-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H9+DN+eRMNLGVWZX8Psj6b6FzhcU4eMc2sljWPceG7c2rtE9hM4kyLMRiBo5XPYi GAEuGZfzsPNBezngLOSOVA== 0001045969-98-000317.txt : 19980331 0001045969-98-000317.hdr.sgml : 19980331 ACCESSION NUMBER: 0001045969-98-000317 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDI JECT CORP /MN/ CENTRAL INDEX KEY: 0001016169 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411350192 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20945 FILM NUMBER: 98578383 BUSINESS ADDRESS: STREET 1: 161 CHESHIRE LANE STREET 2: SUITE 100 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6124757700 MAIL ADDRESS: STREET 1: 161 CHESHIRE LANE STREET 2: SUITE 100 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 10-K 1 FORM 10-K ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from __________ to __________ Commission file number 0-20945 MEDI-JECT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1350192 - --------------------------------- --------------------------------------- State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization 161 CHESHIRE LANE, MINNEAPOLIS, MINNESOTA 55441 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 475-7700 SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: Common Stock, $.01 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 17, 1998 was approximately $6,251,388 (based upon the last reported sale price of $1-5/8 per share on March 17, 1998 on the Nasdaq National Market). The number of shares outstanding of the registrant's common stock as of March 17, 1998: 7,071,589. DOCUMENTS INCORPORATED BY REFERENCE Pursuant to General Instruction G, certain responses in Part III are incorporated herein by reference to information contained in the Company's definitive Proxy Statement for its 1997 annual meeting to be filed on or before April 30, 1998. 1 FORWARD LOOKING STATEMENTS: Certain statements included in this Form 10-K are "forward looking statements" as defined in the Private Securities Litigation Reform Act of of 1995 and are subject to risks and uncertainties. Factors that may affect future results and performance are set forth in Exhibit 99, "Cautionary Statements", which was filed with the United States Securities and Exchange Commission as an exhibit to Form 10-K, December 31, 1996. PART I Item 1. BUSINESS GENERAL Medi-Ject Corporation ("Medi-Ject" or the "Company") is a drug delivery company focused on developing, manufacturing and marketing needle-free injection systems for the self-administration of a wide range of parenteral (injectable) drugs. The Company's product, the Medi-Jector system, is a hand-held, spring-powered device that injects drugs from a front-end chamber through the skin, without a needle, as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to pierce the skin with a sharp needle and manipulate a plunger with the needle inserted through the skin. Therefore many people perceive injections with the Medi-Jector system to be less threatening than injections with a needle. Today's Medi-Jector systems are smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems. The Company believes that the key to widespread market acceptance of its needle-free injection systems depends upon continued improvements in these areas. The Company believes that individuals who require self-injection will benefit from the Medi-Jector system because it (i) eliminates the need to pierce themselves with needles for each injection, which should lead to increased compliance with a prescribed injection regimen and consequently reduce health complications, (ii) provides the ability to inject themselves discreetly and (iii) eliminates the need for sharps disposal of used needles. In addition, healthcare industry providers and payors may benefit from the decrease in long-term costs of patient care which may result from improved patient compliance. Furthermore, based upon discussions with pharmaceutical companies, the Company believes that those companies are motivated to provide improved drug delivery methods in an attempt to differentiate their products in the marketplace and improve patient compliance, which may result in increased sales and larger market share. Although the single largest indication for self-injection is the administration of insulin for the treatment of diabetes, the number of drugs associated with frequent self-injection is increasing as novel biopharmaceuticals are introduced and individuals previously managed in the hospital are now cared for in the home. Medi-Ject was a pioneer in the development of portable needle-free injection systems. Prior to the development of portable systems, needle-free injection systems were powered by large air compressors and their use was limited to mass vaccination by the military or school health programs. These injectors were painful in comparison to today's injectors. The Company's first commercial injector was five times as heavy as its current injector, which weighs six and one-half ounces. Acceptance of the Company's needle-free injection systems has gradually expanded as functionality and ease of use have improved and the purchase price has been reduced. Medi-Ject is a Minnesota corporation, incorporated in February 1979. The Company's offices are located at 161 Cheshire Lane, Minneapolis, Minnesota 55441; telephone (612) 475-7700. 2 INDUSTRY TRENDS Historically, with the exception of the self-administration of insulin, parenteral drug administration was limited to hospitals, doctors' offices and clinics. Liquid injectable medicines came packaged in single or multi-dose vials. Healthcare professionals filled disposable syringes with the medication, injected the patient and discarded the used syringe. Advances in pharmacology have resulted in an increasing number of drugs that require frequent injections over long periods of time. These drugs have provided dramatic therapeutic effects for conditions that in the past resisted more conventional medications. Although the availability of these drugs provides new treatment opportunities, the Company believes that the requirement to inject the drugs has and will continue to hinder their acceptance and reduce patient compliance. The Company believes that most individuals view piercing their skin with a needle as unpleasant. In addition, individuals are often reluctant to use needles in public because needles are frequently associated with illegal drug use and cause fear of accidental needle sticks in others. These and other factors can deter patients from fully complying with their doctor-prescribed injection regimens. The failure to administer all prescribed injections can lead to increased health complications for the patient, decreased drug sales for pharmaceutical companies and increased healthcare costs for payors. In addition, needles require special disposal and therefore must be carried after use until they can be discarded in a special sharps container. These factors have led pharmaceutical manufacturers to explore many alternative delivery technologies, including novel needle injectors (for example, sheathed and spring-powered needle injectors), transdermal patches, controlled release oral delivery methods and inhalation devices. In Western Europe, pharmaceutical and medical products companies market pen-like needle injection systems. Patients have demonstrated a willingness to pay a premium for these systems over traditional needles and syringes. The Company believes, however, that injection will continue as the major delivery method because many of these drugs are protein biopharmaceuticals which are destroyed in the gastrointestinal tract, do not readily penetrate the skin or are not effectively absorbed through the lungs. In addition to the increase in the number of drugs requiring self-injection, changes in the frequency of insulin injections for the treatment of diabetes also may contribute to an increase in the number of self-injections. For many years, standard treatment protocol was for insulin to be administered once or twice daily for the treatment of diabetes. However, according to a recent study, tightly controlling the disease by, among other things, administration of insulin as many as four to six times a day, can decrease its debilitating effects. The Company believes that as the benefits of tightly controlling diabetes become more widely known, the number of insulin injections self-administered by individuals with diabetes will increase. The need to increase the number of insulin injections given per day may also lead additional patients to seek an alternative to traditional needles and syringes. While the Company's marketing efforts are not currently focused on drug applications administered by healthcare professionals, needle-free injection systems may be attractive to hospitals, doctors' offices and clinics, and the Company may explore such applications in the future. The issues raised by accidental needle sticks and disposal of used syringes have led to the development of syringes with sheathed needles and have led hospitals to give injections through intravenous tubing to reduce the number of contaminated needles. The Company believes that needle-free injection systems may be attractive to healthcare professionals as a further means to reduce accidental needle sticks and the burdens of disposing of contaminated needles. MARKET OPPORTUNITY An estimated nine to 12 billion needles and syringes are sold annually worldwide according to industry sources. The Company believes that a significant portion of these are used for the administration of drugs that could be delivered using the Company's Medi-Jector system but that only a small percentage of individuals who self-administer drugs currently use needle-free injection systems. 3 The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin. In the United States, over 3.2 million people inject insulin for the treatment of diabetes, resulting in an estimated 2.3 billion injections annually, and the Company believes that the number of insulin injections will increase with time as the result of new diabetes management techniques which recommend more frequent use. Other parenteral drugs that are presently self-administered and may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headaches, growth retardation, impotence, hormone therapy, AIDS and hepatitis. The Company also believes that other existing parenteral drugs will be self-administered in the future and that additional parenteral drugs that are under development will be deemed appropriate for self-administration. PRODUCTS AND TECHNOLOGY Based in part upon the results of focus group studies performed by the Company, it believes that injections using a Medi-Jector system are more comfortable than injections using a needle because there is no need to pierce the skin with a sharp needle and manipulate a plunger with the needle inserted through the skin. In addition, the Company believes injections can be administered more discreetly using a Medi-Jector. Current Needle-Free Injection Systems The Company's current Medi-Jector system, the Medi-Jector Choice, was introduced in December 1996 and consists of a coil spring mechanism, a dosage meter, multi-use disposable needle-free syringe and a plastic adapter. This injector is used by arming the spring mechanism, filling the needle-free syringe and then setting the pressure level for an optimally effective and comfortable injection. The coil spring is armed by turning the winding grip portion of the power pack to compress the coil spring. The unit is then filled by placing a plastic adapter on a drug vial, turning the winding grip in the opposite direction to pull the medication into the needle-free syringe until the proper dosage is displayed in the dosage window and removing the vial and adapter assembly. The pressure is adjusted by again turning the winding grip. An injection is given by holding the Medi-Jector system perpendicular to the skin in a location appropriate for the injection and pressing the trigger button. The most common injection sites are the upper arm, upper thigh, buttocks or the side of the torso. Multi-Use Disposable Needle-Free Syringes. The Company's previous generations of injector systems contained a steel front-end chamber which required cleaning every two weeks. The Company believes that one of the reasons its previous generations of needle-free injection systems did not gain widespread market acceptance was the inconvenience of cleaning the systems. The disposable needle-free syringe of the Medi-Jector Choice system has eliminated the need to perform this cleaning process and has increased the ease of use. In addition, the disposable needle-free syringe has reduced manufacturing costs by eliminating one of the most expensive components required in the manufacture of previous products. Each needle-free syringe is labeled for use for 14 injections. The retail price of the Medi-Jector Choice device (excluding the needle-free syringe) is $399. The total annual cost to the end user of needle-free syringes and related supplies is approximately $260 per year (based upon an average of two injections per day). Single-Use Disposable Needle-Free Syringes. The Company plans to introduce a single-use disposable needle-free syringe for use with its new generation of pen-like injectors. The Company believes that the single-use disposable needle-free syringe will be priced competitively but at a premium compared to disposable syringes, and that it will offer users sterility and increased convenience. The needle-free syringes used with any of the Medi-Jector systems do not require special disposal. Once a needle-free syringe is removed from the device portion of the system, it cannot pierce the skin, consequently the risk of cross-infection from discarded needle-free syringes is reduced significantly over the risk associated with needles. 