-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I231+FfwTSjLYHUzm4I6L8rx23sBHTDOqQO3MXroWUEdbjjLRqOVB7wRsliHw2r4 BbmWxmQyuIxoCIz1VJ1jnA== 0001045969-99-000201.txt : 19990402 0001045969-99-000201.hdr.sgml : 19990402 ACCESSION NUMBER: 0001045969-99-000201 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDI JECT CORP /MN/ CENTRAL INDEX KEY: 0001016169 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411350192 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20945 FILM NUMBER: 99580456 BUSINESS ADDRESS: STREET 1: 161 CHESHIRE LANE STREET 2: SUITE 100 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6124757700 MAIL ADDRESS: STREET 1: 161 CHESHIRE LANE STREET 2: SUITE 100 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 10-K405 1 FORM 10-K-405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] 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 (I.R.S. Employer of incorporation or Identification Number) organization) 161 Cheshire Lane, Minneapolis, Minnesota 55441 ----------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 475-7700 SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: Common Stock, $.01 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 16, 1999, was approximately $2,150,000 (based upon the last reported sale price of $1.75 per share on March 16, 1999, on the Nasdaq Small Cap Market). Following a one for five reverse stock split effective January 28, 1999, the number of shares outstanding of the registrant's common stock as of March 16, 1999: 1,424,729 DOCUMENTS INCORPORATED BY REFERENCE Pursuant to General Instruction G, certain responses in Part III are incorporated herein by reference to information contained in the Company's definitive Proxy Statement for its 1999 annual meeting to be filed on or before April 30, 1999. 1 Forward Looking Statements: Certain statements included in this Form 10-K are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Factors that may affect future results and performance are set forth in Exhibit 99, "Cautionary Statements", which was filed with the United States Securities and Exchange Commission as an exhibit to Form 10-K, December 31, 1996. PART I Item 1. BUSINESS General Medi-Ject Corporation ("Medi-Ject" or the "Company") is a drug delivery company focused on developing, manufacturing and marketing needle-free injection systems for the self-administration of a wide range of parenteral (injectable) drugs. The Company's product, the Medi-Jector system, is a hand-held, spring-powered device that injects drugs from a front-end chamber through the skin, without a needle, as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to pierce the skin with a sharp needle and manipulate a plunger with the needle inserted through the skin. Therefore, many people perceive injections with the Medi-Jector system to be less threatening than injections with a needle. Today's Medi-Jector systems are smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems. The Company believes that the key to widespread market acceptance of its needle-free injection systems depends upon continued improvements in these areas. The Company believes that individuals who require self-injection will benefit from the Medi-Jector system. 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, (ii) provides the ability to inject oneself discreetly and (iii) eliminates the need for sharps disposal of used needles. In addition, healthcare industry providers and payors may benefit from the decrease in long-term costs of patient care that may result from improved patient compliance. Furthermore, based upon discussions with pharmaceutical companies, the Company believes that those companies are motivated to provide improved drug delivery methods in an attempt to differentiate their products in the marketplace, which may result in increased sales and larger market share. Although the single largest indication for self-injection is the administration of insulin for the treatment of diabetes, the number of drugs associated with frequent self-injection is increasing as novel biopharmaceuticals are introduced and individuals previously managed in the hospital are now cared for in the home. Medi-Ject was a pioneer in the development of portable needle-free injection systems. Prior to the development of portable systems, needle-free injection systems were powered by large air compressors and their use was limited to mass vaccination by the military or school health programs. These injectors were painful in comparison to today's injectors. The Company's first commercial injector was five times as heavy as its current injector, which weighs six and one-half ounces. Acceptance of the Company's needle-free injection systems has gradually expanded as functionality and ease of use have improved and the purchase price has been reduced. Medi-Ject is a Minnesota corporation, incorporated in February 1979. The Company's offices are located at 161 Cheshire Lane, Minneapolis, Minnesota 55441; telephone (612) 475-7700. 2 INDUSTRY TRENDS Historically, with the exception of the self-administration of insulin, parenteral drug administration was limited to hospitals, doctors' offices and clinics. Liquid injectable medicines came packaged in single or multi-dose vials. Healthcare professionals filled disposable syringes with the medication, injected the patient and discarded the used syringe. Advances in pharmacology have resulted in an increasing number of drugs that require frequent injections over long periods of time. These drugs have provided dramatic therapeutic benefit for conditions that in the past resisted more conventional medications. Although the availability of these drugs provides new treatment opportunities, the Company believes that the requirement to inject the drugs has and will continue to hinder their acceptance and reduce patient compliance. The Company believes that most individuals view piercing their skin with a needle as unpleasant. In addition, individuals are often reluctant to use needles in public because needles are frequently associated with illegal drug use and cause fear of accidental needle sticks in others. These and other factors can deter patients from fully complying with their doctor-prescribed injection regimens. The failure to administer all prescribed injections can lead to increased health complications for the patient, decreased drug sales for pharmaceutical companies and increased healthcare costs for payors. In addition, needles require special disposal and therefore must be carried after use until they can be discarded in a special sharps container. These factors have led pharmaceutical manufacturers to explore many alternative delivery technologies, including novel needle injectors (for example, sheathed and spring-powered needle injectors), transdermal patches, controlled release oral delivery methods and inhalation devices. In Western Europe, pharmaceutical and medical products companies market pen-like needle injection systems. Patients have demonstrated a willingness to pay a premium for these systems over traditional needles and syringes. The Company believes, however, that injection will continue as the major delivery method because many of these drugs are protein biopharmaceuticals which are destroyed in the gastrointestinal tract, do not readily penetrate the skin or are not easily formulated to be absorbed through the lungs. In addition to the increase in the number of drugs requiring self-injection, changes in the frequency of insulin injections for the treatment of diabetes also may contribute to an increase in the number of self-injections. For many years, standard treatment protocol was for insulin to be administered once or twice daily for the treatment of diabetes. However, according to 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. The Company believes that as the benefits of tightly controlling diabetes become more widely known, the number of insulin injections self-administered by individuals with diabetes will increase. The need to increase the number of insulin injections given per day may also lead additional patients to seek an alternative to traditional needles and syringes. While the Company's marketing efforts are not currently focused on drug applications administered by healthcare professionals, needle-free injection systems may be attractive to hospitals, doctors' offices and clinics, and the Company may explore such applications in the future. The issues raised by accidental needle sticks and disposal of used syringes have led to products, techniques and regulations designed to reduce exposure to contaminated needles. Syringes with sheathed needles have been developed and hospitals have begun to increasingly give injections through intravenous tubing to reduce the number of contaminated needles. In addition during 1998 the state of California banned the use of exposed needles in hospitals and doctors' offices. The Company believes that needle-free injection systems may be attractive to healthcare professionals as a further means to reduce accidental needle sticks and the burdens of disposing of contaminated needles. While management believes that needle-free technology has broad market applicability, management also recognizes certain inherent limitations of needle-free injection, particularly with regard to dosage volumes above 0.5ml. These limitations relate to the energy required to penetrate the skin, and conventional needle-free injectors require unreasonably large energy sources to manage high volume injections. Nevertheless, parenteral injection of volumes of 1.0ml or more are not uncommon in medical practice today. In order to address perceived needs in the market segment requiring higher dosage volumes, the Company has begun to expend resources on the development of needle-based injection systems. These systems are being designed to incorporate the most important features of the Company's needle-free systems, namely, no visible needle and a very rapid injection cycle time. Management 3 believes that these features will allow the Company to compete more effectively in an important segment of the drug delivery industry. MARKET OPPORTUNITY An estimated nine to 12 billion needles and syringes are sold annually worldwide according to industry sources. The Company believes that a significant portion of these are used for the administration of drugs that could be delivered using the Company's Medi-Jector system but that only a small percentage of individuals who self-administer drugs currently use needle-free injection systems. The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin 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 the Company believes that the number of insulin injections will increase with time as the result of new diabetes management techniques which recommend more frequent use. Other parenteral drugs that are presently self-administered and may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headaches, impotence, hormone therapy, AIDS and hepatitis. The Company also believes that other existing parenteral drugs will be self-administered in the future and that additional parenteral drugs that are under development will be deemed appropriate for self-administration. PRODUCTS AND TECHNOLOGY Based in part upon the results of marketing and clinical studies performed by the Company, it believes that injections using a Medi-Jector system are perceived as more comfortable than injections using a needle. In addition, the Company believes injections can be administered more discreetly using a Medi-Jector. Current Needle-Free Injection Systems The Company's current Medi-Jector system, the Medi-Jector Choice, was introduced in December 1996 and consists of a coil spring mechanism, a dosage meter, multi-use disposable needle-free syringe and a plastic adapter. This injector is used by arming the spring mechanism, filling the needle-free syringe and then setting the pressure level for an optimally effective and comfortable injection. The coil spring is armed by turning the winding grip portion of the power pack to compress the coil spring. The unit is then filled by placing a plastic adapter on a drug vial, turning the winding grip in the opposite direction to pull the medication into the needle-free syringe until the proper dosage is displayed in the dosage window and removing the vial and adapter assembly. The pressure is adjusted by again turning the winding grip. An injection is given by holding the Medi-Jector system perpendicular to the skin in a location appropriate for the injection and pressing the trigger button. The most common injection sites are the upper arm, upper thigh, buttocks or the side of the torso. The retail price of the Medi-Jector Choice insulin device (excluding the needle-free syringe) is $399. Disposable Needle-Free Syringes. The disposable plastic needle-free syringes used with the Medi-Jector Choice system are labeled for use for up to 14 injections. The total annual cost to the end user of needle-free syringes and related supplies is approximately $260 per year (based upon an average of two injections per day). The needle-free syringes used with any of the Medi-Jector systems do not require special disposal. Once a needle-free syringe is removed from the device portion of the system, it cannot pierce the skin, consequently the risk of cross-infection from discarded needle-free syringes is reduced significantly over the risk associated with needles. Future generation injectors currently in development are being designed to accept either single or multi-use syringes. New Product Research and Development The Company continues to dedicate much of its financial resources and personnel toward improving its existing products and developing new products and technology. The Company believes that its development program offers pharmaceutical manufacturers a broad and attractive array of delivery choices, while providing consumers with less expensive and more user friendly injectors. 4 MJ-7 Injector. The Company believes the major obstacle to widespread market acceptance of needle-free injection systems has been the lack of a suitably compact and easy to use power source. Although the Company has reduced the size and complexity of its coil spring injectors over the years, the Company believes further reduction in size or improvement in ease of use of systems is needed. To overcome this obstacle, the Company is developing a novel and proprietary injector, the MJ7, based upon a new, more efficient modified coil spring design. Use of the new spring is expected to reduce the energy requirement by 15-30% with a concomitant reduction in size. The spring is a modified coil spring rather than a gas spring as originally envisioned, because of the lower cost and increased reliability of the coil spring design. Added features include an automatic safety lock, a larger dosage display and elimination of pressure setting adjustments. The device is quieter and easier to arm in addition to being smaller in size. The MJ-7 will be introduced initially for use with insulin and a multi-use disposable syringe. This injector system and disposable components, both single use and multi-use syringes, have been developed with technology collaboration and the financial support of Becton Dickinson and Company ("Becton Dickinson"), and commercialization is planned for 1999. Although the Company is no longer planning to use a gas spring in the MJ-7, it intends to reevaluate the feasibility of gas spring injectors for other applications in the future. MJ-8 Injector. Increasingly, parenteral drugs are being packaged in small 1.0ml to 3.0ml cartridges and administered in smaller volumes. For example, most European insulin users take four injections of insulin daily of 0.10ml to 0.15ml each. The Company conducted extensive research studies in 1998, comparing the effect of fluid volume and syringe nozzle design on energy requirements. The results of these investigations suggest that by reducing fluid volume and increasing nozzle efficiency it is feasible to design and manufacture smaller and easier to use devices. The further reduction in size allows the vial cartridge to fit within the device, adding further user convenience. Prototypes of this platform are scheduled to be completed in 1999, although commercialization is not expected before 2001. AJ-1 injector. Fluid dynamic studies conducted by the Company in early 1998 documented the benefit of adding a very short, hidden needle, supporting a hypothesis that breaking the very outer layers of the skin would permit dramatic energy reduction in its injection systems. Management believes this is a unique hybrid technology combining features of needle-free (jet) delivery and pre-set needle autoinjectors. The Company has filed for patent protection on certain elements of this early work. Also during 1998, the Company entered into discussions with the Elan Corporation plc ("Elan"), a drug delivery company based in Ireland, to acquire certain rights to proprietary technologies that complement the AJ-1 design. In November 1998, Medi-Ject executed an agreement with Elan in which it purchased marketing and manufacturing rights to this technology for certain applications. The purchase involved cash plus a royalty payable to Elan on AJ-1 product sales. The Company is designing and building prototypes of an AJ -1 injector with a capacity of 1.0ml. These injectors are to be pre-filled with medication and discarded after one use. The Company believes this design is attractive for management of short-term therapies that may require very few injections over limited time periods. Commercialization is planned for 2001. The foregoing forward-looking statements regarding the Company's development plans and schedules are subject to risks and uncertainties, including the Company's ability to successfully conclude development, to obtain ongoing funding for these development efforts, the perceived benefits of these products as development continues, including market demand, and the development of competing technologies, by the Company or others. The Company has expended approximately $2,585,000, $2,413,000 and $3,517,000 on research and development efforts during fiscal years 1996, 1997 and 1998, respectively. Of these amounts, approximately $1,854,000, $2,030,000 and $527,000 respectively, were funded by third-party sponsored development programs and licensing fees. 5 TARGET MARKETS The Company intends to target the following markets for use of the Medi-Jector system. To date, the Medi-Jector system has only been approved for use in the U.S., Japan and certain European countries for the administration of insulin and human growth hormone. Insulin Approximately 3.2 million people in the U.S. (estimated to be 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. The Company believes that another, much larger group of individuals, not seriously averse to needles yet still reluctant to piercing themselves, find it difficult to comply with injection regimens. The Company believes that as it continues to make improvements in its technology, that its injection systems will be more attractive to users in this market segment. Norway is an example where current devices have achieved favorable market penetration, assisted by government reimbursement for the Company's injector system. Human Growth Hormone Approximately 52,000 children worldwide receive frequent injections of human growth hormone for the treatment of growth retardation according to industry sources. The disease may be diagnosed as early as age three, with injections administered until bone maturity is reached at age seventeen or beyond. The hormone drug used for the treatment of this condition costs an estimated $20,000 or more at the wholesale level annually. Despite the use of pen-like needle injection systems, which are more convenient to use than traditional needles, compliance with the prescribed injection regimen continues to be a problem. A 1997 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 1998 study performed in the Netherlands showed that most children in the study preferred to have their human growth hormone administered using a Medi-Jector system rather than a pen-like needle injector. A small number of pharmaceutical companies currently hold a significant percentage of the worldwide human growth hormone market. The Company believes that its needle-free injector system offers a marketing advantage to the pharmaceutical companies with which it has agreements relating to human growth hormone. Erectile Dysfunction Studies estimate the number of men in the U.S. suffering from impotence at over 15 million. The causes, earlier thought to be mainly psychogenic, are now thought to be most often a natural result of aging, or a complication of diabetes, urogenital surgery or other physiological causes. Over ten years ago, it was observed that penile injections of vasoactive (blood vessel relaxing) drugs caused temporary erections sufficient to allow satisfactory sexual intercourse. Despite the recent introduction of an oral impotence therapy, penile injection remains an important therapy for men because oral therapy is ineffective for a significant portion of men with advanced stages of this disease. The first drug approved for injection in the U.S. was the generic drug prostaglandin E1. However, the Company believes that use of this drug has been hindered because penile self-injection is difficult and viewed as unpleasant by most men. As a result, one company has introduced an intra-urethereal prostaglandin E1 applicator. The Company believes that its needle-free injection technology may provide yet an additional attractive alternative to needles. 6 OTHER TARGET MARKETS The Company has targeted other parenteral drugs that are regularly self-administered. These include narcotic analgesics, the anticoagulant heparin used to prevent blood clots, hormone therapy, osteoporosis, biopharmaceuticals used for the treatment of AIDS and other hematological disorders. Although the Company has chosen to focus initially on self-injection opportunities, similar opportunities exist in hospitals, doctors' offices, clinics, nursing homes and hospices. Certain opportunities may address the concern for well being, such as the vaccination of small children, and others may be prompted by the danger of accidental needle sticks in high risk environments, such as the emergency room of a hospital. COLLABORATIVE AGREEMENTS The Company's business development efforts are focused on entering into collaborative agreements with pharmaceutical companies. The table below summarizes the Company's current agreements.
