<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to __________
Commission file number 0-20945
-------
MEDI-JECT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1350192
- ---------------------------------- ----------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
1840 Berkshire Lane, Minneapolis, Minnesota 55441
-------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (612) 553-1102
-------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT;
Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 19, 1997 was approximately $33,058,228 (based upon the
last reported sale price of $4.75 per share on March 19, 1997 on the Nasdaq
National Market).
The number of shares outstanding of the registrant's common stock as of March
19, 1997: 6,959,627.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G, certain responses in Part III are
incorporated herein by reference to information contained in the Company's
definitive Proxy Statement for its 1996 annual meeting to be filed on or before
April 30, 1997.
1
<PAGE>
Item 8. FINANCIAL STATEMENTS.
MEDI-JECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... 18
Balance Sheets as of December 31, 1995 and 1996...................................... 19
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996........ 20
Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994,
1995 and 1996...................................................................... 21
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... 22
Notes to Financial Statements........................................................ 23
</TABLE>
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Medi-Ject Corporation:
We have audited the accompanying balance sheets of Medi-Ject Corporation
(the Company) as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medi-Ject Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 21, 1997
18
<PAGE>
MEDI-JECT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 35,817 $ 9,575,240
Marketable securities.......................................... 0 1,464,277
Accounts receivable, less allowances for doubtful accounts of
$4,125 and $12,983, respectively.............................. 176,240 537,755
Inventories.................................................... 280,229 351,330
Prepaid expenses and other assets.............................. 35,508 86,589
----------- ------------
527,794 12,015,191
----------- ------------
Equipment, furniture and fixtures, net.............................. 477,026 595,590
----------- ------------
Patent rights....................................................... 235,288 345,010
----------- ------------
$ 1,240,108 $ 12,955,791
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 243,281 $ 353,456
Accrued expenses and other liabilities......................... 398,232 331,446
Deferred revenue............................................... 148,563 14,019
Capital lease obligations - current maturities................. 45,534 32,747
Notes payable - current maturities............................. 342,457 96,097
----------- ------------
1,178,067 827,765
----------- ------------
Long-term liabilities:
Capital leases, less current maturities........................ 40,109 8,350
Notes payable, less current maturities......................... 96,097 0
----------- ------------
136,206 8,350
----------- ------------
Shareholders' equity (deficit):
Series B convertible preferred stock: $.01 par; authorized
3,046,459 shares: 2,090,633; and 0 issued and outstanding
at December 31, 1995 and 1996, respectively................... 20,906 --
Series A convertible preferred stock: $.01 par; authorized
1,218,584 shares: 1,103,867; and 0 issued and outstanding at
December 31, 1995 and 1996, respectively...................... 11,039 --
Common Stock: $0.01 par; authorized 17,000,000 shares:
218,864 and 6,925,636 issued and outstanding at
December 31, 1995 and 1996, respectively...................... 2,189 69,256
Additional paid-in capital..................................... 9,193,600 23,590,887
Accumulated deficit............................................ (9,301,899) (11,540,467)
----------- ------------
Total shareholders' equity (deficit).......................... (74,165) 12,119,676
----------- ------------
Commitments (Notes 6 and 13)
$ 1,240,108 $ 12,955,791
=========== ============
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Sales ......................................... $1,517,660 $1,653,869 $1,837,704
Licensing & product development................ 470,000 920,937 1,854,100
---------- ---------- ----------
1,987,660 2,574,806 3,691,804
---------- ---------- ----------
Operating Expenses:
Cost of sales.................................. 630,628 1,048,937 1,136,272
Research and development....................... 401,382 1,195,435 2,584,806
General and administrative..................... 1,118,326 1,236,681 1,397,338
Sales and marketing............................ 877,522 886,792 1,019,077
---------- ---------- ----------
3,027,858 4,367,845 6,137,493
---------- ---------- ----------
Net operating loss................................ (1,040,198) (1,793,039) (2,445,689)
---------- ---------- -----------
Other income (expense):
Interest and other income...................... 15,916 16,486 239,055
Interest and other expense..................... (42,180) (105,906) (31,934)
---------- ---------- -----------
(26,264) (89,420) 207,121
---------- ---------- -----------
Net loss.......................................... $(1,066,462) $(1,882,459) $(2,238,568)
========== ========== ===========
Net loss per common share......................... -- -- $ (.39)