4 New Product Research and Development The Company continues to improve its existing products while developing new products and technology. Specifically, it is now developing a novel injector power source which it anticipates will form the basis of a new generation of pen-like injectors. In addition, the Company is customizing its injectors in collaboration with pharmaceutical and medical device companies for use with a broader range of parenteral drugs. These development efforts are focused on making Medi-Jector systems more attractive to users by further reducing the size of the system, making the system easier to arm and lowering the cost barrier for new users. Pen-Like Injectors. The Company believes that a major obstacle to widespread market acceptance of needle-free injection systems has been the lack of a suitably compact and easy to use power source. Although the Company has reduced the size and complexity of its coil spring injectors, the Company believes further reduction in size or improvement in ease of use of systems using a coil spring are not feasible. Other companies have developed and marketed injectors powered by CO2 cartridges but these systems do not provide any advantage in size and are complex and costly to manufacture. To overcome this obstacle, the Company is developing a novel and proprietary power source, the gas spring. The Company's gas spring is a permanently charged gas cylinder that is smaller than a coil spring with comparable capabilities, allowing the development of smaller systems. A rubber seal surrounds a central rod, preventing the gas from escaping and allowing it to be reused thousands of times. The spring is armed by pushing the rod into the cylinder and compressing the gas in the cylinder. When the rod is released, it springs forward with the energy stored from arming. Use of the Company's proprietary gas spring will allow its needle-free injection systems to be easier to arm and reduced in size (anticipated to be approximately 7 3/4 inches long, five ounces in weight and 30% smaller in diameter than the Medi-Jector Choice system) and may result in more comfortable injections. Application Specific Systems. In addition to pen-like injectors for insulin, the Company, in collaboration with Becton Dickinson and Company ("Becton Dickinson") and other pharmaceutical and medical device companies, is in the process of developing customized pen-like needle-free injection systems for specific drug applications. Modified injectors currently are being developed or evaluated for use in gene therapy, the treatment of erectile dysfunction, the treatment of multiple sclerosis and certain other disease states. Research and Development Programs. The Company conducts three principal product development programs relating to the further development of needle-free injection systems. These are; (i) the gas spring, (ii) improving injection quality and (iii) miniaturization of its systems. Over the past year, the Company completed a process which has resulted in the conversion of virtually all of its development efforts to an internally conducted program. This was accomplished by hiring additional technical personnel, purchasing laboratory and prototype development equipment and dedicating facility space to this program. In previous years, product development was conducted principally through the efforts of various outside engineering firms. Product development continues to be the largest single category of Company expenditure, in part supported by fees under license and development agreements. The Company has expended approximately $1,195,000, $2,585,000 and $2,574,000 on research and development efforts during fiscal years 1995, 1996 and 1997, respectively. Of these amounts, approximately $921,000, $1,854,000 and $2,030,000, respectively, were funded by third-party sponsored development programs and licensing fees. TARGET MARKETS The Company intends to target the following markets for use of the Medi-Jector system. To date, the Medi-Jector system has only been approved for use in the United States, Japan and certain European countries for the administration of insulin and human growth hormone. 5 Insulin Approximately 3.2 million people take insulin daily for the control of high blood sugar observed in individuals with diabetes, according to the National Institutes of Health. Most of these individuals take two injections daily, often combining short acting insulin and long acting insulin. In the United States, the vast majority of insulin users use disposable plastic syringes and needles, while in Western Europe and Japan, in addition to disposable plastic syringes, many use pen-like injectors that hold small vial cartridges of insulin and use small needles. The management of Type I (insulin dependent) diabetes has been found to be benefited by a more disciplined approach to glucose management, including, among other things, more frequent injections, which have been proven to reduce long-term complications such as heart disease, strokes, neuropathy (degeneration of the nervous system), kidney failure and loss of vision. As a result, some individuals with diabetes take four to six injections daily. Needle-free injectors have been available to and used by diabetes patients with a serious aversion to needles for many years and for these patients, cost and complexity are not significant barriers to use. The Company believes that another, much larger group of individuals, not seriously averse to needles yet still reluctant to piercing themselves, find it difficult to comply with injection regimens. The Company believes that as it continues to make improvements in its technology, that its injection systems will be more attractive to users in this market segment. Human Growth Hormone Approximately 52,000 children worldwide receive frequent injections of human growth hormone for the treatment of growth retardation according to industry sources. The disease may be diagnosed as early as age three, with injections administered until bone maturity is reached at age seventeen or beyond. The hormone drug used for the treatment of this condition costs an estimated $20,000 or more at the wholesale level annually. Despite the use of pen-like needle injection systems which are more convenient to use than traditional needles, compliance with the prescribed injection regimen continues to be a problem. A study in Germany found that 36% of children on human growth hormone therapy did not fully comply with the therapy using needle injections. In addition, a study performed in the Netherlands showed that most children in the study preferred to have their human growth hormone administered using a Medi-Jector system rather than a pen-like needle injector. A small number of pharmaceutical companies currently hold a significant percentage of the worldwide human growth hormone market. The Company believes that its needle-free injector system offers a marketing advantage to the pharmaceutical companies with which it has agreements relating to human growth hormone. Erectile Dysfunction Studies estimate the number of men in the United States suffering from impotence at over 15 million. The causes, earlier thought to be mainly psychogenic, are now thought to be most often a natural result of aging, or a complication of diabetes, urogenital surgery or other physiological causes. Over ten years ago, it was observed that penile injections of vasoactive (blood vessel relaxing) drugs caused temporary erections sufficient to allow satisfactory sexual intercourse. The first drug approved for such use in the United States was the generic drug Prostaglandin E1. However, the Company believes that use of this drug has been hindered because penile self-injection is difficult and viewed as unpleasant by most men. As a result, one company has introduced an intra-urethereal prostaglandin E1 applicator. The Company believes that its needle-free injection technology may provide yet an additional attractive alternative to needles. Gene Therapy Gene therapy involves the injection of replacement genes into the body instead of biopharmaceutical protein drugs. In recent years, investigators have been successful in inserting missing genes directly into the body for therapeutic purposes. For example, theoretically, an intramuscular injection of genes of Factor VIII (the blood component necessary for proper clotting) which is missing in individuals with hemophilia, could produce sufficient levels of Factor VIII to prevent excessive bleeding. Gene therapy is also being tested as a more effective method of vaccination. At least one published study suggests that gene delivery with a needle-free injector results in higher blood levels of the protein drug or antibodies to vaccines in animals. 6 Multiple Sclerosis Multiple sclerosis is a progressive neurological disease where, most commonly, nerve function loss occurs following an acute episode of peripheral nerve damage. The cause of the disease is obscure, but recent studies have demonstrated that at least three drugs reduce the number of acute episodes. Each of the drugs is a protein or mixture of proteins and requires frequent injections, ranging from daily to weekly. Two of these drugs, Copaxone and Betaseron, are available in the United States and the Company believes that many individuals using them are having difficulty with the prescribed injection regimen due to needle aversion. The Company believes that administration of these drugs would benefit from needle-free injection systems. Approximately 100,000 individuals in the United States are candidates for this treatment. Hepatitis and Cancer Approximately five million people in the United States suffer from chronic hepatitis infection, often resulting in permanent liver damage or liver cancer. The biopharmaceutical drug, alpha interferon, offers a cure to a significant portion of victims, if administered by injection three times a week for periods of 12 months or more. Alpha interferon is used to treat several types of cancer as well. During 1997, the Company began to work with one of the three manufacturers of alpha interferon to evaluate the role of the Medi-Jector as an alternative delivery method. The initial results were favorable, and in early 1998, the Company entered into a licensing and supply agreement with the manufacturer. Other Target Markets The Company has targeted other parenteral drugs that are regularly self-administered. These include narcotic analgesics, the anticoagulant heparin used to prevent blood clots, hormone therapy, osteoporosis, biopharmaceuticals used for the treatment of AIDS. Although the Company has chosen to focus initially on self-injection opportunities, similar opportunities exist in hospitals, doctors' offices, clinics, nursing homes and hospices. Certain opportunities may address the concern for well being, such as the vaccination of small children, and others may be prompted by the danger of accidental needle sticks in high risk environments, such as the emergency room of a hospital. 7 COLLABORATIVE AGREEMENTS The Company's business development efforts are focused on entering into collaborative agreements with pharmaceutical companies. The table below summarizes certain elements of the Company's current agreements.
- ------------------------------------------ -------------------------------------------------------------- COMPANY MARKET - ------------------------------------------ -------------------------------------------------------------- Becton Dickinson and Company (1).......... Insulin (worldwide) - ------------------------------------------ -------------------------------------------------------------- Ferring NV................................ Growth Hormone (Worldwide except United States, Canada, Japan and Korea) - ------------------------------------------ -------------------------------------------------------------- JCR Pharmaceuticals Co., Ltd.............. Growth Hormone (Japan) - ------------------------------------------ -------------------------------------------------------------- Schering-Plough Corporation............... INTRON-A (Hepatitis and Cancer) - ------------------------------------------ -------------------------------------------------------------- Bio-Technology General Corporation (2).... Growth Hormone (United States) - ------------------------------------------ -------------------------------------------------------------- Smithkline Beecham........................ Undisclosed - ------------------------------------------ -------------------------------------------------------------- Organon, a division of Akzo/Nobel......... Undisclosed - ------------------------------------------ -------------------------------------------------------------- Undisclosed............................... Undisclosed (Erectile Dysfunction) - ------------------------------------------ -------------------------------------------------------------- Teva Pharmaceutical Industries, Ltd....... Copaxone(R) (Multiple Sclerosis) - ------------------------------------------ --------------------------------------------------------------
(1) Becton Dickinson has (i) worldwide distribution rights to the Company's injectors for use with insulin and certain other potential future drugs, (ii) an option for distribution rights for the Company's injection systems used by healthcare professionals and (iii) manufacturing rights to the Company's disposable needle-free syringes for any indication. (2) Bio-Technology General Corporation is currently barred by a court injunction from introducing their growth hormone in the U.S. and therefore marketing of the Company's products in the U.S. for use with human growth hormone will not occur until this matter is resolved. PATENTS The Company, when appropriate, actively seeks protection for its products and proprietary information by means of United States and foreign patents and trademarks. The Company currently holds six U.S. patents, one Japanese patent and one Canadian patent. The Company also has 20 other patent applications being considered in various countries throughout the world. Some of the Company's technology is developed on its behalf by independent outside contractors. To protect the rights of its proprietary know-how and technology, Company policy requires all employees and consultants with access to proprietary information to execute confidentiality agreements prohibiting the disclosure of confidential information to anyone outside of the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such individuals while devoted to Company sponsored activities. Companies with which the Company has entered into development agreements have the right to certain technology developed in connection with such agreements. The Company has obtained the rights to certain technology and has made milestone payments to the inventors of certain core technology. 