;
. adequate and well-controlled human clinical trials (Phase I, II and III
studies) to establish the safety and efficacy of the product;
15
. submission of an NDA to the FDA (and comparable filings to regulatory
agencies outside the United States) requesting clearance to market the
product; and
. clearance from the FDA (and foreign regulatory agencies) must be
obtained before the product can be marketed.
All of these steps can take several years and cost a significant amount of
money.
Historically neither the Subsidiaries nor their pharmaceutical partners have
been required to obtain regulatory approval of the FDA for products using the
Subsidiaries' drug delivery technologies because such products have not been
sold in the United States. Products being developed by BioSante using the
Subsidiaries' technology will require FDA approval in the future before those
products can be marketed in the United States.
Any of the Subsidiaries' products sold in the United States, and/or exported
to other countries, are subject to extensive regulation by the FDA and
comparable agencies in other countries where the products are distributed.
Regulations govern a range of activities including manufacturing, quality
assurance, advertising and recordkeeping. The continuing trend of stringent FDA
oversight in product clearance and enforcement has caused more uncertainty,
greater risks and higher costs of obtaining clearance to market a product, and
sometimes longer clearance cycles. Failure to obtain, or delays in obtaining,
regulatory clearance to market new products, as well as other regulatory
actions and recalls, could adversely affect Permatec's financial results.
Permatec and the Subsidiaries are subject to regulation under various laws,
rules, regulations and policies regarding, among other things, occupational
safety, environmental protection, the use, generation, manufacture, storage,
air emission, effluent discharge and handling and disposal of certain regulated
materials and wastes. Permatec and the Subsidiaries believe that they have
complied with these laws and regulations in all material respects. Neither
Permatec nor any Subsidiary has been required to take any action to correct any
material noncompliance. Permatec and the Subsidiaries do not currently
anticipate that any material capital expenditures will be required in order to
comply with these laws or that compliance with these laws will have a material
effect on its business or financial condition. Permatec is unable to predict,
however, the impact on its business of any changes that may be made in these
laws or of any new laws or regulations that may be imposed in the future.
Permatec cannot be sure that it or the Subsidaries will not be required to
incur significant compliance costs or be held liable for damages resulting from
any violation of these laws and regulations.
Medical Insurance Reimbursement
Although neither the Subsidiaries nor their development partners currently
market any commercial products, the willingness of companies to develop
products incorporating the Subsidiaries' current and proposed technology in
certain markets, such as the United States, are dependent in part on the
availability of adequate reimbursement from third-party healthcare payors.
Significant uncertainty exists as to what the reimbursement status will be of
the products developed by the Subsidiaries' partners. Third-party payors are
increasingly challenging pricing in an attempt to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products. There can be no assurance that adequate levels of reimbursement will
be available to enable the Subsidiaries to achieve or maintain market
acceptance of their products or maintain price levels sufficient to realize
profitable operations. Furthermore, there is a possibility of increased
government control or influence over a broad range of healthcare expenditures
in the future. Any such trend could negatively impact the market for products
incorporating the Subsidiaries' patches and gels.
Employees
As of September 1, 2000, Permatec and the Subsidiaries employed 14 full-time
employees and 2 external non-employee project managers. Of the internal
employees, 9 work in research and development, 1 works in business development
and 4 work in general administrative. Ten research and development employees
have
16
doctorate or equivalent degrees. Permatec and the Subsidiaries believe that
they have good relations with their employees.
Property
Located close to Basel in an innovation and biotechnology center, the
Subsidiaries have approximately 1000 square meters of leased facilities with
300 square meters of laboratories (formulation and analytical) and an
additional 300 square meters in expansion reserve. This additional space is
equipped with the necessary infrastructure for installing a controlled air room
to manufacture clinical batches. The Subsidiaries have leased the facilities
for a ten year period starting November 1, 1998 and ending September 30, 2008.
The Subsidiaries believe the facilities will be sufficient to meet their
requirements through the lease period.
Management
Information with respect to the directors and executive officers of Permatec
is set forth below:
Name Age Position
---- --- --------
Dr. Jacques Gonella............ 58 Executive Chairman of the Board
Dr. Philippe Dro............... 37 President and COO, Member of the Board
Dr. Dario Carrara.............. 36 Head of Research and Development
Dr. Thomas Rinderknecht........ 46 Deputy Chairman of the Board
Prof. Ubaldo Conte............. 59 Member, Scientific Advisor
Permatec's Board of Directors consists of Dr. Jacques Gonella, Chairman, Dr.
Thomas Rinderknecht, and Dr. Philippe Dro. Permatec's Scientific Advisor is
Professor Ubaldo Conte.
Dr. Jacques Gonella. Dr. Gonella is the founder of Permatec and has served
as the Chairman of the Board of Directors of Permatec since its founding in
June 1997. Prior to founding Permatec, Dr. Gonella founded JAGO Pharma AG in
1983 and served as the President and Chief Executive Officer from its founding
until its acquisition in May 1996 by SkyePharma, a United Kingdom company
listed on the London Stock Exchange. Dr. Gonella is currently a non-executive
member of the Board of Directors of SkyePharma. Prior to founding JAGO, Dr.
Gonella occupied various positions with Roche and Pfizer between 1968 and 1979.
Dr. Gonella currently also sits on the board of directors of several private
pharmaceutical companies. Dr. Gonella holds a doctorate in analytical chemistry
from the Polytechnic Institute of Lausanne, Switzerland.
Dr. Thomas Rinderknecht. Dr. Rinderknecht has been a director of Permatec
since its founding in June 1997. Dr. Rinderknecht has been a partner in the
firm of Rinderknecht Klein & Stadelhofer in Zurich, Switzerland since 1985, and
has been practicing commercial law in Europe since 1982. Dr. Rinderknecht holds
law degrees from the University of Zurich, Switzerland and the University of
Munich, Germany.
Dr. Philippe Dro. Dr. Dro has been the President and Chief Operating Officer
of Permatec since January 2000 but will be resigning effective October 31, 2000
from such positions. From June 1997 to January 2000, Dr. Dro was the Executive
Director of Permatec. From March 1995 to June 1997, Dr. Dro served as Executive
Director of JAGO Pharma. From 1992 to 1995, Dr. Dro held various finance and
controller positions at Sandoz corporation in Basel, Switzerland. From 1989 to
1991, Dr. Dro held various positions in the production and development area at
Ethypharm corporation in France and India. Dr. Dro received a doctorate in
Pharmacy from the School of Pharmacy of the University of Grenoble, France and
holds an MBA from the Cranfield School of Management in the United Kingdom.
Dr. Dario Carrara. Dr. Carrara has worked for Permatec Pharma AG as General
Manager of the Argentinean affiliate and Head of Research and Development since
1995. Prior to joining Permatec, Dr. Carrara worked as Pharmaceutical
Technology Manager for Laboratorios Beta, a pharmaceutical laboratory in
Argentina that ranks among the top ten pharmaceutical companies in Argentina,
between 1986 and 1995.
17
Dr. Carrara has extensive experience in developing transdermal drug delivery
devices. He earned a double degree in Pharmacy and Biochemistry, as well as a
Ph.D. with a concentration in Pharmaceutical Technology from the University of
Buenos Aires.
Professor Ubaldo Conte. Professor Conte has been Permatec's Scientific
Advisor since July 1997. Professor Conte is currently the head of the post-
graduate school in Industrial Pharmacy at the University of Pavia in Italy,
where he has held various professorships since 1965. From 1991 to 1997,
Professor Conte was the Dean of Faculty at the University of Pavia. Professor
Conte is the author of 48 patents and has authored approximately 170
publications in scientific journals. Professor Conte is a member of a number of
pharmacy and chemical societies.
Certain Relationships and Related Transactions
Drs. Jacques Gonella, Thomas Rinderknecht and Philippe Dro will be directors
of Medi-Ject upon consummation of the Share Transaction and also are
shareholders, directors or officers of Permatec. Permatec has loaned us
$2,900,000 pursuant to the Permatec Notes. The Permatec Notes will
automatically convert into a number of shares of Series C Convertible Preferred
Stock equal to the outstanding principal balance of the Permatec Notes divided
by 200 on the later of (1) the date we have amended our Articles of
Incorporation increasing our authorized common stock to at least 10,000,000
shares (see Proposal 2) and obtain necessary approvals under the listing
requirements for the Nasdaq Stock Market or (2) the closing of the Share
Transaction. The Medi-Ject Series C Convertible Preferred Stock will convert at
the option of the holder into shares of Medi-Ject common stock at any time
after the closing of the Share Transaction. The number of shares of Medi-Ject
common stock to be issued upon a conversion of the Series C Stock shall be
equal to the quotient obtained by dividing (i) the sum of (A) the outstanding
face amount of the Series C Stock, plus (B) all accrued but unpaid dividends on
such face amount; by the lesser of (i) the average of the closing prices per
share of the Medi-Ject common stock for the twenty (20) consecutive trading
days immediately preceding the conversion date, or (ii) $2.00.
The Series C Convertible Preferred Stock will be convertible into common
stock at Permatec's option. Based on the amounts of the promissory notes as of
September 25, 2000, if Permatec converts the shares of preferred stock, it will
own a total of 75.3% of our outstanding common stock. In the event we borrow
the maximum amount available from Permatec of $4.5 million, such percentage
will increase to 78.3% of our outstanding common stock. Dr. Gonella
beneficially owns 96.9% of the outstanding capital stock of Permatec and
accordingly will have the ability to unilaterally approve most, if not all, of
Permatec and our corporate actions, including the election of directors and the
appointment of officers.
Forward-Looking Statements
Certain statements regarding Permatec and the Subsidiaries included in this
Proxy Statement are "forward looking statements" and are subject to risks and
uncertainties. Permatec and the Subsidiaries have based these statements on
their expectations about future events and the anticipated effect of the Share
Transaction described in this Proxy Statement. The words or phrases "will
likely result," "look for," "may result," "will continue," "is anticipated,"
"expect," "project," or similar expressions are intended to identify forward-
looking statements, and are subject to numerous known and unknown risks and
uncertainties. Although Permatec believes the expectations reflected in its
forward-looking statements are reasonable, it cannot assure you that these
expectations will be achieved. Actual results may differ materially from what
is currently expected. Factors that may affect future results and performance
are set forth below and elsewhere in this Proxy Statement.
Risk Factors Regarding the Subsidiaries
The Subsidiaries have a limited operating history and currently are not
profitable. In 1998, the Subsidiaries recorded the first revenue from
developing their technologies. In addition, there have been limited commercial
sales of products utilizing their technology and most of their technology is
still under development. Accordingly, the Subsidiaries only have limited
operating histories. Since 1998, the Subsidiaries have generated
18
revenues from product development fees and licensing arrangements. Their
business and prospects, therefore, must be evaluated in light of the risks and
uncertainties of companies with limited operating histories in the
pharmaceutical industry. In addition to the risks that are particularly
relevant to the Subsidiaries discussed in the subheadings below, the
Subsidiaries also are subject to general business risks and uncertainties.
Permatec is currently not profitable. Permatec and the Subsidiaries have
accumulated aggregate net losses from inception through June 30, 2000 of
approximately $13.8 million. The costs for research and product development of
drug delivery technologies and general and administrative expenses have been
the principal causes of these losses. Historically, the ability of Permatec to
control costs relating to operations has negatively affected Permatec's
profitability and may affect its profitability in the future. In addition,
although general economic conditions during the past decade have for the most
part been favorable to start-up pharmaceutical businesses, there is no
guarantee that such favorable conditions will continue in the future. The
Subsidiaries' ability in the future to achieve sustained profitable operations
depends on a number of factors, many of which are beyond their direct control.
These factors include:
. the demand for their technologies;
. their ability to manufacture products efficiently and with the required
quality;
. their ability to increase manufacturing capacity;
. the level of product and price competition; and
. their ability to develop additional commercial applications for their
technologies.
The Subsidiaries will require additional financing, which may not be
available on favorable terms or at all and which may result in further dilution
of your equity interest. The Subsidiaries' existing cash resources and
estimated cash to be received from license and development agreements will not
be sufficient to fund their capital requirements during the remainder of 2000.
While Dr. Gonella has committed to fund Permatec, and as a result the
Subsidiaries, upon the closing of the Share Transaction, he will have no
further obligation to fund the Subsidiaries. Accordingly, the Subsidiaries will
require equity and/or debt financing during the remainder of 2000 and
thereafter. There can be no assurance that sufficient additional equity or debt
financing will be available. If the Subsidiaries cannot obtain financing when
needed, or obtain it on favorable terms, they may be required to curtail
development of new drug delivery technologies or their expansion of
manufacturing capacity.
If the Subsidiaries cannot develop additional products, their ability to
increase their revenues would be limited. The Subsidiaries intend to continue
to enhance their current technologies and pursue additional proprietary drug
delivery technologies. However, they may be unable to achieve their objectives
of revenue growth and sustained profitability. Even if enhanced or additional
technologies appear promising during various stages of development, the
Subsidiaries may not be able to develop commercial applications for them
because:
. the potential technologies may fail clinical studies;
. they may not find a pharmaceutical company to adopt the technologies;
. it may be difficult to apply the technologies on a commercial scale; or
. the technologies may be uneconomical to market.
The loss of one major customer of the Subsidiaries could reduce revenues
significantly. The Subsidiaries' revenue currently depends on a limited number
of customers. The loss of any one of these customers could cause revenues to
decrease significantly, resulting in, or increasing, its losses from
operations. If the Subsidiaries cannot broaden their customer base, they will
continue to depend on a few customers for the majority of their revenues. The
Subsidiaries may be unable to negotiate favorable business terms with customers
that represent a significant portion of their revenues. If that occurs, the
Subsidiaries' revenues and gross profits may be insufficient to allow them to
achieve sustained profitability.
19
If the Subsidiaries do not enter into additional collaborative agreements
with pharmaceutical companies, they may not be able to achieve sustained
profitability. The Subsidiaries depend upon collaborative agreements with
pharmaceutical companies to develop, test, obtain governmental approval for,
and commercialize gel, patch and oral dosage forms of, active pharmaceutical
ingredients using their drug delivery technologies. The number of products that
the Subsidiaries successfully develop under these collaborative agreements will
affect their revenues. If they do not enter into additional agreements in the
future, or if their current or future agreements do not result in successful
marketing of their products, their revenues and gross profits may be
insufficient to allow them to achieve sustained profitability. The Subsidiaries
currently have collaborative agreements with Solvay, Segix,
Sigmapharma/Novaquimica, Recalcine, Lab Chile and BioSante.
Failure of the Subsidiaries to meet the milestones established in their
collaborative agreements will have a negative impact on their revenues. Under
the terms of their current collaborative agreements, the Subsidiaries do not
receive any fees unless they achieve the milestones specified in the
collaborative agreements. Due to the significant amount of these milestone
payments, ranging from $25,000 to $1,000,000, failure to earn the payments will
have a material effect on the revenue of the Subsidiaries.
The Subsidiaries rely on third parties to develop, obtain regulatory
approvals, market, distribute and sell the products incorporating their drug
delivery technologies and those third parties may not perform. Pharmaceutical
company partners help the Subsidiaries to develop, to obtain regulatory
approvals for, to manufacture and to sell their products. If one or more of the
Subsidiaries' pharmaceutical company partners fail to pursue the development or
marketing of the products as planned. The Subsidiaries' revenues and gross
profits may not reach expectations or may decline. A Subsidiary may not be able
to control the timing and other aspects of the development of products because
pharmaceutical company partners may have priorities that differ from those of
the Subsidiaries. Therefore, commercialization of products under development
may be delayed unexpectedly. In 1999 a pharmaceutical partner of a Subsidiary
decided for internal reasons not to pursue commercialization of a product
containing an estradiol gel formulation licensed by the Subsidiary, despite
obtaining registration of the product in Argentina. Further, the Subsidiaries'
plan is to incorporate their drug delivery technologies into forms of products
marketed and sold by pharmaceutical company partners. The Subsidiaries do not
have a direct marketing channel to consumers for drug delivery technologies.
Therefore, the success of the marketing organizations of the pharmaceutical
company partners, as well as the level of priority assigned to the marketing of
the products by these entities, which level may differ from that of the
Subsidiaries, will determine the success of the products incorporating their
technologies.
If patients and physicians do not accept the Subsidiaries' drug delivery
technologies, the Subsidiaries may be unable to generate significant
revenues. The Subsidiaries' revenues will depend on ultimate patient and
physician acceptance of the Subsidiaries' transdermal gels and patches and
their other drug delivery technologies as an alternative to more traditional
forms of drug delivery including injections, tablets and liquid formulas. If
the Subsidiaries' drug delivery technologies are not accepted in the
marketplace, the pharmaceutical company partners may be unable to successfully
market and sell the Subsidiaries' products, which would limit the Subsidiaries'
ability to generate revenues and to achieve sustained profitability. The degree
of acceptance of the Subsidiaries' drug delivery systems depends on a number of
factors. These factors include:
. demonstrated clinical efficacy and safety;
. cost-effectiveness;
. convenience and ease of administration of transdermal gels and patches;
. advantages over alternative drug delivery systems; and
. marketing and distribution support.
Physicians may refuse to prescribe products incorporating the Subsidiaries'
drug delivery technologies if the physicians believe that the active ingredient
is better administered to a patient using alternative drug
20
delivery technologies or the physicians perceive that the delivery method will
result in patient noncompliance. Factors, such as allergic reactions, patient
perceptions that a gel is inconvenient and cosmetic considerations about
patches, may cause patients to reject the Subsidiaries' drug delivery
technologies.
In addition, the Subsidiaries expect that the pharmaceutical company
partners will price products incorporating their drug delivery technologies
slightly higher than conventional methods, which may impair their acceptance.
Because no products incorporating the Subsidiaries' drug delivery technologies
are commercially available, the Subsidiaries cannot yet assess the level of
market acceptance of their drug delivery technologies.
If the Subsidiaries cannot adequately protect their technology and
proprietary information, they may be unable to sustain a competitive
advantage. The Subsidiaries' success depends, in part, on their ability to
obtain and enforce patents for their products, processes and technologies and
to preserve their trade secrets and other proprietary information. If the
Subsidiaries cannot do so, their competitors may exploit their innovations and
deprive the Subsidiaries of the ability to realize revenues and profits from
their developments.
Any patent applications the Subsidiaries may have made or may make relating
to their potential products, processes and technologies may not result in
patents being issued. Their current patents may not be valid or enforceable.
They may not protect the Subsidiaries against competitors that challenge their
patents, that obtain patents that may have an adverse effect on the
Subsidiaries' ability to conduct business or are able to circumvent a
Subsidiary's patents. Further, the Subsidiaries may not have the necessary
financial resources to enforce their patents.
To protect the Subsidiaries' trade secrets and proprietary technologies and
processes, the Subsidiaries rely, in part, on confidentiality agreements with
employees, consultants and advisors. These agreements may not provide adequate
protection for the Subsidiaries' trade secrets and other proprietary
information in the event of any unauthorized use or disclosure, or if others
lawfully develop the information.
Third parties may claim that the Subsidiaries' technologies, or the products
in which those technologies are used, infringe on the third parties'
proprietary rights and the Subsidiaries may incur significant costs resolving
these claims. Third parties may claim that the manufacture, use or sale of the
Subsidiaries' drug delivery technologies infringe the third parties' patent
rights. If such claims are asserted, the Subsidiaries may have to seek
licenses, defend infringement actions or challenge the validity of those
patents in court. If the Subsidiaries could not obtain required licenses, are
found liable for infringement or are not able to have these patents declared
invalid, the Subsidiaries may be liable for significant monetary damages,
encounter significant delays in bringing products to market or be precluded
from participating in the manufacture, use or sale of products or methods of
drug delivery covered by the patents of others. The Subsidiaries may not have
identified, or be able to identify in the future, United States or foreign
patents that pose a risk of potential infringement claims.
The Subsidiaries enter into collaborative agreements with pharmaceutical
companies to apply drug delivery technologies to drugs developed by others.
Ultimately, the Subsidiaries receive license revenues and product development
fees, as well as revenues from the sale of products incorporating their
technology and royalties. The drugs to which their drug delivery technologies
are applied are generally the property of the pharmaceutical companies. Those
drugs may be the subject of patents or patent applications and other forms of
protection owned by the pharmaceutical companies or third parties. If those
patents or other forms of protection expire, become ineffective or are subject
to the control of third parties, sales of the drugs by the collaborating
pharmaceutical company may be restricted or may cease. The Subsidiaries'
revenues, in that event, may decline.
The Subsidiaries may incur significant costs seeking approval for their
products and if the Subsidiaries are not successful, they may be unable to
achieve anticipated revenues and profits. The design, development, testing,
manufacturing and marketing of pharmaceutical compounds, medical nutrition and
diagnostic products
21
and medical devices are subject to regulation by governmental authorities,
including the United States Food and Drug Administration (the "FDA"), and
comparable regulatory authorities in other countries. The approval process is
generally lengthy, expensive and subject to unanticipated delays. Currently,
the Subsidiaries or their partners are actively pursuing marketing approval for
a number of products from regulatory authorities in other countries and
anticipate seeking regulatory approval from the FDA for products developed
pursuant to the agreement with BioSante. The Subsidiaries' revenue and profit
will depend, in part, on the successful introduction and marketing of some or
all of such products by it or its partners. There can be no assurance as to
when or whether such approvals from regulatory authorities will be received.
Applicants for FDA approval often must submit extensive clinical data and
supporting information to the FDA. Varying interpretations of the data obtained
from pre-clinical and clinical testing could delay, limit or prevent regulatory
approval of a drug product. Changes in FDA approval policy during the
development period, or changes in regulatory review for each submitted new drug
application also may cause delays or rejection of an approval. Even if the FDA
approves a product, the approval may limit the uses or "indications" for which
a product may be marketed, or may require further studies. The FDA also can
withdraw product clearances and approvals for failure to comply with regulatory
requirements or if unforeseen problems follow initial marketing.
In other jurisdictions, the Subsidiaries, and the pharmaceutical companies
with whom they are developing technologies, must obtain required regulatory
approvals from regulatory agencies and comply with extensive regulations
regarding safety and quality. If approvals to market the products are delayed,
if the Subsidiaries fail to receive these approvals, or if the Subsidiaries
lose previously received approvals, their revenues would be reduced. The
Subsidiaries may not be able to obtain all necessary regulatory approvals. The
Subsidiaries may be required to incur significant costs in obtaining or
maintaining regulatory approvals.
The Subsidiaries may be subject to sanctions if they fail to comply with
regulatory requirements. If the Subsidiaries, or pharmaceutical companies with
whom they are developing technologies, fail to comply with applicable
regulatory requirements, the Subsidiaries, and the pharmaceutical companies,
may be subject to sanctions, including:
. warning letters;
. fines;
. product seizures or recalls;
. injunctions;
. refusals to permit products to be imported into or exported out of the
applicable regulatory jurisdiction;
. total or partial suspension of production;
. withdrawals of previously approved marketing applications; and
. criminal prosecutions.
If the marketing claims asserted about its products are not approved, the
Subsidiaries' revenues may be limited. Once a drug product is approved by the
FDA, the Division of Drug Marketing, Advertising and Communication, the FDA's
marketing surveillance department within the Center for Drugs, must approve
marketing claims asserted by the Subsidiaries' pharmaceutical company partners.
If a pharmaceutical company partner fails to obtain from the Division of Drug
Marketing acceptable marketing claims for a product incorporating the
Subsidiaries' drug technology, the Subsidiaries' revenues from that product may
be limited. Marketing claims are the basis for a product's labeling,
advertising and promotion. The claims the pharmaceutical company partners are
asserting about the Subsidiaries' drug delivery technology, or the drug product
itself, may not be approved by the Division of Drug Marketing.
22
The Subsidiaries may face product liability claims related to participation
in clinical trials or the use or misuse of their products. Future testing,
manufacturing and marketing of products utilizing the Subsidiaries' drug
delivery technologies may expose the Subsidiaries to potential product
liability and other claims resulting from their use. If any such claims against
the Subsidiaries are successful, the Subsidiaries may be required to make
significant compensation payments. Any indemnification that the Subsidiaries
have obtained, or may obtain, from contract research organizations or
pharmaceutical companies conducting human clinical trials on their behalf may
not protect them from product liability claims or from the costs of related
litigation. Similarly, any indemnification the Subsidiaries have obtained, or
may obtain, from pharmaceutical companies with whom they are developing drug
delivery technologies may not protect them from product liability claims from
the consumers of those products or from the costs of related litigation. If the
Subsidiaries are subject to a product liability claim, their product liability
insurance may not reimburse them, or may not be sufficient to reimburse them,
for any expenses or losses that may have been suffered. While Permatec
maintains product liability insurance on behalf of itself and the Subsidiaries
of approximately $6,000,000 per occurrence, a successful product liability
claim against the Subsidiaries, if not covered by, or if in excess of, the
product liability insurance, may require the Subsidiaries to make significant
compensation payments, which would be reflected as expenses on their statement
of operations.
If the Subsidiaries cannot keep pace with the rapid technological change and
meet the intense competition in the industry, they may lose business. The
Subsidiaries' success depends, in part, upon maintaining a competitive position
in the development of products and technologies in a rapidly evolving field. If
the Subsidiaries cannot maintain competitive products and technologies, their
current and potential pharmaceutical company partners may choose to adopt the
drug delivery technologies of their competitors. Drug delivery companies that
compete with their technologies include ALZA and Elan, along with many other
companies. The Subsidiaries also compete generally with other drug delivery,
biotechnology and pharmaceutical companies, engaged in the development of
alternative drug delivery technologies or new drug research and testing. Many
of these competitors have substantially greater financial, technological,
manufacturing, marketing, managerial and research and development resources and
experience than the Subsidiaries do, and, therefore, represent significant
competition for the Subsidiaries.
Competitors may succeed in developing competing technologies or obtaining
governmental approval for products before the Subsidiaries do. Competitors'
products may gain market acceptance more rapidly than the Subsidiaries'
products. Developments by competitors may render the Subsidiaries' products, or
potential products, noncompetitive or obsolete.
BACKGROUND AND MEDI-JECT'S REASONS FOR THE SHARE TRANSACTION
In early 1999, we realized that we needed to explore additional means to
raise capital in order to continue operations. We came to this determination as
a result of our recurring losses from operations and a net capital deficiency.
In addition, an $8.4 million product purchase order (which we expected would
result in our receipt of approximately $5 million cash) from Schering-Plough
Corporation was canceled in late 1998, when it became apparent that the project
was not meeting projected timelines. We then began exploring alternatives such
as:
. an equity financing;
. pharmaceutical partnership opportunities; and
. potential merger or other business combination opportunities.
During the first half of 1999, representatives of Fournier, SA contacted Dr.
Pass about a possible transaction with Fournier, SA. Fournier has a jet
injection business in the development stage. After some initial discussions,
Fournier decided to pursue the business on its own. Around the same time,
Franklin Pass, M.D., our Chairman and CEO, initiated discussions regarding a
business combination or investment with two companies: SkyePharma plc and
Permatec. SkyePharma had no interest in such a transaction and rejected the
idea of continuing discussions.
23
Through the connection of a mutual consultant, Dr. Pass had met Dr. Jacques
Gonella, the principal shareholder of Permatec in Basel, Switzerland. Drs.
Gonella and Pass met on several occasions between February 1999 and August 1999
to discuss a business combination. These meetings involved an exchange of
technology information, introduction of key personnel and visits to both
facilities. In August 1999, Dr. Gonella made an offer to the Medi-Ject Board of
Directors. The offer included an initial cash infusion of $2-4 million and a
combination of the two businesses on an equal valuation basis. After
discussion, our Board of Directors decided to reject Dr. Gonella's offer based
upon the apparent insufficient cash to operate businesses that were then
located in Argentina, France and Switzerland.
During the same period in 1999, Dr. Pass held several discussions with the
Chief Executive Officer of Bioject, Inc. and its designated investment banker.
It was apparent that Bioject and Medi-Ject possessed complimentary technologies
but had disparate market capitalizations, Bioject's being over five times that
of Medi-Ject's. During our discussions with Bioject, it appeared that, due to
the disparate market capitalization, a deal with Bioject would result in our
shareholders owning only 3-10% of the resulting company without any additional
cash infusion. Furthermore, Bioject lacked sufficient cash to improve the
financial condition of a combined entity.
In August 1999, we spoke with Grayson & Associates, Inc. and TradeCo, a New
York broker-dealer, to discuss the structure and costs of a private equity
placement. We engaged the services of Grayson & Associates to act as our agent
with the goal of raising approximately $3-5 million of additional working
capital. Although Grayson & Associates had assisted us successfully in raising
capital in the past, this round was not successful and no capital was raised.
Throughout the second half of 1999, we explored pharmaceutical alliances as
a source of equity capital. Discussions were held with Pharmacia & Upjohn
Company, BioSante Pharmaceuticals, Elan Corporation, plc, Bio-Technology
General Corp. and Disetronic Medical Systems AG. Our discussions with Pharmacia
focused on the idea of a licensing agreement with an equity investment by
Pharmacia. Pharmacia is testing our technology and a possibility exists that a
license agreement may result; it is not clear, however, whether there would
still be an equity investment component. BioSante, a startup, Chicago-based
pharmaceutical company entered into a joint technology venture with us in the
DNA vaccine field, but BioSante was not interested in assuming an equity
position in Medi-Ject either because it lacked sufficient cash or because our
business did not advance its strategic plan as a pharmaceutical company. Elan
had previously licensed certain device drug delivery technology to us but they
were not prepared to invest. In December 1999, Bio-Technology General purchased
250 shares of our Series B Preferred Convertible Stock at a price of $1,000 per
share as a condition to entering into a new U.S. growth hormone distribution
agreement. Disetronic, a manufacturer of needle delivery devices, had no
interest in an equity investment in 1999, but discussions regarding joint
cooperation in designing and marketing devices continue.
Drs. Pass and Gonella met once again in late 1999. The feasibility of a
business combination seemed more attractive because Dr. Gonella had
successfully consolidated all Permatec business activity in Basel and
significantly reduced operating expenses. Permatec's cash flow was further
improved due to: (1) progress made in marketing Permatec's first product
through pharmaceutical partners in Latin America and (2) the license to a
European pharmaceutical company of European rights to certain technology.
Furthermore, the transaction with Permatec will be less dilutive to our
shareholders, who will remain holders of approximately 25% of our voting
securities, than the prior transaction contemplated with Bioject would have
been. In determining the number of shares to issue to Permatec in the Share
Transaction, the Board considered that in a combination of us and the
Subsidiaries, the value of the Subsidiaries would be approximately 60% to our
40% on a fully-diluted basis. The 2,900,000 shares of our common stock to be
issued to Permatec reflects this breakdown. At its January 21, 2000 meeting,
the Board of Directors had a discussion regarding our failed attempts at
accessing other avenues of capital infusion available in the marketplace. The
Board then determined that the transaction with Permatec appeared to be the
most viable option to maintain the best value for our shareholders. At such
meeting, the Board approved a Non-Binding Letter of Intent to engage in the
transaction with Permatec.
24
Since the execution of the Non-Binding Letter of Intent, and as contemplated
in such Letter of Intent, Permatec has been providing financing for our
operations in the form of convertible promissory notes. On January 25, 2000 and
again on April 3, 2000, we entered into a Convertible Note Purchase Agreement
with Permatec. Pursuant to such agreements we issued the following convertible
promissory notes payable to Permatec:
Amount of
Date of Note Note
------------ ----------
January 25, 2000 $ 250,000
February 29, 2000 250,000
April 3, 2000 500,000
May 2, 2000 250,000
May 25, 2000 350,000
June 26, 2000 350,000
July 26, 2000 250,000
August 22, 2000 350,000
September 22, 2000 350,000
----------
$2,900,000
The January 25, 2000 and February 29, 2000 notes, as amended, are
collectively referred to as the "First Notes", the remaining notes, as amended,
are collectively referred to as the "Second Notes" and the First Notes and
Second Notes are collectively referred to as the "Permatec Notes."
Under the two Convertible Note Purchase Agreements, Permatec agreed to
invest up to $4,500,000 in Medi-Ject; currently the Permatec Notes total
$2,900,000. In the event that a transaction with Permatec is not consummated
prior to November 30, 2000, the payment of the Permatec Notes will be affected.
The First Notes will be due on the earlier of December 31, 2000 or the date of
a closing of a transfer or license agreement with a third party with respect to
our AJ1 Technology ("AJ1 Technology Closing"). The Second Notes will be due on
the earlier of (1) May 25, 2002; (2) the date of an AJ1 Technology Closing; (3)
the date on which we have at least $7,000,000 in proceeds from any financing;
(4) the consummation of a transaction, such as a merger, consolidation,
acquisition of 20% or more ownership, with a party other than Permatec and (6)
the date of a shareholder meeting at which the shareholders do not approve an
amendment to increase the authorized capital stock. Furthermore, if the Share
Transaction is not consummated prior to November 30, 2000, the outstanding
principal balance of the Permatec Notes will accrue interest at an annual rate
of 10%. The Permatec Notes will automatically convert into Medi-Ject Series C
Convertible Preferred Stock on the later of: (a) the date we have amended our
Articles of Incorporation increasing our authorized common stock to at least
10,000,000 (see Proposal 2) and obtain any necessary approvals under the
listing requirements for the Nasdaq Stock Market or (b) the closing of the
Share Transaction with Permatec.
KPMG LLP, in its Independent Auditors' Report dated February 18, 2000,
stated that substantial doubt has been raised about our ability to continue as
a going concern. In April, 2000, we were notified by Nasdaq/Amex that we no
longer meet certain requirements for continued listing on The Nasdaq SmallCap
Market. As a result, our eligibility for continued listing on The Nasdaq Stock
Market is being reviewed. In May, we provided to Nasdaq a plan for achieving
compliance during the second and third quarter of this year. This plan
included, among other things, the Share Transaction and additional equity
financing. A representative from Nasdaq called in June to inquire about the
status of the Share Transaction. Upon the filing of the preliminary proxy
statement, Lawrence Christian, our Chief Financial Officer, notified Nasdaq
that the Purchase Agreement was signed and that the preliminary proxy statement
was filed. We have spoken with representatives of Nasdaq to update them on the
progress of the Share Transaction but have not received any formal notice of
any action they may intend to take.
From January through June, we actively negotiated the terms of the Purchase
Agreement with Permatec while continuing our evaluation and due diligence
review of Permatec and the Subsidiaries. On numerous occasions, Franklin Pass,
M.D. visited the Permatec facilities and met with Dr. Jacques Gonella and
25
Dr. Philippe Dro. Dr. Peter Sadowski, our Executive Vice President and Chief
Technology Officer, also visited the facilities in order to conduct an
extensive review of the Subsidiaries' intellectual property. At meetings with
our Board of Directors, Lawrence Christian, our Chief Financial Officer,
presented various pro forma financial statements, while Dr. Pass presented an
oral report covering the license agreements and relationships of the
Subsidiaries and Dr. Sadowski also provided an oral report as to the possible
synergies that could result from a transaction with Permatec and updates on the
status of negotiations. Dr. Sadowski's presentation also focused on the patent
portfolio and technologies of the Subsidiaries. During this time, the Board of
Directors had numerous discussions regarding the Share Transaction and any
possible alternatives. The Board of Directors determined, on a number of
occasions, that Dr. Pass should continue negotiations with Permatec.
The Board considered that the Share Transaction provides an opportunity to
create a new drug delivery company with several diverse delivery platforms and
new pharmaceutical alliances with the potential to enhance our operations and
revenues. The Board, however, considered that there can be no assurance that
such improvements will be realized due to several factors, including:
. the integration of the operations and management of Medi-Ject and the
Subsidiaries will be a complex process and there can be no assurance
that the integration will be completed quickly or will result in the
realization of all the anticipated benefits we expect;
. the integration of the companies will require significant management
attention that may temporarily distract management from its regular
focus on the daily operations of the business; and
. the expected costs and expenses as a result of the Share Transaction
On June 5, 2000, the Board agreed that the only realistic alternative to the
Share Transaction is for Medi-Ject to discontinue operations. The Board further
agreed that shareholder value has a greater potential of increasing under the
Share Transaction than under a liquidation. After careful consideration, the
Board unanimously determined that the terms of the Share Transaction are fair
to and in the best interests of Medi-Ject and its shareholders and unanimously
approved the Share Transaction and authorized the execution of a stock purchase
agreement with Permatec. On June 23, 2000 we executed a stock purchase
agreement with Permatec. Subsequent to the execution of that stock purchase
agreement, we and Permatec determined that it was in the best interests of both
parties to rescind and waive that stock purchase agreement and for the Board of
Directors to form a committee of disinterested directors to review the terms of
all transactions with Permatec in order to ensure compliance with the
procedures required in Section 302A.673 of the Minnesota Business Corporation
Act. This Section of Minnesota Law would prohibit Permatec from entering into
any business combination with us subsequent to the Share Transaction unless the
Share Transaction was approved by a committee of disinterested directors, as
such term is defined in the statute.
In accordance with Section 302A.673, on July 13, 2000, our Board of
Directors appointed a Committee of Disinterested Directors. The purpose of this
committee was to evaluate and potentially approve any financing or share
transaction with Permatec. The Board appointed Kenneth Evenstad, Karl Groth,
Geoffrey Guy, M.D., Fred L. Shapiro, M.D. and Stanley Goldberg to serve on the
committee, which directors constituted all of the disinterested directors (as
defined in Section 302A.673, Subd. 1(d) of the Minnesota Statutes). Because
Franklin Pass, M.D. is our employee, he was not eligible to serve on the
committee. The committee further considered the Share Transaction, adopted the
findings of the Board and by unanimous written consent dated July 14, 2000,
approved the Purchase Agreement. We, Permatec and the Subsidiaries executed the
Purchase Agreement on July 14, 2000. We amended the Purchase Agreement on
October 17, 2000 to extend the date on which a party may terminate the Purchase
Agreement.