Company Market ------- ------ Ferring NV.............................. Growth Hormone (Europe and all territories of former U.S.S.R.) JCR Pharmaceuticals Co., Ltd............ Growth Hormone (Japan) Sci-Tech Genetics, Ltd.................. Growth Hormone (India, China and certain countries in South East Asia) Bio-Technology General Corporation (1).. Growth Hormone (United States) Organon, a division of Akzo/Nobel....... Undisclosed Teva Pharmaceutical Industries, Ltd..... Copaxone(R) (Multiple Sclerosis)
(1) Bio-Technology General Corporation is currently barred by a court injunction from introducing their growth hormone in the U.S. and therefore marketing of the Company's products in the U.S. for use with human growth hormone will not occur until this matter is resolved. OTHER RELATIONSHIPS Becton Dickinson In January 1996, the Company 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 MJ-7 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. Subsequent to year-end, both parties reached the conclusion that the MJ-7 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, the Company is free to market the MJ-7 insulin injector and manufacture disposables in exchange for a small royalty on sales. Becton Dickinson retains an option that allows it, for a limited time, to negotiate for marketing rights for the MJ-8 injector and a similar option to negotiate for the right to manufacture disposables under certain conditions. Schering-Plough In early 1998, the Company entered into a contract with Schering-Plough Corporation to supply MJ-7 injectors for persons taking alpha interferon for the treatment of hepatitis. By September 1998, Schering-Plough decided to cancel the order and terminate the project. In March 1999, the Company and Schering-Plough agreed to a financial 7 settlement in which Schering-Plough will pay the Company an undisclosed sum in exchange for cancellation of the purchase order and as reimbursement of certain non-cancelable manufacturing costs. Other Prior to 1998, the Company had received research funding from SmithKline Beecham to investigate the possible application of the Company's technology for certain pharmaceutical compounds. The Company also entered another research relationship with a second, undisclosed party with interests in the area of male erectile dysfunction. Both of these relationships have ended, although the Company continues to self-fund research in the field of male erectile dysfunction. PATENTS The Company, when appropriate, actively seeks protection for its products and proprietary information by means of United States and foreign patents and trademarks. The Company currently holds eight patents in the U.S., one in Japan, four in Taiwan and one in Canada. The Company also has 26 other patent applications being considered in various countries throughout the world. Some of the Company's technology is developed on its behalf by independent outside contractors. To protect the rights of its proprietary know-how and technology, Company policy requires all employees and consultants with access to proprietary information to execute confidentiality agreements prohibiting the disclosure of confidential information to anyone outside of the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such individuals while devoted to Company sponsored activities. Companies with which the Company has entered into development agreements have the right to certain technology developed in connection with such agreements. The Company has obtained the rights to certain technologies and maintains certain obligations to make milestone and royalty payments to the inventors. MANUFACTURING The Company operates 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 parts are manufactured by third-party suppliers and assembled at the Company's facility in Plymouth, Minnesota. Disposable vial adapters are either assembled at the Company's facility or by third parties. Quality control and final packaging are performed on site. The Company anticipates a need to invest in automated assembly equipment as volume increases in the future. MARKETING The Company's basic marketing strategy is to leverage off of the strength, existing distribution systems and expertise of the pharmaceutical and medical device companies with which it collaborates by relying on them to promote and sell its needle-free injection systems together with the products they manufacture. The Company anticipates that under these collaborative arrangements, it will manufacture and supply the needle-free injection technology for specific drug applications to the pharmaceutical company, which will market the system for use with its drugs. In some instances pharmaceutical companies may choose to give the injection systems and disposable components to users without charge as an inducement to customers to use their products. With respect to current selling efforts, the Company's relationship with Ferring, NV best reflects this basic strategy. Ferring is selling human growth hormone throughout Europe with a marketing campaign tied to the Medi-Ject needle-free delivery system. Ferring has been successful in establishing a user base of more that 1,000 children for its drug using the Medi-Jector system, which represents approximately 10% of the targeted markets. The Company's direct sales effort in the domestic insulin market typically requires that individuals with diabetes call the Company directly for information regarding the product and its uses. The Company's sales personnel explain the need for a doctor's prescription and advise on methods of filing for insurance reimbursement. 8 A modest national advertising program in lay journals generates inquiries. Training is supported by a video and manual accompanying each product. The Company employs one nurse to provide training and support for customers through this channel. The customer service "800" number is prominently displayed on each injector. The Company also sells Medi-Jector systems for insulin use to various distributors outside the U.S. In February 1999, the Company established an E-commerce distribution channel that allows its customers to purchase its products directly through the Internet. In the domestic insulin market, the Company has sold its systems for insulin using a combination of direct to consumer marketing and a network of pharmacies and distributors. Until approximately the beginning of the fourth quarter of 1997, the Company had been increasing its reliance on pharmacies and distributors in the domestic insulin market. At that time, management assessed its efforts and results to date with respect to its increased efforts in the domestic insulin market and determined that the most appropriate approach in the near term was to focus on selling direct to consumers. This approach reflects management's assessment that the amount of spending required to produce meaningful results with a distribution based approach is beyond the Company's current resources. Management believes that efforts to significantly expand sales in domestic insulin should be deferred until it can arrange an appropriate marketing alliance with a diabetes products company. The most common retail price of an injector (which can be used over a period of several years) is approximately $400, and disposable components for the system cost approximately $260 annually. This compares to an annual cost of approximately $140 to use two syringes with needles daily. The Company anticipates that the retail price of future generation Medi-Jector systems will be less than the current retail price. The Company has made recent progress in the European insulin market. In Norway, where reimbursement for injector systems has been available since 1997, sales on a per capita basis significantly exceed the U.S. The Company extended its European insulin marketing efforts in 1998 and signed an insulin injector distribution agreement with the Swedish MediSense division of Abbott Laboratories in February 1999. COMPETITION Competition in the parenteral drug delivery market is intensifying. The Company faces competition from traditional needle syringes, newer pen-like and sheathed needle syringes and other needle-free injection systems as well as alternative drug delivery methods including oral, transdermal and pulmonary delivery systems. 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, the Company's needle-free injection systems may be made obsolete by the development or introduction of drugs or drug delivery methods which do not require injection for the treatment of conditions currently targeted by the Company. In addition, because the Company intends to enter into collaborative arrangements with pharmaceutical companies, the Company's competitive position will depend upon the competitive position of the pharmaceutical company with which it collaborates for each drug application. While competition in the needle-free injection market currently is limited to small companies with modest financial resources, the barriers to entry are not great and the Company anticipates additional competition from companies with greater financial, commercial, personnel and development resources in the future. Two companies currently sell coil spring injectors to the U.S. insulin market. These two companies have not actively promoted their products over the past year, and the Company believes that it retains the largest market share. Another company, Bioject, Inc., has sold a CO2 powered injector since 1993. The injector is designed for and used almost exclusively for vaccinations in doctors' offices or public clinics. Powderject Pharmaceuticals, Plc, a British research company, is developing a needle-free injection system, as is Weston Medical Ltd, another U.K. based company. Both Powderject and Weston Medical compete actively and successfully for licensing agreements with pharmaceutical manufacturers. Even though the Company expects the needle-free injection market to expand, improvements continue to be made in needle syringes, including syringes with hidden needles and pen-like needle injectors. The Company expects that it will compete with existing needle injection methods as well as new needle injection methods yet to be developed. 9 GOVERNMENT REGULATION The Company's products and manufacturing operations are subject to extensive government regulations, both in the United States and abroad. In the United States, the FDA administers the Federal Food Drug and Cosmetic Act (the "FDC Act") and has adopted regulations, including those governing the introduction of new medical devices, the observation of certain standards and practices with respect to the manufacturing and labeling of medical devices, the maintenance of certain records and the reporting of device-related deaths, serious injuries and certain malfunctions to the FDA. Manufacturing facilities and certain Company records are also subject to FDA inspections. The FDA has broad discretion in enforcing the FDC Act and the regulations thereunder, and noncompliance can result in a variety of regulatory steps ranging from warning letters, product detentions, device alerts or field corrections to mandatory recalls, seizures, injunctive actions and civil or criminal actions or penalties. Drug delivery systems such as the Company's injectors may be approved or cleared for sale as a medical device or may be evaluated as part of the drug approval process in connection with a new drug application ("NDA") or a Product License Application ("PLA"). To the extent permitted under the FDC Act and current FDA policy, the Company intends to seek the required approvals and clearance for the use of its new injectors, as modified for use in specific drug applications such as 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. The Company believes that its Medi-Jector systems, when indicated for use with drugs or biologicals approved by the agency, will be regulated as medical devices 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 the Company's new injectors must be handled under the new drug provisions of the FDC Act, substantially greater regulatory requirements and approval times will be imposed. Use of a modified new product with a previously unapproved new drug likely will be handled as part of the NDA for the new drug itself. Under these circumstances, the device component will be handled as a drug accessory and will be approved, if ever, only when the NDA itself is approved. The Company's injector may be required to be approved as part of the drug delivery system under a supplemental NDA for use with previously approved drugs. Under these circumstances, the Company's device could be used with the drug only if and when the supplemental NDA is approved for this purpose. It is possible that, for some or even all drugs, the FDA may take the position that a drug-specific approval must be obtained through a full NDA or supplemental NDA before the device may be labeled for use with that drug. 10 To the extent that the Company's modified injectors are handled as drug accessories or part of a drug delivery system, rather than as medical devices, they are subject to all of the requirements that apply to new drugs. These include drug manufacturing requirements, drug adverse reaction reporting requirements, and all of the restrictions that apply to drug labeling and advertising. In general, the drug requirements under the FDC Act are more onerous than medical device requirements. These requirements could have a substantial adverse impact on the profitability of the Company. Similar requirements apply to systems regulated as medical devices. The Company received 510(k) marketing clearance from the FDA allowing the Company to market previous versions of its products, the Medi-Jector EZ system in February 1987, the Medi-Jector V system in October 1988, the Medi-Jector system to administer Bio-Technology General's human growth hormone in April 1996, and the Medi-Jector Choice system in October 1996. The Company expects in the future to submit 510(k) notifications with regard to further device design improvements and uses with additional drug therapies. The FDC Act also regulates the Company's quality control and manufacturing procedures by requiring the Company and its contract manufacturers to demonstrate compliance with the current Quality System Regulation ("QSR"). The FDA's interpretation and enforcement of these requirements has been increasingly strict in recent years and seems likely to be even more stringent in the future. The FDA monitors compliance with these requirements by requiring manufacturers to register with the FDA and by conducting periodic FDA inspections of manufacturing facilities. If the inspector observes conditions that might 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 the Company's devices from the marketplace. The FDA's Medical Device Reporting Regulation requires that the Company provide information to the FDA on the occurrence of any death or serious injuries alleged to have been associated with the use of the Company's products, as well as any product malfunction that would likely cause or contribute to a death or serious injury if the malfunction were to recur. In addition, FDA regulations prohibit a device from being marketed for unapproved or uncleared indications. If the FDA believed that the Company was not in compliance with these regulations, it could institute proceedings to detain or seize the Company's devices, issue a recall, seek injunctive relief or assess civil and criminal penalties against the Company or its executive officers, directors or employees. The Company also is subject to the Occupational Safety and Health Act ("OSHA") and other federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices, environmental protection and disposal of hazardous or potentially hazardous substances. Sales of medical devices outside of the U.S. are subject to foreign legal and regulatory requirements. The Company's injection systems have been approved for sale only in certain foreign jurisdictions. Legal restrictions on the sale of imported medical devices vary from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. Generally, the Company relies upon the companies marketing its injectors in foreign countries to obtain the necessary regulatory approvals for sales of its injectors in those countries. Generally, devices having an effective 510(k) clearance or PMA may be exported without further FDA authorization. FDA authorization is generally required in order to export other medical devices. The Company has obtained ISO 9001/EN 46001 certification of its quality systems. This certification shows that the Company's procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Such certification, along with European Medical Device Directive certification, evidence compliance with the requirements enabling the Company to affix the CE Mark to its current products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union ("EU") countries. 11 EMPLOYEES As of December 31, 1998, the Company employed 37 full-time employees. None of the Company's employees are represented by any labor union or other collective bargaining unit. The Company believes that its relations with its employees are good. LIABILITY INSURANCE The business of the Company entails the risk of product liability claims. Although the Company has not experienced any material product liability claims to date, any such claims could have a material adverse impact on the Company. The Company maintains product liability insurance with coverage of $1 million per occurrence and an annual aggregate maximum of $5 million. Management evaluates its insurance requirements on an ongoing basis. Item 2. DESCRIPTION OF PROPERTY. The Company leases approximately 23,000 square feet of office, manufacturing and warehouse space in Plymouth, a suburb of Minneapolis, Minnesota. The lease will terminate in April 2002. The Company believes its facility will be sufficient to meet its requirements through such time. Item 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of shareholders during the quarter ended December 31, 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- Franklin Pass, M.D. 62 President, Chief Executive Officer and Chairman of the Board of Directors Peter Sadowski, Ph.D. 51 Executive Vice President, Chief Technology Officer Mark S. Derus 43 Executive Vice President, Finance, Chief Financial Officer and Secretary Franklin Pass, M.D., joined the Company as a director and consultant in January 1992, and has served as the Company's President, Chief Executive Officer and Chairman of the Board of Directors since February 1993. From 1990 to 1992, Dr. Pass served as President of International Agricultural Investments, Ltd., an agricultural technology consulting and investment company. Dr. Pass, a physician and scientist, was Director of the Division of Dermatology at Albert Einstein College of Medicine from 1967 to 1973, the Secretary and Treasurer of the American Academy of Dermatology from 1978 to 1981 and the co-founder and Chief Executive Officer of Molecular Genetics, Inc., now named MGI Pharma, Inc., from 1979 to 1986. He is the author of more than 40 published medical and scientific articles. Dr. Pass serves on the board of directors of Verdant Brands Inc., a manufacturer of lawn and garden care products. Peter Sadowski, Ph.D., joined the Company in March 1994 as Vice President, Product Development. In October 1998, Dr. Sadowski was promoted to the position of Executive Vice President and Chief Technical Officer. From October 1992 to February 1994, Dr. Sadowski served as Manager, Product Development for GalaGen, Inc., a 12 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. Mark Derus joined the Company in December 1993 as Vice President, Finance, Chief Financial Officer and Secretary. In October 1998, Mr. Derus was promoted to the position of Executive Vice President and Chief Financial Officer. Mr. Derus initially served as a director of the Company from 1992 until he joined the Company as an employee in 1993. From 1986 to December 1993, Mr. Derus was Vice President, Finance of Cherry Tree Investments, Inc., a venture capital company that invests in early stage ventures. Mr. Derus will resign from his position at the Company effective April 2, 1999, in order to pursue other opportunities. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock has traded on the Nasdaq Small Cap Market of the Nasdaq Stock Market since March 8, 1999. Prior thereto, 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 the Company's 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 1997: First Quarter $31 7/8 $17 1/2 Second Quarter $23 3/4 $14 11/16 Third Quarter $19 1/16 $10 Fourth Quarter $19 3/8 $9 3/8 1998: First Quarter $14 3/8 $7 1/2 Second Quarter $12 1/2 $6 1/2 Third Quarter $9 11/16 $5 5/8 Fourth Quarter $5 5/8 $ 1 9/16 HOLDERS As of March 16, 1999, there were 147 holders of record of the Company's common stock, with another estimated 2,225 shareholders whose stock is held by nominees or broker dealers. DIVIDENDS The Company has not paid or declared any cash dividends on its common stock during the past five years. The Company has no intention of paying cash dividends in the foreseeable future on common stock. The Company will be paying semi-annual dividends on Series A Convertible Preferred Stock at a rate of 10%, payable on May 10 and November 10 each year. CHANGES IN SECURITIES Use of proceeds from public offering The Company's initial Registration Statement on Form S-1, file no. 333-6661, was declared effective by the Securities and Exchange Commission on October 10, 1996. The offering of the Company's Common Stock covered by such Registration Statement commenced on October 2, 1996. Rodman & Renshaw and R.J. Steichen & 13 Company acted as the managing underwriters ("the Representatives") for the offering. A total of 550,000 shares of Common Stock, including 66,000 shares subject to the Representatives over-allotment option and 44,000 shares subject to the warrants issued to the Representatives were registered. In addition, warrants to purchase 44,000 shares of Common Stock issued to the Representatives were also registered. The aggregate offering price of the registered Common Stock and warrants was $15,367,220. Of this amount, $12,100,000 representing 440,000 shares of Common Stock and warrants to purchase 44,000 shares of Common Stock have been sold. The underwriter's over-allotment option has expired and these shares were not sold. The Representative's warrant has not yet been exercised and consequently the offering has not yet terminated. The amount of expenses incurred for the Company's account in connection with the issuance and distribution of the securities registered are as follows: Underwriting discounts and commissions......... $ 907,500 Finder's fees.................................. 0 Expenses paid to or for the underwriters....... 12,786 Other expenses................................. 549,833 ------------- Total expenses....................... $ 1,470,119 ============= All such expenses were paid directly or indirectly to others. The net offering proceeds to the Company after deducting expenses were $10,629,881. All of the net proceeds have been used by the Company. The amount of net offering proceeds to the Company used for the following purposes is as follows: Purchase and installation of machinery and equipment.... $ 1,573,972 Repayment of indebtedness............................... 184,669 Working capital......................................... 740,069 Other : -market development expenses.......... 2,527,335 -product development expenses......... 5,603,836 ------------- $ 10,629,881 All such payments were made directly or indirectly to others. The use of proceeds contained herein does not represent a material change in the use of proceeds described in the prospectus. SALES OF UNREGISTERED SECURITIES On November 10, 1998 the Company sold 1,000 shares of Series A Preferred Stock (the "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. The Series A is redeemable at the Company's option at anytime 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 the election of the Company 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 anytime 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. 14 Item 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (In thousands, except per share data)
Year Ended December 31, ---------------------------------------------------------- 1994 1995 1996 1997 1998 ------- -------- ------- -------- ------- Statement of Operations Data: Sales.................................... $ 1,518 $ 1,654 $ 1,838 $ 1,687 $ 2,224 Licensing and product development............. 470 921 1,854 2,030 527 ------- -------- ------- ------- -------- Revenues............................... 1,988 2,575 3,692 3,717 2,751 ------- -------- ------- ------ -------- Cost of sales............................ 631 1,049 1,136 1,221 1,852 Research and development................. 401 1,195 2,585 2,413 3,517 General and administrative.................... 1,118 1,237 1,397 1,983 2,427 Sales and marketing........................... 878 887 1,019 1,540 1,001 ------- -------- ------- ------ -------- Operating expenses..................... 3,028 4,368 6,137 7,157 8,797 ------- -------- ------- ------ -------- Net operating loss....................... (1,040) (1,793) (2,445) (3,440) (6,046) Net other income (expense)............... (26) (89) 207 468 276 ------- -------- ------- ------ -------- Net loss................................. $(1,066) $ (1,882) $(2,238) $(2,972) $ (5,770) ======= ======== ======= ======= ======== Net loss per common share (1), (2), (3) ...... $(26.98) $ (43.03) $ (4.22) $ (2.12) $ (4.07) ======= ======== ========= ======= ======== Weighted average number of common shares (3) ............................ 40 44 530 1,402 1,421
At December 31, ---------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- --------- --------- -------- Balance Sheet Data: Cash and cash equivalents................ $ 646 $ 36 $ 11,039 $ 7,283 $ 2,852 Working capital (deficit)................ 108 (650) 11,187 7,804 3,068 Total assets............................. 1,361 1,240 12,956 10,047 5,334 Long-term liabilities, less current maturities....................... 299 136 8 2 Accumulated deficit...................... (7,419) (9,302) (11,540) (14,512) (20,296) Total shareholders' equity (deficit)..... $ 252 $ (74) $ 12,120 $ 9,337 $ 4,630