8 MANUFACTURING The Company operates a manufacturing facility in compliance with current Quality System Regulations ("QSR") established by the Food and Drug Administration ("FDA"). Injector parts are manufactured by third-party suppliers and assembled at the Company's facility in Plymouth, Minnesota. Disposable vial adapters are either assembled at the Company's facility or by third parties. Quality control and final packaging are performed on site. The Company anticipates a need to invest in automated assembly equipment as volume increases in the future. Becton Dickinson has the right to manufacture the disposable plastic components of the gas spring injector system for the Company in exchange for royalty payments and certain profit sharing arrangements. MARKETING The Company's basic marketing strategy is to leverage off of the strength, existing distribution systems and expertise of the pharmaceutical and medical device companies with which it collaborates by relying on them to promote and sell its needle-free injection systems together with the products they manufacture. The Company anticipates that under these collaborative arrangements, it will manufacture and supply the needle-free injection technology for specific drug applications to the pharmaceutical company which will market the system for use with its drugs. In some instances pharmaceutical companies may choose to give the injection systems and disposable components to users without charge as an inducement to customers to use their products. With respect to current selling efforts, the Company's relationship with Ferring, NV best reflects this basic strategy. Ferring is selling human growth hormone throughout Europe with a marketing campaign tied exclusively to the Medi-Ject needle-free delivery system. Ferring has been successful in establishing a user base of more that 1,000 children for its drug using the Medi-Jector system, which represents approximately 10% of the targeted markets. The Company's direct sales effort in the domestic insulin market typically requires that individuals with diabetes call the Company directly for information regarding the product and its uses. The Company's sales personnel explain the need for a doctor's prescription and advise on methods of filing for insurance reimbursement. A modest national advertising program in lay journals generates inquiries. Training is supported by a video and manual accompanying each product. The Company employs two nurses to provide training and support for customers through this channel. The customer service 800 number is prominently displayed on each injector. The Company also sells a small number of Medi-Jector systems for insulin use to various distributors outside the United States. In the domestic insulin market, the Company has sold its systems for insulin using a combination of direct to consumer marketing and a network of pharmacies and distributors. Until approximately the beginning of the fourth quarter of 1997, the Company had been increasing its reliance on pharmacies and distributors in the domestic insulin market. At that time, management assessed its efforts and results to date with respect to its increased efforts in the domestic insulin market and determined that the most appropriate approach in the near term was to focus on selling direct to consumers. This approach reflects management's assessment that the amount of spending required to produce meaningful results with a distribution based approach is beyond the Company's current resources. Management believes that efforts to significantly expand sales in domestic insulin should be deferred until the availability of its next generation injector. The most common retail price of an injector (which can be used over a period of several years) is approximately $400, and disposable components for the system cost approximately $260 annually. This compares to an annual cost of approximately $140 to use two syringes with needles daily. The Company anticipates that the retail price of future generation Medi-Jector systems will be less than the current retail price. 9 COMPETITION Competition in the drug delivery market is intensifying. The Company faces competition from traditional needle syringes, newer pen-like and sheathed needle syringes and other needle-free injection systems as well as alternative drug delivery methods including oral, transdermal and pulmonary delivery systems. The vast majority of injections currently are administered using needles. Because injection is typically only used when other drug delivery methods are not feasible, the Company's needle-free injection systems may be made obsolete by the development or introduction of drugs or drug delivery methods which do not require injection for the treatment of conditions currently targeted by the Company. In addition, because the Company intends to enter into collaborative arrangements with pharmaceutical companies, the Company's competitive position will depend upon the competitive position of the pharmaceutical company with which it collaborates for each drug application. While competition in the needle-free injection market currently is limited to small companies with modest financial resources, the barriers to entry are not great and the Company anticipates additional competition from companies with greater financial, commercial, personnel and development resources in the future. Two companies, Health-Mor Personal Care Corporation ("Health-Mor") and Vitajet Corporation ("Vitajet"), currently sell coil spring injectors to the United States insulin market. The product sold by Health-Mor resembles an earlier version of the Medi-Jector system and sells for more than $600. Vitajet has introduced a product which incorporates a disposable needle-free syringe and is similar to the Medi-Jector Choice. Another company, Bioject, Inc., has sold a CO2 powered injector since 1993. The injector is designed for and used almost exclusively for vaccinations in doctors' offices or public clinics. Powderject Pharmaceuticals, Plc, a British research company, is developing a needle-free injection system, as is Weston Medical Ltd, another U.K. based company. Even though the Company expects the needle-free injection market to expand, improvements continue to be made in needle syringes, including syringes with hidden needles and pen-like needle injectors. The Company expects that it will compete with existing needle injection methods as well as new needle injection methods yet to be developed. GOVERNMENT REGULATION The Company's products and manufacturing operations are subject to extensive government regulations, both in the United States and abroad. In the United States, the FDA administers the Federal Food Drug and Cosmetic Act (the "FDC Act") and has adopted regulations, including those governing the introduction of new medical devices, the observation of certain standards and practices with respect to the manufacturing and labeling of medical devices, the maintenance of certain records and the reporting of device-related deaths, serious injuries and certain malfunctions to the FDA. Manufacturing facilities and certain Company records are also subject to FDA inspections. The FDA has broad discretion in enforcing the FDC Act and the regulations thereunder, and noncompliance can result in a variety of regulatory steps ranging from warning letters, product detentions, device alerts or field corrections to mandatory recalls, seizures, injunctive actions and civil or criminal actions or penalties. Drug delivery systems such as the Company's injectors may be approved or cleared for sale as a medical device or may be evaluated as part of the drug approval process in connection with a new drug application ("NDA") or a Product License Application ("PLA"). To the extent permitted under the FDC Act and current FDA policy, the Company intends to seek the required approvals and clearance for the use of its new injectors, as modified for use in specific drug applications such as gene therapy, the treatment of erectile dysfunction, and the treatment of multiple sclerosis, under the medical device provisions, rather than under the new drug provisions, of the FDC Act. 10 Products regulated as medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA, unless otherwise exempted from the FDC Act and regulations thereunder. There are two methods for obtaining such clearance or approvals. Certain products qualify for a premarket notification under Section 510(k) of the FDC Act ("510(k) notification") of the manufacturer's intention to commence marketing the product. The manufacturer must, among other things, establish in the 510(k) notification that the product to be marketed is substantially equivalent to another legally marketed product (that is, that it has the same intended use and that it is as safe and effective as a legally marketed device and does not raise questions of safety and effectiveness that are different from those associated with the legally marketed device). Marketing may commence when the FDA issues a letter finding substantial equivalence to such a legally marketed device. The FDA may require, in connection with a 510(k) notification, that it be provided with animal and/or human test results. If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a premarket approval ("PMA") application under Section 515 of the FDC Act. A PMA must show that the device is safe and effective and is generally a much more complex submission than a 510(k) notification, typically requiring more extensive prefiling testing and a longer FDA review process. The Company believes that its Medi-Jector systems, when indicated for use with drugs or biologicals approved by the agency, will be regulated as medical devices are eligible for clearance through the 510(k) notification process. There can be no assurance however that the FDA will not require a PMA in the future. In addition to submission when a device is being introduced into the market for the first time, a 510(k) notification is also required when the manufacturer makes a change or modification to an already marketed device that could significantly affect safety or effectiveness, or where there is a major change or modification in the intended use or in the manufacture of the device. When any change or modification is made in a device or its intended use, the manufacturer is expected to make the initial determination as to whether the change or modification is of a kind that would necessitate the filing of a new 510(k) notification. The FDA's regulations provide only limited guidance in making this determination. If the FDA concludes that any or all of the Company's new injectors must be handled under the new drug provisions of the FDC Act, substantially greater regulatory requirements and approval times will be imposed. Use of a modified new product with a previously unapproved new drug likely will be handled as part of the NDA for the new drug itself. Under these circumstances, the device component will be handled as a drug accessory and will be approved, if ever, only when the NDA itself is approved. The Company's injector may be required to be approved as part of the drug delivery system under a supplemental NDA for use with previously approved drugs. Under these circumstances, the Company's device could be used with the drug only if and when the supplemental NDA is approved for this purpose. It is possible that, for some or even all drugs, the FDA may take the position that a drug-specific approval must be obtained through a full NDA or supplemental NDA before the device may be labeled for use with that drug. To the extent that the Company's modified injectors are handled as drug accessories or part of a drug delivery system, rather than as medical devices, they are subject to all of the requirements that apply to new drugs. These include drug manufacturing requirements, drug adverse reaction reporting requirements, and all of the restrictions that apply to drug labeling and advertising. In general, the drug requirements under the FDC Act are more onerous than medical device requirements. These requirements could have a substantial adverse impact on the profitability of the Company. Similar requirements apply to systems regulated as medical devices. The Company received 510(k) marketing clearance from the FDA allowing the Company to market the Medi-Jector EZ system in February 1987, the Medi-Jector V system in October 1988, the Medi-Jector system to administer Bio-Technology General's human growth hormone in April 1996, and the Medi-Jector Choice system in October 1996. The Company expects in the future to submit 510(k) notifications with regard to further device design improvements and uses with additional drug therapies. 11 The FDC Act also regulates the Company's quality control and manufacturing procedures by requiring the Company and its contract manufacturers to demonstrate compliance with the current Quality System Regulation ("QSR"). The FDA's interpretation and enforcement of these requirements has been increasingly strict in recent years and seems likely to be even more stringent in the future. The FDA monitors compliance with these requirements by requiring manufacturers to register with the FDA and by conducting periodic FDA inspections of manufacturing facilities. If the inspector observes conditions that might be violative of the QSR, the manufacturer must correct those conditions or explain them satisfactorily. Failure to adhere to QSR requirements would cause the devices produced to be considered in violation of the FDA Act and subject to FDA enforcement action that might include physical removal of the Company's devices from the marketplace. The FDA's Medical Device Reporting Regulation requires that the Company provide information to the FDA on the occurrence of any death or serious injuries alleged to have been associated with the use of the Company's products, as well as any product malfunction that would likely cause or contribute to a death or serious injury if the malfunction were to recur. In addition, FDA regulations prohibit a device from being marketed for unapproved or uncleared indications. If the FDA believed that the Company was not in compliance with these regulations, it could institute proceedings to detain or seize the Company's devices, issue a recall, seek injunctive relief or assess civil and criminal penalties against the Company or its executive officers, directors or employees. The Company also is subject to the Occupational Safety and Health Act ("OSHA") and other federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices, environmental protection and disposal of hazardous or potentially hazardous substances. Sales of medical devices outside of the United States are subject to foreign legal and regulatory requirements. The Company's injection systems have been approved for sale only in certain foreign jurisdictions. Legal restrictions on the sale of imported medical devices vary from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. Generally, the Company relies upon the companies marketing its injectors in foreign countries to obtain the necessary regulatory approvals for sales of its injectors in those countries. Generally, devices having an effective 510(k) clearance or PMA may be exported without further FDA authorization. FDA authorization is generally required in order to export other medical devices. The Company is in the process of implementing ISO 9001/46001 systems to obtain a certification showing that the Company's procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Such certification, along with European Medical Device Directive certification, would evidence compliance with the requirements enabling the Company to affix the CE Mark to its current products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union ("EU") countries. After June 1998, medical devices may not be sold in EU countries unless they display the CE Mark. The Company is currently attempting to obtain the right to affix the CE Mark prior to such time. EMPLOYEES As of December 31, 1997, the Company employed 43 full-time employees. None of the Company's employees are represented by any labor union or other collective bargaining unit. The Company believes that its relations with its employees are good. LIABILITY INSURANCE The business of the Company entails the risk of product liability claims. Although the Company has not experienced any material product liability claims to date, any such claims could have a material adverse impact on the Company. The Company maintains product liability insurance with coverage of $1 million per occurrence and an annual aggregate maximum of $5 million. The Company evaluates its insurance requirements on an ongoing basis. 