<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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)
161 Cheshire Lane, Minneapolis, Minnesota 55441
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (763) 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. [X]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 17, 2000, was approximately $7,012,000 (based upon the
last reported sale price of $5.06 per share on March 17, 2000, on the Nasdaq
Small Cap Market).
There were 1,424,729 shares of our common stock outstanding as of March 17,
2000.
Forward Looking Statements
1
<PAGE>
Certain statements included in this Form 10-K are "forward looking
statements" as defined in the Private Securities Litigation Reform Act 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") develops, manufactures and markets
novel medical devices, called jet injectors, that allow people to self-inject
drugs without using a needle. We make a small spring-action device and the
attached disposable plastic syringes to hold the drug. A liquid drug is drawn up
into the syringe through a small hole at the end. When the syringe is held
against the body and the spring is released, a piston drives the fluid stream
into the tissues beneath the skin. A person may re-arm the device and repeat the
process or attach a new sterile syringe between injections. These devices
operate without a needle at very high energy forces. Recently we have developed
a variation of the jet injector by adding a very small hidden needle. We are
thus able to greatly reduce the energy needed for injection and successfully
build small disposable injectors. Many people find our injectors to be less
threatening than ordinary needles and syringes, yet the market for such devices
remains small. We believe that the key to widespread market acceptance of our
injectors depends upon continued improvements in technology and improved
awareness among pharmaceutical companies, healthcare professionals and
consumers.
We believe that people will benefit from Medi-Ject injection systems for
several reasons. Needle-free injection (i) eliminates the need to pierce oneself
with needles for each injection, which should lead to increased compliance with
a prescribed injection regimen and, consequently, reduce health complications
and associated costs, (ii) provides the ability to inject oneself discreetly,
and (iii) eliminates the need for sharps disposal of used needles.
The injection systems with small hidden needles provide similar advantages
while (i) accommodating drugs that require additional delivery features, such
as, higher liquid volume, and (ii) providing a less expensive and totally
disposable system in situations that call for only a few injections in the home.
The small hidden needle devices are in advanced clinical testing and are
anticipated to reach the market in a few years.
All parties involved in healthcare may benefit from injection systems that
improve home drug delivery. For example, health insurance companies may benefit
from the decrease in the cost linked to poor patient compliance or the cost
associated with hospitalization. Based upon recent industry interest, we believe
that pharmaceutical companies are prepared to use jet injection to differentiate
their products in the marketplace, which may result in increased sales and
larger market share. Physicians and patients benefit from the many new,
self-injected drugs that treat previously unmanageable diseases.
Medi-Ject was a pioneer in the invention of home needle-free injection
systems in the late 1970s. Earlier needle-free injection systems were powered by
large air compressors, so their use was limited to vaccinations by the military
or school health programs. Early injectors were painful in comparison to today's
injectors, and they were large. Our first home insulin injector was five times
as heavy as the current injector, which weighs five ounces. Acceptance of our
insulin injectors has gradually expanded as functionality and ease of use have
improved and the retail consumer purchase price has been reduced from $399 to
$299. Our first growth hormone injector was introduced in Europe in 1994.
Distribution of growth hormone injectors has expanded to include Japan and other
Asian countries.
Medi-Ject is a Minnesota corporation, incorporated in February 1979. Our
offices are located at 161 Cheshire Lane, Minneapolis, Minnesota 55441;
telephone (612) 475-7700.
Industry Trends
2
<PAGE>
We believe that the requirement to inject drugs has and will continue to
hinder their acceptance, reducing patient compliance with treatment programs. We
believe that most people view piercing their skin with a needle as unpleasant.
In addition, treating diabetes often involves taking insulin during the working
or school day, and people 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. The failure to take all prescribed
injections can lead to increased health complications for the patient, decreased
drug sales for pharmaceutical companies and increased healthcare costs for
insurance companies. In addition, conventional syringe needles require special
and often costly disposal methods.
These factors have led pharmaceutical manufacturers to explore many
alternatives to needle delivery, including transdermal patches, special oral
delivery formulations and inhalation devices. In Western Europe, pharmaceutical
and medical products companies market popular, attractive pen-like injection
systems with small needles. Many Europeans are willing to pay a premium for
these systems over traditional needles and syringes. Despite promising
alternatives on the horizon, we believe that injection will continue as the
major delivery method. Many drugs are protein biopharmaceuticals which are
destroyed in the gastrointestinal tract, do not readily penetrate the skin or
are not easily formulated to be absorbed through the lungs. Furthermore, the
re-formulation of these medications for alternative delivery systems is a
costly, lengthy and risky endeavor.
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 recent
studies, 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. We believe that as the benefits of tightly controlling diabetes become
more widely known, the number of insulin injections self-administered by people
with diabetes will increase. The need to increase the number of insulin
injections given per day may also motivate diabetics to seek an alternative to
traditional needles and syringes.
Due to the substantial costs involved, our marketing efforts are not
currently focused on drug applications administered by healthcare professionals.
Needle-free injection systems, however, may be attractive to hospitals, doctors'
offices and clinics, and we 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 as well as the practice of
giving injections through intravenous tubing to reduce the number of
contaminated needles. In 1998, the State of California banned the use of exposed
needles in hospitals and doctors' offices. We believe 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. Furthermore, certain drugs, particularly experimental DNA vaccines, may
actually be more effective if delivered by jet injection.
Market Opportunity
An estimated nine to 12 billion needles and syringes are sold annually
worldwide according to industry sources. We believe that a significant portion
of these are used for the administration of drugs that could be delivered using
our injectors but that only a small percentage of people who self-administer
drugs currently use jet injection systems.
Our focus is on the market for the delivery of self-administered injectable
drugs. The largest and most mature segments of this market consist of the
delivery of insulin for diabetics and human growth hormone for children with
growth retardation. In the U.S., over 3.2 million people inject insulin for the
treatment of diabetes, resulting in an estimated 2.3 billion injections
annually, and we believe that the number of insulin injections will increase
with time as the result of new diabetes management techniques which recommend
more frequent injections. A second, attractive market has developed with growth
hormone; children suffering from growth retardation take daily hormone
injections for an average of five years. Most children are exceptionally needle
adverse, and our distributors in Europe, Japan and Asia have made significant
inroads using our injectors in their markets. Other injectable drugs that are
presently self-administered and may be suitable for injection with our systems
include therapies for the prevention of blood clots and the treatment of
multiple sclerosis, migraine headaches, impotence, hormone therapy, AIDS and
hepatitis. We also believe that many injectable drugs that are now under
development will be given by self-injection once they reach the market.
Products and Technology
3
<PAGE>
Based in part upon the results of marketing and clinical studies performed
by us, we believe that injections using a Medi-Ject injection system are
considered more comfortable and more discreet than injections using a
conventional needle and syringe.
Current Needle-Free Injection Systems
Currently, we market two needle-free systems. The Medi-Jector Choice was
introduced in December 1996 and consists of a coil spring mechanism, a dosage
meter, a multi-use disposable needle-free syringe and a plastic vial adapter. A
small, easier to use model, the Medi-Jector Vision was introduced in October
1999. The Vision replaced the Choice in the U.S. insulin market and will
gradually replace the Choice in international markets. Each injector model is
operated by first compressing a coil spring mechanism and then filling the
attached disposable plastic syringe from a multi-use medication vial. The proper
dosage is displayed in the dosage window. An injection is given by holding the
injector perpendicular to the skin in a location appropriate for the injection
and pressing the trigger button. An injector is recommended for 3,000
injections, and the needle-free plastic syringes are recommended for 7-21
injections, depending upon the drug and schedule of injections.
The U.S. retail price of the Medi-Jector Vision insulin device (excluding
the needle-free syringe) is $299. The total annual cost to the end user of
needle-free syringes and related supplies is approximately $250 per year (based
upon an average of two injections per day). The needle-free syringes used with
any of the injector 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.
New Product Research and Development
We continue to dedicate much of our financial resources and personnel
toward improving our existing products and developing new products and
technology. Specifically, we are currently developing three new injector
platforms. One platform, code named the MJ-8, represents a new concept in
needle-free delivery, incorporating a smaller power pack with a self-contained
medicinal cartridge. A second platform, referred to as the AJ-1, combines a very
low energy power source with a small hidden needle to offer a totally
disposable, single injection system best suited for high volume doses or
medications that require infrequent injections. A third platform, referred to as
the MJ-10, is a needle-free version of the disposable injector. We believe that
this diverse development program will offer pharmaceutical manufacturers a broad
and attractive array of delivery choices while providing consumers with less
expensive and more user-friendly injectors.
MJ-8 Injector. We believe the major obstacle to widespread market
acceptance of needle-free injection systems has been the lack of a suitably
compact and easy to use injector. Although we have reduced the size and
complexity of our injectors over the years, we believe further reduction in size
is possible by limiting delivery of a single dose to 0.25ml or less. To this
end, we have targeted the European insulin market where most people with
diabetes take four injections daily of 0.10ml to 0.15ml. Smaller doses require
less energy and smaller energy sources. The space conserved by reducing the
energy source is used to store a vial cartridge within the device, adding
further user convenience. Prototypes of this platform are scheduled to be tested
in clinical trials during the second quarter of 2000 and to reach the market in
2001.
AJ-1 Injector. The coil springs of our commercial needle-free injectors
limit injection volume to 0.5ml; larger fluid volumes require larger springs and
are therefore impractical. Nevertheless, injection volumes of 1.0ml or more are
not uncommon. In 1998, our engineers found that they could greatly reduce the
size of the coil spring by adding a very short, hidden needle. They concluded
that breaking the very outer layers of the skin with a small needle allows very
low energy jet injection. At lower energies, the devices could hold the drug in
small, standard, single dose cartridges. We built and successfully tested a
small, pre-filled, totally disposable small needle injector during 1999.
Engineers with Elan Corporation plc ("Elan"), a drug delivery company based
in Ireland, had developed additional proprietary technologies that complement
the Medi-Ject AJ-1 design, and in November 1998, Medi-Ject licensed the Elan
technology for certain applications. During the fourth quarter of 1999, we
collaborated with an undisclosed pharmaceutical manufacturer to successfully
adapt the design to a novel drug formulation. Should this project continue to
market, introduction could occur in 2003.
4
<PAGE>
MJ-10 Injector. Several needle-free injection companies and pharmaceutical
manufacturers are pursuing needle-free versions of the AJ-1 device with only
limited success. Our engineers believe that they have identified unique
opportunities in this field, and we are proceeding with product development.
Prototype disposable needle-free injectors will be built and tested toward the
end of 2000.
We have expended approximately $2,413,000, $3,517,000 and $2,551,000 on
research and development efforts during fiscal years 1997, 1998 and 1999,
respectively. Of these amounts, approximately $2,030,000, $527,000 and
$1,381,000, respectively, were funded by third-party sponsored development
programs and licensing fees.
Target Markets
We intend to target the following markets for use of the injector systems.
To date, the Medi-Ject systems have been approved for use in the U.S., Japan,
European and certain South East Asian countries for the administration of only
insulin and human growth hormone.
Insulin
Approximately 3.2 million people in the U.S. (approximately 40% of the
worldwide market) take insulin daily for the control of high blood sugar
observed in individuals with diabetes, according to the National Institutes of
Health. In the U.S., most individuals take two injections daily, often combining
short acting insulin and long acting insulin. In the U.S., the vast majority of
insulin users use disposable plastic syringes and needles, while in Western
Europe and Japan, the majority use pen-like injectors that hold small vial
cartridges of insulin and use small needles. The management of diabetes has been
found to be benefited by a more disciplined approach to glucose management,
including, among other things, more frequent injections. Such regimens are
referred to as "tight control" and 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. 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, the cost and complexity of
earlier injectors was not a significant barrier to use. We believe that another,
much larger group of individuals, not seriously averse to needles yet still
reluctant to pierce themselves, find it difficult to comply with injection
regimens. We believe that recent improvements in our technology make our
injectors more attractive to users in this market segment. This belief is
supported by small but significant sales and market share gains in the past two
years. Also, it is evident by recent interest expressed in the Medi-Jector
Vision by a number of prominent diabetes product distributors in the U.S. and
Europe with the signing of two new distributors in the first quarter 2000 and
the anticipated signing of an additional two in the second quarter.
Human Growth Hormone
Frequent injections of human growth hormone are received by children being
treated for growth retardation. 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 a majority of
children in the study preferred to have their human growth hormone administered
using a Medi-Ject needle-free system rather than a pen-like needle injector. We
believe that our needle-free injector system offers a marketing advantage to the
three pharmaceutical companies now distributing our growth hormone injectors.
Erectile Dysfunction
Studies estimate the number of men in the U.S. suffering from impotence to
be 10 to 20 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, prostate cancer 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. Despite the recent introduction of an oral impotence
therapy, penile injection remains an important therapy for men with advanced
stages of the disease. The first drug approved for injection in the U.S. was the
generic drug prostaglandin E1, also called alprostadil. However, we believe 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-urethral alprostadil applicator, but this method of treatment is not as
effective as the injections. The fluid stream from
5
<PAGE>
our insulin or growth hormone injectors does not penetrate deep enough to reach
the penile erectile tissues, but we have added several design changes and can
now effectively deliver saline to the proper location needle-free. We plan to
complete one or more clinical studies using active drug in 2000 to determine
whether our injector will be effective in the treatment of erectile dysfunction.