ADVANTAGES AND DISADVANTAGES OF APPROVING THE SHARE TRANSACTION
The advantage of the Share Transaction is that it gives us an opportunity to
continue operations and possibly, to achieve the benefits that we believe may
result from combining our business with the Subsidiaries. When we began
actively negotiating the terms of the transaction with Permatec in January,
2000, our stock price was trading at approximately $1.50. In August, it
increased into the $5.00 range. Although factors in
26
addition to the announcement of the Share Transaction most likely contributed
to the increase in stock price, our continued operations, funded to a large
degree by Permatec since January, 2000, have increased shareholder value. If
the Share Transaction is not approved, we will be forced to stop operations.
If we stop operations, we will attempt to sell our assets. We do not expect,
however, that such a liquidation sale would be very profitable due to the
nature of our assets and our market. For example, most of our value is related
to our technology. The market for such technology in a liquidation context is
very limited. Even if a party is interested in purchasing the technology,
there is no guaranty that the party will have sufficient funds to do so. It is
likely that, after payment to our creditors, no money resulting from a
liquidation sale will be available to shareholders, and the shareholders will
lose the total value of their investment.
A disadvantage of the Share Transaction is that the current shareholders are
diluted and a change in control results. The Share Transaction results in
Permatec (and indirectly, Permatec's shareholder Dr. Jacques Gonella) becoming
our majority owner. Based on the amounts of the promissory notes as of
September 25, 2000, if Permatec converts the shares of preferred stock, it
will own a total of 75.3% of our outstanding common stock. In the event we
borrow the maximum amount available from Permatec of $4.5 million, it will own
78.3% of our outstanding common stock. Dr. Gonella beneficially owns 96.9% of
the outstanding capital stock of Permatec and accordingly will have the
ability to unilaterally approve most, if not all, of Permatec and our
corporate actions, including the election of directors and the appointment of
officers.
Another disadvantage of approving the Share Transaction is that there will be
additional risks to our shareholders. See "Risk Factors Regarding the
Subsidiaries" beginning on page 18 and "Existing Shareholders; Impact on
Market Value and Dilution of Medi-Ject Common Stock and Related Risks" on
page 31.
Based on the determination of the Committee and the Board's considerations,
the Board of Directors recommends that the shareholders approve the Share
Transaction.
TERMS OF THE PURCHASE AGREEMENT
Purchase of Subsidiaries' Stock and Issuance of Medi-Ject common
stock. Pursuant to the Purchase Agreement, Permatec has agreed to transfer the
Subsidiaries' Stock to us. In exchange, we will issue 2,900,000 shares of
Medi-Ject common stock (representing approximately 67% of the Medi-Ject common
stock outstanding at that time) to Permatec.
Board of Directors. Pursuant to the Purchase Agreement, upon the closing, Karl
Groth, Geoffrey Guy, M.D., Fred L. Shapiro, M.D. and Stanley Goldberg will
submit resignations to our Board of Directors and the remaining two directors
will appoint the following designees of Permatec: Dr. Jacques Gonella, Dr.
Thomas M. Rinderknecht, Professor Ubaldo Conte and Dr. Philippe Dro to fill
the vacancies. Franklin Pass, M.D. and Kenneth Evenstad will remain on the
Board of Directors.
The Closing. The Purchase Agreement contemplates a closing to occur on the
later of August 31, 2000 or the fifth business day after the conditions set
forth in the Purchase Agreement are either satisfied or waived.
Representations and Warranties. We made to Permatec and the Subsidiaries and
Permatec and the Subsidiaries made to us a number of representations and
warranties that are standard in acquisition agreements.
Covenants and Agreements. In the Purchase Agreement, each party made covenants
and agreements regarding actions during the time period prior to the closing.
For instance, each party has agreed to grant access to certain
representatives, such as officers, legal counsel, and independent certified
public accountants, of the other party to review its properties, books and
records. The Purchase Agreement requires that until the closing, we are to
carry on our business and each Subsidiary is to carry on its respective
business in a certain manner that is consistent with its past practices and
shall refrain from changing its capitalization and existing plans or
arrangements (including compensation, benefit plans or accounting practices).
27
A party seeking to take any actions inconsistent with such covenants or
agreements must obtain the written agreement and consent of the non-acting
party. In addition, the parties agree to confer on a regular basis and inform
each other of any potential material adverse effect on its respective business
or on the transactions contemplated. The parties will use their best efforts to
consummate the transactions of the Purchase Agreement, including obtaining any
necessary consents or giving any required notices. We also agreed to file this
Proxy Statement and Permatec agreed to use commercially reasonable efforts to
raise at least $7,000,000 for us and the Subsidiaries. Permatec also agreed to
prepare a business plan for 2000 and 2001; our Board of Directors will review
and if acceptable, approve the business plan. Permatec will also search for a
new chief executive officer to replace Franklin Pass, M.D. We will assist
Permatec in this search and our Board of Directors has the right to approve the
candidate.
Conditions. Our obligations to perform the Purchase Agreement are subject to
conditions (some of which can be waived). In addition to the standard
conditions, the conditions include:
. the Subsidiaries having an aggregate cash reserve or cash equivalents of
at least 1,000,000 Swiss francs
. a private equity placement in an aggregate of at least $7,000,000
resulting from Permatec's efforts is in a position to close upon the
completion of the Share Transaction
In addition to the standard conditions, the obligations of Permatec and the
Subsidiaries to perform the Purchase Agreement are subject to conditions
including:
. absence of changes that would have a material adverse effect on us,
including any formal notification from the Nasdaq Stock Market that our
common stock has been delisted
. acceptance of resignations of directors Karl Groth, Geoffrey Guy, M.D.,
Fred L. Shapiro, M.D. and Stanley Goldberg and appointment of Dr.
Jacques Gonella, Dr. Thomas M. Rinderknecht, Professor Ubaldo Conte and
Dr. Philippe Dro to our Board of Directors
. our delivery to Permatec of shares of Medi-Ject Series C Preferred Stock
upon conversion of the Permatec Notes
. our receipt of consents from each of: Elan Corporation, plc., Bio-
Technology General Corp., Becton Dickinson, Grayson & Associates, Inc.
(a waiver of any fees/commissions in connection with the Share
Transaction has been received from Grayson & Associates, Inc.)
. the execution of an amendment, in form satisfactory to Permatec, of the
License and Development Agreement with Elan Corporation, plc.
. execution of lock-up agreements with the following people: Lawrence
Christian, Michael Kasprick, Kenneth Evenstad, Julius Sund and Peter
Sadowski.
Obligations of all parties are contingent on the:
. execution and delivery of an Employment Agreement between us and
Franklin Pass, M.D.
. receipt of governmental consents and corporate approvals (including the
approval of our shareholders for this Proposal 1 and for Proposal 2 ).
Conversion of Permatec Notes. As a condition to closing, Permatec will
deliver the Permatec Notes to us for cancellation and we will convert the
Permatec Notes into shares of Series C Convertible Preferred Stock. See
Proposal 3--The Series C Stock Conversion Proposal for additional information.
Registration Rights Agreement. As a condition to closing, we will enter into
a Registration Rights Agreement with Permatec. Pursuant to such agreement, we
grant Permatec certain piggy-back registration rights relating to the Medi-Ject
common stock it is acquiring in the Share Transaction and agree to pay all
registration expenses. The Registration Rights Agreement also provides for
indemnification by each party in certain circumstances.
28
Lock-Up Agreements. As a condition to closing, a lock-up agreement will be
entered into with each of the following individuals: Lawrence Christian,
Michael Kasprick, Kenneth Evenstad, Julius Sund and Peter Sadowski. These
agreements will restrict those individuals from selling Medi-Ject common stock
held by them for varying periods of up to twelve months from the closing of the
Share Transaction.
Indemnification and Escrow Agreement. In the Purchase Agreement, we,
Permatec, and the Subsidiaries make and agree to a number of representations,
warranties, covenants and obligations. In the event that any claims, costs,
loss, liability, expense or other damage (including third party claims) result
from a breach of the representations, warranties, covenants or obligation, a
non-breaching party may seek indemnification from the breaching party. Notices
of all claims for indemnification must be given on or prior to the sixth month
anniversary of the closing date. Neither we nor Permatec shall be liable to the
other until the aggregate of claims exceed $50,000 and then, only to the extent
such claims exceed $50,000.
In accordance with an escrow agreement, Permatec will be required to place
580,000 shares of Medi-Ject common stock into an escrow account. Permatec will
not be liable to the extent that aggregate claims exceed the value of the
shares held in escrow. Such limitation, however, will not apply to damages
resulting from any Subsidiary's fraud or willful or intentional
misrepresentation or intentional or willful breach. We will not be liable to
the extent that aggregate claims exceed the value of the shares held in escrow.
Notwithstanding the foregoing and without limitation as to time or amount,
Permatec must indemnify Medi-Ject and the Subsidiaries from certain claims
arising from the subsidiaries of Permatec not being acquired pursuant to the
Purchase Agreement, and any claims in respect of the share ownership of
Permatec NV.
Termination. The Purchase Agreement provides that it may be terminated: by
the mutual consent of the parties or by any party if the conditions to closing
have not been met by November 30, 2000 (unless the conditions were not met
solely as a result of the party seeking to terminate). In the event of
termination, the Purchase Agreement would be of no further force or effect. A
party would, however, remain liable beyond the termination of the Purchase
Agreement for its pre-termination breach of representations, warranties,
covenants or agreements it made in the Purchase Agreement. Furthermore, in the
event that a closing does not occur due to Permatec's failure to satisfy its
conditions, the period in which we have to repayment of the Permatec Notes
shall be extended for an additional three (3) months. In addition, the
Confidentiality Agreement entered into by and among the parties on April 21,
1999 shall continue to be in effect in accordance with its terms.
Fees and Expenses. All fees, costs and expenses in connection with the
Purchase Agreement, will be paid by the party incurring such expenses. In the
event, however, that a legal action is instituted to enforce or interpret the
Purchase Agreement, the prevailing party in such action shall be, in addition
to any other relief awarded, entitled to the reimbursement of attorneys' fees.
We have, however, agreed to reimburse Permatec and the Subsidiaries for certain
expenses related to the preparation of this proxy statement and the private
placement memorandum, incurred on our behalf.
CHANGE OF NAME
By approving the Share Transaction, you approve that, upon the closing, we
will amend our Second and Amended Restated Articles of Incorporation, as
amended, to change Article 1 to read, in its entirety:
"ARTICLE 1. NAME
The name of the Corporation is Antares Pharma, Inc."
29
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
When our Board of Directors considered the Share Transaction, the directors
were aware that certain of our officers and directors have interests and
arrangements that may be different from, or in addition to, your interest as a
shareholder. Pursuant to their respective employment agreements, each dated as
of May 1, 2000, with us, Lawrence M. Christian and Peter L. Sadowski will each
receive, upon the closing of the Share Transaction a bonus and a stock option
grant. We will give Mr. Christian a bonus of $12,000 (payable in four
installments that will begin on the business day following the closing date of
the Share Transaction and will be subsequently payable on the last business day
of each of the next three calendar quarters) and we will grant, on the closing
date of the Share Transaction, a stock option to Mr. Christian to purchase
5,000 shares of Medi-Ject common stock. We will give Dr. Sadowski a bonus of
$17,000 (payable in four installments that will begin on the business day
following the closing date of the Share Transaction will be subsequently
payable on the last business day of each of the next three calendar quarters)
and we will grant, on the closing date of the Share Transaction, a stock option
to Dr. Sadowski to purchase 5,000 shares of Medi-Ject common stock. Under an
Employment Agreement, the vesting of the options granted to Franklin Pass, M.D.
will accelerate upon a change in control. Dr. Pass holds 131,517 share options
that have an exercise price of $1.5625, of which 121,517 of these options were
repriced January 3, 2000. Further details regarding the repricing are set forth
on page 62. At or prior to the closing date of the Share Transaction, Dr. Pass
will enter into a new Employment Agreement pursuant to which we will pay him
the following bonuses: $25,000 payable at the closing of the Share Transaction
and an additional $25,000 payable at the closing of the Share Transaction if
Dr. Pass is successful (as determined by Dr. Jacques Gonella) in negotiating
revisions to a licensing agreement to which we are a party. All outstanding
options will be 100% exercisable upon the closing of the Share Transaction.
VOTE REQUIRED; QUORUM
Under the Nasdaq Stock Market Rule 4310(c)(25)(G)(i), shareholder approval
is required for our issuance of securities that results in a change of control
of our company (the "Control Rule"). There is no concrete test to determine the
amount of securities that we may issue to a party without triggering the
Control Rule. Additionally, to the extent that such rule could be implicated
due to the Share Transaction under the Nasdaq Stock Market Rule
4310(c)(25)(G)(i) applicable to Nasdaq SmallCap issuers, shareholder approval
is required for an issuance of common stock (or securities convertible into or
exercisable for common stock) equal to 20% or more of the common stock or 20%
or more of the voting power outstanding before the issuance (the "20% Rule").
We are seeking approval to allow for the issuance of the 2,900,000 shares of
Medi-Ject common stock in order to ensure compliance with Nasdaq's Control Rule
and the 20% Rule.
For each share of Medi-Ject common stock held on the record date, a
shareholder is entitled to one vote on each matter submitted to a vote at the
Annual Meeting. A majority of shares of Medi-Ject common stock outstanding on
the record date constitutes a quorum at the Annual Meeting. With a quorum
present, a majority of the total votes cast on the proposal in person or by
proxy constitutes shareholder approval for purposes of the Nasdaq Stock Market.
With a quorum present, the Minnesota Business Corporation Act requires the
affirmative vote of the holders of a majority of the outstanding shares of
Medi-Ject common stock present, in person or by proxy, and entitled to vote on
that item of business.
NO DISSENTERS' RIGHTS
Under Minnesota law, Medi-Ject shareholders do not have dissenters' rights
in the Share Transaction.
30
EXISTING SHAREHOLDERS; IMPACT ON MARKET VALUE AND DILUTION OF MEDI-JECT COMMON
STOCK AND RELATED RISKS
There will be no material differences in the rights of our shareholders
following the consummation of the Share Transaction. If the Share Transaction
is approved, we will amend our Second and Amended Restated Articles of
Incorporation, amended to date, to change our name to "Antares Pharma, Inc."
Following such amendment, any new stock certificates issued by us will bear the
new name. Shareholders holding stock certificates bearing the name "Medi-Ject
Corporation" will continue to be shareholders and will not be required to
exchange their stock certificates with our transfer agent for certificates
bearing the new name.
The issuance of the Medi-Ject common stock to Permatec in connection with
the Share Transaction will dilute the current shareholders' voting power. In
addition, the proposed Share Transaction will result in a significantly
increased concentration of ownership by a single shareholder and may cause a
decline in Medi-Ject common stock's market value. Dr. Gonella beneficially
holds 96.9% of the outstanding stock of Permatec, Medi-Ject's majority
shareholder upon the closing of the Share Transaction. Accordingly, Dr. Gonella
will be able to exercise significant control over the affairs of Medi-Ject,
including approval of the acquisition or disposition of assets, future
issuances of common stock or other securities and the authorization of
dividends on Medi-Ject's common stock. Dr. Gonella could use his stock
ownership to delay, defer or prevent a change of control of Medi-Ject,
depriving shareholders of the opportunity to sell their stock at a price in
excess of the prevailing market price.
As part of the Share Transaction, we are engaged in a search for a chief
executive officer to replace Dr. Pass, who will continue to serve as our
chairman. In addition, we also plan to appoint a new Chief Financial Officer by
the end of 2001. There is no assurance that we will find suitable candidates in
the near future to serve in such roles or that such candidates will manage our
business effectively.
There is no assurance that the integration of our operations with those of
the Subsidiaries will result in the realization of the full benefits that we
expect. The integration of the companies involves risks, including that:
.the attention and effort devoted to the integration will significantly
divert management's attention from other issues
.the process of integrating operations could cause an interruption of our
ongoing business activities
.the benefits from the Share Transaction may be offset by costs incurred in
the integration
ACCOUNTING TREATMENT OF THE SHARE TRANSACTION
The Share Transaction will be accounted for under the purchase method as a
reverse acquisition as Permatec will hold approximately 67% of the outstanding
common stock of Medi-Ject after the Share Transaction. We will continue as a
publicly-traded company in the United States and the historical financial
statements of the Subsidiaries will be used for financial reporting purposes.
FEDERAL INCOME TAX CONSEQUENCES OF THE SHARE TRANSACTION
The Share Transaction is intended to constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of
1986, as amended (the "Code") and the tax laws of Switzerland. Whether or not
the Share Transaction constitutes a tax free reorganization, the parties intend
to close the Share Transaction. Because the Share Transaction is between Medi-
Ject and Permatec, the shareholders of Medi-Ject will have no tax consequences
arising from the Share Transaction.
REGULATORY APPROVAL
We are not aware of any approval required by a state or federal regulatory
agency in order to consummate the Share Transaction.
31
NO FAIRNESS OPINION
The Board of Directors chose not to obtain a "fairness" opinion from an
investment banking firm concerning the Share Transaction. The Purchase
Agreement and the related documents were negotiated at arm's length between
Permatec and us. Because of our limited financial resources, the Board of
Directors did not believe that it was in the best interests of the company or
the shareholders to incur the cost of a fairness opinion.
PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
While negotiating the Purchase Agreement, Permatec agreed to invest up to
$4,500,000 in Medi-Ject. On each of January 25, 2000 and April 3, 2000, we
entered into a Convertible Note Purchase Agreement with Permatec. Pursuant to
the two Convertible Note Purchase Agreements, we issued the following
convertible notes in the aggregate amount of $2,900,000:
Amount
Date of Note of Note
------------ ----------
January 25, 2000 $ 250,000
February 29, 2000 250,000
April 3, 2000 500,000
May 2, 2000 250,000
May 25, 2000 350,000
June 26, 2000 350,000
July 26, 2000 250,000
August 22, 2000 350,000
September 22, 2000 350,000
----------
Total $2,900,000
==========
The Permatec Notes will automatically convert into Series C Stock on the
later of: (a) the date we have amended our Articles increasing our authorized
capital stock to at least 10,000,000 (see Proposal 2) and obtain any necessary
approvals under the listing requirements for the Nasdaq Stock Market or (b) the
closing of the Share Transaction with Permatec. See Proposal 3--The Series C
Stock Conversion Proposal.
32
FINANCIAL INFORMATION
SUMMARY OF HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables show the financial results actually achieved by
Permatec and its five subsidiaries (collectively, the "Group") and Medi-Ject
(the "historical figures") as well as the results as if the companies had been
combined for the periods presented (the "pro forma combined" figures). The
subsidiaries commenced operations as follows: Technologie 1998; Argentina 1993;
NV 1993; France 1996; and Pharma 1997.
SELECTED HISTORICAL AND PRO FORMA DATA AS OF DECEMBER 31, 1999 AND JUNE 30,
2000
THE GROUP'S SELECTED HISTORICAL CONDENSED FINANCIAL DATA
The following selected historical condensed financial data should be read in
conjunction with the Group's audited consolidated financial statements and
related notes which are included in this Proxy Statement and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein. This selected historical condensed financial data includes the
financial information of the Group. The balance sheet data as of December 31,
1995 and 1996 and the statement of operations data for each of the years then
ended have been derived from the unaudited consolidated financial statements of
the Group. The balance sheet data as of December 31, 1997, 1998 and 1999 and
the statement of operations data for each of the years then ended have been
derived from the Group's consolidated financial statements, which have been
audited by KPMG Fides Peat and are included elsewhere in this Proxy Statement.
The selected historical condensed financial data for the six months ended June
30, 2000 and 1999, were derived from the unaudited consolidated financial
statements of the Group included in this Proxy Statement, which in the opinion
of management reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of interim data. Information for
any interim period is not necessarily indicative of results that may be
anticipated for a full year. Similarly, historical results are not necessarily
indicative of the results to be expected in the future.
As of December 31, As of
------------------------------------------------------------ June 30,
1995 1996 1997 1998 1999 2000
--------- ---------- ----------- ----------- ----------- ------------
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 14,382 $ (61,822) $ 113,551 $ (109,380) $ (569,352) $ (240,851)
Total assets............ 200,230 1,176,942 1,656,363 2,670,634 2,284,355 4,942,883
Long-term obligations... 473,107 1,601,663 3,328,058 7,918,414 10,099,163 14,173,294
Stockholders' deficit... (351,153) (681,651) (2,204,135) (6,517,619) (9,347,324) (10,805,758)
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ 141,522 $ -- $ 144,828 $ 246,838 $ 1,351,607 $ 1,336,869 $ 800,000
--------- ----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Research and
development........... 336,572 430,412 796,410 1,749,666 1,647,059 853,754 410,228
Marketing and sales.... -- -- 69,794 178,741 213,110 81,846 522,886
General and
administrative........ 129,767 748,779 1,225,989 2,431,638 3,220,514 1,448,004 1,290,411
--------- ----------- ----------- ----------- ----------- ----------- -----------
466,339 1,179,191 2,092,193 4,360,045 5,080,683 2,383,604 2,223,525
--------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss.......... (324,817) (1,179,191) (1,947,365) (4,113,207) (3,729,076) (1,046,735) (1,423,525)
Other income (expense).. (5,998) 8,564 (54,550) (124,372) (159,120) (51,394) (279,508)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before income
taxes.................. (330,815) (1,170,627) (2,001,915) (4,237,579) (3,888,196) (1,098,129) (1,703,033)
Income tax expense...... (45,582) (4,453) (53,862) (32,427) (79,170) (37,050) (1,002)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss attributed to
common
stockholders........... $(376,397) $(1,175,080) $(2,055,777) $(4,270,006) $(3,967,366) $(1,135,179) $(1,704,035)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ 62.73 $ 195.85 $ (342.63) $ (533.75) $ (396.74) $ (113.52) $ (170.40)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted
weighted average number
of shares outstanding.. 6,000 6,000 6,000 8,000 10,000 10,000 10,000
========= =========== =========== =========== =========== =========== ===========
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
The Group's business consists of developing new, or improving existing,
technology for the delivery of drug compounds. As a niche drug delivery
technology company, the Group develops highly specialized formulations to
address the need to deliver drugs through connective tissues like skin and
mucosa. The Group has developed a technology and patent portfolio encompassing
four main areas: patches, gels, fast dissolving tablets and transbuccal
tablets. The Group's strategy is to license its technology to development and
marketing partners through a combination of license and development agreements,
as well as research and development collaborations.
Permatec is a private Swiss holding company, founded in 1997, whose
principal wholly owned subsidiaries consist of Permatec Pharma AG
(Switzerland), Permatec Technologie AG (Switzerland) and Permatec NV
(Netherlands Antilles). As discussed below, the other two subsidiaries are in
the process of being liquidated. Permatec Laboratorios SA ("Permatec
Argentina"), was initially founded in Argentina in 1996 as part of the JAGO
group. JAGO was a Swiss oral drug delivery company that was sold in 1996 by its
founder Dr. Jacques Gonella, the principal shareholder of Permatec, to
SkyePharma, a United Kingdom company traded on the London Stock Exchange and
Nasdaq Stock Market. Permatec Argentina was not acquired by SkyePharma as part
of the JAGO group transaction and subsequently became a wholly owned subsidiary
of Permatec, along with Permatec Pharma, Permatec Technologie and Permatec NV,
each of which was acquired in 1996 by the persons who later founded Permatec.
In 1999, the Group restructured its operations into one location in Basel,
Switzerland and commenced the liquidation of Permatec France. Permatec
Argentina's operations in Buenos Aires, Argentina consisted primarily of a
research facility and Permatec France, SA's operations in Lyon, France
consisted of business development and regulatory matters. To reduce costs
associated with operating a small company in different countries, the Group
decided to consolidate its operations in Basel, Switzerland, the location of
many pharmaceutical companies in Europe. Facilities in both France and
Argentina were closed. As a result of this restructuring, the Group incurred a
restructuring charge of $454,428 during the fiscal year ended December 31,
1999, and $266,790 for the six-month period ended June 30, 2000. The
restructuring programs are now substantially complete. After the closing of the
transaction, Permatec Argentina and Permatec France will remain wholly owned
subsidiaries of Permatec. Any costs incurred or benefits obtained with respect
to the dissolution of these subsidiaries will affect Permatec and not Medi-
Ject.
The Subsidiaries have entered into various product development, licensing,
marketing, manufacturing and supply agreements with collaborative partners.
Product development and licensing agreements generally provide for the Group to
receive payments in various forms. These payments can include licensing fees
and other payments upon the execution of an agreement, milestone payments upon
achievement of certain technical and regulatory goals, or periodic payments in
the form of cost reimbursements for product development.
Results of operations may vary significantly from quarter to quarter. These
results depend upon, among other factors, the signing of new product
development agreements, the timing of fees and milestone payments made by
collaborative partners, the progress of clinical trials, product sales levels
and costs associated with the manufacturing processes. The timing of research
and development revenues may not match the timing of the associated expenses.
The amount of revenues in any given period is not necessarily indicative of
future revenues.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 compared to the six months ended June 30, 1999.
REVENUES. Revenues decreased by 40.2% from $1,336,869 in 1999 to $800,000 in
2000. In 1999 the Group received $1 million, upon the achievement of a
milestone, while development revenue during the first six months of 2000 were
$710,000 and license fees were $90,000.
34
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by 51.95% from $853,754 in 1999 to $410,228 in 2000. The decrease was
attributable to the closing in 1999 of operations in Argentina and France.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 10.9% from $1,448,004 in 1999 to $1,290,411 in 2000 due to the
closure of operations in France and Argentina.
The Group recorded USD 266,790 of restructuring expenses during the six
month period ended June 30, 2000. Such expenses are in connection with the
dissolution of Permatec Laboratorios (Permatec Argentina), and the related
closure of the Group's research and development facility in Argentina and the
dissolution of Permatec France and the related terminated of employees
associated with the Group's business development, patent administration,
project management and administrative functions in France. The Group has
recorded all restructuring charges incurred during the six months ended June
30, 2000, as general and administrative expenses.
The restructuring charges incurred during the six months ended June 30, 2000
included involuntary severance benefits of USD 178,257 for two employees of the
Group's French operations resulting from an out of court arbitration settlement
finalized in March 2000. During 1999, at the time the original restructuring
plan was formulated, management was unable to estimate the severance benefit
for these two employees. In connection with the restructuring activities which
commenced in 1999 approximately 25 employees were terminated, 13 of which
received involuntary severance benefits.
As a result of management's ongoing review of the restructuring activities
related to the dissolution of Permatec France and Permatec Argentina, which
commenced in 1999, the Group recorded charges of approximately USD 17,000
related to the write-off of certain equipment which was to be disposed of via
scrap at its French subsidiary in the six months ended June 30, 2000.
Accordingly, the Group adjusted the carrying value of the equipment to zero,
resulting in an impairment charge of USD 17,000. The Group also incurred
restructuring related expenses of USD 71,533 in the six months ended June 30,
2000 related to certain other incremental costs of exiting its facilities
including legal and consulting fees, and lease termination costs.
The Group has undertaken these restructuring actions as part of its effort
to reduce costs and to centralize its developmental and administrative
functions in Switzerland. These restructuring programs are now substantially
complete. The following table provides a summary of the Group's restructuring
provision activity:
Asset
Severance & Impairment Facilities,
Benefits (non-cash) Legal & Total
USD USD Other USD USD
----------- ---------- ----------- --------
Balance December 31, 1999..... 179,288 -- 101,528 280,816
-------- ------- -------- --------
2000 restructuring expenses... 178,257 17,000 71,533 266,790
Amount utilized in the six
months ended June 30, 2000... (357,545) (17,000) (173,061) (547,606)
-------- ------- -------- --------
Balance June 30, 2000......... -- -- -- --
======== ======= ======== ========
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 539%
from $81,846 in 1999 to $522,886 in 2000. The majority of the increase during
the first six months of 2000 was attributable to additional consulting expenses
of approximately $330,000 related to market analysis studies and public
relations costs. Approximately $111,040 was attributable to increases in Travel
and Key Account (Client) Management expenses.
OTHER INCOME (EXPENSE). Net interest and other expenses increased 443.9%
from $51,394 in 1999 to $279,508 in 2000 due to higher average borrowings
during the period.
35
Year ended December 31, 1999 compared to year ended December 31, 1998.
REVENUES. Total revenues increased from $246,838 in 1998 to $1,351,607 in
1999. The increase in revenues was primarily a result of the commencement of
licensing activities and the receipt of milestone payments from development
agreements.
License revenues increased 362% from $67,528 in 1998 to $311,740 in 1999.
License revenues were primarily attributable to signing on fees for new
development contracts with Solvay and Segix related to the NETA/Estradiol
Combi-gel and Estradiol patch, respectively. Product development fees were
$1,036,533 in 1999 compared to none in 1998. The Group received other revenue
of $179,310 in 1998 due to undertaking sub-contract work for a related company.
The corresponding amount in 1999 was $3,334 a reduction of 98%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by 5.9% from $1,749,666 in 1998 to $1,647,059 in 1999. The decrease
was attributable to the partial closing of operations in France in late 1999 as
the first action in restructuring the Group. The future level of research and
development expenditures will depend on, among other things, the status of
products under development and the outcome of clinical trials, strategic
decisions by management, and the consummation of new license agreements.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 32.4% from $2,431,638 in 1998 to $3,220,514 in 1999 due to a $454,428
restructuring charge and to increases in rent, office expenses and personnel
costs for new employees in the office in Basel.
The restructuring expenses are in connection with the closure of the Group's
developmental facility in Argentina and termination of employees associated
with the Group's business development, patent administration, project
management and administrative functions in France.
The restructuring charge is primarily comprised of involuntary severance
benefits and other incremental costs of exiting facilities, including lease
termination costs, and write-off of certain assets. In connection with the
closure of these facilities, the Group has involuntarily terminated
approximately 25 employees, of which 13 were entitled to receive severance
benefits from the Group.
The Group reported charges of approximately USD 103,400 related to the
write-off of assets which were disposed of in connection with the closure of
the France and Argentina facilities for the year ended December 31, 1999. The
assets disposed of consisted of certain laboratory equipment and office
equipment that the Group decided not to transfer to its central facilities in
Basel, Switzerland.
The following table provides a summary of the Group's restructuring
provision activity:
Facilities &
Severance & Asset Legal &
Benefits Impairment Other Total
USD USD USD USD
----------- ---------- ------------ --------
Balance December 31, 1998.... -- -- -- --
------- -------- ------- --------
1999 restructuring
provisions.................. 249,500 103,400 101,528 454,428
Amount utilized in 1999...... (70,212) (103,400) -- (173,612)
------- -------- ------- --------
Balance December 31, 1999.... 179,288 -- 101,528 280,816
======= ======== ======= ========
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 19.2%
from $178,741 in 1998 to $213,110 in 1999 mainly due to payments to a
consultant on the signing of new project.
OTHER INCOME (EXPENSE). Net interest and other expenses increased 28% from
$124,372 in 1998 to $159,120 in 1999 due to higher average borrowings during
the period.
36
Year ended December 31, 1998 compared to year ended December 31, 1997.
REVENUES. Total revenues increased 70.4% from $144,828 in 1997 to $246,838
in 1998. The Group received revenue of $144,828 in 1997 due to undertaking sub-
contract work for a related company. The corresponding amount in 1998 was
$179,310. The Group also received $67,528 in 1998 pursuant to its first
licensing agreement.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
increased 120% from $796,410 in 1997 to $1,749,666 in 1998. The increase was
attributable to the continued expansion of Permatec's facilities and the
commencement of client development projects. New product development included
work related to transdermal delivery systems for hormone deficiency.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 98% from $1,225,989 in 1997 to $2,431,638 in 1998, due to the set up
costs and first full year of expenses in the new Basel headquarters and an
increase in staffing and office expenses at the location in France.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 156%
from $69,794 in 1997 to $178,741 in 1998. This increase was a result of more
concerted efforts by the Group in marketing its technologies.
OTHER INCOME (EXPENSE). Interest and other expenses increased 128% from
$54,550 in 1997 to $124,372 in 1998 due to higher average borrowings during the
period.
LIQUIDITY AND CAPITAL RESOURCES
Permatec historically has financed the operations of the Subsidiaries by
obtaining loans from Permatec's controlling shareholders, which loans amounted
to $14,056,801 at June 30, 2000. If the Share Transaction is consummated, the
full principal amount of these loans, along with liabilities to related parties
of $333,480 at June 30, 2000, respectively, will convert to equity at the
closing of the transaction.
As of June 30, 2000, Permatec had $1,191,361 in cash and cash equivalents as
compared to $674,569 at December 31, 1999. Cash used in 1999 funded the net
operating loss, purchase of fixed assets and was offset in part by reductions
in accounts receivable and by increases in accounts payable and compensation
and other accrued liabilities.
Permatec expects to report a net loss for the year ending December 31, 2000
as it continues to incur marketing and development costs related to bringing
future generations of products to market. The long term capital requirements
will depend on numerous factors, including the status of collaborative
arrangements, the progress of research and development programs and the receipt
of revenues from sales of products. Permatec's existing cash resources and
estimated cash to be received from licensing and development agreements will
not be sufficient to fund the Subsidiaries' cash requirements during the
remainder of 2000. Accordingly, Permatec will continue to finance the
operations of the Subsidiaries until the closing of the Share Transaction.
Since January 2000, Permatec has loaned approximately $1,950,000 to Medi-
Ject to fund Medi-Ject's operating expenses. Permatec received convertible
promissory notes from Medi-Ject for such loans, which notes will be convertible
into approximately 9,750 shares of Medi-Ject Series C Convertible Preferred
Stock at the closing of the transaction.
Dr. Gonella has committed to fund Permatec through September 2001; however,
upon the closing of the Share Transaction, he will have no further obligation
to fund the Subsidiaries. To the extent that the Subsidiaries' financial
resources are insufficient to fund future activities, the Subsidiaries will
need to raise additional capital. There can be no assurance that such
additional capital will be available. The inability to obtain additional
financing on reasonable terms when needed would have a material adverse effect
on the the Subsidiaries' business, financial condition, prospects and results
of operations.
37
MEDI-JECT CORPORATION SELECTED HISTORICAL CONDENSED FINANCIAL DATA
The following selected historical condensed financial data should be read in
conjunction with Medi-Ject's audited financial statements and related notes and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Medi-Ject" which are incorporated by reference in this Proxy
Statement. The statement of operations information for the years ended December
31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and
1997 have been derived from Medi-Ject's audited financial statements. The
statement of operations information for each of the years in the three-year
period ended December 31, 1999, and the balance sheet data as of December 31,
1998 and 1999, have been derived from Medi-Ject's financial statements, which
have been audited by KPMG LLP and are incorporated by reference herein. The
selected historical condensed financial data for the six months ended June 30,
1999 and 2000, were derived from the unaudited financial statements of Medi-
Ject incorporated herein by reference, which in the opinion of management
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim data. Information for any interim
period is not necessarily indicative of results that may be anticipated for a
full year. Similarly, historical results are not necessarily indicative of the
results to be expected in the future.
As of December 31, As of
--------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---------- ----------- ----------- ---------- ---------- -----------
BALANCE SHEET DATA:
Working capital
(deficit).............. $ (650,273) $11,187,426 $ 7,804,232 $3,067,746 $ (198,015) $(1,626,395)
Total assets............ 1,240,108 12,955,791 10,047,468 5,334,431 2,010,136 2,129,968
Long-term obligations... 136,206 8,350 1,721 -- 54,094 48,774
Mandatorily redeemable
preferred stock........ -- -- -- -- 250,000 250,000
Stockholders' equity
(deficit).............. (74,165) 12,119,676 9,337,130 4,630,007 802,855 (788,286)
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales.......... $ 1,653,869 $ 1,837,704 $ 1,686,588 $ 2,171,881 $ 2,100,735 $ 959,275 $ 1,228,113
Licensing & product
development........... 920,937 1,854,100 2,030,435 527,364 1,381,127 1,209,608 22,788
----------- ----------- ----------- ----------- ----------- ----------- -----------
2,574,806 3,691,804 3,717,023 2,699,245 3,481,862 2,168,883 1,250,901
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Cost of sales.......... 1,048,937 1,136,272 1,221,051 1,853,715 1,785,464 820,839 885,370
Research and
development........... 1,195,435 2,584,806 2,413,366 3,516,856 2,550,773 1,185,585 562,708
Marketing and sales.... 886,792 1,019,077 1,539,504 947,866 1,058,364 488,235 339,380
General and
administrative........ 1,236,681 1,397,338 1,983,024 2,426,639 1,831,229 974,209 1,085,427
----------- ----------- ----------- ----------- ----------- ----------- -----------
4,367,845 6,137,493 7,156,945 8,745,076 7,225,830 3,468,868 2,872,885
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net operating loss...... (1,793,039) (2,445,689) (3,439,922) (6,045,831) (3,743,968) (1,299,985) (1,621,984)
Other income (expense).. (89,420) 207,121 468,155 276,367 40,529 36,857 (3,528)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ (1,882,459) (2,238,568) (2,971,767) (5,769,464) (3,703,439) (1,263,128) (1,625,512)
Preferred stock
dividends.............. -- -- -- (14,246) (148,452) (50,000) (73,810)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shares.......... $(1,882,459) $(2,238,568) $(2,971,767) $(5,783,710) $(3,851,891) $(1,313,128) $(1,669,322)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per common share.. $ -- $ (2.53) $ (2.12) $ (4.07) $ (2.70) $ (0.92) $ (1.19)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted
weighted average common
shares outstanding..... -- 883,983 1,402,140 1,421,066 1,424,731 1,424,733 1,424,781
=========== =========== =========== =========== =========== =========== ===========
Pro forma net loss per
common share
(unaudited)*........... $ (3.02) -- -- -- -- -- --
===========
Pro forma weighted
average common shares
outstanding
(unaudited)*........... 622,599 -- -- -- -- -- --
===========
- --------
* The unaudited pro forma net loss per common share information for the year
ended December 31, 1995 reflects the impact of the conversion of all
Preferred Shares retroactively as of the date of issuance of the Preferred
Shares. Also, pursuant to the Securities and Exchange Commission
regulations, all common and Preferred Shares issued and options and warrants
granted by the Company during the 12-month period preceding the initial
filing date of the October 1996 public offering have been included in the
1996 year end and pro forma calculation of weighted average common and
common equivalent shares outstanding as if they were outstanding for all
periods presented using the treasury stock method and an offering price of
$27.50 per share.