12 Item 2. DESCRIPTION OF PROPERTY. The Company leases approximately 23,000 square feet of office, manufacturing and warehouse space in Plymouth, a suburb of Minneapolis, Minnesota. The lease will terminate in April 2002. The Company believes its facility will be sufficient to meet its requirements through such time. Item 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of shareholders during the quarter ended December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT NAME AGE POSITION ---- --- -------- Franklin Pass, M.D. 61 President, Chief Executive Officer and Chairman of the Board of Directors Mark S. Derus 42 Vice President, Finance, Chief Financial Officer and Secretary Todd Leonard 38 Vice President, Business Development Peter Sadowski, Ph.D. 50 Vice President, Product Development Franklin Pass, M.D., joined the Company as a director and consultant in January 1992, and has served as the Company's President, Chief Executive Officer and Chairman of the Board of Directors since February 1993. From 1990 to 1992, Dr. Pass served as President of International Agricultural Investments, Ltd., an agricultural technology consulting and investment company. Dr. Pass, a physician and scientist, was Director of the Division of Dermatology at Albert Einstein College of Medicine from 1967 to 1973, the Secretary and Treasurer of the American Academy of Dermatology from 1978 to 1981 and the co-founder and Chief Executive Officer of Molecular Genetics, Inc., now named MGI Pharma, Inc., from 1979 to 1986. He is the author of more than 40 published medical and scientific articles. Dr. Pass serves on the board of directors of Ringer Corporation, a producer of lawn and garden care products. Mark Derus joined the Company in December 1993 as Vice President, Finance, Chief Financial Officer and Secretary. Mr. Derus served as a director of the Company from 1992 until he joined the Company as an employee in 1993. From 1986 to December 1993, Mr. Derus was Vice President, Finance of Cherry Tree Investments, Inc., a venture capital company that invests in early stage ventures. Todd Leonard joined the Company in April 1993 as Vice President, Business Development. From 1991 to 1993, Mr. Leonard served as a Senior Licensing Specialist in the Office of Technology Transfer at the National Institutes of Health. From 1985 to 1991, Mr. Leonard was Vice President of MediMorphics, a biotechnology company focused on AIDS related therapies. Prior to 1985, Mr. Leonard was in sales and marketing for a division of American Home Products. Peter Sadowski, Ph.D., joined the Company in March 1994 as Vice President, Product Development. From October 1992 to February 1994, Dr. Sadowski served as Manager, Product Development for GalaGen, Inc., a biopharmaceutical company. From 1988 to 1992, he was Vice President, Research and Development for American Biosystems, Inc., a medical device company. Dr. Sadowski holds a Ph.D. in microbiology. 13 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol MEDJ. The following table sets forth the per share high and low sales prices of the Company's Common Stock for its initial period of trading, following the initial public offering of its common stock on October 2, 1996. Sales prices are as reported by the Nasdaq National Market. HIGH LOW ---- --- Stock Price Range - Fourth Quarter 1996 $6 $3 1/8 Stock Price Range - First Quarter 1997 $6 3/8 $3 1/2 Stock Price Range - Second Quarter 1997 $4 3/4 $2 15/16 Stock Price Range - Third Quarter 1997 $3 13/16 $2 Stock Price Range - Fourth Quarter 1997 $3 7/8 $1 7/8 HOLDERS. As of March 17, 1998, there were 125 holders of record of the Company's common stock, with another estimated 1,124 shareholders whose stock is held by nominees or broker dealers. DIVIDENDS. The Company has not paid or declared any cash dividends in the past five years. The Company has no intention of paying cash dividends in the foreseeable future. CHANGES IN SECURITIES. Use of proceeds from public offering The Company's initial Registration Statement on Form S-1, file no. 333-6661, was declared effective by the Securities and Exchange Commission on October 10, 1996. The offering of the Company's Common Stock covered by such Registration Statement commenced on October 2, 1996. Rodman & Renshaw and R.J. Steichen & Company acted as the managing underwriters ("the Representatives") for the offering. A total of 2,750,000 shares of Common Stock, including 330,000 shares subject to the Representatives over-allotment option and 220,000 shares subject to the warrants issued to the Representatives were registered. In addition, warrants to purchase 220,000 shares of Common Stock issued to the Representatives were also registered. The aggregate offering price of the registered Common Stock and warrants was $15,367,220. Of this amount, $12,100,000 representing 2,200,000 shares of Common Stock and warrants to purchase 220,000 shares of Common Stock have been sold. The underwriter's over-allotment option has expired and these shares were not sold. The Representative's warrant has not yet been exercised and consequently the offering has not yet terminated. 14 The amount of expenses incurred for the Company's account in connection with the issuance and distribution of the securities registered are as follows: Underwriting discounts and commissions............... $ 907,500 Finder's fees........................................ 0 Expenses paid to or for the underwriters............. 12,786 Other expenses....................................... 549,833 ------------- Total expenses............................. $ 1,470,119 ============= All such expenses were paid directly or indirectly to others. The net offering proceeds to the Company after deducting expenses were $10,629,881. The amount of net offering proceeds to the Company used for the following purposes is as follows: Purchase and installation of machinery and equipment.......... $ 999,685 Repayment of indebtedness..................................... 178,641 Working capital............................................... 759,589 Temporary investments, marketable securities.................. 3,537,483 Other : -market development expenses................ 1,819,258 -product development expenses............... 3,335,225 ------------- $ 10,629,881 All such payments were made directly or indirectly to others. The use of proceeds contained herein does not represent a material change in the use of proceeds described in the prospectus. Item 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1993 1994 1995 1996 1997 --------- -------- -------- ------- -------- (unaudited) STATEMENT OF OPERATIONS DATA: Sales.................................... $ 1,058 $ 1,518 $ 1,654 $ 1,838 $ 1,687 Licensing and product development........ 125 470 921 1,854 2,030 ------- -------- ---------- ------- -------- Revenues............................... 1,183 1,988 2,575 3,692 3,717 ------- -------- ---------- ------- -------- Cost of sales............................ 409 631 1,049 1,136 1,221 Research and development................. 146 401 1,195 2,585 2,574 General and administrative............... 615 1,118 1,237 1,397 1,823 Sales and marketing...................... 485 878 887 1,019 1,540 ------- -------- ---------- ------- -------- Operating expenses..................... 1,655 3,028 4,368 6,137 7,157 ------- -------- ---------- ------- -------- Net operating loss....................... (472) (1,040) (1,793) (2,446) (3,440) Net other income (expense)............... (28) (26) (89) 207 468 ------- -------- ---------- ------- -------- Net loss................................. $ (500) $ (1,066) $ (1,882) $ (2,239) $ (2,972) ======= ======== ========== ========= ======== Net loss per common share (1), (2), (3)....... $ (0.46) $ (0.39) $ (0.42) ========== ========= ======== Weighted average number of common shares (2), (3)........................ 4,087 5,803 7,011
15
AT DECEMBER 31, ----------------------------------------------------------- 1993 1994 1995 1996 1997 --------- -------- -------- ------- -------- (unaudited) BALANCE SHEET DATA: Cash and cash equivalents............. $ 649 $ 646 $ 36 $ 11,039 $ 7,283 Working capital (deficit)............. 197 108 (650) 11,187 7,804 Total assets.......................... 894 1,361 1,240 12,956 10,047 Long-term liabilities, less current maturities............. 190 299 136 8 2 Accumulated deficit................... (6,353) (7,419) (9,302) (11,540) (14,512) Total shareholders' equity (deficit).. $ 119 $ 252 $ (74) $ 12,120 $ 9,337
(1) Basic and diluted loss per share amounts are identical as the effect of potential common shares is anti-dilutive. (2) Net loss per common share and weighted average common shares outstanding for 1995 are computed on the basis described in Note 1 of the Notes to Financial Statements. (3) Due to significant capital structure changes, earnings per common share and weighted average common shares outstanding for 1993 and 1994 are not presented. In addition, the Company has not paid any dividends since inception. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Medi-Ject Corporation designs, manufactures and markets needle-free injection systems. In 1993, the Company hired a new management team with the goal of revitalizing and redefining the Company's strategic direction. Since that time, product development efforts have increased, emphasizing reductions in the cost of the Company's systems to make them more competitive in the marketplace. In addition, marketing efforts have been focused on expanding the use of needle-free injection systems for parenteral drugs other than insulin. As part of this effort to encourage broader use of needle-free injection systems, the Company began entering into technology and product license agreements to sell the Medi-Jector system. The licensing and development income from these agreements has been used primarily to fund increased product development efforts. Development efforts have resulted in a new generation of the Medi-Jector system, the Medi-Jector Choice system, introduced in December 1996, which incorporates molded plastic components rather than tooled steel components and a disposable needle-free syringe. Current development efforts are primarily oriented toward completion of the gas spring system, improved injection quality and continued size reduction. RESULTS OF OPERATIONS Year Ended December 31, 1996 Compared to Year Ended December 31, 1997 Revenues increased from approximately $3,692,000 in 1996 to approximately $3,717,000 in 1997, an increase of approximately 1%. This increase was primarily due to an increase of approximately $176,000 or 10% in development and licensing fee income, offset by a decrease in product sales of approximately $151,000 or 8%. Product sales include sales of injectors, related parts and disposable components, repairs and freight. The total number of devices sold was nearly unchanged at 3,338 and 3,391 in 1996 and 1997, respectively. Total revenue from injector sales decreased however due to a decline in the average selling price per injector from $385 in 1996 to $294 in 1997, consistent with the Company's general strategy as discussed above. Approximately half of the decrease in revenue from injector sales was offset by increased sales of related supplies, including disposable components for the Medi-Jector Choice system. 