===========
Weighted average common shares
outstanding.................................... -- -- 5,803,346
Proforma net loss per common share
(unaudited) (Note 1)........................... -- $ (.46) --
===========
Proforma weighted average common shares
outstanding (unaudited) (Note 1................ -- 4,087,360 --
</TABLE>
See accompanying Notes to Financial Statements
20
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------
SERIES C SERIES B SERIES A
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......................... -- $ -- 761,615 $ 7,616 1,103,867 $ 11,039
Common stock:
Shares issued as compensation.................. -- --
Shares issued for cash......................... -- -- -- -- -- --
Series B:
Exercise of stock options...................... -- -- 552,171 5,522 --
Shares issued for cash......................... -- -- 175,172 1,752 -- --
Offering costs................................. -- -- -- -- -- --
Net Loss............................................ -- -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1994.......................... -- -- 1,488,958 14,890 1,103,867 11,039
Common stock:
Exercise of stock options...................... -- -- -- -- -- --
Series B:
Exercise of stock options...................... -- -- 228,483 2,284 -- --
Shares issued for cash......................... -- -- 373,192 3,732 -- --
Offering costs................................. -- -- -- -- -- --
Amendments to investor option agreement........ -- -- -- -- -- --
Net Loss............................................ -- -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1995.......................... -- -- 2,090,633 20,906 1,103,867 11,039
Conversion of Series A to common
stock.......................................... -- -- -- -- (1,103,867) (11,039)
Conversion of note payable........................ -- -- -- -- -- --
Shares issued for reverse stock split............. -- -- 43 -- -- --
Series B:
Exercise of stock options and conversion
of note payable................................ -- -- 380,808 3,808 -- --
Series C:
Shares issued for cash......................... 761,615 7,616 -- -- -- --
Offering costs................................. -- -- -- -- -- --
Series E:
Warrant issued for cash....................... -- -- -- -- -- --
Common stock:
Issued common stock pursuant to the
company's initial public offering.............. -- -- -- --
Offering costs.................................... -- -- -- -- -- --
Underwriter's warrant............................. -- -- -- -- -- --
Conversion of Series C to common stock.............. (761,615) (7,616) -- -- -- --
Conversion of Series B to common stock............. -- -- (2,471,484) (24,714) -- --
Issuance of Series B anti-dilution shares........... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1996.......................... -- $ -- -- $ -- -- $ --
======== ========= ========= ========= =========== ========
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
---------------------------
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993........................ 177,598 $ 1,776 $ 6,451,269 $(6,352,978) $ 118,722
Common stock:
Shares issued as compensation................ 37,310 373 2,029 -- 2,402
Shares issued for cash....................... 2,814 28 200 -- 228
Series B:
Exercise of stock options.................... -- -- 719,478 -- 725,000
Shares issued for cash....................... -- -- 548,248 -- 550,000
Offering costs............................... -- -- (77,863) -- (77,863)
Net Loss.......................................... -- -- -- (1,066,462) (1,066,462)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1994........................ 217,722 2,177 7,643,361 (7,419,440) 252,027
Common stock:
Exercise of stock options.................... 1,142 12 1,548 -- 1,560
Series B:
Exercise of stock options.................... -- -- 347,716 -- 350,000
Shares issued for cash....................... -- -- 1,221,268 -- 1,225,000
Offering costs............................... -- -- (65,383) -- (65,383)
Amendments to investor option agreement...... -- -- 45,090 -- 45,090
Net Loss.......................................... -- -- -- (1,882,459) (1,882,459)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1995........................ 218,864 2,189 9,193,600 (9,301,899) (74,165)
Conversion of Series A to common
stock........................................ 1,103,867 11,039 -- -- --
Conversion of note payable...................... 30,465 305 99,695 -- 100,000
Shares issued for reverse stock split........... 589 5 (5) -- --
Series B:
Exercise of stock options and conversion
of note payable.............................. -- -- 809,822 -- 813,630
Series C:
Shares issued for cash....................... -- -- 2,992,384 -- 3,000,000
Offering costs............................... -- -- (236,022) -- (236,022)
Series E:
Warrant issued for cash..................... -- -- 125,000 -- 125,000
Common stock:
Issued common stock pursuant to the
company's initial public offering............ 2,200,000 22,000 12,078,000 -- 12,100,000
Offering costs.................................. -- -- (1,470,419) -- (1,470,419)
Underwriter's warrant........................... -- -- 220 -- 220
Conversion of Series C to common stock............ 761,615 7,616 -- -- --
Conversion of Series B to common stock........... 2,471,484 24,714 -- -- --
Issuance of Series B anti-dilution shares......... 138,752 1,388 (1,388) -- --
Net loss.......................................... -- -- -- (2,238,568) (2,238,568)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1996........................ 6,925,636 $ 69,256 $23,590,887 $(11,540,467) $12,119,676