(1) Basic and diluted loss per share amounts are identical as the effect of potential common shares is anti-dilutive. (2) The Company has not paid any dividends on its common stock since inception. In November 1998, the Company issued a new Series A Convertible Preferred Stock which requires the payment of dividends. 1998 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 injection systems. In 1993, the Company hired a new management team with the goal of revitalizing and redefining the Company's strategic direction. Since that time, product development efforts have increased, emphasizing reductions in the cost of the Company's systems to make them more competitive in the marketplace. In addition, marketing efforts have been focused on expanding the use of needle-free injection systems for parenteral drugs other than insulin. As part of this effort to encourage broader use of needle-free injection systems, the Company began entering into technology and product license agreements to sell the Medi-Jector system. The licensing and development income from these agreements has been used primarily to fund increased product development efforts. Development efforts have resulted in a new generation of the Medi-Jector system, the Medi-Jector Choice system, introduced in December 1996, which incorporates molded plastic components rather than tooled steel components and a disposable needle-free syringe. Current development efforts are primarily oriented toward completion of the smaller coil spring system, improved injection quality and continued size reduction. 15 RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to Year Ended December 31, 1998 Revenues decreased from approximately $3,717,000 in 1997 to approximately $2,751,000 in 1998, a decrease of approximately 26%. 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 $537,000 or 32%. 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%. 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. The Company expects that licensing and development fee income will continue to fluctuate on a quarter to quarter basis, depending on a number of factors including the timing of the execution of new development and licensing agreements and the timing, nature and size of fee payments to be made under existing and new agreements. In addition, since the Company in general does not recognize project based fee income until related development work has been performed, quarterly results will fluctuate with the timing of the Company's research and development efforts. 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 $1,852,000 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 mainly due to the purchase of proprietary needle based injection technology from Elan Corporation, plc. 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 charge in the fourth quarter following the suspension of development activities relating to the gas spring power source project. Activities on this project have been temporarily suspended after new coil spring alternatives became available which appear to meet product needs. Management believes the gas spring has certain features which may be valuable in future generation injection systems and therefore 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 the Company's repurchase of certain distributor rights in the human growth hormone market from one of its distributors. The repurchase of these rights has allowed the Company to sign a new agreement that is expected to generate fee income and product sales in the future. Sales and marketing expenses decreased from approximately $1,540,000 in 1997 to approximately $1,001,000 in 1998, a decrease of approximately 35%. Reduced expenses in the sales and marketing program reflect the Company's planned reduction in sales efforts in the U.S. insulin market. This reduction was initiated in late 1997 16 and is consistent with the Company's long term strategy of selling its products through pharmaceutical companies with a focus on higher priced pharmaceuticals. 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. Year Ended December 31, 1996 Compared to Year Ended December 31, 1997 Revenues increased from approximately $3,692,000 in 1996 to approximately $3,717,000 in 1997, an increase of approximately 1%. This increase was primarily due to an increase of approximately $176,000 or 10% in development and licensing fee income, offset by a decrease in product sales of approximately $151,000 or 8%. Product sales include sales of injectors, related parts and disposable components, repairs and freight. The total number of devices sold was nearly unchanged at 3,338 and 3,391 in 1996 and 1997, respectively. Total revenue from injector sales decreased however due to a decline in the average selling price per injector from $385 in 1996 to $294 in 1997, consistent with the Company's general strategy as discussed above. Approximately half of the decrease in revenue from injector sales was offset by increased sales of related supplies, including disposable components for the Medi-Jector Choice system. Licensing and development fee income increased as a result of three new agreements signed with pharmaceutical firms interested in obtaining marketing rights for injection systems under development. In September 1997, the Company announced that its customers were occasionally experiencing certain problems when using the Medi-Jector Choice system. These problems pertained to the unexpected breakage of the disposable needle-free syringe portion of the system and the fit of the disposable vial adapter onto the syringe. As a result, management initiated a product recall and replacement campaign for the affected disposable components. Management conducted the recall campaign under the guidance of the FDA. These problems interrupted production and also caused certain sales delays during the fourth quarter while a correction to the problem was developed. Cost of sales increased from approximately $1,136,000 in 1996 to approximately $1,221,000 in 1997, an increase of 7%. The increase was primarily due to higher manufacturing expenses during a period of flat unit volume. The principal factors contributing to the increase in manufacturing expenses were outside engineering consulting services, depreciation, rent and personnel. Product problems relating to the disposable needle-free syringe of the Medi-Jector Choice (discussed above) also increased manufacturing expense. These expenses related primarily to scrap, engineering consulting fees and interrupted production during the fourth quarter of 1997. Research and development expenses decreased from approximately $2,585,000 in 1996 to approximately $2,413,000 in 1997, a decrease of less than 7%. This decrease occurred as the Company completed an important transition in its product research and development program. Prior to 1997, this program was largely based on the efforts of a few outside engineering firms which handled a majority of the engineering and development work. During 1997, the Company purchased certain equipment and hired eight additional engineers and technicians who are dedicated entirely to design and development of improved needle-free injection and drug delivery systems. The transition to an internal research and development program has resulted in an overall increase in the number of person hours dedicated to such efforts while reducing the associated expense. General and administrative expenses increased from approximately $1,397,000 in 1996 to approximately $1,983,000 in 1997, an increase of approximately $586,000 or 42%. Management estimates that approximately one half of this increase relates to costs associated with being a publicly traded company for all of 1997 compared to just three months of 1996. These increased expenses relate to investor relations efforts, stock transfer and NASDAQ fees, D&O liability insurance and legal expense. Depreciation and amortization expense also increased by approximately $106,000 as a result of higher equipment balances and the start of amortization of capitalized intellectual property following the issuance of a major patent in early 1997. Sales and marketing expenses increased from approximately $1,019,000 in 1996 to approximately $1,540,000 in 1997, an increase of approximately of 51%. This increase is primarily attributable to expenses associated with a 17 significant sales program directed at the domestic insulin market initiated in early 1997. In October 1997 the Company announced that it was terminating this program due to poor results. During the fourth quarter, expenses associated with this program were reduced by approximately $500,000 on an annual basis. Management believes that this revised level of spending is appropriate relative to the current opportunities in the domestic insulin market. Interest and other income increased from approximately $239,000 in 1996 to approximately $505,000 in 1997, an increase of approximately $266,000. This increase is attributable to increased interest earnings on higher average cash reserves on hand during 1997, following the Company's initial public offering in October 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short term investments decreased from approximately $7,283,000 on December 31, 1997 to $2,852,000 at December 31, 1998. The decrease is primarily due to a net loss of approximately $5,769,000 and fixed asset purchases of approximately $516,000 offset in part by a sale of preferred stock to Elan Corporation, plc, non-cash depreciation and amortization expenses, and by a lower accounts receivable balance at the end of 1998. During the year ended December 31, 1998, cash used to fund operating activities was approximately $5,012,000. The major components of this amount included a net loss of approximately $5,769,000 and an increase of approximately $195,000 in inventories, offset by depreciation and amortization totaling approximately $597,000, an increase in deferred revenue of $216,000 and a decrease in receivables of approximately $485,000. Net cash received from investing activities totaled approximately $3,080,000 principally due to net proceeds from sales of marketable securities totaling approximately $3,714,000. This amount was offset in part by additions to fixed assets of approximately $516,000, and an additional investment in patent rights totaling approximately $120,000. Net cash provided by financing activities totaled approximately $1,039,000, resulting primarily from the issuance of convertible preferred stock for $1,000,000. The Company expects that it will report a net loss for the year ending December 31, 1999 as it continues to incur marketing and development costs related to bringing future generations of its products to market. The Company's long term capital requirements will depend on numerous factors, including the status of the Company's collaborative arrangements, the progress of the Company's research and development programs and the receipt of revenues from sales of the Company's products. In October 1998, the Company took certain actions to reduce its operating expenses. These actions included involuntary staff reductions, personnel reductions through attrition and the termination of certain consultant relationships. In March 1999, the Company reached an agreement with Schering-Plough Corporation to settle mutual obligations of the parties under a contract dated January 20,1998. Schering-Plough agreed to pay the Company an undisclosed sum in exchange for cancellation of a product purchase order and as reimbursement for certain non-cancelable manufacturing expenses. The Company believes that the capital available to the Company at December 31, 1998, plus the expected revenue from product sales and from various development and licensing agreements, including the settlement with Schering-Plough, will provide sufficient cash to fund expected losses and meet other cash usage needs through December 1999. In order to meet its capital needs beyond this period, the Company may be required to raise additional capital through public or private debt or equity offerings. The Company can provide no assurance, however, that cash available will be sufficient to meet the Company's needs during the next twelve months or beyond, that the Company will ever become profitable or that the Company will be able to raise additional capital when and if needed, on terms acceptable to the Company, or at all. IMPACT OF THE YEAR 2000 The Company is addressing the issue associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way. The Company is aware of the computing difficulties that the millenium issue presents for the Year 2000. The Company has formed a team to address the information technology (IT) systems used for internal purposes at the Company and to also address the non-IT systems. Software has been purchased to expedite the process of determining which systems are out of compliance and the Company intends to have all systems analyzed, 18 reprogrammed and tested by June 30, 1999. The non-IT systems generally require third-party assurances as to compliance with Year 2000. To date, confirmations have been received from virtually all of the Company's vendors indicating that plans are being developed to address processing of transactions in the Year 2000. There can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal operating systems, which are composed predominantly of third party software and hardware technology, or by the inability of vendors to correct their Year 2000 issues. The majority of the Company's current standard product lines and manufacturing equipment are not date sensitive and therefore are not affected by the Year 2000 issues. The Company incurred approximately $5,000 of expense to address the Year 2000 problem during fiscal 1998 and expects to incur total expenses of approximately $20,000 in relation to this problem. The Company is in the process of establishing a contingency plan if the Company's IT and non-IT systems are not Year 2000 compliant. It is anticipated that the contingency plan and all related Year 2000 compliance initiatives will be completed by June 30, 1999. STOCK OPTION REPRICING On July 21, 1998, the Board of Directors approved the repricing of all outstanding options held by employees, other than the Chief Executive Officer of the Company, 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, the Board of Directors approved the repricing of one stock option agreement held by the Chief Executive Officer of the Company, 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. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for the Company in 1999. The Company is currently evaluating SFAS No. 133, but does not expect that it will have a material effect on its financial statements. Item 7(a). MARKET RISK ASSESSMENT Under Items 305(b) and 9A of Regulation S-K, the Company believes that it has no material exposure to market risks. All foreign sales are denominated and transacted in U.S. dollars, the Company's excess cash is invested in a highly liquid money market fund which primarily invests in short term securities and its outstanding shares of convertible preferred have a fixed coupon rate. 19 Item 8. FINANCIAL STATEMENTS. MEDI-JECT CORPORATION INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report.................................................21 Balance Sheets as of December 31, 1997 and 1998..............................22 Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998........................................23 Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1997 and 1998...........................................................24 Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998........................................25 Notes to Financial Statements................................................26 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Medi-Ject Corporation: We have audited the accompanying balance sheets of Medi-Ject Corporation (the Company) as of December 31, 1997 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 26, 1999 except as to Note12(c), which is as of March 26, 1999 21 MEDI-JECT CORPORATION BALANCE SHEETS
December 31, ---------------------------- 1997 1998 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents ......................................... $ 3,745,851 $ 2,852,285 Marketable securities ............................................. 3,537,483 -- Accounts receivable, less allowances for doubtful accounts of $22,284 and $25,000, respectively ............................... 760,948 275,694 Inventories ....................................................... 397,072 592,185 Prepaid expenses and other assets ................................. 71,495 52,006 ------------ ------------ 8,512,849 3,772,170 ------------ ------------ Equipment, furniture and fixtures, net ................................. 1,165,213 1,278,456 ------------ ------------ Patent rights, net ..................................................... 369,406 283,805 ------------ ------------ $ 10,047,468 $ 5,334,431 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 321,758 $ 250,512 Accrued expenses and other liabilities ............................ 379,776 236,191 Deferred revenue .................................................. -- 216,000 Capital lease obligations - current maturities .................... 7,083 1,721 ------------ ------------ 708,617 704,424 ------------ ------------ Capital leases, less current maturities ................................ 1,721 -- Shareholders' equity: Series A Convertible Preferred Stock: $0.01 par; authorized 10,000 shares; 1,000 issued and outstanding at December 31, 1998, aggregate liquidation preference of $1 million -- 10 Common Stock: $0.01 par; authorized 3,400,000 shares; 1,414,318 and 1,424,752 issued and outstanding at December 31, 1997 and 1998, respectively ........................ 14,143 14,247 Additional paid-in capital ........................................ 23,835,221 24,911,694 Accumulated deficit ............................................... (14,512,234) (20,295,944) ------------ ------------ 9,337,130 4,630,007 ------------ ------------ Commitments (Note 4) $ 10,047,468 $ 5,334,431 ============ ============
See accompanying notes to financial statements. 22 MEDI-JECT CORPORATION STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Revenues: Sales .................................... $ 1,837,704 $ 1,686,588 $ 2,223,504 Licensing & product development .......... 1,854,100 2,030,435 527,364 ----------- ----------- ----------- 3,691,804 3,717,023 2,750,868 ----------- ----------- ----------- Operating Expenses: Cost of sales ............................ 1,136,272 1,221,051 1,852,026 Research and development ................. 2,584,806 2,413,366 3,516,856 General and administrative ............... 1,397,338 1,983,024 2,426,639 Sales and marketing ...................... 1,019,077 1,539,504 1,001,178 ----------- ----------- ----------- 6,137,493 7,156,945 8,796,699 ----------- ----------- ----------- Net operating loss ............................. (2,445,689) (3,439,922) (6,045,831) ----------- ----------- ----------- Other income (expense): Interest and other income ................ 239,055 505,295 291,521 Interest and other expense ............... (31,934) (37,140) (15,154) ----------- ----------- ----------- 207,121 468,155 276,367 ----------- ----------- ----------- Net loss ....................................... (2,238,568) (2,971,767) (5,769,464) Preferred stock dividends ...................... -- -- (14,246) ----------- ----------- ----------- Net loss applicable to common shares ........... $(2,238,568) $(2,971,767) $(5,783,710) =========== =========== =========== Basic and diluted net loss per common share .... $ (4.22) $ (2.12) $ (4.07) =========== =========== =========== Basic and diluted weighted average common shares outstanding .............................. 529,936 1,402,140 1,421,066
See accompanying notes to financial statements 23 MEDI-JECT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
Convertible Preferred Stock --------------------------------------------------------------------------------- Series C Series B Series A ----------------------------------- -------------------------- ------------ Shares Amount Shares Amount Shares Amount -------- --------- ------------ ------------ ------------ ----------- Balance, December 31, 1995 .................. -- -- 2,090,633 20,906 1,103,867 11,039 Conversion of Series A to common stock ... -- -- -- -- (1,103,867) (11,039) Conversion of note payable ............... -- -- -- -- -- -- Shares issued for reverse stock split .... -- -- 43 -- -- -- Series B: Exercise of stock options and conversion of note payable ........................ -- -- 380,808 3,808 -- -- Series C: Shares issued for cash ................. 761,615 7,616 -- -- -- -- Offering costs ......................... -- -- -- -- -- -- Series E: Warrant issued for cash ................ -- -- -- -- -- -- Common stock: Issued common stock pursuant to the company's initial public offering ..... -- -- -- -- -- -- Offering costs ......................... -- -- -- -- -- -- Conversion of Series C to common stock ... (761,615) (7,616) -- -- -- -- Conversion of Series B to common stock ... -- -- (2,471,484) (24,714) -- -- Issuance of Series B anti-dilution shares -- -- -- -- -- -- Net loss ................................. -- -- -- -- -- -- -------- --------- ------------ ------------ ------------ ------------ Balance, December 31, 1996 .................. -- -- -- -- -- -- Exercise of stock options and warrants .. -- -- -- -- -- -- Compensation expense, stock options ...... -- -- -- -- -- -- Net loss ................................. -- -- -- -- -- -- -------- --------- ------------ ------------ ------------ ------------ Balance, December 31, 1997 .................. -- -- -- -- -- -- Issuance of Series A preferred stock ..... -- -- -- -- 1,000 10 Dividends payable on preferred stock ..... -- -- -- -- -- -- Financing cost ........................... -- -- -- -- -- -- Exercise of stock options and warrants ... -- -- -- -- -- -- Compensation expense, stock options ...... -- -- -- -- -- -- Net loss ............................... -- -- -- -- -- -- -------- --------- ------------ ------------ ------------ ------------ Balance, December 31, 1998 .................. -- $ -- -- $ -- 1,000 $ 10 ======== ========= ============ ============ ============ ============ Common stock Additional --------------------------- paid-in Accumulated Shares Amount capital deficit Total ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 .................. 43,773 438 9,195,351 (9,301,899) (74,165) Conversion of Series A to common stock ... 220,773 2,208 8,831 -- -- Conversion of note payable ............... 6,093 61 99,939 -- 100,000 Shares issued for reverse stock split .... 118 1 (1) -- -- Series B: Exercise of stock options and conversion of note payable ........................ -- -- 809,822 -- 813,630 Series C: Shares issued for cash ................. -- -- 2,992,384 -- 3,000,000 Offering costs ......................... -- -- (236,022) -- (236,022) Series E: Warrant issued for cash ................ -- -- 125,000 -- 125,000 Common stock: Issued common stock pursuant to the company's initial public offering ..... 440,000 4,400 12,095,600 -- 12,100,000 Offering costs ......................... -- -- (1,470,199) -- (1,470,199) Conversion of Series C to common stock ... 152,323 1,523 6,093 -- -- Conversion of Series B to common stock ... 494,297 4,943 19,771 -- -- Issuance of Series B anti-dilution shares 27,750 277 (277) -- -- Net loss ................................. -- -- -- (2,238,568) (2,238,568) ------------ ------------ ------------ ------------ ------------ 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 ..... -- -- 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 .................. 1,424,752 $ 14,247 $ 24,911,694 ($20,295,944) $ 4,630,007 ============ ============ ============ ============ ============
See accompanying notes to financial statements 24 MEDI-JECT CORPORATION STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------- 1996 1997 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss ................................................. $ (2,238,568) $ (2,971,767) $ (5,769,464) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................ 178,526 326,065 596,727 Loss on disposal of assets ............................... -- 17,079 9,445 Interest on marketable debt securities ................... (7,417) (246,813) (176,086) Compensation expense ..................................... 4,995 30,944 Changes in operating assets and liabilities: Accounts receivable .................................... (361,515) (223,193) 485,254 Inventories ............................................ (71,101) (45,742) (195,113) Prepaid expenses and other assets ...................... (51,081) 15,094 19,489 Accounts payable ....................................... 110,175 (31,698) (71,246) Accrued liabilities .................................... (66,786) 48,330 (157,831) Deferred revenue ....................................... (134,544) (14,019) 216,000 ------------ ------------ ------------ Net cash used in operating activities ...................... (2,642,311) (3,121,669) (5,011,881) ------------ ------------ ------------ Cash flows from investing activities: Purchases of marketable securities ....................... (1,456,860) (6,975,059) (2,729,831) Proceeds from sales of marketable securities ............. -- 5,148,666 6,443,400 Purchases of equipment, furniture and fixtures ........... (297,090) (859,373) (516,186) Proceeds from sale of equipment, furniture & fixtures .... -- -- 2,200 Payments for patent rights ............................... (109,722) (77,790) (119,828) ------------ ------------ ------------ Net cash provided by (used in) investing activities ........ (1,863,672) (2,763,556) 3,079,755 ------------ ------------ ------------ Cash flows from financing activities: Principal payments on capital lease obligations .......... (44,546) (32,293) (7,083) Proceeds from issuance of common stock, net .............. 10,394,689 184,226 64,580 Proceeds from issuance of convertible preferred stock, net 3,812,500 -- 981,063 Warrants issued .......................................... 125,220 -- -- Proceeds from issuance of notes payable .................. 187,500 -- -- Principal payments on notes payable ...................... (429,957) (96,097) -- ------------ ------------ ------------ Net cash provided by financing activities .................. 14,045,406 55,836 1,038,560 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....... 9,539,423 (5,829,389) (893,566) Cash and cash equivalents: Beginning of year ........................................ 35,817 9,575,240 3,745,851 ------------ ------------ ------------ End of year .............................................. $ 9,575,240 $ 3,745,851 $ 2,852,285 ============ ============ ============
See accompanying notes to financial statements. 25 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 1. Description of Business and Summary of Significant Accounting Policies Business The Company is primarily a manufacturer and distributor of needle-free injection devices and disposables for the injection of insulin and human growth hormone. Products are sold throughout the United States, Europe, the Middle East, and Asia. 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, 1996, 1997 and 1998, the effects of potential common shares were excluded from the calculation of diluted EPS because their effect was antidilutive. Cash Equivalents The Company considers highly liquid debt instruments with original maturities of 90 days or less to be cash equivalents. Marketable Securities The Company's marketable debt securities are classified as available-for-sale and are carried at amortized cost, which approximates fair value. 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 the Company has an unconditional right to such payment. Depending on a license or product 26 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 development agreement's terms, recognition criteria may be satisfied upon achievement of milestones, passage of time, or product sales by the licensee. Payments received by the Company in excess of amounts earned are classified as deferred revenue. Stock-Based Compensation Compensation expense for stock incentives granted to employees and directors is recognized in accordance with Accounting Principles Board, Opinion 25 ("APB 25"), "Accounting for Stock Issued to Employees." Pro forma effects on net loss and loss per share are provided as if the fair value based method defined in Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," had been applied. Product Warranty The Company recognizes the estimated cost of warranty obligations to its customers at the time the products are shipped. Research and Development Company sponsored research and development expenses related to both present and future products are expensed as incurred. Patent Rights The Company capitalizes the cost of obtaining patent rights. These capitalized costs are amortized on a straight-line basis over seven years beginning on the earlier of the date the patent is issued or the first commercial sale of product utilizing such patent rights. 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 Discposed Of The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be 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 27 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 by the amount by which the carrying amount of the assets exceed 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. Fair Value of Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. Advertising Expenses Advertising expense (including production and communication costs) for 1996, 1997 and 1998 was $168,145, $333,515 and $201,521, respectively. Production costs related to advertising are expensed as incurred. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income or loss and its components (revenue, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company has adopted SFAS No. 130, but because it does not have any components of comprehensive income, net loss and comprehensive net loss are identical. New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for the Company in 1999. The Company is currently evaluating SFAS No. 133, but does not expect that it will have a material effect on its financial statements. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to the development of internal use software, other than those incurred during the application development stage, to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 is effective for the Company's fiscal year ending December 31, 1999. Adoption is not expected to have a material effect on the Company's financial statements. 2. Liquidity As reflected in the accompanying consolidated financial statements, the Company incurred a net loss of $5,769,464 for the year ended December 31, 1998. In addition, the Company has incurred net losses and has had negative cash flows from operating activities since inception. Management believes current working capital of $3,067,746 and projected operating revenues supplemented by proceeds from a financial settlement with Schering-Plough will provide the Company with sufficient liquidity through 1999. It is probable the Company will be 28 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 required to raise additional capital by early 2000. Management's intentions are to raise this additional capital through alliances with strategic corporate partners, issuance of debt, or an equity offering. If capital requirements vary materially from those currently planned, the Company could require additional capital at an earlier time. There can be no assurance that adequate funds will be available when needed or on acceptable terms. 3. Composition of Certain Financial Statement Captions December 31, -------------------------- 1997 1998 ----------- ----------- Inventories: Raw material ........................... $ 196,579 $ 132,884 Work-in-process ........................ 78,220 95,157 Finished goods ......................... 122,273 364,144 ----------- ----------- $ 397,072 $ 592,185 =========== =========== Equipment, furniture and fixtures: Furniture, fixtures and office equipment $ 805,310 $ 933,296 Production equipment ................... 1,161,803 1,518,675 Less accumulated depreciation .......... (801,900) (1,173,515) ----------- ----------- $ 1,165,213 $ 1,278,456 =========== =========== Patent rights: Patent rights .......................... $ 422,800 $ 542,628 Less accumulated amortization .......... (53,394) (258,823) ----------- ----------- $ 369,406 $ 283,805 =========== =========== Accrued expenses and other liabilities: Product warranty and returns ........... $ 51,436 $ 56,000 Payroll ................................ 