38
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The selected unaudited pro forma consolidated condensed combined financial
data, which has been derived from the selected historical financial statements,
appearing elsewhere herein or incorporated herein by reference, gives effect to
the Share Transaction. This pro forma combined financial information should be
read in conjunction with the pro forma financial statements and their notes.
For the purpose of the unaudited pro forma condensed combined balance sheet
data, the Group's balance sheet as of June 30, 2000, has been combined with
Medi-Ject's balance sheet of the same date. For the purpose of the unaudited
pro forma condensed combined statements of operations data, the Group's
consolidated results of operations for the year ended December 31, 1999 and the
six months ended June 30, 2000, have been combined with Medi-Ject's results of
operations for the year ended December 31, 1999 and the six months ended June
30, 2000. The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the future operating results or financial
position of the combined enterprise.
As of
June 30, 2000
-------------
Pro Forma Condensed Combined Balance Sheet Data:
Cash and cash equivalents....................................... $1,332,858
Total assets.................................................... 7,535,782
Long-term obligations........................................... 165,267
Stockholders' equity............................................ 5,209,168
Book value per share............................................ 1.20
Six Months
Year Ended Ended
December 31, 1999 June 30, 2000
----------------- -------------
Pro Forma Condensed Combined Statement of
Operations Data:
Net revenue................................. $ 4,833,469 $ 2,050,901
Net loss.................................... (7,948,098) (3,468,194)
Net loss attributable to common
stockholders............................... (8,096,550) (3,542,004)
Net loss per share (basic and diluted)...... (1.87) (0.82)
39
COMPARATIVE PER SHARE DATA
The following table summarizes certain historical and pro forma per share
information for Permatec and Medi-Ject. The following information should be
read in conjunction with the audited and unaudited financial statements of
Permatec and Medi-Ject and the unaudited pro forma condensed combined financial
statement of Permatec and Medi-Ject.
Medi-Ject Permatec Common
Common Stock Stock
------------ ---------------------
Pro Forma
Historical Historical Combined
------------ ---------- ---------
Book Value (Deficit)(1) June 30, 2000....... $ (.55) $(1,080.58) $ 1.20
Dividends Declared(2)....................... -- -- --
Net Loss(3)
Year ended December 31, 1999................ $(2.70) $ (396.74) $(1.87)
Six months ended June 30, 2000.............. $(1.19) $ (170.40) $ (.82)
- --------
(1) The historical book value per share for Medi-Ject and Permatec is based
upon the historical total common stockholders' equity (deficit) of each
respective company divided by the total number of shares of common stock
of each respective company outstanding at June 30, 2000.
The pro forma combined book value per share of Permatec is based upon the
historical total common stockholders' equity (deficit) for Permatec and the
effects of the merger with Medi-Ject divided by pro forma shares of Medi-
Ject outstanding after the transaction.
(2) Neither Medi-Ject nor Permatec has declared or paid any dividends.
(3) The pro forma combined net loss per share of Permatec is based upon the
combined historical net loss for Medi-Ject and Permatec divided by the
average pro forma common shares of the combined entity.
SECURITIES
Permatec is privately held with 5 holders of record of common stock and
10,000 shares outstanding as of June 30, 2000, of which Dr. Gonella
beneficially owns 96.9%.
Medi-Ject is publicly traded on the Nasdaq SmallCap Market. As of July 20,
2000, there were approximately 123 holders of record of common stock and
another estimated 2,198 shareholders whose stock is held by nominees or broker
dealers, with approximately 1,424,869 shares of common stock outstanding. As of
July 20, 2000, there was one holder of record of 1,100 shares of Series A
Preferred Stock and one holder of record of 250 shares of Series B Preferred
Stock outstanding; the shares of Series A Preferred Stock and Series B
Preferred Stock are convertible into a total of approximately 372,446 common
shares.
40
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Medi-Ject will issue 2,900,000 shares of its common stock in exchange for
three of Permatec's subsidiaries: Permatec Pharma AG, Permatec Technologie AG
and Permatec NV. The Share Transaction is being accounted for as a reverse
acquisition because Permatec shareholders will hold approximately 67% of the
outstanding common stock of Medi-Ject after the closing of the Share
Transaction. Accordingly, for accounting purposes, Permatec is deemed to have
acquired Medi-Ject. The transaction is valued at approximately $3.6 million,
which represents the fair market value of Medi-Ject. For accounting purposes,
the fair value of Medi-Ject is based on the 1,424,729 shares of Medi-Ject
common stock outstanding on January 25, 2000 at an average price three days
before and after such date of $2.509 per share. On this date, Medi-Ject
publicly announced its intentions to enter into the Share Transaction and the
consideration had been established pursuant to a letter of intent.
The following pro forma unaudited condensed financial statements give effect
to the Share Transaction. The Share Transaction has been accounted for under
the purchase method of accounting. The unaudited pro forma balance sheet as of
June 30, 2000, gives effect to the Share Transaction as if it had occurred on
June 30, 2000. The pro forma statement of operations is based on historical
results of operations of both the Group and Medi-Ject for the year ended
December 31, 1999 and six months ended June 30, 2000, and gives effect to the
Share Transaction as if it had occurred on January 1, 1999.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto included
herein and incorporated by reference for the Group and Medi-Ject, respectively.
The pro forma financial information is presented for illustrative purposes only
and is not necessarily indicative of the future financial position or future
results of operations of the consolidated company after the Share Transaction,
or of the financial position or results of operations of the consolidated
company that would have actually occurred had the Share Transaction of Permatec
with Medi-Ject been effected as of the dates described above.
41
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2000
Permatec Medi-Ject Pro Forma Pro Forma
Holding AG Corporation Adjustments Consolidated
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash
equivalents.......... $ 1,191,361 $ 141,497 $ $ 1,332,858
Accounts receivable,
net.................. 143,135 379,681 522,816
Inventories........... 0 432,063 432,063
Prepaid expenses and
other current
assets............... 0 39,844 39,844
------------ ------------ ------------ ------------
1,334,496 993,085 2,327,581
------------ ------------ ------------ ------------
Equipment, furniture and
fixtures, net.......... 877,692 848,502 1,726,194
Patent rights, net...... 239,964 288,381 528,345
Notes receivable........ 1,950,000 0 (1,950,000)(A) 0
Prepaid acquisition
cost................... 360,000 0 (360,000)(B) 0
Cost in excess of fair
value of assets
acquired, net.......... 177,963 0 2,772,931 (B) 2,950,894
Other assets............ 2,768 0 2,768
------------ ------------ ------------ ------------
3,608,387 1,136,883 462,931 5,208,201
------------ ------------ ------------ ------------
4,942,883 2,129,968 462,931 7,535,782
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts
payable.............. 438,377 207,335 645,712
Accounts payable,
other................ 174,491 0 174,491
Accrued expenses and
other liabilities.... 258,088 447,105 705,193
Convertible notes
payable.............. 0 1,950,000 (1,950,000)(A) 0
Deferred revenue...... 250,000 0 250,000
Long-term obligations,
current.............. 120,911 15,040 135,951
Liabilities to related
parties.............. 333,480 0 (333,480)(C) 0
------------ ------------ ------------ ------------
1,575,347 2,619,480 (2,283,480) 1,911,347
------------ ------------ ------------ ------------
Long-term Liabilities:
Loans from
shareholders......... 14,056,801 0 (14,056,801)(C) 0
Long-term obligations,
less current......... 116,340 48,774 165,114
Other................. 153 0 153
------------ ------------ ------------ ------------
14,173,294 48,774 (14,056,801) 165,267
------------ ------------ ------------ ------------
Total Liabilities.... 15,748,641 2,668,254 (16,340,281) 2,076,614
------------ ------------ ------------ ------------
Mandatorily redeemable
Series B preferred
stock.................. 0 250,000 250,000
------------ ------------ ------------ ------------
Shareholders' Equity
(Deficit):
Preferred stock--
Series A & C......... 0 11 98 (A) 109
Common stock.......... 689,655 14,249 (689,655)(D)
29,000 (B) 43,249
Accumulated other
comprehensive
income............... 1,038,018 0 1,038,018
Additional paid in
capital.............. 1,174,680 25,044,611 (98)(A)
2,383,931 (B)
14,390,281 (C)
689,655 (D)
(25,044,611)(E)
(802,546)(E) 17,835,903
Accumulated deficit... (13,708,111) (25,847,157) 25,847,157 (E) (13,708,111)
------------ ------------ ------------ ------------
(10,805,758) (788,286) 16,803,212 5,209,168
------------ ------------ ------------ ------------
$ 4,942,883 $ 2,129,968 $ 462,931 $ 7,535,782
============ ============ ============ ============
42
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Permatec Medi-Ject Pro Forma Pro Forma
Holding AG Corporation Adjustments Consolidated
----------- ----------- ----------- ------------
Revenues:
Product sales......... $ -- $ 2,100,735 $ $ 2,100,735
Product development... 1,036,533 -- 1,036,533
License revenue....... 311,740 1,381,127 1,692,867
Contract research..... 3,334 -- 3,334
----------- ----------- -----------
1,351,607 3,481,862 4,833,469
----------- ----------- -----------
Operating expenses:
Cost of product
sales................ -- 1,785,464 1,785,464
Research and
development.......... 1,647,059 2,550,773 4,197,832
Marketing and sales... 213,110 1,058,364 1,271,474
General and
administrative....... 3,042,551 1,831,229 4,873,780
Amortization of
goodwill............. 177,963 -- 277,293 (B) 455,256
----------- ----------- --------- -----------
5,080,683 7,225,830 277,293 12,583,806
----------- ----------- --------- -----------
Net operating loss...... (3,729,076) (3,743,968) (277,293) (7,750,337)
Other income (expense).. (159,120) 40,529 -- (118,591)
----------- ----------- --------- -----------
Net loss before taxes... (3,888,196) (3,703,439) (277,293) (7,868,928)
Income tax expense...... 79,170 -- -- 79,170
----------- ----------- --------- -----------
Net loss................ (3,967,366) (3,703,439) (277,293) (7,948,098)
Preferred stock
dividends.............. -- (148,452) -- (148,452)
----------- ----------- --------- -----------
Net loss applicable to
common shares.......... $(3,967,366) $(3,851,891) $(277,293) $(8,096,550)
=========== =========== ========= ===========
Basic and diluted net
loss per common share.. $ (396.74) $ (2.70) $ (1.87)
=========== =========== ===========
Basic and diluted
weighted average number
of shares outstanding
....................... 10,000 (G) 1,424,731 2,890,000 (F) 4,324,731
=========== =========== ========= ===========
43
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
Permatec Medi-Ject Pro Forma Pro Forma
Holding AG Corporation Adjustments Consolidated
----------- ----------- ----------- ------------
Revenues:
Product sales......... $ 0 $ 1,228,113 $ $ 1,228,113
Product development... 710,000 22,788 732,788
License revenue....... 90,000 0 90,000
----------- ----------- ---------- -----------
800,000 1,250,901 0 2,050,901
----------- ----------- ---------- -----------
Operating Expenses:
Cost of products
sold................. 0 885,370 885,370
Research and
development.......... 410,228 562,708 972,936
Marketing and sales... 522,886 339,380 862,266
General and
administrative....... 1,201,429 1,085,427 2,286,856
Amortization of
goodwill............. 88,982 0 138,647 (B) 227,629
----------- ----------- ---------- -----------
2,223,525 2,872,885 138,647 5,235,057
----------- ----------- ---------- -----------
Net operating loss...... (1,423,525) (1,621,984) (138,647) (3,184,156)
Other expense........... (279,508) (3,528) (283,036)
----------- ----------- ---------- -----------
Net loss before taxes... (1,703,033) (1,625,512) (138,647) (3,467,192)
Income tax expense...... (1,002) 0 (1,002)
----------- ----------- ---------- -----------
Net loss................ (1,704,035) (1,625,512) (138,647) (3,468,194)
Preferred stock
dividends.............. 0 (73,810) (73,810)
----------- ----------- ---------- -----------
Net loss applicable to
common shares.......... (1,704,035) (1,699,322) (138,647) (3,542,004)
=========== =========== ========== ===========
Basic and diluted ner
loss per common share $ (170.40) $ (1.19) $ (0.82)
=========== =========== ===========
Basis and diluted
weighted average number
of shares outstanding.. 10,000 (G) 1,424,781 2,890,000 (F) 4,324,781
=========== =========== ========== ===========
44
NOTES TO THE UNAUDITED AND PRO FORMA CONDENSED FINANCIAL DATA
The Share Transaction is being accounted for as a reverse acquisition
because Permatec will hold approximately 67% of the outstanding common stock of
Medi-Ject after the Share Transaction. Accordingly, for accounting purposes,
Permatec is deemed to have acquired Medi-Ject. The transaction is valued at
$3,574,645, which represents the fair market value of Medi-Ject. For accounting
purposes, the fair value of Medi-Ject is based on the 1,424,729 shares of Medi-
Ject common stock outstanding on January 25, 2000, at an average closing price
three days before and after such date of $2.509 per share. On January 26, 2000,
Medi-Ject publicly announced its intentions to enter into the Share Transaction
and the consideration had been established pursuant to a letter of intent.
Pro forma adjustments are as follows:
(A) Medi-Ject's $1,950,000 of convertible promissory notes will convert
into 9,750 shares of Series C Convertible Preferred Stock at the
closing of the Share Transaction. Upon shareholder approval of
Proposal 3 or if not approved by shareholders, to the extent permitted
under the NASDAQ Stock Market rules, these notes are to be converted
to common stock at the lessor of (i) the average of the closing prices
per share of the Medi-Ject common stock for the twenty (20)
consecutive trading days immediately preceding the conversion date, or
(ii) $2.00. If the conversion had occurred as of June 30, 2000, based
on $1,950,000 of convertible promissory notes outstanding, 975,000
shares of Medi-Ject common stock would be issued. The conversion
feature is in-the-money and this benefit will be a deemed dividend to
the Preferred shareholder at the date the Share Transaction closes and
will increase the net loss available to common shareholders in the
Company's net loss per share calculation. The deemed dividend
associated with the contingent in-the-money feature at June 30, 2000
is approximately $1,764,000 and is not included in the pro forma net
loss per share. The conversion of convertible promissory notes into
equity is deemed to occur prior to purchase price allocation. The
$1,950,000 of notes payable on Medi-Ject's balance sheet is converted
into equity resulting in an increase in additional paid in capital.
(B) Medi-Ject's equity at June 30, 2000, as adjusted for the conversion of
the $1,950,000 of convertible promissory notes is $1,161,714. The
excess of the purchase price of $3,574,645 over the adjusted net equity
of $1,161,714 plus Permatec capital acquisition cost of $360,000 is
reflected as an increase in net equity and goodwill. This is for
illustrative purposes only as the actual purchase price allocation will
be based on the fair values of the acquired assets and assumed
liabilities as of the actual acquisition date. The pro forma
amortization of goodwill and other intangible assets is $277,293 for
the year ended December 31, 1999, and $138,647 for the six months ended
June 30, 2000. The pro forma adjustment is based on the assumption that
the entire amount identified as goodwill and other intangible assets
will be amortized on a straight-line basis over a ten-year period.
Medi-Ject has engaged a third party to value actual intangible assets
to be acquired. When completed, certain amounts identified as
intangible assets may be amortized over periods other than the ten-year
period presented in the pro forma statement of operations.
Additionally, a portion of the purchase price may be identified as in-
process research and development. This amount, if any, will be charged
to operating results in Medi-Ject's fiscal year 2000 financial
statements, when the acquisition accounting and valuation amounts are
finalized. The pro forma statement of operations does not give effect
to any potential in-process research and development charge related to
the transactions.
(C) Liabilities to related parties of $333,480 at June 30, 2000, resulted
from entities owned by Permatec's majority shareholder paying expenses
on the Group's behalf. This liability is not being assumed by Medi-
Ject, and will be deemed as contributed capital. The Group's loans from
shareholders of $14,056,801 will be converted to additional paid-in
capital at the closing of the Share Transaction.
(D) The common stock value of the Group will be converted to additional
paid-in capital at the closing of the Share Transaction.
(E) Medi-Ject's additional paid-in capital and accumulated deficit will be
eliminated at the closing of the Share Transaction leaving only the
Group's accumulated deficit.
45
(F) The pro forma statement of operations results in a loss; therefore, the
pro forma basic and diluted loss per common share are computed by
dividing the loss available to shares by the weighted average number of
common shares outstanding. The calculation of the pro forma weighted
average number of common shares outstanding assumes the 2,900,000
shares of Medi-Ject's common stock to be issued in the Share
Transaction were outstanding as of January 1, 1999 and January 1, 2000
minus the 10,000 shares of Permatec stock that will be held by Medi-
Ject.
(G) The Share Transaction will be accounted for as a reverse merger for
accounting purposes. Upon consummation of the Share Transaction, the
historical equity of Permatec will be restated to reflect the number of
shares received in the transaction. In addition, the earnings per share
for periods prior to the Share Transaction will be restated to reflect
the shares issued. The following represents the Permatec historical
loss per share restated for the 2.9 million shares of Medi-Ject common
stock issued in the Share Transaction.
Six Months Ended
Year Ended December 31 June 30
------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss attributed to
common stockholders.... $(376,397) $(1,175,080) $(2,055,777) $(4,270,006) $(3,967,366) $(1,135,179) $(1,704,035)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (0.13) $ (0.41) $ (0.71) $ (1.47) $ (1.37) $ (0.39) $ (0.59)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted
weighted average number
of shares outstanding.. 2,900,000 2,900,000 2,900,000 2,900,000 2,900,000 2,900,000 2,900,000
========= =========== =========== =========== =========== =========== ===========
THE BOARD OF DIRECTORS HAS APPROVED THE TERMS OF THE STOCK PURCHASE AGREEMENT
AND THE SHARE TRANSACTION. THE BOARD BELIEVES THAT THE PROPOSAL IS IN THE BEST
INTEREST OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE TO
APPROVE THE PROPOSAL.
46
THE AMENDMENT TO THE ARTICLES OF INCORPORATION PROPOSAL
(PROPOSAL 2 ON PROXY CARD)
SUMMARY OF THE PROPOSED AMENDMENT
Our Second Amended and Restated Articles of Incorporation, as amended to
date, (the "Articles") currently authorize 4,400,000 shares of capital stock,
3,400,000 of which are common stock, par value $.01 per share, and 1,000,000 of
which are preferred stock, par value $.01 per share. As of September 25, 2000,
we had 1,427,611 shares of common stock issued and outstanding and 893,033
shares of common stock reserved for issuance under our stock option plans and
outstanding options and warrants. In addition, as of September 25, 2000, we had
1,350 shares of preferred stock issued and outstanding. We are requesting your
approval to increase the authorized number of shares of common stock from
3,400,000 shares to 15,000,000 and to increase the authorized number of shares
of preferred stock from 1,000,000 to 3,000,000. If such increase is approved
the number of authorized and unissued shares of common stock available for
future issuance will be 10,672,851 and the number of authorized and unissued
shares of preferred stock will be 2,998,650.
OUR CURRENT CAPITAL STRUCTURE
As of September 25, 2000, 1,427,611 shares of Medi-Ject common stock were
issued and outstanding and an additional 918,766 shares of Medi-Ject common
stock were reserved for issuance under our stock incentive plans and existing
options and warrants. We also have 1,100 shares of Series A Convertible
Preferred Stock issued and outstanding as of September 25, 2000. The Series A
Convertible Preferred Stock is convertible into Medi-Ject common stock on
November 10, 2008. Each share of outstanding Series A Convertible Preferred
Stock is convertible into that number of shares obtained by dividing $1,000
(plus any accrued but unpaid dividends) by the lesser of $7.50 per share or 95%
of the market price of the Medi-Ject common stock on the conversion date. Based
on the market closing price as of September 25, 2000 of $4.781, an aggregate of
242,187 shares of Medi-Ject common stock would be issuable on conversion of all
outstanding shares of Series A Convertible Preferred Stock. We also have 250
shares of Series B Convertible Preferred Stock issued and outstanding as of
September 25, 2000. The Series B Convertible Preferred Stock is convertible
into that number of shares obtained by dividing $1,000 (plus any declared and
unpaid dividends) by the lesser of (i) $2.50 per share or (ii) the average of
the closing prices per share of the Medi-Ject common stock for the immediately
preceding 20 trading days. Based on the market closing price as of September
25, 2000 of $4.781 an aggregate of 100,000 shares of Medi-Ject common stock
would be issuable upon conversion of the outstanding shares of Series B
Convertible Preferred Stock. In addition, we are obligated to issue common
stock upon conversion of the Series C Convertible Preferred Stock. Currently,
an aggregate of $2,900,000 principal amount of Permatec Notes are outstanding.
The Permatec Notes will convert into shares of Series C Convertible Preferred
Stock. Assuming shareholder approval of Proposal 3, each share of Series C
Convertible Preferred Stock is convertible in certain circumstances into
100 shares of Medi-Ject common stock (which would have equalled an aggregate of
1,450,000 shares if such shares had been outstanding and converted as of
September 25, 2000). Accordingly, total shares of Medi-Ject common stock
outstanding of 1,427,611 shares on September 25, 2000, when aggregated with
918,766 shares issuable upon exercise of outstanding options and warrants, up
to 242,187 shares issuable upon conversion of the Series A Convertible
Preferred Stock, 100,000 shares issuable upon conversion of the Series B
Convertible Preferred Stock and up to 1,450,000 shares issuable upon conversion
of the Series C Preferred Stock (if it had been outstanding as of such date),
exceeds the 3,400,000 shares of Medi-Ject common stock currently authorized.
BACKGROUND AND REASONS FOR THE PROPOSED AMENDMENT
As discussed in Proposal 1, we need to amend the Articles to increase the
authorized common and preferred stock in order to proceed with and close the
Share Transaction. See Proposal 1 for reasons for the Share Transaction. Even
if we do not go forward with the Share Transaction (because shareholder
approval was not received or other conditions were not met), we need to
increase the authorized capital stock to reserve the appropriate number of
shares for the conversion of the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock and to explore and implement any
47
other financing alternatives, if any are available. As of December 31, 1999, we
held cash and cash equivalents of $0.1 million. In addition, we reported a net
loss of approximately $3.9 million for the year ended December 31, 1999. We
currently anticipate that cash on hand, plus expected revenue from product
sales and various development and licensing agreements, will be insufficient to
fund expected losses and meet other cash usage needs each month. We will be
required to raise additional capital through debt or equity offerings, and we
anticipate such offerings will involve the sale of common or preferred stock,
warrants to purchase common or preferred stock or securities convertible into
common stock. We may not be able to obtain any such financing if there are not
sufficient shares of common or preferred stock available to issue to
prospective investors or to issue upon exercise of warrants or convertible
securities sold to prospective investors. While we are in the process of
contacting prospective investors in connection with the financing described in
Proposal 1, we do not have any firm commitments from investors to purchase
securities. No assurance can be given that we will be able to raise additional
financing on acceptable terms or that we will have adequate funds to continue
operations. KPMG LLP, in its Independent Auditors' Report dated February 18,
2000, stated that substantial doubt has been raised about our ability to
continue as a going concern.
THE IMPACT OF APPROVAL OR DISAPPROVAL OF THE PROPOSAL
If this proposal and Proposal 1--The Share Transaction are approved, we will
be able to proceed with the Share Transaction. If this proposal and Proposal
3--The Series C Stock Conversion Proposal are approved, the Series C Stock will
be able to be converted. Furthermore, if this proposal and Proposal 4--The
Series B Stock Conversion Proposal are approved, the Series B Stock will be
able to be converted at the holder's option. The additional shares of Medi-Ject
common stock, if and when issued, would be part of the existing class of
Medi-Ject common stock and would have the same rights and privileges as the
shares of Medi-Ject common stock currently outstanding. If the proposed
amendment is approved, the additional shares of Medi-Ject common stock would be
available for issuance without further action by the shareholders, unless such
action is required by applicable law, the rules of the National Association of
Securities Dealers, Inc., or any stock exchange on which Medi-Ject securities
may be listed. The additional shares of preferred stock, if and when issued,
would have the rights and preferences designated by the Board of Directors and
would be available for issuance without further action by the shareholders,
unless such action is required by applicable law, the rules of the National
Association of Securities Dealers, Inc., or any stock exchange on which Medi-
Ject securities may be listed.
If this proposal is not approved, we will not be able to proceed with the
Share Transaction (see Proposal 1), the Series C Stock will not be able to be
converted (see Proposal 3) and the Series B Stock (see Proposal 4) will not be
converted at the holder's option and we may be required to redeem the Series B
Stock at a higher price than its liquidation value (see Proposal 4--Background
of and Reasons to Approve). Furthermore, if this proposal is not approved, we
may not be able to obtain other financing and we may not have sufficient
resources to continue operations.
We desire to increase the authorized number of shares in order to complete
the actions described in Proposals 1, 3 and 4 and to enhance our ability to
obtain the additional equity financing required to continue operations. This
proposal is not submitted as a result of, or in response to, any accumulation
of stock or threatened takeover. However, the proposal combined with the
ability of the Board of Directors to designate and issue additional classes or
series of common stock or preferred stock without shareholder approval, as
authorized by our Articles of Incorporation, may have the effect of impeding or
deterring an unsolicited tender offer, takeover proposal or proxy contest. We
currently do not have plans to implement any other measures having anti-
takeover effects. There are, however, provisions already present in our
Articles of Incorporation and Bylaws which may have anti-takeover effects,
specifically Section 3 of Article 3 of the Articles of Incorporation which
gives the directors the right to designate the rights and preferences of
classes or series of preferred stock without shareholder approval; Article 4 of
the Articles of Incorporation which eliminates cumulative voting for the
election of directors; Article 8 of the Articles of Incorporation which provide
that directors can be removed only by the affirmative vote of holders of at
least 70% of the shareholders; and
48
Section 3.02 of the Bylaws which classifies directors to serve for staggered
terms. In addition, certain provisions of Minnesota law which are applicable to
us, including Section 302A.672 relating to control share acquisitions and
Section 302A.673 relating to business combinations, could have the effect of
discouraging attempts to acquire us. By discouraging such attempts, this
proposal and such provisions could make more difficult the removal of
management, deprive shareholders of opportunities to sell their shares at
prices higher than prevailing market prices and may also have a depressive
effect on the market price of the common stock. In addition, the issuance of
additional shares having preferential rights could adversely affect the voting
power and other rights of holders of common stock.
On the date of this Proxy Statement, the Board of Directors has not
authorized the issuance of any additional shares of Medi-Ject common stock,
except in connection with currently outstanding options, warrants, the Series A
Stock, the Series B Stock and the Permatec Notes into Series C Stock and,
except as described in Proposal 1--The Share Transaction, we do not have any
agreements or commitments with respect to the sale or issuance of any shares of
Medi-Ject common stock.
THE TEXT OF THE PROPOSED AMENDMENT
The Board of Directors recommends that we amend Article III of the Articles
to increase the number of authorized shares of common stock from 3,400,000 to
15,000,000 and to increase the number of authorized shares of preferred stock
from 1,000,000 to 3,000,000 shares. If the shareholders approve the amendment,
the first sentence of Article III will read as follows:
The first sentence of Article III is hereby amended to read as follows:
"The total number of shares of capital stock which the corporation is
authorized to issue shall be 18,000,000 shares, consisting of 15,000,000
shares of common stock, par value $.01 per share ("Common Stock"), and
3,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock")."
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED AMENDMENT TO OUR ARTICLES TO
INCREASE THE AUTHORIZED COMMON STOCK FROM 3,400,000 TO 15,000,000 SHARES AND TO
INCREASE THE AUTHORIZED PREFERRED STOCK FROM 1,000,000 TO 3,000,000. THE BOARD
BELIEVES THAT THE PROPOSAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE TO APPROVE THE PROPOSAL.
49
THE SERIES C STOCK CONVERSION PROPOSAL
(PROPOSAL 3 ON PROXY CARD)
GENERAL
At the meeting, a vote will be taken to approve the future conversion of
Medi-Ject Series C Convertible Preferred Stock, $.01 par value per share (the
"Series C Stock") to Medi-Ject common stock. As of September 25, 2000, there
are no shares of Series C Stock issued and outstanding. Permatec, however,
holds the Permatec Notes, all of which will convert into Series C Stock upon
the later of: (a) the date we have amended our Articles increasing our
authorized capital stock to at least 10,000,000 (see Proposal 2) and obtain any
necessary approvals under the listing requirements for the Nasdaq Stock Market
or (b) the closing of the Share Transaction with Permatec. The Permatec Notes
will convert into a number of shares of Series C Stock equal to the outstanding
principal balance of the Permatec Notes divided by $200. Without shareholder
approval, conversion of Series C Stock into Medi-Ject common stock is allowed
only to the extent permitted under the Nasdaq Stock Market rules; we are
seeking your approval for conversion in full.
Series C Stock is convertible at the option of the holder into shares of
Medi-Ject common stock at any time after the closing of the Share Transaction.
The number of shares of Medi-Ject common stock to be issued upon a conversion
of the Series C Stock shall be equal to the quotient obtained by dividing (i)
the sum of (A) the outstanding face amount of the Series C Stock, plus (B) all
accrued but unpaid interest on such face amount; by the lesser of (i) the
average of the closing price per share of the Medi-Ject common stock for the
twenty (20) consecutive trading days immediately preceding the conversion date,
or (ii) $2.00. Nasdaq Stock Market Rule 4310(c)(25)(G)(i) requires shareholder
approval of the issuance of shares in excess of 20% of the outstanding voting
power of the Company. If the Series C Stock was outstanding as of September 25,
2000, based upon outstanding Permatec Notes of $2,900,000 as of such date, such
Series C Stock would be convertible into 1,450,000 shares of Medi-Ject common
stock; when these shares are aggregated with the 2,900,000 shares received upon
the closing of the Share Transaction, Permatec will own 75.3% of the
outstanding Medi-Ject common stock.
BACKGROUND AND REASONS TO APPROVE
While negotiating the Purchase Agreement and in order to finance our
continuing operations, Permatec agreed to invest up to $4,500,000 in Medi-Ject.
On each of January 25, 2000 and April 3, 2000, we entered into a Convertible
Note Purchase Agreement with Permatec. As of September 25, 2000, we have
issued, pursuant to the two Convertible Note Purchase Agreements, Permatec
Notes in the aggregate amount of $2,900,000:
Amount of
Date of Note Note
------------ ----------
January 25, 2000 $ 250,000
February 29, 2000 250,000
April 3, 2000 500,000
May 2, 2000 250,000
May 25, 2000 350,000
June 25, 2000 350,000
July 26, 2000 250,000
August 22, 2000 350,000
September 22, 2000 350,000
----------
Total $2,900,000
==========
The proceeds of the Permatec Notes have been used to fund our operations
including the purchase of molds and dies, the payment of payroll and operating
expenses. In order to continue operations, we anticipate the need to issue
additional convertible notes on a monthly basis at the rate of $300,000 to
$500,000 per month until the Share Transaction closes. We anticipate that the
$4,500,000 will fund our operations through December 31, 2000.
50
The Permatec Notes convert into Series C Stock which are convertible into
Medi-Ject common stock, as described above. The other terms of the Series C
Stock are as follows:
. The Series C Stock is non-voting.
. The Series C Stock will not accrue a dividend, however, if the Share
Transaction has not been closed by November 30, 2000, the Series C Stock
will begin accruing a dividend of 10% annually, such dividend payable in
Medi-Ject common stock.
. The Series C Stock will have a liquidation preference equal to the
purchase price of such stock.
. Subject to Permatec's right to convert the Series C Stock into common
stock, the Series C Stock will be redeemable by us, at our option, upon
the closing of an equity investment in Medi-Ject of $7,000,000 or more.
. We agreed to use our best efforts to obtain the necessary shareholder
approvals of the conversion terms.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE ABOVE PROPOSAL
TO CONVERT THE SERIES C PREFERRED STOCK TO MEDI-JECT COMMON STOCK.
51
THE SERIES B STOCK CONVERSION PROPOSAL
(PROPOSAL 4 ON PROXY CARD)
GENERAL
At the meeting, a vote will be taken to approve the conversion, at the
holder's option, of Medi-Ject Series B Convertible Preferred Stock, $.01 par
value per share (the "Series B Stock") to Medi-Ject common stock. Pursuant to
our Certificate of Designations, Preferences and Rights of Series B Convertible
Preferred Stock, after we have filed an amendment to our articles increasing
the authorized Medi-Ject common stock from 3,400,000 to at least 10,000,000
shares (see Proposal 2) and have obtained any necessary approvals of the
conversion (the amendment and the approvals are referred to as "Permissible
Conversion Events"), a holder of Series B Stock may choose to convert the
Series B Stock into Medi-Ject common stock. In the event that a holder does not
convert, an Automatic Conversion will occur on the later of: (1) the occurrence
of the Permissible Conversion Events or (2) June 20, 2001. Based on the market
closing price as of September 25, 2000 of $4.781, an aggregate of 100,000
shares of Medi-Ject common stock would be issuable on conversion of all
outstanding shares of Series B Stock. Without shareholder approval, conversion
of Series B Stock into Medi-Ject common stock is allowed only to the extent
permitted under the Nasdaq rules; we are seeking your approval for conversion
in full.
Nasdaq Stock Market Rule 4310(c)(25)(G)(i) requires shareholder approval of
the issuance of shares in excess of 20% of our outstanding voting power. Based
on the conversion price as of September 25, 2000, the Series B Stock is
convertible into approximately 7% of the outstanding voting shares, which would
not require shareholder approval. However, the conversion price, as described
below, floats based on the trading price of the common stock, and accordingly
it is possible that when the Series B Stock converts in the future, based on a
future stock price, the holders of Series B Preferred Stock could receive more
than 20% of our voting securities. Nasdaq's interpretation of its shareholder
approval rule requires prior shareholder approval of such conversion in that
instance. Each share of Series B Stock is convertible in accordance with the
following formula:
1. the original purchase price ($1,000 per share) plus any declared and
unpaid dividends
2. divided by the conversion price applicable of each share of Medi-Ject
common stock which equals the lesser of:
(i) the average of the closing price per share of the Medi-Ject common
stock for the 20 consecutive trading days immediately preceding
the Optional Conversion Date (or Automatic Conversion Date, as
applicable); or
(ii) $2.50 per share
BACKGROUND AND REASONS TO APPROVE
To raise working capital, we entered into a Preferred Stock Purchase
Agreement dated as of December 22, 1999 (the "Preferred Stock Agreement")
pursuant to which we issued 250 shares of the Series B Stock to Bio-Technology
General Corp at a price of $1,000 per share.
We used the $250,000 received for the Series B Stock to pay operating
expenses, including payroll. Other terms of the Series B Stock are as follows:
. The Series B Stock is non-voting, except that we cannot take any action
that adversely affects the rights of the holders of Series B Stock
relative to other classes without the approval of a majority of
outstanding Series B Stock voting as a separate class.
. The Series B Stock does not accrue a dividend.
. The Series B Stock has a liquidation preference equal to the purchase
price for such stock.
52
. The Series B Stock is redeemable by us, subject to the holder's right to
convert for cash at a price equal to the purchase price the holder paid
for such stock upon the occurrence of the Permissible Conversion Events.
In the Preferred Stock Agreement, we agree to use our best efforts to amend
our Articles to increase the authorized Medi-Ject common stock as set forth in
Proposal 2 and to obtain the necessary approvals of the conversion before
December 22, 2000. If we do not complete the amendment and the approval by such
date, we must immediately redeem all 250 shares of the Series B Stock at a
price per share equal to 105% of the liquidation preference which is $1,050 per
share or $262,500 in the aggregate. As we are not in the financial position to
redeem the Series B Stock at such a price, it is important that we fulfill our
obligations to amend the Articles and approve the conversion.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE ABOVE PROPOSAL
TO CONVERT, AT THE HOLDER'S OPTION, THE SERIES B PREFERRED STOCK.
53
THE ELECTION OF DIRECTORS PROPOSAL
(PROPOSAL 5 ON PROXY CARD)
Our Articles provide that the Board of Directors be divided into three
classes of directors of as nearly equal size as possible. The members of each
class are elected to serve a three-year term, and the terms are staggered. The
terms of Kenneth Evenstad and Karl Groth will expire at the 2000 Annual Meeting
of Shareholders; the terms of Geoffrey Guy and Fred Shapiro will expire at the
2001 Annual Meeting of Shareholders; and the terms of Franklin Pass and Stanley
Goldberg will expire at the 2002 Annual Meeting of Shareholders. Vacancies on
the Board of Directors and newly created directorships can be filled by the
vote of a majority of the directors then in office.
The Board of Directors has nominated and recommended that Kenneth Evenstad
and Karl Groth be elected as Directors at the 2000 Annual Meeting of
Shareholders, each to hold office until the Annual Meeting of Shareholders in
the year 2003 or until his respective successor is duly elected and qualified.
Each of the nominees is currently a member of our Board of Directors and has
indicated a willingness to serve as a director if elected. In case any nominee
is not a candidate for any reason, the proxies named in the enclosed form of
proxy may vote for a substitute nominee in their discretion, unless an
instruction to the contrary is indicated on the proxy. We have no reason to
believe that any nominee will, if elected, be unable to serve as a director.
However, if the Share Transaction is approved, as requested by the terms of the
Share Transaction, as described in Proposal 1, Karl Groth, Geoffrey Guy, Fred
Shapiro and Stanley Goldberg will resign from the Board.
The accompanying proxy will be voted in favor of the election of the
nominees of directors, unless the shareholder giving the proxy indicates to the
contrary on the proxy.
The Board of Directors recommends a vote FOR the election of Kenneth Evenstad
and Karl E. Groth.