Other Target Markets
We have targeted other injectable drugs that are regularly
self-administered. These include narcotic analgesics, the anticoagulant heparin
used to prevent blood clots, certain hormone therapies and drugs to treat
osteoporosis, multiple sclerosis, AIDS and other blood disorders.
Although we have 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.
One area of intense research activity is the delivery of DNA vaccines. In
1999, a study was published demonstrating enhanced efficacy of DNA vaccines
using our injector. We have entered into a joint venture with BioSante
Pharmaceuticals to evaluate the efficacy of their experimental DNA vaccine
technology with our injectors.
Patents
We, when appropriate, actively seek protection for our products and
proprietary information by means of U.S. and foreign patents and trademarks. We
currently hold eight U.S. patents, one Japanese patent, one Taiwanese patent and
one Canadian patent. Our patents have expiration dates ranging from March 2002
to April 2019. We also have 14 other patent applications being considered in the
U.S. and various countries throughout the world.
Some of our technology is developed on our behalf by independent outside
contractors. To protect the rights of our proprietary know-how and technology,
our policy requires all employees and consultants with access to proprietary
information to execute confidentiality agreements prohibiting the disclosure of
confidential information to anyone outside 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 we have entered into development agreements have the right
to certain technology developed in connection with such agreements.
Manufacturing
We operate a manufacturing facility in compliance with current Quality
System Regulations ("QSR") established by the Food and Drug Administration
("FDA") and by the centralized European regulatory authority (ISO 9001 and EN
46,001). Injector and disposable parts are manufactured by third-party suppliers
and assembled at our facility in Plymouth, Minnesota. Quality control and final
packaging are performed on site. We anticipate 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 certain injector
systems for us in exchange for royalty payments. In 1999, we manufactured two
injector prototypes in Asia.
Marketing
Our basic business strategy is to develop and manufacture new products
specific to certain pharmaceutical applications but to market through the
existing distribution systems of pharmaceutical and medical device companies. 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. In other instances, the marketing partner may be a
medical device distributor with distribution skills unique to a specific drug.
With respect to current selling efforts, our 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-Ject needle-free
system. In the Netherlands, where they enjoy their largest market share, 22% of
6
<PAGE>
children taking growth hormone use our injector. In 1999, SciTech Genetics began
Asian distribution of our growth hormone injectors along with their drug.
During 1999, our international sales revenue accounted for 68% of our total
product sales revenue. Europe (primarily Germany) accounted for 73% of
international product sales revenue with the remainder coming primarily from
Asia. Two customers accounted for 85% of international product sales revenue and
58% of worldwide product sales revenue.
Our business development efforts are focused on entering into collaborative
agreements with pharmaceutical companies. The table below summarizes our current
collaborative and distribution agreements.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Company Market
-----------------------------------------------------------------------------------------
<S> <C>
Ferring NV....................................... Growth Hormone
(Europe)
-----------------------------------------------------------------------------------------
JCR Pharmaceuticals Co., Ltd..................... Growth Hormone
(Japan)
-----------------------------------------------------------------------------------------
SciGen Pte Ltd................................... Growth Hormone
(Asia/Pacific)
-----------------------------------------------------------------------------------------
Bio-Technology General Corporation .............. Growth Hormone
(United States)
-----------------------------------------------------------------------------------------
Chronimed (February 2000)........................ Insulin - Direct Sales
(United States)
-----------------------------------------------------------------------------------------
drugstore.com ................................... Insulin - E-Commerce
(United States)
-----------------------------------------------------------------------------------------
MediSense (Abbott Laboratories) ................. Insulin - Distribution
(Norway, Sweden)
-----------------------------------------------------------------------------------------
Beijing Wilcon, Ltd. ............................ Insulin - Distribution
(China)
-----------------------------------------------------------------------------------------
Direct Trading International .................... Insulin - Distribution
(Czech Republic)
-----------------------------------------------------------------------------------------
Prosamed ........................................ Insulin - Distribution
(Germany)
-----------------------------------------------------------------------------------------
Organon, a division of Akzo Nobel................ Undisclosed Development Program
-----------------------------------------------------------------------------------------
Becton Dickinson and Company (1) ................ Manufacturing - All Applications
(worldwide)
-----------------------------------------------------------------------------------------
BioSante Pharmaceuticals ........................ DNA vaccine research
(worldwide)
-----------------------------------------------------------------------------------------
</TABLE>
(1) Becton Dickinson has certain manufacturing rights to our disposable
needle-free syringes for any indication.
In January 1996, we entered into a strategic alliance with Becton Dickinson
that included an exclusive Development and Licensing Agreement, an equity
purchase and a seat on the Board of Directors. The agreement provided Becton
Dickinson with exclusive rights to market the Medi-Jector Vision insulin
injector and subsequent generations of injectors developed as a result of
collaborative development. In addition, Becton Dickinson held the right to
manufacture the disposable components of injector systems. In turn, Becton
Dickinson contributed funding and other resources, including dedicated
engineering skills, to the development program. We believe that with time, both
parties reached the conclusion that the Vision product and its disposable
components would not fulfill the marketing or manufacturing requirements of
Becton Dickinson. Therefore, the Development and Licensing Agreement of 1996 was
terminated in February 1999 and replaced with a new agreement. Under the terms
of the new agreement, we are free to market the Vision insulin injector and
manufacture disposables in exchange for a payment to Becton Dickinson of a
royalty on sales. Becton Dickinson retains an option to manufacture the
disposable components of the Vision system under certain conditions.
Over the past year, we have taken several steps to increase our U.S.
insulin injector distribution while lowering the associated expense. In February
1999, we established an E-commerce distribution channel that allows purchase
through the Internet, and in October 1999, we began E-commerce distribution with
drugstore.com, a leading Internet pharmacy.
7
<PAGE>
In April 1999, the FDA granted us permission to sell our insulin injectors
without requiring a prescription. In February 2000, we transferred
responsibility for the majority of our direct sales to the Home Service Medical
division of Chronimed, a leading direct diabetes consumer marketing
organization.
The most common retail price of a U.S. insulin injector (which can be used
over a period of several years) is $299, and disposable components for the
system cost approximately $250 annually. This compares to an annual cost of
approximately $140 to use two syringes with needles daily. We anticipate that
the retail price of future generations of injector systems will be less than the
current retail price.
We have made progress recently in the European insulin market. Since
establishing distribution and reimbursement in Norway during 1997, we have
extended our European insulin marketing efforts. We have signed insulin injector
distribution agreements with the MediSense division of Abbott Laboratories in
Norway and Sweden, with Prosamed in Germany and with Direct Trading
International in the Czech Republic.
Competition
Competition in the injectable drug delivery market is intensifying. We face
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.
Nevertheless, the vast majority of injections currently are administered using
needles. Because injection is typically only used when other drug delivery
methods are not feasible, our 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 we have currently
targeted. In addition, because we intend to enter into collaborative
arrangements with pharmaceutical companies, our competitive position will depend
upon the competitive position of the pharmaceutical company with which we
collaborate 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 we anticipate additional competition from companies with greater
financial, commercial, personnel and development resources in the future. Two
companies currently sell injectors to the U.S. insulin market. Medi-Ject
believes that it retains the largest market share and competes on the basis of
device size, price and ease of use.
Another company, Bioject, Inc., has sold a CO2 powered injector since 1993.
Their injector is designed for and used almost exclusively for vaccinations in
doctors' offices or public clinics. In 1998, Bioject purchased the insulin
injector business of Vitajet, and after some months of redesign, they entered
the U.S. insulin injector market. Powderject Pharmaceuticals, Plc, a British
research company, is developing a needle-free injection system, as is Weston
Medical Ltd., another U.K. based company. Both Powderject and Weston Medical
compete actively and successfully for licensing agreements with pharmaceutical
manufacturers.
Even though we expect 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. We expect we will compete with
existing needle injection methods as well as new needle injection methods yet to
be developed.
Government Regulation
Our 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 our 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
8
<PAGE>
Application ("PLA"). To the extent permitted under the FDC Act and current FDA
policy, we intend to seek the required approvals and clearance for the use of
our new injectors, as modified for use in specific drug applications such as the
treatment of erectile dysfunction, under the medical device provisions, rather
than under the new drug provisions, of the FDC Act.
Products regulated as medical devices may not be commercially distributed
in the United States unless they have been cleared or approved by the FDA,
unless otherwise exempted from the FDC Act and regulations thereunder. There are
two methods for obtaining such clearance or approvals. Certain products qualify
for a pre-market 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 pre-market 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 pre-filing testing and a longer
FDA review process. We believe that injection systems, when indicated for use
with drugs or biologicals approved by the Agency, will be regulated as medical
devices and 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 our 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. Our injectors 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, our 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 our 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 our
ability to commercialize our products and our operations.
We received 510(k) marketing clearance from the FDA allowing us to market
the Medi-Jector EZ system in February 1987, the Medi-Jector V system in October
1988, the Medi-Jector V system to administer Bio-Technology General
Corporation's human growth hormone in April 1996, and the Medi-Jector Choice
system in October 1996.
We expect in the future to submit 510(k) notifications with regard to
further device design improvements and uses with additional drug therapies.
The FDC Act also regulates our quality control and manufacturing procedures
by requiring us and our contract manufacturers to demonstrate compliance with
the current Quality System Regulations ("QSR"). The FDA's interpretation and
enforcement of these requirements have been increasingly strict in recent years
and seems likely to be
9
<PAGE>
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 violate 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 our devices from the marketplace.
The FDA's Medical Device Reporting Regulation requires that we provide
information to the FDA on the occurrence of any death or serious injuries
alleged to have been associated with the use of our 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 we were not in compliance with these regulations, it could
institute proceedings to detain or seize our devices, issue a recall, seek
injunctive relief or assess civil and criminal penalties against us or our
executive officers, directors or employees.
We also are 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 U.S. are subject to foreign legal
and regulatory requirements. Our 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. We rely upon the companies
marketing our injectors in foreign countries to obtain the necessary regulatory
approvals for sales of our injectors in those countries. Generally, devices
having an effective 510(k) clearance or PMA may be exported without further FDA
authorization.
We have obtained ISO 9001/EN 46001 systems. This certification shows that
our procedures and manufacturing facilities comply with standards for quality
assurance and manufacturing process control. Such certification, along with
European Medical Device Directive certification, evidence compliance with the
requirements enabling us to affix the CE Mark to our 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.
Employees
As of December 31, 1999, we employed 36 full-time and 4 part-time
employees. None of our employees are represented by any labor union or other
collective bargaining unit. We believe that our relations with our employees is
good.
Liability Insurance
The business of the Company entails the risk of product liability claims.
Although we have not experienced any material product liability claims to date,
any such claims could have a material adverse impact on our business. We
maintain product liability insurance with coverage of $1 million per occurrence
and an annual aggregate maximum of $5 million. We evaluate our insurance
requirements on an ongoing basis.
Item 2. DESCRIPTION OF PROPERTY.
We lease 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. We believe our facility will be sufficient to meet our
requirements through such time.
Item 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
10
<PAGE>
No matters were submitted to a vote of shareholders during the quarter
ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
Franklin Pass, M.D. .... 63 President, Chief Executive Officer and
Chairman of the Board of Directors
Lawrence Christian ..... 57 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Peter Sadowski, Ph.D. .. 52 Executive Vice President and Chief
Technology Officer
Franklin Pass, M.D., joined the Company as a director and consultant in
January 1992 and has served as our President, Chief Executive Officer and
Chairman of the Board of Directors since February 1993. From 1990 to 1992, Dr.
Pass served as President of International Agricultural Investments, Ltd., an
agricultural technology consulting and investment company. Dr. Pass, a physician
and scientist, was Director of the Division of Dermatology at Albert Einstein
College of Medicine from 1967 to 1973, the Secretary and Treasurer of the
American Academy of Dermatology from 1978 to 1981 and the co-founder and Chief
Executive Officer of Molecular Genetics, Inc., now named MGI Pharma, Inc., from
1979 to 1986. He is the author of more than 40 published medical and scientific
articles. Dr. Pass serves on the board of directors of Verdant Brands Inc., a
manufacturer of lawn and garden care products.
Lawrence Christian joined the Company in March 1999 as Vice President,
Finance & Administration, Chief Financial Officer and Secretary. Mr. Christian
took early retirement from 3M after a 16-year career. Since 1996 Mr. Christian
had been 3M Financial Manager - World-Wide Corporate R&D and Government
Contracts involved in organizing new business venture units and
commercialization of new technologies. Prior to 1996 Mr. Christian served as
Financial Merger - Government Contracts, European Controller and Division
Controller within 3M. Prior to joining 3M in 1982, Mr. Christian was Vice
President/CFO of APC Industries, Inc., a closely-held telecommunications
manufacturing company in Texas.