========== ========== =========== ============ =============
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996
-------------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(1,066,462) $(1,882,459) $(2,238,568)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................................. 36,945 85,960 178,526
Interest on marketable debt securities................... 0 0 (7,417)
Shares issued as compensation............................ 2,402 -- --
Amendments to investor option agreement.................. -- 45,090 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (20,639) (86,937) (361,515)
Inventories............................................. (121,547) (109,368) (71,101)
Prepaid expenses and other assets....................... 3,542 (23,190) (51,081)
Accounts payable........................................ 16,854 83,263 110,175
Accrued liabilities..................................... 90,026 107,193 (66,786)
Deferred revenue........................................ 66,250 38,563 (134,544)
----------- ----------- -----------
Net cash used in operating activities......................... (992,629) (1,741,885) (2,642,311)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities....................... 0 0 (1,456,860)
Purchases of equipment, furniture and fixtures........... (256,622) (120,392) (297,090)
Purchase of patent rights................................ -- (235,288) (109,722)
----------- ----------- -----------
Net cash used in investing activities......................... (256,622) (355,680) (1,863,672)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations.......... (26,729) (42,138) (44,546)
Proceeds from issuance of common stock................... 228 1,560 12,101,130
Proceeds from issuance of convertible preferred stock.... 1,275,000 1,575,000 3,812,500
Warrants issued.......................................... -- -- 125,220
Proceeds from issuance of notes payable.................. 100,000 125,000 187,500
Principal payments on notes payable...................... (24,967) (106,324) (429,957)
Offering costs........................................... (77,863) (65,383) (1,706,441)
----------- ----------- -----------
Net cash provided by financing activities..................... 1,245,669 1,487,715 14,045,406
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... (3,582) (609,850) 9,539,423
Cash and cash equivalents:
Beginning of year........................................ 649,249 645,667 35,817
----------- ----------- -----------
End of year.............................................. $ 645,667 $ 35,817 $ 9,575,240
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
22
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is primarily a manufacturer and distributor of needle-free
injection devices and disposables for the injection of insulin and human growth
hormone. Products are sold throughout the United States, Europe, the Middle
East, and Asia.
The Company completed an initial public offering ("IPO") of 2,200,000
shares of its common stock on October 2, 1996. Simultaneously with the closing
date of the IPO, all outstanding shares of preferred stock (consisting of
2,471,484 shares Series B, and 761,615 shares Series C) were automatically
converted into an aggregate of 3,371,851 shares of common stock. The conversion
of the Company's preferred stock to common stock, as described herein, has been
reflected in the balance sheet at December 31, 1996.
Reverse Stock Split
In connection with the Company's IPO, the Board of Directors and shareholders
approved a 1-for -1.313 reverse stock split of its common stock, effective
August 6, 1996. The effect of the stock split has been retroactively reflected
in the accompanying financial statements and notes thereto.
Net Loss Per Share
Net loss per common share is computed based upon the weighted average number
of common shares outstanding.
The unaudited pro forma net loss per common share information included in the
statement of operations for the year ended December 31, 1995 reflects the impact
of the conversion of all Preferred Shares retroactively as of the date of
issuance of the Preferred Shares. Also, pursuant to the Securities and Exchange
Commission regulations, all common and Preferred Shares issued and options and
warrants granted by the Company during the 12-month period preceding the initial
filing date of the October 1996 public offering have been included in the year
end and pro forma calculation of weighted average common and common equivalent
shares outstanding as if they were outstanding for all periods presented using
the treasury stock method and an offering price of $5.50 per share.
Cash Equivalents
The Company considers highly liquid debt instruments with original maturities
of ninety days or less to be cash equivalents.
Marketable Securities
The Company accounts for its marketable debt securities in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Company's
marketable debt securities are classified as available-for-sale. However,
because the original maturities of the Company's debt securities are less than
one year, they are reported at amortized cost which approximates fair value.
23
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out basis.
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures are stated at cost and are depreciated
using the straight-line method over their estimated useful lives ranging from 3
to 10 years.
Sales Recognition
Sales and related costs are recognized upon shipment of product to customers.
Sales are recorded net of provisions for returns and discounts.