Certain information concerning the nominees and other directors follows:
Nominees for Election at the 2000 Annual Meeting of Shareholders
Name Age
---- ---
Kenneth Evenstad 56 Mr. Evenstad joined the Board of Directors in May 1993
and is a member of the Audit Committee of the Board of
Directors. Since 1969, Mr. Evenstad has been the
Chairman and Chief Executive Officer of Upsher-Smith
Laboratories, Inc., a private pharmaceutical company
specializing in branded generic cardiovascular drugs.
Mr. Evenstad is a pharmacist.
Karl E. Groth 52 Mr. Groth joined the Board of Directors in February
1998 and is a member of the Compensation Committee of
the Board of Directors. Mr. Groth is the
President/Chief Executive Officer of First Circle
Medical Inc., a medical device company that produces
equipment related to the treatment of AIDS and
hepatitis using hyperthermia. From 1996 to 1997, he was
the President and Chief Executive Officer of Browne
Medical Systems, Inc., a medical device company that
produces equipment for the urodynamic market. From 1992
to 1996, Mr. Groth was the Director of Clinical and
Regulatory Affairs & Vice President Sales and Marketing
of InStent Inc., a medical products company. He also
has held positions with Medtronic, Inc., the University
of Minnesota and Upjohn Pharmaceutical Company.
54
Directors Whose Terms Continue Until the 2001 Annual Meeting of Shareholders
Geoffrey Guy, M.D. 45 Dr. Guy joined the Board of Directors in November
1993 and is a member of the Compensation Committee
of the Board of Directors. In 1985, Dr. Guy
founded Ethical Holdings plc, a company that
develops new transdermal and oral drug delivery
systems and was its Chairman and Chief Executive
Officer until December 1997. Dr. Guy is a director
of GW Pharmaceuticals Ltd, a pharmaceutical
company located in the U.K and he holds a Diploma
of Pharmaceutical Medicine from the British Royal
College of Physicians.
Fred L. Shapiro, M.D. 66 Dr. Shapiro joined the Board of Directors in
September 1992. He is Chairman of the Compensation
Committee of the Board of Directors. Dr. Shapiro
was president of Hennepin Faculty Associates, an
organization of the medical staff of the Hennepin
County Medical Center in Minneapolis, Minnesota,
from 1983 until his retirement in 1995. Dr.
Shapiro is a nephrologist who has authored or co-
authored more than 100 published medical and
scientific articles. Dr. Shapiro was also a co-
founder of Minntech, a company that designs and
manufactures medical equipment. He has been a
director of Minntech since its incorporation in
1974.
Directors Whose Terms Continue Until the 2002 Annual Meeting of Shareholders
Franklin Pass, M.D. 64 Dr. Pass joined our company as a director and
consultant in January 1992 and has served as our
President, Chief Executive Officer and Chairman of
the Board of Directors since February 1993. From
1990 to 1992, Dr. Pass served as President of
International Agricultural Investments, Ltd., an
agricultural technology consulting and investment
company. Dr. Pass, a physician and scientist, was
Director of the Division of Dermatology at Albert
Einstein College of Medicine from 1967 to 1973,
the Secretary and Treasurer of the American
Academy of Dermatology from 1978 to 1981 and the
co-founder and Chief Executive Officer of
Molecular Genetics, Inc., now named MGI Pharma,
Inc., from 1979 to 1986. He is the author of more
than 40 published medical and scientific articles.
Dr. Pass also serves on the Board of Directors of
Verdant Brands, Inc. (formerly Ringer
Corporation), a leading manufacturer of garden
pesticides.
Stanley Goldberg 53 Mr. Goldberg joined the Board of Directors in
February 1998 and is a member of the Audit
Committee of the Board of Directors. Mr. Goldberg
is currently the Managing Partner of Goldmark
Advisors, a business development firm focused on
emerging and high growth potential companies.
Previously, he served as Chairman of the Board of
Verdant Brands, Inc. (formerly Ringer Corporation)
since 1996, Chief Executive Officer since 1993 and
its President since 1991. From 1990 to 1992, Mr.
Goldberg was Vice President and General Manager of
Thomson, S.A., World Wide Audio Division, and,
from 1988 to 1990, General Manager of Thomson
S.A., Audio Americas Operations. Thomson, S.A. is
a defense and electronics company. From 1986 to
1988, Mr. Goldberg was Manager of Product
Development for General Electric Company, a
consumer and industrial products and defense
company. Mr. Goldberg also held various positions
in marketing and management at General Electric.
Mr. Goldberg also is a director of Destron-
Fearing.
None of the above directors are related to one another or to any executive
officer of our company.
55
Information Concerning the Board of Directors
The Board of Directors met eleven times during 1999. The Board of Directors
acted by written action one time during 1999. The Board of Directors has an
Audit and a Compensation Committee.
The Audit Committee, consisting of Mr. Evenstad, Mr. Goldberg and Dr.
Shapiro met one time during 1999. The Audit Committee reviews the results and
scope of the audit and other services provided by our independent auditors, as
well as our accounting principles and systems of internal controls, and reports
the results of its review to the full Board of Directors and to management.
The Compensation Committee, consisting of Dr. Shapiro, Dr. Guy and Mr.
Groth, met two times during 1999. The Compensation Committee makes
recommendations concerning executive salaries and incentive compensation for
employees and administers our 1993 Stock Option Plan (the "1993 Plan"). The
Board of Directors, as a whole, administers our 1996 Incentive and Stock Option
Plan (the "1996 Plan") and the 1998 Stock Option Plan for Non-Employee
Directors (the "Directors Plan").
During 1999, each of the directors attended at least 75% of the aggregate
number of meetings of the Board of Directors and of the Committees on which he
serves with the exception of Karl Groth who attended 64% of the Board of
Directors meetings held during the year.
Compensation of Directors
Historically, we have not paid directors' fees. All directors may be
reimbursed for expenses actually incurred in attending meetings of the Board of
Directors and its committees. In the past, the Board of Directors has made
annual discretionary grants of options to purchase shares of Common Stock under
our 1993 Plan and 1996 Plan to certain members of the Board of Directors. The
size of these grants has varied from year to year. In accordance with the
Directors' Plan, eligible non-employee directors will receive an automatic
grant of an option to purchase 1,000 shares of Medi-Ject common stock as of the
first business day of each calendar year. The Directors' Plan also provides for
an initial option grant of 2,000 shares of Medi-Ject common stock on the day
that the director is first elected to the Board of Directors.
56
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Overview
The Compensation Committee is responsible for establishing compensation
policies for all executive officers of our company, including the three most
highly compensated executive officers named in the accompanying tables (the
"Named Executives Officers"). The members of the Compensation Committee are Dr.
Shapiro, Dr. Guy and Mr. Groth. The Compensation Committee establishes the
total compensation for the executive officers in light of these policies. The
Compensation Committee is composed entirely of outside (non-employee)
directors.
The objectives of our executive compensation program are:
1. to attract and retain superior talent and reward individual
performance;
2. to support the achievement of our financial and strategic goals; and
3. through stock based compensation, align the executive officers'
interests with those of our shareholders.
The following report addresses our executive compensation policies and
discusses factors considered by the Compensation Committee in determining the
compensation of our President and Chief Executive Officer and other executive
officers for the year ended December 31, 1999.
Compensation Policies for Executive Officers
The Compensation Committee's executive compensation policies are designed to
provide competitive levels of compensation that integrate pay with our
company's annual and long term performance goals, reward above average
corporate performance, recognize individual initiative and achievements, and
assist our company in attracting and retaining qualified executives. To that
end, the Compensation Committee has established certain parameters of corporate
performance that must be met before the discretionary features of its executive
compensation plans apply. These discretionary features include stock option
grants and performance bonuses based upon an executive officer's base salary.
Absent the discretionary features, the executive officers are paid base
salaries that are subject to annual cost-of-living increases, along with
periodic adjustments to make such salaries competitive with other similar sized
companies in the drug delivery industry. Our executive officers are also given
the opportunity to participate in certain other broad-based employee benefit
plans. As a result of our company's emphasis on tying executive compensation to
corporate performance, in any particular year the executives may be paid more
or less than the executives of other companies in the drug delivery industry.
Our company's use of stock option grants as a key component of our executive
compensation plans reflects the Compensation Committee's position that stock
ownership by management and stock based compensation arrangements are
beneficial in aligning management's and shareholders' interests to enhance
shareholder value.
Pursuant to the terms of their respective employment agreements, the annual
salaries in 2000 increased by 5.5% for the Chief Executive Officer, 29.6% for
the Chief Financial Officer and 14.3% for the Chief Technology Officer.
Bonuses
Cash bonuses are used to reward executive officers for achievement of
financial and technical milestones, as well as for individual performance. No
bonuses were awarded to executive officers for the 1999 business year.
Stock Options
Stock options awarded under our 1993 and 1996 Plans are intended as
incentive compensation and have historically been granted annually to officers,
other key employees and consultants based on our financial
57
performance and achievement of technical and regulatory milestones. During
1999, stock options to purchase a total of 24,115 shares held by the five
outside directors were canceled and reissued at an exercise price of $3.50 per
share. Also, on January 3, 2000, options to purchase a total of 31,829 shares
held by the five outside directors, options to purchase a total of 160,924
shares held by three executive officers and options to purchase a total of
86,200 shares held by 37 employees were canceled and reissued at an exercise
price of $1.5625 per share (see report on repricing of options below). In
addition, stock options totaling 2,000, 24,000 and 9,100 were granted to one
consultant, two executive officers and four employees respectively, during
1999. The 1999 annual stock option grant totaling 50,000 and 26,200 shares,
with a grant date of January 3, 2000, were granted to three executive officers
and 37 employees, respectively. These grants were made to provide ongoing
incentives to our consultants, outside directors and employees. All outstanding
options will be 100% exercisable upon the closing of the Share Transaction.
Chief Executive Officer's Compensation
As reflected in the Summary Compensation Table contained herein, Dr.
Franklin Pass's 1999 compensation consisted of base compensation and certain
employee benefits. Dr. Pass's base compensation for 1999 was not increased from
his base salary in 1998.
At this time, the Committee has no formal long-range written plan for CEO
compensation separate and apart from the employment agreement (see below).
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS:
Fred Shapiro Karl Groth Geoffrey Guy
58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Agreements with Executive Officers
We have written employment agreements with Franklin Pass, M.D., Lawrence
Christian and Peter Sadowski, Ph.D.
Employment Agreement with Dr. Pass. Our employment agreement with Dr. Pass
became effective as of December 22, 1999 (the "1999 Agreement") and extended
the term under a prior agreement (which term had not expired).
The 1999 Agreement provides for a base salary of $210,000 with 1997 as the
base year and, as to subsequent years, for a base salary to be mutually agreed
upon prior to the beginning of each year but, in no event, shall his salary for
subsequent years be less than his 1997 salary as adjusted for inflation.
Pursuant to the terms of a prior agreement, we granted to Dr. Pass an option to
purchase 80,000 shares of Medi-Ject common stock at an exercise price equal to
$26.90 per share. The option was later canceled and reissued at a price of
$1.56 per share. The option vests in equal monthly installments over a period
of four years. The option shall become 100% vested upon Dr. Pass's death or
disability or upon a change in control. "Change in control" means: (1) the
election of directors who weren't members at the time the Employment Agreement
was entered into (unless election supported by existing members); (2) a
complete liquidation or sale of assets constituting 50% or more of our value;
(3) merger, consolidation or other similar transaction unless at least 75% of
the voting power of the surviving entity is held by those holding voting power
immediately prior to the transaction; and (4) a person's or entity's
acquisition of 50% or more of the total voting power of all then-outstanding
voting securities of our company. The Share Transaction constitutes a change in
control under both (3) and (4) and accordingly, all options will vest. The 1999
Agreement also contains provisions regarding participation in benefit plans,
repayment of expenses, participation as a director or consultant to other
companies (which is permitted provided that such participation does not
materially detract from his obligations to our company or violate the terms of
the 1999 Agreement), protection of confidential information, noncompetition and
ownership of intellectual property. In addition, the 1999 Agreement contains
covenants that Dr. Pass will devote substantially all of his time to our
company during the term of his employment. The 1999 Agreement has a term
through December 31, 2002. The 1999 Agreement may be terminated prior to the
end of the term or any extension thereof upon, among other things, (i) at least
90 days' prior written notice of our intent to terminate the 1999 Agreement or
(ii) our material breach of the 1999 Agreement. At or prior to the closing date
of the Share Transaction, Dr. Pass will enter into a new Employment Agreement
pursuant to which we will pay him the following bonuses: (i) $25,000 payable at
the closing of the Share Transaction and (ii) $25,000 payable at the closing of
the Share Transaction if Dr. Pass is successful (as determined by Dr. Jacques
Gonella) in negotiating revisions to a certain licensing agreement.
Employment Agreements with Lawrence Christian and Peter Sadowski. Mr.
Christian and Dr. Sadowski entered into employment agreements with us as of
December 22, 1999 with updated agreements as of May 1, 2000, (each, an
"Employment Agreement"). The Employment Agreements provided for 2000 base
salaries of $102,000 for Mr. Christian until May 1, 2000 and $124,000
thereafter and $135,820 for Dr. Sadowski. In accordance with the Employment
Agreements, upon the closing of the Share Transaction, we will pay
Mr. Christian a bonus of $12,000 (payable in four installments) and Dr.
Sadowski a bonus of $17,000 (payable in four installments). Upon the closing of
the Share Transaction, we will grant an option to purchase 5,000 shares of
Medi-Ject common stock to each of Mr. Christian and Dr. Sadowski. The
Employment Agreements also contain provisions regarding participation in
benefit plans, repayment of expenses, participation as a director or consultant
to other companies (which is permitted provided that such participation does
not materially detract from their respective obligations to our company or
otherwise violate the terms of their Employment Agreements), protection of
confidential information and ownership of intellectual property. In addition,
the Employment Agreements contain covenants not to compete and covenants with
respect to non-solicitation and non-interference with our customers, suppliers
or employees. Mr. Christian's employment agreement is for 365 days continuing
each day on a rolling 365-day basis. Dr. Sadowski's employment agreement has a
term through December 31, 2002.
59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
owners of the Medi-Ject common stock as of August 21, 2000, with respect to (i)
all persons we know to be the beneficial owners of more than 5% of the
outstanding Medi-Ject common stock, (ii) each of our directors, (iii) each
Named Executive Officer, and (iv) all directors and executive officers as a
group.
Shares Outstanding Percentage of
Beneficially Options and Outstanding
Name of Beneficial Owner Owned(1) Warrants(2) Shares
- ------------------------ ------------ ----------- -------------
Becton Dickinson and Company (3)....... 609,292 456,969 32.4%
Franklin Pass, M. D. (4)............... 112,042 91,917 7.4%
Kenneth Evenstad (4)................... 6,279 4,223 *
Stanley Goldberg (4)................... 4,000 4,000 *
Karl Groth (4)......................... 4,000 4,000 *
Geoffrey Guy, M.D. (4)................. 8,984 8,223 *
Fred L. Shapiro, M. D. (4)............. 14,887 4,223 1.0%
Lawrence Christian (4)................. 17,000 14,000 1.2%
Peter Sadowski (4)..................... 12,047 12,047 *
All directors and executive officers as
a group (8 persons)................... 179,238 142,632 11.4%
Dr. Jacques Gonella(5)(6).............. 0 0 --
Dr. Thomas Rinderknecht(5)(6).......... 0 0 --
Dr. Philippe Dro(5)(6)................. 0 0 --
Prof. Ubaldo Conte(5)(6)............... 0 0 --
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Medi-Ject
common stock subject to options or warrants currently exercisable or
exercisable within 60 days of August 21, 2000, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person. We
believe that the persons named in this table, based on information provided
by such persons, each have sole voting and investment power with respect to
the shares of Medi-Ject common stock indicated.
(2) Shares of Medi-Ject common stock issuable upon the exercise of outstanding
options and warrants.
(3) The address of Becton Dickinson is 1 Becton Drive, Franklin Lakes, NJ
07417.
(4) The director's or officer's address is 161 Cheshire Lane, Suite 100,
Plymouth, MN 55441.
(5) Director's address is c/o Permatec, Gewerbestrasse 18, 4123 Allschwil,
Switzerland.
(6) If the Share Transaction is approved, this person will be appointed a
director of Medi-Ject upon the closing.
60
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation that we paid to or accrued on behalf of the Chief Executive
Officer and the two other most highly compensated executive officers (the
"Named Executive Officers") as of the year ended December 31, 1999, for
services in all capacities as well as compensation earned by such person for
the previous two fiscal years (if the person was an executive officer during
any part of such fiscal year):
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------- ------------
Other Annual Stock
Fiscal Salary Bonus Compensation Options
Name and Principal Position Year ($) ($) ($)(1) (#)
- --------------------------- ------ ------ ----- ------------ ------------
Franklin Pass, M.D.,........ 1999 216,300 -- 16,545 --
Chairman, President and
Chief Executive 1998 216,300 -- 21,958 80,000(2)
Officer 1997 210,000 -- 15,698 80,000
Lawrence Christian,......... 1999 68,538(3) -- -- 21,000
Vice President, Finance &
Administration and Chief
Financial Officer
Peter Sadowski, Executive
Vice....................... 1999 118,300 -- -- 3,000
President and Chief
Technology Officer 1998 115,360 -- -- 19,215(2)
1997 112,000 -- -- 3,000
- --------
(1) Represents premiums paid for disability and life insurance policies with
coverage limits in excess of those provided under our standard employee
insurance policies.
(2) All options granted to named executives in 1998 represent options issued at
an exercise price of $7.20 following the cancellation of an equal number of
options issued in previous years. See "Report on Repricing of Options".
(3) Represents salary paid from his employment date of March 23, 1999.
STOCK OPTIONS
Option Grants During 1999
The table below sets forth individual grants of stock options made to the
Named Executive Officers during the year ended December 31, 1999. Each of the
options granted were issued following the cancellation of a similar option with
a higher exercise price.
Potential
Realizable Value at
Percent of Assumed Annual
Number of Total Options Rates of Stock
Securities Granted to Exercise Price Appreciation
Underlying Employees Price or for Option Term(1)
Options During the Base Expiration -------------------
Name Granted(#) Year(%) Price/sh.($) Date 5%($) 10%($)
- ---- ---------- ------------- ------------ ---------- ----- ---------
Lawrence Christian(2)... 21,000 63.4 1.75 03/23/09 23,100 58,380
Peter Sadowski(3)....... 3,000 9.1 3.50 05/20/09 6,600 16,740
- --------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future prices of Medi-Ject common
stock.
61
(2) Incentive stock option granted on March 23, 1999 pursuant to our 1996
Incentive and Stock Option Plan. This option vests in three equal
installments on March 23 in each of 1999, 2000, 2001.
(3) Incentive stock option granted on May 20, 1999 pursuant to our 1996
Incentive and Stock Option Plan. This option vests in five equal
installments on May 20 in each of 2000, 2001, 2002, 2003 and 2004.
Aggregated Option Exercises in 1999 and Year End Option Values
The following table provides information concerning stock option exercises
and the value of unexercised options at December 31, 1999 for the Named
Executive Officers:
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at Year End(#) at Year End($)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Franklin Pass........... 0 0 81,056 49,600 0 0
Lawrence Christian...... 0 0 7,000 14,000 0 0
Peter Sadowski.......... 0 0 15,255 6,960 0 0
Report on Repricing of Options
In May 1999, after a significant decrease in the price of Medi-Ject common
stock, the Compensation Committee of the Board of Directors determined that
options to purchase an aggregate of 24,115 shares of Medi-Ject common stock
previously granted to five of our outside directors no longer provided a
meaningful incentive as originally intended. These option agreements had been
granted on four separate occasions between January 3, 1995, and February 11,
1998, had original exercise prices ranging from $9.05 to $25.00 per share, and
were granted pursuant to our 1996 Incentive and Stock Option Plan, our 1993
Stock Option Plan or our 1998 Directors Plan. In order to provide meaningful
incentives to our Board of Directors in the future, the Board of Directors
canceled these option agreements and then reissued the options at an exercise
price of $3.50 per share, the market price on the day of the reissue. All of
the other terms and conditions of the original option agreements, including the
vesting periods, were unchanged following reissue.
Years
Market Remaining
Number of Price of Exercise in Original
Underlying Stock at Price at New Option Term
Shares Time of Time of Exercise on Date of
Name Date Repriced Repricing Repricing Price Repricing
- ---- -------- ---------- --------- --------- -------- -----------
Ken Evenstad...... 01/03/95 762 $3.50 $16.45 $3.50 0.6
Ken Evenstad...... 03/14/96 1,143 3.50 19.70 3.50 6.6
Ken Evenstad...... 10/22/96 1,800 3.50 25.00 3.50 7.4
Ken Evenstad...... 02/11/98 1,000 3.50 9.05 3.50 8.7
Stanley Goldberg.. 02/11/98 1,000 3.50 9.05 3.50 8.7
Stanley Goldberg.. 02/11/98 2,000 3.50 9.05 3.50 8.7
Karl Groth........ 02/11/98 3,000 3.50 9.05 3.50 8.7
Geoffrey Guy...... 01/03/95 762 3.50 16.45 3.50 0.6
Geoffrey Guy...... 03/14/96 1,143 3.50 19.70 3.50 6.6
Geoffrey Guy...... 10/22/96 1,800 3.50 25.00 3.50 7.4
Geoffrey Guy...... 02/11/98 4,000 3.50 9.05 3.50 8.7
Geoffrey Guy...... 02/11/98 1,000 3.50 9.05 3.50 8.7
Fred Shapiro...... 01/03/95 762 3.50 16.45 3.50 0.6
Fred Shapiro...... 03/14/96 1,143 3.50 19.70 3.50 6.6
Fred Shapiro...... 10/22/96 1,800 3.50 25.00 3.50 7.4
Fred Shapiro...... 02/11/98 1,000 3.50 9.05 3.50 8.7
62
On December 21, 1999, our Board of Directors approved the repricing of all
outstanding Qualified and Non-Qualified Stock Options, as of January 3, 2000,
held by our employees and directors, which had an exercise price greater than
$1.5625 per share. This repricing action reduced the exercise price to $1.5625
per share for all such Stock Option Agreements, representing approximately
252,517 shares which had exercise prices ranging from $1.75 to $25.00 per
share. Following the repricing, all other terms and conditions of these option
agreements were unchanged, including the vesting schedules. Information
regarding repriced options for directors and executive officers is as follows:
Years
Market Remaining
Number of Price of Exercise in Original
Underlying Stock at Price at New Option Term
Shares Time of Time of Exercise on Date of
Name Date Repriced Repricing Repricing Price Repricing
- ---- -------- ---------- --------- --------- -------- -----------
Directors
- ---------
Ken Evenstad............ 03/14/96 1,143 1.56 3.50 1.56 6.0
Ken Evenstad............ 10/22/96 1,800 1.56 3.50 1.56 6.9
Ken Evenstad............ 02/11/98 1,000 1.56 3.50 1.56 8.1
Ken Evenstad............ 01/04/99 1,000 1.56 2.50 1.56 9.0
Stanley Goldberg........ 02/11/98 1,000 1.56 3.50 1.56 8.1
Stanley Goldberg........ 02/11/98 2,000 1.56 3.50 1.56 8.1
Stanley Goldberg........ 01/04/99 1,000 1.56 2.50 1.56 9.0
Karl Groth.............. 02/11/98 3,000 1.56 3.50 1.56 8.1
Karl Groth.............. 01/04/99 1,000 1.56 2.50 1.56 9.0
Geoffrey Guy............ 03/14/96 1,143 1.56 3.50 1.56 6.0
Geoffrey Guy............ 10/22/96 1,800 1.56 3.50 1.56 6.8
Geoffrey Guy............ 02/11/98 4,000 1.56 3.50 1.56 8.1
Geoffrey Guy............ 02/11/98 1,000 1.56 3.50 1.56 8.1
Geoffrey Guy............ 01/04/99 1,000 1.56 2.50 1.56 9.0
Fred Shapiro............ 03/14/96 1,143 1.56 3.50 1.56 6.0
Fred Shapiro............ 10/22/96 1,800 1.56 3.50 1.56 6.8
Fred Shapiro............ 02/11/98 1,000 1.56 3.50 1.56 8.1
Fred Shapiro............ 01/04/99 1,000 1.56 2.50 1.56 9.0
Executive Officers
- ------------------
Franklin Pass........... 07/01/93 15,232 1.56 6.55 1.56 3.6
Franklin Pass........... 03/14/96 2,285 1.56 19.70 1.56 6.0
Franklin Pass........... 10/22/96 8,000 1.56 25.00 1.56 6.9
Franklin Pass........... 10/22/96 16,000 1.56 25.00 1.56 6.9
Franklin Pass........... 02/21/97 80,000 1.56 7.20 1.56 7.1
Lawrence Christian...... 03/23/99 21,000 1.56 1.75 1.56 9.3
Peter Sadowski.......... 02/28/94 5,484 1.56 7.20 1.56 3.9
Peter Sadowski.......... 03/14/96 1,523 1.56 7.20 1.56 6.0
Peter Sadowski.......... 10/22/96 5,400 1.56 7.20 1.56 6.9
Peter Sadowski.......... 12/17/97 3,000 1.56 7.20 1.56 7.9
Peter Sadowski.......... 05/20/99 3,000 1.56 3.50 1.56 9.4
63
Performance Graph
The graph below provides an indication of our cumulative total shareholder
returns ("Total Return") as compared with the Nasdaq Composite Index and
Biotechnology Stocks weighted by market value at each measurement point.
This graph covers the period beginning October 3, 1996, when Medi-Ject
common stock was first traded on the Nasdaq National Market, through December
31, 1999. The graph assumes $100 was invested in each of Medi-Ject common
stock, the Nasdaq Composite Index and the Biotechnology Stocks on October 3,
1996 (based upon the closing price of each). Total Return assumes reinvestment
of dividends.
[PERFORMANCE GRAPH APPEARS HERE]
3-Oct 1996 31-Dec 1996 31-Dec 1997 31-Dec 1998 31-Dec 1999
---------- ----------- ----------- ----------- -----------
Medi-Ject............... $100 $ 69.05 $ 38.10 $ 7.14 $ 1.50
Nasdaq Composite Index.. 100 104.47 128.20 180.09 334.25
Biotechnology Stocks.... 100 94.86 99.19 143.19 311.70
64
THE RATIFICATION OF THE APPOINTMENT OF AUDITORS PROPOSAL
(PROPOSAL 6 ON PROXY CARD)
At the meeting, a vote will be taken on a proposal to ratify the appointment
of KPMG LLP ("KPMG") as our independent auditors for the year ending December
31, 2000. KPMG has audited our financial statements since 1995.
A representative of KPMG is expected to be present at the Annual Meeting to
make a statement if he or she so desires and to respond to appropriate
questions.
The affirmative vote of a majority of the outstanding shares of Medi-Ject
common stock, represented in person or by proxy at the Annual Meeting, is
necessary for approval of the selection of KPMG LLP as our independent
auditors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE ABOVE PROPOSAL
TO RATIFY THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT AUDITORS.
OTHER MATTERS
Solicitation
We will bear the cost of preparing, assembling and mailing the proxy, Proxy
Statement, annual report and other material which may be sent to the
shareholders in connection with this solicitation. We may request brokerage
houses and other custodians, nominees and fiduciaries to forward soliciting
material to the beneficial owners of stock, in which case we will reimburse
them for their expenses. While proxies are being solicited primarily by mail,
officers of our company may solicit proxies personally by telephone or special
letter, but will not receive extra compensation for doing so.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
certain officers and persons who own more than 10% of a registered class of
Medi-Ject equity securities, to file reports of ownership on Form 3 and changes
in ownership on Forms 4 or 5 with the SEC. These officers, directors and 10%
shareholders are also required by the SEC's rules to provide to us copies of
all Section 16(a) reports they file.
Specific due dates for such reports have been established by the SEC and we
are required to disclose in this Proxy Statement any failure to file reports by
such dates. Based solely on our review of the copies of such reports received
by us or by written representations from certain reporting persons, we believe
that during the year ended December 31, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and ten percent shareholders
were complied with, except for the filing of a report describing the issuance
of a stock option to the Chief Executive Officer in February 1997. A report
detailing this transaction was filed in February 1999.
Other Matters at Annual Meeting
The Board of Directors does not intend to present to the Annual Meeting any
matter not referred to above and does not presently know of any matters that
may be presented to the meeting by others. However, if other matters come
before the Annual Meeting, it is the intention of the persons named in the
enclosed form of proxy to vote the proxy in accordance with their best
judgment.
65
Annual Report and Incorporation by Reference
This Proxy Statement incorporates by reference certain sections of our
Annual Report to shareholders which accompanies this Proxy Statement. It
consists of our Form 10-KA for the fiscal year ended December 31, 1999, which
includes an audited balance sheet as of that date and the related statements of
earnings, cash flows and stockholders' equity, as well as other financial
information relating to us, including Management's Discussion and Analysis of
Financial Condition and Results of Operations. Items 1, 2, 6, 7, 7A and 8 of
the Annual Report on Form 10-KA are incorporated by reference into this Proxy
Statement. Otherwise our Annual Report does not form part of the materials for
solicitation of proxies. In addition, Items 1 and 2 of Part 1 of our reports on
Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000 are
incorporated by reference into this Proxy Statement. The Annual Report, which
includes the Form 10KA, and Form 10-Qs are being delivered to shareholders
along with this Proxy Statement.
PROPOSALS OF SHAREHOLDERS
The proxy rules of the Securities and Exchange Commission permit
shareholders, after timely notice to issuers, to present proposals for
shareholder action in issuer proxy statements where such proposals are
consistent with applicable law, pertain to matters appropriate for shareholder
action, and are not properly omitted by company action in accordance with proxy
rules. Shareholder proposals for the 2001 Annual Meeting must be prepared in
accordance with the proxy rules and received by us on or before December 15,
2000 in order to be eligible for inclusion in our proxy materials.
66
Index to the Permatec Holding AG
Consolidated Financial Statements
Independent auditors' report.............................................. F-2
Consolidated balance sheets as of December 31, 1997, 1998 and 1999........ F-3
Consolidated statements of operations for the years ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated statements of cash flows for the years ended December 31,
1997, 1998 and 1999...................................................... F-5
Consolidated statements of shareholders' deficit and comprehensive loss
for the years ended December 31, 1997, 1998 and 1999..................... F-6
Notes to the consolidated financial statements............................ F-7
Interim consolidated balance sheets as of December 31, 1999 and June 30,
2000..................................................................... F-17
Interim consolidated statements of operations for the six month periods
ended June 30, 1999 and 2000............................................. F-18
Interim consolidated statements of cash flows for the six month periods
ended June 30, 1999 and 2000............................................. F-19
Interim consolidated statements of shareholders' deficit for the six month
periods ended June 30, 1999 and 2000..................................... F-20
Notes to the interim consolidated financial statements.................... F-21
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Permatec Holding AG:
We have audited the accompanying consolidated balance sheets of Permatec
Holding AG and its subsidiaries (the "Group") as of December 31, 1997, 1998 and
1999, and the related consolidated statements of operations, shareholders'
deficit and comprehensive loss and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Group'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 in the United States. 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 the Group as
of December 31, 1997, 1998 and 1999, and the consolidated results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.
As discussed in Note 14, the accompanying consolidated financial statements
have been restated for the effects of purchase accounting applied to the
acquisition of certain minority interests in the Group's subsidiaries in June
1996 which were previously accounted for as mergers of entities under common
control.
KPMG Fides Peat
Zurich, Switzerland
May 8, 2000
(except as to the effect of matters discussed in Note 14, which is as of
September 21, 2000)
F-2
PERMATEC HOLDING AG
Consolidated Balance Sheets
as of December 31
(as restated, see Note 14)
1997 1998 1999
USD USD USD
---------- ---------- -----------
Assets
Current assets:
Cash and cash equivalents............... 331,718 492,376 674,569
VAT, capital taxes and other
receivables............................ 294,996 632,240 284,023
Prepaid expenses and other current
assets................................. 19,277 35,843 4,572
---------- ---------- -----------
645,991 1,160,459 963,164
---------- ---------- -----------
Equipment, furniture, and fixtures, net... 218,779 889,199 800,044
Patent rights, net........................ 126,550 164,078 247,074
Goodwill, net............................. 622,871 444,908 266,945
Deposits.................................. 30,000 11,264 7,128
Other non-current assets.................. 12,172 726 --
---------- ---------- -----------
Total assets.............................. 1,656,363 2,670,634 2,284,355
========== ========== ===========
Liabilities and shareholders' deficit
Current liabilities:
Trade accounts payable.................. 78,029 285,747 305,710
Accounts payable other.................. 258,413 245,036 237,125
Restructuring provisions................ -- -- 280,816
Capital lease obligations--current...... 67,034 123,729 91,808
Accrued expenses........................ 117,929 111,835 269,200
Liabilities to related parties.......... -- 491,173 339,733
Other current liabilities............... 11,035 12,319 8,124
---------- ---------- -----------
532,440 1,269,839 1,532,516
---------- ---------- -----------
Loans from shareholders (subordinated).... 3,268,368 7,729,909 10,005,146
Capital lease obligations--less current
maturities............................... 59,690 187,599 92,141
Other long-term liabilities............... -- 906 1,876
---------- ---------- -----------
Total liabilities......................... 3,860,498 9,188,253 11,631,679
---------- ---------- -----------
Shareholders' deficit
Share capital CHF 100 par; shares:
6,000, 10,000 and 10,000 shares issued
and outstanding at December 31, 1997,
1998 and 1999, respectively............ 413,793 689,655 689,655
Additional paid in capital.............. 1,110,097 1,110,097 1,110,097
Accumulated other comprehensive
income/(loss).......................... 38,679 (280,661) 857,000
Accumulated deficit..................... (3,766,704) (8,036,710) (12,004,076)
---------- ---------- -----------
Total shareholders' deficit............... (2,204,135) (6,517,619) (9,347,324)
---------- ---------- -----------
Total liabilities and shareholders'
deficit.................................. 1,656,363 2,670,634 2,284,355
========== ========== ===========
See the accompanying notes to the consolidated financial statements.
F-3
PERMATEC HOLDING AG
Consolidated Statements of Operations
for the years ended December 31
(as restated, see Note 14)
1997 1998 1999
USD USD USD
---------- ---------- ----------
Revenues:
Product development (milestone
payments).............................. -- -- 1,036,533
License revenue......................... -- 67,528 311,740
Contract research with related parties.. 144,828 179,310 3,334
---------- ---------- ----------
144,828 246,838 1,351,607
---------- ---------- ----------
Operating expenses:
Research and development................ 796,410 1,749,666 1,647,059
General and administrative.............. 1,225,989 2,431,638 3,220,514
Sales and marketing..................... 69,794 178,741 213,110
---------- ---------- ----------
2,092,193 4,360,045 5,080,683
---------- ---------- ----------
Operating loss............................ (1,947,365) (4,113,207) (3,729,076)
---------- ---------- ----------
Other income (expense):
Interest and other expense.............. (95,000) (173,146) (297,451)
Interest and other income............... 40,450 48,774 138,331
---------- ---------- ----------
(54,550) (124,372) (159,120)
---------- ---------- ----------
Loss before taxes......................... (2,001,915) (4,237,579) (3,888,196)
Income tax expense........................ 53,862 32,427 79,170
---------- ---------- ----------
Net loss.................................. (2,055,777) (4,270,006) (3,967,366)
========== ========== ==========
Net loss per share (USD).................. (342.63) (533.75) (396.74)
========== ========== ==========
Basic and diluted weighted average shares
outstanding.............................. 6,000 8,000 10,000
========== ========== ==========
See the accompanying notes to the consolidated financial statements.
F-4
PERMATEC HOLDING AG
Consolidated Statements of Cash Flows
for the years ended December 31
(as restated, see Note 14)
1997 1998 1999
USD USD USD
---------- ---------- ----------
Cash flows from operating activities:
Net loss................................. (2,055,777) (4,270,006) (3,967,366)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization.......... 285,537 427,881 560,628
Gain on sale of equipment, furniture
and fixtures.......................... -- -- (50,423)
Stock based compensation expense....... 180,000 -- --
Changes in operating assets and
liabilities:
VAT, capital taxes and other
receivables........................... (263,547) (306,722) 322,008
Prepaid expenses and other assets...... 22,310 (14,837) 28,100
Trade accounts payable................. 207,890 142,910 59,517
Other liabilities and accrued
expenses.............................. 161,595 489,913 126,614
Restructuring provisions............... -- -- 299,537
Other.................................. (27,786) 47,543 (33,095)
---------- ---------- ----------
Net cash used in operating activities...... (1,489,778) (3,483,318) (2,654,480)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of equipment, furniture and
fixtures................................ (185,685) (607,648) (424,053)
Payments for patent rights............... (140,612) (48,810) (145,449)
Proceeds from sale of equipment,
furniture and fixtures.................. -- -- 89,469
---------- ---------- ----------
Net cash used in investing activities...... (326,297) (656,458) (480,033)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from loans from shareholders.... 1,811,314 4,364,234 3,560,640
Principal payments on capital lease
obligations............................. (37,897) (87,569) (135,681)
Capital contribution..................... 307,838 -- --
---------- ---------- ----------
Net cash provided by financing activities.. 2,081,255 4,276,665 3,424,959
---------- ---------- ----------
Effect of exchange rate changes on cash and
cash equivalents.......................... (49,537) 23,769 (108,253)
---------- ---------- ----------
Increase in cash and cash equivalents...... 215,643 160,658 182,193
Cash and cash equivalents:
Beginning of year........................ 116,075 331,718 492,376
---------- ---------- ----------
End of year.............................. 331,718 492,376 674,569
========== ========== ==========
See the accompanying notes to the consolidated financial statements.