59,665 34,715 Other .................................. 268,675 145,476 ----------- ----------- $ 379,776 $ 236,191 =========== =========== 4. Leases The Company has a noncancelable operating lease for its office and manufacturing facility that expires in April 2002. This lease requires the Company to pay all executory costs such as maintenance and property taxes. Rent expense incurred for the years ended December 31, 1996, 1997 and 1998 was $101,139, $161,339 and $214,093, respectively. The Company is also obligated under a non-cancelable lease classified as a capital lease. The lease calls for monthly payments of $202 with an expiration date of September 1999. Equipment, furniture, and fixtures include $67,380 and $8,813 of cost and $51,524 and $7,050 of accumulated amortization as of December 31, 1997 and 1998, respectively, related to the current and prior leases. 29 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 Future minimum lease payments are as follows as of December 31, 1998: Capital Operating Leases Leases ------ ------ 1999................................ 1,721 243,844 2000................................ -- 260,610 2001................................ -- 279,031 2002................................ -- 98,508 ------ -------- $1,721 $881,993 ====== ======== 5. Income Taxes The Company incurred losses for both book and tax purposes in each of the years in the three year period ended December 31, 1998 and, accordingly, no income taxes were provided. Effective tax rates differ from statutory federal income tax rates in the years ended December 31, 1996, 1997 and 1998 as follows: 1996 1997 1998 ---- ---- ---- Statutory federal income tax rate ........ (34.0)% (34.0)% (34.0)% Valuation allowance increase ............. 39.8 35.7 39.0 State income taxes, net of federal benefit (2.0) (2.0) (3.6) Research and experimentation credit ...... (1.6) -- (1.6) Other .................................... (2.2) 0.3 0.2 ---- ---- ---- 0.0% 0.0% 0.0% ==== ==== ==== Deferred tax assets as of December 31, 1997 and 1998 consist of the following: 1997 1998 ----------- ----------- Inventory reserve ............. $ 20,000 $ 18,000 Net operating loss carryforward 5,060,000 7,383,000 Research credit carryforward .. 165,000 372,000 Other ......................... 45,000 109,000 ----------- ----------- 5,290,000 7,882,000 Less valuation allowance ........... (5,290,000) (7,882,000) ----------- ----------- $ 0 $ 0 =========== =========== At December 31, 1998, the Company had net operating loss carryforwards ("NOL") of approximately $20,000,000 for federal income tax purposes which if unused will begin to expire in 2008. Additionally, the Company had research credit carryforwards of approximately $372,000. As a result of the 1996 equity changes as described in Note 6, the net operating loss will be subject to annual limitation as defined by Section 382 of the Internal Revenue Code. The annual limitation for utilization of the net operating loss carryforwards is approximately $750,000. Subsequent equity changes could further limit the net operating losses available. 30 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 6. Shareholders' Equity Initial Public Offering In October 1996, the Company completed an initial public offering ("IPO") of its common stock. In this offering 440,000 common shares were sold at a price of $27.50 per share. As a consequence of this offering, and in accordance with the terms of each of the various series of preferred stock that the Company had outstanding prior to the IPO, all series of preferred shares then outstanding and rights to acquire preferred shares were automatically converted into common stock or rights to purchase common stock Authorized Shares At December 31, 1998, 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 undesignated as to class. The authorized common share figure has been adjusted for a one for five reverse stock split effective on January 28, 1999. The stock split had no effect on the authorized preferred shares. Series A Convertible Preferred Stock On November 10, 1998 the Company sold 1,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred") and warrants to purchase 56,000 shares of common stock for total consideration of $1,000,000 to Elan Corporation, plc. The Series A Preferred carries a 10% dividend which is payable semi-annually. The Series A Preferred is redeemable at the Company's option at anytime at $1,000 per share. The Series A Preferred is not convertible by the holder into common stock until 10 years from the date of issue at $7.50 per share or 95 percent of the market price on the date of conversion. The Series A Preferred becomes convertible at the election of the Company in the event the Company is unable to secure a sub-licensee or user for certain technology purchased from Elan prior to November 10, 2000. The shares are convertible into common stock at an average closing market price of the common stock for the 20 trading days immediately preceding the date of conversion. Stock Options and Warrants The Company's stock option plans allow for the grants of options to officers, directors, 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. As of December 31, 1995 the Company had stock options outstanding for 380,808 shares of its Series B convertible preferred stock issued in connection with a 1993 stock purchase agreement. This option agreement was exercised in full on February 29, 1996. The exercise price was $1.64 per share for 190,404 shares and $2.63 for the remaining 190,404 shares, all of which were converted to shares of common stock in connection with the Company's IPO. Stock Option Repricing On July 21, 1998, the Board of Directors approved the repricing of all outstanding options held by employees, other than the Chief Executive Officer and directors, of the Company, which had an exercise price greater than 31 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 $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, the Board of Directors approved the repricing of one stock option agreement held by the Chief Executive Officer of the Company, 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. Stock option and warrant activity is summarized as follows: Weighted Number average of Shares prices ---------- ----------- Outstanding at December 31, 1995......... 198,362 9.20 Granted.............................. 588,583 28.05 Exercised............................ (76,276) 8.20 Canceled............................. (3,992) 8.75 -------- ------ 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 ======== ====== The following table summarizes information concerning currently outstanding and exercisable options and warrants by price range:
Outstanding Exercisable --------------------------------------------------------- -------------------------------------- Number of Shares Weighted Average Weighted Average Number Exercisable Weighted Average Price Range Outstanding Remaining Life Exercise Price Exercise Price - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ Pursuant to Option Plans: $ 2.80 to 3.15 26,500 9.9 $3.06 -- $ -- 6.55 to 9.40 222,169 7.6 7.28 111,787 7.09 14.70 to 25.00 53,870 7.2 21.46 34,630 19.94 -------- ------- 302,539 146,417 ======= ======= Warrants: $15.00 to 23.00 132,772 7.0 $19.60 132,772 $19.60 29.55 to 33.00 424,807 6.6 29.91 424,807 29.91 ------- ------- 557,579 557,579 ======= =======
The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based 32 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 compensation plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, the Company's net loss and loss per share would have increased to the pro-forma amounts shown below: 1996 1997 1998 ---- ---- ---- Net loss applicable to common shareholders: As reported ......... $2,238,568 $2,971,767 $5,783,710 Pro forma ........... $2,614,000 $3,672,000 $6,667,938 Net loss per common share: As reported ......... $ 4.22 $ 2.12 $ 4.07 Pro forma ........... $ 4.93 $ 2.62 $ 4.69 The per share weighted-average fair value of stock based awards granted during 1996, 1997 and 1998 is estimated as $20.80, $17.15 and $9.19 respectively, on the date of grant using the Black-Scholes option pricing model with the following assumptions: 1996 1997 1998 ---- ---- ---- Risk-free interest rate..................... 6.0% 6.0% 5.5% Annualized volatility....................... 106% 99% 100% Weighted average expected life, in years.... 7.5 5.0 5.0 Expected dividend yield..................... 0.0% 0.0% 0.0% Proforma net loss reflects only options granted after December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented because compensation cost is reflected over the option vesting periods and compensation cost for options granted prior to January 1, 1995 is not considered. 7. Employee Savings Plan The Company has an employee savings plan that covers all employees who have met minimum age and service requirements. Under the plan, eligible employees may contribute up to 15% of their compensation into the plan. The Company, at the discretion of the Board of Directors, may contribute elective amounts to the plan, allocated in proportion to employee contributions to the plan, employee's salary, or both. No elective contributions have been made for the years ended December 31, 1996, 1997 and 1998. 8. Supplemental Disclosures of Cash Flow Information Cash paid for interest during the years ended December 31, 1996, 1997 and 1998 was $30,919, $9,339 and $1,398, respectively. Cash paid for taxes during the years ended December 31, 1996, 1997 and 1998 was $300, $300 and $2,758 respectively. During 1996, notes payable of $312,500 and $100,000, respectively, were converted into 190,404 shares of Series B Preferred Stock and 6,093 shares of Common Stock, respectively. 33 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 9. Additional Sales Information In the current year, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for disclosure about operating segments, products, geography and major customers. The Company is primarily a manufacturer and distributor of needle-free 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 1996, 1997, and 1998 were approximately 31%, 52%, and 73%, respectively of total sales. International sales by country are summarized as follows: International Sales Revenue: 1996 1997 1998 --------- --------- ----------- Europe (primarily Germany).............. $ 356,838 $ 759,168 $ 1,173,364 Other (primarily Asia).................. 221,653 113,044 440,923 --------- --------- ----------- Total............................... $ 578,491 $ 872,212 $ 1,614,287 ========= ========= =========== The following summarizes significant customers comprising 10% or more of the Company's customer sales and outstanding accounts receivable as of and for the years ended: Significant Customer Revenue: 1996 1997 1998 --------- ---------- ------------ Ferring ........................... $ 460,498 $ 632,004 $ 1,095,779 Schering........................... 151,231 0 0 JCR ............................... 156,679 43,902 365,388 Significant Customer Receivable Balances: 1996 1997 1998 ---------- --------- --------- Ferring ............................ $ 158,772 $ 230,379 $ 71,911 Schering............................ 151,231 0 0 JCR ................................ 13,587 0 20,531 10. Equity Transaction with Becton Dickinson On January 25, 1996, the Company sold 152,323 shares of common stock to Becton Dickinson and Company ("Becton Dickinson") for $3,000,000. In addition, the Company granted Becton Dickinson an option to purchase 76,162 shares of common stock with an exercise price of $23.00. Warrants for 380,807 shares of common stock were also granted at an exercise price of $29.55 for initial consideration of $125,000. The Becton Dickinson option and warrant agreements each expire on the tenth anniversary of the agreement. In connection with the sale of equity to Becton Dickinson, the Company entered into a licensing agreement with Becton Dickinson, which provided Becton with exclusive worldwide rights to certain Medi-Ject technology. In exchange for granting these rights, the Company received $100,000 per month for 24 months beginning January 1996 to develop the technology. (See note 12.) 34 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 11. Quarterly Financial Data (unaudited)
First Second Third Fourth ----- ------ ----- ------ 1997: Total revenues $ 971,025 $ 881,379 $ 609,828 $ 1,254,791 Net loss (582,290) (818,063) (926,787) (644,627) Loss per common share (.42) (.59) (.66) (.46) Weighted average shares (1) 1,389,449 1,398,394 1,411,407 1,413,299 1998: Total revenues $ 912,973 $ 779,588 $ 702,667 $ 355,640 Net loss (845,556) (1,074,888) (1,262,042) (2,586,978) Loss per common share (.60) (.75) (.88) (1.83) Weighted average shares (1) 1,414,318 1,431,587 1,438,463 1,424,752
(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 antidilutive. 12. Subsequent Events (a) Reverse Stock Split On January 28, 1999, the Company declared a one-for-five reverse stock split of its outstanding common stock, applicable to shareholders of record at close of trading on January 28, 1999. The reverse split is in response to the Nasdaq National Market listing requirements which require that the Company maintain a minimum value of public float of $5,000,000 and a minimum bid price of $1.00 per share. After the reverse split, the Company met the requirements for continued listing on the Nasdaq Small Cap Market, which are to maintain a minimum bid price of $1.00 per share and to maintain a minimum value of public float of $1,000,000. After the reverse split, the Company 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. (b) Becton Dickinson Agreement On February 8, 1999, the Company executed an agreement with Becton Dickinson to restructure their original agreement which the parties 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 the Company's 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, the Company is free to market the MJ-7 insulin injector and manufacture disposables in exchange for a small 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. 35 MEDI-JECT CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 (c) Settlement of Schering-Plough Contract In March 1999, the Company signed an agreement with Schering-Plough Corporation to settle mutual obligations of the parties under a contract dated January 20, 1998. The original agreement called for an exclusive sales arrangement where the Company would sell its products to Schering-Plough for distribution with its drug Intron-A. Schering-Plough agreed to pay the Company an undisclosed sum in exchange for cancellation of a product purchase order and as reimbursement for certain non-cancelable manufacturing expenses. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 14th, 1999 is incorporated by reference. Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information as to executive officers of the Company is set forth in Part 1 of the Form 10-K under separate caption. Item 11. EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 14th, 1999 is incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 14th, 1999 is incorporated by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on or about May 14th, 1999 is incorporated by reference. 36 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 1998. (c) Exhibits 3.1 Second Amended and Restated Articles of Incorporation of the Company.(a) 3.2 Second Amended and Restated Bylaws of the Company.(a) 3.3 Certificate of Designations for Series A 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) 1.3 Stock Option, dated January 25, 1996, issued to Becton Dickinson and Company.(a) 4.4 Warrant, dated March 24, 1995, issued to Robert Fullerton.(a) 4.5 Warrant, dated March 24, 1995, issued to Michael Trautner.(a) 4.6 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company (filed herewith as Exhibit 10.7).(a) 4.7 Warrant issued to Elan International Services, Ltd. on November 10, 1998 10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments thereto.(a) 10.3 Security Agreement, dated September 30, 1994, by and between the Company and Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited Partnership.(a) 10.4 Reserved. 10.5 Reserved. 37 10.6 Loan Agreement, dated as of December 22, 1995, by and between Ethical Holdings plc and the Company, including the related Promissory Note, dated December 22, 1995, issued to Ethical Holdings plc.(a) 10.7 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25, 1996, between the Company and Becton Dickinson and Company.(a) 10.8* Employment Agreement, dated as of January 1, 1997, between the Company and Franklin Pass, MD.(c) 10.9* Employment Agreement, dated as of January 3, 1995, between the Company and Mark Derus.(a) 10.10* Reserved. 10.11* Employment Agreement, dated as of January 3, 1995, between the Company and Peter Sadowski.(a) 10.12* 1993 Stock Option Plan.(a) 10.13* Form of incentive stock option agreement for use with 1993 Stock Option Plan.(a) 10.14* Form of non-qualified stock option agreement for use with 1993 Stock Option Plan.(a) 10.15* 1996 Stock Option Plan, with form of stock option agreement.(a) 10.20+ Development and License Agreement between Becton Dickinson and Company and the Company, effective January 1, 1996 (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 between the Company and Geoffrey W. Guy. (d) 10.24# Agreement with Becton Dickinson and Company 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 Peat Marwick LLP 27 Financial Data Schedule 99 Cautionary Statement (b) 38 * 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 the Company's Registration Statement on Form S-1 (File No. 333-6661), filed with the Securities and Exchange Commission on October 1, 1996. (b) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. (c) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1997. (d) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 39 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, 1999. 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, 1999. Signature Title --------- ----- /s/Franklin Pass, M.D. President, Chief Executive Officer and Director - --------------------------- Franklin Pass, M.D. (principal executive officer) /s/Mark S. Derus Vice President of Finance, Chief Financial Officer - --------------------------- Mark S. Derus (principal financial and accounting officer) /s/Kenneth Evenstad Director - --------------------------- Kenneth Evenstad /s/Geoffrey Guy Director - --------------------------- Geoffrey Guy /s/Norman Jacobs Director - --------------------------- Norman Jacobs /s/Fred Shapiro, M.D. Director - --------------------------- Fred Shapiro, M.D. /s/Stanley Goldberg Director - --------------------------- Stanley Goldberg /s/Karl Groth Director - --------------------------- Karl Groth 40 EX-3.3 2 CERT. OF DESIGNATION FOR SERIES A PREFERRED STOCK EXHIBIT 3.3 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF MEDI-JECT CORPORATION The undersigned officers of Medi-Ject Corporation, a corporation organized and existing under the Minnesota Business Corporation Act (the "Corporation"), do hereby certify that, pursuant to authority conferred by the Second Amended and Restated Articles of Incorporation of the Corporation, as amended (the "Articles of Incorporation"), and pursuant to the provisions of Section 302A.401 of the Minnesota Business Corporation Act, the Board of Directors of the Corporation adopted a resolution adopting a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (this "Certificate of Designations") providing for certain designations, powers, number, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of 10,000 shares of Series A Convertible Preferred Stock, $.01 par value per share, which resolution is as follows: RESOLVED: That pursuant to Article 3 of the Second Amended and Restated Articles of Incorporation, as amended, of this Corporation, the Board of Directors hereby establishes the following series of Preferred Stock, $.01 par value per share (the "Preferred Stock"), of the Corporation having the designations, powers, number, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof set forth below: 1. Designation. 10,000 shares of the Preferred Stock shall be designated ----------- and known as the "Series A Convertible Preferred Stock." 2. Dividend Provisions. ------------------- a. The Series A Convertible Preferred Stock shall bear a mandatory dividend of 10% per annum of the stated value, payable semi-annually in cash on May 1st and November 1st of each year commencing May 1, 1999 (each a "Dividend Distribution Date"), on any shares of the Series A Convertible Preferred Stock issued and outstanding. The stated value of the Series A Convertible Preferred Stock shall be $1,000 per share. In the event the Corporation does not have legally available funds to make such distribution (provided, however, that the Board of Directors shall have taken all necessary and appropriate action to make such funds legally available), such distribution shall be made by the issuance of additional shares of Series A Convertible Preferred Stock having a stated value equal to the amount of the distribution not otherwise made on the same terms and subject to the same conditions as the Series A Convertible Preferred Stock originally issued hereby. Fractional shares of Series A Convertible Preferred Stock shall be issuable for purposes hereunder. b. Notwithstanding anything contained in this Certificate of Designations, as amended, to the contrary, so long as any shares of Series A Convertible Preferred Stock remain outstanding, no dividends shall be declared or payable with respect to any outstanding shares of Common Stock of the Corporation or shares of any other class of shares of the Corporation nor, except for repurchases or redemptions made in good faith by the Corporation in consideration for the exercise of options issued under the Corporation's stock option plans existing on the date hereof, nor shall the Corporation redeem, repurchase or otherwise acquire shares of Common Stock of the Corporation or shares of any other class of shares of the Corporation. 3. Liquidation Preference. ---------------------- a. In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary (collectively, a "Liquidation"), before any payment of cash or distribution of other property shall be made to the holders of the Common Stock (the "Common Shareholders") or any other class or series of stock subordinate in Liquidation Preference to the Series A Convertible Preferred Stock, the holders of the Series A Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its shareholders, the Original Purchase Price per share (as appropriately adjusted for any combinations or divisions or similar recapitalizations affecting the Series A Convertible Preferred Stock after issuance) plus any accrued and unpaid dividends thereon (the "Series A Liquidation Preference"). As used herein, the "Original Purchase Price" is $1,000 per share. b. If, upon any Liquidation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Convertible Preferred Stock the full amounts to which they shall be entitled, the holders of the Series A Convertible Preferred Stock shall share ratably in any distribution of assets in proportion to the respective amounts which would be payable to them in respect of the shares held by them if all amounts payable to them in respect of such were paid in full pursuant to subsection 3(a), above. c. After the distributions described in subsection (a), above, have been paid, the holders of the Series A Convertible Preferred Stock shall not be entitled to any further participation in any distribution of assets of the Corporation. d. For purposes of this Section 3: (i) a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); except, if (i) the Corporation's shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition (by virtue of 2 securities issued as consideration for the Corporation's acquisition) hold at least 50% of the voting power of the surviving or acquiring entity or (ii) if a majority in interest of the Series A Convertible Preferred Stock, voting as a class, shall have approved such reorganization, merger or consolidation; or (B) a sale of all or substantially all of the assets of the Corporation. (ii) Upon the occurrence of any of the events described in the foregoing subsection (3)(d)(i), if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value, which shall be valued as follows: (A) if traded on a securities exchange or through Nasdaq, the average of the closing sale prices of the securities on such exchange for the 20 consecutive trading days ending with the day which is two trading days prior to the closing of such transaction (the "Market Price"); (B) if actively traded over-the-counter, the average of the closing bid or sale prices (whichever is applicable) over the 30 day period ending three days prior to the closing; or (C) if there is no active public market, the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series A Convertible Preferred Stock. The method of valuation of securities subject to restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (ii), (A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of the Series A Convertible Preferred Stock. (iii) In the event the requirements of this subsection 3(d) are not complied with, the Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 3 have been complied with; or 3 (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Convertible Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 3(e) below. e. The Corporation shall give each holder of record of Series A Convertible Preferred Stock written notice of any impending transaction described under subsection 3(d)(i) above, not later than 20 days prior to the shareholders' meeting called to approve such transaction, or 20 days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 3, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than 20 days after the Corporation has given the first notice provided for herein or sooner than 10 days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Series A Convertible Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of Series A Convertible Preferred Stock. 4. Conversion. The holders of the Series A Convertible Preferred Stock ---------- shall have conversion rights as follows (the "Conversion Rights"): a. Each share of Series A Convertible Preferred Stock shall be convertible, at the option of the holder thereof, within sixty (60) days after the tenth anniversary of the first issuance of shares of Series A Convertible Preferred Stock (the "Original Conversion Date") at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by valuing each issued and outstanding share of Series A Convertible Preferred Stock at the Series A Liquidation Preference and converting such share into such number of shares of Common Stock as may be acquired at such value where each share of Common Stock is valued at the conversion price applicable to such share (the "Conversion Price"), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. On the third (3rd) anniversary of the Original Conversion Date, all outstanding shares of Series A Convertible Preferred Stock shall, subject to the requirements of Nasdaq Rule 4460(i)(1)(d)(ii) to the extent applicable, automatically convert into shares of Common Stock at the Conversion Price in effect on such date. The Conversion Price per share of Common Stock on any day for purposes of this paragraph shall be equal to the lower of $1.50 per share and ninety-five (95%) per cent of the Market Price of the Common Stock as of such date. b. Before any holder of Series A Convertible Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any 4 transfer agent for the Series A Convertible Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Convertible Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Convertible Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. c. Corporation Conversion Right. Notwithstanding anything contained ---------------------------- herein to the contrary, and subject to the provisions of Section 4(b) of the Securities Purchase Agreement between the Corporation and Elan International Services, Inc. (the "Purchase Agreement"), in the event the Corporation is unable to secure a sub-licensee or user of the Auto-Injector Technology (as that term is defined in that certain License and Development Agreement, between the Corporation and Elan Corporation, plc) prior to the second anniversary of the date of the Purchase Agreement, the Corporation, at the Corporation's option, shall have the right, upon written notice given to the holder within thirty (30) days after the second anniversary of the date hereof, to convert all issued and outstanding shares of Series A Convertible Preferred Stock into Common Stock, by delivering to the holder of the Series A Convertible Preferred Stock such number of shares of Common Stock, as is determined by valuing each issued and outstanding share of Series A Convertible Preferred Stock at the Liquidation Preference and converting such share into such number of shares of Common Stock as may be acquired at such value where each share of Common Stock is valued at the conversion price applicable to such share (the "Conversion Price") in effect on the date the Corporation gives notice of its intention to call the Series A Convertible Preferred Stock for conversion. The Conversion Price per share of Common Stock shall be equal to the Market Price of the Common Stock, (as defined below). Notwithstanding anything contained herein to the contrary, the Corporation shall not be entitled to convert the Series A Preferred Stock pursuant to this paragraph in the event that (A) the Market Price on the date of payment is not greater than 85% of the average Market Price for the Common Stock for the 45 consecutive trading days immediately prior to such date of payment, or (B) the Market Price on the date of payment is not greater than the Market Price on the Closing Date (as such term is defined in the Purchase Agreement"). d. As used herein, the term "Market Price" shall mean the average closing sale price of the Common Stock, as reported by its principal trading exchange, for the twenty (20) trading days immediately preceding the date of conversion. 