Peter Sadowski, Ph.D., joined the Company in March 1994 as Vice President,
Product Development. He was promoted to Executive Vice President and Chief
Technology Officer in 1999. 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.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our Common Stock has traded on the Nasdaq Small Cap Market of the Nasdaq
Stock Market since March 8, 1999. Prior to that time, the Common Stock traded on
the Nasdaq National Market of the Nasdaq Stock Market. The Common Stock is
traded under the symbol MEDJ. The following table sets forth the per share high
and low sales prices of our Common Stock for each quarterly period during the
two most recent fiscal years. Sales prices are as reported by the Nasdaq Stock
Market. All figures have been adjusted for a one-for-five reverse split
effective January 28, 1999.
High Low
---- ---
1998:
11
<PAGE>
First Quarter $14.375 $7.500
Second Quarter 12.500 6.500
Third Quarter 9.688 5.625
Fourth Quarter 5.625 1.563
1999:
First Quarter 5.375 1.625
Second Quarter 7.000 1.281
Third Quarter 4.219 1.875
Fourth Quarter 3.875 1.500
Common Shares Holders
As of March 17, 2000, there were 127 holders of record of the Company's
common stock, with another estimated 2,099 shareholders whose stock is held by
nominees or broker dealers.
Dividends
We have not paid or declared any cash dividends on our common stock during
the past five years. We have no intention of paying cash dividends in the
foreseeable future on common stock. We are liable to pay semi-annual dividends
on Series A Convertible Preferred Stock at a rate of 10%, payable on May 10 and
November 10 each year. In addition to the stated 10% dividend, we are also
obligated to pay foreign tax withholding on the dividend payment, which equates
to an effective dividend rate of 14.2%. Such foreign tax withholding payments
have been reflected as dividends since they are non-recoverable.
Sales of Unregistered Securities
On November 10, 1998, we sold 1,000 shares of Series A Convertible
Preferred Stock ("Series A") and warrants to purchase 56,000 shares of Common
Stock to Elan International Services, Ltd., for total consideration of
$1,000,000. The Series A carries a 10% dividend which is payable semi-annually.
In addition to the stated 10% dividend, we are also obligated to pay foreign tax
withholding on the dividend payment, which equates to an effective dividend rate
of 14.2%. Such foreign tax withholding payments have been reflected as dividends
since they are non-recoverable. The Series A is redeemable at our option at any
time and is convertible into Common Stock for sixty days following the 10th
anniversary of the date of issuance at the lower of $7.50 per share or 95% of
the market price of the Common Stock. Under certain limited circumstances where
certain conditions fail to be met, the Series A may be converted at our election
within 30 days of the second anniversary of the date of issuance at the market
price of the Common Stock at such time. The warrants to purchase Common Stock
may be exercised at any time prior to November 10, 2005, at a price of $15.00
per share. The proceeds from the sale of these securities were used primarily to
fund the purchase of certain technology from Elan Corporation. There was no
underwriter involved and no fees were paid to any other parties in connection
with this transaction. These securities were exempt from registration because
they were issued to a single accredited investor in a private placement pursuant
to Section 4(2) of the Securities Act of 1933.
On December 22, 1999, we sold 250 shares of Series B Convertible Preferred
Stock ("Series B") to Bio-Technology General Corporation for total consideration
of $250,000. The Series B does not carry a dividend rate. A holder of Series B
Stock may choose to convert the Series B Stock into Medi-Ject Common Stock after
the "Permissible Conversion Events," which is defined as a combination of
increasing our authorized Common Stock from 3,400,000 shares to at least
10,000,000 shares and receiving necessary approvals under the Nasdaq listing
requirements. In the event that a holder does not convert, an Automatic
Conversion will occur on the later of (i) the date of occurrence of Permissible
Conversion Events or (ii) June 30, 2001. The conversion price will be the lower
of (i) the average of the closing prices per share of our Common Stock for the
twenty (20) consecutive trading days immediately preceding the conversion date,
or (ii) $2.50 per share. The Series B has certain preference rights over holders
of Common Stock and is subordinated to Series A in liquidation rights. The
proceeds from the sale of these securities were used primarily for working
capital. There was no underwriter involved and no fees were paid to any other
parties, except legal fees, in connection with this transaction. These
securities were exempt from registration because they were issued to a single
accredited investor in a private placement pursuant to Section 4(2) of the
Securities Act of 1933.
Item 6. SELECTED FINANCIAL DATA
12
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .................... $ 36 $ 11,039 $ 7,283 $ 2,852 $ 85
Working capital (deficit) .................... (650) 11,187 7,804 3,068 (198)
Total assets ................................. 1,240 12,956 10,047 5,334 2,010
Long-term liabilities, less current maturities 136 8 2 -- 54
Mandatorily redeemable preferred stock ....... -- -- -- -- 250
Accumulated deficit .......................... (9,302) (11,540) (14,512) (20,296) (24,148)
Total shareholders' equity (deficit) ......... $ (74) $ 12,120 $ 9,337 $ 4,630 $ 803
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales ........................................ $ 1,654 $ 1,838 $ 1,687 $ 2,172 $ 2,101
Licensing and product development ............ 921 1,854 2,030 527 1,381
-------- -------- -------- -------- --------
Revenues ................................... 2,575 3,692 3,717 2,699 3,482
-------- -------- -------- -------- --------
Cost of sales ................................ 1,049 1,136 1,221 1,854 1,786
Research and development ..................... 1,195 2,585 2,413 3,517 2,551
Sales and marketing .......................... 887 1,019 1,540 948 1,058
General and administrative ................... 1,237 1,397 1,983 2,426 1,831
-------- -------- -------- -------- --------
Operating expenses ......................... 4,368 6,137 7,157 8,745 7,226
-------- -------- -------- -------- --------
Net operating loss ........................... (1,793) (2,445) (3,440) (6,046) (3,744)
Net other income (expense) ................... (89) 207 468 276 41
-------- -------- -------- -------- --------
Net loss ..................................... $ (1,882) $ (2,238) $ (2,972) $ (5,770) $ (3,703)
======== ======== ======== ======== ========
Net loss per common share (1), (2), (3) ........... $ (43.03) $ (4.22) $ (2.12) $ (4.07) $ (2.70)
======== ======== ======== ======== ========
Weighted average number of
common shares (3) ................................. 44 530 1,402 1,421 1,425
</TABLE>
(1) Basic and diluted loss per share amounts are identical as the effect of
potential common shares is anti-dilutive.
(2) We have not paid any dividends on our Common Stock since inception. In
November 1998, we issued a new Series A Convertible Preferred Stock which
requires the payment of dividends. The 1998 and 1999 loss per common share
has been adjusted to reflect the accrual of these dividends.
(3) All share and per share figures have been retroactively adjusted for a
one-for-five reverse stock split effective January 28, 1999.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Medi-Ject Corporation designs, manufactures and markets needle-free and
small-needle injection systems. In 1993, we hired a new management team with the
goal of revitalizing and redefining our strategic direction. Since that time,
product development efforts have increased, emphasizing reductions in the cost
of our 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 injectable 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 injector
systems. The licensing and development income from these agreements has been
used primarily to fund increased product development efforts. Development
efforts have resulted in new generations of injector systems; 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, and the Medi-Jector Vision system, introduced in October 1999, which is
easier to use and provides a longer life disposable needle-free syringe. Current
development efforts are
13
<PAGE>
primarily oriented toward improved injection quality, improved features, ease of
use, and continued size and cost reduction.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1999
Revenues increased from approximately $2,699,000 in 1998 to approximately
$3,482,000 in 1999, or approximately 29%. This increase was primarily due to an
increase in licensing and development fee income of approximately $854,000 or
162% offset in part by a decrease in product sales of approximately $71,000 or
3%. Product sales include sales of injectors, related parts, disposable
components, and repairs. The total number of devices sold decreased from 4,178
in 1998 to 3,970 in 1999, a decrease of 5%, while revenue from the sale of
disposable parts increased 5%.
The product sales decrease is due primarily to the decreased sales of
growth hormone injectors in international markets that reflected strong sales in
1998 due to initial market entry. The decrease was offset in part by higher
sales in the domestic insulin market following FDA approval of the sale of our
device without prescription, increased advertising and a new model introduction
in the fourth quarter.
Licensing and development fee income increased primarily due to settlement
in March 1999 of obligations under a contract with Schering-Plough Corporation
dated January 20, 1999. We received a one-time payment of an undisclosed amount
from Schering-Plough in exchange for cancellation of a product purchase order
and as reimbursement for certain non-cancelable manufacturing expenses. We
expect 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 we do not recognize project-based fee income until related
development work has been performed, quarterly results will fluctuate with the
timing of our research and development efforts.
Cost of sales decreased from approximately $1,854,000 in 1998 to
approximately $1,785,000 in 1999, a decrease of 4%. This decrease relates
primarily to the 21% decrease in unit sales of products used in growth hormone
applications, partially offset by an increase in cost of sales due to increases
in disposables production.
Manufacturing overhead decreased from $1,139,000 in 1998 to $872,000 in
1999, a decrease of 23%. This primarily resulted from decreasing manufacturing
staffing by four people in October 1998 - a purchasing manager, a manufacturing
engineer and two quality inspectors/analysts charged to manufacturing overhead.
Other than a severance payment of $8,257 paid at termination, there were no
future financial obligations relating to this staff reduction.
Research and development expenses decreased from approximately $3,517,000
in 1998 to approximately $2,551,000 in 1999, a decrease of 27%. The decrease in
1999 is primarily due to the 1998 one-time purchase of intellectual property
rights to proprietary small-needle injection technology from Elan Corporation,
plc, partially offset by the agreed settlement of a product development dispute
of $134,000. The technology purchased in 1998 must be proven technically
feasible and additional investments made in order to advance to a viable
product; accordingly, the cost of the rights were charged to operating expense
in 1998.
Sales and marketing expenses increased approximately $110,000 or 12% from
$948,000 in 1998 to $1,058,000 in 1999. This increase is due primarily to
increased expenses generated for advertising, web-site introduction, preparation
for e-commerce sales and literature related to the launch of a new line of
products in the fourth quarter of 1999.
General and administrative expenses decreased from approximately $2,427,000
in 1998 to approximately $1,831,000 in 1999, a decrease of $595,000 or 25%. This
decrease was primarily driven by three factors. The first was a decrease in
payroll costs of approximately $197,000 attributable to staffing reductions
completed in October 1998. The second factor was a decrease of $161,000 in
patent amortization and depreciation expense. This decrease relates primarily to
a 1998 write down of $125,000 capitalized patent costs related to a novel
injector energy source. The write down was taken in 1998 as activities on this
project were temporarily suspended after improvements on coil spring designs
became available. Management believes the novel energy source has certain
features which may be valuable in future generation injection systems and, after
the write down, has a reasonable future value; therefore, we will continue to
monitor the recoverability of the remaining patent asset on an ongoing basis.
The third factor contributing to the decrease in general and administrative
expenses for the period was a decrease of approximately $72,000 in travel
expenses mainly due to reduced staffing in this department. Legal and business
insurance expense also decreased by $72,000 related to planned spending
reductions.
Interest and other income decreased from approximately $292,000 in 1998 to
approximately $66,000 in 1999, a decrease of $226,000. This decrease is
attributable to reduced interest earnings on lower average cash reserves during
1999. Interest and other expense increased by approximately $10,000 from
approximately $15,000 in 1998 to approximately $25,000 in 1999 due primarily to
interest on a note payable.
14
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Revenues decreased from approximately $3,717,000 in 1997 to approximately
$2,699,000 in 1998, a decrease of approximately 27%. This decrease was primarily
due to a decrease in licensing and development fee income of approximately
$1,503,000 or 74% offset in part by an increase in product sales of
approximately $485,000 or 29%. Product sales include sales of injectors, related
parts and disposable components, repairs and freight. The total number of
devices sold increased from 3,391 in 1997 to 4,178 in 1998, an increase of 23%,
and revenue from the sale of disposable parts increased 63%.
The product sales increase is due primarily to the increased sales in the
human growth hormone market. The increase was offset in part by lower sales in
the domestic insulin market following a reduction in sales efforts in this area.
The increase in disposable parts revenue is primarily due to the increase in
device sales in the human growth hormone market.
Licensing and development fee income decreased primarily due to completion
in December 1997 of a two year product development funding contract with Becton
Dickinson Company. We expect 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 we do not recognize project
based fee income until related development work has been performed, quarterly
results will fluctuate with the timing of our research and development efforts.
The product sales increase is due primarily to the increased sales in the
human growth hormone market. The increase was offset in part by lower sales in
the domestic insulin market following a reduction in sales efforts in this area.
The increase in disposable parts revenue is primarily due to the increase in
device sales in the human growth hormone market.
Cost of sales increased from approximately $1,221,000 in 1997 to
approximately $1,854,000 in 1998, an increase of approximately 52%. This
increase relates primarily to an increase in the amount of product sold in 1998
along with higher overall manufacturing overhead. Manufacturing overhead
increased primarily due to increased scrap, depreciation and compensation
expense. A majority of the approximately $100,000 increase in scrap expense
relates to the discontinuance of an older product line and the cost to relieve
inventory of certain parts. The depreciation expense increase is primarily due
to the introduction of certain new product tooling. Compensation expense
increased due to scale up efforts in anticipation of a large order from Schering
Plough that did not materialize.