F-5
PERMATEC HOLDING AG
Consolidated Statements of Shareholders' Deficit and Comprehensive Loss
for the Years Ended December 31, 1997, 1998 and 1999
(as restated, see Note 14)
Accumulated
Additional Other Total
Share Paid In Accumulated Comprehensive Shareholders'
Capital Capital Deficit Income Deficit
USD USD USD USD USD
------- ---------- ----------- ------------- -------------
Balance, December 31,
1996................... -- 1,036,052 (1,710,927) (6,777) (681,652)
------- --------- ----------- --------- ----------
Capital contribution.... -- 307,838 -- -- 307,838
Share issuance to
employee............... -- 180,000 -- -- 180,000
Issuance of Permatec
Group share capital on
November 1, 1997 (6,000
shares)................ 413,793 (413,793) -- -- --
Net loss................ -- -- (2,055,777) -- (2,055,777)
Translation adjustment.. -- -- -- 45,456 45,456
------- --------- ----------- --------- ----------
Comprehensive loss...... -- -- -- -- (2,010,321)
------- --------- ----------- --------- ----------
Balance at December 31,
1997................... 413,793 1,110,097 (3,766,704) 38,679 (2,204,135)
------- --------- ----------- --------- ----------
Conversion of
subordinated loan into
share capital (4,000
shares)................ 275,862 -- -- -- 275,862
Net loss................ -- -- (4,270,006) -- (4,270,006)
Translation adjustment.. -- -- -- (319,340) (319,340)
------- --------- ----------- --------- ----------
Comprehensive loss...... -- -- -- -- (4,589,346)
------- --------- ----------- --------- ----------
Balance, December 31,
1998................... 689,655 1,110,097 (8,036,710) (280,661) (6,517,619)
------- --------- ----------- --------- ----------
Net loss................ -- -- (3,967,366) -- (3,967,366)
Translation adjustment.. -- -- -- 1,137,661 1,137,661
------- --------- ----------- --------- ----------
Comprehensive loss...... -- -- -- -- (2,829,705)
------- --------- ----------- --------- ----------
Balance, December 31,
1999................... 689,655 1,110,097 (12,004,076) 857,000 (9,347,324)
------- --------- ----------- --------- ----------
See the accompanying notes to the consolidated financial statements.
F-6
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
1. Description of Business and Summary of Significant Accounting Policies
Business description and basis of presentation
Permatec Holding AG ("Permatec", and its wholly owned subsidiaries Permatec
Pharma AG, Permatec Technologie AG, Permatec NV, Permatec Laboratorios SA and
Permatec France SA, collectively the "Group") are primarily engaged in
activities related to the development of transdermal and transmucosal
pharmaceutical products. The Group develops highly specialized formulations to
address the need to deliver drugs through skin and mucosa using patches, gels,
and fast-dissolving and transbuccal tablets for several drugs and drug
combinations. The Group's principal development facilities and executive
offices are located in Basel, Switzerland.
Permatec is 60% owned by Venture Capital Partners ("VECAP"), an entity owned
90% by Dr. Jacques Gonella, 36.9% owned directly by Dr. Gonella and 3.1% owned
by three other minority shareholders. Permatec was founded in 1997 by VECAP and
Dr. Gonella, who then owned 40% of the outstanding shares of VECAP. Pursuant to
a voting agreement among VECAP shareholders, Dr. Gonella had effective control
of VECAP since 1993. At the time of Permatec's organization in December 1997,
VECAP owned 60% of the outstanding shares of Permatec Technologie, which owned
100% of the shares of Permatec NV. Prior to Permatec's organization, Permatec
NV owned 100% of the shares of Permatec Laboratorios. VECAP contributed to
Permatec the 60% of Permatec Technologie which it owned and Dr. Gonella
contributed the remaining 40% of Permatec Technologie which he owned. Permatec
NV subsequently transferred 100% of the outstanding shares of Permatec
Laboratorios to Permatec. At the same time, Dr. Gonella transferred to Permatec
all of the outstanding shares of Permatec Pharma. Also in 1997, Dr. Gonella,
who owned 98% of the shares of Permatec France, transferred all of those shares
to Permatec. As a result of these transfers, Dr. Gonella and VECAP owned 28%
and 60%, respectively, of the outstanding shares of Permatec in 1997.
Accordingly, for reporting purposes the Group has been presented as if it
existed as of January 1, 1997 to reflect the Group's shareholder structure on
an historical basis. In the Group's consolidated statements of shareholders'
deficit, share capital of Permatec is displayed for all dates following
November 1, 1997.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America. All
intercompany transactions and balances between Permatec and its subsidiaries
have been eliminated for all periods presented.
Translation of foreign currencies
The Group has determined that the local currency is the functional currency
for all of its subsidiaries under Financial Accounting Standards Board
Statement No. 52, "Foreign Currency Translation" (FAS 52). The Group's
reporting currency is the Unites States Dollar ("USD"). The financial
statements of the Group's foreign subsidiaries are translated into USD for
consolidation purposes. All assets and liabilities are translated using period-
end exchange rates and statements of operations items are translated using
average exchange rates for the period. The resulting translation adjustments
are recorded as a separate component of shareholders' deficit. Foreign currency
transaction gains and losses are included in determining net income, but have
not been material in any of the periods presented.
Cash and Cash Equivalents
The Group considers highly liquid debt instruments with original maturities
of 90 days or less to be cash equivalents.
F-7
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures are stated at cost and are depreciated
using the straight-line method over their estimated useful lives ranging from
four to ten years.
Patent Rights
The Group capitalizes the costs of obtaining patent rights. These
capitalized costs are amortized on a straight-line basis over ten years
beginning in the year the patent is issued. Recoverability of such patent
assets is evaluated on a periodic basis.
Goodwill
Goodwill is amortized on a straight-line basis over 5 years. Goodwill (along
with all long-lived assets) is reviewed for impairment whenever the facts and
circumstances indicate the carrying value may not be recoverable.
Licensing and Product Development Revenue Recognition
Licensing and product development revenue is recognized when underlying
performance criteria for payment have been met and the Group has an
unconditional right to such payment. Depending on a license or product
development agreement's terms, recognition criteria may be satisfied upon
achievement of milestones or passage of time. Milestone payments are typically
triggered by the successful achievement of important events such as the
completion of clinical studies, filings with the FDA, bioequivalence to other
drugs, and approval by the FDA as defined by the underlying licensing and
product development agreement. The Group classifies amounts received related to
the performance of a series of tasks, (e.g. testing the transdermal penetration
of a drug, manufacture of a clinical batch, etc.) as product development
revenues.
The Group recognizes royalty revenues upon the sale of licensed products by
the licensee, and recognizes such revenue as license revenue. The Group
occasionally receives payment of up-front royalty advances from licensees.
Revenues from up-front royalty payments are deferred until earned through the
sale of licensed revenue from the licensee or the termination of the agreement
based on the terms of the license. The Group classifies amounts received
related to royalties from sales of products licensed by the Group, which the
Group developed or partially developed, as license revenues in accordance with
the terms of the underlying agreement.
In certain cases the Group receives up-front payments upon signing licensing
and development agreements. If the up-front payment relates to services already
performed, and there is no additional performance obligation under the
agreement the amount is recognized as revenue in the period the payment is
received. If the Group has subsequent obligations under the agreement, or the
payment does not relate to services already provided, the amount is deferred in
relation to the performance requirements under the related licensing and
development agreement.
Research and Development
Group sponsored research and development expenses related to product and
patent development are expensed as incurred.
Start-up and Organization Costs
The Group expenses all costs associated with start-up activities and
organization costs as such costs are incurred.
F-8
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases. 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 realized or settled.
Net Loss Per Share
Basic earnings per share is computed by dividing the net loss by the
weighted-average number of shares outstanding for the period. For the years
ended December 31, 1997, 1998 and 1999, basic and diluted earnings per share
are identical, as there were no potentially dilutive securities. For
comparative purposes, the Group has assumed the 6,000 shares issued in November
1997 in connection with the formation of Permatec were issued and outstanding
for all of 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, other receivables,
deposits, and all financial liabilities other than the subordinated loans from
shareholders reported in the balance sheet are carried at amounts that
approximate their estimated fair value. At December 31, 1997, 1998, and 1999,
it was not practicable to estimate the fair value of the subordinated loans
from shareholders, because of the lack of quoted market prices for similar
investments, and such loans can only be repaid by the Group once the Group
achieves positive shareholders' equity as defined by Swiss statutory
regulations.
Fair value estimates are made at a specific point in time based on relevant
market and financial instrument information. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
Stock Based Compensation
Compensation expense for stock incentives granted to employees and directors
is recognized in accordance with Accounting Principles Board, Opinion 25 ("APB
25"), "Accounting for Stock Issued to Employee." Pro
F-9
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
forma effects on net loss and loss per share are provided as if the fair value
based method defined in Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock Based Compensation," has been applied.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), in June 1998, the amended version of which is effective
January 1, 2001. SFAS 133 will require us to record all derivatives on the
balance sheet at fair value. For derivatives that are hedges, the changes in
the fair value will be offset by the changes in the fair value of the hedged
assets, liabilities or firm commitments. We are currently evaluating the impact
of adopting SFAS 133 on our reported results of operations and financial
position.
The Securities and Exchange Commission issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101), on December 3,
1999. SAB 101 provides additional guidance on the application of existing
generally accepted accounting principles to revenue recognition in financial
statements. We are currently evaluating the impact of adopting SAB 101 on our
consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentation. Except as noted in Note 14, these reclassifications had no
impact on previously reported earnings.
2. Liquidity
As reflected in the accompanying Group consolidated financial statements,
the Group incurred a net loss of USD 3,967,366 for the year ended December 31,
1999. In addition, the Group has incurred net losses and has had negative cash
flows from operating activities since inception. Management believes current
working capital, projected product development and license revenues, and
continued projected debt financing from shareholders will provide the Group
with sufficient liquidity through March 2001. Dr. Gonella has declared his
continuing financial support for the Group's activities through March 2001;
however, upon the closing of the Share Transaction, he will have no further
obligation to fund the Subsidiaries.
3. Composition of Certain Financial Statement Captions
1997 1998 1999
USD USD USD
------- --------- ---------
Equipment furniture and fixtures:
Equipment, furniture and fixtures............. 336,287 1,255,084 1,443,566
Less accumulated depreciation................. 117,508 365,885 643,522
------- --------- ---------
218,779 889,199 800,044
======= ========= =========
Patent rights:
Patent rights................................. 140,611 199,030 308,023
Less accumulated amortization................. 14,061 34,952 60,949
------- --------- ---------
126,550 164,078 247,074
======= ========= =========
4. Leases
The Group has several noncancelable operating leases for its office and
developmental facilities that expire on various dates through September 2008.
Rent expense incurred for the years ended December 31, 1997, 1998 and 1999 was
USD 38,223, USD 94,730 and USD 270,537, respectively.
F-10
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
The Group is also obligated under various non-cancellable leases classified
as capital leases. Equipment, furniture, and fixtures include USD 219,545, USD
484,972 and USD 572,392 of cost and USD 87,003, USD 218,764 and USD 309,256 of
accumulated amortization as of December 31, 1997, 1998 and 1999 respectively,
related to current and prior leases.
The following is a schedule by year of the future minimum lease payments at
December 31, 1999:
Operating Capital
Year ending leases leases
December 31 USD USD
----------- --------- -------
2000....................................................... 189,896 83,683
2001....................................................... 158,000 78,372
2002....................................................... 139,500 13,770
2003....................................................... 149,500 --
2004....................................................... 162,000 --
2005 and beyond............................................ 607,500 --
--------- -------
Total.................................................... 1,406,396 175,825
========= =======
5. Restructuring Activities
The Group recorded USD 454,428 of restructuring expenses during the year
ended December 31, 1999. Such expenses are in connection with the closure of
the Group's developmental facility in Argentina and termination of employees
associated with the Group's business development, patent administration,
project management and administrative functions in France. The Group has
recorded all restructuring charges incurred during the year ended December 31,
1999, as general and administrative expense.
The restructuring charge is primarily comprised of involuntary severance
benefits and other incremental costs of exiting facilities, including lease
termination costs, and write-off of certain assets. In connection with the
closure of these facilities, the Group has involuntarily terminated
approximately 25 employees, of which 13 were entitled to receive severance
benefits from the Group.
The Group reported charges of approximately USD 103,400 related to the
write-off of assets which were disposed of in connection with the closure of
the France and Argentina facilities for the year ended December 31, 1999. The
assets disposed of consisted of certain laboratory equipment and office
equipment that the Group decided not to transfer to its central facilities in
Basel, Switzerland.
The Group is undertaking these restructuring actions as part of its efforts
to reduce costs and to centralize its developmental and administrative
functions in Switzerland. These restructuring programs are expected to be
substantially complete by the end of 2000. The following table provides a
summary of the Group's restructuring provision activity:
Facilities &
Severance & Asset Legal &
Benefits Impairment Other Total
USD USD USD USD
----------- ---------- ------------ --------
Balance December 31, 1998.... -- -- -- --
------- -------- ------- --------
1999 restructuring
provisions.................. 249,500 103,400 101,528 454,428
Amount utilized in 1999...... (70,212) (103,400) -- (173,612)
------- -------- ------- --------
Balance December 31, 1999.... 179,288 -- 101,528 280,816
======= ======== ======= ========
F-11
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
6. Taxes
Due to taxable losses, the Group did not record a provision for current
income taxes in the each of the years ended December 31, 1997, 1998 and 1999.
The provision for taxes in all years presented in the Group's consolidated
financial statements consists of minimum capital taxes and value added taxes.
Deferred tax assets and liabilities as of December 31, 1997, 1998 and 1999
consist of the following:
1997 1998 1999
USD USD USD
-------- ---------- ----------
Net operating loss carryforward............ 37,241 260,870 581,250
Research and development................... 126,207 749,275 918,750
-------- ---------- ----------
Total deferred tax assets.................. 163,448 1,010,145 1,500,000
Less valuation allowance................... (163,448) (1,010,145) (1,500,000)
-------- ---------- ----------
Net deferred tax assets.................... -- -- --
======== ========== ==========
At December 31, 1999, the Group had net operating loss carryforwards ("NOL")
of approximately USD 2,906,250 for income tax purposes, which if unused will
begin to expire in 2004. The Group's deferred tax assets related to research
and development are associated with certain research and development costs,
which are eligible for capitalization for tax purposes in certain of the
Group's taxable jurisdictions. At December 31, 1999, the Group has established
a valuation allowance against its net deferred tax assets due to the Group's
history of pre-tax losses and a lack of significant offsetting objective
evidence that such deferred tax assets are realizable.
7. Shareholders' Equity
On November 1, 1997, Dr. Jacques Gonella, VECAP, and three unaffiliated
shareholders founded Permatec as a legal entity domiciled in Zug, Switzerland
with 6,000 shares of share capital. All authorized shares of Permatec's share
capital are issued and outstanding. Each share of share capital is entitled to
one vote per share. No proceeds were received by the Group in connection with
establishment of the legal entity.
In June of 1998, subordinated loans of USD 275,862 provided by Dr. Gonella
and VECAP, Permatec's shareholders, were converted into 4,000 shares of
Permatec's share capital.
8. Pensions or related plans
The Group contributes premiums to a fund for its employees, which is
administered by a third-party insurer. The Group has no obligation to provide
specific benefits to its employees and has determined that its benefit plan is
a defined contribution plan. Contributions under this plan amounted to USD 0,
USD 6,706 and USD 9,103 for the years ended December 31, 1997, 1998 and 1999,
respectively.
9. Related Party Transactions
At December 31, 1997, 1998, and 1999 the Group had subordinated loans
payable to Permatec's minority shareholder, Dr. Jacques Gonella of USD 732,628,
USD 4,917,684, and USD 7,506,773 and to Permatec's majority shareholder, VECAP,
of USD 2,535,740, USD 2,812,225 and USD 2,498,373, respectively. These parties
have provided the loans, which bear an annual interest rate of 3%, in several
installments throughout the Group's operating history. These loans are
subordinated, and can only be repaid by the Group once the Group achieves
positive shareholders' equity as defined by Swiss statutory regulations.
F-12
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
At December 31, 1997, 1998, and 1999 the Group had USD 0, USD 491,173, and
USD 339,733, respectively, payable to other companies ultimately owned by
Permatec's shareholder, Dr. Gonella, related to administrative and management
services provided by related companies in the periods. These amounts are non-
interest bearing and are considered to be current liabilities.
Based on a memorandum of understanding and corresponding invoices the Group
paid approximately USD 701,379 and USD 637,500 related to certain costs
incurred by other companies owned by Dr. Gonella, in 1998 and 1999,
respectively. These costs primarily relate to management and administrative
services provided by the related companies on behalf of the Group. The Group
paid no amounts to companies owned by Dr. Gonella in 1997. This agreement has
been terminated effective January 1, 2000.
The Group received approximately USD 144,828 and USD 179,310 and USD 3,334
for patent registration and other administration and research and development
services provided by the Group for other companies owned by shareholder, Dr.
Gonella, in 1997, 1998 and 1999, respectively.
Management believes that the transactions described above were concluded on
terms similar to those that would have been obtained from unaffiliated third
parties.
10. Supplemental Disclosures of Cash Flow Information
The Group did not make any cash payments for interest during the years ended
December 31, 1997, 1998 and 1999. All interest expense incurred by the Group
related to its subordinated loans to Dr. Gonella and VECAP has been included in
the outstanding loan balance at December 31, 1997, 1998 and 1999. Interest
expense credited to the loan balances in the years ended December 31, 1997,
1998 and 1999, were USD 74,899, USD 155,062, and USD 248,101, respectively.
Cash paid for taxes during the years ended December 31, 1997, 1998 and 1999
was USD 53,862, USD 32,427 and USD 79,170 respectively.
The Group incurred additional capital lease obligations of USD 94,724, USD
263,267, and USD 130,629, in the years ended December 31, 1997, 1998 and 1999,
respectively.
As further described in Note 7 to the Group's consolidated financial
statements, a subordinated loan of USD 275,862 provided by the Group's
shareholders was converted into 4,000 shares of Permatec's share capital. This
transaction had no impact on the Group's consolidated cash flows for the year
ended December 31, 1997.
11. Industry Segment and Operations by Geographic Areas
The Group is primarily engaged in one line of business -- development of
transdermal and transmucosal pharmaceutical products -- which accounted for
100% of consolidated sales. For reporting purposes, these operations are
considered to be one segment. The geographic distributions of the Group's
identifiable assets, net (loss) before taxes and revenues are summarized in the
following table:
Revenues by country of origin are summarized as follows:
1997 1998 1999
USD USD USD
------- ------- ---------
Switzerland........................................ -- 67,528 1,348,273
France............................................. 144,828 179,310 3,334
------- ------- ---------
144,828 246,838 1,351,607
======= ======= =========
F-13
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
Net loss before taxes by country is summarized as follows:
1997 1998 1999
USD USD USD
---------- ---------- ----------
Switzerland.............................. (382,072) (1,796,619) (778,284)
Argentina................................ (852,982) (1,333,982) (1,543,982)
France................................... (584,310) (907,241) (1,407,537)
All other................................ (182,551) (199,737) (158,393)
---------- ---------- ----------
(2,001,915) (4,237,579) (3,888,196)
========== ========== ==========
Assets by country are summarized as follows:
1997 1998 1999
USD USD USD
--------- --------- ---------
Switzerland.................................... 240,298 1,213,841 1,064,613
Argentina...................................... 687,414 668,454 516,475
France......................................... 344,310 508,514 512,031
All other...................................... 384,341 279,825 191,236
--------- --------- ---------
1,656,363 2,670,634 2,284,355
========= ========= =========
12. Additional sales information
The following summarizes significant customers comprising 10% or more of the
Group's revenue for the year ended December 31:
1997 1998 1999
USD USD USD
------- ------- ---------
Solvay............................................. -- 41,614 1,036,534
Segix.............................................. -- 25,914 228,720
Laboratories Jago (related party).................. 144,828 179,310 3,333
Other.............................................. -- -- 83,020
------- ------- ---------
144,828 246,838 1,351,607
======= ======= =========
13. Subsequent event
On January 25, 2000 Permatec entered into a non-binding letter of intent to
sell three of its subsidiaries, Permatec Pharma AG, Permatec Technologie AG and
Permatec NV to Medi-Ject Corporation (a US company based in Minneapolis,
Minnesota). Subject to satisfactory due diligence Permatec and Medi-Ject plan
to negotiate a definitive agreement in 2000. The parties intend to account for
the proposed transaction as a reverse acquisition. This proposed transaction
structure would feature Medi-Ject as the surviving legal entity and continue to
be a publicly traded company in the United States on the Nasdaq, while Permatec
would be the acquiror for financial reporting purposes.
14. Restatement
In June of 1996, Dr. Gonella acquired the 40% minority ownership interests
in Permatec NV, Permatec Laboratorios, and Permatec Technologie AG each of
which was subsequently transferred into Permatec in
F-14
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
November of 1997. At the time Dr. Gonella purchased these minority ownership
interests, Dr. Gonella was the controlling shareholder of VECAP. Dr. Gonella
acquired the minority interests for approximately USD 600,000. The excess of
cost over fair value of the minority interests acquired (USD 889,816) is being
amortized by the Group over 5 years. The Group's consolidated financial
statements as of and for each of the three years ended December 31, 1999 have
been restated to reflect the acquisitions of the minority ownership interests
under the purchase method of accounting. These acquisitions were originally
recorded as mergers of entities under common control. The effect of the
restatement on the Group's consolidated statement of operations is to increase
net loss by USD 177,963 for the amount of the goodwill amortization (USD
177,963) related to the acquisition of the minority interests for each year
presented.
In May 1997, Dr. Gonella sold 12% of the outstanding shares in Permatec
Pharma AG, Permatec NV and Permatec France SA to two key employees for
approximately USD 12,000. The share agreement with each of the employees
specified that should Dr. Gonella transfer his ownership of the aforementioned
entities into a holding entity, the shares of the two employees would be
converted into shares of the holding entity. This transfer occurred when
Permatec Holding AG ("Permatec") was founded in November 1997, thus resulting
in the two employees each owning 360 shares of Permatec. The shares of the two
employees are subject to dilution should Dr. Gonella or other shareholders
contribute additional funds to the Group. The Group accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees."
Compensation expense is measured as the excess of the estimated fair value of
the Group's shares at the date of grant over the amount an employee must pay to
acquire the shares. The fair value of the Group's stock was based on the fair
value of the minority shareholder buyout in 1996 taking into consideration
changes in the Group's business and operations since the buyout. The shares
which were sold by Dr. Gonella to the two employees were vested as of the date
of the sale. The Group's consolidated financial statements have been restated
to reflect the compensation expense associated with the sale of shares in 1997.
The effect of this restatement on the Group's consolidated statement of
operations is to increase the net loss by USD 180,000 in 1997.
In the second quarter of fiscal 2000, it was determined that an error had
been made relating to the calculation of the weighted average number of shares
outstanding for the years ended December 31, 1997 and 1998. Accordingly the
Group's consolidated financial statements as of and for each of the three years
ended December 31, 1999 have been restated to correct the error. The weighted
average number of shares outstanding for the year ended December 31, 1997
decreased by 666 shares to 6,000 from the previously reported amount of 6,666.
The weighted average number of shares outstanding for the year ended December
31, 1998 decreased by 2,000 shares to 8,000 from the previously reported amount
of 10,000. The related loss per share amounts have been recalculated based on
the corrected weighted average number of shares outstanding shown on the
Group's consolidated statements of operations. This correction had no impact on
the Group's net loss or shareholders' deficit for any of the periods presented.
In the second quarter of fiscal 2000, the Group determined that an error had
been made related to the presentation of timing of funding received from VECAP
and Dr. Gonella in its 1997 consolidated financial statements. The Group
previously reported the cash contributed by VECAP and Dr. Gonella to the
Group's subsidiaries as having been contributed as of December 31, 1996. Based
on subsequent analysis, these amounts were received by the Group during 1997.
Accordingly, the Group's consolidated financial statements have been restated
to correct the error. The correction of this error increased shareholders'
deficit and decreased cash as of December 31, 1996 by USD 307,838 and increased
cash flows from financing activities by the same amount for
F-15
PERMATEC HOLDING AG
Notes to the Consolidated Financial Statements--(Continued)
December 31, 1997, 1998 and 1999
(as restated, see Note 14)
the year ended December 31, 1997. Total assets, shareholders' deficit and net
income were not impacted by this correction in the accompanying consolidated
balance sheets and statements of operations for all periods presented.
In the second quarter of 2000, the Group determined that an error had been
made related to the translation of a product development (milestone payment)
revenue transaction which was recognized by the Group's wholly owned
subsidiary, Permatec Technologie AG, which has the Swiss Franc as its
functional currency in the second quarter of 1999. The Group previously
translated the revenue into USD, the Group's reporting currency, using the
average rate of exchange for 1999 of 1USD/1.50CHF, as opposed to the exchange
rate effective in the quarter when the transaction was consummated of
1USD/1.47CHF. Accordingly, the Group's consolidated financial statements have
been restated to reflect the correction of this translation error. The effect
of this restatement on the Group's consolidated statement of operations for the
year ended December 31, 1999 is to increase product development (milestone
payment) revenue and net income by USD 20,000. The effect of this restatement
on the Group's consolidated statement of cash flows is to decrease net cash
used in operating activities by USD 20,000.
The aforementioned restatements did not have an impact on the Group's income
tax expense for any of the period's presented. The effect of the restatement on
the Group's consolidated financial statements is summarized in the tables
below:
Year ended December 31, 1997 Year ended December 31, 1998 Year ended December 31, 1999
---------------------------------- ---------------------------------- ----------------------------------
As As As
Previously As Previously As Previously As
Reported Adjustments Adjusted Reported Adjustments Adjusted Reported Adjustments Adjusted
---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Statement of
Operations
Data:
Product
development
reserve
(milestone
payments)...... -- -- -- -- -- -- 1,016,533 20,000 1,036,533
General and
administrative
expenses....... 868,026 357,963 1,225,989 2,253,675 177,963 2,431,638 3,042,551 177,963 3,220,514
Net loss........ (1,697,814) (357,963) (2,055,777) (4,092,043) (177,963) (4,270,006) (3,809,403) (157,963) (3,967,366)
Net loss per
share (USD).... (254.70) (87.93) (342.63) (409.20) (124.55) (533.75) (380.94) (15.80) (396.74)
Weighted average
number of
shares
outstanding.... 6,666 (666) 6,000 10,000 (2,000) 8,000 10,000 -- 10,000
As of December 31, 1997 As of December 31, 1998 As of December 31, 1999
---------------------------------- ---------------------------------- ----------------------------------
As As As
Previously As Previously As Previously As
Reported Adjustments Adjusted Reported Adjustments Adjusted Reported Adjustments Adjusted
---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Balance Sheet
Data:
Goodwill........ -- 622,871 622,871 -- 444,908 444,908 -- 266,945 266,945
Total Assets.... 1,033,492 622,871 1,656,363 2,225,726 444,908 2,670,634 2,017,410 266,945 2,284,355
Shareholders'
deficit........ (2,827,006) 622,871 (2,204,135) (6,962,527) 444,908 (6,517,619) (9,614,269) 266,945 (9,347,324)
Total
liabilities and
shareholders'
deficit........ 1,033,492 622,871 1,656,363 2,225,726 444,908 2,670,634 2,017,410 266,945 2,284,355
F-16
PERMATEC HOLDING AG
Interim Consolidated Balance Sheets
as of December 31, 1999 and June 30, 2000 (Unaudited)
1999 2000
USD USD
----------- -----------
Assets
Current assets:
Cash and cash equivalents.......................... 674,569 1,191,361
VAT, capital taxes and other receivables........... 284,023 143,135
Prepaid expenses and other current assets.......... 4,572 --
----------- -----------
963,164 1,334,496
Equipment, furniture, and fixtures, net.............. 800,044 877,692
Patent rights, net................................... 247,074 239,964
Goodwill, net........................................ 266,945 177,963
Deposits............................................. 7,128 2,768
Prepaid acquisition costs............................ -- 360,000
Notes receivable from Medi-Ject Corporation.......... -- 1,950,000
----------- -----------
Total assets......................................... 2,284,355 4,942,883
=========== ===========
Liabilities and shareholders' deficit
Current liabilities:
Trade accounts payable............................. 305,710 438,377
Accounts payable other............................. 237,125 174,491
Restructuring provisions........................... 280,816 --
Capital lease obligations--current................. 91,808 120,911
Deferred income.................................... -- 250,000
Accrued expenses................................... 269,200 252,566
Liabilities to related parties..................... 339,733 333,480
Other current liabilities.......................... 8,124 5,522
----------- -----------
1,532,516 1,575,347
----------- -----------
Loans from shareholders (subordinated)............... 10,005,146 14,056,801
Capital lease obligations--less current maturities... 92,141 116,340
Other long-term liabilities.......................... 1,876 153
----------- -----------
Total liabilities.................................... 11,631,679 15,748,641
----------- -----------
Shareholders' deficit
Share capital CHF 100 par; shares: 10,000 and
10,000 shares issued and outstanding at December
31, 1999 and June 30, 2000, respectively 689,655 689,655
Additional paid in capital......................... 1,110,097 1,174,680
Accumulated other comprehensive income............. 857,000 1,038,018
Accumulated deficit................................ (12,004,076) (13,708,111)
----------- -----------
Total shareholders' deficit.......................... (9,347,324) (10,805,758)
----------- -----------
Total liabilities and shareholders' deficit.......... 2,284,355 4,942,883
=========== ===========
See the accompanying notes to the unaudited interim consolidated financial
statements.
F-17
PERMATEC HOLDING AG
Interim Consolidated Statements of Operations
for the six-month periods ended June 30, 1999 and 2000 (Unaudited)
1999 2000
USD USD
---------- ----------
Revenues:
Product development
(milestone payments)... 1,036,533 710,000
License revenue......... 300,336 90,000
---------- ----------
1,336,869 800,000
---------- ----------
Operating expenses:
Research and
development............ 853,754 410,228
General and
administrative......... 1,448,004 1,290,411
Sales and marketing..... 81,846 522,886
---------- ----------
2,383,604 2,223,525
---------- ----------
Operating loss............ (1,046,735) (1,423,525)
---------- ----------
Other income (expense):
Interest and other
expense................ (145,558) (302,521)
Interest and other
income................. 94,164 23,013
---------- ----------
(51,394) (279,508)
---------- ----------
Loss before income taxes.. (1,098,129) (1,703,033)
Income tax expense........ (37,050) (1,002)
---------- ----------
Net loss.................. (1,135,179) (1,704,035)
========== ==========
Net loss per share (USD).. (113.52) (170.40)
========== ==========
Basic and diluted weighted
average shares
outstanding.............. 10,000 10,000
========== ==========
See the accompanying notes to the unaudited interim consolidated financial
statements.
F-18
PERMATEC HOLDING AG
Interim Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 1999 and 2000 (Unaudited)
1999 2000
USD USD
---------- ----------
Cash flows from operating activities:
Net loss............................................. (1,135,179) (1,704,035)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization...................... 251,772 193,604
Stock based compensation expense................... -- 64,583
Gain on sale of equipment, furniture and fixtures.. -- (9,000)
Changes in operating assets and liabilities:
VAT, capital taxes and other receivables........... (1,126,514) 134,016
Prepaid expenses and other assets.................. (27,656) 4,432
Trade accounts payable............................. (13,199) 136,617
Other liabilities and accrued expenses............. 66,330 180,352
Restructuring provisions........................... -- (272,306)
Other.............................................. 28,411 5,745
---------- ----------
Net cash used in operating activities.................. (1,956,035) (1,265,992)
---------- ----------
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures....... (171,358) (55,280)
Prepaid acquisition costs............................ -- (360,000)
Payments for patent rights........................... (81,074) (13,057)
---------- ----------
Net cash used in investing activities.................. (252,432) (428,337)
---------- ----------
Cash flows from financing activities:
Proceeds from loans from shareholders................ 2,597,783 2,258,091
Principle payments on capital lease obligations...... (67,748) (57,849)
---------- ----------
Net cash provided by financing activities.............. 2,530,035 2,200,242
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents........................................... 2,456 10,879
---------- ----------
Increase in cash and cash equivalents.................. 324,024 516,792
Cash and cash equivalents:
Beginning of period.................................. 492,376 674,569
---------- ----------
End of period........................................ 816,400 1,191,361
========== ==========
See the accompanying notes to the unaudited interim consolidated financial
statements.
F-19
PERMATEC HOLDING AG
Interim Consolidated Statements of Shareholders' Deficit
and Comprehensive Loss for the six months ended June 30, 1999 and 2000
Accumulated
Additional Other Total
Share Paid In Comprehensive Accumulated Shareholders'
Capital Capital Income Deficit Deficit
USD USD USD USD USD
------- ---------- ------------- ----------- -------------
Balance, December 31,
1998................... 689,655 1,110,097 (280,661) (8,036,710) (6,517,619)
------- --------- --------- ----------- -----------
Net loss................ -- -- -- (1,135,179) (1,135,179)
Translation adjustment.. -- -- 966,539 -- 966,539
------- --------- --------- ----------- -----------
Comprehensive loss...... -- -- -- -- (168,640)
------- --------- --------- ----------- -----------
Balance, June 30, 1999.. 689,655 1,110,097 685,878 (9,171,889) (6,686,259)
------- --------- --------- ----------- -----------
Balance, December 31,
1999................... 689,655 1,110,097 857,000 (12,004,076) (9,347,324)
------- --------- --------- ----------- -----------
Share issuance to
employees.............. -- 64,583 -- -- 64,583
Net loss................ -- -- -- (1,704,035) (1,704,035)
Translation adjustment.. -- -- 181,018 -- 181,018
------- --------- --------- ----------- -----------
Comprehensive loss...... -- -- -- -- (1,523,017)
------- --------- --------- ----------- -----------
Balance, June 30, 2000.. 689,655 1,174,680 1,038,018 (13,708,111) (10,805,758)
------- --------- --------- ----------- -----------
See the accompanying notes to the unaudited interim consolidated financial
statements.
F-20
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements
as of and for the six-month periods ended June 30, 1999 and 2000
1. Description of Business and Summary of Significant Accounting Policies
Business description and basis of presentation
Permatec Holding AG ("Permatec", and its wholly owned subsidiaries Permatec
Pharma AG, Permatec Technologie AG, Permatec NV, Permatec Laboratorios and
Permatec France SA, collectively the "Group") are primarily engaged in
activities related to the development of transdermal and transmucosal
pharmaceutical products. The Group develops transdermal patches, gel
formulations and fast-dissolving tablets for several drugs and drug
combinations. The Group's principal development facilities and executive
offices are located in Basel, Switzerland.
Permatec is 60% owned by Venture Capital Partners ("VECAP"), an entity owned
90% by Dr. Jacques Gonella, 36.9% owned directly by Dr. Gonella and 3.1% owned
by three other minority shareholders. Permatec was founded in 1997 by VECAP and
Dr. Gonella, who then owned 40% of the outstanding shares of VECAP. At the time
of Permatec's organization in December 1997, VECAP owned 60% of the outstanding
shares of Permatec Technologie, which owned 100% of the shares of Permatec NV.
Prior to Permatec's organization, Permatec NV owned 100% of the shares of
Permatec Laboratorios. VECAP contributed to Permatec the 60% of Permatec
Technologie which it owned and Dr. Gonella contributed the remaining 40% of
Permatec Technologie which he owned. Permatec NV subsequently transferred 100%
of the outstanding shares of Permatec Laboratorios to Permatec. At the same
time, Dr. Gonella transferred to Permatec all of the outstanding shares of
Permatec Pharma. Also in 1997, Dr. Gonella, who owned 98% of the shares of
Permatec France, transferred all of those shares to Permatec. As a result of
these transfers, Dr. Gonella and VECAP owned 28% and 60%, respectively, of the
outstanding shares of Permatec in 1997. Accordingly, for reporting purposes the
Group has been presented as if it existed as of January 1, 1997 to reflect the
Group's shareholder structure on a historical basis.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The accompanying financial statements
and notes should be read in conjunction with the Group's audited financial
statements and notes thereto as of and for the year ended December 31, 1999.
All intercompany transactions and balances within the Group have been
eliminated for all periods presented.
Translation of foreign currencies
The Group has determined that the local currency is the functional currency
for all of its subsidiaries under Financial Accounting Standards Board
Statement No. 52, "Foreign Currency Translation" (FAS 52). The Group's
reporting currency is the United States Dollar ("USD"). The financial
statements of the Group's foreign subsidiaries are translated into USD for
consolidation purposes. All assets and liabilities are translated using period-
end exchange rates and statements of operations items are translated using
average exchange rates for the period. The resulting translation adjustments
are recorded as a separate component of shareholders' deficit. Foreign currency
transaction gains and losses are included in determining net income, but have
not been material in any of the periods presented.
Cash and Cash Equivalents
The Group considers highly liquid debt instruments with original maturities
of 90 days or less to be cash equivalents.
F-21
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures are stated at cost and are depreciated
using the straight-line method over their estimated useful lives ranging from
four to ten years.
Patent Rights
The Group capitalizes the costs of obtaining patent rights. These
capitalized costs are amortized on a straight-line basis over ten years
beginning in the year the patent is issued. Recoverability of such patent
assets is evaluated on a periodic basis.
Goodwill
Goodwill is amortized on a straight-line basis over 5 years. Goodwill (along
with all long-lived assets) is reviewed for impairment whenever the facts and
circumstances indicate the carrying value may not be recoverable.
Licensing and Product Development Revenue Recognition
Licensing and product development revenue is recognized when underlying
performance criteria for payment have been met and the Group has an
unconditional right to such payment. Depending on a license or product
development agreement's terms, recognition criteria may be satisfied upon
achievement of milestones or passage of time. Milestone payments are typically
triggered by the successful achievement of important events such as the
completion of clinical studies, filings with the FDA, bioequivalence to other
drugs, and approval by the FDA as defined by the underlying licensing and
product development agreement. The Group classifies amounts received related to
the performance of a series of tasks, (e.g. testing the transdermal penetration
of a drug, manufacture of a clinical batch, etc.) as product development
revenues.