Licensing and Product Development Revenue Recognition
Licensing and product development revenue is recognized when underlying
performance criteria for payment have been met and the Company has an
unconditional right to such payment. Depending on a license or product
development agreement's terms, recognition criteria may be satisfied upon
achievement of milestones, passage of time, or product sales by the licensee.
Payments received by the Company in excess of amounts earned are classified as
deferred revenue.
Stock-Based Compensation
Compensation expense for stock incentives granted to employees and directors
is recognized in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees." Pro forma effects on net loss and
loss per share are provided as if the fair value based method defined in
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," has been applied.
Product Warranty
The Company recognizes the estimated cost of warranty obligations to its
customers at the time the products are shipped.
Research and Development
Company sponsored research and development expenses related to both present
and future products are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases.
24
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Concentration of Credit Risk
Financial instruments that may subject the Company to concentration of credit
risk consist principally of marketable debt securities investments and trade
accounts receivable. Risks related to marketable securities purchased are
mitigated by the limitations established in the Company's investment policy.
This policy requires strong issuer credit ratings and limits the amount of
credit exposure from any one issuer or industry. For trade accounts receivable,
risks are mitigated by the large number of individual customers, long-standing
credit relationships with major distributors and a satisfactory financial
evaluation of distributors carrying substantial credit balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate estimated
fair value.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw material................... $ 145,603 $ 175,251
Work-in-process................ 80,663 119,575
Finished goods................. 53,963 56,504
---------- ----------
$ 280,229 $ 351,330
========== ==========
</TABLE>
25
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
3. EQUIPMENT, FURNITURE, FIXTURES
Equipment, furniture and fixtures consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Office equipment.............................................. $ 262,847 $ 404,811
Production equipment.......................................... 753,319 822,477
Displays...................................................... 11,296 11,296
Less Accumulated Depreciation................................. (550,436) (642,994)
--------- ---------
$ 477,026 $ 595,590
========= =========
</TABLE>
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
--------------- -----------
<S> <C> <C>
Product warranty and returns.................................. $ 71,620 $ 86,436
Payroll....................................................... 29,787 37,828
Patent rights obligation...................................... 96,500 --
Other......................................................... 200,325 207,182
--------- ---------
Other......................................................... $ 398,232 $ 331,446
========= =========
</TABLE>
5. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Unsecured notes payable, interest at 10%............................... $ 125,000 $ --
Notes payable, due in aggregate monthly payments of $11,127
including interest at 10% through October 1997. Notes are
secured by all assets of the Company.................................. 213,554 96,097
Unsecured note payable to shareholder/director, with interest
at 12% payable monthly, Convertible into
30,465 shares of common stock......................................... 100,000 --
----------- -----------
438,554 96,097
Current maturities..................................................... (342,457) (96,097)
----------- -----------
Notes payable, less current maturities................................. $ 96,097 --
========= ===========
</TABLE>
On January 25, 1996, the Company converted an unsecured note payable
totaling $312,500 (of which $125,000 was outstanding at December 31, 1995) into
190,404 shares of common stock. In addition, the holder of the debt purchased
an additional 190,404 shares of common stock for proceeds of $500,000 in
connection with a stock option exercise.
On February 29, 1996 an unsecured note payable to a shareholder totaling
$100,000, which was outstanding at December 31, 1995, was converted into 30,465
shares of common stock.
26
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
6. LEASES
The Company has a noncancelable operating lease for its office and
manufacturing facility that expires in April 1997. This lease requires the
Company to pay all executory costs such as maintenance and insurance. In
February, 1997, the Company executed a five year lease for a new facility, (See
note 13).
Rent expense incurred for the years ended December 31, 1994, 1995 and 1996
was $102,306, $107,616 and $101,139, respectively.
The Company is also obligated under noncancelable leases classified as
capital leases. The leases call for aggregate monthly payments of $4,302 with
various expiration dates through September 1999. Equipment, furniture, and
fixtures include $326,186 and $282,186 of cost and $221,341 and $221,409 of
accumulated amortization as of December 31, 1995 and 1996, respectively, related
to these leases.