16 Licensing and development fee income increased as a result of three new agreements signed with pharmaceutical firms interested in obtaining marketing rights for injection systems under development. The Company expects that licensing and development fee income will continue to fluctuate on a quarter to quarter basis, depending on a number of factors including the timing of the execution of new development and licensing agreements and the timing, nature and size of fee payments to be made under existing and new agreements. In addition, since the Company in general does not recognize project based fee income until related development work has been performed, quarterly results will fluctuate with the timing of the Company's research and development efforts. In September 1997, the Company announced that its customers were occasionally experiencing certain problems when using the Medi-Jector Choice system. These problems pertained to the unexpected breakage of the disposable needle-free syringe portion of the system and the fit of the disposable vial adapter onto the syringe. As a result, management initiated a product recall and replacement campaign for the affected disposable components. Management conducted the recall campaign under the guidance of the FDA. These problems interrupted production and also caused certain sales delays during the fourth quarter while a correction to the problem was developed. These issues were largely resolved prior to the end of the fourth quarter of 1997. Cost of sales increased from approximately $1,136,000 in 1996 to approximately $1,221,000 in 1997, an increase of 7%. The increase was primarily due to higher manufacturing expenses during a period of flat unit volume. The principal factors contributing to the increase in manufacturing expenses were outside engineering consulting services, depreciation, rent and personnel. Product problems relating to the disposable needle-free syringe of the Medi-Jector Choice (discussed above) also increased manufacturing expense. These expenses related primarily to scrap, engineering consulting fees and interrupted production during the fourth quarter of 1997. Research and development expenses decreased from approximately $2,585,000 in 1996 to approximately $2,574,000 in 1997, a decrease of less than 1%. This decrease occurred as the Company completed an important transition in its product research and development program. Prior to 1997, this program was largely based on the efforts of a few outside engineering firms which handled a majority of the engineering and development work. During 1997, the Company purchased certain equipment and hired eight additional engineers and technicians who are dedicated entirely to design and development of improved needle-free injection and drug delivery systems. The transition to an internal research and development program has resulted in an overall increase in the number of person hours dedicated to such efforts while reducing the associated expense. General and administrative expenses increased from approximately $1,397,000 in 1996 to approximately $1,823,000 in 1997, an increase of approximately $426,000 or 30%. Management estimates that approximately one half of this increase relates to costs associated with being a publicly traded company for all of 1997 compared to just three months of 1996. These increased expenses relate to investor relations efforts, stock transfer and NASDAQ fees, D&O liability insurance and legal expense. Depreciation and amortization expense also increased by approximately $106,000 as a result of higher equipment balances and the start of amortization of capitalized intellectual property following the issuance of a major patent in early 1997. Sales and marketing expenses increased from approximately $1,019,000 in 1996 to approximately $1,540,000 in 1997, an increase of approximately of 51%. This increase is primarily attributable to expenses associated with a significant sales program directed at the domestic insulin market initiated in early 1997. In October 1997 the Company announced that it was terminating this program due to poor results. During the fourth quarter, expenses associated with this program were reduced by approximately $500,000 on an annual basis. Management believes that this revised level of spending is appropriate relative to the current opportunities in the domestic insulin market. Interest and other income increased from approximately $239,000 in 1996 to approximately $505,000 in 1997, an increase of approximately $266,000. This increase is attributable to increased interest earnings on higher average cash reserves on hand during 1997, following the Company's initial public offering in October 1996. 17 Year Ended December 31, 1995 Compared to Year Ended December 31, 1996 Revenues increased from approximately $2,575,000 in 1995 to approximately $3,692,000 in 1996, an increase of approximately 43%. This increase was primarily due to development and licensing fee income, which increased by approximately $933,000 or 101% to approximately $1,854,000 in 1996. Sales of injectors, parts, supplies and repairs increased by 11% from approximately $1,654,000 in 1995 to approximately $1,838,000 in 1996. This change was attributable to an increase in the number of injectors sold in 1996 (3,110 in 1995 and 3,338 in 1996) and also from increased sales of parts and supplies and revenue from repairs. The average price per injector decreased from $397 in 1995 to $385 in 1996 as a result of increased sales through distributors. The increase in licensing and product development fee income was primarily the result of the execution of an agreement with Becton Dickinson in January 1996 (the "Becton Dickinson Agreement"). Cost of sales increased from approximately $1,049,000 in 1995 to approximately $1,136,000 in 1996, an increase of 8%. The increase was due to increased unit sales, partially offset by a decrease in unit manufacturing costs. Research and development expenses increased from approximately $1,195,000 in 1995 to approximately $2,585,000 in 1996, an increase of approximately $1,390,000 or 116%. This increase in spending was caused by a greater number of development projects that were underway in 1996, including the Company's collaboration with Becton Dickinson, which is being funded in large part by Becton Dickinson under the Becton Dickinson Agreement and the Company's initial public offering. General and administrative expenses increased from approximately $1,237,000 in 1995 to approximately $1,397,000 in 1996, an increase of approximately 13%. The principal components of this increase included higher executive compensation, increased support salaries, and higher legal expenses related to the negotiation of the Becton Dickinson Agreement. Sales and marketing expenses increased from approximately $887,000 in 1995 to approximately $1,019,000 in 1996, an increase of approximately 15%. This increase is primarily the result of expenses associated with additional management personnel, higher travel expenses and increased expenses related to the creation of new sales literature and other materials. Interest and other income increased from approximately $16,000 in 1995 to approximately $239,000 in 1996, an increase of approximately $223,000. This increase is attributable to increased interest earnings on higher cash reserves on hand during 1996, following the sale of equity securities to Becton Dickinson, Ethical Holdings and the Company's initial public offering. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short term investments decreased from approximately $11,040,000 on December 31, 1996 to $7,283,000 at December 31, 1997. The decrease is primarily due to a net loss of approximately $2,972,000 and fixed asset purchases of approximately $859,000 during 1997. During the year ended December 31, 1997, cash used to fund operating activities was approximately $3,122,000. The major components of this amount included a net loss of approximately $2,972,000 and an aggregate increase of approximately $269,000 in receivables and inventories, offset by depreciation and amortization totaling approximately $326,000. Cash used in investing activities was approximately $2,764,000. The components of this amount were net purchases of marketable securities totaling approximately $1,826,000, additions to fixed assets of approximately $859,000, and an additional investment in patent rights totaling approximately $78,000. Net cash provided by financing activities of approximately $56,000, resulted from proceeds from stock option and warrant exercises of approximately $184,000 offset by payments on notes payable and capital lease obligations totaling approximately $128,000. 18 The Company expects that it will report a net loss for the year ending December 31, 1998 as it continues to incur marketing and development costs related to bringing future generations of its products to market. The Company believes that the capital available to the Company at December 31, 1997 plus the expected product sales and revenues from various development and licensing agreements will provide sufficient cash to fund expected losses and meet other cash usage needs for the next twelve months. The Company can provide no assurance, however, that it will ever become profitable or that cash available will be sufficient to meet its needs. IMPACT OF THE YEAR 2000 The Company has assessed and continues to assess the impact of the Year 2000 issue on its operations and its external relationships. The Year 2000 issue results from computer programs using two digits rather than four digits to define the applicable year. Based on existing information and due to recent and ongoing upgrading of information systems, the Company believes the anticipated spending necessary to become Year 2000 compliant will not have a material effect on the financial position, cash flows or results of operations of the Company, nor will the Year 2000 issues cause any material adverse effect on the future business operations of the Company. 19 Item 8. FINANCIAL STATEMENTS. MEDI-JECT CORPORATION INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report.............................................21 Balance Sheets as of December 31, 1996 and 1997..........................22 Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997.......................................23 Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1995, 1996 and 1997...................24 Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.................................25 Notes to Financial Statements............................................26 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Medi-Ject Corporation: We have audited the accompanying balance sheets of Medi-Ject Corporation (the Company) as of December 31, 1996 and 1997, and the related statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medi-Ject Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 25, 1998 21 MEDI-JECT CORPORATION BALANCE SHEETS
DECEMBER 31, 1996 1997 ------------ ----------- ASSETS Current Assets: Cash and cash equivalents.............................. $ 9,575,240 $ 3,745,851 Marketable securities.................................. 1,464,277 3,537,483 Accounts receivable, less allowances for doubtful accounts of $12,983 and $22,284, respectively.................... 537,755 760,948 Inventories............................................ 351,330 397,072 Prepaid expenses and other assets...................... 86,589 71,495 -------------- ------------- 12,015,191 8,512,849 -------------- ------------- Equipment, furniture and fixtures, net................... 595,590 1,165,213 -------------- ------------- Patent rights, net....................................... 345,010 369,406 -------------- ------------- $12,955,791 $10,047,468 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....................................... $ 353,456 $ 321,758 Accrued expenses and other liabilities................. 331,446 379,776 Deferred revenue....................................... 14,019 0 Capital lease obligations - current maturities......... 32,747 7,083 Notes payable - current maturities..................... 96,097 0 -------------- ------------- 827,765 708,617 -------------- ------------- Capital leases, less current maturities.................. 8,350 1,721 Shareholders' equity: Common Stock: $0.01 par; authorized 17,000,000 shares: 6,925,636 and 7,071,589 issued and outstanding at December 31, 1996 and 1997, respectively............. 69,256 70,716 Additional paid-in capital............................. 23,590,887 23,778,648 Accumulated deficit.................................... (11,540,467) (14,512,234) -------------- ------------- 12,119,676 9,337,130 -------------- ------------- Commitments (Note 4) $ 12,955,791 $ 10,047,468 ============== =============
See accompanying notes to financial statements. 22 MEDI-JECT CORPORATION STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1995 1996 1997 --------------- --------------- --------------- Revenues: Sales................................... $ 1,653,869 $ 1,837,704 $ 1,686,588 Licensing & product development......... 920,937 1,854,100 2,030,435 ------------- --------------- -------------- 2,574,806 3,691,804 3,717,023 ------------- --------------- -------------- Operating Expenses: Cost of sales........................... 1,048,937 1,136,272 1,221,051 Research and development................ 1,195,435 2,584,806 2,573,814 General and administrative.............. 1,236,681 1,397,338 1,822,576 Sales and marketing..................... 886,792 1,019,077 1,539,504 ------------- --------------- -------------- 4,367,845 6,137,493 7,156,945 ------------- --------------- -------------- Net operating loss........................ (1,793,039) (2,445,689) (3,439,922) ------------- --------------- -------------- Other income (expense): Interest and other income............... 16,486 239,055 505,295 Interest and other expense.............. (105,906) (31,934) (37,140) ------------- --------------- -------------- (89,420) 207,121 468,155 ------------- --------------- -------------- Net loss.................................. $ (1,882,459) $ (2,238,568) $ (2,971,767) ============= =============== ============== Basic and diluted net loss per common share........................ -- $(.39) $(.42) =============== ============== Basic and diluted weighted average common shares outstanding....... -- 5,803,346 7,010,703 Proforma net loss per common share (unaudited) (Note 1).................... $(.46) -- -- ============= Proforma weighted average common shares outstanding (unaudited) (Note 1).................... 4,087,360 -- --