Research and development expenses increased from approximately $2,413,000
in 1997 to approximately $3,517,000 in 1998, an increase of approximately 46%.
This increase is primarily due to the purchase of intellectual property rights
to proprietary small-needle injection technology from Elan Corporation, plc.
This technology must be proven technically feasible and additional investments
made in order to advance to a viable product; accordingly, the cost of the
rights were charged to operating expense.
Sales and marketing expenses decreased from approximately $1,540,000 in
1997 to approximately $948,000 in 1998, a decrease of approximately 38%. Reduced
expenses in the sales and marketing program reflect our planned reduction in
sales efforts in the U.S. insulin market. This reduction was initiated in late
1997 and is consistent with our long term strategy of selling our products
through pharmaceutical and medical products companies.
General and administrative expenses increased from approximately $1,983,000
in 1997 to approximately $2,427,000 in 1998, an increase of approximately
$444,000 or 22%. This increase was primarily driven by three factors. The first
is an increase of $173,000 related to on-going quality assurance efforts and
non-recurring expenses incurred in the ISO certification process completed in
June 1998. The second factor is an increase of $157,000 in depreciation and
patent amortization expense. This increase relates primarily to a patent
amortization write down of $125,000 in the fourth quarter following the
suspension of development activities relating to a novel injector energy source.
Activities on this project were temporarily suspended after improvements on coil
spring designs became available. Management believes the novel energy source has
certain features which may be valuable in future generation injection systems
and, after the write down, has a reasonable future value; therefore, we will
continue to monitor the recoverability of the remaining patent asset on an
ongoing basis. A third major factor contributing to the increase in general and
administrative expenses for the period is an expense of $75,000 relating to our
repurchase of certain distributor rights in the human growth hormone market from
one of our distributors. The repurchase of these rights has allowed us to sign a
new agreement that is expected to generate fee income and has begun to result in
product sales.
15
<PAGE>
Interest and other income decreased from approximately $505,000 in 1997 to
approximately $292,000 in 1998, a decrease of approximately $213,000. This
decrease is attributable to reduced interest earnings on lower average cash
reserves during 1998.
Liquidity and Capital Resources
Our cash decreased from approximately $2,852,000 on December 31, 1998 to
approximately $85,000 at December 31, 1999. The decrease is primarily due to a
net loss of approximately $3,703,000 and fixed asset purchases of approximately
$303,000 offset in part by a sale of preferred stock to Bio-Technology General
Corporation, non-cash depreciation and amortization expenses, and by accelerated
collections on accounts receivable balances at the end of 1999.
During the year ended December 31, 1999, cash used to fund operating
activities was approximately $2,633,000. The major components of this amount
included a net loss of approximately $3,703,000 and a decrease in deferred
revenue of approximately $216,000, offset by depreciation and amortization
totaling approximately $461,000, loss on disposal of assets of approximately
$174,000, decrease in accounts receivable, inventories and prepaid expense of
approximately $108,000, $163,000, and $29,000, respectively, along with
increases in accounts payable and accrued liabilities of $87,000 and $234,000,
respectively. Net cash used in investing activities totaled approximately
$378,000 principally due to additions to fixed assets of approximately $303,000,
and an additional investment in patent rights totaling approximately $75,000.
Net cash provided by financing activities totaled approximately $245,000,
resulting primarily from the issuance of mandatorily redeemable convertible
preferred stock for $250,000.
Our financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities and
other commitments in the normal course of business. Our Auditors Report has a
going concern qualification raising doubt about our ability to continue as a
viable company. We incurred net losses of approximately $2,972,000, $5,769,000
and $3,703,000 in 1997, 1998 and 1999, respectively. In addition, we incurred
net losses and have had negative cash flows from operating activities since
inception.
We expect to report a net loss for the year ending December 31, 2000 as we
continue to incur marketing and development costs related to bringing future
generations of products to market. Our long term capital requirements will
depend on numerous factors, including the status of collaborative arrangements,
the progress of research and development programs and the receipt of revenues
from sales of products.
To continue our existence, we will be required to raise additional working
capital or merge with another entity or both. We currently anticipate the
business combination transaction with Permatec Holding AG, discussed in Notes 2
and 13(b), will be consummated. The business combination is contingent on the
parties raising $10 million to fund both operations after closing of the
transaction. If the Permatec business combination does not occur, a note
payable, incurred in conjunction with the anticipated transaction, will be
payable in full December 31, 2000, and we will need to seek other sources of
capital or pursue other business combinations. We can provide no assurance that
we will ever become profitable or that we will be able to raise additional
capital, on terms acceptable to us, or at all.
Our financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary if we are unable to
continue as a going concern
Impact of the Year 2000
Based on our assessment of operations through March 15, 2000, we have not
experienced any significant Year 2000 issues. We will continue to monitor areas
of concern throughout the Year 2000 transition period as additional information
becomes available. There can be no assurance that we will not experience serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in our internal operating systems,
which are composed primarily of third party software and hardware technology, or
by the inability of our vendors or customers to correct their Year 2000 issues.
The majority of our current standard product lines and manufacturing equipment
are not date sensitive and therefore are not directly affected by the Year 2000
issues.
Stock Option Repricing
16
<PAGE>
On July 21, 1998, our Board of Directors approved the repricing of all
outstanding options held by employees, other than our Chief Executive Officer,
which had an exercise price greater than $7.20 per share. This repricing action
reduced the exercise price to $7.20 per share for stock option agreements
representing approximately 100,000 shares which had exercise prices ranging from
$7.80 to $25.00. Following the repricing, all other terms and conditions of
these option agreements were unchanged, including the vesting schedules.
On December 8, 1998, our Board of Directors approved the repricing of one
stock option agreement held by our Chief Executive Officer, which had an
exercise price of $26.90 per share. This option agreement totals 80,000 shares
and its exercise price was reduced to $7.20 per share. Following the repricing,
all other terms and conditions of this option agreement were unchanged,
including its vesting schedule.
On May 20, 1999, our Board of Directors approved the repricing of all
outstanding Non-Qualified Stock Options held by our directors which had an
exercise price greater than $3.50 per share. This repricing action reduced the
exercise price to $3.50 per share for Non-Qualified Stock Option Agreements
representing approximately 24,115 shares which had exercise prices ranging from
$9.05 to $25.00 per share. Following the repricing, all other terms and
conditions of these option agreements were unchanged, including the vesting
schedules.
On December 21, 1999, our Board of Directors approved the repricing of all
outstanding Qualified and Non-Qualified Stock Options, as of January 3, 2000,
held by our employees and directors, which had an exercise price greater than
$1.5625 per share. This repricing action reduced the exercise price to $1.5625
per share for all such Stock Option Agreements, representing approximately
252,517 shares which had exercise prices ranging from $1.75 to $25.00 per share.
Following the repricing, all other terms and conditions of these option
agreements were unchanged, including the vesting schedules.
Recent Developments
In January 2000, we signed a non-binding letter of intent with Permatec
Holding AG, a privately-held drug delivery company located in Basel,
Switzerland, to combine operations. Under the terms of the letter of intent, the
parties are currently negotiating the purchase of certain Permatec subsidiaries
by us in exchange for up to approximately 60% of our Common Stock. Permatec is
owned by Jacques Gonella, an entrepreneur and founder of Jago Pharma, now part
of SkyePharma plc. Permatec develops and licenses certain pharmaceutical
formulation technologies, including transdermal patches and topical gels. In
January and March 2000, Permatec invested a total of $500,000 in a Medi-Ject
convertible note, which will convert to common stock at the completion of the
business combination. If the Permatec transaction does not close, the note will
be payable in full on December 31, 2000.
In February 2000, we signed an agreement with Chronimed for distribution of
our needle-free injection devices and supplies to the U.S. diabetes market.
Chronimed is a publicly-held, diversified healthcare company that develops,
markets and distributes pharmaceuticals, medical products and other specialized
services for people with long-term conditions such as diabetes, HIV/AIDS, organ
transplants and select diseases treated with self-injectable drugs. The
distribution agreement is with Home Service Medical & Pharmacy (HSM), the direct
marketing division of Chronimed, which sells medical supplies and prescription
drugs to the consumer through mail order catalogs.
New Accounting Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," effective for the year ending December 31, 2001, will require
derivatives to be recorded on the balance sheet as assets or liabilities,
measured at fair value. At the present time, we have not yet made a
determination of the impact the adoption will have on our consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
We will be required to adopt the new standard beginning with the second quarter
of fiscal 2000. The impact of adoption on our financial statements is not yet
quantifiable.
Item 7(a). MARKET RISK ASSESSMENT
17
<PAGE>
Under Items 305(b) and 9A of Regulation S-K, we believe that we have no
material exposure to market risks. All foreign sales are denominated and
transacted in U.S. dollars and our outstanding shares of convertible preferred
stock have either a fixed coupon rate or are non-interest bearing.
18
<PAGE>
Item 8. FINANCIAL STATEMENTS.
MEDI-JECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report..........................................................20
Balance Sheets as of December 31, 1998 and 1999.......................................21
Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999.........22
Statements of Shareholders' Equity for the Years Ended December 31, 1997,
1998 and 1999.......................................................................23
Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.........24
Notes to Financial Statements.........................................................25
</TABLE>
19
<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, 1998 and 1999, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 13(b) to
the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Notes 2 and 13(b). The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 8, the accompanying financial statements have been
restated to reclassify the Series B convertible preferred stock outside of
permanent equity.