Future minimum lease payments are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1997............................................................ $ 36,570 $ 27,236
1998............................................................ 7,070 --
1999............................................................ 2,412 --
-------- --------
46,052 $ 27,236
========
Amount representing interest (at rates from 12% to 20.9%)....... (4,955)
--------
Present value of minimum capital lease payments............. 41,097
Current maturities.............................................. (32,747)
--------
Obligations under capital leases less current maturities.... $ 8,350
========
</TABLE>
7. INCOME TAXES
The Company incurred losses for both book and tax purposes in each of the
three years in the period ended December 31, 1996 and, accordingly, no income
taxes were provided. Effective tax rates differ from statutory federal income
tax rates in the years ended December 31, 1996, 1995, and 1994 as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate........... (34.0)% (34.0)% (34.0)%
Valuation allowance increase................ 36.0 36.0 39.8
State income taxes, net of federal benefit.. (2.0) (2.0) (2.0)
Research and experimentation credit......... -- -- (1.6)
Other....................................... -- -- (2.2)
------ ------ ------
0.0% 0.0% 0.0%
====== ====== ======
</TABLE>
27
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Deferred taxes as of December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory reserve................ $ 72,100 $ 21,000
Net operating loss carryforward.. 3,123,600 4,012,000
Research credit carryforward..... 117,000 152,000
Other............................ 27,300 45,000
----------- -----------
3,340,000 4,230,000
Less valuation allowance........... (3,340,000) (4,230,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
("NOL") of approximately $11,100,000 for federal income tax purposes, which
begin to expire in 1997. Additionally, the Company had research credit
carryforwards of approximately $152,000, which begin to expire in 1997.
As a result of the 1996 equity changes as described in Note 8, the net
operating loss will be subject to annual limitation as defined by Section 382 of
the Internal Revenue Code. The annual limitation for utilization of the net
operating loss carryforwards is approximately $750,000. Subsequent and future
equity changes could further limit the net operating losses available.
8. SHAREHOLDERS' EQUITY
Initial Public Offering
On October 2, 1996, the Company completed an initial public offering
("IPO") of its common stock. In this offering 2,200,000 common shares were sold
at a price of $5.50 per share. As a consequence of this offering, and in
accordance with the terms of each of the various series of preferred stock that
the Company had outstanding prior to the IPO, all series of preferred shares
then outstanding and rights to acquire preferred shares were automatically
converted into common stock or rights to purchase common stock
Authorized Shares
At December 31, 1996, the total number of shares authorized for all classes
of stock was 18,000,000 shares: 17,000,000 common shares and 1,000,000 preferred
shares unissued and undesignated as to class.
Series A Preferred
On January 31, 1996, the Company converted its Series A convertible
preferred stock into common stock. Automatic conversion into common stock of the
Series A was precipitated by the Company's net worth exceeding $1.0 million.
Stock Options and Warrants
The Company has issued options and warrants for common stock to various
officers, directors, employees, lenders and others. These options and warrants
have exercise prices ranging from $0.79 to $6.60 per share and expire from
January 1997 to January 2006.
28
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
As of December 31, 1995 the Company had stock options outstanding for
380,808 shares of its Series B convertible preferred stock issued in connection
with a 1993 stock purchase agreement. This option agreement, was exercised in
full on February 29, 1996. The exercise price was $1.64 per share for 190,404
shares and $2.63 for the remaining 190,404 shares, all of which were converted
to shares of common stock in connection with the Company's IPO. Amendments
during 1995 to the Series B preferred option agreement resulted in the
recognition of $45,090 in expense. This expense was associated with decreases in
the exercise price of certain options in exchange for a short-term credit
facility, and the cancellation of a technology license and co-development
agreement.
The Company's stock option plans allow for grant of options to officers,
directors, and employees to purchase up to 995,050 shares of common stock at
exercise prices not less than 100% of fair market value on the dates of grant.
The term of the options may not exceed tens years and vest in varying periods.
Stock option and warrant activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE
SHARES PRICES
----------- ----------
<S> <C> <C>
Outstanding at December 31, 1993..................................... 1,043,282 $ 1.41
Granted............................................................ 124,995 1.61
Exercised.......................................................... (152,323) 1.31
Canceled........................................................... (7,236) 29.42
----------- ----------
Outstanding at December 31, 1994..................................... 1,008,718 1.43
Granted............................................................ 214,776 3.16
Exercised.......................................................... (229,627) 1.45
Canceled........................................................... (2,057) 3.28
----------- ----------
Outstanding at December 31, 1995..................................... 991,810 1.84
Granted............................................................ 2,942,915 5.61
Exercised.......................................................... (381,380) 1.64
Canceled........................................................... (19,959) 1.75
----------- ----------
Outstanding at December 31, 1996..................................... 3,533,386 $ 5.03
=========== ==========
</TABLE>
As of December 31, 1995 and 1996, 406,931 and 828,498 options and 584,879
and 2,704,888 warrants were outstanding, respectively.