The Group recognizes royalty revenues upon the sale of licensed products by
the licensee, and recognizes such revenue as license revenue. The Group
occasionally receives payment of up-front royalty advances from licensees.
Revenues from up-front royalty payments are deferred until earned through the
sale of licensed revenue from the licensee or the termination of the agreement
based on the terms of the license. The Group classifies amounts received
related to royalties from sales of products licensed by the Group, which the
Group developed or partially developed, as license revenues in accordance with
the terms of the underlying agreement.
In certain cases the Group receives up-front payments upon signing licensing
and development agreements. If the up-front payment relates to services already
performed, and there is no additional performance obligation under the
agreement the amount is recognized as revenue in the period the payment is
received. If the Group has subsequent obligations under the agreement, or the
payment does not relate to services already provided, the amount is deferred in
relation to the performance requirements under the related licensing and
development agreement.
Research and Development
Group sponsored research and development expenses related to product and
patent development are expensed as incurred.
Start-up and Organization Costs
The Group expenses all costs associated with start-up activities and
organization costs as such costs are incurred.
F-22
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases. 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 realized or settled.
Net Loss Per Share
Basic earnings per share is computed by dividing the net loss by the
weighted-average number of shares outstanding for the period. For the six
months ended June 30, 1999 and 2000, basic and diluted earnings per share are
identical, as there were no potentially dilutive securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Operating
results for the six months ended June 30, 2000 are not necessarily indicative
of the results to be expected for the full year ending December 31, 2000.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, other receivables,
deposits, and all financial liabilities other than the subordinated loans from
shareholders reported in the balance sheet are carried at amounts that
approximate their estimated fair value. At June 30, 2000 it was not practicable
to estimate the fair value of the subordinated loans from shareholders, because
of the lack of quoted market prices for similar investments, and such loans can
only be repaid by the Group once the Group achieves positive shareholders'
equity as defined by Swiss statutory regulations.
Fair value estimates are made at a specific point in time based on relevant
market and financial instrument information. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
Stock Based Compensation
Compensation expense for stock incentives granted to employees and directors
is recognized in accordance with Accounting Principles Board, Opinion 25 ("APB
25"), "Accounting for Stock Issued to Employee." Pro forma effects on net loss
and loss per share are provided as if the fair value based method defined in
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock Based Compensation," has been applied.
F-23
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), in June 1998, the amended version of which is effective
January 1, 2001. SFAS 133 will require us to record all derivatives on the
balance sheet at fair value. For derivatives that are hedges, the changes in
the fair value will be offset by the changes in the fair value of the hedged
assets, liabilities or firm commitments. We are currently evaluating the impact
of adopting SFAS 133 on our reported results of operations and financial
position.
The Securities and Exchange Commission issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101), on December 3,
1999. SAB 101 provides additional guidance on the application of existing
generally accepted accounting principles to revenue recognition in financial
statements. We do not expect SAB 101 to have a material effect on our
consolidated financial statements.
The Financial Accounting Standard Board issued Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation (FIN 44), in
March 2000. This interpretation clarifies the application of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, with
respect to certain issues in accounting for employee stock compensation and is
generally effective as of July 1, 2000. We do not expect FIN 44 to have a
material effect on our consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. Liquidity
As reflected in the accompanying Group consolidated financial statements,
the Group incurred a net loss of USD 1,704,035 for the six-month period ended
June 30, 2000. In addition, the Group has incurred net losses and has had
negative cash flows from operating activities since inception. Management
believes current working capital, projected product development and license
revenues, and continued projected debt financing from shareholders will provide
the Group with sufficient liquidity through September 2001. Dr. Gonella
shareholder has declared his continuing financial support for the Group's
activities through September 2001; however, upon the closing of the Share
Transaction, he will have no further obligation to fund the Subsidiaries.
3. Composition of Certain Financial Statement Captions
1999 2000
USD USD
--------- --------
Equipment furniture and fixtures:
Equipment, furniture and fixtures..................... 1,443,566 981,422
Less accumulated depreciation......................... (643,522) (103,730)
--------- --------
800,044 877,692
========= ========
Patent rights:
Patent rights......................................... 308,023 315,570
Less accumulated amortization......................... (60,949) (75,606)
--------- --------
247,074 239,964
========= ========
Goodwill:
Goodwill.............................................. 889,816 889,816
Less accumulated amortization......................... (622,871) (711,853)
--------- --------
266,945 177,963
========= ========
F-24
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
4. Restructuring Activities
The Group recorded USD 266,790 of restructuring expenses during the six
month period ended June 30, 2000. Such expenses are in connection with the
dissolution of Permatec Laboratorios (Permatec Argentina), the Group's research
and development facility in Argentina, and the dissolution of Permatec France,
which performed business development, patent administration, project management
and administrative functions in France. The Group has recorded all
restructuring charges incurred during the six months ended June 30, 2000, as
general and administrative expenses.
The restructuring charges incurred during the six months ended June 30, 2000
included involuntary severance benefits of USD 178,257 for two employees of the
Group's French operations resulting from an out of court arbitration settlement
finalized in March 2000. During 1999, at the time the original restructuring
plan was formulated, management was unable to estimate the severance benefit
for these two employees. In connection with the restructuring activities which
commenced in 1999 approximately 25 employees were terminated, 13 of which
received involuntary severance benefits.
As a result of management's ongoing review of the restructuring activities
related to the dissolution of Permatec France and Permatec Argentina, which
commenced in 1999, the Group recorded charges of approximately USD 17,000
related to the write-off of certain equipment which was to be disposed of via
scrap at its French subsidiary in the six months ended June 30, 2000.
Accordingly, the Group adjusted the carrying value of the equipment to zero,
resulting in an impairment charge of USD 17,000. The Group also incurred
restructuring related expenses of USD 71,533 in the six months ended June 30,
2000 related to certain other incremental costs of exiting its facilities
including legal and consulting fees, and lease termination costs.
The Group has undertaken these restructuring actions as part of its effort
to reduce costs and to centralize its developmental and administrative
functions in Switzerland. These restructuring programs are expected to be
substantially complete by the end of 2000. The following table provides a
summary of the Group's restructuring provision activity:
Severance & Asset Facilities,
Benefits Impairment Legal & Total
USD USD Other USD USD
----------- ---------- ----------- --------
Balance December 31, 1998..... 0 0 0
-------- -------- -------- --------
1999 restructuring expenses... 249,500 103,400 101,528 454,428
Amount utilized in 1999....... (70,212) (103,400) -- (173,612)
-------- -------- -------- --------
Balance December 31, 1999..... 179,288 -- 101,528 280,816
-------- -------- -------- --------
2000 restructuring expenses... 178,257 17,000 71,533 266,790
Amount utilized in the six
months ended June 30, 2000... (357,545) (17,000) (173,061) (547,606)
-------- -------- -------- --------
Balance June 30, 2000......... -- -- -- --
======== ======== ======== ========
F-25
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
5. Related Party Transactions
At December 31, 1999 and June 30, 2000 the Group had subordinated loans
payable to Permatec's minority shareholder, Dr. Gonella of USD 7,506,773 and
USD 11,567,549, respectively, and to Permatec's majority shareholder, VECAP, of
USD 2,498,373 and USD 2,489,252 respectively. These parties have provided the
loans, which bear an annual interest rate of 3%, in several installments
throughout the Group's operating history. These loans are subordinated, and can
only be repaid by the Group once the Group achieves positive shareholders'
equity as defined by Swiss statutory regulations.
At December 31, 1999 and June 30, 2000 the Group had USD 339,733 and USD
333,480 respectively, payable to other companies ultimately owned by Permatec's
shareholder, Dr. Gonella, related to administrative and management services
provided by the related companies in the periods. These amounts are non-
interest bearing and are considered to be current liabilities. Management
believes these transactions described above were concluded at terms as fair to
the Group as could have been obtained from unaffiliated third parties.
6. Supplemental Disclosures of Cash Flow Information
The Group did not make any cash payments for interest during the six-month
periods ended June 30, 1999 and 2000. All interest expense incurred by the
Group related to the Group's subordinated loans to Dr. Gonella and VECAP has
been included in the outstanding loan balance at June 30, 1999 and 2000.
Interest expenses credited to the loan balance in the six months ended June 30,
1999 and 2000 were USD 123,473 and USD 157,316, respectively.
Acquisitions of assets under capital lease during the six months ended June
30, 1999 and 2000 were USD 78,958, and USD 143,069, respectively.
As of June 30, 2000 Permatec had several notes receivable from Medi-Ject
Corporation totaling USD 1,950,000 and subordinated loans payable to Dr.
Gonella for the same amount (see further discussion in Note 7). Dr. Gonella
directly paid Medi-Ject the amounts listed in Note 7 on behalf of Permatec. The
notes receivable and related subordinated loans payable have not been included
in the Group's consolidated statement of cash flows, as the amounts were not
paid directly by the Group.
7. Transactions with Medi-Ject
On January 25, 2000 the Group entered into a non-binding letter of intent to
sell three of its subsidiaries, to Medi-Ject Corporation (a US company based in
Minneapolis, Minnesota). The respective share purchase agreement signed on July
14, 2000 specifies that Permatec will transfer all of the issued and
outstanding shares of Permatec's Permatec Pharma AG, Permatec Technologie AG,
and Permatec NV subsidiaries to Medi-Ject in exchange for 2,900,000 shares of
Medi-Ject common stock. The transaction is expected to close during the fourth
quarter of 2000.
In connection with the proposed transaction with Medi-Ject described above,
the Group has incurred direct incremental acquisition related expenses of USD
360,000, which are comprised of consulting, accounting and legal fees during
the six months ended June 30, 2000. These costs have been capitalized as
prepaid acquisition costs, and will be included in the cost of acquisition upon
successful consummation of the transaction with Medi-Ject.
In connection with the above mentioned transaction with Medi-Ject, Permatec
agreed to invest up to USD 4,500,000 in Medi-Ject. On each of January 25, 2000
and April 3, 2000 Permatec entered into a Convertible
F-26
PERMATEC HOLDING AG
Notes to the Interim Consolidated Financial Statements--(Continued)
as of and for the six-month periods ended June 30, 1999 and 2000
Note Agreement with Medi-Ject. The amount of the notes receivable and the
respective dates of the individual notes are described in the table below. The
notes will convert into Medi-Ject Series C Convertible Preferred stock upon
closing of the Share Transaction with Medi-Ject, or earlier if Permatec and
Medi-Ject agree.
Amount
of Note
Date of Note USD
------------ ---------
January 25, 2000................................................... 250,000
February 29, 2000.................................................. 250,000
April 3, 2000...................................................... 500,000
May 2, 2000........................................................ 250,000
May 26, 2000....................................................... 350,000
June 26, 2000...................................................... 350,000
---------
1,950,000
=========
If the proposed transaction with Medi-Ject is consummated, the full
principal amount of the shareholders' loans of $14,056,801 along with the
liability to related parties of $333,480 at June 30, 2000, will convert to
equity at the closing of the transaction.
F-27
ANNEX A
STOCK PURCHASE AGREEMENT
among
MEDI-JECT CORPORATION,
a Minnesota corporation;
PERMATEC HOLDING AG,
a Company organized under the laws of Switzerland;
PERMATEC PHARMA AG,
a Company organized under the laws of Switzerland;
PERMATEC TECHNOLOGIE AG,
a Company organized under the laws of Switzerland;
and
PERMATEC NV,
a Company organized under the laws of the Netherlands Antilles
---------------------
Dated as of July 14, 2000
---------------------
TABLE OF CONTENTS
Page
---------
RECITALS ....................................................................A-1
TERMS .......................................................................A-1
SECTION 1. DESCRIPTION OF TRANSACTION ...................................... A-1
1.1. The Transaction. .................................................. A-1
(a)Sale of Stock ..................................................... A-1
(b)Board of Directors ................................................ A-1
(c)Tax Treatment ..................................................... A-1
1.2. Closing ........................................................... A-2
1.3. Deliveries and Proceedings at Closing ............................. A-2
(a)Other Agreements .................................................. A-2
(b)Deliveries by Permatec ............................................ A-2
(c)Deliveries by Medi-Ject ........................................... A-2
(d)Escrow Shares ..................................................... A-2
(e)Other Deliveries .................................................. A-2
SECTION 2. REPRESENTATIONS AND WARRANTIES OF PERMATEC AND SUBSIDIARIES ..... A-2
2.1. Due Organization; Subsidiaries; Etc. .............................. A-2
2.2. Organizational Documents; Records ................................. A-3
2.3. Capitalization, Etc. .............................................. A-3
2.4. Financial Statements .............................................. A-3
2.5. Absence of Changes ................................................ A-4
2.6. Title to Assets; Equipment; Real Property ......................... A-4
2.7. Proprietary Assets ................................................ A-4
2.8. Contracts ......................................................... A-5
2.9. Compliance with Legal Requirements ................................ A-5
2.10. Governmental Authorizations ....................................... A-6
2.11. Tax Matters ....................................................... A-6
2.12. Employee Benefit Plans ............................................ A-6
2.13. Insurance ......................................................... A-7
2.14. Related Party Transactions ........................................ A-7
2.15. Legal Proceedings; Orders ......................................... A-7
2.16. Authority; Binding Nature of Agreement .............................A-7
2.17. Non-Contravention; Consents ........................................A-7
2.18. Financial Advisor ..................................................A-8
2.19. Employees ..........................................................A-8
2.20. Environmental Matters ..............................................A-8
2.21. Entire Business ....................................................A-8
2.22. Change in Control ..................................................A-8
2.23. Other ..............................................................A-8
SECTION 3. REPRESENTATIONS AND WARRANTIES OF MEDI-JECT ......................A-9
3.1. Due Organization; Subsidiaries; Etc. ...............................A-9
3.2. Organizational Documents; Records ..................................A-9
3.3. Authority; Binding Nature of Agreement .............................A-9
3.4. Financial Statements ...............................................A-9
3.5. Absence of Changes ................................................A-10
3.6. Tax Returns .......................................................A-10
3.7. Capitalization, Etc. ..............................................A-10
3.8. Non-Contravention; Consents .......................................A-11
3.9. Title to Assets; Equipment; Real Property .........................A-11
3.10. Proprietary Assets ................................................A-11
i
3.11. Contracts .........................................................A-12
3.12. Compliance with Legal Requirements ................................A-12
3.13. Governmental Authorizations .......................................A-13
3.14. Employee Benefit Plans ............................................A-13
3.15. Insurance .........................................................A-13
3.16. Legal Proceedings; Orders .........................................A-13
3.17. Financial Advisor .................................................A-13
3.18. Environmental Matters .............................................A-13
3.19. Change in Control .................................................A-13
3.20. Required Medi-Ject Vote ...........................................A-14
3.21. SEC Reports .......................................................A-14
3.22. Antitrust .........................................................A-14
3.23. Other .............................................................A-14
SECTION 4. CERTAIN COVENANTS AND AGREEMENTS ................................A-14
4.1. Access to Records and Properties ..................................A-14
4.2. Operation of Subsidiaries .........................................A-15
4.3. Operation of Medi-Ject ............................................A-16
4.4. Advice of Changes .................................................A-18
4.5. Efforts to Consummate .............................................A-18
4.6. Additional Agreements .............................................A-18
4.7. Proxy Statement ...................................................A-18
4.8. Financing .........................................................A-19
4.9. Business Plan .....................................................A-19
4.10. Search for Chief Executive Officer ................................A-19
4.11. Noncompetition ....................................................A-19
SECTION 5. CERTAIN CONDITIONS ..............................................A-19
5.1. Conditions to Each Party's Obligations ............................A-19
(a)Approvals .........................................................A-19
(b)Financing .........................................................A-20
5.2. Conditions to Obligations of Medi-Ject ............................A-20
(a)Representations and Warranties ....................................A-20
(b)Performance of Obligations of Permatec and Subsidiaries ...........A-20
(c)Absence of Certain Changes ........................................A-20
(d)Delivery of Convertible Notes .....................................A-20
(e)Cash ..............................................................A-20
(f)Employment Agreement ..............................................A-20
(g)Capital Stock of Subsidiaries .....................................A-20
(h)Escrow Agreement ..................................................A-20
(i)Opinions of Counsel ...............................................A-20
(j)Officer's Certificate. ............................................A-20
5.3. Conditions to Obligations of Permatec and Subsidiaries ............A-20
(a)Representations and Warranties ....................................A-20
(b)Performance of Obligations of Medi-Ject ...........................A-21
(c)Opinion of Counsel to Medi-Ject ...................................A-21
(d)Absence of Certain Changes ........................................A-21
(e)Delivery of Medi-Ject Series C Stock upon Conversion of Convertible
Notes ......................................................................A-21
(f)Employment Agreement ..............................................A-21
(g)Capital Stock of Medi-Ject ........................................A-21
(h)Board of Directors ................................................A-21
(i)Officer's Certificate .............................................A-21
(j)Approvals and Consents ............................................A-21
ii
(k)Amendment of the Elan License Agreement ...........................A-21
(l)Lock-Up Agreements ................................................A-21
SECTION 6. TERMINATION .....................................................A-22
6.1. Termination .......................................................A-22
6.2. Effect of Termination .............................................A-22
6.3. Procedure Upon Termination ........................................A-22
SECTION 7. INDEMNIFICATION AND ESCROW ......................................A-22
7.1. Indemnification by Permatec .......................................A-22
7.2. Indemnification by Medi-Ject ......................................A-22
7.3. Procedure for Third Party Claims ..................................A-23
7.4. Procedures Related to Other Claims ................................A-23
7.5. Indemnity Period ..................................................A-23
7.6. Basket; Cap .......................................................A-23
7.7. Exclusion of Remedies by Law ......................................A-24
7.8. Exceptions to Limitations on Indemnification ......................A-24
SECTION 8. CERTAIN DEFINITIONS .............................................A-24
8.1. Definitions .......................................................A-24
SECTION 9. MISCELLANEOUS PROVISIONS ........................................A-26
9.1. Amendment .........................................................A-26
9.2. Waiver ............................................................A-26
9.3. Entire Agreement; Counterparts; Applicable Law and Arbitration ....A-27
9.4. Assignability .....................................................A-27
9.5. Notices ...........................................................A-27
9.6. Cooperation .......................................................A-28
9.7. Fees and Expenses. ................................................A-28
9.8. Non-Survival of Representations, Warranties Past the Indemnification
Period; Survival of Covenants ..............................................A-28
9.9. Titles ............................................................A-28
iii
AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made and entered into as of
July 14, 2000, by and among Medi-Ject Corporation, a Minnesota corporation,
("Medi-Ject"); Permatec Holding AG, a company organized under the laws of
Switzerland ("Permatec"); Permatec Pharma AG, a company organized under the
laws of Switzerland ("Pharma"); Permatec Technologie AG, a company organized
under the laws of Switzerland ("Technologie"); and Permatec NV, a company
organized under the laws of the Netherlands Antilles ("NV") (Pharma,
Technologie and NV sometimes being referred to herein collectively as the
"Subsidiaries" and individually as "Subsidiary"). Certain capitalized terms
used in this Agreement are defined in Section 8 hereof.
RECITALS
A. Permatec owns all of the issued and outstanding capital stock of each
Subsidiary.
B. Permatec has previously agreed to invest up to $4,500,000 in Medi-Ject
(the "Commitment"). As of the date hereof Permatec has funded the Commitment in
exchange for two short-term promissory notes dated January 25, 2000 and
February 29, 2000, respectively (the "Initial Convertible Notes") and four
promissory notes dated April 3, 2000, May 2, 2000, May 26, 2000 and June 26,
2000 of Medi-Ject (such notes and any other note of Medi-Ject issued pursuant
to the Convertible Note Purchase Agreement dated April 3, 2000 (the "Note
Purchase Agreement") are referred to herein as the "Interim Notes"). The
Initial Convertible Notes and the Interim Notes are collectively referred to
herein as the "Convertible Notes." The Convertible Notes are convertible into
Series C Convertible Preferred Stock, par value $.01 per share, of Medi-Ject
(the "Medi-Ject Series C Stock").
C. Medi-Ject desires to acquire from Permatec, and Permatec desires to
transfer to Medi-Ject, all of the issued and outstanding capital stock of each
Subsidiary in exchange for an aggregate of 2,900,000 shares of Medi-Ject common
stock, par value $.01 per share (the "Medi-Ject Common Stock").
TERMS
NOW THEREFORE, in consideration of the mutual covenants, promises,
representations and agreements contained herein, the parties to this Agreement,
intending to be legally bound, agree as follows:
SECTION 1
DESCRIPTION OF TRANSACTION
1.1. The Transaction.
(a) Sale of Stock. Subject to the terms and conditions hereof, at the
Closing referred to in Section 1.2 below, (a) Permatec shall transfer and
deliver to Medi-Ject, all of the issued and outstanding shares of capital stock
of each Subsidiary (collectively, the "Subsidiaries Stock"), and (b) Medi-Ject
shall issue and sell to Permatec 2,900,000 shares of Medi-Ject Common Stock.
All rights to, benefits in and risks to the Subsidiaries Stock shall pass to
Medi-Ject upon Closing and all rights to, benefits in and risks to the
2,900,000 shares of Medi-Ject Common Stock shall pass to Permatec upon Closing.
(b) Board of Directors. At the Closing the Company shall cause Karl Groth,
Geoffrey Guy, M.D., Fred L. Shapiro, M.D. and Stanley Goldberg to tender their
resignations from the board of directors of Medi-Ject and that the directors
then remaining shall, pursuant to the Bylaws of Medi-Ject, fill such vacancies
by appointing Dr. Jacques Gonella, Dr. Thomas M. Rinderknecht, Prof. Ubaldo
Conte and Dr. Philippe Dro.
(c) Tax Treatment. The parties intend that the transaction contemplated
herein constitute a tax-free reorganization within the meaning of Section
368(a)(1)(B) of the Code, and the tax laws of Switzerland, and that there be no
recognition of income tax resulting from the application of Code Section 367 to
the exchanges described herein.
A-1
1.2. Closing. The closing under this Agreement (the "Closing") will take
place at 10:00 A.M., local time, on the later of (i) August 31, 2000 or (ii)
the fifth business day after all conditions set forth in Section 5 shall have
been satisfied or waived, at the offices of Leonard, Street and Deinard, 150
South Fifth Street, Suite 2300, Minneapolis, Minnesota 55402 or at such other
time, date or place as the parties shall mutually agree. The date on which
Closing occurs is sometimes referred to herein as the "Closing Date."
1.3. Deliveries and Proceedings at Closing. At the Closing:
(a) Other Agreements. Permatec, Subsidiaries, Medi-Ject, and the other
parties thereto shall execute and deliver (i) the Registration Rights Agreement
in the form attached hereto as Exhibit A (the "Registration Rights Agreement"),
(ii) the Employment Agreement in the form attached hereto as Exhibit B (the
"Employment Agreement"), (iii) the Escrow Agreement in the form attached hereto
as Exhibit C (the "Escrow Agreement"); and (iv) the Lock-Up Agreements in the
forms attached hereto as Exhibits D through H (the "Lock-Up Agreements").
(b) Deliveries by Permatec. Permatec shall deliver to Medi-Ject (i) good
title to all of the issued and outstanding capital stock of each Subsidiary,
free and clear of all Encumbrances, and (ii) the Convertible Notes to Medi-Ject
for cancellation.
(c) Deliveries by Medi-Ject. On the Closing Date, Medi-Ject will deliver (i)
to Permatec a certificate registered in the name of Permatec for 2,320,000
shares of Medi-Ject Common Stock; and (ii) a certificate registered in the name
of Permatec for the number of shares of Medi-Ject Series C Stock issuable upon
conversion of the Convertible Notes.
(d) Escrow Shares. On the Closing Date, Medi-Ject on behalf of Permatec,
shall deposit into escrow, pursuant to the terms of the Escrow Agreement to be
entered into pursuant to Section 5.2(h), 580,000 shares of Medi-Ject Common
Stock (the "Indemnity Escrow Amount"). The Indemnity Escrow Amount shall be
deposited on behalf of Permatec from the shares of Medi-Ject Common Stock to be
issued and delivered to Permatec pursuant to this Agreement. The shares of
Medi-Ject Common Stock deposited pursuant to the Escrow Agreement, together
with any other property on deposit with the escrow agent, is referred to herein
as the "Escrow Property."
(e) Other Deliveries. The closing certificates, opinions of counsel and
other documents and agreements required to be delivered pursuant to this
Agreement shall be exchanged.
SECTION 2
REPRESENTATIONS AND WARRANTIES
OF PERMATEC AND SUBSIDIARIES
For purposes of this Section 2 and Section 4 below, "Subsidiary" shall be
deemed to include each Subsidiary, where the context so provides. Permatec and
each Subsidiary jointly and severally represent and warrant to Medi-Ject that,
except as set forth in the disclosure schedule delivered by Permatec and each
Subsidiary to Medi-Ject on the date of this Agreement (the "Permatec Disclosure
Schedule"):
2.1. Due Organization; Subsidiaries; Etc.
(a) Permatec and each Subsidiary is a corporation duly organized and validly
existing and in good corporate and tax standing under the laws of the
jurisdiction of its incorporation and has the necessary corporate power and
authority: (i) to conduct its business in the manner in which its business is
currently being conducted; (ii) to own and use its assets in the manner in
which its assets are currently owned and used; and (iii) to perform its
obligations under all Contracts by which it is bound.
(b) Except as set forth in Section 2.1(b) of the Permatec Disclosure
Schedule, Permatec and each Subsidiary have no subsidiaries and do not own any
shares of capital stock of, or equity interest of any nature in, any Entity
(other than shares of non-affiliates held as non-material financial
investments). No Subsidiary has agreed or is obligated to make any future
investment in or capital contribution to any Entity.
A-2
2.2. Organizational Documents; Records. Permatec has delivered or made
available to Medi-Ject accurate and complete copies of the certificate of
incorporation, articles of association (statutes), bylaws, management bylaws or
similar organizational documents of Permatec and each Subsidiary, including all
amendments thereto. Permatec has made available to Medi-Ject accurate and
complete copies of the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise
without a meeting) of the shareholders of Permatec and each Subsidiary and the
board of directors and all committees of the board of directors of Permatec and
each Subsidiary.
2.3. Capitalization, Etc.
(a) The authorized, issued and outstanding shares of capital stock of
Permatec and each Subsidiary are set forth in Section 2.3(a) of the Permatec
Disclosure Schedule. All of the foregoing shares of capital stock have been
duly authorized and validly issued, and are fully paid and nonassessable.
(b) Except as set forth in Section 2.3(b) of the Permatec Disclosure
Schedule, as of the date of this Agreement, there is no: (i) profit sharing
certificate, outstanding subscription, option, call, warrant or right to
acquire any shares of the capital stock or other securities of any Subsidiary;
(ii) outstanding security, instrument or obligation that is or will become
convertible into or exchangeable for any shares of the capital stock or other
securities of any Subsidiary; or (iii) contract under which any Subsidiary is
or will become obligated to sell or otherwise issue any shares of its capital
stock or any other securities.
(c) Permatec owns all of the issued and outstanding capital stock of each
Subsidiary. All such shares are owned free and clear of any Encumbrances. No
agreement, law, order, obligation, decree or other document restricts
Permatec's right, power and ability to transfer the Subsidiaries Stock.
(d) Except for the rights of Medi-Ject under the Escrow Agreement, upon
issuance, Permatec shall own the 2,900,000 shares of Medi-Ject Common Stock
issuable pursuant to Section 1.1 hereof, free and clear of any Encumbrances. No
agreement, law, order, obligation, decree or other document shall restrict
Permatec's right, power and ability to transfer such shares.
2.4. Financial Statements.
(a) Permatec has delivered to Medi-Ject the following financial statements
and notes (collectively, the "Permatec Financial Statements"):
(i) the audited consolidated balance sheet of Permatec as of December
31, 1999, 1998 and 1997, and the related audited statements of operations,
stockholders' equity and cash flows of Permatec for each of the years ended
December 31, 1999, 1998 and 1997, together with the notes thereto and the
unqualified report of KPMG Fides Peat relating thereto;
(ii) the unaudited consolidated balance sheet of Permatec as of March
31, 2000, and the related unaudited statement of operations and a statement
of cash flows of Permatec for the three (3) months then ended, together
with the notes thereto;
(iii) the unaudited balance sheet of each Subsidiary as of December 31,
1999, 1998 and 1997, and the related unaudited statements of operations,
stockholders' equity and cash flows of each Subsidiary for each of the
years ended December 31, 1999, 1998 and 1997, together with the notes
thereto;
(iv) the unaudited balance sheet of each Subsidiary as of March 31,
2000, and the related unaudited statements of operations and cash flows of
each Subsidiary for the three (3) months then ended, together with the
notes, if any, thereto.
(b) The Permatec Financial Statements present fairly, in all material
respects, the financial position of Permatec and each Subsidiary as of the
respective dates thereof and the results of operations and cash flows of
Permatec and each Subsidiary for the periods covered thereby. The Permatec
Financial Statements described in Section 2.4(a)(iii) have been audited and
closed pursuant to Swiss law and translated for presentation in accordance with
United States generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered. The Permatec Financial
Statements described in Section 2.4(a)(ii) have
A-3
been prepared without audit and in accordance with GAAP for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. All adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included in such financial statements. The Pematec
Financial Statements described in Section 2.4(a)(iv) are subject to normal and
recurring year-end audit adjustments.
(c) To the knowledge of Permatec and each Subsidiary, except for liabilities
or obligations which are accrued or reserved in the Permatec Financial
Statements (or reflected in the notes thereto) or which were incurred after
December 31, 1999 in the ordinary course of business, neither Permatec nor any
Subsidiary has any liabilities or obligations (accrued or contingent) of a
nature required by GAAP to be reflected in a balance sheet or that would be
required to be disclosed in footnotes that would be required pursuant to GAAP.
2.5. Absence of Changes. Except as set forth in Section 2.5 of the Permatec
Disclosure Schedule, since December 31, 1999, none of the Subsidiaries have:
(a) sold or transferred any of their assets or any portion of the
interests in such assets other than sales of their respective products in
the ordinary course of business;
(b) suffered any material loss, or material interruption in use, of any
asset or property (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;
(c) made any material change in the nature of their business or
operations;
(d) entered into any material transaction other than sales or licenses
of their products and services in the ordinary course of business;
(e) incurred any liabilities other than in the ordinary course of
business; or
(f) suffered any adverse change with respect to their business or
financial condition which has had or is expected to have a Material Adverse
Effect on any of the Subsidiaries.
2.6. Title to Assets; Equipment; Real Property. Each Subsidiary owns and has
good title to the assets purported to be owned by it and which are material to
such Subsidiary or to the conduct of its business. Except as set forth in
Section 2.6 of the Permatec Disclosure Schedule, such assets are owned by each
Subsidiary free and clear of any Encumbrances. The material items of equipment
and other tangible assets owned by or leased to each Subsidiary are adequate
for the uses to which they are being put and are in good condition and repair
(ordinary wear and tear excepted). No Subsidiary owns or leases any real
property or any material interest in real property, except as described in
Section 2.6 of the Permatec Disclosure Schedule.
2.7. Proprietary Assets.
(a) Each Subsidiary owns the intellectual property in the Permatec
Proprietary Assets, and to its knowledge, has the exclusive right to use and
exploit all of the intellectual property in the Permatec Proprietary Assets.
None of the Subsidiaries jointly own with any other Person any Permatec
Proprietary Asset. Except as set forth in Section 2.7(a) of the Permatec
Disclosure Schedule, there is no Permatec Contract pursuant to which any
Subsidiary has granted any Person any right (whether or not currently
exercisable) to license, commercially distribute or otherwise market any
Permatec Proprietary Asset. The Permatec Proprietary Assets are held and owned
by the Subsidiaries, and Permatec has no rights with respect to such assets
(other than by Permatec as the sole shareholder of Subsidiaries).
(b) To Permatec's and each Subsidiary's knowledge, the Subsidiaries have
taken commercially reasonable measures and precautions to protect and maintain
the confidentiality, secrecy and value of the Permatec Proprietary Assets
(except Permatec Proprietary Assets whose value would be unimpaired by public
disclosure). No current or former officer, director, shareholder, employee,
consultant or independent contractor of Permatec or any Subsidiary has any
ownership right with respect to any Permatec Proprietary Asset.
(c) No Subsidiary has been charged, nor, to its knowledge, is threatened to
be charged, with infringement of any unexpired patent, trademark, trade name,
service mark, copyright or other proprietary right of any Person, nor has any
claim been asserted by any Person, nor, to Permatec's or any Subsidiary's
knowledge, is a
A-4
claim threatened to be asserted by any Person, or to any Subsidiary's knowledge
are there grounds for any such claim to be asserted, challenging or questioning
the validity, enforceability or effectiveness of the Proprietary Assets of any
Subsidiary or any license or sublicense agreements to which any Subsidiary is a
party. No Subsidiary is aware of any other Person that is infringing on any
Permatec Proprietary Asset.
(d) Permatec Proprietary Assets, together with agreements for the license
to any Subsidiary of software generally available to the public, constitute all
the material Proprietary Assets necessary to enable each Subsidiary to conduct
its business in the manner in which such business is currently being conducted.
Except as set forth in Section 2.7(d) of the Permatec Disclosure Schedule,
neither Permatec nor any of the Subsidiaries have (i) licensed any of the
Permatec Proprietary Assets to any Person on an exclusive basis, or (ii)
entered into any covenant not to compete or Contract limiting its ability (A)
to exploit fully any material Permatec Proprietary Assets or (B) to transact
business in any market or geographical area or with any Person.
(e) Section 2.7(e) of the Permatec Disclosure Schedule sets forth all
patents that have been issued to Permatec, Subsidiaries, or any former
subsidiary of Permatec, patent applications that have been filed by Permatec,
Subsidiaries, or any former subsidiary of Permatec, and trademarks that have
been registered by Permatec, Subsidiaries, or any former subsidiary of
Permatec, and the jurisdictions in which such patents have been issued, patent
applications have been filed and trademarks have been registered.
(f) Permatec and each Subsidiary have delivered to Medi-Ject true, correct
and complete copies of each agreement, registration, application, assignment
and transfer document relating to the Permatec Proprietary Assets.
2.8. Contracts.
(a) Section 2.8 of the Permatec Disclosure Schedule identifies each
Permatec Contract to which any Subsidiary is a party or by which any Subsidiary
or any asset of any Subsidiary is bound (the "Subsidiary Contracts"). Permatec
and each Subsidiary have delivered or made available to Medi-Ject accurate,
current and complete copies of the Subsidiary Contracts. Each Subsidiary
Contract is valid and in full force and effect.
(b) Neither Permatec nor any Subsidiary has received notice from any Person
that such Subsidiary has violated or breached, or committed any default under,
any Permatec Contract, nor to Permatec's or any Subsidiary's knowledge are
there grounds for any Person to make such a claim; and Permatec and each
Subsidiary has no knowledge that any other Person has violated or breached, or
committed any default under, any Permatec Contract, except where such
violations, breaches or defaults have not had and will not have a Material
Adverse Effect on any Subsidiary.
(c) Neither Permatec nor any Subsidiary has executed any agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree
which could reasonably be expected to have the effect of prohibiting or
impairing any business practice of any Subsidiary, any acquisition of property
(tangible or intangible) by any Subsidiary or the conduct of business by any
Subsidiary. Without limiting the foregoing, neither Permatec nor any Subsidiary
has entered into any agreement under which any Subsidiary is restricted from
selling, licensing or otherwise distributing any of the Subsidiaries' products
to any class of customers, or providing consulting services, in any geographic
area, during any period of time, nor has Permatec or any Subsidiary granted to
any other person any exclusive rights with respect to any products of Permatec
or any Subsidiary.
(d) The execution of this Agreement does not violate, conflict with, or
constitute a default under any Permatec Contract.
(e) Permatec has no rights with respect to any Subsidiary Contract; all
such rights are held by Subsidiaries.
2.9. Compliance with Legal Requirements. To its knowledge, each Subsidiary
is in compliance with applicable Legal Requirements, except where the failure
to comply with such Legal Requirements will not have a Material Adverse Effect
on any Subsidiary. Neither Permatec nor any Subsidiary has received (i) at any
time since January 1, 1997, any notice or written communication from any
Governmental Body regarding any actual
A-5
or possible violation of, or failure to comply with, any Legal Requirement or
(ii) prior to January 1, 1997 any such notice or communication that remains
pending. No investigation or review of Permatec or any Subsidiary by any
Governmental Body is pending or, to any Subsidiary's knowledge, threatened.
2.10. Governmental Authorizations. To Permatec's and each Subsidiary's
knowledge, each Subsidiary holds the Governmental Authorizations necessary to
enable it to conduct its businesses in the manner in which such businesses are
currently being conducted and in compliance with applicable Legal Requirements,
except where the failure to hold such Governmental Authorizations will not have
a Material Adverse Effect on any Subsidiary. Such Governmental Authorizations
are valid and in full force and effect. To Permatec's and each Subsidiary's
knowledge, each Subsidiary is in compliance with the terms and requirements of
such Governmental Authorizations except where failure to be in compliance will
not have a Material Adverse Effect on any Subsidiary. Neither Permatec nor any
Subsidiary has received (i) at any time since January 1, 1997 any written
notice or other written communication from any Governmental Body regarding (a)
any actual or possible violation of or failure to comply with any term or
requirement of any material Governmental Authorization or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any material Governmental Authorization or (ii) prior to
January 1, 1997 any such notice or communication that remains pending.
2.11. Tax Matters.
(a) Permatec and each Subsidiary have timely filed or caused to be filed
all Tax Returns required to be filed, or, requests for extensions to file such
Tax Returns have been filed, granted and have not expired. All such Tax Returns
are complete and accurate in all material respects. Permatec and each
Subsidiary have paid all Taxes shown as due on such Tax Returns, and Permatec
Financial Statements fully accrue Permatec's and each Subsidiary's liabilities
for Taxes with respect to all periods in accordance with GAAP. No deficiencies
for any Tax have been proposed in writing, asserted or assessed, in each case
by any Governmental Authority, against Permatec or any Subsidiary for which
there is not an adequate reserve, except for deficiencies that would not have a
Material Adverse Effect on Permatec or any Subsidiary. To the knowledge of
Permatec and each Subsidiary, there are no current examinations or audits of
any Permatec or any Subsidiary Tax Return.