KPMG LLP
Minneapolis, Minnesota
February 18, 2000, except as to the
effect of matters discussed in Note 14,
which is as of September 15, 2000
20
<PAGE>
MEDI-JECT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
------------ ------------
ASSETS (as restated,
see Note 14)
<S> <C> <C>
Current Assets:
Cash ........................................................ $ 2,852,285 $ 85,136
Accounts receivable, less allowances for doubtful accounts of
$25,000 and $25,000, respectively ......................... 275,694 167,301
Inventories ................................................. 592,185 429,472
Prepaid expenses and other assets ........................... 52,006 23,263
------------ ------------
3,772,170 705,172
------------ ------------
Equipment, furniture and fixtures, net ............................... 1,278,456 1,002,554
------------ ------------
Patent rights, net ................................................... 283,805 302,410
------------ ------------
$ 5,334,431 $ 2,010,136
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 250,512 $ 337,927
Accrued expenses and other liabilities ...................... 236,191 551,104
Deferred revenue ............................................ 216,000 --
Capital lease obligations - current maturities .............. 1,721 --
Note payable obligations - current maturities ............... -- 14,156
------------ ------------
704,424 903,187
------------ ------------
Note payable, less current maturities ................................ -- 54,094
------------ ------------
Total liabilities .................................................... 704,424 957,281
------------ ------------
Mandatorily Redeemable Series B Convertible Preferred Stock:
$0.01 par; authorized 250 shares; 250 issued and outstanding at
December 31, 1999 ............................................... -- 250,000
Shareholders' equity:
Preferred Stock: $0.01 par; authorized 1,000,000 shares:
Series A Convertible Preferred Stock: $0.01 par; authorized
10,000 shares; 1,000 issued and outstanding at
December 31, 1998 and 1999, aggregate liquidation
preference of $1 million ................................. 10 10
Common Stock: $0.01 par; authorized 3,400,000 shares;
1,424,752 and 1,424,729 issued and outstanding at
December 31, 1998 and 1999, respectively .................. 14,247 14,247
Additional paid-in capital ...................................... 24,911,694 24,936,433
Accumulated deficit ............................................. (20,295,944) (24,147,835)
------------ ------------
4,630,007 802,855
------------ ------------
Commitments (Notes 4, 5 and 6)
$ 5,334,431 $ 2,010,136
============ ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(as restated,
see Note 14)
<S> <C> <C> <C>
Revenues:
Sales .................................... $ 1,686,588 $ 2,171,881 $ 2,100,735
Licensing & product development .......... 2,030,435 527,364 1,381,127
----------- ----------- -----------
3,717,023 2,699,245 3,481,862
----------- ----------- -----------
Operating Expenses:
Cost of sales ............................ 1,221,051 1,853,715 1,785,464
Research and development ................. 2,413,366 3,516,856 2,550,773
Sales and marketing ...................... 1,539,504 947,866 1,058,364
General and administrative ............... 1,983,024 2,426,639 1,831,229
----------- ----------- -----------
7,156,945 8,745,076 7,225,830
----------- ----------- -----------
Net operating loss ............................. (3,439,922) (6,045,831) (3,743,968)
----------- ----------- -----------
Other income (expense):
Interest and other income ................ 505,295 291,521 66,018
Interest and other expense ............... (37,140) (15,154) (25,489)
----------- ----------- -----------
468,155 276,367 40,529
----------- ----------- -----------
Net loss ....................................... (2,971,767) (5,769,464) (3,703,439)
Preferred stock dividends ...................... -- (14,246) (148,452)
----------- ----------- -----------
Net loss applicable to common shares ........... $(2,971,767) $(5,783,710) $(3,851,891)
=========== =========== ===========
Basic and diluted net loss per common share .... $ (2.12) $ (4.07) $ (2.70)
=========== =========== ===========
Basic and diluted weighted average common shares
outstanding .............................. 1,402,140 1,421,066 1,424,731
</TABLE>
See accompanying notes to financial statements
22
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(as restated, see Note 14)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock
--------------
Series A Common stock Additional
-------------- --------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ............... -- $ -- 1,385,127 $ 13,851 $ 23,646,292 $(11,540,467) $ 12,119,676
Exercise of stock options and warrants -- -- 29,191 292 183,934 -- 184,226
Compensation expense, stock options ... -- -- -- -- 4,995 -- 4,995
Net loss .............................. -- -- -- -- -- (2,971,767) (2,971,767)
------ ----- ---------- -------- ------------ ------------ ------------
Balance, December 31, 1997 ............... -- -- 1,414,318 14,143 23,835,221 (14,512,234) 9,337,130
Issuance of Series A preferred stock .. 1,000 10 -- -- 999,990 -- 1,000,000
Dividends payable on preferred stock .. -- -- -- -- -- (14,246) (14,246)
Financing cost ........................ -- -- -- -- (18,937) -- (18,937)
Exercise of stock options and warrants -- -- 10,434 104 64,476 -- 64,580
Compensation expense, stock options ... -- -- -- -- 30,944 -- 30,944
Net loss ............................ -- -- -- -- -- (5,769,464) (5,769,464)
------ ----- ---------- -------- ------------ ------------ ------------
Balance, December 31, 1998 ............... 1,000 10 1,424,752 14,247 24,911,694 (20,295,944) 4,630,007
Dividends payable on preferred stock .. -- -- -- -- -- (148,452) (148,452)
Financing cost ........................ -- -- -- -- (4,934) -- (4,934)
Redemption of fractional shares ....... -- -- (23) -- (66) -- (66)
Compensation expense, stock options ... -- -- -- -- 29,739 -- 29,739
Net loss ............................ -- -- -- -- -- (3,703,439) (3,703,439)
------ ----- ---------- -------- ------------ ------------ ------------
Balance, December 31, 1999 ............... 1,000 $ 10 1,424,729 $ 14,247 $ 24,936,433 $(24,147,835) $ 802,855
====== ===== ========== ======== ============ ============ ============
</TABLE>
See accompanying notes to financial statements
23
<PAGE>
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(2,971,767) $(5,769,464) $(3,703,439)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................ 326,065 596,727 461,343
Loss on disposal and abandonment of assets ............... 17,079 9,445 173,682
Interest on marketable debt securities ................... (246,813) (176,086) --
Compensation expense ..................................... 4,995 30,944 29,739
Changes in operating assets and liabilities:
Accounts receivable .................................... (223,193) 485,254 108,393
Inventories ............................................ (45,742) (195,113) 162,713
Prepaid expenses and other assets ...................... 15,094 19,489 28,743
Accounts payable ....................................... (31,698) (71,246) 87,415
Accrued liabilities .................................... 48,330 (157,831) 233,921
Deferred revenue ....................................... (14,019) 216,000 (216,000)
----------- ----------- -----------
Net cash used in operating activities ............................. (3,121,669) (5,011,881) (2,633,490)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities ....................... (6,975,059) (2,729,831) --
Proceeds from sales of marketable securities ............. 5,148,666 6,443,400 --
Purchases of equipment, furniture and fixtures ........... (859,373) (516,186) (302,743)
Proceeds from sale of equipment, furniture & fixtures .... -- 2,200 --
Payments for patent rights ............................... (77,790) (119,828) (74,985)
----------- ----------- -----------
Net cash provided by (used in) investing activities ............... (2,763,556) 3,079,755 (377,728)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable .......................... -- -- 72,425
Principal payments on capital lease obligations .......... (7,083) (1,721)
Principal payments on note payable obligations ........... -- -- (4,175)
Proceeds from issuance of common stock, net .............. 184,226 64,580 --
Redemption of fractional shares .......................... -- -- (66)
Proceeds from issuance of convertible preferred stock, net -- 981,063 --
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net ....................... -- -- 245,066
Payment of dividends and related tax liability ........... -- -- (67,460)
Principal payments on notes payable ...................... (96,097) -- --
----------- ----------- -----------
Net cash provided by financing activities ......................... 55,836 1,038,560 244,069
----------- ----------- -----------
Net decrease in cash and cash equivalents ......................... (5,829,389) (893,566) (2,767,149)
Cash and cash equivalents:
Beginning of year ........................................ 9,575,240 3,745,851 2,852,285
----------- ----------- -----------
End of year .............................................. $ 3,745,851 $ 2,852,285 $ 85,136
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Description of Business and Summary of Significant Accounting Policies
Business
We are primarily a manufacturer and distributor of needle-free and
small-needle 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.
Net Loss Per Share
Basic EPS is computed by dividing net income or loss available to Common
Shareholders 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,
1997, 1998 and 1999, the effects of potential Common Shares were excluded from
the calculation of diluted EPS because their effect was antidilutive.
Cash Equivalents
We consider highly liquid debt instruments with original maturities of 90
days or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a basis that approximates 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.
Licensing and Product Development Revenue Recognition
Licensing and product development revenue is recognized when underlying
performance criteria for payment have been met and we have 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 we receive 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
25
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
We recognize the estimated cost of warranty obligations to our customers at
the time the products are shipped.
Research and Development
All of our sponsored research and development expenses related to both
present and future products are expensed as incurred.
Patent Rights
We capitalize 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. Recoverability of such patent assets is evaluated
on a quarterly basis.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation. These reclassifications did not impact previously reported
net loss or net loss per share.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate estimated
fair value.
Advertising Expense
Advertising expense (including production and communication costs) for
1997, 1998 and 1999 was $333,515, $201,521 and $342,627, respectively.
Production costs related to advertising are expensed as incurred.
New Accounting Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," effective for the year ending December 31, 2001, will require
derivatives to be recorded on the balance sheet as assets or liabilities,
measured at
26
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
fair value. At the present time, we have not yet made a determination of the
impact the adoption will have on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
We will be required to adopt the new standard beginning with the second quarter
of fiscal 2000. The impact of adoption on our financial statements is not yet
quantifiable.
2. Going Concern
Our accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and other commitments in the normal course of business. We incurred
net losses of approximately $2,972,000, $5,769,000 and $3,703,000 in 1997, 1998
and 1999, respectively. In addition, we incurred net losses and have had
negative cash flows from operating activities since inception.
We expect to report a net loss for the year ending December 31, 2000, as we
continue to incur marketing and development costs related to bringing future
generations of products to market. Our long term capital requirements will
depend on numerous factors, including the status of collaborative arrangements,
the progress of research and development programs and the receipt of revenues
from the sales of products.
To continue our existence, we will be required to raise additional working
capital or merge with another entity. We currently anticipate the business
combination transaction with Permatec Holdings, AG, discussed in Note 13(b) will
be consummated. The business combination is contingent on the parties raising
$10 million to fund both operations after closing of the transaction. If the
business combination transaction does not occur, we will seek other sources of
capital, or pursue other business combinations. We can provide no assurance that
we will ever become profitable or that we will be able to raise additional
capital, on terms acceptable to us, or at all.
Our financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary if we are unable to
continue as a going concern.
27
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
3. Composition of Certain Financial Statement Captions
December 31,
----------------------------
1998 1999
------------ ------------
Inventories:
Raw material................................ $ 132,884 $ 219,903
Work-in-process............................. 95,157 60,998
Finished goods.............................. 364,144 148,571
----------- -----------
$ 592,185 $ 429,472
=========== ===========
Equipment, furniture and fixtures:
Furniture, fixtures and office equipment.... $ 933,296 $ 1,392,568
Production equipment........................ 1,518,675 1,014,310
Less accumulated depreciation............... (1,173,515) (1,404,324)
----------- -----------
$ 1,278,456 $ 1,002,554
=========== ===========
Patent rights:
Patent rights............................... $ 542,628 $ 617,612
Less accumulated amortization............... (258,823) (315,202)
----------- -----------
$ 283,805 $ 302,410
=========== ===========
Accrued expenses and other liabilities:
Product warranty and returns................ $ 56,000 $ 50,000
Payroll..................................... 34,715 46,326
Inventory purchases received................ 29,877 107,131
Legal and patent fees....................... -- 32,146
Other....................................... 101,353 87,269
Dividend payable................................. 14,246 95,238
Product development dispute settlement...... -- 132,994
----------- -----------
$ 236,191 $ 551,104
=========== ===========
4. Leases
We have a non-cancelable operating lease for our office and manufacturing
facility that expires in April 2002. This lease requires us to pay all executory
costs such as maintenance and property taxes.
Lease expense incurred for the years ended December 31, 1997, 1998 and 1999
was $161,339, $214,093 and $243,674, respectively.
Future minimum lease payments are as follows as of December 31, 1999:
2000..................................................... $258,543
2001..................................................... 278,833
2002..................................................... 98,508
2003..................................................... --
--------
$635,884
5. Note Payable
28
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
We are obligated under a non-cancelable 48-month lease for information
system software classified as a note payable. The lease calls for monthly
payments of $2,275 with an expiration date of August 2003. Upon payment of a
$1.00 buy-out fee, we retain ownership of the software.
The note payable consists of the following:
Secured note payable, imputed interest at 18.33%........... $ 68,250
Current maturities ........................................ (14,156)
--------
Note payable, less current maturities...................... $ 54,094
========
Future minimum note payments are as follows as of December 31, 1999:
2000 $ 27,302
2001 27,302
2002 27,302
2003 18,201
--------
$100,107
========
6. Agreement Restructuring
(a) Becton Dickinson Agreement
On February 8, 1999, we executed an agreement with Becton Dickinson to
restructure the original agreement entered into in January 1996. The original
agreement involved a strategic alliance with Becton Dickinson that included an
exclusive Development and Licensing Agreement, which provided Becton with
marketing and manufacturing rights to our products and technology. The revised
agreement is based upon the realization of both parties that the MJ-7 product
and its disposable components would not fulfill the marketing or manufacturing
requirements of Becton Dickinson. Under the terms of the new agreement, we are
free to market the MJ-7 insulin injector and manufacture disposables in exchange
for a royalty on sales. Becton Dickinson retains an option that allows it, for a
limited time, to negotiate for marketing rights for a future generation MJ-8
injector and a similar option to negotiate for the right to manufacture
disposables under certain conditions.
(b) Schering-Plough Contract
In March 1999, we signed an agreement with Schering-Plough Corporation to
settle mutual obligations under a contract dated January 20, 1998. The original
agreement called for an exclusive sales arrangement where we would sell our
products to Schering-Plough for distribution with its drug Intron-A.
Schering-Plough agreed to pay us an undisclosed sum in exchange for cancellation
of a product purchase order and as reimbursement for certain non-cancelable
manufacturing expenses.
29
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
7. Income Taxes
We incurred losses for both book and tax purposes in each of the years in
the three year period ended December 31, 1999, and, accordingly, no income taxes
were provided. Effective tax rates differ from statutory federal income tax
rates in the years ended December 31, 1997, 1998 and 1999 as follows:
1997 1998 1999
------ ------- ------
Statutory federal income tax rate ............. (34.0)% (34.0)% (34.0)%
Valuation allowance increase................... 35.7 39.0 43.0
State income taxes, net of federal benefit..... (2.0) (3.6) (5.0)
Research and experimentation credit............ -- (1.6) (4.6)
Other.......................................... 0.3 0.2 0.6
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
Deferred tax assets as of December 31, 1998 and 1999 consist of the following:
1998 1999
----------- -----------
Inventory reserve.................. $ 18,000 $ 31,000
Net operating loss carryforward.... 7,383,000 8,717,000
Research credit carryforward....... 372,000 544,000
Other.............................. 109,000 181,000
----------- -----------
7,882,000 9,473,000
Less valuation allowance................ (7,882,000) (9,473,000)
----------- -----------
$ 0 $ 0
=========== ===========
At December 31, 1999, we had net operating loss carryforwards ("NOL") of
approximately $23,000,000 for federal income tax purposes which if unused will
begin to expire in 2009. Additionally, the Company had research credit
carryforwards of approximately $544,000.
The net operating loss is 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 in
particular, the proposed transaction described in Notes 2 and 13(b) will further
limit net operating losses availability.
8. Mandatorily Redeemable Series B Convertible Preferred Stock
On December 22, 1999, we sold 250 shares of Series B Convertible Preferred
Stock ("Series B") to Bio-Technology General Corporation for total consideration
of $250,000. The Series B does not carry a dividend rate. A holder of Series B
Stock may choose to convert the Series B Stock into Medi-Ject Common Stock after
the "Permissible Conversion Events," which is defined as a combination of
increasing our authorized Common Stock from 3,400,000 shares to at least
10,000,000 shares and receiving necessary approvals under the Nasdaq listing
requirements. In the event that a holder does not convert, an Automatic
Conversion will occur on the later of (i) the date of occurrence of Permissible
Conversion Events or (ii) June 30, 2001. If the Permissible Conversion Events do
not occur before December 22, 2000, the company must redeem all 250 shares at
105% of the liquidation preference which is $1,050 per share or $262,500 in
total. As such, the Series B has been classified as mandatorily redeemable
preferred stock. The conversion price will be the lower of (i) the average of
the closing prices per share of our Common Stock for the twenty (20) consecutive
trading days immediately preceding the conversion date, or (ii) $2.50 per share.