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options and warrants was $.79 - $6.60
and 8 years, respectively. At December 31, 1995 and 1996, currently exercisable
options and warrants aggregated 238,240 and 419,875 options and 584,879 and
2,704,888 warrants, respectively and the weighted-average exercise price of
those options and warrants was $1.84 and $5.03, respectively.
The per share weighted-average fair value of stock options granted during
1995 and 1996 is estimated as $.95 and $4.16, respectively on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
1995 and 1996: expected volatility of 0 and 106 for 1995 and 1996, respectively,
risk-free interest rate of 6.0%, expected dividends of $0 and expected lives of
2.5 to 7.5 years for both years.
29
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, Accounting and Disclosure
of Stock-Based Compensation, the Company's net loss and loss per share would
have increased by approximately $97,000 or $.03 per share in 1995 and $375,000,
or $.08 per share in 1996.
Proforma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the options vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.
9. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan that covers all employees who have
met minimum age and service requirements. Under the plan, eligible employees may
contribute up to 15% of their compensation into the plan. The Company, at the
discretion of the Board of Directors, may contribute elective amounts to the
plan, allocated in proportion to employee contributions to the plan, employee's
salary, or both. No elective contributions have been made for the years ended
December 31, 1994, 1995, and 1996.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1994, the Company entered into capital lease obligations for
equipment of $111,571.
Cash paid for interest during the years ended December 31, 1994, 1995, and
1996 was $67,785, $62,515 and $30,919, respectively.
Cash paid for taxes during the years ended December 31, 1994, 1995 and 1996
was $300 in each year.
During 1996, notes payable of $125,000 and $100,000, respectively, were
converted into 190,404 shares of Series B Preferred Stock and 30,465 shares of
Common Stock, respectively.
11. SALES
The Company had a foreign customer, a distributor of the Company's
products, who accounted for approximately 5%, 18% and 18% of sales for the years
ended December 31, 1994, 1995, and 1996, respectively.
Foreign sales by geography were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Europe (primarily Germany)...... $ 14,960 $301,277 $356,838
Other........................... 146,469 319,379 221,653
-------- -------- --------
Total....................... $161,429 $620,656 $578,491
======== ======== ========
</TABLE>
Other consists mainly of sales to Asia.
30
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
12. BECTON DICKINSON ARRANGEMENT
On January 25, 1996, the Company sold 761,615 shares of common stock to
Becton Dickinson and Company ("Becton Dickinson") for $3,000,000. In addition,
the Company granted Becton Dickinson an option to purchase 380,808 shares of
common stock with an exercise price of $4.60. Warrants for 1,904,037 shares of
common stock were also granted at an exercise price of $5.91 for initial
consideration of $125,000. The Becton Dickinson option and warrant agreements
each expire on the tenth anniversary of the agreement.
In connection with the sale of equity to Becton Dickinson, the Company
entered into a licensing agreement with Becton Dickinson, which provides Becton
Dickinson exclusive worldwide rights to certain Medi-Ject technology. In
exchange for granting this exclusive right, the Company will receive $100,000
per month for 24 months beginning January 1996 to develop the technology.
13. SUBSEQUENT EVENTS
On February 11, 1997, the Company executed a lease for a new office and
manufacturing facility. The new facility consists of a total of 22,968 square
feet of space and is located in Plymouth, Minnesota, near the Company's existing
offices. The lease term is for 60 months at an average of $14,355 per month.
31
<PAGE>
* Indicates management contract or compensatory plan or arrangement.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-6661), filed with the Securities and Exchange Commission
on October 1, 1996.
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibit 10.20 were deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment, which was subsequently granted by the Securities
and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on May 5, 1997.
MEDI-JECT CORPORATION
/s/ Mark S. Derus
---------------------
Mark S. Derus
Chief Financial Officer
35
<PAGE>
Exhibit 23
Independent Auditors' Consent
The Board of Directors and Shareholders
Medi-Ject Corporation:
We consent to incorporation by reference in the Registration Statement (No.
333-20389) on Form S-8 of Medi-Ject Corporation of our report dated February 24,
1997, relating to the balance sheets of Medi-Ject Corporation as of December 31,
1995 and 1996, and the related statements of operations, shareholders' equity
(defict) and cash flows for each of the years in the three-year period ended
December 31, 1996, which report is incorporated by reference in the annual
report on Form 10-K/A-1 of Medi-Ject Corporation.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 5, 1997