(b) Neither Permatec nor any Subsidiary is or has been a "controlled
foreign corporation" within the meaning of Section 957 of the Code.
(c) As of the date the transaction is consummated, no Subsidiary shall have
made any election under Treas. Reg. 301.7701-3 relating to entity
classification for United States federal tax purposes, or otherwise taken any
steps to be treated as other than a corporation for United States federal tax
purposes.
2.12. Employee Benefit Plans.
(a) Section 2.12(a) of the Permatec Disclosure Schedule sets forth a true
and complete list of each Benefit Plan; and each material employment,
termination or severance plan, agreement or arrangement, in each case that is
sponsored, maintained or contributed to or required to be contributed to by
Permatec or any Subsidiary, or to which Permatec or any Subsidiary is a party,
whether written or oral, for the benefit of any employee or former employee of
Permatec or any Subsidiary.
(b) To Permatec's and each Subsidiary's knowledge, each Permatec Benefit
Plan has been administered and operated in compliance with its terms and all
applicable Legal Requirements.
(c) To Permatec's and each Subsidiary's knowledge, there are no liabilities
of Permatec or any Subsidiary with respect to any Permatec Benefit Plan, other
than liabilities disclosed or provided for in the Permatec Financial
Statements.
(d) Section 2.12(d) of the Permatec Disclosure Schedule includes a complete
and accurate list of all officers, employees and independent contractors of
Permatec and each Subsidiary, as of the date hereof, and the salaries and fees
paid to such individuals, in calendar year 1999.
A-6
2.13. Insurance. Section 2.13 of the Permatec Disclosure Schedule contains a
complete and accurate list and description of all insurance policies held by
Permatec and each Subsidiary. To Permatec's and each Subsidiary's knowledge,
the policies set forth on Section 2.13 of the Permatec Disclosure Schedule are
of the type and in amounts customarily carried by organizations conducting
businesses or owning assets similar to those of Permatec and the Subsidiaries.
Since January 1, 1997, neither Permatec nor any Subsidiary has received any
written notice or other written communication regarding any actual or possible
(a) cancellation or invalidation of any insurance policy (b) refusal of any
coverage or rejection of any material claim under any insurance policy, or (c)
material adjustment in the amount of the premiums payable with respect to any
insurance policy. To each Subsidiary's knowledge, there is no pending material
claim (including any workers' compensation claim) under or based upon any
insurance policy of Permatec or any Subsidiary. Each insurance policy of
Permatec and Subsidiaries is in full force and effect.
2.14. Related Party Transactions. No Related Party has any direct or
indirect interest in any material asset used in or otherwise relating to the
business of Permatec or any Subsidiary. No Related Party has any direct or
indirect financial interest in any Permatec Contract, transaction or business
dealing involving Permatec or any Subsidiary. No Related Party has any claim or
right against Permatec for which a Subsidiary may be liable or against any
Subsidiary (other than rights to receive compensation for services performed as
an employee of Permatec or any Subsidiary). For purposes of this Section 2.14,
each of the following shall be deemed to be a "Related Party": (i) each
individual who is an officer or director of Permatec or any Subsidiary or any
of the former subsidiaries of Permatec; (ii) each member of the immediate
family of each of the individuals referred to in clause "(i)" above; and (iii)
any trust or other Entity in which any one of the individuals referred to in
clauses "(i)" and "(ii)" above holds (or in which more than one of such
individuals collectively hold), beneficially or otherwise, a material voting,
proprietary or equity interest.
2.15. Legal Proceedings; Orders.
(a) Except as set forth in Section 2.15 of the Permatec Disclosure
Schedule, there is no pending Legal Proceeding, and no Person has overtly
threatened to commence any Legal Proceeding: (i) that involves Permatec or any
Subsidiary or any assets owned or used by Permatec or any Subsidiary; or (ii)
that challenges any of the transactions contemplated by this Agreement.
(b) There is no order, writ, injunction, judgment or decree to which
Permatec or any Subsidiary, or any assets owned or used by Permatec or any
Subsidiary, is subject.
2.16. Authority; Binding Nature of Agreement. Permatec and each Subsidiary
has all necessary corporate right, power and authority to enter into and to
perform their respective obligations under this Agreement. This Agreement has
been duly executed and delivered by Permatec and each Subsidiary and
constitutes the legal, valid and binding obligation of Permatec and each
Subsidiary, enforceable against each of them in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
2.17. Non-Contravention; Consents. Except as set forth in Section 2.17(d) of
the Permatec Disclosure Schedule, neither (1) the execution, delivery or
performance of this Agreement, nor (2) the consummation of the transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of the certificate of incorporation, bylaws or similar
organizational documents of Permatec or any Subsidiary;
(b) contravene, conflict with or result in a violation of, any Legal
Requirement or any order, writ, injunction, judgment or decree to which
Permatec or any Subsidiary, or any material assets owned or used by
Permatec or any Subsidiary, is subject;
A-7
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any material Governmental Authorization that is
held by Permatec or any Subsidiary or that otherwise relates to the
business of Permatec or any Subsidiary or to any material assets owned or
used by Permatec or any Subsidiary; or
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under or require the giving of notice under, or result
in the creation of any lien with respect to the assets of Permatec or any
Subsidiary pursuant to, any provision of any Permatec Contract, except for
any such violations, liens, breaches or defaults, or failures to give
notice that will not have a Material Adverse Effect on Permatec or any
Subsidiary.
Permatec and each Subsidiary are not and will not be required to make any
filing with or give any notice to, or to obtain any Consent from, any Person in
connection with (x) the execution, delivery or performance of this Agreement or
(y) the consummation of the transactions contemplated by this Agreement, except
where the failure to take such actions will not have a Material Adverse Effect
on any Subsidiary.
2.18. Financial Advisor. Except as set forth in Section 2.18 of the Permatec
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission to be paid by Permatec or any
Subsidiary in connection with the transactions contemplated by this Agreement.
2.19. Employees. Section 2.19 of the Permatec Disclosure Schedule contains
an accurate list of: (i) all written agreements providing for a term of
employment of six (6) months or more between Permatec or any Subsidiary and any
current or retired employee; (ii) all collective bargaining agreements to which
Permatec or any Subsidiary is a party (other than any labor contracts mandated
by applicable law); and (iii) all officers and employees of Permatec and each
Subsidiary as of the date hereof, and the salaries paid in calendar year 1999.
No strike or labor dispute involving Permatec or any Subsidiary and a group of
their respective employees has occurred during the last three (3) years or, to
the knowledge of Permatec, is threatened. To Permatec's and each Subsidiary's
knowledge, Permatec and each Subsidiary have complied in all respects with
applicable wage and hour, equal employment, safety and other legal requirements
relating to its employees, except where the failure to comply will not have a
Material Adverse Effect on Permatec or any Subsidiary.
2.20. Environmental Matters. To Permatec's and each Subsidiary's knowledge,
Permatec and each Subsidiary have complied in all respects with all applicable
Legal Requirements relating to the environment or occupational health and
safety, except where the failure to comply will not have a Material Adverse
Effect on Permatec or any Subsidiary. There is no pending, or, to the knowledge
of Permatec and each Subsidiary, threatened, civil or criminal litigation,
written notice of violation, formal administrative proceedings, or
investigation, inquiry or information request by any Governmental Body,
relating to any such Legal Requirements. To the knowledge of Permatec and each
Subsidiary, there have been no releases by Permatec or any Subsidiary or by
others of any chemicals, pollutants, contaminants, or hazardous substances into
the environment at any parcel of real property or facility formerly or
currently owned, leased, operated or controlled by Permatec or any Subsidiary
in violation of environmental or occupational health Legal Requirements, except
where such violation will not have a Material Adverse Effect on Permatec or any
Subsidiary.
2.21. Entire Business. Neither Permatec nor its affiliates, nor the former
subsidiaries of Permatec, own any assets necessary for the conduct of the
business conducted or proposed to be conducted by the Subsidiaries.
2.22. Change in Control. Neither Permatec nor any Subsidiary is a party to
any contract, agreement or understanding which contains a "change in control,"
"potential change in control" or similar provision that would affect the
transactions contemplated by this Agreement. The consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional acts or events) result in any payment (whether of severance
pay or otherwise) becoming due from Permatec or any Subsidiary to any person.
2.23. Other. Neither this Agreement nor any of the exhibits hereto, nor any
of the documents delivered by or on behalf of Permatec or any Subsidiary
pursuant to Section 5 hereof, nor the Permatec Disclosure
A-8
Schedule, taken as a whole, contain any untrue statement of material fact
regarding Permatec or any Subsidiary or its business or omit to state a
material fact necessary to make this Agreement, the exhibits hereto, or any
document executed in connection therewith, not misleading.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF MEDI-JECT
Medi-Ject represents and warrants to Permatec and the Subsidiaries that,
except as set forth in the disclosure schedule delivered by Medi-Ject to
Permatec on the date of this Agreement (the "Medi-Ject Disclosure Schedule"):
3.1. Due Organization; Subsidiaries; Etc.
(a) Medi-Ject is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota. Medi-Ject has the necessary
corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(b) Except as set forth in Section 3.1(b) of the Medi-Ject Disclosure
Schedule, Medi-Ject has no subsidiaries and does not own any shares of capital
stock of, or equity interest of any nature in, any Entity (other than shares of
non-affiliates held as non-material financial investments). Medi-Ject has not
agreed nor is Medi-Ject obligated to make any future investment in or capital
contribution to any Entity.
(c) Medi-Ject is qualified to do business as a foreign corporation, and is
in good standing, under the laws of the jurisdictions where the nature of its
business requires such qualification and where the failure to so qualify will
have a Material Adverse Effect on Medi-Ject. Each such jurisdiction is listed
in Section 3.1(c) of the Medi-Ject Disclosure Schedule.
3.2. Organizational Documents; Records. Medi-Ject has delivered or made
available to Permatec accurate and complete copies of the certificate of
incorporation and bylaws of Medi-Ject, including all amendments thereto. Medi-
Ject has made available to Permatec accurate and complete copies of the minutes
and other records of the meetings and other proceedings (including any actions
taken by written consent or otherwise without a meeting) of the shareholders of
Medi-Ject and the board of directors and all committees of the board of
directors of Medi-Ject.
3.3. Authority; Binding Nature of Agreement. Medi-Ject has all necessary
corporate right, power and authority to enter into and perform (subject to the
approval of Medi-Ject's Shareholders) its obligations under this Agreement.
This Agreement has been duly executed and delivered by Medi-Ject and
constitutes the legal, valid and binding obligation of Medi-Ject, enforceable
against Medi-Ject in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.4. Financial Statements.
(a) Medi-Ject has delivered to Permatec the following financial statements
and notes (collectively, the "Medi-Ject Financial Statements"):
(i) the audited balance sheets of Medi-Ject as of December 31, 1999,
1998 and 1997 and the related audited statements of operations,
stockholders' equity and cash flows of Medi-Ject for each of the years
ended December 31, 1999, 1998, and 1997 together with the notes thereto and
the unqualified opinion of KPMG LLP thereon, which contains an emphasis
paragraph regarding Medi-Ject's ability to continue as a going concern; and
(ii) the unaudited balance sheet of Medi-Ject as of March 31, 2000,
and the related unaudited statements of operations and cash flows of Medi-
Ject for the three (3) months ended March 31, 2000.
A-9
(b) The Medi-Ject Financial Statements present fairly, in all material
respects, the financial position of Medi-Ject as of the respective dates
thereof and the results of operations and cash flows of Medi-Ject for the
periods covered thereby. The Medi-Ject Financial Statements have been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
covered. The unaudited interim financial statements have been prepared without
audit and in accordance with GAAP for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. All adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included in such financial statements.
(c) To its knowledge, except for liabilities or obligations which are
accrued or reserved in the statements (or reflected in the notes thereto) or
which were incurred after March 31, 2000 in the ordinary course of business,
Medi-Ject has no liabilities or obligations (accrued or contingent) of a nature
required by GAAP to be reflected in a balance sheet or that would be required
to be disclosed in footnotes that are required pursuant to GAAP.
3.5. Absence of Changes. Since December 31, 1999, Medi-Ject has not:
(a) sold or transferred any portion of its assets or any portion of the
interests in such assets other than sales of Medi-Ject's products in the
ordinary course of business;
(b) suffered any material loss, or material interruption in use, of any
asset or property (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;
(c) made any material change in the nature of its business or
operations;
(d) entered into any material transaction other than sales of Medi-
Ject's products in the ordinary course of business;
(e) incurred any liabilities other than the Convertible Notes or
liabilities incurred in the ordinary course of business; or
(f) suffered any adverse change with respect to its business or
financial condition which has had or is expected to have a Material Adverse
Effect on Medi-Ject.
3.6. Tax Returns. Medi-Ject has timely filed or caused to be filed all Tax
Returns required to be filed, or, requests for extensions to file such Tax
Returns have been filed, granted and have not expired. All such Tax Returns are
complete and accurate in all material respects. Medi-Ject has paid all Taxes
shown as due on such Tax Returns, and the Medi-Ject Financial Statements fully
accrue Medi-Ject's liabilities for Taxes with respect to all periods in
accordance with GAAP. No deficiencies for any Tax have been proposed in
writing, asserted or assessed, in each case by any Governmental Authority,
against Medi-Ject for which there are not adequate reserves, except for
deficiencies that would not have a Material Adverse Effect on Medi-Ject. There
are no examinations or audits of any Medi-Ject Tax Return currently underway.
3.7. Capitalization, Etc.
(a) As of the date of this Agreement, the authorized capital stock of Medi-
Ject is 4,400,000 shares divided into three classes consisting of: (i)
3,400,000 shares of common stock, par value $.01 per share, of which 1,424,869
shares have been issued and are outstanding as of the date of this Agreement;
(ii) 10,000 shares of Series A Preferred Stock, par value $.01 per share, of
which 1,100 shares have been issued and are outstanding as of the date of this
Agreement and are convertible into approximately 287,248 shares of Medi-Ject
Common Stock (based on the market closing price on July 7, 2000 of $4.031), and
(iii) 250 shares of Series B Preferred Stock, par value $.01 per Share, of
which 250 shares have been issued and are outstanding and are convertible into
approximately 100,000 shares of Medi-Ject Common Stock (based on the market
closing price on July 7, 2000 of $4.031); and as of the Closing Date the
authorized capital stock of Medi-Ject shall be 18,000,000 shares consisting of
(i) 15,000,000 shares of common stock, par value $.01 per share, (ii) 3,000,000
shares of preferred stock of which (10,000 shares have been designated Series A
Preferred Stock,
A-10
par value $.01 per share, (2) 250 shares have been designated Series B
Preferred Stock, par value $.01 per share, (3) a yet to be determined number of
Series C Preferred Stock, par value $.01 per share and (4) a yet to be
determined number of Series D Preferred Stock, of unknown par. All of the
outstanding shares of capital stock of Medi-Ject have been duly authorized and
validly issued, and are fully paid and nonassessable. The proposals to seek the
Medi-Ject Shareholders' approval of this Agreement and the transactions
contemplated herein shall include a provision seeking approval of an increase
in the authorized capital stock of Medi-Ject.
(b) Medi-Ject has reserved 415,226 shares of Medi-Ject Common Stock for
future issuance pursuant to stock options granted and outstanding; and 515,807
shares of Medi-Ject Common Stock are reserved for future issuance pursuant to
warrants granted and outstanding. Assuming a market closing price on July 7,
2000 of $4.031, Medi-Ject has issued securities convertible into approximately
1,362,248 shares of Medi-Ject Common Stock (including 975,000 shares of Medi-
Ject Common Stock underlying the Series C Preferred Stock into which the
Convertible Notes are convertible) for which there are insufficient authorized
shares to effect such conversion.
(c) Except as set forth in Section 3.7(c) of the Medi-Ject Disclosure
Schedule, as of the date of this Agreement there is no: (i) outstanding
subscription, option, call, warrant or right to acquire any shares of the
capital stock or other securities of Medi-Ject; (ii) outstanding security,
instrument or obligation that is or will become convertible into or
exchangeable for any shares of the capital stock or other securities of Medi-
Ject; or (iii) contract under which Medi-Ject is or will become obligated to
sell or otherwise issue any shares of its capital stock or any other
securities.
3.8. Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement, nor (2) the consummation of the transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of the articles of incorporation or bylaws of Medi-Ject;
(b) contravene, conflict with or result in a violation of, any Legal
Requirement or any order, writ, injunction, judgment or decree to which or
any material assets owned or used by Medi-Ject is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any material Governmental Authorization that is
held by Medi-Ject or that otherwise relates to the business of Medi-Ject or
to any material assets owned or used by Medi-Ject; or
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, or result in the creation of any lien with
respect to Medi-Ject's assets pursuant to, or require the giving of notice
under, any provision of any Medi-Ject Contract, except for any such
violations, liens, breaches or defaults, or failures to give notice that
will not have a Material Adverse Effect on Medi-Ject.
Medi-Ject is not required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or (y) the consummation of the
transactions contemplated by this Agreement, except where the failure to take
such actions will not have a Material Adverse Effect on Medi-Ject.
3.9. Title to Assets; Equipment; Real Property. Medi-Ject owns and has good
title to the assets purported to be owned by it and which are material to Medi-
Ject or to the conduct of its business. Except as set forth in Section 3.9 of
the Medi-Ject Disclosure Schedule or in the Medi-Ject SEC Reports (as defined
herein), such assets are owned by Medi-Ject free and clear of any Encumbrances.
The material items of equipment and other tangible assets owned by or leased to
Medi-Ject are adequate for the uses to which they are being put and are in good
condition and repair (ordinary wear and tear excepted). Medi-Ject does not own
or lease any real property or any material interest in real property, except as
described in the Medi-Ject SEC Reports.
3.10. Proprietary Assets.
(a) Medi-Ject owns the intellectual property in the Medi-Ject Proprietary
Assets, and to its knowledge, has the exclusive right to use and exploit all of
the intellectual property in its Proprietary Assets. Medi-Ject
A-11
does not jointly own with any other Person any Medi-Ject Proprietary Asset.
Except as set forth in Section 3.10(a) of the Medi-Ject Disclosure Schedule,
there is no Contract pursuant to which Medi-Ject has granted any Person any
right (whether or not currently exercisable) to license, commercially
distribute or otherwise market any Medi-Ject Proprietary Asset.
(b) To its knowledge, Medi-Ject has taken commercially reasonable measures
and precautions to protect and maintain the confidentiality, secrecy and value
of its Proprietary Assets (except Medi-Ject Proprietary Assets whose value
would be unimpaired by public disclosure). No current or former officer,
director, shareholder, employee, consultant or independent contractor has any
ownership right with respect to any Medi-Ject Proprietary Asset.
(c) Medi-Ject has not been charged, nor to its knowledge is Medi-Ject
threatened to be charged with infringement of any unexpired patent, trademark,
trade name, service mark, copyright or other proprietary right of any Person.
No claim has been asserted by a Person, nor to Medi-Ject's knowledge is a claim
threatened to be asserted by a Person, or to Medi-Ject's knowledge are there
grounds for any such claim to be asserted, challenging or questioning the
validity, enforceability or effectiveness of the Proprietary Assets of Medi-
Ject or any license or sublicense agreements to which Medi-Ject is a party.
Medi-Ject is not aware of any other Person that is infringing on any Medi-Ject
Proprietary Asset.
(d) Medi-Ject Proprietary Assets constitute all the material Proprietary
Assets necessary to enable Medi-Ject to conduct its business in the manner in
which such business is currently being conducted. Except as set forth in
Section 3.10(d) of the Medi-Ject Disclosure Schedule, Medi-Ject has not (i)
licensed any of the Medi-Ject Proprietary Assets to any Person on an exclusive
basis, or (ii) entered into any covenant not to compete or contract limiting
its ability (A) to exploit fully any material Medi-Ject Proprietary Assets or
(B) to transact business in any market or geographical area or with any Person.
(e) Medi-Ject has delivered to Permatec true, correct and complete copies
of each agreement, registration, application, assignment and transfer document
relating to the Medi-Ject Proprietary Assets.
(f) Section 3.10(f) of the Medi-Ject Disclosure Schedule sets forth all
patents that have been issued to Medi-Ject, patent applications that have been
filed by Medi-Ject and trademarks that have been registered by Medi-Ject and
the jurisdictions in which such patents have been issued, patent applications
have been filed and trademarks have been registered.
(g) To the best knowledge of Medi-Ject, the devices currently manufactured,
marketed, distributed, and/or licensed by Medi-Ject, including those with the
designation "MJ-6" and "MJ-7," do not require any licenses, rights, or consent
from any third parties and do not rely on proprietary rights owned by third
parties; Medi-Ject will be able to continue to manufacture, market, distribute
and/or license such devices without obtaining any rights or consent from third
parties. The small needle injection system technology licensed from Elan
Corporation, plc does not require licenses, rights, or consent from any third
parties.
3.11. Contracts.
(a) Section 3.11(a) of the Medi-Ject Disclosure Schedule identifies each
Medi-Ject Contract. Medi-Ject has delivered or made available to Permatec
accurate and complete copies of each of Medi-Ject's Contracts. Each Medi-Ject
Contract is valid and in full force and effect.
(b) Medi-Ject has not received notice from any Person that Medi-Ject has
violated or breached, or committed any default under, any Medi-Ject Contract,
nor to Medi-Ject's knowledge are there grounds for any Person to make such a
claim; and Medi-Ject has no knowledge that any other Person has violated or
breached, or committed any default under, any Medi-Ject Contract, except where
such violations, breaches or defaults have not had and will not have a Material
Adverse Effect on Medi-Ject.
3.12. Compliance with Legal Requirements. To its knowledge, Medi-Ject is in
compliance with applicable Legal Requirements, except where the failure to
comply with such Legal Requirements will not have
A-12
a Material Adverse Effect on Medi-Ject. Medi-Ject has not received (i) at any
time since January 1, 1997, any notice or written communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any Legal Requirement or (ii) prior to January 1, 1997 any such
notice or communication that remains pending. No investigation or review of
Medi-Ject by any Governmental Body is pending or, to Medi-Ject's knowledge,
threatened.
3.13. Governmental Authorizations. To its knowledge, Medi-Ject holds the
Governmental Authorizations necessary to enable it to conduct its business in
the manner in which such businesses are currently being conducted and in
compliance with applicable Legal Requirements, except where the failure to hold
such Governmental Authorizations will not have a Material Adverse Effect on
Medi-Ject. Such Governmental Authorizations are valid and in full force and
effect. To its knowledge, Medi-Ject is in compliance with the terms and
requirements of such Governmental Authorizations except where failure to be in
compliance will not have a Material Adverse Effect on Medi-Ject. Medi-Ject has
not received (i) at any time since January 1, 1997 any written notice or other
written communication from any Governmental Body regarding (a) any actual or
possible violation of or failure to comply with any term or requirement of any
material Governmental Authorization or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
material Governmental Authorization or (ii) prior to January 1, 1997 any such
notice or communication that remains pending.
3.14. Employee Benefit Plans.
Section 3.14 of the Medi-Ject Disclosure Schedule sets forth a true and
complete list of each Medi-Ject Benefit Plan; and each material employment,
termination or severance plan, agreement or arrangement, in each case that is
sponsored, maintained or contributed to or required to be contributed to by
Medi-Ject, or to which Medi-Ject is a party, whether written or oral, for the
benefit of any employee or former employee of Medi-Ject.
3.15. Insurance. Section 3.15 of the Medi-Ject Disclosure Schedule contains
a complete and accurate list and description of all insurance policies held by
Medi-Ject. Since January 1, 1997, Medi-Ject has not received any written notice
or other written communication regarding any actual or possible (a)
cancellation or invalidation of any insurance policy (b) refusal of any
coverage or rejection of any material claim under any insurance policy, or (c)
material adjustment in the amount of the premiums payable with respect to any
insurance policy. To Medi-Ject's knowledge, there is no pending material claim
(including any workers' compensation claim) under or based upon any insurance
policy of Medi-Ject.
3.16. Legal Proceedings; Orders.
(a) Except as set forth in Section 3.16 of the Medi-Ject Disclosure
Schedule or in the Medi-Ject SEC Reports, there is no pending Legal Proceeding,
and no Person has overtly threatened to commence any Legal Proceeding: (i) that
involves Medi-Ject or any assets owned or used by Medi-Ject; or (ii) that
challenges any of the transactions contemplated by this Agreement.
(b) There is no order, writ, injunction, judgment or decree to which Medi-
Ject, or any assets owned or used by Medi-Ject, is subject.
3.17. Financial Advisor. Except as set forth in Section 3.17 of the Medi-
Ject Disclosure Schedule, no broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission to be paid by Medi-Ject in
connection with the transactions contemplated by this Agreement.
3.18. Environmental Matters. There is no pending, or, to Medi-Ject's
knowledge, threatened, civil or criminal litigation, written notice of
violation, formal administrative proceedings, or investigation, inquiry or
information request by any Governmental Body, relating to any Legal
Requirements relating to the environment or occupational health and safety,
except where the failure to comply will not have a Material Adverse Effect on
Medi-Ject.
3.19. Change in Control. Except as set forth in Section 3.19 of the Medi-
Ject Disclosure Schedule, Medi-Ject is not a party to any contract, agreement
or understanding which contains a "change in control,"
A-13
"potential change in control" or similar provision that would affect the
transactions contemplated by this Agreement. The consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional acts or events) result in any payment (whether of severance
pay or otherwise) becoming due from Medi-Ject to any person.
3.20. Required Medi-Ject Vote. The affirmative vote of a majority of all
shares of Medi-Ject Common Stock entitled to vote, the affirmative vote of a
majority of all shares of Medi-Ject's Series A Convertible Preferred Stock,
voting together as a single class, and the affirmative vote of a majority of
all shares of Medi-Ject's Series B Convertible Preferred Stock, voting together
as a single class are the only votes of the holders of any class or series of
Medi-Ject's securities necessary to approve the transactions contemplated by
this Agreement.
3.21. SEC Reports. Medi-Ject has filed all required forms, reports and
documents with the SEC since January 1, 1997 (the "Medi-Ject SEC Reports"),
each of which has complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act, each as in effect on
the dates such forms, reports and documents were filed. None of the Medi-Ject
SEC Reports contained, when filed, any untrue statement of material fact or
omitted to state a material fact required to be stated or incorporated by
reference therein, in light of the circumstances under which they were made,
not misleading.
3.22. Antitrust. Medi-Ject, together with all entities which it controls,
(i) does not have total assets of $10 million or more as stated in Medi-Ject's
most recent regularly prepared balance sheet and (ii) does not have total
annual net sales of $10 million or higher, as stated in the last regularly
prepared annual statement of income and expense for Medi-Ject.
3.23. Other. Neither this Agreement nor any of the exhibits hereto, nor any
of the documents delivered by or on behalf of Medi-Ject pursuant to Section 5
hereof, nor the Medi-Ject Disclosure Schedule, taken as a whole, contain any
untrue statement of material fact regarding Medi-Ject or Medi-Ject's business
or omit to state a material fact necessary to make this Agreement, the exhibits
hereto, or any document executed in connection therewith, not misleading.
SECTION 4
CERTAIN COVENANTS AND AGREEMENTS
4.1. Access to Records and Properties.
(a) From and after the date hereof until the Closing or the earlier
termination of this Agreement pursuant to Section 6.1 hereof (the "Executory
Period"), Permatec and each Subsidiary shall afford (subject to any applicable
laws relating to the maintenance of confidentiality or the preservation of
privacy of data and information): (i) to the officers, independent certified
public accountants, legal counsel and other Representatives of Medi-Ject, free
and full access at all reasonable times and upon reasonable prior notice to all
of its properties, books and records (including tax returns filed and those in
preparation), in order that Medi-Ject and such other persons may have full
opportunity to make such investigations as they shall reasonably desire to make
of the business and affairs of Permatec; and (ii) to the independent certified
public accountants of Medi-Ject, free and full access at all reasonable times
and upon reasonable prior notice to the work papers of the independent
certified public accountants for Permatec and each Subsidiary. Additionally,
Permatec and each Subsidiary will permit Medi-Ject, its officers, directors,
auditors, legal counsel and other Representatives to make such reasonable
inspections of it and its operations during normal business hours as Medi-Ject
may reasonably require and Permatec and each Subsidiary will cause the officers
of Permatec and each Subsidiary to furnish to Medi-Ject and such other persons,
such additional financial and operating data and other information as to its
business and properties as Medi-Ject or such other persons shall from time to
time reasonably request. No investigation pursuant to this Section 4.1(a), or
made prior to the date hereof, shall affect or otherwise diminish or obviate in
any respect any of the representations and warranties of Permatec and each
Subsidiary.
(b) During the Executory Period, Medi-Ject shall afford (subject to any
applicable laws relating to the maintenance of confidentiality or the
preservation of privacy of data and information): (i) to the officers,
A-14
independent certified public accountants, legal counsel and other
Representatives of Permatec, free and full access at all reasonable times and
upon reasonable prior notice to all of its properties, books and records
(including tax returns filed and those in preparation), in order that Permatec
and such other persons may have full opportunity to make such investigations
as they shall reasonably desire to make of the business and affairs of Medi-
Ject; and (ii) to the independent certified public accountants of Permatec,
free and full access at all reasonable times and upon reasonable prior notice
to the work papers of the independent certified public accountants for Medi-
Ject. Additionally, Medi-Ject will permit Permatec, its officers, directors,
auditors, legal counsel and other Representatives to make such reasonable
inspections of it and its operations during normal business hours as Permatec
may reasonably require and Medi-Ject will cause its officers to furnish to
Permatec and such other persons, such additional financial and operating data
and other information as to its business and properties as Permatec or such
other persons shall from time to time reasonably request. No investigation
pursuant to this Section 4.1(b), or made prior to the date hereof, shall
affect or otherwise diminish or obviate in any respect any of the
representations and warranties of Medi-Ject.
4.2. Operation of Subsidiaries. During the Executory Period, except as
contemplated in this Agreement or the Permatec Disclosure Schedule, Permatec
and each Subsidiary, unless Medi-Ject has agreed otherwise in writing,
(a) shall operate their respective businesses as now operated and only
in the normal and ordinary course and, consistent with such operation;
(b) shall use their best efforts to preserve intact their business
organization;
(c) shall keep available the services of each employee;
(d) shall maintain satisfactory relationships with Permatec's and each
Subsidiary's customers and other persons having business dealings with
Permatec and each Subsidiary;
(e) shall not take any action, or be notified of any circumstance, that
would result in any of the representations and warranties of Permatec and
each Subsidiary herein becoming untrue;
(f) shall not issue or agree to issue any shares of Permatec or any
Subsidiary's capital stock or securities, rights, options or warrants
convertible into or exercisable or exchangeable for shares of Permatec or
any Subsidiary's capital stock (other than shares of capital stock issuable
upon exercise or conversion of outstanding rights and options in accordance
with the present terms thereof);
(g) shall not amend its articles of incorporation or bylaws or
comparable governing instruments;
(h) shall not accelerate, amend or change the period of exercisability
of options granted under any employee stock plan or authorize cash payments
in exchange for any options granted under any of such plans;
(i) shall not accelerate, amend or change the period of exercisability
of any warrants to purchase capital stock or authorize cash payments in
exchange for any warrants granted by it;
(j) shall not take or cause to occur any of the actions or transactions
described in Section 2.5 hereof;
(k) shall not amend the terms of the Permatec Benefit Plans, including,
without limitation, any employment, severance or similar agreements or
arrangements in existence on the date hereof, or adopt any new employee
benefit plans, programs or arrangements or any employment, severance or
similar agreements or arrangements;
(l) shall not (i) increase or agree to increase the compensation
payable or to become payable to their officers or, other than increases in
accordance with past practice which are not material, to its employees,
(ii) grant any severance or termination pay to any employee or (iii) enter
into any collective bargaining agreement;
A-15
(m) shall not (i) incur, create, assume or otherwise become liable for
borrowed money or assume, guarantee, endorse or otherwise become
responsible or liable for the obligations of any other individual,
corporation or other entity or (ii) make any loans or advances to any other
person;
(n) shall not (i) materially change any practice with respect to Taxes,
(ii) make, change or revoke any material Tax election, or (iii) settle or
compromise any material dispute involving a Tax liability;
(o) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other equity securities or (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or other
equity securities, or make any commitment for any such action or (iii)
split, combine or reclassify any of its capital stock or other equity
securities or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock
or other equity securities;
(p) shall not make or agree to make any capital expenditure in excess
of $25,000 in the aggregate;
(q) shall not change any accounting principles or practices;
(r) shall not pay, discharge, settle or satisfy any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in the most
recent consolidated financial statements (or the notes thereto) of Permatec
or any Subsidiary or incurred thereafter in the ordinary course of business
consistent with past practice, or waive any material benefits of, or agree
to modify in any material respect any confidentiality, standstill, non-
solicitation or similar agreement to which Permatec or any Subsidiary is a
party;
(s) shall not revalue in any material respect any of its material
assets, including, without limitation, writing down the value of any
inventory or writing off of any notes or accounts receivable other than as
required by GAAP.
(t) shall not take, or agree (in writing or otherwise) or resolve to
take, any of the foregoing actions.
4.3. Operation of Medi-Ject.
During the Executory Period, except as contemplated in this Agreement or the
Medi-Ject Disclosure Schedule, Medi-Ject, unless Permatec has agreed otherwise
in writing,
(a) shall operate its business as now operated and only in the normal
and ordinary course and, consistent with such operation;
(b) shall use its best efforts to preserve intact its business
organization;
(c) shall keep available the services of its officers and employees;
(d) shall maintain satisfactory relationships with its respective
customers and other persons having business dealings with it;
(e) shall promptly file such reports as are required of it by the
Securities Act or the Exchange Act (and shall deliver such reports promptly
to Permatec);
(f) shall not take any action that would result in any of the
representations and warranties of Medi-Ject herein becoming untrue;
(g) shall not issue or agree to issue any shares of its capital stock
or securities, rights, options or warrants convertible into or exercisable
or exchangeable for shares of its capital stock (other than shares of
capital stock issuable upon exercise or conversion of outstanding rights
and options in accordance with the present terms thereof), except as
provided in the Convertible Notes, and any other notes issued pursuant to
the Note Purchase Agreement;
A-16
(h) shall not amend its articles of incorporation or bylaws;
(i) shall not accelerate, amend or change the period of exercisability
of options granted under any employee stock plan or authorize cash payments
in exchange for any options granted under any of such plans, except that
all stock options issued and outstanding on the Closing Date shall
accelerate upon Closing;
(j) shall not accelerate, amend or change the period of exercisability
of any warrants to purchase capital stock or authorize cash payments in
exchange for any warrants granted by Medi-Ject, except as otherwise
provided in the respective warrants;
(k) shall not take or cause to occur any of the actions or transactions
described in Section 3.5 hereof;
(l) shall not amend the terms of any Medi-Ject Benefit Plan, including,
without limitation, any employment, severance or similar agreements or
arrangements in existence on the date hereof, or adopt any new employee
benefit plans, programs or arrangements or any employment, severance or
similar agreements or arrangements;
(m) shall not (i) increase or agree to increase the compensation
payable or to become payable to its officers or, other than increases in
accordance with past practice which are not material, to its employees,
(ii) grant any severance or termination pay to any employee or (iii) enter
into any collective bargaining agreement;
(n) shall not (i) incur, create, assume or otherwise become liable for
borrowed money or assume, guarantee, endorse or otherwise become
responsible or liable for the obligations of any other individual,
corporation or other entity or (ii) make any loans or advances to any other
person, except as provided in the Convertible Notes or the Note Purchase
Agreement;
(o) shall not (i) materially change any practice with respect to Taxes,
(ii) make, change or revoke any material Tax election, or (iii) settle or
compromise any material dispute involving a Tax liability;
(p) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other equity securities or (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or other
equity securities, or make any commitment for any such action or (iii)
split, combine or reclassify any of its capital stock or other equity
securities or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock
or other equity securities;
(q) shall not make or agree to make any capital expenditure in excess
of $125,000 in the aggregate;
(r) shall not change any accounting principles or practices;
(s) shall not pay, discharge, settle or satisfy any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in the most
recent consolidated financial statements (or the notes thereto) of Medi-
Ject or incurred thereafter in the ordinary course of business consistent
with past practice, or waive any material benefits of, or agree to modify
in any material respect any confidentiality, standstill, non-solicitation
or similar agreement to which Medi-Ject is a party;
(t) shall not revalue in any material respect any of its material
assets, including, without limitation, writing down the value of any
inventory or writing off of any notes or accounts receivable other than as
required by GAAP; and
(u) shall not take, or agree (in writing or otherwise) or resolve to
take, any of the foregoing actions.
A-17
4.4. Advice of Changes. The parties shall confer on a regular and frequent
basis with each other, report on operational matters and promptly advise each
other orally and in writing of any change, event or circumstance having, or
which, insofar as can reasonably be foreseen, could have, a Material Adverse
Effect on such party; or which would, or could reasonably be foreseen to,
affect the transactions contemplated herein.
4.5. Efforts to Consummate. Subject to the terms and conditions herein
provided, the parties shall use their best efforts to do or cause to be done
all such acts and things as may be necessary, proper or advisable, consistent
with all applicable laws and regulations, to consummate and make effective the
transactions contemplated hereby and to satisfy or cause to be satisfied all
conditions precedent that are set forth in Section 5 hereof as soon as
reasonably practicable.
4.6. Additional Agreements. Each party to this Agreement (i) shall make all
filings (if any) and give all notices (if any) required to be made and given by
such party in connection with the transactions contemplated by this Agreement,
and (ii) shall use commercially reasonable efforts to obtain each Consent (if
any) required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the transactions
contemplated by this Agreement. Each party shall promptly deliver to the other
party a copy of each such filing made, each such notice given and each such
Consent obtained.