The Series B has certain preference rights over holders of Common Stock and is
subordinated to Series A in liquidation rights. The proceeds from the sale of
these securities were used primarily for working capital. There was no
underwriter involved and no fees were paid to any other parties, except legal
fees, in connection with this transaction. These securities were exempt from
registration because they were issued to a single accredited investor in a
private placement pursuant to Section 4(2) of the Securities Act of 1933.
9. Shareholders' Equity
Authorized Shares
At December 31, 1999, the total number of shares authorized for all classes
of stock was 4,400,000 shares: 3,400,000 common shares and 1,000,000 preferred
shares with 10,000 preferred shares designated as Series A. The authorized
common share figure has been adjusted for a one for five reverse stock split
effective on January 28, 1999. The reverse stock split had no effect on the
authorized preferred shares.
Reverse Stock Split
On January 28, 1999, we declared a one-for-five reverse stock split of our
outstanding Common Stock, applicable to shareholders of record at close of
trading on January 28, 1999. After the reverse split, we had 1,424,752 shares of
common stock outstanding. All common share and per share amounts in this report
have been retroactively restated to give effect to this reverse stock split.
30
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Series A Convertible Preferred Stock
On November 10, 1998, we sold 1,000 shares of Series A Convertible
Preferred Stock ("Series A") and warrants to purchase 56,000 shares of common
stock to Elan International Services, Ltd., for total consideration of
$1,000,000. The Series A carries a 10% dividend which is payable semi-annually.
In addition to the stated 10% dividend, we are also obligated to pay foreign tax
withholding on the dividend payment, which equates to an effective dividend rate
of 14.2%. Such foreign tax withholding payments have been reflected as dividends
since they are non-recoverable. The Series A is redeemable at our option at any
time and is convertible into common stock for sixty days following the 10th
anniversary of the date of issuance at the lower of $7.50 per share or 95% of
the market price of the Common Stock. Under certain limited circumstances where
certain conditions fail to be met, the Series A may be converted at our election
within 30 days of the second anniversary of the date of issuance at the market
price of the Common Stock at such time. The warrants to purchase Common Stock
may be exercised at any time prior to November 10, 2005, at a price of $15.00
per share. The proceeds from the sale of these securities were used to
fund the purchase of intellectual property rights to proprietary small-needle
injection technology from Elan Corporation, plc. The technology must be proven
technically feasible and additional investments made in order to advance to a
viable product; accordingly, the entire cost of the rights, of $1,000,000, was
charged to product development operating expenses.
Stock Option Repricing
On July 21, 1998, our Board of Directors approved the repricing of all
outstanding options held by employees, other than our Chief Executive Officer
and directors which had an exercise price greater than $7.20 per share. This
repricing action reduced the exercise price to $7.20 per share for stock option
agreements representing approximately 100,000 shares which had exercise prices
ranging from $7.80 to $25.00. Following the repricing, all other terms and
conditions of these option agreements were unchanged, including the vesting
schedules.
On December 8, 1998, our Board of Directors approved the repricing of one
stock option agreement held by our Chief Executive Officer, which had an
exercise price of $26.90 per share. This option agreement totals 80,000 shares
and its exercise price was reduced to $7.20 per share. Following the repricing,
all other terms and conditions of this option agreement were unchanged,
including its vesting schedule.
On May 20, 1999, our Board of Directors approved the repricing of all
outstanding Non-Qualified Stock Options held by our directors which had an
exercise price greater than $3.50 per share. This repricing action reduced the
exercise price to $3.50 per share for Non-Qualified Stock Option Agreements
representing approximately 24,115 shares which had exercise prices ranging from
$9.05 to $25.00 per share. Following the repricing, all other terms and
conditions of these option agreements were unchanged, including the vesting
schedules.
On December 21, 1999, our Board of Directors approved the repricing of all
outstanding Qualified and Non-Qualified Stock Options, as of January 3, 2000,
held by our employees and directors, which had an exercise price greater than
$1.5625 per share. This repricing action reduced the exercise price to $1.5625
per share for all such Stock Option Agreements, representing approximately
252,517 shares which had exercise prices ranging from $1.75
31
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
to $25.00 per share. Following the repricing, all other terms and conditions of
these option agreements were unchanged, including the vesting schedules.
No compensation expense has been recorded for these repricings since the
adjusted exercise price equaled or exceeded the market price of the underlying
stock at the date of repricing.
Stock Options and Warrants
Our stock option plans allow for the grants of options to officers,
directors, consultants and employees to purchase up to 369,010 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.
Our warrants were issued in connection with debt financing and technology
procurement during 1996 through 1998. The terms of the warrants do not exceed
ten years and vest in varying periods. All performance obligations by warrant
recipients have been completed.
Stock option and warrant activity is summarized as follows:
Weighted
Number average
of Shares prices
--------- --------
Outstanding at December 31, 1996............. 706,677 $25.15
Granted.................................. 121,700 22.25
Exercised................................ (29,190) 6.50
Canceled................................. (19,141) 22.35
-------- ------
Outstanding at December 31, 1997............. 780,046 25.40
Granted.................................. 301,190 8.40
Exercised................................ (10,434) 6.23
Canceled................................. (210,684) 19.47
-------- ------
Outstanding at December 31, 1998............. 860,118 21.11
Granted ................................. 74,215 2.73
Exercised ............................... -- --
Canceled ................................ (85,483) 9.45
-------- ------
Outstanding at December 31, 1999............. 848,850 $20.68
======== ======
January 3, 2000, repricing............... 848,850 $18.67
======== ======
The following table summarizes information concerning currently outstanding and
exercisable options and warrants by price range after the January 3, 2000,
repricing:
<TABLE>
<CAPTION>
--------------------- --------------------------------------------------------- --------------------------------------
Outstanding Exercisable
--------------------- --------------------------------------------------------- --------------------------------------
Weighted Average
Price Range Number of Shares Remaining Life Weighted Average Number Weighted Average
Outstanding In Years Exercise Price Exercisable Exercise Price
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Pursuant to Option
Plans:
$ 1.56 273,852 6.9 $1.56 142,092 $ 1.56
2.31 to 14.70 3,600 8.9 6.88 1,000 11.31
15.65 to 19.70 3,818 3.5 16.66 3,218 16.85
------- -------
281,270 6.9 1.84 146,310 1.97
======= =======
Warrants:
$2.40 to 23.00 142,772 5.9 $18.39 142,772 $18.39
29.55 to 33.00 424,808 5.6 29.91 424,808 29.91
------- -------
567,580 5.7 27.01 567,580 27.01
======= =======
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
</TABLE>
We apply APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for our plans. Accordingly, no compensation
expense has been recognized for our stock-based compensation plans. Had we
determined compensation cost based on the fair value at the grant date for stock
options under SFAS No.
32
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
123, Accounting and Disclosure of Stock-Based Compensation, our net loss and
loss per share would have increased to the pro-forma amounts shown below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported................................ $(2,971,767) $(5,783,710) $(3,851,891)
Pro forma.................................. $(3,672,000) $(6,667,938) $(4,591,675)
Net loss per common share:
As reported................................ $(2.12) $(4.07) $(2.70)
Pro forma.................................. $(2.62) $(4.69) $(3.22)
</TABLE>
The per share weighted-average fair value of stock based awards granted
during 1997, 1998 and 1999 is estimated as $17.15, $9.19 and $1.82 respectively,
on the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1997 1998 1999
---- ---- ----
Risk-free interest rate......................... 6.0% 5.5% 5.5%
Annualized volatility........................... 99% 100% 100%
Weighted average expected life, in years........ 5.0 5.0 5.0
Expected dividend yield......................... 0.0% 0.0% 0.0%
10. Employee Savings Plan
We have 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 20% of their compensation into the plan. At the discretion of
the Board of Directors, we 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, 1997, 1998 and 1999.
11. Supplemental Disclosures of Cash Flow Information
Cash paid for interest during the years ended December 31, 1997, 1998 and
1999 was $9,339, $1,398 and $4,427, respectively.
Cash paid for taxes during the years ended December 31, 1997, 1998 and 1999
was $300, $2,758 and $700 respectively.
12. Additional Sales Information
We are primarily a manufacturer and distributor of needle-free and
small-needle injection devices and disposables for the injection of insulin and
human growth hormone. For reporting purposes, these operations are considered to
be one segment.
International sales for the years ended 1997, 1998, and 1999 were
approximately 52%, 74%, and 68%, respectively of total sales. International
sales by country are summarized as follows:
International Sales Revenue: 1997 1998 1999
--------- ----------- -----------
Europe (primarily Germany)........... $ 759,168 $ 1,173,364 $ 1,041,661
Other (primarily Asia)............... 113,044 440,923 390,152
--------- ----------- -----------
Total............................ $ 872,212 $ 1,614,287 $ 1,431,813
========= =========== ===========
33
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
The following summarizes significant customers comprising 10% or more of
our customer sales and outstanding accounts receivable as of and for the years
ended:
Significant Customer Revenue: 1997 1998 1999
--------- ----------- ---------
Ferring .................................. $ 632,004 $ 1,095,779 $ 945,173
JCR ...................................... 43,902 365,388 269,393
Significant Customer Receivable Balances: 1997 1998 1999
--------- ----------- ---------
Ferring .................................. $ 230,379 $ 71,911 $ 69,127
JCR ...................................... 0 20,531 4,428
13. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1998:
Total revenues $ 912,973 $ 755,517 $ 687,548 $ 343,207
Net loss (845,556) (1,074,888) (1,262,042) (2,601,224)
Net loss applicable to common shares (.60) (.76) (.89) (1.83)
Weighted average shares (1) 1,414,318 1,420,287 1,424,752 1,424,752
1999:
Total revenues $ 1,591,988 $ 576,895 $ 509,058 $ 803,921
Net loss (290,121) (1,023,007) (1,192,048) (1,346,715)
Net loss applicable to common shares (.20) (.72) (.84) (.95)
Weighted average shares (1) 1,424,736 1,424,729 1,424,729 1,424,729
</TABLE>
(1) 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
anti-dilutive.
14. Reclassifications
During the year ended December 31, 1999, the Company issued 250 shares of
Series B Convertible Preferred Stock, which was previously recorded as permanent
equity. Subsequent to the issuance of the Company's 1999 financial statements
and upon closer examination of the Series B Convertible Preferred Stock
Agreement, it was determined that the $250,000 of Series B Convertible Preferred
Stock should have been classified outside of permanent equity for the year ended
December 31, 1999. See Note 8. In addition, during the year ended December 31,
1999, the Company reached a $133,000 settlement with a third party that was
recorded as other expense. Subsequent to the issuance of the Company's 1999
financial statements, it was determined that the settlement should have been
recorded as a product development expense. As a result, the Company's 1999
financial statements have been adjusted for these reclassifications in
accordance with accounting principles generally accepted in the United States of
America. There was no effect on net loss as a result of the reclassifications.
15. Subsequent Events
(a) Stock Option Repricing
On December 21, 1999, our Board of Directors approved the repricing of all
outstanding Qualified and Non-Qualified Stock Options, as of January 3, 2000,
held by our employees and directors, which had an exercise price greater than
$1.5625 per share. This repricing action reduced the exercise price to $1.5625
per share for all such Stock Option Agreements representing approximately
252,517 shares which had exercise prices ranging from $1.75 to $25.00 per share.
Following the repricing, all other terms and conditions of these option
agreements were unchanged, including the vesting schedules.
(b) Business Combination Agreement
In January 2000, we signed a non-binding letter of intent with Permatec
Holding AG, a privately-held drug delivery company located in Basel,
Switzerland, to combine operations. Under the terms of the letter of intent, the
parties are currently negotiating the purchase of certain Permatec subsidiaries
by us in exchange for up to approximately 60% of our Common Stock. Permatec is
owned by Jacques Gonella, an entrepreneur and founder of Jago Pharma, now part
of SkyePharma plc. Permatec develops and licenses certain pharmaceutical
formulation technologies, including transdermal patches and topical gels. In
January and March 2000, Permatec invested a total of $500,000 in a Medi-Ject
convertible note, which will convert to common stock at the completion of the
business combination. If the Permatec transaction does not close, the note will
be payable in full on December 31, 2000.
34
<PAGE>
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(c) Chronimed Distribution Agreement
In February 2000, we signed an agreement with Chronimed for distribution of
our needle-free injection devices and supplies to the U.S. diabetes market.