See accompanying Notes to Financial Statements 23 MEDI-JECT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK -------------------------------------------------------------------- SERIES C SERIES B SERIES A COMMON STOCK ------------------ -------------------- ------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- ------- -------- ------- ------- ------- -------- -------- Balance, December 31, 1994....... -- $ -- 1,488,958 $14,890 1,103,867 $ 11,039 217,722 $ 2,177 Common stock: Exercise of stock options.... -- -- -- -- -- -- 1,142 12 Series B: Exercise of stock options.... -- -- 228,483 2,284 -- -- -- -- Shares issued for cash....... -- -- 373,192 3,732 -- -- -- -- Offering costs............... -- -- -- -- -- -- -- -- Amendments to investor option agreement............ -- -- -- -- -- -- -- -- Net Loss....................... -- -- -- -- -- -- -- -- --------- --------- ---------- --------- --------- --------- ---------- -------- Balance, December 31, 1995....... -- -- 2,090,633 20,906 1,103,867 11,039 218,864 2,189 Conversion of Series A to common stock.............. -- -- -- -- (1,103,867) (11,039) 1,103,867 11,039 Conversion of note payable .... -- -- -- -- -- -- 30,465 305 Shares issued for reverse stock split.......... -- -- 43 -- -- -- 589 5 Series B: Exercise of stock options and conversion of note payable................. -- -- 380,808 3,808 -- -- -- -- Series C: Shares issued for cash....... 761,615 7,616 -- -- -- -- -- -- Offering costs............... -- -- -- -- -- -- -- -- Series E: Warrant issued for cash...... -- -- -- -- -- -- -- -- Common stock: Issued common stock pursuant to the company's initial public offering.............. -- -- -- -- -- -- 2,200,000 22,000 Offering costs.............. -- -- -- -- -- -- -- -- Conversion of Series C to common stock ............. (761,615) (7,616) -- -- -- -- 761,615 7,616 Conversion of Series B to common stock.............. -- -- (2,471,484) (24,714) -- -- 2,471,484 24,714 Issuance of Series B anti-dilution shares ........ -- -- -- -- -- -- 138,752 1,388 Net loss....................... -- -- -- -- -- -- -- -- --------- --------- ---------- --------- --------- --------- ---------- -------- Balance, December 31, 1996....... -- -- -- -- -- -- 6,925,636 69,256 Exercise of stock options and warrants ................ -- -- -- -- -- -- 145,953 1,460 Compensation expense, stock options................ -- -- -- -- -- -- -- -- Net Loss....................... -- -- -- -- -- -- -- -- ----------- --------- ---------- ---------- ---------- -------- ---------- -------- Balance, December 31, 1997....... $ $ $ 7,071,589 $ 70,716 =========== ========= ========== ========== ========== ======== ========== ======== ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL ------- ---------- ------- Balance, December 31, 1994....... $7,643,361 $(7,419,440) $ 252,027 Common stock: Exercise of stock options.... 1,548 -- 1,560 Series B: Exercise of stock options.... 347,716 -- 350,000 Shares issued for cash....... 1,221,268 -- 1,225,000 Offering costs............... (65,383) -- (65,383) Amendments to investor option agreement............ 45,090 -- 45,090 Net Loss....................... -- (1,882,459) (1,882,459) ----------- ----------- ---------- Balance, December 31, 1995....... 9,193,600 (9,301,899) (74,165) Conversion of Series A to common stock.............. -- -- -- Conversion of note payable .... 99,695 -- 100,000 Shares issued for reverse stock split.......... (5) -- -- Series B: Exercise of stock options and conversion of note payable................. 809,822 -- 813,630 Series C: Shares issued for cash....... 2,992,384 -- 3,000,000 Offering costs............... (236,022) -- (236,022) Series E: Warrant issued for cash...... 125,000 -- 125,000 Common stock: Issued common stock pursuant to the company's initial public offering.............. 12,078,000 -- 12,100,000 Offering costs.............. (1,470,199) -- (1,470,199) Conversion of Series C to common stock.............. -- -- -- Conversion of Series B to common stock.............. -- -- -- Issuance of Series B anti-dilution shares......... (1,388) -- -- Net loss....................... -- (2,238,568) (2,238,568) ----------- ---------- ---------- Balance, December 31, 1996....... 23,590,887 (11,540,467) 12,119,676 Exercise of stock options and warrants................. 182,766 -- 184,226 Compensation expense, stock options................ 4,995 -- 4,995 Net Loss....................... -- (2,971,767) (2,971,767) ----------- ---------- ---------- Balance, December 31, 1997....... $23,778,648 ($14,512,234) $9,337,130 =========== ============ ==========
See accompanying notes to financial statements 24 MEDI-JECT CORPORATION STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1995 1996 1997 ----------------- --------------- ------------- Cash flows from operating activities: Net loss.............................................. $ (1,882,459) $ (2,238,568) $ (2,971,767) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 85,960 178,526 326,065 Loss on disposal of assets............................ -- 17,079 Interest on marketable debt securities................ -- (7,417) (246,813) Other ................................................ 45,090 -- 4,995 Changes in operating assets and liabilities: Accounts receivable................................. (86,937) (361,515) (223,193) Inventories......................................... (109,368) (71,101) (45,742) Prepaid expenses and other assets................... (23,190) (51,081) 15,094 Accounts payable.................................... 83,263 110,175 (31,698) Accrued liabilities................................. 107,193 (66,786) 48,330 Deferred revenue.................................... 38,563 (134,544) (14,019) ---------------- ---------------- ------------------ Net cash used in operating activities................... (1,741,885) (2,642,311) (3,121,669) ---------------- ---------------- ------------------ Cash flows from investing activities: Purchases of marketable securities.................... -- (1,456,860) (6,975,059) Proceeds from sales of marketable securities.......... -- -- 5,148,666 Purchases of equipment, furniture and fixtures........ (120,392) (297,090) (859,373) Payments for patent rights............................ (235,288) (109,722) (77,790) ---------------- ---------------- ------------------ Net cash used in investing activities................... (355,680) (1,863,672) (2,763,556) ----------------- ---------------- ------------------ Cash flows from financing activities: Principal payments on capital lease obligations....... (42,138) (44,546) (32,293) Proceeds from issuance of common stock................ 1,560 12,101,130 184,226 Proceeds from issuance of convertible preferred stock. 1,575,000 3,812,500 -- Warrants issued....................................... -- 125,220 -- Proceeds from issuance of notes payable............... 125,000 187,500 -- Principal payments on notes payable................... (106,324) (429,957) (96,097) Offering costs........................................ (65,383) (1,706,441) -- ---------------- ---------------- ----------------- Net cash provided by financing activities............... 1,487,715 14,045,406 55,836 ---------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents.... (609,850) 9,539,423 (5,829,389) Cash and cash equivalents: Beginning of year..................................... 645,667 35,817 9,575,240 ---------------- ---------------- ----------------- End of year........................................... $ 35,817 $ 9,575,240 $ 3,745,851 ================ ================ =================
See accompanying Notes to Financial Statements. 25 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business The Company is primarily a manufacturer and distributor of needle-free injection devices and disposables for the injection of insulin and human growth hormone. Products are sold throughout the United States, Europe, the Middle East, and Asia. Reverse Stock Split In connection with the Company's initial public offering, the Board of Directors and shareholders approved a 1 for 1.313 reverse stock split of its common stock, effective August 6, 1996. The effect of the stock split has been retroactively reflected in the accompanying financial statements and notes thereto. Net Loss Per Share The Company has adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which supersedes APB Opinion No. 15, "Earnings per Share". SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the Statements of Operations. Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock. For the years ended December 31, 1996 and 1997, the effects of potential common shares were excluded from the calculation of diluted EPS because their effect was antidilutive. The unaudited pro forma net loss per common share information included in the statement of operations for the year ended December 31, 1995 reflects the impact of the conversion of all Preferred Shares retroactively as of the date of issuance of the Preferred Shares. Also, pursuant to the Securities and Exchange Commission regulations, all common and Preferred Shares issued and options and warrants granted by the Company during the 12-month period preceding the initial filing date of the October 1996 public offering have been included in the 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 $5.50 per share. Cash Equivalents The Company considers highly liquid debt instruments with original maturities of 90 days or less to be cash equivalents. Marketable Securities The Company accounts for its marketable debt securities in accordance with the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities". The Company's marketable debt securities are classified as available-for-sale and are carried at amortized cost, which approximates fair value. 26 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. Equipment, Furniture, and Fixtures Equipment, furniture, and fixtures are stated at cost and are depreciated using the straight-line method over their estimated useful lives ranging from three to seven years. Sales Recognition Sales and related costs are recognized upon shipment of product to customers. Sales are recorded net of provisions for returns and discounts. Licensing and Product Development Revenue Recognition Licensing and product development revenue is recognized when underlying performance criteria for payment have been met and the Company has an unconditional right to such payment. Depending on a license or product development agreement's terms, recognition criteria may be satisfied upon achievement of milestones, passage of time, or product sales by the licensee. Payments received by the Company in excess of amounts earned are classified as deferred revenue. Stock-Based Compensation Compensation expense for stock incentives granted to employees and directors is recognized in accordance with Accounting Principles Board, Opinion 25 ("APB 25"), "Accounting for Stock Issued to Employees." Pro forma effects on net loss and loss per share are provided as if the fair value based method defined in Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," had been applied. Product Warranty The Company recognizes the estimated cost of warranty obligations to its customers at the time the products are shipped. Research and Development Company sponsored research and development expenses related to both present and future products are expensed as incurred. Patent Rights The Company capitalizes the cost of obtaining patent rights. These capitalized costs are amortized on a straight-line basis over seven years beginning on the earlier of the date the patent is issued or the first commercial sale of product utilizing such patent rights. 27 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 Income Taxes Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Concentration of Credit Risk Financial instruments that may subject the Company to concentration of credit risk consist principally of marketable debt securities investments and trade accounts receivable. Risks related to marketable debt securities purchased are mitigated by the limitations established in the Company's investment policy. This policy requires strong issuer credit ratings and limits the amount of credit exposure from any one issuer or industry. The Company has not realized any losses on its investments. For trade accounts receivable, risks are mitigated by the large number of individual customers, long-standing credit relationships with major distributors and a satisfactory financial evaluation of distributors carrying substantial credit balances. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Fair Value of Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. Advertising Costs Advertising expense (including production and communication costs) for 1995, 1996 and 1997 was $147,613, $168,145 and $333,515, respectively. Prepaid advertising costs were $0 in each of the years ended December 31, 1996 and 1997. Production costs related to advertising are expensed as incurred. New Accounting Pronouncements Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," were issued in June 1997. SFAS 130 and SFAS 131 are effective for fiscal years beginning subsequent to December 15, 1997 and, therefore, will be adopted by the Company on January 1, 1998. The Company does not expect the adoption of SFAS 130 or SFAS 131 to result in any substantive changes in its disclosure. 28 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS December 31, --------------------------- 1996 1997 ------------ ---------- Inventories: Raw material.................................... $ 175,251 $ 196,579 Work-in-process................................. 119,575 78,220 Finished goods.................................. 56,504 122,273 ------------ ----------- $ 351,330 $ 397,072 ============ =========== Equipment, furniture and fixtures: Furniture, fixtures and office equipment........ $ 404,811 $ 805,310 Production equipment............................ 833,773 1,161,803 Less accumulated depreciation................... (642,994) (801,900) ------------ ---------- $ 595,590 $1,165,213 ============ ========== Patent rights: Patent rights................................... $ 345,010 $ 422,800 Less accumulated amortization................... -- (53,394) ------------ ---------- $ 345,010 $ 369,406 ============ ========== Accrued expenses and other liabilities: Product warranty and returns.................... $ 86,436 $ 51,436 Payroll......................................... 37,828 59,665 Other........................................... 207,182 268,675 ------------ ----------- $ 331,446 $ 379,776 ============ =========== 3. NOTES PAYABLE December 31, --------------------------- 1996 1997 ------------ ---------- Notes payable: Notes payable, due in aggregate monthly payments of $11,127 including interest at 10% through October 1997. Notes are secured by all assets of the Company............ $ 96,097 $ -- ------------ ----------- Current maturities.............................. (96,097) -- ------------ ----------- Notes payable, less current maturities.......... $ -- $ -- ============ =========== On January 25, 1996, the Company converted an unsecured note payable totaling $312,500 (of which $125,000 was outstanding at December 31, 1995) into 190,404 shares of common stock. In addition, the holder of the debt purchased an additional 190,404 shares of common stock for proceeds of $500,000 in connection with a stock option exercise. On February 29, 1996 an unsecured note payable to a shareholder totaling $100,000, which was outstanding at December 31, 1995, was converted into 30,465 shares of common stock. 29 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 4. LEASES The Company has a noncancelable operating lease for its office and manufacturing facility that expires in April 2002. This lease requires the Company to pay all executory costs such as maintenance and property taxes. Rent expense incurred for the years ended December 31, 1995, 1996 and 1997 was $107,616, $101,139 and $161,339, respectively. The Company is also obligated under noncancelable leases classified as capital leases. The leases call for aggregate monthly payments of $1,947 with various expiration dates through September 1999. Equipment, furniture, and fixtures include $282,186 and $67,380 of cost and $221,409 and $51,524 of accumulated amortization as of December 31, 1996 and 1997, respectively, related to these leases. Future minimum lease payments are as follows as of December 31, 1997: CAPITAL OPERATING LEASES LEASES ----------- ----------- 1998..................................... $ 7,464 $ 211,995 1999..................................... 