5. Redemption. The Corporation shall have the right, at any time after ---------- the issuance of the shares of Series A Convertible Preferred Stock and prior to the conversion of such shares into shares of Common Stock as provided in Section 4 above, to redeem any or all of the issued and outstanding shares of Series A Convertible Preferred Stock for cash at a price per share equal to the Series A Liquidation Preference. 5 6. Other Distributions. In the event the Corporation shall declare a ------------------- distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(iii), then, in each such case for the purpose of this Section 6, the holders of the Series A Convertible Preferred Stock shall be entitled, upon conversion of the Series A Convertible Preferred Stock, to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A Convertible Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 7. Recapitalization. If at any time or from time to time there shall ---------------- be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in Section 3 or Section 4) provision shall be made so that the holders of the Series A Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Convertible Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of Section 4 with respect to the rights of the holders of the Series A Convertible Preferred Stock after the recapitalization to the end that the provisions of Section 4 shall be applicable after that event as nearly equivalent as may be practicable. 8. No Impairment. The Corporation will not, by amendment of its Articles ------------- of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Convertible Preferred Stock against impairment. 9. No Fractional Common Shares and Certificate as to Adjustments. No ------------------------------------------------------------- fractional shares of Common Stock shall be issued upon the conversion of any share or shares of the Series A Convertible Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. 10. Notices of Record Date. If at any time that the Series A Convertible ---------------------- Preferred Stock is convertible pursuant to Section 4 hereof, the Corporation takes a record of the holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Convertible Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, 6 and the amount and character of such dividend, distribution or right. 11. Reservation of Stock Issuable Upon Conversion. The Corporation shall --------------------------------------------- at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock not otherwise reserved shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Convertible Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Articles of Incorporation, as amended. 12. Notices. Any notice required by the provisions hereof to be given to ------- the holders of shares of Series A Convertible Preferred Stock shall be deemed given on the date of service if served personally on the party to whom notice is to be given, on the date of transmittal of services via telecopy to the party to whom notice is to be given and five (5) days after mailing if mailed by first- class mail to the address of the holder appearing on the books of the Corporation. 13. Voting Rights. ------------- a. In any vote by the holders of the Series A Convertible Preferred Stock acting as a class, each holder of Series A Convertible Preferred Stock shall be entitled to one vote for each share of Series A Convertible Preferred Stock. b. So long as any shares of Series A Convertible Preferred Stock remain outstanding, in the event the Corporation is unable to make a cash dividend with respect to all issued and outstanding shares of Series A Convertible Preferred Stock for two consecutive years, the holders of the Series A Convertible Preferred Stock, acting as a class, shall be entitled to elect a member of the Board of Directors of the Corporation. The term of office of any director so elected by the holders of the Series A Convertible Preferred Stock shall automatically terminate at such time as all dividends due and payable hereunder shall have been paid. 7 c. So long as any shares of Series A Convertible Preferred Stock remain outstanding on or after the sixtieth (60th) day following the Original Conversion Date, (i) the holders of the Series A Convertible Preferred Stock, acting as a class, shall be entitled to elect such additional members to the Board of Directors of the Corporation as shall constitute a majority of the members of the Board of Directors of the Corporation at any time; (ii) the holders of the Common Stock (and any other classes entitled to vote with the holders of the Common Stock) shall be entitled to elect the remaining directors, (subject to the rights of any other class of preferred stock or others to elect any members of the Board of Directors) and (iii) holders of shares of Series A Convertible Preferred Stock together with holders of shares of outstanding shares of Common Stock (and any other class of stock entitled to vote therewith) shall have the right to vote together on all matters with respect to which holders of Common Stock (and any other class entitled to vote thereon with the holders of Common Stock) are entitled to vote, together as a single class, with each share of Series A Convertible Preferred Stock having the number of votes at the time of any vote as determined by the following formula: P = T - PS where P equals the number of votes allocable to each share of Series A Convertible Preferred Stock in any vote where the Series A Convertible Preferred Stock and other classes of stock of the Corporation are voting together as a single class; T equals the difference of (i) the number of votes held by other classes entitled to vote in the action to be taken by the shareholders of the Corporation, divided by three-tenths less (ii) the number of votes exercisable by other classes entitled to vote and PS equals the total number of outstanding shares of Series A Convertible Preferred Stock. Notwithstanding anything contained in this Section 13(c)(iii) to the contrary, in no event shall the holders of the Series A Preferred Stock be entitled to any voting rights in excess of those allowed by Nasdaq Rule 4460(i)(1)(d)(ii) unless and until the Corporation shall have received shareholder approval of the voting rights granted hereunder or the requirements of such rule are no longer applicable to the Corporation. 14. Protective Provisions. Except as otherwise provided hereunder, so long --------------------- as any shares of Series A Convertible Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Convertible Preferred Stock, voting separately as a class: 8 a. increase or decrease the authorized or outstanding number of the shares of Series A Convertible Preferred Stock (other than by the conversion or redemption or such shares as provided for herein), respectively, so as to affect adversely such shares; b. authorize or issue any other equity security, or security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, or being senior to, the Series A Convertible Preferred Stock with respect to voting, dividends, liquidation or redemption, respectively; or c. authorize or issue any other equity security, or security convertible into or exercisable for any equity security, or any other series of preferred stock which shall have voting rights, under any circumstances, of greater than one vote per share. 15. Status of Converted or Redeemed Stock. In the event any shares of ------------------------------------- Series A Convertible Preferred Stock shall be converted pursuant to Section 4 hereof or redeemed pursuant to Section 5 hereof, the shares so converted or redeemed shall be canceled and shall not be reissuable by the Corporation. 16. Amendment. Notwithstanding anything contained herein to the contrary, --------- any provision of this Certificate of Designations may be modified or waived with the consent of the Company and the holders of a majority in interest of the Series A Convertible Preferred Stock. 9 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations, Preferences and Rights to be duly executed to this 10th day of November, 1998. MEDI-JECT CORPORATION By: _______________________________ Name: Mark Derus Title: Chief Financial Officer and Secretary 10 EX-4.7 3 WARRANT ISSUED TO ELAN INTL. SERVICES ON 11-10-98 EXHIBIT 4.7 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION OF THIS WARRANT OR OF ANY OF SUCH SHARES MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY IN FORM AND CONTENT TO THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED, OR (III) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 5 OF THIS WARRANT. MEDI-JECT CORPORATION WARRANT TO PURCHASE SHARES OF COMMON STOCK THIS CERTIFIES THAT, for value received, ELAN INTERNATIONAL SERVICES, LTD., or its affiliates or assigns or any other holder of this Warrant (each, a "Holder"), is entitled to subscribe for and purchase up to 280,000 (Two hundred eighty thousand) shares (as adjusted pursuant to Section 4 hereof, the "Shares") of the fully paid and nonassessable common stock, par value $.01 (the "Common Stock"), of MEDI-JECT CORPORATION, a Minnesota corporation (the "Company"), at the price of $3.00 per share (such price, and such other prices as shall result from time to time, from the adjustments specified in Section 4 below, the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. 1. Term. Subject to the limitations set forth in Section 2 below, ---- the purchase right represented by this Warrant is exercisable, in whole or in part, at any time, and from time to time, from and after the date hereof and until 5:00 p.m. Eastern Daylight Time November 10, 2005. To the extent not exercised at 5:00 p.m. Eastern Daylight Time on November 10, 2005, this Warrant shall completely and automatically terminate and expire, and thereafter it shall be of no force or effect whatsoever. 2. Method of Exercise; Payment; Issuance of New Warrant. (a) The ----------------------------------------------------- purchase right represented by this Warrant may be exercised by the Holder, in whole or in part and from time to time, by the surrender of this Warrant (with the notice of exercise form attached hereto as Annex A duly executed) at the ------- principal office of the Company and by the payment to the Company of an amount, in cash or other immediately available funds, equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. (b) The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the Shares represented thereby (and such Shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. Upon any exercise of the rights represented by this Warrant, certificates for the Shares purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days of receipt of such notice and payment and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of Shares, if any, with respect to which this Warrant shall not then have been exercised, shall also be issued to the holder hereof as soon as possible and in any event within such thirty (30) day period. 3. Stock Fully Paid, Reservation of Shares. All Shares that may be --------------------------------------- issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, fully paid and nonassessable, and will be free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon the exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and ------------------------------------------------ kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to the adjustment from time to time upon the occurrence of certain events, as follows: (a) Reclassification, Merger, Etc. In case of (i) any ------------------------------ reclassification, reorganization, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value), or (ii) any consolidation of the Company with or into another corporation (other than a merger or consolidation with another corporation in which the Company is the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or (iii) any sale of all or substantially all of the assets of the Company, then the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant or a supplement hereto (in form and substance reasonably satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon the exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, reorganization, change, conversion, merger or consolidation by a holder of the number of shares of Common Stock then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly attach to successive reclassifications, reorganizations, changes, mergers, consolidations and transfers. (b) Subdivision or Combination of Shares. If the Company at any ------------------------------------ time during which this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, (i) in the case of a subdivision, the Warrant Price shall be proportionately decreased and the number of Shares purchasable hereunder shall be proportionately increased, and (ii) in the 2 case of a combination, the Warrant Price shall be proportionately increased and the number of Shares purchasable hereunder shall be proportionately decreased. (c) Stock Dividends; Etc. If the Company at any time while this -------------------- Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock in Common Stock or Options, or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in Sections 4(a) and (b) above), the price at which the holder of this Warrant shall be able to purchase Shares shall be adjusted by multiplying the Warrant Price in effect immediately prior to such date of determination of the holders of securities entitled to receive such dividend or distribution, by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution, as if all of such Options had been exercised and the Company used the consideration payable in respect thereof to purchase shares of Common Stock in the market. Upon each adjustment in the Warrant Price pursuant to this Section 4(c), the number of Shares of Common Stock purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (d) If the Company at any time while this Warrant is outstanding and unexpired shall (i) issue or sell any shares of Common Stock at a price below the Warrant Price, (ii) except for issuances otherwise permitted under clause (iii) hereof, issue, sell or fix a record date for the issuance of rights, options, warrants or other securities exercisable, convertible or exchangeable into Common Stock (collectively "Options") at a price per share (or exercise, conversion or exchange price per share) which is below the Warrant Price on the date of issuance, or (iii) issue any Options to officers, directors, employees or consultants to the Company, other than pursuant to the Company's existing duly authorized and constituted stock option plans (the "Company Plans") having an exercise price (on a per share basis) below the Market Price on the date of issuance, then the price at which the holder of this Warrant shall be able to purchase Shares shall be adjusted downward (but may not be increased) to the price determined by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Warrant Price in effect plus (2) the aggregate consideration ---- received or receivable for the shares of Common Stock issued or issuable by (B) the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale plus (2) the number of shares issued or sold or ---- receivable upon the exercise or conversion of such Options. For purposes of this Section 4(c), "Market Price" as of any date shall mean the closing sale price of the Common Stock on such date. 3 (e) Repurchases or Redemptions of Common Stock or Options. Except ----------------------------------------------------- for repurchases or redemptions made in good faith by the Company to permit a cashless exercise of options issued under a Company Plan, if the Company at any time while this Warrant is outstanding and unexpired shall repurchase or redeem any outstanding shares of Common Stock, or any Options for a price which is more than the Warrant Price, the Warrant Price shall thereupon be adjusted downward (but may not be increased) by subtracting from the Warrant Price an amount equal to the amount obtained by multiplying the Warrant Price in effect at the time of such repurchase or redemption by a fraction (i) the numerator of which shall be the redemption price less the Warrant Price multiplied by the number of shares or options redeemed in such repurchase or redemption and (ii) the denominator of which shall be the Warrant Price multiplied by the number of issued and outstanding of shares of Common Stock of the Company prior to the purchase or redemption. Upon each adjustment in the Warrant Price pursuant to this Section 4(e), the number of Shares of Common Stock purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (e) No Impairment. The Company will not, by amendment of its charter -------------- or bylaws or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. (f) Notice of Adjustments. Whenever the Warrant Price or the number ---------------------- of Shares purchasable hereunder shall be adjusted pursuant to this Section 4, the Company shall prepare a certificate setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment and the method by which such adjustment was calculated. Such certificate shall be signed by its chief financial officer and shall be delivered to the holder of this Warrant. (g) Fractional Shares. No fractional shares of Common Stock will be ------------------ issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Common Stock on the date of exercise as reasonably determined in good faith by the Company's Board of Directors. (h) Cumulative Adjustments. No adjustment in the Warrant Price shall ---------------------- be required under this Section 4 until cumulative adjustments result in a concomitant change of 1% 4 or more of the Warrant Price or in the number of shares of Common Stock purchasable upon exercise of this Warrant as in effect prior to the last such adjustment; provided, however, that any adjustments which by reason of this Section 4 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. 5. Compliance with Securities Act; Disposition of Warrant or Shares ---------------------------------------------------------------- of Common Stock. (a) The holder of this Warrant, by acceptance hereof, agrees - --------------- that this Warrant and the Shares to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon exercise hereof except under circumstances which will not result in a violation of applicable securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Securities Act of 1933, as amended (the "Act"), or an exemption from the registration requirements of such Act is available, the holder hereof shall confirm in writing, by executing an instrument in form reasonably satisfactory to the Company, that the Shares so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all Shares issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY IN FORM AND CONTENT TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, OR (III) OTHERWISE COMPLYING WITH THE PROVISIONS OF THE WARRANT UNDER WHICH THIS SECURITY WAS ISSUED. (b) With respect to any offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if requested by the Company, in form and content reasonably satisfactory to the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such Shares and indicating whether or not under the Act certificates for this Warrant or such Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with the Act. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or 5 otherwise dispose of this Warrant or such Shares, all in accordance with the terms of the notice delivered to the Company. Notwithstanding the foregoing, this Warrant or such Shares may be offered, sold or otherwise disposed of in accordance with Rule 144 as promulgated under the Act ("Rule 144"), provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Act, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to insure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 6. Rights as Shareholders. No holder of this Warrant, as such, shall ---------------------- be entitled to vote or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 7. Representations and Warranties. The Company represents and ------------------------------ warrants to the holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; and (c) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's charter or bylaws, as amended, and do not and will not constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound. 8. Miscellaneous. (a) This Warrant and any provision hereof may be ------------- changed, waived, discharged or terminated only by an instrument in writing signed by both the Company and the holder of this Warrant. 6 (b) Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall (i) be in writing, (ii) be delivered personally or sent by mail or overnight courier to the intended recipient to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant, unless the recipient has given notice of another address, and (iii) be effective on receipt if delivered personally, two business days after dispatch if mailed, and one business day after dispatch if sent by overnight courier service. (c) The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of a bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. (d) The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. (e) This Warrant shall be governed by and construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York, with respect to contracts to be wholly performed within such state. 7 IN WITNESS WHEREOF, Medi-Ject Corporation has executed this Warrant as of the date set forth below. MEDI-JECT CORPORATION By:___________________________ Name: ________________________ Title: _______________________ Dated: November 10, 1998. 8 Annex A ------- NOTICE OF EXERCISE To: Medi-Ject Corporation 1. The undersigned hereby elects to purchase _____ shares of Common Stock of Medi-Ject Corporation in accordance with the terms of the attached Warrant, and tenders herewith full payment of the purchase price of such shares, in cash or other immediately available funds. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: Name: __________________________________________ Address: _______________________________________ ________________________________________________ 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. Signature:_________________________________ Name:______________________________________ Address:___________________________________ ___________________________________________ ___________________________________________ Social Security or taxpayer identification number: ___________________________________________ 9 EX-10.24 4 AGREEMENT WITH BECTON DICKSON & CO. DATED 1-1-99 EXHIBIT 10.24 CONFIDENTIAL AGREEMENT --------- This AGREEMENT, made and effective January 1, 1999 ("Effective Date") by and between BECTON DICKINSON AND COMPANY, a New Jersey corporation ("BECTON") and MEDI-JECT CORPORATION, a Minnesota corporation ("MEDI-JECT"). Whereas, BECTON and MEDI-JECT have previously entered into that certain Development and License Agreement, dated as of January 1, 1996, an Amendment No. 1 to Development and License Agreement and an Amendment No. 2 to Development and License Agreement (collectively the "DEVELOPMENT AND LICENSE AGREEMENT"), relating to the development and commercialization of certain needle-free injectors and disposables, particularly the MJ-7 injector, copies of which are attached hereto; and Whereas, the parties have now completed the three (3) year period from January 1, 1996 under the DEVELOPMENT AND LICENSE AGREEMENT, including the initial term of the OPEN DEVELOPMENT PROGRAM, and the parties now wish to set forth the terms and conditions to restructure their relationship and redefine their roles, rights and obligations to one another going forward whereby MEDI- JECT shall be free to develop, make, have made, import, offer for sale, sell, distribute and use needleless injectors and disposables, including assuming complete responsibility for the commercialization of the MJ-7 injector, as well as multiple-use disposable drug chambers (user-filled) and other related drug- containing or drug-contacting components (e.g., vial adapter) for use in connection with the MJ-7 injector, and BECTON is free to develop, make, have made, import, offer for sale, sell, distribute and use needleless injectors and disposables, including disposable drug chambers (either user-filled or pre- fillable) and other related drug-containing or drug-contacting components (e.g., vial adapter); and Now, therefore, in consideration of the premises and promises contained herein, the parties agree as follows: 1. DEFINITIONS. ----------- Each of the capitalized terms used in this Agreement (other than the headings of the Paragraphs), whether used in the singular or the plural, shall have the meaning as set forth below or, if not listed below, the meaning as designated in places throughout this Agreement. 1.1 "AFFILIATE" shall mean any corporation or other business entity controlled by or in common control of a party. "Control" as used herein means the ownership directly or indirectly of fifty percent (50%) or the maximum interest permitted by local law of the voting stock of a corporation or a fifty percent (50%) or greater interest in the income of such corporation or other business entity or the ability otherwise of a party to secure that the affairs of such corporation or other business entity are managed in accordance with its wishes. 1.2 "BECTON PROPERTY" shall mean all INTELLECTUAL PROPERTY owned by or licensed to (with right of sublicense) BECTON prior to January 1, 1996 relating to DISPOSABLES. 1.3 "CONFIDENTIAL INFORMATION" shall mean any information, report, document or other materials (including, but not limited to, laboratory notebooks, schematics, specifications, circuits, diagrams, specimens, samples, prototypes, models and data regardless of how stored) disclosed or provided to the other party during the DEVELOPMENT AND LICENSE AGREEMENT which is of a trade secret, confidential, proprietary or like undisclosed nature or was identified as such. 1.4 "DISPOSABLE" shall mean a single-use or multiple-use disposable drug chamber (either USER-FILLED or PRE-FILLABLE) or other related drug-containing or drug-contacting component (e.g., vial adapter) for use with a NEEDLELESS INJECTOR. 1.5 "INTELLECTUAL PROPERTY" shall mean and include all patentable and unpatentable inventions, ideas, discoveries, improvements, design rights, works of authorship, trade secrets, know-how and any equivalents thereof. 1.6 "MJ-7 INJECTOR" shall mean the reusable device described in the specification attached hereto as Exhibit A for needleless, transdermal injection of parenteral drugs and any 2 improvements or modifications thereto, excluding next generation devices such as the MJ-8 needleless injector to be submitted to BECTON under Paragraph 9.2. 1.7 "MEDI-JECT PROPERTY" shall mean all INTELLECTUAL PROPERTY owned by or licensed to (with right of sublicense) MEDI-JECT prior to January 1, 1996 relating to NEEDLELESS INJECTORS and/or DISPOSABLES, including all PATENTS filed by MEDI-JECT before March 1, 1996. 1.8 "NEEDLELESS INJECTOR" shall mean (a) a device for needleless, transdermal injection of parenteral drugs which is (i) designed for use with a DISPOSABLE and (ii) self-powered or powered by means of any external energy source and, if applicable, (b) any reusable external energy source and related ancillary components. 1.9 "NET SALES" shall mean the price at which ROYALTY-BEARING DISPOSABLES are sold by MEDI-JECT, its respective AFFILIATES or sublicensees to a purchaser (other than MEDI-JECT, its respective AFFILIATES or sublicensees), less returns or credits, rebates, excise, sale, use or value-added taxes, cash and trade discounts actually allowed and import duties. The parties recognize that only one royalty shall be payable with respect to any ROYALTY-BEARING DISPOSABLE regardless of the number of VALID CLAIMS under the applicable PROGRAM PATENTS that may cover the manufacture, sale or use of such DISPOSABLE. 1.10 "PATENTS" shall mean United States and foreign patents and/or patent applications, including any continuations, continuations-in-part, divisions, extensions, substitutions, reissues or re-examinations thereof. 1.11 "PRE-FILLABLE" shall mean a DISPOSABLE filled by any one other than a patient, nurse, doctor or other healthcare professional. 1.12 "PROGRAM PATENTS" shall mean those PATENTS within the PROGRAM PROPERTY and for which PATENTS have been filed for by March 1, 1999. 1.13 "PROGRAM PROPERTY" shall mean all INTELLECTUAL PROPERTY made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or 3 MEDI-JECT or jointly by employees or agents of both parties) during and/or in connection with their respective activities under the DEVELOPMENT AND LICENSE AGREEMENT between January 1, 1996 and January 1, 1999 relating to NEEDLELESS INJECTORS and/or DISPOSABLES. 