Chronimed is a publicly-held, diversified healthcare company that develops,
markets and distributes pharmaceuticals, medical products and other specialized
services for people with long-term conditions such as diabetes, HIV/AIDS, organ
transplants and select diseases treated with self-injectable drugs. The
distribution agreement is with Home Service Medical & Pharmacy (HSM), the direct
marketing division of Chronimed, which sells medical supplies and prescription
drugs to the consumer through mail order catalogs.
In this new distribution arrangement, Home Service Medical will take over
all of our direct-to-patient sales of devices and disposable supplies for the
U.S. diabetes market. We will retain retail pharmacy-based distribution as well
as our existing online selling alliance with drugstore.com.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
35
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Directors Whose Terms Continue Until the 2000 Annual Meeting of Shareholders
Age
---
Kenneth Evenstad 56 Mr. Evenstad joined the Board of Directors in May
1993 and is a member of the Audit Committee of the
Board of Directors. Since 1969, Mr. Evenstad has
been the Chairman and Chief Executive Officer of
Upsher-Smith Laboratories, Inc., a private
pharmaceutical company specializing in branded
generic cardiovascular drugs. Mr. Evenstad is a
trained pharmacist.
Karl E. Groth 52 Mr. Groth joined the Board of Directors in
February 1998 and is a member of the Compensation
Committee of the Board of Directors. Mr. Groth is
the President/Chief Executive Officer of First
Circle Medical Inc., a medical device company that
produces equipment related to the treatment of
AIDS and hepatitis using hyperthermia. From 1996
to 1997, he was the President and Chief Executive
Officer of Browne Medical Systems, Inc., a medical
device company that produces equipment for the
urodynamic market. From 1992 to 1996, Mr. Groth
was the Director of Clinical and Regulatory
Affairs & Vice President Sales and Marketing of
InStent Inc., a medical products company. He also
has held positions with Medtronic, Inc., the
University of Minnesota and Upjohn Pharmaceutical
Company.
Directors Whose Terms Continue Until the 2001 Annual Meeting of Shareholders
Geoffrey Guy, M.D. 45 Dr. Guy joined the Board of Directors in November
1993 and is a member of the Compensation Committee
of the Board of Directors. In 1985, Dr. Guy
founded Ethical Holdings plc ("Ethical"), a
company that develops new transdermal and oral
drug delivery systems and was its Chairman and
Chief Executive Officer until December 1997. Dr.
Guy is a director of GW Pharmaceuticals Ltd, a
pharmaceutical company located in the U.K. and he
holds a Diploma of Pharmaceutical Medicine from
the British Royal College of Physicians.
Fred L. Shapiro, M.D. 65 Dr. Shapiro joined the Board of Directors in
September 1992. He is Chairman of the Compensation
Committee of the Board of Directors. Dr. Shapiro
was president of Hennepin Faculty Associates, an
organization of the medical staff of the Hennepin
County Medical Center in Minneapolis, Minnesota,
from 1983 until his retirement in 1995. Dr.
Shapiro is a nephrologist who has authored or
co-authored more than 100 published medical and
scientific articles. Dr. Shapiro was also a
co-founder of Minntech, a company that designs and
manufactures medical equipment. He has been a
director of Minntech since its incorporation in
1974.
Directors Whose Terms Continue Until the 2002 Annual Meeting of Shareholders
36
<PAGE>
Franklin Pass, M.D. 63 Dr. Pass joined our Company as a director and
consultant in January 1992 and has served as our
President, Chief Executive Officer and Chairman of
the Board of Directors since February 1993. From
1990 to 1992, Dr. Pass served as President of
International Agricultural Investments, Ltd., an
agricultural technology consulting and investment
company. Dr. Pass, a physician and scientist, was
Director of the Division of Dermatology at Albert
Einstein College of Medicine from 1967 to 1973,
the Secretary and Treasurer of the American
Academy of Dermatology from 1978 to 1981 and the
co-founder and Chief Executive Officer of
Molecular Genetics, Inc., now named MGI Pharma,
Inc., from 1979 to 1986. He is the author of more
than 40 published medical and scientific articles.
Dr. Pass also serves on the board of directors of
Verdant Brands, Inc. (formerly Ringer
Corporation), a leading manufacturer of garden
pesticides.
Stanley Goldberg 53 Mr. Goldberg joined the Board of Directors in
February 1998 and is a member of the Audit
Committee of the Board of Directors. Mr. Goldberg
has been the Chairman of Verdant Brands, Inc.
(formerly Ringer Corporation) since 1996, Chief
Executive Officer since 1993 and its President
since September 1992. From 1990 to 1992, Mr.
Goldberg was Vice President and General Manager of
Thomson, S.A., World Wide Audio Division, and,
from 1988 to 1990, General Manager of Thomson
S.A., Audio Americas Operations. Thomson, S.A. is
a defense and electronics company. From 1986 to
1988, Mr. Goldberg was Manager of Product
Development for General Electric Company, a
consumer and industrial products and defense
company. Mr. Goldberg also held various positions
in marketing and management at General Electric.
Mr. Goldberg also is a director of
Destron-Fearing.
None of the above directors are related to one another or to any executive
officer of our Company.
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 is set forth in
Part 1 of the Form 10-K under separate caption.
Information Concerning the Board of Directors
The Board of Directors met eleven times during 1999. The Board of Directors
acted by written action one time during 1999. The Board of Directors has an
Audit and a Compensation Committee.
The Audit Committee, consisting of Mr. Evenstad, Mr. Goldberg and Dr.
Shapiro met one time during 1999. The Audit Committee reviews the results and
scope of the audit and other services provided by our independent auditors, as
well as our accounting principles and our systems of internal controls, and
reports the results of its review to the full Board of Directors and to
management.
The Compensation Committee, consisting of Dr. Shapiro, Dr. Guy and Mr.
Groth, met two times during 1999. The Compensation Committee makes
recommendations concerning executive salaries and incentive compensation for
employees and administers our 1993 Stock Option Plan (the "1993 Plan"). The
Board of Directors as a whole administers our 1996 Incentive and Stock Option
Plan (the "1996 Plan") and our 1998 Stock Option Plan for Non-Employee Directors
(the "Directors Plan").
During 1999, each of the directors attended at least 75% of the aggregate
number of meetings of the Board of Directors and of the Committees on which he
serves with the exception of Karl Groth who attended 64% of the Board of
Directors meetings held during the year and Mr. Jacobs who did not stand for
re-election.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
37
<PAGE>
Section 16 (a) of the Securities Exchange Act of 1934 requires our
directors, certain officers and persons who own more than ten percent of a
registered class of our equity securities, to file reports of ownership on Form
3 and changes in ownership on Forms 4 or 5 with the SEC. Such officers,
directors and ten percent shareholders are also required by the SEC's rules to
furnish us with copies of all Section 16(a) reports they file.
Specific due dates for such reports have been established by the SEC and we
are required to disclose in this Proxy Statement any failure to file reports by
such dates. Based solely on its review of the copies of such reports received by
us or by written representations from certain reporting persons, we believe that
during the year ended December 31, 1999, all Section 16(a) filing requirements
applicable to our officers, directors and ten percent shareholders were complied
with.
Item 11. EXECUTIVE COMPENSATION
Compensation of Directors
We have not in the past paid directors' fees. All directors may be
reimbursed for expenses actually incurred in attending meetings of the Board of
Directors and its committees. In the past, the Board of Directors has made
annual discretionary grants of options to purchase shares of Common Stock under
our 1993 Plan and our 1996 Plan to certain members of the Board of Directors.
The size of these grants has varied from year to year. In accordance with the
Directors' Plan, eligible non-employee directors will receive an automatic grant
of an option to purchase 1,000 shares of our Common Stock as of the first
business day of each calendar year. The Directors' Plan also provides for an
initial option grant of 2,000 shares of our Common Stock on the day they are
first elected to the Board of Directors.
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by us to or on behalf of the Chief Executive
Officer and the two other most highly compensated executive officers (the "Named
Executive Officers") as of the year ended December 31, 1999, for services in all
capacities as well as compensation earned by such person for the previous two
fiscal years (if the person was an executive officer during any part of such
fiscal year):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Name and Other Annual Stock
Principal Fiscal Salary Bonus Compensation Options
Position Year ($) ($) ($)(1) (#)
--------------------------- ---- -------- ----- ------------- -------
<S> <C> <C> <C> <C> <C>
Franklin Pass, M.D., 1999 216,300 -- 16,545 --
Chairman, President 1998 216,300 -- 21,958 80,000(2)
and Chief Executive 1997 210,000 -- 15,698 80,000
Officer
Lawrence Christian, 1999 68,538(3) -- -- 21,000
Vice President, Finance &
Administration and Chief
Financial Officer, Secretary
Peter Sadowski, Executive Vice 1999 118,300 -- -- 3,000
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
President and Chief 1998 115,360 -- -- 19,215(2)
Technology Officer 1997 112,000 -- -- 3,000
</TABLE>
----------
(1) Represents premiums paid for disability and life insurance policies with
coverage limits in excess of those provided under our standard employee
insurance policies.
(2) All options granted to named executives in 1998 represent options issued at
an exercise price of $7.20 following the cancellation of an equal number of
options issued in previous years. See "Report on Repricing of Options".
(3) Represents salary paid from employment date of March 23, 1999.
Employment Agreements with Executive Officers
We have written employment agreements with Franklin Pass, M.D., Lawrence
Christian and Peter Sadowski, Ph.D.
Employment Agreement with Dr. Pass. Dr. Pass' employment agreement became
effective as of December 22, 1999 (the "1999 Agreement").
The 1999 Agreement provides for a base salary of $210,000 with 1997 as the
base year and, as to subsequent years, for a base salary to be mutually agreed
upon prior to the beginning of each year but, in no event, shall his salary for
subsequent years be less than his 1997 salary as adjusted for inflation.
Pursuant to the terms of a prior agreement, we granted to Dr. Pass an option to
purchase 80,000 shares of Common Stock at an exercise price equal to $26.90 per
share, later canceled and reissued at a price of $7.20 per share. The option
vests in equal monthly installments over a period of four years. The option
shall become 100% vested upon Dr. Pass's death or disability or upon a change in
control (as such terms are defined in the 1999 Agreement). The 1999 Agreement
also contains provisions regarding participation in benefits plans, repayment of
expenses, participation as a director or consultant to other companies (which is
permitted provided that such participation does not materially detract from his
obligations to our Company or violate the terms of the 1999 Agreement),
protection of confidential information, noncompetition and ownership of
intellectual property. In addition, the 1999 Agreement contains covenants that
Dr. Pass will devote substantially all of his time to our Company during the
term of his employment. The 1999 Agreement has a term through December 31, 2002.
The 1999 Agreement may be terminated prior to the end of the term or any
extension thereof upon, among other things, (i) at least 90 days' prior written
notice of our intent to terminate the 1999 Agreement or (ii) our material breach
of the 1999 Agreement.
Employment Agreements with Lawrence Christian and Peter Sadowski. Mr.
Christian and Dr. Sadowski entered into employment agreements with us as of
December 22, 1999, (each, an "Employment Agreement"). The Employment Agreements
provided for 2000 base salaries of $102,000, and $135,820 for Mr. Christian and
Dr. Sadowski, respectively. The Employment Agreements also contain provisions
regarding participation in benefits plans, repayment of expenses, participation
as a director or consultant to other companies (which is permitted provided that
such participation does not materially detract from their respective obligations
to our Company or otherwise violate the terms of their Employment Agreements),
protection of confidential information and ownership of intellectual property.
In addition, the Employment Agreements contain covenants not to compete and
covenants with respect to non-solicitation and non-interference with our
customers, suppliers or employees. Mr. Christian's employment agreement is for
twelve months continuing each day on a rolling twelve-month basis. Dr.
Sadowski's employment agreement has a term through December 31, 2001. We may
terminate the Employment Agreements upon 90 days' notice.
Option Grants During 1999
The table below sets forth individual grants of stock options made to the
Named Executive Officers during the year ended December 31, 1999. Each of the
options granted was issued following the cancellation of a similar option with a
higher exercise price.
39
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates
Number of Total Options Exercise of Stock Price
Securities Granted to Price or Appreciation
Underlying Employees Base for Option Term (1)
Options During Price/sh. Expiration ---------------------
Name Granted(#) the Year(%) ($) Date 5%($) 10%($)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Christian(2) 21,000 63.4 1.75 03/23/09 23,100 58,380
Peter Sadowski(3) 3,000 9.1 3.50 05/20/09 6,600 16,740
</TABLE>
----------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices.
(2) Incentive stock option granted pursuant to the Company's 1996 Incentive and
Stock Option Plan on March 23, 1999. This option vests in three equal
installments on March 23 of each of 1999, 2000, 2001.
(3) Incentive stock option granted pursuant to the Company's 1996 Incentive and
Stock Option Plan on May 20, 1999. This option vests in five equal
installments on May 20 of each of 2000, 2001, 2002, 2003 and 2004.