1,816 217,737 2000..................................... -- 223,479 2001..................................... -- 229,221 2002..................................... -- 88,111 ----------- ----------- 9,280 $ 970,543 =========== Amount representing interest (at rates from 13% to 18%) (476) ----------- Present value of minimum capital lease payments....................... 8,804 Current maturities....................... (7,083) ----------- Obligations under capital leases less current maturities.............. $ 1,721 =========== 5. INCOME TAXES The Company incurred losses for both book and tax purposes in each of the years in the three year period ended December 31, 1997 and, accordingly, no income taxes were provided. Effective tax rates differ from statutory federal income tax rates in the years ended December 31, 1995, 1996 and 1997 as follows: 1995 1996 1997 ---- ---- ---- Statutory federal income tax rate ........... (34.0)% (34.0)% (34.0)% Valuation allowance increase................. 36.0 39.8 35.7 State income taxes, net of federal benefit... (2.0) (2.0) (2.0) Research and experimentation credit.......... -- (1.6) -- Other........................................ -- (2.2) 0.3 ------ ------ ------ 0.0% 0.0% 0.0% ====== ====== ====== 30 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 Deferred tax assets as of December 31, 1996 and 1997 consist of the following: 1996 1997 ---------- ----------- Inventory reserve............................... $ 21,000 $ 20,000 Net operating loss carryforward................. 4,012,000 5,060,000 Research credit carryforward.................... 152,000 165,000 Other........................................... 45,000 45,000 ---------- ----------- 4,230,000 5,290,000 Less valuation allowance.......................... (4,230,000) (5,290,000) ---------- ----------- $ 0 $ 0 ========== =========== At December 31, 1997, the Company had net operating loss carryforwards ("NOL") of approximately $14,000,000 for federal income tax purposes which if unused will begin to expire in 2008. Additionally, the Company had research credit carryforwards of approximately $165,000. As a result of the 1996 equity changes as described in Note 6, the net operating loss will be subject to annual limitation as defined by Section 382 of the Internal Revenue Code. The annual limitation for utilization of the net operating loss carryforwards is approximately $750,000. Subsequent equity changes could further limit the net operating losses available. 6. SHAREHOLDERS' EQUITY Initial Public Offering On October 2, 1996, the Company completed an initial public offering ("IPO") of its common stock. In this offering 2,200,000 common shares were sold at a price of $5.50 per share. As a consequence of this offering, and in accordance with the terms of each of the various series of preferred stock that the Company had outstanding prior to the IPO, all series of preferred shares then outstanding and rights to acquire preferred shares were automatically converted into common stock or rights to purchase common stock Authorized Shares At December 31, 1997, the total number of shares authorized for all classes of stock was 18,000,000 shares: 17,000,000 common shares and 1,000,000 preferred shares undesignated as to class. Series A Preferred On January 31, 1996, the Company converted its Series A convertible preferred stock into common stock. Automatic conversion into common stock of the Series A was precipitated by the Company's net worth exceeding $1.0 million. 31 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 Stock Options and Warrants The Company has issued options and warrants for common stock to various officers, directors, employees, lenders and others. These options and warrants have exercise prices ranging from $0.79 to $6.60 per share, are fully exercisable, and expire from March 1998 to January 2006. As of December 31, 1995 the Company had stock options outstanding for 380,808 shares of its Series B convertible preferred stock issued in connection with a 1993 stock purchase agreement. This option agreement was exercised in full on February 29, 1996. The exercise price was $1.64 per share for 190,404 shares and $2.63 for the remaining 190,404 shares, all of which were converted to shares of common stock in connection with the Company's IPO. Amendments during 1995 to the Series B preferred option agreement resulted in the recognition of $45,090 in expense. This expense was associated with decreases in the exercise price of certain options in exchange for a short-term credit facility, and the cancellation of a technology license and co-development agreement. The Company's stock option plans allow for grant of options to officers, directors, and employees to purchase up to 1,695,050 shares of common stock at exercise prices not less than 100% of fair market value on the dates of grant. The term of the options may not exceed ten years and vest in varying periods. Stock option and warrant activity is summarized as follows: NUMBER WEIGHTED OF AVERAGE SHARES PRICES ----------- ------------ Outstanding at December 31, 1994................ 1,008,718 $ 1.43 Granted..................................... 214,776 3.16 Exercised................................... (229,627) 1.45 Canceled.................................... (2,057) 3.28 ----------- ----------- Outstanding at December 31, 1995................ 991,810 1.84 Granted..................................... 2,942,915 5.61 Exercised................................... (381,380) 1.64 Canceled.................................... (19,959) 1.75 ----------- ----------- Outstanding at December 31, 1996................ 3,533,386 5.03 Granted..................................... 608,500 4.45 Exercised................................... (145,953) 1.30 Canceled.................................... (95,704) 4.47 ----------- ----------- Outstanding at December 31, 1997................ 3,900,229 $ 5.08 =========== =========== 32 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 The following table summarizes information concerning currently outstanding and exercisable options and warrants by price range:
OUTSTANDING EXERCISABLE --------------------------------------------------------- -------------------------------------- NUMBER OF SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE PRICE RANGE OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------------- ------------------ ------------------- ------------------ ------------------ ------------------- PURSUANT TO OPTION PLANS: $ .79 to 1.65 169,693 5.4 $1.35 169,693 $1.35 2.19 to 2.94 138,500 9.9 2.43 - - 3.13 to 3.94 333,665 7.4 3.44 253,079 3.49 5.00 to 5.38 661,900 9.0 5.23 152,380 5.25 --------- --------- 1,303,758 575,152 ========= ========= WARRANTS: $ 1.31 to 3.00 84,009 0.5 $1.31 84,009 $1.31 3.28 to 4.60 388,425 7.9 4.57 388,425 4.57 5.91 to 6.60 2,124,037 7.6 5.98 2,124,037 5.98 --------- --------- 2,596,471 2,596,471 ========= =========
The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, the Company's net loss and loss per share would have increased to the pro-forma amounts shown below: 1995 1996 1997 ---- ---- ---- Net loss: As reported.......................... $1,882,459 $2,238,568 $2,971,767 Pro forma............................ $1,980,000 $2,614,000 $3,672,000 Net loss per common share: As reported.......................... $0.46 $0.39 $0.42 Pro forma............................ $0.49 $0.45 $0.52 The per share weighted-average fair value of stock based awards granted during 1995, 1996 and 1997 is estimated as $0.95, $4.16 and $3.43, respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions: 1995 1996 1997 ---- ---- ---- Risk-free interest rate....................... 6.0% 6.0% 6.0% Annualized volatility......................... 0.0% 106% 99% Weighted average expected life, in years...... 4.7 7.5 5.0 Expected dividend yield....................... 0.0% 0.0% 0.0% Proforma net loss reflects only options granted in 1995, 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the option vesting periods and compensation cost for options granted prior to January 1, 1995 is not considered. 33 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 7. EMPLOYEE SAVINGS PLAN The Company has an employee savings plan that covers all employees who have met minimum age and service requirements. Under the plan, eligible employees may contribute up to 15% of their compensation into the plan. The Company, at the discretion of the Board of Directors, may contribute elective amounts to the plan, allocated in proportion to employee contributions to the plan, employee's salary, or both. No elective contributions have been made for the years ended December 31, 1995, 1996 and 1997. 8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest during the years ended December 31, 1995, 1996 and 1997 was $62,515, $30,919 and $9,339, respectively. Cash paid for taxes during the years ended December 31, 1995, 1996 and 1997 was $300 in each year. During 1996, notes payable of $312,500 and $100,000, respectively, were converted into 190,404 shares of Series B Preferred Stock and 30,465 shares of Common Stock, respectively. 9. SALES The Company had a foreign customer, a distributor of the Company's products, who accounted for approximately 18%, 18% and 37% of sales for the years ended December 31, 1995, 1996 and 1997, respectively. Foreign sales by geography were as follows: 1995 1996 1997 ------------- ------------- ------------ Europe (primarily Germany)...... $ 301,277 $ 356,838 $ 759,168 Other........................... 319,379 221,653 113,044 ------------- ------------- ------------ Total....................... $ 620,656 $ 578,491 $ 872,212 ============= ============= ============ Other consists mainly of sales to Asia. 34 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 10. BECTON DICKINSON ARRANGEMENT On January 25, 1996, the Company sold 761,615 shares of common stock to Becton Dickinson and Company ("Becton Dickinson") for $3,000,000. In addition, the Company granted Becton Dickinson an option to purchase 380,808 shares of common stock with an exercise price of $4.60. Warrants for 1,904,037 shares of common stock were also granted at an exercise price of $5.91 for initial consideration of $125,000. The Becton Dickinson option and warrant agreements each expire on the tenth anniversary of the agreement. In connection with the sale of equity to Becton Dickinson, the Company entered into a licensing agreement with Becton Dickinson, which provides Becton Dickinson exclusive worldwide rights to certain Medi-Ject technology. In exchange for granting this exclusive right, the Company received $100,000 per month for 24 months beginning January 1996 to develop the technology. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) FIRST SECOND THIRD FOURTH ----- ------ ----- ------ 1996: Total revenues $ 769,148 $ 731,134 $ 949,219 $ 1,242,303 Net loss (553,016) (631,162) (551,616) (502,774) Loss per common share (.14) (.12) (.10) (.07) Weighted average shares 4,087,360 5,260,880 5,260,880 6,925,636 1997: Total revenues $ 971,025 $ 881,379 $ 609,828 $ 1,254,791 Net loss (582,290) (818,063) (926,787) (644,627) Loss per common share (.08) (.12) (.13) (.09) Weighted average shares 6,947,245 6,991,969 7,057,035 7,066,497 Loss per common share is computed based upon the weighted average number of shares outstanding during each period. Basic and diluted loss per share amounts are identical as the effect of potential common shares is antidilutive. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 35 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the headings "Election of Directors" and "Compliance with Section16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1998 is incorporated by reference. Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information as to executive officers of the Company is set forth in Part 1 of the Form 10-K under separate caption. Item 11. EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1998 is incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1998 is incorporated by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1998 is incorporated by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements - see Part II (2) Financial Statement Schedule -All schedules have been omitted because they are not applicable or not required or because the information is included in the financial statements or the notes thereto. (3) Item 601 Exhibits- see list of Exhibits below (b) Reports on Form 8-K There were no reports filed on Form 8-K for the fourth quarter of 1997. 36 (c) Exhibits 3.1 Second Amended and Restated Articles of Incorporation of the Company.(a) 3.2 Second Amended and Restated Bylaws of the Company.(a) 4.1 Form of Certificate for Common Stock.(a) 4.2 Stock Warrant, dated January 25, 1996, issued to Becton Dickinson and Company.(a) 4.3 Stock Option, dated January 25, 1996, issued to Becton Dickinson and Company.(a) 4.4 Warrant, dated March 24, 1995, issued to Robert Fullerton.(a) 4.5 Warrant, dated March 24, 1995, issued to Michael Trautner.(a) 4.6 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company (filed herewith as Exhibit 10.7).(a) 10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments thereto.(a) 10.3 Security Agreement, dated September 30, 1994, by and between the Company and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership.(a) 10.4 Promissory Note, dated September 30, 1994, issued to Kelsey Lake Limited Partnership.(a) 10.5 Promissory Note, dated September 30, 1994, issued to Kerry Lake Company, a Limited Partnership.(a) 10.6 Loan Agreement, dated as of December 22, 1995, by and between Ethical Holdings plc and the Company, including the related Promissory Note, dated December 22, 1995, issued to Ethical Holdings plc.(a) 10.7 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company.(a) 10.8* Employment Agreement, dated as of January 1, 1997, between the Company and Franklin Pass, MD.(c) 10.9* Employment Agreement, dated as of January 3, 1995, between the Company and Mark Derus.(a) 10.10* Employment Agreement, dated as of January 3, 1995, between the Company and Todd Leonard.