1.14 "ROYALTY-BEARING DISPOSABLE" shall mean: (a) any DISPOSABLE for use with the MJ-7 INJECTOR; or (b) any DISPOSABLE, (i) the manufacture, importation, offer for sale, sale or use of such is covered, in the country where the DISPOSABLE is manufactured, imported, offered for sale, sold or used, by (1) for the two (2) year period commencing on the first commercial sale of DISPOSABLES, a claim of a pending patent application within the PROGRAM PATENTS, or (2) at any time during the term hereof, a VALID CLAIM of any PROGRAM PATENTS. 1.15 "USER-FILLED" shall mean a DISPOSABLE filled by a patient, nurse, doctor or other healthcare professional. 1.16 "VALID CLAIM" shall mean at least one claim of an issued or granted PROGRAM PATENT so long as such claim shall not have been cancelled or shall not have been held invalid or not infringed in an unappealed or unappealable decision rendered by a tribunal of competent jurisdiction. 1.17 Except to the extent expressly provided in this Agreement, any other capitalized terms used herein shall have the same meanings as provided under the DEVELOPMENT AND LICENSE AGREEMENT. 2. UNDERSTANDING OF THE PARTIES & MUTUAL RELEASES. In furtherance of the ---------------------------------------------- parties' desire to restructure the relationship and redefine their roles, rights and obligations to one another going forward with respect to the MJ-7 INJECTOR and DISPOSABLES, the DEVELOPMENT AND LICENSE AGREEMENT is hereby cancelled and shall have no further force and effect. Accordingly, except as specifically provided herein, from the Effective Date hereof, the parties 4 agree that: (a) neither party shall bear any further obligation or responsibility to the other party pursuant to the DEVELOPMENT AND LICENSE AGREEMENT, and each party shall not to bring any lawsuit against the other party, or its affiliated and subsidiary entities, and fully releases and forever discharges the other party, and its affiliated and subsidiary entities and their respective legal representatives, successors, assigns, agents, directors and employees, from and against any and all actions, claims, and liabilities of whatsoever kind or character, in law or in equity, now known or unknown, suspected or unsuspected, that the other party has ever had or may now have against them or any of them as related to or arising from the respective activities and obligations of the parties under the DEVELOPMENT AND LICENSE AGREEMENT; (b) MEDI-JECT shall be free to develop, make, have made, import, offer for sale, sell, distribute and use NEEDLELESS INJECTORS and DISPOSABLES, including but not limited to being free to commercialize the MJ-7 INJECTOR and DISPOSABLES for use in connection therewith; (c) BECTON shall be free to develop, make, have made, import, offer for sale, sell, distribute and use NEEDLELESS INJECTORS and DISPOSABLES; and (d) the rights and obligations of the parties in and to the INTELLECTUAL PROPERTY which is the subject of the DEVELOPMENT AND LICENSE AGREEMENT shall be allocated between the parties in the manner set forth in this Agreement. 3. INTELLECTUAL PROPERTY. All INTELLECTUAL PROPERTY shall be owned by --------------------- the parties as follows: (a) MEDI-JECT shall own all MEDI-JECT PROPERTY and all PROGRAM PROPERTY covering NEEDLELESS INJECTORS, excluding PROGRAM PATENTS; (b) BECTON shall own all BECTON PROPERTY and all PROGRAM PROPERTY covering DISPOSABLES, excluding PROGRAM PATENTS; (c) BECTON and MEDI-JECT shall jointly own all PROGRAM PATENTS; and 5 (d) BECTON and MEDI-JECT shall jointly own any remaining PROGRAM PROPERTY not otherwise covered herein under Sub-Paragraphs (a) & (b). 4. PATENT PROSECUTION. Each party shall promptly disclose, in writing, to ------------------ the other party all INTELLECTUAL PROPERTY covered by Paragraph 3, and each party shall be responsible for filing and prosecuting patent applications covering INTELLECTUAL PROPERTY exclusively owned by it. However, with respect to jointly owned PROGRAM PATENTS, the parties shall mutually agree on whether and in which countries to file and prosecute patent applications covering such INTELLECTUAL PROPERTY, and to maintain patents granted thereunder; with each party having an opportunity to review and comment on any such filings prior to submission and to discuss the strategy for preparing, filing, prosecuting, maintaining and defending of any such patent applications or resulting patents, and with the parties sharing equally any out-of-pocket costs and expenses incurred with respect to such actions. Unless otherwise mutually agreed, the parties agree that at a minimum PROGRAM PATENTS shall be applied for, prosecuted and maintained in at least the United States, Europe (designating the United Kingdom, France and Germany) and Japan. In the event one party declines to share in the future expenses for seeking or maintaining a PROGRAM PATENT, such party shall provide the other party with prior written notice of its wish to share in any future expenses before such expenses are incurred and shall continue to jointly own such PROGRAM PATENT but such party shall not be entitled --- to enforce such PROGRAM PATENT against a third-party without the written authorization of the other party. Also, in the case of BECTON, if BECTON declines to participate in the future expenses for seeking or maintaining such PROGRAM PATENT, for purposes of royalties owed under this Agreement, such PROGRAM PATENT shall be considered has having been cancelled for purposes of whether it includes a VALID CLAIM. 6 5. COOPERATION. Upon request, each party shall execute and deliver to the ----------- other party all descriptions, applications, assignments and other documents and instruments necessary or proper to carry out the provisions of this Agreement without further compensation; and the parties shall cooperate with and assist each other or their nominees in all reasonable ways and at all reasonable times, including, but not limited to, testifying in all legal proceedings, signing all lawful papers and in general performing all lawful acts reasonable, necessary or proper, to aid the other party in obtaining, maintaining, defending and enforcing all lawful patent, copyright, trade secret, know-how and the like in the United States and elsewhere. 6. CROSS-LICENSES. The following cross-licenses are hereby granted: -------------- (a) BECTON hereby grants to MEDI-JECT a non-exclusive, worldwide, royalty- free license to use the PATENTS within the BECTON PROPERTY (subject to any restrictions or obligations to third parties, including license royalty obligations) to develop, make, have made, market, import, offer for sale, sell, distribute and use multiple-use disposable drug chambers (USER-FILLED) or other related drug-containing or drug- contacting component (e.g., vial adapter) for use with the MJ-7 INJECTOR, as well as the continuing right and license to use such PATENTS actually used in connection with the MJ-7 INJECTOR to develop, make, have made, market, import, offer for sale, sell, distribute and use multiple-use disposable drug chambers (USER-FILLED) or other related drug-containing or drug-contacting component (e.g., vial adapter) for use with future NEEDLELESS INJECTORS; and (b) MEDI-JECT hereby grants to BECTON a non-exclusive, worldwide, royalty- free license to use the PATENTS within the MEDI-JECT PROPERTY (subject to any restrictions or obligations to third parties, including license royalty obligations) to develop, make, have made, market, import, offer for sale, sell, distribute and use single-use disposable drug chambers (either USER-FILLED or PRE-FILLABLE) 7 or other related drug-containing or drug-contacting components (e.g., vial adapter). (c) Except as specifically provided herein, nothing contained in this Agreement shall be construed by implication or otherwise to grant to a party any rights to any of the other party's other INTELLECTUAL PROPERTY, including PATENTS, made, conceived, created, developed or reduced to practice (by employees or agents of BECTON or MEDI-JECT or jointly by employees or agents of both parties) prior to January 1, 1996 or independently acquired or developed by either party after January 1, 1999. 7. ROYALTIES. --------- 7.1 Notwithstanding the royalty-free nature of the rights granted MEDI- JECT under Paragraph 6(a), in consideration of the rights granted hereunder, as well as the rights granted to BECTON under the DEVELOPMENT AND LICENSE AGREEMENT and in accordance herewith relinquished by BECTON, MEDI-JECT agrees to pay BECTON the following royalties: (a) A (***) percent ((***)%) royalty on NET SALES of the MJ-7 INJECTORS for use with insulin; (b) A (***) percent ((***)%) royalty on NET SALES of ROYALTY-BEARING DISPOSABLES for use with insulin; and (c) A (***) percent ((***)%) royalty on NET SALES of ROYALTY-BEARING DISPOSABLES for uses other than with insulin. 7.2 At the expiration of the last to expire PROGRAM PATENT having a VALID CLAIM covering a ROYALTY-BEARING DISPOSABLE, MEDI-JECT shall have a completely paid-up, royalty-free right and license under the PROGRAM PATENTS to subsequently make, have made, use, sell and import such ROYALTY-BEARING DISPOSABLES and shall have no further obligation to BECTON under the PROGRAM *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 8 PATENTS under this Agreement with respect to such ROYALTY-BEARING DISPOSABLE for use other than with the MJ-7 INJECTOR. 7.3 MEDI-JECT shall keep complete and accurate records of the NET SALES of DISPOSABLES, as applicable, and all data necessary for the computation of payment or other calculation made hereunder or thereunder. However, MEDI-JECT shall have no duty of trust or other fiduciary relationship with BECTON regarding the maintenance of the books of account or the calculation and reporting of royalties and other calculations and payments hereunder. 7.4 Royalty payments hereunder, when due, shall be made on or before the last business day of May, August, November and February of each year for the sales of the ROYALTY-BEARING DISPOSABLES, as the case may be, during the preceding quarterly periods ending on the last day of March, June, September and December, respectively. Such payments shall be accompanied by a statement showing the NET SALES and such other particulars as are necessary for an account of the payments to be made pursuant to this Agreement. Payment of the amount due shall accompany such statement, which shall be deemed to be true and correct unless objected to and audited in accordance with Paragraph 7.6 below. 7.5 All royalties and other payments hereunder shall be payable by MEDI- JECT to BECTON in United States dollars by a check or checks drawn to the order of BECTON. To the extent sales may have been made by MEDI-JECT in a foreign country, such royalty payments shall be made in United States dollars on the basis of conversion, from the currency of such foreign country according to MEDI-JECT's then standard procedures for such conversions, which standard procedures shall utilize a publicly available bank exchange rate or other published exchange rate (e.g., The Wall Street Journal), on the last business day of the calendar quarter when the sales occurred, and shall be paid at the time and in the manner set forth above, provided, however, that royalties based on sales in any foreign country shall be payable to BECTON only after deducting for exchange and all other charges due foreign governments, including withholding taxes, arising from the origin and transmittal of such royalties, and further provided that the foregoing is subject to the right of MEDI-JECT to make payment of royalties in 9 any country where the currency is blocked and where legal conversion of the currency billed cannot be made into United States dollars by depositing such royalty payments in BECTON's name in a bank designated by BECTON within such country. 7.6 BECTON, at its own expense, shall have the right for a period of two (2) years after receiving any report from MEDI-JECT to nominate an independent Certified Public Accountant ("CPA") reasonably acceptable to MEDI-JECT, who shall have access to MEDI-JECT's records during reasonable business hours for the purpose of verifying the payments or other calculations made under this Agreement, but this right may not be exercised more than once in any calendar year, and the CPA shall disclose to BECTON only information relating to the accuracy of the payment report or other calculations and the payments made in accordance with this Agreement. The failure of BECTON to request verification of any payment report during said two (2) year period shall be considered acceptance of the accuracy of such report and MEDI-JECT shall have no obligation to maintain any records pertaining such report beyond said two (2) year period. 8. CONFIDENTIALITY. Subject to the rights and licenses granted herein, --------------- MEDI-JECT and BECTON shall continue to be restricted from using or disclosing CONFIDENTIAL INFORMATION for a period of five (5) years from the Effective Date of this Agreement, except as provided as provided under Paragraph 12.4 in connection with a transfer so long as any receiving party agrees to be bound by the restrictions and obligations set forth herein, including but not limited to those with respect non-use and confidentiality of CONFIDENTIAL INFORMATION. However, nothing in this Agreement shall in any way restrict the right of a receiving party to use, disclose, or otherwise deal with any information which (i) was already known to the receiving party at the time of disclosure as evidenced by written documents in the receiving party's possession prior to disclosure; or (ii) was generally available to the public or becomes publicly known through no wrongful act of the receiving party; or (iii) was received by the receiving party from a third-party who had a legal right to provide it; or (iv) was developed 10 independently of knowledge of CONFIDENTIAL INFORMATION received by the receiving party from the disclosing party. 9. RIGHT OF FIRST REFUSAL ---------------------- 9.1 Disposables. For a period of five (5) years from the Effective Date ----------- of this Agreement, MEDI-JECT agrees to notify BECTON in writing no more than (***) months before MEDI-JECT either commits capital to manufacture or commits to a third-party to manufacture for it more than (***) DISPOSABLES per calendar year and MEDI-JECT agrees to negotiate with BECTON, before any others, for exclusive rights to manufacture such DISPOSABLE for MEDI-JECT. BECTON shall have (***) days after receiving such written notification to notify MEDI-JECT if BECTON desires to exercise its right of first refusal. Failure to provide such notice in a timely manner shall result in a forfeiture of such right of first refusal as to such DISPOSABLE. Upon receipt of notice by MEDI-JECT from BECTON that it intends to exercise its right of first refusal, BECTON and MEDI-JECT shall negotiate, in good faith and in an expeditious manner, terms and conditions satisfactory to both parties under which BECTON would exclusively manufacture and sell such DISPOSABLE, unless otherwise agreed to by the parties. If the parties are unable to agree on the terms and conditions of an agreement within a period of (***) days after receiving the notification from MEDI-JECT provided for under this Paragraph, MEDI-JECT shall be free to offer the same rights to such DISPOSABLE as were offered to BECTON to any third party on terms no more favorable in the aggregate to that third party than the terms last offered to BECTON. 9.2 Injector for Use with Insulin. For a period of (***) months from the ----------------------------- Effective Date of this Agreement, MEDI-JECT agrees to notify BECTON in writing in the event MEDI-JECT has conceived of a new NEEDLELESS INJECTOR to be commercially developed for use with insulin and provide BECTON with at least one (***) prototype of such new NEEDLELESS INJECTOR, and MEDI-JECT agrees to negotiate with BECTON, before any others, for exclusive rights to commercially develop and sell the new NEEDLELESS INJECTOR, which *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 11 BECTON understands the next new NEEDLELESS INJECTOR may be known as the MJ-8. BECTON shall have (***) days after receiving such written notification to notify MEDI-JECT if BECTON desires to exercise its right of first refusal. Failure to provide such notice in a timely manner shall result in a forfeiture of such right of first refusal as to such new NEEDLELESS INJECTOR. Upon receipt of notice by MEDI-JECT from BECTON that it intends to exercise its right of first refusal, BECTON and MEDI-JECT shall negotiate, in good faith and in an expeditious manner, terms and conditions satisfactory to both parties under which BECTON would exclusively sell such new NEEDLELESS INJECTOR for use with insulin, unless otherwise agreed to by the parties. If the parties are unable to agree on the terms and conditions of an agreement within a period of (***) days after receiving the notification from MEDI-JECT provided for under this Paragraph, MEDI-JECT shall be free to offer the same rights to such NEEDLELESS INJECTOR as were offered to BECTON to any third party on terms no more favorable in the aggregate to that third party than the terms last offered to BECTON. 9.3 Injectors for use with other than Insulin. For a period of (***) ----------------------------------------- months from the Effective Date of this Agreement, MEDI-JECT agrees to notify BECTON in writing in the event MEDI-JECT has conceived of a new NEEDLELESS INJECTOR to be commercialized for use with other than insulin and provide BECTON with at least one sample of such new NEEDLELESS INJECTOR, and MEDI-JECT agrees to negotiate with BECTON, before any others, for exclusive rights to offer for sale, sell and use DISPOSABLES in connection with the new NEEDLELESS INJECTOR to deliver other than insulin, which BECTON understands the next new NEEDLELESS INJECTOR may be known as the MJ-8. BECTON shall have (***) days after receiving such written notification to notify MEDI-JECT if BECTON desires to exercise its right of first refusal. Failure to provide such notice in a timely manner shall result in a forfeiture of such right of first refusal as to such new NEEDLELESS INJECTOR. Upon receipt of notice by MEDI-JECT from BECTON that it intends to exercise its right of first refusal, BECTON and MEDI-JECT shall negotiate, in good faith and in an expeditious manner, terms and conditions satisfactory to both parties under which BECTON would exclusively make, *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 12 have made, offer for sale, sell, import and use DISPOSABLES in connection with such new NEEDLELESS INJECTOR for use with other than insulin, unless otherwise agreed to by the parties. If the parties are unable to agree on the terms and conditions of an agreement within a period of (***) days after receiving the notification from MEDI-JECT provided for under this Paragraph, MEDI-JECT shall be free to offer the same rights to such NEEDLELESS INJECTOR and/or DISPOSABLE as were offered to BECTON to any third party on terms no more favorable in the aggregate to that third party than the terms last offered to BECTON. 10. OBLIGATIONS TO THIRD-PARTIES. BECTON and MEDI-JECT agree to cooperate ---------------------------- (***) 11. RIGHTS AND OBLIGATIONS TO NEGOTIATE AND RESOLUTION OF DISPUTES. -------------------------------------------------------------- 11.1 Within sixty (60) days of the Effective Date of this Agreement, the parties shall attempt in good faith to identify and categorize all of the PATENTS within the PROGRAM PROPERTY and MEDI-JECT PROPERTY covered by this Agreement, and resolve any outstanding issues with respect thereto, including any issues raised under Paragraphs 4 and 5. 11.2 If during a period of two (2) years from the Effective Date of this Agreement it becomes necessary or desirable for a party to have access to the INTELLECTUAL PROPERTY of the other party covered by this Agreement in order to carry out any of its rights and obligations under this Agreement or access to PROGRAM PROPERTY not specifically provided for herein, MEDI-JECT and BECTON agree to negotiate in good faith with each other a mutually agreeable arrangement, including, for example, a licensing agreement to provide access to such necessary rights. 11.3 The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiations between executives of each party who have the authority to settle such dispute. Executives of both parties shall attempt to resolve such dispute in the course of discussions conducted by telephone or face-to-face meeting at a mutually *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 13 acceptable times and places, and thereafter as often as they reasonably deem necessary, to exchange relevant information. If the executives are unable to resolve such dispute, the parties shall submit such dispute to non-binding mediation, to be performed over a period not to exceed five days by a professional mediation service reasonably acceptable to the parties. If the dispute is not resolved by such mediation, the parties may exercise their rights to any legal or equitable remedy available; provided, however that the exclusive jurisdiction and venue for any such disputes shall be the state and federal courts located in (a) Minneapolis, Minnesota, if BECTON brings suit against MEDI-JECT or (b) Bergen County, New Jersey, if MEDI-JECT brings suit against BECTON. 12. MISCELLANEOUS. ------------- 12.1 Each party represents and warrants to the other party that it is duly authorized to enter into this Agreement and become bound by all of its terms and conditions, and further represents and warrants that nothing in this Agreement will contravene or conflict with any Article of Incorporation, by-law, rule, regulation, order, statute, agreement or other writing by which it may be bound or held accountable. 12.2 Nothing in this Agreement shall be deemed or construed as creating any agency or partnership between or among the parties. The parties shall not conduct their activities hereunder in such manner as to make it appear to third parties that they have formed a partnership. No person not a party to this Agreement, including any employees or agents or any party to this Agreement, shall have or acquire any rights by reason of the parties having entered into this Agreement. 12.3 This Agreement and any of its individual terms shall be amended, modified, waived, superseded or canceled only by a writing duly authorized and signed by both parties. The delay or failure of any party at any time or times to require performance of any term shall in no manner affect that party's rights at a later time to enforce the same. 14 12.4 This Agreement shall be binding upon and inure to the benefit of the parties and their respective legal representatives, successors and permitted assigns. Neither party shall assign this Agreement or any part thereof without the prior written consent of the other party; provided, however, either party, without such consent, may assign this Agreement or delegate its responsibilities under this Agreement to an AFFILIATE, and in connection with the transfer or sale of substantially its entire business to which this Agreement pertains in the event of its merger or consolidation with or acquisition by another company or in the event of the transfer or sale to a wholly-owned subsidiary. 12.5 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. 12.6 Any notice permitted or required under this Agreement shall be deemed given upon receipt when hand-delivered or sent by United States Postal Service Express Mail when addressed to: If to BECTON: President Becton Dickinson Pharmaceutical Systems 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 with a copy to: Chief Intellectual Property Counsel Becton Dickinson and Company 1 Becton Drive Franklin Lakes, New Jersey 07417-1880 15 If to MEDI-JECT: President Medi-Ject Corporation 161 Cheshire Lane, Suite 100 Minneapolis, Minnesota 55441 with a copy to: Morris Sherman, Esq. LEONARD, STREET & DEINARD 150 South 5th Street, Suite 2300 Minneapolis, Minnesota 55402 12.7 This Agreement shall be governed by and construed in accordance with Minnesota law (excluding its choice of law rules). 12.8 If any term or condition of this Agreement is or is found to be invalid or unenforceable in any country or countries, the remaining terms and conditions shall remain in full force and effect, and the parties agree to amend or construe the invalid or unenforceable terms or conditions of this Agreement in such manner so as to render them valid and enforceable giving due regard to the intent of the parties. In the event that cannot be done and the invalid or unenforceable term or condition is material to this Agreement, the parties agree to renegotiate the entire Agreement with respect to that country. 12.9 If the parties determine that a filing or notification with the European Economic Commission is necessary or useful to affect the intent of this Agreement within the European Economic Community, the parties shall cooperate, at their own expense, in the preparation and filing of such documents. 12.10 This Agreement constitutes the complete understanding between the parties of each party's obligations to the other party with respect to the subject matter hereof and cancels and supersedes all prior and contemporaneous understandings, negotiations and agreements whether written or oral, including but not limited to the DEVELOPMENT AND LICENSE AGREEMENT. 12.11 This Agreement can be modified only by a written document executed by an authorized representative of the parties which refers to this Agreement and includes a copy of this Agreement as an attachment. 16 Having intended to become bound by the terms and conditions of this Agreement, the parties acknowledge entering into this Agreement as evidenced by their duly authorized signatures set forth below. MEDI-JECT CORPORATION BECTON, DICKINSON AND COMPANY By: /s/ Franklin Pass By: /s/ Alexandre Conroy ---------------------------- ---------------------------- Authorized Signature Authorized Signature ____________________________ ____________________________ Name & Title Typed Name & Title Typed Date Signed: 2/8/99 Date Signed: 2/1/99 ------------------- ------------------ 17 EX-10.25 5 SECURITIES PURCHASES AGREEMENT WITH ELAN INTL. EXHIBIT 10.25 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of November 10, 1998, between MEDI-JECT CORPORATION, a Minnesota corporation (the "Company"), and ELAN INTERNATIONAL SERVICES, LTD., a Bermuda corporation ("EIS"). R E C I T A L S : A. The Company desires to issue and sell to EIS, and EIS desires to purchase from the Company, on the Closing Date (as defined below), 1,000 shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock") and the Company's Warrant for the purchase of shares of Common Stock of the Company (the "Warrant") which shall be issued to EIS for aggregate consideration of US$1,000,000 (one million United States dollars), to be paid by EIS to the Company on the Closing Date. B. The Company and Elan Corporation have entered into a License and Development Agreement of even date herewith (the "License Agreement"), for the purpose of researching, developing and commercializing the Auto-Injector Technology (as that term is defined therein). Capitalized terms used herein which are not otherwise defined shall have the same meanings as ascribed to them in the License Agreement. The parties intend, as provided herein, that the proceeds of the issuance of Series A Preferred Stock shall be applied by the Company solely for the payment of the license fee by the Company for the Auto- Injector Technology. A G R E E M E N T : NOW THEREFORE, the parties agree as follows: SECTION 1. Closing. (a) Time and Place. The closing of the ------- -------------- transactions contemplated hereby (the "Closing") shall occur simultaneous with the execution of this Agreement on the date hereof (the "Closing Date"), at the offices of counsel to EIS or such other place as the parties may agree. (b) Issuance of the Series A Preferred Stock. At the Closing, ---------------------------------------- the Company shall issue and sell to EIS, and EIS shall purchase from the Company, 1,000 shares of Series A Preferred Stock, and a warrant to purchase 280,000 shares of Common Stock of the Company for an aggregate purchase price of US $1,000,000 (one million United States dollars). (c) Delivery. At the Closing, EIS shall pay the purchase price -------- for the Series A Preferred Stock by wire transfer of immediately available funds in accordance with the Company's instructions, and the parties hereto shall execute and deliver to each other, as applicable: (i) a certificate or certificates for the shares of the Series A Preferred Stock (against payment of the purchase price therefor); (ii) certificates as to the incumbency of the officers executing this Agreement and each of the other documents or instruments executed in connection herewith; (iii) the Warrant for the issuance of shares of Common Stock to EIS and (iii) each of the other documents or instruments executed in connection herewith (together, with this Agreement, the "Transaction Documents"). In addition, at the Closing, the Company shall cause to be delivered to EIS an opinion of counsel, from Dorsey & Whitney LLP, in the form and substance reasonable acceptable to EIS. As a condition precedent for the transactions contemplated herein, prior to or simultaneous with the Closing, the Company and Elan Corporation shall have executed and delivered the to each other the License Agreement. 