4.7. Proxy Statement.
(a) As soon as practicable after the date of this Agreement, Medi-Ject
shall prepare for filing with the SEC and thereafter for circulation to Medi-
Ject's shareholders a proxy statement (the "Proxy Statement") relating to the
transactions contemplated by this Agreement, and in particular to obtain the
approval by such shareholders of the issuance of the Medi-Ject Common Stock to
Permatec, as required by the Nasdaq Stock Market as a condition for continued
listing thereon. Medi-Ject shall cause such proxy statement to comply (except
as to information supplied by Permatec and Subsidiaries, to which information
this covenant does not apply) with the applicable requirements of (i) the
Exchange Act, including without limitation, Sections 14(a) and 14(d) thereof
and the respective regulations promulgated thereunder and (ii) The Nasdaq Stock
Market.
(b) The information supplied by Permatec and Subsidiaries for inclusion in
any filing with the SEC will not, at the time the filing is made, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading. Permatec and
Subsidiaries shall ensure that each such filing meets and complies in all
material respects with all applicable Laws, including all applicable rules
under the Securities Act or the Exchange Act, as such filing relates to
Permatec and Subsidiaries.
(c) Medi-Ject shall call and hold a shareholders' meeting as promptly as
practicable for the purpose of voting upon the issuance of the Medi-Ject Common
Stock hereunder and an increase in the authorized capital stock of Medi-Ject,
and, subject to the fiduciary duties of its Board of Directors, Medi-Ject shall
use its best efforts (through its agents or otherwise) to solicit from its
shareholders proxies in favor of the approval of such issuance and increase,
and shall take all other action necessary or advisable to secure the
affirmative vote of its shareholders required by applicable law to secure such
approvals. Subject to the fiduciary duties of the Medi-Ject board of directors,
the Proxy Statement shall include the unanimous and unconditional
recommendation of the board of directors of Medi-Ject to the shareholders of
Medi-Ject that they approve the issuance of the Medi-Ject Common Stock
contemplated by this Agreement and approve an increase in the authorized
capital stock of Medi-Ject.
(d) Permatec and Subsidiaries will cooperate, and will cause their
respective financial, accounting and legal advisors to cooperate, with Medi-
Ject in the preparation and filing of the Proxy Statement and all documents and
materials (each a "Filing") required or elected to be disclosed or reported by
Medi-Ject pursuant to applicable securities laws in connection with the
transactions contemplated by this Agreement and the other transaction documents
or to the extent otherwise relating to or concerning Permatec and any
Subsidiary. To that end, Permatec and Subsidiaries shall furnish to Medi-Ject,
as promptly as is practicable after Medi-Ject's request therefor, such data and
information relating to Permatec and Subsidiaries, and such financial
statements of Permatec and Subsidiaries and opinions, comfort letters and
consents of independent certified public accountants relating thereto as, in
the opinion of counsel for Medi-Ject, shall be required by law
A-18
to be disclosed or reported by Medi-Ject or as are otherwise determined by
Medi-Ject to be reasonably necessary or appropriate in connection therewith.
Medi-Ject shall provide a draft of each Filing to Permatec promptly following
the preparation thereof for approval by Permatec, which approval shall be at
Permatec's sole discretion but which approval shall be made promptly, and such
approval shall not be unreasonably withheld. If, at any time prior to the
Closing, any event should occur relating to Permatec or any Subsidiary which
should be set forth in an amendment of, or a supplement to, any Filing,
Permatec and Subsidiaries will promptly inform Medi-Ject.
4.8. Financing. During the Executory Period, Permatec, with the full
cooperation and assistance of Medi-Ject, will use commercially reasonable
efforts to raise at least Seven Million United States Dollars ($7,000,000) for
the operation of the combined business of Medi-Ject and the Subsidiaries
subsequent to the consummation of the transactions contemplated hereby. To aid
Permatec in such financing, Medi-Ject shall provide (i) such information and
(ii) such time of its officers and employees as are reasonably needed by
Permatec to conduct such financing. The board of directors of Medi-Ject shall
consider the terms of the financing, and, if acceptable, approve such
financing, which approval may be conditioned on the consummation of the
transactions contemplated hereby.
4.9. Business Plan. During the Executory Period, Permatec, with the full
cooperation and assistance of Medi-Ject, will prepare a written business plan
for 2000 and 2001 and the pro forma projections related thereto reflecting the
combined business of Medi-Ject and the Subsidiaries subsequent to the
consummation of the transactions contemplated hereby. To aid Permatec in
preparing such business plan and projections, Medi-Ject shall provide (i) such
information and (ii) such time of its officers and employees as are reasonably
needed by Permatec to prepare such business plan and projections. The board of
directors of Medi-Ject shall consider the business plan, and, if acceptable,
approve such business plan, such approval being contingent upon the
consummation of the transactions contemplated hereby.
4.10. Search for Chief Executive Officer. During the Executory Period,
Permatec, with the full cooperation and assistance of Medi-Ject, will undertake
a comprehensive search for a new chief executive officer of Medi-Ject. To aid
Permatec in such search, Medi-Ject shall provide (i) such information and (ii)
such time of its officers and employees as are needed by Permatec to conduct
such search. The board of directors of Medi-Ject shall have the right to
approve the candidate before his or her hiring.
4.11. Noncompetition. For a period commencing on the Closing Date and ending
on the date that is twelve months from the Closing Date, Permatec shall not
provide, develop, perform or offer any technology, product or service
substantially similar to the technology, products, or services owned, produced
or under development by any of the Subsidiaries as of the Closing Date. The
foregoing restriction shall not apply to (i) the ownership by Permatec of
shares of the capital stock of Medi-Ject or (ii) the ownership by Permatec of
49.9% or less of the voting power of any other entity, it being understood that
Permatec may own in excess of 49.9% of the voting power of any other entity
that does not provide, develop, perform or offer any technology, product or
service substantially similar to the technology, products, or services owned,
produced or under development by the Subsidiaries as of the Closing Date.
SECTION 5
CERTAIN CONDITIONS
5.1. Conditions to Each Party's Obligations. The obligations of the parties
to effect the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
(a) Approvals. All Governmental Authorizations and corporate approvals
and Consents of third parties required in connection with the transactions
contemplated hereby shall have been obtained and shall be in full force and
effect, including, but not limited to, the approval by the Medi-Ject
shareholders of this Agreement and the related increase of the authorized
capital stock of Medi-Ject. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the
A-19
transactions contemplated hereby shall have been issued by any court of
competent jurisdiction and remain in effect, and there shall not be any
applicable law that makes consummation of this Agreement illegal.
(b) Financing. Permatec shall have raised for Medi-Ject an aggregate of
at least Seven Million United States Dollars ($7,000,000); such financing
to be closed upon completion of the transactions contemplated by this
Agreement.
5.2. Conditions to Obligations of Medi-Ject. The obligations of Medi-Ject to
perform this Agreement are subject to the satisfaction of the following
conditions unless waived (to the extent such conditions can be waived) by Medi-
Ject:
(a) Representations and Warranties. The representations and warranties
of Permatec and each Subsidiary set forth in Section 2 hereof shall in each
case be true and correct in all material respects (except for any
representation or warranty that by its terms is qualified by materiality,
in which case it shall be true and correct in all respects) as of the date
of this Agreement and as of the Closing Date as though made at and as of
such dates, respectively.
(b) Performance of Obligations of Permatec and Subsidiaries. Permatec
and each Subsidiary shall have performed in all material respects the
obligations required to be performed by each of them under this Agreement
prior to or as of the Closing Date.
(c) Absence of Certain Changes. There shall have been no events, changes
or effects with respect to Permatec or any Subsidiary which would have a
Material Adverse Effect on Permatec or any Subsidiary. Without limiting the
generality of the foregoing, Permatec and each Subsidiary shall not have
incurred any indebtedness during the period between December 31, 1999 and
the Closing Date that has had or will have a Material Adverse Effect on
Permatec or any Subsidiary.
(d) Delivery of Convertible Notes. Permatec shall have delivered the
Convertible Notes to Medi-Ject for cancellation.
(e) Cash. Subsidiaries shall have aggregate cash reserves or Cash
Equivalents of not less than One Million Swiss Francs (CHF 1,000,000) on
the Closing Date.
(f) Employment Agreement. The Employment Agreement between Medi-Ject and
Franklin Pass, M.D. in the form attached hereto as Exhibit B, such
agreement to be executed concurrently with this Agreement, shall have been
executed by Medi-Ject.
(g) Capital Stock of Subsidiaries. s of the Closing Date there shall
have been no changes in the outstanding capital stock of any Subsidiary,
including the right to acquire stock in any Subsidiary. Permatec shall have
delivered certificates representing all of the issued and outstanding
capital stock of each Subsidiary.
(h) Escrow Agreement. The Escrow Agreement shall have been executed and
delivered by Permatec and the Escrow Agent, and shall be in full force and
effect.
(i) Opinions of Counsel. Medi-Ject shall have received the satisfactory
opinions dated the Closing Date of legal counsel to Permatec and
Subsidiaries in form and substance reasonably satisfactory to it.
(j) Officer's Certificate. Medi-Ject shall have received from Permatec
and each Subsidiary an officer's certificate certifying to the fulfillment
of the conditions specified in Sections 5.1(a) and Section 5.2(a), 5.2(b),
5.2(c), 5.2(d), 5.2(e), 5.2(g) and 5.2(i).
5.3. Conditions to Obligations of Permatec and Subsidiaries. The obligation
of Permatec and Subsidiaries to perform this Agreement are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by Permatec:
(a) Representations and Warranties. The representations and warranties
of Medi-Ject set forth in Section 3 hereof shall be true and correct in all
material respects (except for any representation or
A-20
warranty that by its terms is qualified by materiality, in which case it
shall be true and correct in all respects) as of the date of this
Agreement, and as the Closing Date as though made at and as of such dates,
respectively.
(b) Performance of Obligations of Medi-Ject. Medi-Ject shall have
performed in all material respects the obligations required to be performed
by it under this Agreement prior to or as of the Closing Date and Permatec
shall have received a certificate signed by an executive officer of Medi-
Ject to that effect.
(c) Opinion of Counsel to Medi-Ject. Permatec shall have received a
satisfactory opinion dated the Closing Date of Leonard, Street and Deinard;
in form and substance reasonably satisfactory to it.
(d) Absence of Certain Changes. There shall have been no events, changes
or effects with respect to Medi-Ject which would have a Material Adverse
Effect on Medi-Ject. Without limiting the generality of the foregoing,
Medi-Ject (i) shall not have incurred any indebtedness (except for the
Convertible Notes and Note Purchase Agreement during the period between
December 31, 1999 and the Closing Date which would have to be listed as
such on its financial statements, and (ii) shall not have received any
formal notification from the NASDAQ Stock Market that the Medi-Ject common
stock listed on the NASDAQ Small Cap Market is or has been delisted or
received a formal and final notification that it will be delisted.
(e) Delivery of Medi-Ject Series C Stock upon Conversion of Convertible
Notes. Medi-Ject shall have delivered the number of shares of Medi-Ject
Series C Stock of Medi-Ject that are due to Permatec upon conversion of the
Convertible Notes in accordance with the terms of the Convertible Notes.
(f) Employment Agreement. The Employment Agreement between Medi-Ject and
Franklin Pass, M.D. in the form attached hereto as Exhibit B, such
agreement to be executed concurrently with this Agreement, shall have been
executed by Medi-Ject.
(g) Capital Stock of Medi-Ject. As of the Closing Date there shall have
been no changes in the outstanding capital stock of Medi-Ject, including
the right to acquire stock in Medi-Ject.
(h) Board of Directors. Karl Groth, Geoffrey Guy, M.D., Fred L. Shapiro,
M.D. and Stanley Goldberg shall each have resigned from the Board of
Directors of Medi-Ject and Dr. Jacques Gonella, Dr. Thomas M. Rinderknecht,
Prof. Ubaldo Conte and Dr. Philippe Dro shall have been appointed to the
Board of Directors of Medi-Ject.
(i) Officer's Certificate. Permatec shall have received from Medi-Ject
an officer's certificate certifying to the fulfillment of the conditions
specified in Sections 5.1(b) and Section 5.3(a), 5.3(b), 5.3(d), and
5.3(g).
(j) Approvals and Consents. Medi-Ject shall have obtained the consent of
each of the following to the consummation of the transactions contemplated
hereby: Elan Corporation, plc; Bio-Technology General Corp.; Becton
Dickinson; Grayson & Associates, Inc.
(k) Amendment of the Elan License Agreement. The License and Development
agreement by and between Elan Corporation plc and Medi-Ject Corporation
shall have been amended in form and substance reasonably satisfactory to
Permatec.
(l) Lock-Up Agreements. Medi-Ject shall have entered into Lock-Up
Agreements with each of Kenneth Evenstad, Lawrence Christian, Julius Sund,
Mike Kasprick and Peter Sadowski in the forms attached hereto as Exhibits
D, E, F, G and H, respectively, such agreements to be executed concurrently
with this Agreement.
A-21
SECTION 6
TERMINATION
6.1. Termination. This Agreement may be terminated notwithstanding the
approval of this Agreement by Medi-Ject, Permatec and the Subsidiaries at any
time prior to the Closing, by:
(a) the mutual written consent of Medi-Ject and Permatec; or
(b) Medi-Ject or Permatec, if the conditions set forth in Section 5.1
hereof shall not have been met by October 31, 2000, except if such
conditions have not been met solely as a result of the action or inaction
of the party seeking to terminate; or
(c) Medi-Ject if the conditions set forth in Section 5.2 hereof shall
not have been met, and Permatec if the conditions set forth in Section 5.3
hereof shall not have been met, in either case, by October 31, 2000, except
if such conditions have not been met solely as a result of the action or
inaction of the party seeking to terminate.
Any termination pursuant to this Section 6.1 (other than a termination pursuant
to Section 6.1(a) hereof) shall be effected by written notice from the party so
terminating to the other parties hereto.
6.2. Effect of Termination. In the event of the termination of this
Agreement as provided in Section 6.1, this Agreement shall be void and of no
further force or effect, except that (i) the agreements contained in this
Section 6.2 shall survive the termination hereof, (ii) nothing herein shall
relieve any party from liability for any breach of this Agreement, (iii) Medi-
Ject shall be required to repurchase the Convertible Notes from Permatec in
accordance with the terms thereof, except that if the Closing does not occur
because Permatec fails to satisfy the conditions to Closing described in
Section 5.1(b) hereof, the repayment by Medi-Ject of such Convertible Notes
shall be extended for an additional three (3) month period; and (iv) the
Confidentiality Agreement entered into by and between the parties on April 21,
1999 shall continue to be in effect in accordance with its terms.
6.3. Procedure Upon Termination. In the event of termination of this
Agreement pursuant to Section 6.1, each party shall redeliver all documents,
work papers and other material of any other party and any and all copies
thereof relating to the transactions contemplated hereby, whether obtained
before or after the execution hereof, to the party furnishing the same.
SECTION 7
INDEMNIFICATION AND ESCROW
7.1. Indemnification by Permatec. From and after the Closing, Permatec shall
indemnify Medi-Ject and any employee, director, officer or agent (the "Medi-
Ject Indemnified Parties") of each of them against, hold each of them harmless
from, and reimburse each of them for any claim, costs, loss, liability or
expense (including reasonable attorneys' fees and expenses) or other damage
(including, without limitation, expectation, actual, punitive and consequential
damages) (collectively, "Damages") arising, directly or indirectly, from or in
connection with: (a) any inaccuracy in any of the warranties or representations
of Permatec and Subsidiaries in this Agreement, (b) any failure by Permatec and
Subsidiaries to perform or comply with any covenant or obligation in this
Agreement, or (c) any Third Party Claim (as defined below) relating to an
inaccuracy or failure referred to in clause (a) or (b) above, including any
claim to ownership of shares of Subsidiaries Stock or proceeds thereof by any
spouse or former spouse of Dr. Jacques Gonella.
7.2. Indemnification by Medi-Ject. From and after the Closing, Medi-Ject
shall indemnify Permatec ("Permatec Indemnified Parties") against, and hold it
harmless from, and reimburse it for any Damages arising, directly or
indirectly, from or in connection with: (a) any inaccuracy in any of the
warranties or representations of Medi-Ject in this Agreement, (b) any failure
by Medi-Ject to perform or comply with any covenant or obligation in this
Agreement, or (c) any Third Party Claim relating to an inaccuracy or failure
referred to in clause (a) or (b) above. Any Medi-Ject Indemnified Party or
Permatec Indemnified Party entitled to
A-22
indemnification under this Section 7 is referred to herein as an "Indemnified
Party," and any party against whom such indemnification is sought is referred
to as an "Indemnifying Party."
7.3. Procedure for Third Party Claims. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or demand or
claim by a third party (a "Third Party Claim") which may give rise to Damages,
such Indemnified Party shall, if a claim in respect thereof is to be made
against Permatec, give notice to Permatec, and if such claim is to be made
against Medi-Ject, give notice to Medi-Ject, of its assertion of such claim for
indemnification and provide reasonable detail with respect thereto. Failure to
so notify the Indemnifying Party shall not relieve any Indemnifying Party of
any liability that it may have to any Indemnified Party except to the extent
that the defense of such action or Third Party Claim is materially prejudiced
thereby. If any such action shall be brought or a Third Party Claim shall be
asserted against an Indemnified Party and the Indemnified Party shall give
notice to the Indemnifying Party of the commencement or assertion thereof, the
Indemnifying Party shall be entitled, at its own expense (and with respect to
Permatec, without recourse to the Escrowed Property), to participate therein
and, to the extent that it shall wish, to assume the defense thereof with
counsel reasonably satisfactory to such Indemnified Party. If an Indemnifying
Party receives notice of any action or Third Party Claim, it shall promptly
notify the Indemnified Party as to whether, at it expense (and with respect to
Permatec, without recourse to the Escrowed Property), it intends to control the
defense thereof. If the Indemnifying Party defends an action, it shall have
full control over the litigation, including settlement and compromise thereof,
subject only to the following: no compromise or settlement thereof may be
effected without the Indemnified Party's consent (which shall not be
unreasonably withheld) unless (i) there is no finding or admission of any
violation of law and no effect on any other claims that may be made against the
Indemnified Party and (ii) the sole relief provided is monetary damages that
are paid in full by the Indemnifying Party. If notice is given to the
Indemnifying Party of the commencement of any action and it does not, within
twenty (20) days after the Indemnified Party's notice is given, give notice to
the Indemnified Party of its election to assume the defense thereof, the
Indemnified Party shall have full control over the litigation, including
settlement and compromise thereof.
7.4. Procedures Related to Other Claims. In the event an Indemnified Party
shall have a claim against an Indemnifying Party that does not involve a Third
Party Claim being asserted against or sought to be collected from such
Indemnified Party, the Indemnified Party shall deliver notice of such claim
with reasonable promptness to the Indemnifying Party. The failure by any
Indemnified Party to so notify an Indemnifying Party shall not relieve the
Indemnifying Party from any liability which it may have to the Indemnified
Party, except to the extent that the Indemnifying Party has been actually
prejudiced by such failure.
7.5. Indemnity Period. No claim for indemnification under this Section 7 may
be made unless notice is given by the Indemnified Party to the Indemnifying
Party on or prior to the sixth month anniversary of the Closing Date.
7.6. Basket; Cap.
(a) Permatec shall not be liable to the Medi-Ject Indemnified Parties,
unless and until the aggregate claims by the Medi-Ject Indemnified Parties
exceed $50,000, and then only to the extent such claims exceed $50,000. Medi-
Ject shall not be liable to the Permatec Indemnified Parties, unless and until
the aggregate claims by the Permatec Indemnified Parties exceed $50,000, and
then only to the extent such claims exceed $50,000.
(b) Permatec shall not be liable to the Medi-Ject Indemnified Parties to
the extent aggregate claims indemnified hereunder by Permatec exceed the Value
of the Escrow Shares (as defined in Section 2(c) of the Escrow Agreement). The
limit set forth in this paragraph shall not apply to Damages resulting from any
Subsidiary's fraud or willful or intentional misrepresentation or intentional
or willful breach.
(c) Medi-Ject shall not be liable to the Permatec Indemnified Parties to
the extent aggregate claims indemnified hereunder by Medi-Ject exceed the Value
of the Escrowed Shares. The limit set forth in this paragraph shall not apply
to Damages resulting from Medi-Ject's fraud or willful or intentional
misrepresentation or intentional or willful breach.
A-23
7.7. Exclusion of Remedies by Law. The Parties mutually agree and
acknowledge that exclusively the terms and provisions set forth in this
Agreement shall be applicable in respect of any representations or warranties
given herein and any claims, actions or remedies either party may have against
the other in respect of any representations or warranties. Such contractual
rights and obligations shall be in lieu of any rights or obligations set forth
in the applicable laws.
7.8. Exceptions to Limitations on Indemnification. Notwithstanding the
foregoing and without limitation as to time or amount, the parties agree that
Permatec shall indemnify, defend and hold Medi-Ject and the Subsidiaries
harmless from and against (a) any and all Damages based upon, arising out of,
or otherwise in respect of Permatec Laboratorios S.A., Buenos Aires, Argentina
("Permatec Argentina"), and/or Permatec (France) S.A., Lyon, France ("Permatec
France"), which both are subsidiaries of Permatec, are both not being acquired
by Medi-Ject pursuant to this Agreement and both are in the process of
liquidation (provided, however, that in no event shall Permatec indemnify,
defend or hold Medi-Ject or a Subsidiary harmless under this Agreement with
respect to any Damages caused by (i) any assets or technology of Permatec
Argentina or Permatec France that has been transferred to a Subsidiary and (ii)
any Contract or agreement of Permatec Argentina or Permatec France that has
been transferred to a Subsidiary); and (b) any and all Damages based upon,
arising out of, or otherwise in respect of the potential inability of Permatec
to deliver at the Closing the original share certificates of NV and/or any
third party making any claims in respect of the share certificates of NV.
Notwithstanding any other provision in this Section 7.8, Medi-Ject and the
Subsidiaries shall be entitled to obtain equitable relief in any appropriate
indemnification claim under this Section 7.8.
SECTION 8
CERTAIN DEFINITIONS
8.1. Definitions. For purposes of this Agreement, the following defined
terms have the meanings set forth below:
"Benefit Plan" shall mean each defined compensation, incentive compensation,
stock purchase, stock option and other equity compensation plan, program,
agreement or arrangement; each material severance or termination pay, medical,
surgical, hospitalization, life insurance and other welfare benefit plan, fund
or similar program; each material profit-sharing, stock bonus or other pension
plan, fund or similar program; each material employment, termination or
severance agreement; and each other material employee benefit plan, fund,
program, agreement or arrangement, in each case that is sponsored, maintained
or contributed to or required to be contributed to by any Person, or to which
any Person is a party, whether written or oral, for the benefit of any employee
or former employee of any Person.
"Cash Equivalents" shall mean short term investments in securities of the
United States government, certificates of deposit, or money market instruments,
all with original maturity of three months or less.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consent" shall mean any approval, consent, ratification, permission, waiver
or authorization (including any Governmental Authorization).
"Contract" shall mean any written, oral or other agreement, contract,
subcontract, lease, understanding, instrument, note, option, warranty, purchase
order, license, sublicense, insurance policy, benefit plan or legally binding
commitment or undertaking of any nature.
"Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage,
security interest or encumbrance.
"Entity" shall mean any corporation (including any non-profit corporation),
general partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization or
entity.
A-24
"Escrow Shares" shall mean 580,000 shares of the Medi-Ject Common Stock
being transferred to Permatec pursuant to this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"Governmental Authorization" shall mean any: permit, license, certificate,
franchise, permission, clearance, registration, qualification or authorization
issued, granted, given or otherwise made available by or under the authority of
any Governmental Body or pursuant to any Legal Requirement.
"Governmental Body" shall mean any: (a) nation, state, commonwealth, canton,
province, territory, county, municipality, district or other jurisdiction of
any nature; (b) federal, state, local, municipal, foreign or other government;
or (c) governmental or quasi-governmental authority of any nature (including
any governmental division, department, agency, commission, instrumentality,
official, organization, unit, body or Entity and any court or other tribunal).
"Legal Proceeding" shall mean any action, suit, litigation, arbitration,
proceeding or hearing conducted or heard by or before, or otherwise involving,
any court or other Governmental Body or any arbitrator or arbitration panel.
"Legal Requirement" shall mean any federal, state, local, municipal, foreign
or other law, statute, constitution, ordinance, code, rule or regulation,
issued, enacted, adopted, promulgated, implemented or otherwise put into effect
by or under the authority of any Governmental Body.
"Material Adverse Effect" on Permatec or the Subsidiaries shall mean any
event, violation, inaccuracy, circumstance or other matter if such event,
violation, inaccuracy, circumstance or other matter, either alone or taken
together with any other events, violations, inaccuracies, circumstances or
other matters, would have a material adverse effect on the business, condition,
assets, liabilities, operations or financial performance of Permatec or any
Subsidiary. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "Material Adverse Effect" on Medi-Ject if such event,
violation, inaccuracy, circumstance or other matter, either alone or taken
together with any other events, violations, inaccuracies, circumstances or
other matters, would have a material adverse effect on the business, condition,
assets, liabilities, operations or financial performance of Medi-Ject taken as
a whole.
"Medi-Ject Contract" shall mean any Contract that is material to Medi-Ject,
to the business or operations of Medi-Ject or to any of the transactions
contemplated by this Agreement: (a) to which Medi-Ject is a party; or (b) by
which Medi-Ject or any of its assets are bound or under which Medi-Ject has any
obligation, except for agreements for the license to Medi-Ject of software
generally available to the public.
"Medi-Ject Proprietary Asset" shall mean any material Proprietary Asset
owned by or exclusively licensed to Medi-Ject, except for software generally
available to the public. As used herein, "exclusively licensed" means
exclusively licensed for commercial use subject to certain retentions,
exceptions and license-backs.
"Permatec Contract" shall mean any Contract (other than insurance policies
identified in Section 2.13 of the Permatec Disclosure Schedule) that is
material to Permatec or any Subsidiary, to the business or operations of
Permatec or any Subsidiary or to any of the transactions contemplated by this
Agreement: (a) to which Permatec or any Subsidiary is a party, including,
without limitation, existing agreements with Medi-Ject; or
(b) by which Permatec or any Subsidiary or any asset of Permatec or any
Subsidiary is bound or under which Permatec or any Subsidiary has any
obligation.
"Permatec Plan" shall mean each defined compensation, incentive
compensation, stock purchase, stock option and other equity compensation plan,
program, agreement or arrangement; each material severance or termination pay,
medical, surgical, hospitalization, life insurance and other welfare benefit
plan, fund or similar program; each material profit-sharing, stock bonus or
other pension plan, fund or similar program; each material employment,
termination or severance agreement; and each other material employee benefit
plan, fund, program, agreement or arrangement, in each case that is sponsored,
maintained or contributed to or required to
A-25
be contributed to by Permatec or any Subsidiary, or to which Permatec or any
Subsidiary is a party, whether written or oral, for the benefit of any employee
or former employee of Permatec or any Subsidiary.
"Permatec Proprietary Asset" shall mean any material Proprietary Asset owned
by or exclusively licensed to Permatec or any Subsidiary, except for software
generally available to the public. As used herein, "exclusively licensed" means
exclusively licensed for commercial use subject to certain retentions,
exceptions and license-backs.
"Person" shall mean any individual, Entity or Governmental Body.
"Proprietary Asset" shall mean any: (a) patent, patent application,
trademark (whether registered or unregistered), trademark application, URL,
trade name, fictitious business name, service mark (whether registered or
unregistered), service mark application, copyright (whether registered or
unregistered), copyright application, maskwork, maskwork application, trade
secret, know-how, business method, computer software, computer program, source
code, algorithm, invention, proprietary product, technology, proprietary right
or other intellectual property right or intangible asset; or (b) right to use
or exploit any of the foregoing, including without limitation rights granted
pursuant to license or sub-license agreements with respect to a Proprietary
Asset.
"Representatives" shall mean officers, directors, employees, agents,
attorneys, accountants, advisors and Representatives.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933.
"Subsidiary" shall mean any Entity in which any Person owns more than fifty
percent (50%) of the outstanding voting securities, or the value of the
outstanding equity securities or interests of which are owned directly or
indirectly by any Person.
"Tax" shall mean any tax (including any income tax, franchise tax, capital
gains tax, gross receipts tax, value-added tax, import tax, export tax, surtax,
excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax,
property tax, business tax, withholding tax or payroll tax), levy, assessment,
duty or other similar charge together with any interest fines or penalties
thereon, imposed, assessed or collected by or under the authority of any
Governmental Body.
"Tax Return" shall mean any return, declaration, report or similar statement
(including any information return) filed with or submitted to, or required to
be filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with
any Legal Requirement relating to any Tax.
SECTION 9
MISCELLANEOUS PROVISIONS
9.1. Amendment. This Agreement may not be amended except by an instrument in
writing signed by each of the parties hereto.
9.2. Waiver.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege
or remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or
A-26
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
9.3. Entire Agreement; Counterparts; Applicable Law; and Arbitration. This
Agreement and the other agreements referred to herein constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject
matter hereof and thereof. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument, and shall be governed in all respects
by the laws of the State of New York without regard to the conflicts of law
principles thereof. Any dispute, controversy or claim arising out of or
connected with this Agreement, its interpretation, the breach thereof or any
other agreement entered into in connection with the transactions contemplated
herein, including the arbitrability of such dispute, controversy or claim,
shall be settled by final and binding arbitration venued in New York, New York
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award entered by the arbitrator may be
entered in any court having jurisdiction thereof; provided, however, that
nothing herein shall be construed to prohibit any party from seeking in any
court of competent jurisdiction any injunctive relief to which it is entitled
hereunder. Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of (a) the Supreme Court of the State of New York, New York
County, and (b) the United States District Court for the Southern District of
New York, for the purposes of any such action or other proceeding arising out
of this Agreement or any transaction contemplated hereby. Each party further
agrees that service of process, summons, notice or document by U.S. registered
mail to such party's respective address set forth below shall be effective
service of process for any action, suit or proceeding in New York with respect
to any matters to which it has submitted to jurisdiction in this Section 9.3.
9.4. Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective permitted successors and assigns; provided, however, that neither
this Agreement nor any of any party's rights or obligations hereunder may be
assigned by any party without the prior written consent of the other parties
hereto, and any attempted assignment of this Agreement or any of such rights or
obligations without such consent shall be void and of no effect. Nothing in
this Agreement is intended to or shall confer upon any Person any third-party
rights under or by reason of this Agreement.
9.5. Notices. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered
personally, telecopied, sent by nationally-recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
To Medi-Ject:
Medi-Ject Corporation 161 Cheshire Lane, Suite 100 Minneapolis, MN
55441 USA Attention: Franklin Pass, M.D. Telephone: (612) 475-7700 Fax:
(612) 476-1009
with a copy to:
Leonard, Street and Deinard 150 South Fifth Street, Suite 2300
Minneapolis, MN 55402 USA Attention: Morris M. Sherman Telephone: (612)
335-1561 Fax: (612) 335-1657
A-27
To Permatec and Subsidiaries:
Permatec Holding AG Gewerbestrasse 18 CH-4123 Allschwil, Switzerland
Attention: Dr. Philippe Dro Telephone: 41-61-486-41-41 Fax: 41-61-486-
41-42
with a copy to:
Faegre & Benson 2300 Norwest Center 90 South 7th Street Minneapolis, MN
55402 Attention: Mark A. Sides Telephone: (612) 336-3000 Fax: (612)
336-3026
Rinderknecht Klein & Stadelhofer Beethovenstrasse 7 8002 Zurich,
Switzerland Attention: Dr. Thomas M. Rinderknecht Telephone: 41-1-287-
2424 Fax: 41-1-287-2400
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (c) in the case of delivery by nationally-
recognized, overnight courier, on the business day following dispatch and (d)
in the case of mailing, on the fifth business day following such mailing.
9.6. Cooperation. Each party agrees to cooperate fully with the other party
and to execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
the other party to evidence or reflect the transactions contemplated by this
Agreement and to carry out the intent and purposes of this Agreement.
9.7. Fees and Expenses. All fees, costs and expenses in connection with this
Agreement shall be paid by the party incurring such expenses, provided,
however, that if any legal action is instituted to enforce or interpret the
terms of this Agreement, the prevailing party in such action shall be entitled
to any other relief to which the party is entitled, and to the reimbursement of
attorneys' fees.
9.8. Non-Survival of Representations, Warranties Past the Indemnification
Period; Survival of Covenants. The representations and warranties in this
Agreement shall terminate upon the expiration of any indemnification periods
provided for in Section 7 hereof. It being further agreed that the covenants
contained in Section 4.11 hereof shall survive the Closing for the periods set
forth in such Section.
9.9. Titles. The titles and captions of the Sections of this Agreement are
included for convenience of reference only and shall have no effect on the
construction or meaning of this Agreement.
[Signatures on Next Page]
A-28
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
MEDI-JECT CORPORATION
/s/ Franklin Pass
By: _________________________________
Franklin Pass
Name: ___________________________
President
Title: __________________________
PERMATEC HOLDING AG
/s/ Dr. Jacques Gonella
By: _________________________________
Dr. Jacques Gonella
Name: ___________________________
Chairman of the Group
Title: __________________________
PERMATEC PHARMA AG
/s/ Dr. Jacques Gonella
By: _________________________________
Dr. Jacques Gonella
Name: ___________________________
Chairman of the Group
Title: __________________________
PERMATEC TECHNOLOGIE AG
/s/ Dr. Jacques Gonella
By: _________________________________
Dr. Jacques Gonella
Name: ___________________________
Chairman of the Group
Title: __________________________
PERMATEC NV
/s/ Dr. Jacques Gonella
By: _________________________________
Dr. Jacques Gonella
Name: ___________________________
Chairman of the Group
Title: __________________________
A-29
MEDI-JECT CORPORATION
---------------------
ANNUAL MEETING OF SHAREHOLDERS
October __, 2000
10:00 a.m. CDT
Medi-Ject Corporation
161 Cheshire Lane, Suite 100
Plymouth, Minnesota 55441
Medi-Ject Corporation
161 Cheshire Lane, Suite 100, Plymouth, Minnesota 55441 proxy
- --------------------------------------------------------------------------------
PROXY--ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON _________, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. PLEASE
MARK, SIGN, DATE AND RETURN IN THE ENCLOSED ENVELOPE.
By signing this proxy, you revoke all prior proxies and appoint Franklin Pass
and Lawrence M. Christian, or either one of them, as Proxies, each with the
power to appoint his substitute and to act without the other, and authorize each
of them to represent and to vote, as designated herein, all shares of common
stock of Medi-Ject held of record by the undersigned on September 14, 2000, at
the Annual Meeting of Shareholders of the Company to be held on ___________,
2000 or any adjournment thereof.
----------------------
COMPANY #
CONTROL #
----------------------
The Board of Directors Recommends a Vote FOR Items 1, 2, 3, 4, 5, 6 and 7.
1. To approve the terms of a certain Stock Purchase Agreement dated as of July
14, 2000, as amended, by and among Medi-Ject, Permatec, Permatec Pharma AG,
Permatec Technologie AG, and Permatec NV, whereby we purchase all of the
outstanding capital stock of Permatec Pharma AG, Permatec Technologie AG, and
Permatec NV and as consideration, we issue 2,900,000 shares of Medi-Ject common
stock to Permatec. Upon the closing of the transaction, (a) Permatec will own
approximately 67% of the outstanding Medi-Ject common stock; (b) Karl Groth,
Geoffrey Guy, M.D., Fred L. Shapiro, M.D. and Stanley Goldberg will each resign
from the position of director and Dr. Jacques Gonella, Dr. Thomas M.
Rinderknecht, Professor Ubaldo Conte and Dr. Philippe Dro will be appointed to
fill such vacancies; (c) the promissory notes issued to Permatec will convert
into shares of Medi-Ject Series C Preferred Stock; and (d) we will amend our
Second Amended and Restated Articles of Incorporation, as amended to date, to
change our name to "Antares Pharma, Inc."
/ / FOR / / AGAINST / / ABSTAIN
\|/ Please fold here \|/
- --------------------------------------------------------------------------------
2. To amend the Second and Restated Articles of Incorporation, as amended to
date, to increase the number of authorized shares of Medi-Ject common stock from
3,400,000 to 15,000,000 and to increase the number of authorized shares of
preferred stock from 1,000,000 to 3,000,000.
/ / FOR / / AGAINST / / ABSTAIN
3. To approve the future conversion of Medi-Ject Series C Preferred Stock into
Medi-Ject common stock.
/ / FOR / / AGAINST / / ABSTAIN
4. To approve the conversion, at the holder's option, of the Series B
Convertible Preferred Stock into shares of Medi-Ject common stock.
/ / FOR / / AGAINST / / ABSTAIN
5. To elect two members of the Board of Directors:
01 Kenneth Evenstad 02 Karl E. Groth
/ / VOTE FOR ALL NOMINEES / / VOTE WITHHELD FROM ALL NOMINEES
(except as marked)
(Instructions: To withhold authority to vote for any indicated nominee, write
the number(s) of the nominees(s) in the box provided to the right.)
_________________________________
_________________________________
6. To ratify the appointment of KPMG LLP as our independent auditors for the
year ending December 31, 2000.
/ / FOR / / AGAINST / / ABSTAIN
7. To transact such other business as may properly come before the meeting or
any adjournment thereof.
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPSAL.
Address Change? Mark Box / / Indicate changes below:
Date ____________________________
_________________________________
_________________________________
Signature(s) in Box
Please sign exactly as your name(s)
appear on Proxy. If held in joint
tenancy, all persons must sign.
Trustees, administrators, etc.,
should include title and authority.
Corporations should provide full
name of corporation and title of
authorized officer signing the
proxy.