(a) 10.11* Employment Agreement, dated as of January 3, 1995, between the Company and Peter Sadowski.(a) 10.12* 1993 Stock Option Plan.(a) 10.13* Form of incentive stock option agreement for use with 1993 Stock Option Plan.(a) 37 10.14* Form of non-qualified stock option agreement for use with 1993 Stock Option Plan.(a) 10.15* 1996 Stock Option Plan, with form of stock option agreement.(a) 10.20+ Development and License Agreement between Becton Dickinson and Company and the Company, effective January 1, 1996.(a) 10.21 Office-Warehouse lease with Carlson Real Estate Company, dated February 11, 1997. (b) 10.22* 1998 Stock Option Plan for Non-Employee Directors. (d) 10.23* Letter consulting agreement dated February 20, 1998 between the Company and Geoffrey W. Guy. (d) 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule 99 Cautionary Statement (b) * Indicates management contract or compensatory plan or arrangement. + Pursuantto Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibit 10.20 were deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment, which was subsequently granted by the Securities and Exchange Commission. (a) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-6661), filed with the Securities and Exchange Commission on October 1, 1996. (b) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. (c) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1997. (d) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on March 25, 1998. MEDI-JECT CORPORATION /s/Franklin Pass, M.D. ------------------------------------- Franklin Pass, MD President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities indicated on March 25, 1998. SIGNATURE TITLE /s/Franklin Pass, M.D. President, Chief Executive Officer and Director - ---------------------------- Franklin Pass, M.D. (principal executive officer) /s/Mark S. Derus Vice President of Finance, Chief Financial Officer - ---------------------------- Mark S. Derus (principal financial and accounting officer) /s/Kenneth Evenstad Director - ---------------------------- Kenneth Evenstad /s/Geoffrey Guy Director - ---------------------------- Geoffrey Guy /s/Norman Jacobs Director - ---------------------------- Norman Jacobs /s/Fred Shapiro, M.D. Director - ---------------------------- Fred Shapiro, M.D. /s/Stanley Goldberg Director - ---------------------------- Stanley Goldberg /s/Karl Groth Director - ---------------------------- Karl Groth 39 EX-10.22 2 1998 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS MEDI-JECT CORPORATION 1998 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. PURPOSE OF PLAN This plan shall be known as the "Medi-Ject Corporation 1998 Stock Option Plan For Non-Employee Directors" and is hereinafter referred to as the "Plan." The purpose of the Plan is to promote the interests of Medi-Ject Corporation, a Minnesota corporation (the "Company"), by enhancing its ability to attract and retain the services of experienced and knowledgeable non-employee directors and by providing additional incentive for such directors to increase their interest in the Company's long-term success and progress. Options granted under this Plan shall be nonqualified stock options which do not qualify as incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. STOCK SUBJECT TO PLAN Subject to the provisions of Section 10 hereof, the stock to be subject to options under the Plan shall be authorized but unissued shares of the Company's common stock, $.01 par value per share (the "Common Stock"). Subject to the adjustment as provided in Section 10 hereof, the maximum number of shares for which options may be exercised under this Plan shall be 150,000 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan. 3. ADMINISTRATION OF PLAN The Plan shall be administered by a committee composed of members of the Board of Directors of the Company (the "Committee"). The Committee shall have plenary authority in its discretion, subject to the express provisions of this Plan including the restrictions contained in Section 11 below, to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations on the foregoing matters shall be final and conclusive. 4. ELIGIBILITY (a) Each director of the Company who is not otherwise an employee of the Company or any subsidiary of the Company (an "Eligible Director") shall be eligible to participate in the Plan. (b) An option to purchase 10,000 shares of Common Stock shall be granted automatically on the day that any Eligible Director is first elected to the Board of Directors; provided, however, that if such day is not a business day, such grant shall be effective on the first business day following such election. Such grants shall only be made to Eligible Directors who were not directors of the Company on the date this Plan is adopted by the Board of Directors. (c) An option to purchase 5,000 shares of Common Stock shall be granted automatically on the date this Plan is adopted by the Board of Directors (February 11, 1998) subject to shareholder approval of this Plan as provided in Section 13 hereof, and, thereafter, an option to purchase 5,000 shares of Common Stock shall be granted automatically on the first business day of each calendar year (the "Annual Option Grant Date") during the term of the Plan, beginning on January 4, 1999, to each Eligible Director in office on such Annual Option Grant Date. (d) Notwithstanding the above, any Eligible Director may elect not to receive any option, in whole or in part, which would otherwise be granted to such Eligible Director pursuant to the terms hereof by giving notice of such election to the Company. 5. PRICE The option price for all options granted under the Plan shall be the fair market value of the shares covered by the option on the date the option is granted. For purposes of this Plan, the fair market value of the Common Stock on a given date shall be (i) the last sale price of the Common Stock as reported on the Nasdaq Stock Market on such date, if the Common Stock is then quoted on the Nasdaq Stock Market or (ii) the closing price of the Common Stock on such date on a national securities exchange, if the Common Stock is then being traded on a national securities exchange. If on the date as of which the fair market value is being determined the Common Stock is not publicly traded, the Committee shall make a good faith attempt to determine such fair market value and, in connection therewith, shall take such actions and consider such factors as it deems necessary or advisable. 6. TERM Each option shall, subject to the provisions of Section 8 hereof, expire 10 years from the date on which the option was granted. 7. EXERCISE OF OPTION 2 (a) Options granted under the Plan shall not be initially exercisable by the optionee but shall become exercisable in full on the first anniversary of the date of grant. (b) The exercise of any option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. An optionee desiring to exercise an option may be required by the Company, as a condition of the effectiveness of any exercise of an option granted hereunder, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held for his or her own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state securities laws. (c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either (i) in cash (including check, bank draft or money order), or (ii) by delivering the Company's Common Stock already owned by the optionee having a fair market value on the date of exercise equal to the full purchase price of the shares, or (iii) by any combination of cash and the method specified in (ii) of this sentence. For purposes of the preceding sentence, the fair market value of Common Stock tendered shall be determined as provided in Section 5 hereof as of the date of exercise. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he or she shall possess no rights as a shareholder with respect to such shares. 8. EFFECT OF TERMINATION OF DIRECTORSHIP OR DEATH OR DISABILITY (a) In the event that an optionee shall resign or be removed without cause as a member of the Board of Directors of the Company or its subsidiaries, such optionee shall have the right to exercise the option for a period of ninety (90) days after such resignation or removal to the extent of the full number of shares he or she was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (b) In the event that an optionee shall die or become disabled while a Director of the Company or its subsidiaries, such optionee (or such optionee's guardian, administrators or personal representative) shall have the right to exercise the option for a period of one year after the date of such death or disability to the extent of the full number of shares he or she was entitled to purchase under the 3 option on the date of death or disability, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (c) In the event that an optionee shall cease to be a director of the Company by reason of his or her gross and willful misconduct during the course of his or her service as a director of the Company, including but not limited to wrongful appropriation of funds of the Company, or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of the misconduct. (d) Nothing in this Plan or in any agreement hereunder shall confer on any optionee any right to continue as a director of the Company or affect in any way any legal rights with respect to termination of such directorship or removal of such optionee as a director. 9. NON-TRANSFERABILITY No option granted under the Plan shall be transferable by an optionee, otherwise than by will or the laws of descent or distribution. Except as provided in Section 8 herein with respect to disability of the optionee, during the lifetime of an optionee, the option shall be exercisable only by such optionee. 10. DILUTION OR OTHER ADJUSTMENTS If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares subject to outstanding options and the exercise prices thereof in order to prevent dilution or enlargement of option rights. 11. AMENDMENT OR DISCONTINUANCE OF PLAN If there shall be any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares subject to outstanding options and the option exercise prices thereof in order to prevent dilution or enlargement of option rights. 4 12. TIME OF GRANTING Unless the Plan shall have been discontinued as provided in Section 12 hereof, the Plan shall terminate upon the expiration of 10 years from the date upon which it takes effect as provided in Section 13 hereof. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. 13. EFFECTIVE DATE AND TERMINATION OF PLAN (a) The Plan was approved by the Board of Directors on February 11, 1998, and shall be effective from that date, subject to the approval by shareholders of the Company. In the event shareholder approval is not obtained, this Plan shall be of no force or effect, and any option previously granted hereunder shall terminate. The Plan shall be submitted for approval to shareholders of the Company within 12 months of the effective date. (b) Unless the Plan shall have been discontinued as provided in Section 11 hereof, the Plan shall terminate on February 11, 2008. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted. 14. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Minnesota and construed accordingly. 5 EX-10.23 3 CONSULTING AGREEMENT WITH GEOFFREY W. GUY EXHIBIT 10.23 [LETTERHEAD OF MEDI-JECT CORPORATION] February 20, 1998 Dr. Geoffrey Guy GWG, Ltd. Le Manior du Markham Les Gravees St. Petersport Guernsey GY1 1RL United Kingdom Dear Geoffrey: I am writing this letter agreement on behalf of Medi-Ject Corporation to engage your consulting services through a contract with GWG, Ltd. As the new injectors reach the market over the coming year, the Company faces many exciting business challenges. It is our understanding that you will assist us with strategic planning and in relevant meetings and negotiations with third parties in the pharmaceutical industry. We have estimated that you will spend six days annually in Minneapolis (two days scheduled around three different Board of Directors meetings) and approximately an additional six days scattered through the year. In addition, you will be available for consultation by telephone and e-mail. We have agreed that you will receive as compensation 20,000 option shares and a monthly cash stipend of $3,000, beginning March 1, 1998. In addition, you will be reimbursed for travel and other out of pocket expenses. Unless otherwise agreed to, the cash compensation will be address to GWG, Ltd. And the option shares will be in your name. We have a verbal understanding that the term of this agreement will be two years, but we propose that the agreement be cancelable by either party with 60 days notice. The stock options vest over a twenty-four month period. I have asked Todd Leonard to prepare and forward to you for signature a separate confidentiality agreement between GWG, Ltd. and Medi-Ject. Dr. Geoffrey Guy Page 2 February 20, 1998 We at Medi-Ject deeply appreciate your continued interest in our business, and we look forward to working more closely with you. Please sign two copies of this letter and return one to me. Sincerely yours, /s/ Franklin Pass Franklin Pass, M.D. Chairman/CEO /sf enclosures Agreed to and signed this 25th day of February, 1998. /s/ Geoffrey W. Guy - ----------------------------------------------------- Geoffrey W. Guy EX-23 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders Medi-Ject Corporation: We consent to incorporation by reference in the registration statements (Nos. 333-20389 and 333-40483) on Form S-8 of Medi-Ject Corporation of our report dated February 25, 1998, relating to the balance sheets of Medi-Ject Corporation as of December 31, 1996 and 1997, and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1997, which report is included in the annual report on Form 10-K of Medi-Ject Corporation. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota March 26, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 DEC-31-1997 9,575,240 3,745,851 1,464,277 3,537,483 550,738 783,232 12,983 22,284 351,330 397,072 12,015,191 8,512,849 1,238,584 1,967,113 642,994 801,900 12,955,791 10,047,468 827,765 708,617 8,350 1,721 0 0 0 0 69,256 70,716 12,050,420 9,266,414 12,955,791 10,047,468 1,837,704 1,686,588 3,930,859 4,222,318 1,136,272 1,221,051 5,001,221 5,935,894 0 0 0 0 31,934 37,140 (2,238,568) (2,971,767) 0 0 (2,238,568) (2,971,767) 0 0 0 0 0 0 (2,238,568) (2,971,767) (.39) (.42) (.39) (.42) INCLUDES INTEREST INCOME OF $239,055 FOR PE 12-31-96 AND $505,295 FOR PE 12-31-97.
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