Aggregated Option Exercises in 1999 and Year End Option Values
The following table provides information concerning stock option exercises
and the value of unexercised options at December 31, 1999 for the Named
Executive Officers:
<TABLE>
<CAPTION>
Number of Value of
Shares Securities Underlying Unexercised
Acquired Unexercised In-The-Money Options
on Value Options at Year End(#) at Year End($)
Exercise Realized ---------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Franklin Pass 0 0 81,056 49,600 0 0
Lawrence Christian 0 0 7,000 14,000 0 0
Peter Sadowski 0 0 15,255 6,960 0 0
</TABLE>
40
<PAGE>
Report on Repricing of Options
In May 1999, after a significant decrease in the price of the Company's
Common Stock, the Compensation Committee of the Board of Directors determined
that options to purchase an aggregate of 24,115 shares of Common Stock
previously granted to five outside directors of the Company no longer provided a
meaningful incentive as originally intended. These option agreements had been
granted on four separate occasions between January 3, 1995, and February 11,
1998, had original exercise prices ranging from $9.05 to $25.00 per share, and
were granted pursuant to either the Company's 1996 Incentive and Stock Option
Plan, its 1993 Stock Option Plan or its 1998 Directors Plan. In order to provide
meaningful incentives to the Company's Board of Directors in the future, the
Board of Directors canceled these option agreements and then reissued them at an
exercise price of $3.50 per share, the market price on the day of the reissue.
All of the other terms and conditions of the original option agreements,
including the vesting periods, were unchanged following reissue.
<TABLE>
<CAPTION>
Years
Market Price Remaining
Number of of Exercise in Original
Underlying Stock at Price at New Option Term
Shares Time of Time of Exercise on Date of
Name Date Repriced Repricing Repricing Price Repricing
---- ---- -------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Ken Evenstad 01/03/95 762 $3.50 $16.45 $3.50 0.6
Ken Evenstad 03/14/96 1,143 3.50 19.70 3.50 6.6
Ken Evenstad 10/22/96 1,800 3.50 25.00 3.50 7.4
Ken Evenstad 02/11/98 1,000 3.50 9.05 3.50 8.7
Stanley Goldberg 02/11/98 1,000 3.50 9.05 3.50 8.7
Stanley Goldberg 02/11/98 2,000 3.50 9.05 3.50 8.7
Karl Groth 02/11/98 3,000 3.50 9.05 3.50 8.7
Geoffrey Guy 01/03/95 762 3.50 16.45 3.50 0.6
Geoffrey Guy 03/14/96 1,143 3.50 19.70 3.50 6.6
Geoffrey Guy 10/22/96 1,800 3.50 25.00 3.50 7.4
Geoffrey Guy 02/11/98 4,000 3.50 9.05 3.50 8.7
Geoffrey Guy 02/11/98 1,000 3.50 9.05 3.50 8.7
Fred Shapiro 01/03/95 762 3.50 16.45 3.50 0.6
Fred Shapiro 03/14/96 1,143 3.50 19.70 3.50 6.6
Fred Shapiro 10/22/96 1,800 3.50 25.00 3.50 7.4
Fred Shapiro 02/11/98 1,000 3.50 9.05 3.50 8.7
</TABLE>
----------
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Overview
The Compensation Committee is responsible for establishing compensation
policies for all executive officers of the Company, including the three most
highly compensated executive officers named in the accompanying tables (the
"Named Executives Officers"). The members of the Compensation Committee are Dr.
Shapiro, Dr. Guy and Mr. Groth. The Compensation Committee establishes the total
compensation for the executive officers in light of these policies. The
Compensation Committee is composed entirely of outside Directors.
41
<PAGE>
The objectives of the Company's executive compensation program are:
1. to attract and retain superior talent and reward individual
performance;
2. to support the achievement of the Company's financial and strategic
goals; and
3. through stock based compensation, align the executive officers'
interests with those of the shareholders of the Company.
The following report addresses the Company's executive compensation
policies and discusses factors considered by the Compensation Committee in
determining the compensation of the Company's President and Chief Executive
Officer and other executive officers for the year ended December 31, 1999.
Compensation Policies for Executive Officers
The Compensation Committee's executive compensation policies are designed
to provide competitive levels of compensation that integrate pay with the
Company's annual and long term performance goals, reward above average corporate
performance, recognize individual initiative and achievements, and assist the
Company in attracting and retaining qualified executives. To that end, the
Compensation Committee has established certain parameters of corporate
performance that must be met before the discretionary features of its executive
compensation plans apply. These discretionary features include stock option
grants and performance bonuses based upon an executive officer's base salary.
Absent the discretionary features, the Company's executive officers are paid
base salaries that are subject to annual cost-of-living increases, along with
periodic adjustments to make such salaries competitive with other similar sized
companies in the drug delivery industry. The Company's executive officers are
also given the opportunity to participate in certain other broad-based employee
benefit plans. As a result of the Company's emphasis on tying executive
compensation to corporate performance, in any particular year the Company's
executives may be paid more or less than the executives of other companies in
the drug delivery industry. The Company's use of stock option grants as a key
component of its executive compensation plans reflects the Compensation
Committee's position that stock ownership by management and stock based
compensation arrangements are beneficial in aligning management's and
shareholders' interests to enhance shareholder value.
The annual salary of the Chief Executive Officer was increased in 2000 by
5.5% pursuant to the terms of the executive officers' employment agreements. The
annual salary of the Chief Financial Officer and the Chief Technology Officer
was increased 13.3% and 14.3%, respectively.
Bonuses
Cash bonuses are used to reward executive officers for achievement of
financial and technical milestones, as well as for individual performance. No
bonuses were awarded to executive officers during 1999.
42
<PAGE>
Stock Options
Stock options awarded under the Company's 1993 and 1996 Plans are intended
as incentive compensation and have historically been granted annually to
officers, other key employees and consultants based on the Company's financial
performance and achievement of technical and regulatory milestones. During 1999,
stock options to purchase a total of 24,115 shares held by the five outside
directors were canceled and reissued at an exercise price of $3.50 per share.
Also, on January 3, 2000, options to purchase a total of 31,829 shares held by
the five outside directors, options to purchase a total of 160,924 shares held
by three executive officers and options to purchase a total of 86,200 shares
held by 37 employees were canceled and reissued at an exercise price of $1.5625
per share (see report on repricing of options below). In addition, stock options
totaling 2,000, 24,000 and 9,100 were granted to one consultant, two executive
officers and 4 employees respectively, during 1999. The 1999 annual stock option
grant totaling 50,000 and 26,200 shares, with a grant date of January 3, 2000,
were granted to three executive officers and 37 employees, respectively. These
grants were made to provide ongoing incentives to the Company's consultants,
outside directors and employees.
Chief Executive Officer's Compensation
Compensation for Dr. Franklin Pass during 1999, as reflected in the Summary
Compensation Table on page 11 herein, consisted of base compensation and certain
employee benefits. Dr. Pass' base compensation for 1999 was not increased from
his base salary in 1998.
At this time the Committee has no formal long-trange written plan for CEO
compensation separate and apart from the employment agreement (see below).
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS:
Fred Shapiro Karl Groth Geoffrey Guy
Performance Graph
The graph below provides an indication of cumulative total shareholder
returns ("Total Return") for the Company as compared with the Nasdaq Composite
Index and the Nasdaq Non-Financial Stock Index weighted by market value at each
measurement point.
This graph covers the period beginning October 3, 1996, when the Company's
Common Stock was first traded on the Nasdaq National Market, through December
31, 1999. The graph assumes $100 was invested in each of the Company's Common
Stock, the Nasdaq Composite Index and the Nasdaq Non-Financial Stock Index on
October 3, 1996 (based upon the closing price of each). Total Return assumes
reinvestment of dividends.
43
<PAGE>
[LINE GRAPH]
<TABLE>
<CAPTION>
October 3, December 31, December 31, December 31, December 31
1996 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Medi-Ject $100.00 $ 69.05 $ 38.10 $ 7.14 $ 1.50
Nasdaq Composite
Index 100.00 104.47 128.20 180.09 334.25
Biotechnology
Stocks 100.00 94.86 99.19 143.19 311.70
</TABLE>
44
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of our Common Stock as of March 17, 2000, with respect to (i) all
persons known to be the beneficial owners of more than 5% of our outstanding
Common Stock, (ii) each of our directors, (iii) each Named Executive Officer,
and (iv) all directors and executive officers as a group.
Shares Outstanding Percentage of
Beneficially Options & Outstanding
Name of Beneficial Owner Owned(1) Warrants(2) Shares
Becton Dickinson and Company (3) 609,292 456,969 30.0%
Franklin Pass, M. D. (4) 112,042 91,917 7.4%
Kenneth Evenstad (4) 6,279 4,223 *
Stanley Goldberg (4) 4,000 4,000 *
Karl Groth (4) 4,000 4,000 *
Geoffrey Guy, M.D. (4) 8,984 8,223 *
Fred L. Shapiro, M. D. (4) 16,942 4,223 1.2%
Lawrence Christian (4) 17,000 14,000 1.2%
Peter Sadowski (11) 11,447 11,447 *
All directors and executive
officers as a group (8 persons) 180,693 142,032 11.5%
----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days of March 16, 1999, are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, we believe that the persons named in this table,
based on information provided by such persons, have sole voting and
investment power with respect to the shares of Common Stock indicated.
(2) Shares of Medi-Ject Common Stock issuable upon the exercise of outstanding
options and warrants.
(3) The address of Becton Dickinson is 1 Becton Drive, Franklin Lakes, NJ
07417.
(4) The director's or officer's address is 161 Cheshire Lane, Suite 100,
Plymouth, MN 55441.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
45
<PAGE>
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 Schedules -All schedules have been omitted because
they are not applicable, are immaterial or are not required 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 1999.
(c) Exhibits
3.1 Second Amended and Restated Articles of Incorporation.(a)
3.2 Second Amended and Restated Bylaws.(a)
3.3 Certificate of Designations for Series A Convertible Preferred
Stock
3.4 Certificate of Designations for Series B Convertible Preferred
Stock
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, with Becton Dickinson and Company (filed
herewith as Exhibit 10.7).(a)
4.7 Warrant issued to Elan International Services, Ltd. on
November 10, 1998
4.8 Warrant issued to Grayson & Associates, Inc. on September 23,
1999
10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995,
including amendments thereto.(a)
10.3 Security Agreement, dated September 30, 1994, with Kelsey Lake
Limited Partnership and Kerry Lake Company, a Limited
Partnership.(a)
10.4 Exclusive License & Supply Agreement with Bio-Technology
General Corporation, dated December 22, 1999
46
<PAGE>
10.5 Preferred Stock Purchase Agreement with Bio-Technology General
Corporation, dated December 22, 1999
10.6 Loan Agreement, dated December 22, 1995, with Ethical Holdings
plc, 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, with Becton Dickinson and Company.(a)
10.8* Employment Agreement, dated January 1, 1997, with Franklin
Pass, MD.(c)
10.8.1 Employment Agreement, dated December 21, 1999, with Franklin
Pass, M.D.
10.9* Employment Agreement, dated December 21, 1999 with Lawrence
Christian
10.10* Reserved.
10.11* Employment Agreement, dated January 3, 1995, with Peter
Sadowski.(a)
10.11.1 Employment Agreement, dated December 21, 1999, with Peter
Sadowski.
10.12* 1993 Stock Option Plan.(a)
10.13* Form of incentive stock option agreement for use with 1993
Stock Option Plan.(a)
10.14* Form of 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 with Becton Dickinson and
Company, effective January 1, 1996 (terminated January 1,
1999). See Exhibit 10.24 (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 with
Geoffrey W. Guy. (d)
10.24# Agreement with Becton Dickinson dated January 1, 1999
10.25 Securities Purchase Agreement with Elan International
Services, Ltd. dated November 10, 1998
10.26# License & Development Agreement with Elan Corporation, plc,
dated November 10, 1998
23 Consent of KPMG LLP
27 Financial Data Schedule
99 Cautionary Statement (b)
47
<PAGE>
* Indicates management contract or compensatory plan or arrangement.
+ 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.
# Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibits 10.24 and 10.26 were
deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.
(a) Incorporated by reference to our 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 our Form 10-K for the year ended December
31, 1996.
(c) Incorporated by reference to our Form 10-Q for the quarter ended March
31, 1997.
(d) Incorporated by reference to our Form 10-K for the year ended December
31, 1997.
48
<PAGE>
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 30, 2000.
MEDI-JECT CORPORATION
/s/Franklin Pass, M.D.
-------------------------------------
Franklin Pass, MD
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the registrant in the capacities indicated on March 30, 2000.
Signature Title
--------- -----
/s/Franklin Pass, M.D. President, Chief Executive Officer and Director
------------------------------ (principal executive officer)
Franklin Pass, M.D.
/s/Lawrence M. Christian Vice President of Finance & Administration,
------------------------------ Chief Financial Officer and Secretary
Lawrence M. Christian (principal financial and accounting officer)
/s/Kenneth Evenstad Director
------------------------------
Kenneth Evenstad
/s/Geoffrey Guy Director
------------------------------
Geoffrey Guy
/s/Fred Shapiro, M.D. Director
------------------------------
Fred Shapiro, M.D.
/s/Stanley Goldberg Director
------------------------------
Stanley Goldberg
/s/Karl Groth Director
------------------------------
Karl Groth
49