1 (d) Exemption from Registration. The Series A Preferred Stock --------------------------- will be issued under an exemption or exemptions from registration under the Securities Act of 1933, as amended; accordingly, the certificates evidencing the Series A Preferred Stock shall, upon issuance, contain the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO THE RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, DATED NOVEMBER 10, 1998, BY AND BETWEEN MEDI-JECT CORPORATION AND ELAN INTERNATIONAL SERVICES, LTD. SECTION 2. Representations and Warranties of the Company. Except as --------------------------------------------- set forth in the Schedule of Exceptions attached hereto as Exhibit 1, the --------- Company hereby represents to EIS on behalf of itself and, as applicable, its subsidiaries and affiliates: (a) Organization and Qualification. The Company is duly ------------------------------ organized, validly existing and in good standing under the laws of the State of Minnesota and has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted and to consummate the transactions contemplated hereby. The Company is qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted or the property owned by it requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect (as defined below) on the business, prospects, properties or condition (financial or otherwise) of the Company. Annexed hereto as Exhibit A is true and complete copy of the Company's Articles of Incorporation, as amended, as of the date hereof, together with all certificates of designations related thereto. Annexed hereto as Exhibit B is a true and complete copy of the Company's bylaws, as amended, as of the date hereof. Annexed hereto as Exhibit C is a true and complete copy of the Certificate of Designations related to the Series A Preferred Stock (the "Certificate of Designations") which the Company represents and warrant contains all of the designations, rights and preferences of the Series A Preferred Stock and has been filed and is effective as of the date hereof. (b) Capitalization. (i) Immediately prior to the Closing of the -------------- transactions contemplated hereby: the authorized capital stock of the Company consisted of 17,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock; of the authorized Common Stock, 7,123,762 shares are issued and outstanding; of the authorized Preferred Stock, 10,000 are designated Series A Preferred Stock. and no other shares of Preferred Stock have been designated; and as of the date hereof, there are no shares of Preferred Stock issued and outstanding. Simultaneously herewith, the Company is issuing 1,000 shares of Series A Preferred Stock to EIS. (ii) As of the Closing Date: the Company has reserved (A) 1,415,101 shares of Common Stock for issuance upon exercise of outstanding option grants to employees, directors and consultants of the Company, (B) 429,949 shares of Common Stock for future option grants to employees, directors and consultants of the Company, (C) 2,787,893 shares of Common Stock for issuance upon exercise of outstanding warrants, including 280,000 shares of Common Stock issuable upon exercise of the Warrant, dated of 2 even date herewith, issued by the Company to EIS and (D) 2,000,000 shares of Common Stock for issuance upon conversion of the Series A Preferred Stock. In addition, the Company has reserved (E) 9,000 shares of Series A Preferred Stock for issuance as dividend distributions in the event the Company does not have sufficiently legally available funds for payment of a cash distribution on a dividend payment date. Other than the foregoing, there are no preemptive rights, voting agreements, rights of first offer or refusal, options, warrants or other conversion privileges or rights presently outstanding to purchase, subscribe for or otherwise acquire, or any securities into or exercisable for or into, any of the Company's authorized but unissued capital stock. Except as otherwise provided herein, there are no agreements to register any of the Company's outstanding securities under the U.S. federal securities laws. (iii) All of the outstanding shares of capital stock of the Company have been issued in accordance with applicable state and federal laws and regulations governing the sale and purchase of securities, all of such shares have been duly and validly issued and are fully paid and non-assessable, and none of such shares carries preemptive or similar rights. (c) Authorization of Transaction Documents. The Company has full -------------------------------------- corporate power and authority to execute and deliver this Agreement, and each of the other Transaction Documents, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by the Company of the Transaction Documents (including the issuance and sale of the Series A Preferred Stock) have been authorized by all requisite corporate actions by the Company; and the Transaction Documents (including the issuance and sale of the Series A Preferred Stock) have been duly executed and delivered by the Company, are the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, and except as enforcement of rights to indemnity and contribution hereunder and thereunder may be limited by U.S. federal or state securities laws. (d) No Conflicts. The execution, delivery and performance by the ------------ Company of the Transaction Documents (including the issuance and sale of the Series A Preferred Stock), and compliance with the provisions thereof by the Company, will not (i) violate any provision of applicable law, statute, rule or regulation applicable to the Company or, to the Company's knowledge, any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to the Company or any of their respective properties or assets or (ii) conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute (with notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of, any Encumbrance (as defined below) upon any of the properties or assets of the Company under its Articles of Incorporation, as amended and restated, any other or similar certificates of designations or Bylaws, or any material contract to which the Company is a party, except where such violation, conflict or breach would not, individually or in the aggregate, have a material adverse effect on the business properties, condition (financial or otherwise), operations or prospects of the Company ("Material Adverse Effect"). As used herein, "Encumbrance" shall mean any lien, charge, encumbrance, 3 equity, claim, option, proxy, pledge, security interest, or other similar right of any nature, except for such conflicts, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect. (e) Approvals. No material permit, authorization, consent or --------- approval of or by, or any notification of or filing with, any person or entity (governmental or otherwise) is required in connection with the execution, delivery or performance of the Transaction Documents (including the issuance and sale of the Securities or the filing of the Certificate of Designations) by the Company except for the filing of a Form D with the Securities and Exchange Commission and any required notices or filings and with the Nasdaq Stock Market. (f) Filings and Financial Statements. (i) The Company has filed -------------------------------- its annual report on Form 10-K for the year ended December 31, 1997, its related proxy materials and its quarterly reports on Form 10-Q for the quarters ended March 31 and June 30, 1998 (collectively, including all exhibits and schedules required to be filed in connection therewith, the "SEC Filings") with the Securities and Exchange Commission, the Nasdaq Stock Market and any other required person or entity (governmental or otherwise) in a timely manner and as otherwise required by applicable laws and regulations, including the federal securities acts. The audited financial statements of the Company for the fiscal year ended December 31, 1997 included in the SEC Filings (the "Audited Financial Statements"), and the Company's unaudited balance sheet for the period ending June 30, 1998, together with the accompanying statements of operations and cash flows including the notes thereto (the "June Financial Statements"; collectively, with the Audited Financial Statements, the "Financial Statements") are accurate and complete in all material respects and fairly present the financial condition of the Company as at the dates thereof and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be otherwise indicated in such financial statements or the notes thereto), subject, in the case of the June Financial Statements, to normal year-end audit adjustments (which shall not be material in the aggregate) and the absence of footnote disclosures. (g) Taxes and Plans. (i) The Company has filed in a timely --------------- manner all material federal, state, local and foreign tax returns, reports and filings (collectively, "Returns"), including income, franchise, property and other taxes, and has paid or accrued the appropriate amounts reflected on such Returns. None of the Returns have been audited or challenged, nor has the Company received any notice of challenge nor have any of the amounts or other data included in the Returns been challenged or reviewed by any governmental authority. (ii) The Company does not maintain, sponsor, is not required to make contributions to or otherwise have any liability with respect to any pension, profit sharing, thrift or other retirement plan, employee stock ownership plan, deferred compensation, stock ownership, stock purchase, performance share, bonus or other incentive plan, severance plan, health or group insurance plan, welfare plan, or other similar plan, agreement, policy or understanding (whether written or oral), whether or not such plan is intended to be qualified under Section 401(a) of the Code, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, which plan covers 4 any employee or former employee of the Company. (h) Absence of Changes. Since December 31, 1997, there has not ------------------ been (a) any Material Adverse Effect on the Company; (b) any damage, destruction or loss, whether or not covered by insurance, resulting in a Material Adverse Effect on the Company; (c) any declaration, setting aside or payment of any dividend or other distribution or payment (whether in cash, stock or property) in respect of the capital stock of the Company, or any redemption or other acquisition of such stock by the Company (other than the repurchase of unvested shares of Common Stock held by employees of or consultants to the Company upon termination of employment or consultancy in accordance with the provisions of the Company's equity incentive plan and agreements); (d) any disposal or lapse of any trade secret, invention, patent, patent application or continuation (in whole or in part), trademark, trademark registration, service mark, service mark registration, copyright, copyright registration, or any application therefor or filing in respect thereof (collectively, and together with any and all know-how, trade secrets and proprietary business or technology information, the "Intellectual Property"); (e) loss of the services of any of the key officers or key employees of the Company; (f) any incurrence of or entry into any liability or Encumbrance, commitment or transaction, including without limitation, any borrowing (or assumption or guarantee thereof) or guarantee of a third party's obligations, or capital expenditure (or lease in the nature of a conditional purchase of capital equipment) in excess of $100,000; or (g) any material change by the Company in accounting methods or principles or (h) any change in the assets, liabilities, condition (financial or otherwise), results or operations or prospects of the Company from those reflected on the Company's financial statements as of or for the year ended December 31, 1997 (the "Financial Statements"), as furnished to EIS in writing, except changes in the ordinary course of business that have not, individually or in the aggregate, had a Material Adverse Effect or changes reflected in the SEC Filings. (i) No Liabilities. Except as set forth in the SEC Filings, -------------- since June 30, 1998 the Company has not incurred or suffered any liability or obligation, matured or unmatured, contingent or otherwise, except in the ordinary course of business and that have not, individually or in the aggregate, had a Material Adverse Effect. (j) Properties and Assets; Etc. (a) The Company does not own any -------------------------- interest in real property, and (b) the Company owns or has the right to use pursuant to license, sub-license, agreement or permission all Intellectual Property necessary for the operation of its business as presently conducted, including patents, patent applications, continuations, continuations-in-part, extensions, trademarks and trademark applications, know-how and other Intellectual Property, as reflected in the Financial Statements, subject in each case, to no Encumbrances required to be disclosed in the Financial Statements except as set forth therein. All of the Company's Intellectual Property which is owned by the Company is owned free and clear of all liens, claims and encumbrances; none of the Company's rights in or use of such Intellectual Property has been or is currently being threatened to be, challenged; to the Company's knowledge, without making any inquiry other than those, if any, routinely conducted by the Company in the ordinary course of business, no current or currently planned product based upon the Company's Intellectual Property would infringe any patent, trademark, service mark, trade name or copyright of any other person or entity issued or pending on the Closing Date if the Company were to distribute, sell, market or manufacture 5 such products; and the Company is not aware, after due inquiry, of any actual or threatened claim by any person or entity alleging any infringement by the Company of a patent, trademark, service mark, trade name or copyright possessed by such person or entity. None of such Intellectual Property, whether foreign or domestic, has been canceled, abandoned, or otherwise terminated. All of the Company's patent applications, trademark applications, service mark applications, trade name applications and copyright applications have been duly filed with the appropriate regulatory authorities. (k) The Company has and maintains fire and casualty insurance policies, sufficient in amount, subject to reasonable deductibles, to allow it to replace any of its properties that may become damaged or destroyed. (l) The Company, its business and properties and assets are in compliance, in all material respects, with all applicable laws and regulations, including without limitation, those relating to (a) health, safety and employee relations, (b) environmental matters, including the discharge of any hazardous or potentially hazardous materials into the environment, and (c) the development, commercialization and sale of pharmaceutical and biotechnology products, including all applicable regulations of the U.S. Food and Drug Administration and comparable, applicable foreign regulatory authorities. (m) Legal Proceedings, etc. Except as set forth in the Company's ---------------------- SEC Filings, there is no legal, administrative, arbitration or other action or proceeding or governmental investigation pending or, to the Company's knowledge, threatened against the Company. (n) Disclosure. The representations and warranties set forth ---------- herein do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained herein and therein not misleading, in light of the circumstances under which they were made. (o) Brokers or Finders. The Company has not retained any ------------------ investment banker, broker or finder in connection with the transactions contemplated by the Transaction Documents; and no person or entity is entitled to any fee or compensation in respect thereof. SECTION 3. Representations, Warranties and Covenants of EIS. EIS ------------------------------------------------ hereby represents, warrants and covenants to the Company as follows: (a) Organization. EIS is a corporation duly organized, validly ------------ existing and in good standing under the laws of Bermuda and has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted and to consummate the transactions contemplated hereby. EIS is qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted or the property owned by it requires such qualification, except where the failure to so qualify would not reasonably be expected to have a material adverse effect on the business or condition (financial or otherwise) of EIS. (b) Authorization of Agreement. EIS has full legal right, power -------------------------- 6 and authority to enter into this Agreement and purchase and accept the Series A Preferred Stock, and perform its obligations hereunder, which have been duly authorized by all requisite corporate action. This Agreement has been duly executed and delivered by EIS and is the valid and binding obligations of EIS, enforceable against EIS in accordance with its terms. (c) No Conflicts. The execution, delivery and performance by EIS ------------ of this Agreement, the purchase and acceptance of the Series A Preferred Stock and compliance with provisions hereof by EIS, will not (i) violate any provisions of applicable law, statute, rule or regulation or, to the best of EIS's knowledge, any ruling, injunction, order, judgment or decree of any court, arbitration, administrative agency of other governmental body applicable to EIS of any of its properties or assets or (ii) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with notice or lapse of time to both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of any Encumbrance upon any of the properties or assets of EIS under the organizational documents of EIS or any material contract to which EIS is party, except where such violation conflict or breach would not, individually or in the aggregate, have a material adverse effect on EIS. (d) Approvals. No permit, authorization, consents or approval of --------- or by, or any notification of or filing with, any person or entity (governmental or otherwise) is required in connection with the execution, delivery or performance of this Agreement by EIS. (e) Investment Representations. -------------------------- (i) EIS has not been formed solely for the purpose of entering into the transactions described herein and is acquiring the Securities for investment for its own account, not as a nominee or agent, and not with the view to, or for sale in connection with, any distribution of any part thereof. (ii) EIS understands that the offer and sale of the Series A Preferred Stock has not been, and will not be, registered under the Securities Act of 1933 as amended, (the "Securities Act"), by reason of a specific exemption from the Registration provisions of the Securities Act that depends, among other things, the bona fide nature of EIS's investment intent and the accuracy of EIS's representations as expressed herein and in response to the Company's inquiries. EIS further understands that no public market now exists for the Series A Preferred Stock, and the Company has made no assurances that such a public market will ever exist for the Series A Preferred Stock. (iii) EIS has had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the Company and the terms and conditions of this transaction. All questions raised by EIS have been answered to its satisfaction, and all information requested by EIS has been supplied. (iv) EIS's decision to enter into the transactions contemplated hereby is based on its own evaluation of the risk and merits of the purchase and the Company's proposed business activities. EIS acknowledges that the Series A Preferred Stock or the Common Stock issuable upon conversion thereof must 7 be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. EIS is aware of the provisions of Rule 144 promulgated under the Securities Act, which may permit resale of the Series A Preferred Stock, subject to the satisfaction of certain conditions. (v) Nothing contained in this Section 3(e) shall limit any of the Company's representations or warranties or limit EIS's recourse in respect thereof. (vi) EIS has not retained any investment banker, broker or finder in connection with the transactions contemplated by the Transaction Documents; and no person or entity is entitled to any fee or compensation in respect thereof. (vii) EIS has a net worth in excess of US $5,000,000 (five million United States dollars). SECTION 4. Covenants. --------- (a) Fully-Diluted Stock Ownership. (i) Notwithstanding any other ----------------------------- provision of this Agreement, in the event that EIS shall have determined that at any time it (together with its Affiliates, if applicable) holds or has the right to receive or the obligation to accept from the Company Common Stock (or securities or rights, options or warrants exercisable, exchangeable or for or into Common Stock) representing in the aggregate in excess of 19.9% of the Company's outstanding Common Stock (assuming any such exercise, exchange or conversion, but not the exercise, exchange or conversion of any other similar securities), EIS shall have the right, in its sole discretion, rather than acquiring such securities from the Company, to exchange such number of securities as are necessary to bring its holdings to below 19.9% of the voting securities of the Company, for non-voting, no liquidation preference equity securities of the Company (which shall be reasonably satisfactory to the Company and EIS), which equity securities shall be entitled to all of the other rights and benefits of the Common Stock. In the event that EIS shall undertake to exercise such right, the Company shall use its good faith best efforts to obtain the approval of the terms of such equity securities by its shareholders if so required by law, and EIS shall retain the additional right to exchange such new class of equity security for Common Stock, in its discretion. In the event the Company has exercised its rights under Section 4(e) hereof and such approval is required but not obtained, the Company's rights under such Section 4(e) shall be deemed null and void. (ii) Notwithstanding anything contained herein to the contrary, the Company shall not issue a number of shares of Common Stock upon conversion of the Series A Preferred Stock in excess of 20% of the number of shares of Common Stock outstanding on the date the Series A Preferred Stock was first issued (1,424,752 shares) unless and until the Company shall have received the approval of its shareholders of such issuance as and to the extent required by Nasdaq Rule 4460(i)(1)(d)(ii). At any time that the Series A Preferred Stock is convertible pursuant to its terms and the number of shares that would be issuable upon conversion of the Series A Preferred Stock shall exceed such number of shares, the Company, upon the request of a holder of Series A Preferred Shares, shall submit the approval of such issuance to its shareholders for approval to the extent required by Nasdaq Rule 4460(i)(1)(d)(ii). (b) Use of Proceeds. The Company shall use the proceeds of the --------------- sale of the Series A Preferred Stock solely for the purpose of paying the license fee to Elan Corporation pursuant to the License and Development Agreement, dated as of the date hereof. (c) Registration. The Company covenants and agrees that all ------------ 8 shares of Common Stock issuable upon conversion of the Series A Preferred Stock, whether converted by the holder or by the Company, shall at the time of issuance be registered under the Securities Act or shall be freely transferable without volume restriction by EIS pursuant to an exemption from the registration requirements of the Securities Act. The Company shall bear all expenses with respect to any such registration. (d) Further Assurances. From and after the date hereof, each of ------------------ the parties hereto agrees to do or cause to be done such further acts and things and deliver or cause to be delivered to each other such additional assignments, agreements, powers and instruments, as each may reasonably require or deem advisable to carry into effect the purposes of the Transaction Documents or to better to assure and confirm unto each other their respective rights, powers and remedies hereunder and thereunder. SECTION 5. Entire Agreement. This Agreement and the other ---------------- Transaction Documents contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. SECTION 6. Survival and Indemnification. ---------------------------- (a) Survival Period. The representations and warranties of the --------------- Company contained herein shall survive until the redemption of all shares of the Series A Preferred Stock or their conversion into shares of Common Stock (the "Survival Period"). (b) Indemnification. In addition to all rights and remedies --------------- available to the parties hereunder at law or in equity, the Company shall indemnify EIS, and its respective affiliates, and EIS' and its respective affiliates' stockholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Indemnified Person"), and save and hold EIS harmless from and against and pay on behalf of or reimburse each such Indemnified Person, as and when incurred, for any and all losses, cost, or damages, arising out of claims by or on behalf of such Indemnified Person or any third party, (collectively, "Losses"), that any such Indemnified Person may suffer, sustain incur or become subject to, as a result of, in connection with or relating to: (i) any misrepresentation or breach of warranty on the part of the Company under Section 2 of this Agreement; or (ii) any breach or failure to perform of any covenant or agreement on the part of the Company under Section 4 of this Agreement; (c) Investigation. All indemnification rights hereunder shall ------------- survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to the extent provided in Section 6(b) above, irrespective of any investigation, inquiry or examination made for or on behalf of, or any knowledge of the Indemnified Person or the acceptance of any certificate or opinion. (d) Contribution. If the indemnity provided for the this Section ------------ 6 shall be, in whole or in part, unavailable to any Indemnified Person, due to Section 6(b) being declared unenforceable by a court of competent jurisdiction based upon reasons of public 9 policy, so that Section 6(b) shall be insufficient to hold each such Indemnified Person harmless from Losses which would otherwise be indemnified hereunder, then the Indemnifying Party and the Indemnified Person shall each contribute to the amount paid or payable for such Loss in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnifying Party on the one hand and the Indemnified Person on the other, but also the relative fault of the Indemnifying Party and be in addition to any liability that the Indemnifying Party may otherwise have. The indemnity, contribution and expense reimbursement obligations that the Indemnifying Party has under this Section 6 shall survive the expiration of the Transaction Documents. The parties hereto further agree that the indemnification and reimbursement commitments set forth in this Agreement shall apply whether or not the Indemnified Person is a formal part to any such lawsuit, claims or other proceedings. (e) Limitation. No claim shall be brought by an Indemnified ---------- Person in respect of any misrepresentation or breach of warranty under this Agreement after the Survival Period unless written notice thereof shall have been provided prior to the expiration of the Survival Period, in which case such surviving claims shall be limited to those in such notice; and any claim for nonfulfillment, default or breach of any covenant shall be brought within one year of the date of that such Indemnified Person became aware or should have become aware of the nonfulfillment, default or breach, unless written notice thereof shall have been provided prior to such one -year period, in which case such surviving claims shall be limited to those in such notice. Except as set forth in the previous sentence and in Section 6(c) above, this Section 6 is not intended to limit the rights or remedies otherwise available to any party hereto with respect to this Agreement or the Transaction Documents. SECTION 7. Notices. All notices, demands and requests of any kind to ------- be delivered to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally-recognized overnight courier or by registered or certified first- class mail, return receipt requested and postage prepaid, or by facsimile transmission, addressed as follows: (i) if to the Company, to: Medi-Ject Corporation 161 Cheshire Lane Suite 100 Minneapolis, Minnesota 55441 Facsimile: (612) 476-1009 Attention: Chief Executive Officer with a copy to: Dorsey & Whitney LLP 2200 First Bank Place East Minneapolis, Minnesota 55402 Facsimile: (612)340-8827 Attention: Karin Keitel, Esq. 10 (ii) if to EIS, to: Elan International Services, Ltd. 102 St. James Court Flatts, Smiths Parish Bermuda, SL04 Facsimile: (441) 292-2224 Attention: Director with a copy to: Cohen & Tauber LLP 1350 Avenue of the Americas 26th Floor New York, New York 10019 Facsimile: (212) 519-5195 Attention: Laurence Tauber or to such other address as the party to whom notice is to be given may have furnished to the other party hereto in writing in accordance with provisions of this Section 7. Any such notice or communication shall be deemed to have been received (i) in the case of personal delivery or facsimile transmission, on the date of such delivery, (ii) in the case of nationally-recognized overnight courier, on the second business day after the date when sent and (iii) in the case of mailing, on the fifth business day following that day on which the piece of mail containing such communication is posted. Notice hereunder may be given on behalf of the parties by their respective attorneys. SECTION 8. Amendments. This Agreement may not be modified or ---------- amended, or any of the provisions hereof waived, except by written agreement of the Company and EIS. SECTION 9. Withholding. The Company agrees to pay to any holder of ----------- the Series A Preferred Stock that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due with respect to any dividend payment being made to such person with respect thereto, after deduction for or withholding in respect of any U.S. taxes imposed with respect to any such dividend payment (or, in lieu thereof, payment of such U.S. taxes by such non-U.S. person), will not be less than the amount which would otherwise be distributed to such non-U.S. person, absent such deduction, withholding or payment. SECTION 10. Counterparts and Facsimile. The Transaction Documents -------------------------- may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. Each of the Transaction Documents may be signed and delivered to the other party by facsimile transmission; such transmission shall be deemed a valid signature. SECTION 11. Headings. The section and paragraph headings contained -------- in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of the Agreement. SECTION 12. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the internal laws of the State of New York, without giving 11 effect to principles of conflicts of laws. SECTION 13. Expenses. Each of the parties shall be responsible for -------- its own costs and expenses incurred in connection with the transactions contemplated hereby and by the other Transaction Documents. SECTION 14. Public Releases; Etc. The parties shall reasonably agree -------------------- in writing upon the contents of any press release or releases and other public disclosure in respect of the transactions contemplated hereby, and no such press release or disclosure shall be made except as so agreed, except as may otherwise be required by applicable law or judicial or administrative process or pursuant to arrangements with financial, accounting or legal advisors. SECTION 15. Schedules, etc. All statements contained in any exhibit -------------- or schedule delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated hereby, are an integral part of this Agreement and shall be deemed representations and warranties hereunder. SECTION 16. Assignments. This Agreement and all of the provisions ----------- hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. EIS may transfer and assign its rights hereunder and to the Shares to any of its Affiliates without the prior consent of the Company. EIS may not transfer or assign its rights hereunder and to the Series A Preferred Stock to any other party without the prior consent of the Company, which consent shall not be unreasonably withheld or delayed. [Signature page follows] 12 IN WITNESS WHEREOF, each of the undersigned has duly executed this Securities Purchase Agreement as of the date first written above. MEDI-JECT CORPORATION. By: ______________________________________ Frank Pass President and Chief Executive Officer ELAN INTERNATIONAL SERVICES, LTD. By: ______________________________________ Kevin Insley, President 13 EX-10.26 6 LICENSE & DEVELOPMENT AGREEMENT WITH ELAN CORP. EXHIBIT 10.26 LICENSE AND DEVELOPMENT AGREEMENT BY AND BETWEEN ELAN CORPORATION, PLC An Irish Company AND MEDI-JECT CORPORATION A Minnesota Corporation This Agreement is made as of the 10th day of November 1998 TABLE OF CONTENTS ----------------- 1. ARTICLE I: DEFINITIONS.......................................... 1 2. ARTICLE II: THE LICENSE.......................................... 7 3. ARTICLE III: DEVELOPMENT OF THE PRODUCT...........................14 4. ARTICLE IV: FINANCIAL PROVISIONS.................................14 5. ARTICLE V: REGISTRATION OF THE PRODUCT..........................17 6. ARTICLE VI: WARRANTY AND INDEMNITY...............................18 7. ARTICLE VII: PATENTS..............................................21 8. ARTICLE VIII: MISCELLANEOUS CLAUSES................................24 LICENSE AND DEVELOPMENT AGREEMENT, DATED AS OF NOVEMBER 10, 1998, BY AND BETWEEN ELAN CORPORATION, PLC, AN IRELAND CORPORATION ("ELAN") AND MEDI-JECT CORPORATION, A MINNESOTA CORPORATION ("MEDI-JECT"). RECITALS A. Elan owns various patents and patent applications, including the Elan Patent Rights (capitalized terms used herein are defined below), which have been granted or are pending under the International Convention in relation to the development and production of drug delivery devices and processes. B. Elan is knowledgeable in the development of drug delivery devices and has developed a unique range of systems for the delivery of medicaments. C. Medi-Ject desires to enter into a licensing agreement with Elan pursuant to which Medi-Ject shall have the right to manufacture Devices, market the Products in the Territory and sublicense the Elan Intellectual Property, to the extent and subject to the terms and conditions set forth herein. D. Elan is prepared to license the Elan Intellectual Property for the Field in the Territory to Medi-Ject in accordance with the terms and conditions contained herein. E. As of the date of this Agreement, Elan and Medi-Ject are entering into several agreements with respect to the transactions contemplated hereunder. NOW THEREFORE, the Parties agree as follows: 1. ARTICLE I: DEFINITIONS AND INTERPRETATIONS 1.1. Definitions. In the present Agreement and any further agreements based thereon between the Parties hereto, the following definitions shall apply: "Affiliate" shall mean any corporation or entity controlling, controlled by or under the common control of Elan or Medi-Ject, as the case may be. For the purpose of this Agreement, "control" shall mean the direct or indirect ownership of at least fifty (50%) percent of the outstanding shares or other voting rights of the subject entity to elect directors, or if not meeting the preceding criteria, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists. "Auto-Injector Technology" shall mean any technology incorporated or used in a device (i) constituting a disposable, single use, needle injection system wherein the active ingredient is housed in a vial which is situated in a manner substantially perpendicular to the body surface, (ii) utilising gas generation achieved via a 1 chemical reaction for delivery of the active ingredient and (iii) having infusion time for delivery of an active ingredient which is less than or equal to 10 seconds. For the avoidance of doubt, Auto-Injector Technology shall not include any other technology that does not meet the foregoing definition, whether or not similar or containing elements of the Elan Intellectual Property, including, without limitation, the Medipad(TM) Technology or any other Excluded Technology. "cGCP", "cGLP" and "cGMP" shall mean current Good Clinical Practices, current Good Laboratory Practices and current Good Manufacturing Practices respectively. "Confidential Information" shall have the meaning set forth in Article 8.1 below. "Definitive Documents" shall mean this Agreement; a warrant for the purchase of shares of common stock of Medi-Ject issued by Medi-Ject to Elan International Services, Ltd. and a securities purchase agreement, between Medi-Ject and Elan International Services, Ltd., for the purchase of shares of Medi-Ject's Series A Convertible Preferred Stock, all of which are dated as of the date hereof and any other documents or agreements executed in connection with the transactions contemplated hereunder and thereunder. "Device" shall mean any device or any parts or components thereof, the manufacture, use, importation or sale of which is covered by or embodies the Auto-Injector Technology, the Elan Intellectual Property, the Joint Intellectual Property and the Medi-Ject Intellectual Property. "Effective Date" shall mean November 10, 1998. "Elan" shall mean Elan Corporation, plc. "Elan Compounds" shall mean, at any time during the Term of this Agreement or, in the event of the acquisition of Elan by another pharmaceutical company, immediately prior to the time of such acquisition, chemical entities (i) for which Elan is the patent holder or which are in-licensed by Elan or (ii) which are not patented and which Elan is developing to sell itself In Market. "Elan Improvements" shall mean any and all improvements to the Auto- Injector Technology conceived, created, developed, and/or otherwise invented by or on behalf of Elan which can be used in the Field. "Elan Intellectual Property" shall mean the Elan Patent Rights, Elan Improvements and/or the Elan Know-How. "Elan Know-How" shall mean all knowledge, information, trade secrets, data and expertise relating to the Elan Patents for use in the Field and that is owned or 2 licensed by Elan (other than the Excluded Technology) as of the Effective Date, including, but not limited to, clinical data and test results, whether or not covered by any patent, copyright, design, trademark, trade secret or other industrial or intellectual property rights, but, except as otherwise provided herein, all subject to any contractual obligations to unaffiliated third parties that Elan has as of the Effective Date. "Elan Patent Rights" shall mean the patents and patent applications related to the Auto-Injector Technology for use in the Field that are owned or licensed by or on behalf of Elan (but excluding the Medipad(TM) Technology or other Excluded Technology), set forth on Appendices A-1 and A-2 attached hereto; subject, however, except as otherwise provided herein, to any contractual obligations to unaffiliated third parties that Elan has as of the Effective Date. Elan Patent Rights shall also include all extensions, continuations, continuations-in-part, divisionals, patents-of-additions, re- examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder and any Elan Improvements. "Excluded Technology" shall mean all knowledge, information, trade secrets, data, discoveries, inventions, improvements, ideas, techniques, processes, formulations, systems, designs and/or expertise, and any and all other intellectual property (including patents and patent applications that are issued or that may be issued), relating to any technology, other than the Auto-Injector Technology in the Field. For the avoidance of doubt, Excluded Technology shall include such intellectual property relating to (i) the Auto-Injector Technology for utilization outside of the Field and (ii) the Medipad(TM) Technology. "FDA" shall mean the United States Food and Drug Administration or any other successor agency, whose approval is necessary to market the Devices or Products in the United States of America. "Field" shall mean the practice of delivering therapeutic entities utilizing Auto Injector Technology, other than (A) active ingredients used in the treatment of (i) (***) (ii) (***) (iii) (***) and (iv) (***) and (B) Elan Compounds, provided, in the case of Elan Compounds that Medi-Ject has not previously sub- licensed the right to use the Auto-Injector Technology with respect to such compound to an unaffiliated third party on an exclusive basis pursuant to a written agreement and that Medi-Ject has delivered to Elan prior written notice of same. "In Market" shall mean the sale of the Products or Devices to a third party such as a wholesaler, distributor, managed care organization, hospital, pharmacy and/or the like. *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 3 "Joint Intellectual Property" shall mean the Joint Know-How and/or the Joint Patent Rights. "Joint Know-How" shall mean all knowledge, information and expertise developed by Elan and Medi-Ject during the Term relating to the Auto- Injector Technology and in accordance with the Project whether or not covered by any patent, copyright, design, trademark or other industrial or intellectual property rights. "Joint Patent Rights" shall mean any patent and patent applications created, developed, conceived or otherwise jointly invented or developed by Elan and Medi-Ject, relating to the Auto-Injector Technology. Joint Patent Rights shall also include all extensions, continuations, continuations-in-part, divisionals, patents of additions, re-examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder. "Manufacturing Cost" shall mean the fully allocated cost which is the sum total of all production related costs for a Product (direct labor, direct materials, facility overhead and expenses which can be allocated to the Product, QA/QC and analytical charges, packaging and regulatory compliance costs for the Product, including, but not limited to, stability studies and FDA fees) accounted for in accordance with United States Generally Accepted Accounting Principles, consistently applied. "Major Markets" shall mean (***). "Marketing Authorization" shall mean the procurement of registrations and permits required by applicable government authorities in a country in the Territory for the marketing, sale, and distribution of Devices and/or a Product in such country. "Medi-Ject" shall mean Medi-Ject Corporation and any of its Affiliates. "Medi-Ject Intellectual Property" shall mean the Medi-Ject Know-How and/or the Medi-Ject Patent Rights. "Medi-Ject Know-How" shall mean all knowledge, information, trade secrets, data and expertise relating to the Auto-Injector Technology, that is possessed by Medi-Ject, or from time to time, developed, invented or otherwise acquired by or on behalf of Medi-Ject during the Term, including without limitation, Medi-Ject Project Know-How, and clinical data and test results, whether or not covered by any patent, copyright, design, trademark, trade secret or other industrial or intellectual property rights. *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 4 "Medi-Ject Patent Rights" shall mean all patents and patent applications owned or to be owned by, or licensed or to be licensed by Medi-Ject relating to the Auto-Injector Technology. Medi-Ject Patent Rights shall also include all extensions, continuations, continuations-in-part, divisionals, patents of additions, re- examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder. Medi-Ject Patent Rights shall further include any patents or patent applications covering any improved Products or improved methods of making or using the Products invented or acquired by Medi- Ject during the Term relating to the Auto-Injector Technology (and shall for the avoidance of doubt include the Medi-Ject Project Patent Rights). "Medi-Ject Project Know-How" shall mean all knowledge, information, trade secrets, data and expertise owned or to be developed by or on behalf of Medi-Ject in connection with the Project, or otherwise relating to the Auto-Injector Technology, including clinical data, whether or not covered by any patent, copyright, design, trademark, trade secret or other industrial or intellectual property rights. "Medi-Ject Project Patent Rights" shall mean any patents or patent applications covering any improved Products or methods of making or using the Products, invented or acquired by or on behalf of Medi-Ject in connection with the Project. "Medipad(TM) Technology" shall mean (***). *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 5 "NSP" shall mean net selling price determined by deducting from the gross amount billed by Medi-Ject for Devices or Products (including, without limitation, any and all sums billed for the compound and/or drug product delivered with, by and/or via the Devices or Products; sums billed for the supply of Devices and Products; and royalties receivable for the sale of Devices or Products) sold In Market, the following: (***) If Medi-Ject shall sell any of the Devices or the Products together with other products to third parties in a particular country and the price attributable to the Devices or Products is less than the average price of "arms length" sales of the Devices or Products alone in the particular country for the reporting period in which such sales occur (such sales to be excluded from the calculation of the average price of "arms length" sales), NSP for any such sales shall be the average price of "arms length" sales by Medi-Ject of the Devices or Products alone (as the case may be) in the country during the reporting period in which such sales occur. "Party" shall mean Medi-Ject or Elan as the case may be. "Parties" shall mean Medi-Ject and Elan. "Plan" shall mean the program of development agreed to by the Parties and attached hereto as Appendix B, with respect to the research and development of the Devices or Products. "Products" shall mean all Devices or any parts or components thereof, together with any and all compounds, active ingredients, and/or drug products delivered with, by and/or via the Devices, that are used, developed, manufactured, offered for sale and/or sold by or on behalf of Medi-Ject and/or its permitted sub-licensees, and the manufacture, use, importation or sale of which is covered by or embodies the Elan Intellectual Property, the Medi-Ject Intellectual Property and/or the Joint Intellectual Property. *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 6 "Project" shall mean all activity as undertaken by Medi-Ject in order to develop Products in accordance with the Plan. "Retained Elan Intellectual Property" shall mean the Elan Patent Rights listed on Appendix A-2 and the Elan Know-How related thereto. "Technological Competitor" shall mean any entity that substantially engages or proposes to substantially engage directly or indirectly in the development or commercialization of drug delivery systems or products in the pharmaceutical industry. "Term" shall have the meaning set forth in Article 8.5 below. "Territory" shall mean all of the countries of the world. "Trademark" shall mean the trademark(s) as may be selected by Medi- Ject or its permitted sub-licensees which has been or may be registered by Medi-Ject or its permitted sub-licensees in one or more countries in the Territory. "$" shall mean United States Dollars. 1.2. Interpretation. In this Agreement, the following shall apply: 1.2.1. the singular includes the plural and vice versa, the masculine includes the feminine and vice versa and references to natural persons include corporate bodies, partnerships and vice versa; 1.2.2. any reference to an Article or Appendix shall, unless otherwise specifically provided, be to a Article or Appendix of this Agreement; and 1.2.3. the headings of this Agreement are for ease of reference only and shall not affect its construction or interpretation. 2. ARTICLE II : THE LICENSE 2.1. License Grant. 2.1.1 Subject to the terms and conditions of this Agreement and to the terms and conditions of any contractual arrangements existing on the Effective Date, Elan hereby grants to Medi-Ject for the Term, and Medi-Ject hereby accepts, (i) an exclusive license of the Elan Intellectual Property and the Joint Intellectual Property in connection with the applications or deliveries of compounds listed on Appendix D, except with respect to any Retained 7 Elan Intellectual Property, as to which Medi-Ject is being granted a non-exclusive license, (ii) a non-exclusive license of the Elan Intellectual Property and the Joint Intellectual Property in connection with the applications or deliveries of compounds listed on Appendix E, and (iii) subject to existing contractual rights of third parties, an exclusive license of the Elan Intellectual Property and the Joint Intellectual Property for use with any other compounds not listed on Appendices D or E and which are not Elan Compounds, in each case for use only as Auto-Injector Technology and in the Field for the Territory to develop, make, have made, manufacture, have manufactured, package, use, import, export, promote, distribute, market, offer for sale, and sell the Devices and Products in the Field for the Territory. From time to time, Medi-Ject may notify Elan of the intended use of the Elan Intellectual Property upon the terms and conditions contained herein, in connection with compounds not listed on Appendix D and E hereof, and Elan shall as promptly as possible thereafter, notify Medi-Ject whether any of such intended uses are subject to the contractual rights of third parties previously granted by Elan. 2.1.2 For further avoidance of doubt, nothing in this license shall be deemed to (i) constitute a license to the Elan Compounds; or (ii) include the use of Elan Intellectual Property for uses other than as Auto-Injector Technology and in the Field for the Territory. 2.1.3 For further avoidance of doubt, notwithstanding the license granted to Medi-Ject, Elan shall retain (A) the right to utilise or license the Elan Intellectual Property to the extent provided in Section 2.3 hereof, and (B) subject to Elan's grant of non-exclusive rights to Medi-Ject, all rights, including the rights to utilise or license, with respect to the Retained Elan Intellectual Property and, with respect to the compounds listed on Appendix E, to use of the Auto-Injector Technology in connection with such compounds. 2.2. Medi-Ject may assign or sublicense the licenses and rights granted to it herein without the prior written approval of Elan; provided that: (i) each and any sublicense shall be limited to the utilization of Devices in connection with a single Product and including therein derivatives of the active ingredient of such Product which the sub-licensee shall sell In-Market; 8 (ii) any such sub-license will prohibit the sub-licensee thereunder from assigning its rights thereunder or granting any sub-license of the rights granted thereunder other than to an Affiliate of such sub-licensee; (iii) the rights granted under any such sublicense shall not include the right to manufacture Devices; provided, however, such sublicense may provide for the designation by Medi-Ject or its sub-licensee of a reputable manufacturer to manufacture Devices in the event Medi-Ject fails to meet its manufacturing obligations thereunder; provided further that such manufacturer agrees to enter into an agreement with Elan with respect to the manufacture of Devices with respect to such Product on terms substantially the same, to the extent applicable, as those contained herein; and (iv) any such sublicense shall be subject to all the provisions of this Agreement hereof. Medi-Ject shall indemnify and hold Elan harmless for the acts and omissions of any of its sub-licensees. 2.3. Notwithstanding the foregoing, Elan shall be entitled to use the Elan Intellectual Property and all technical and clinical data or improvements thereto in connection with or with respect to (i) Elan's commercial arrangements for Devices or Products in any country that ceases to be a part of the Territory, or in any country in the Territory in the event of the expiration or sooner termination of this Agreement, (ii) Elan's commercial arrangements for Devices or Products outside of the Field, (iii) any Excluded Technology, and (iv) the right to utilize the Auto-Injector Technology on an exclusive basis for the delivery of Elan Compounds within the Field, provided Medi-Ject has not previously licensed the right to use the Elan Intellectual Property with respect to such compound to an unaffiliated third party on an exclusive basis pursuant to a written agreement and that Medi-Ject has delivered to Elan prior written notice of same, it being understood that Medi-Ject may not license or utilize the Auto-Injector Technology in connection with any Elan Compound after Medi- Ject has received notification from Elan of its rights in any Elan Compound. Such commercial arrangements referred to in the immediately preceding sentence shall include the right to research, develop, manufacture, offer for sale, sell, license or otherwise market the Devices and/or Products. 2.4. (***) *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 9 2.5. Notwithstanding anything contained in this Agreement to the contrary, in the event Elan itself does not wish to manufacture Devices incorporating Auto- Injector Technology for use outside the Field or with respect to Elan Compounds as provided herein, Medi-Ject shall have the right of first refusal to manufacture such devices. Such right of first refusal shall be exercised as follows: 2.5.1. If Elan intends to enter into an agreement with a third party for the manufacture of Devices that is subject to Medi-Ject's right of first refusal, then Elan immediately shall notify Medi-Ject in writing of the proposed terms of such agreement. Medi-Ject shall indicate its desire to exercise its right of first refusal pursuant to this Article 2.5 by delivering written notice to Elan within thirty (30) days of Medi-Ject's receipt of the written notification from Elan to Medi-Ject. If Medi-Ject does not notify Elan within such thirty (30) day period of its intention to exercise its right of first refusal under this Article 2.5, Elan shall be free to enter into an agreement to manufacture Devices with the third party specified in the notification upon terms which are substantially the same as those specified in the notification provided under this Article 2.5 by Elan to Medi-Ject. If Medi-Ject elects to exercise its right of first refusal, the Parties shall negotiate in good faith the terms of an applicable agreement based upon the terms contained in the notice delivered. 2.5.2. If, despite such good faith negotiations, Elan and Medi-Ject do not reach agreement on the terms of such an agreement within sixty (60) days from the notification in writing by Elan to Medi-Ject, then Elan shall be free to offer a third party terms to manufacture Devices in the Territory, which terms when taken as a whole, are no more favorable to Elan than the principal terms of the last written proposal offered to Medi-Ject by Elan, or by Medi-Ject to Elan, as the case may be. 2.6. During the term of this Agreement or so long as the license granted hereunder remains in effect for any country, in the event Elan desires to market Devices incorporating Auto-Injector Technology for use outside the Field or with respect to a Product in a country for which the license hereunder has been terminated pursuant to Section 2.10(ii) or (iii) or with respect to Elan Compounds as provided herein, but does not wish to manufacture the Devices, Elan shall have the right to require Medi-Ject to manufacture the Devices, to the extent Medi-Ject has available manufacturing capacity, for it at a price equal to the lower of (***). 2.7. Medi-Ject, or its permitted sub-licensees, shall market the Devices or Products in the Territory under a Trademark, which Trademark will be owned by Medi-Ject or such sub-licensees subject to the terms and conditions of this Agreement. *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 10 2.8. Subject to the provisions of Article 2.15 hereof, Medi-Ject hereby grants to Elan during the Term a non-exclusive royalty free license in the Medi-Ject Intellectual Property, to develop, make, have made, manufacture, have manufactured, package, use, import, export, promote, distribute, market, offer for sale, and sell Devices and Products (i) in the Field for any particular Product or Device in any country, the rights to which have reverted to Elan pursuant to Article 2.10-2.12 and 2.14 hereof, (ii) for the delivery of active ingredients used in the treatment of (1) (***), (2) (***), (3) (***), and (4) (***) and (iii) for the delivery of Elan Compounds in the Field in the Territory, on the following terms and conditions: (A) Elan shall as soon as it becomes aware of any infringement give to Medi-Ject in writing full particulars of any use or proposed use by any other person, firm or company of a trade name or trademark or promotional or advertising activity which may constitute infringement. (B) If Elan becomes aware that any other person, firm or company alleges that such Medi-Ject Intellectual Property infringes any rights of another party, Elan shall immediately give to Medi-Ject full particulars in writing thereof and shall make no comment or admission to any third party in respect thereof. (C) Medi-Ject shall have the right to conduct all proceedings relating to such Medi-Ject Intellectual Property and shall in its sole discretion decide what action, if any, to take in respect of any infringement or alleged infringement of such Medi-Ject Intellectual Property or any other claim or counter-claim brought or threatened in respect of the use of such Medi-Ject Intellectual Property. Any such proceedings shall be conducted at Medi-Ject's expense and for its own benefit. For the avoidance of doubt, nothing herein shall be deemed to be a license to Elan of Medi-Ject Intellectual Property for use other than in connection with the Auto-Injector Technology. 2.9. When packaged, and to the extent permitted by law, at Elan's election, Product labels shall include an acknowledgement that the Product is made under license from Elan. Such acknowledgement shall take into consideration regulatory requirements and Medi-Ject's reasonable commercial requirements. Medi-Ject shall, wherever possible, at Elan's request, in conformance with industry standards, give due acknowledgement and recognition to Elan in all printed promotional and other material regarding the Product such as stating that the Product is under license from Elan and that the applicable Elan Intellectual Property has been applied to the Products. Medi-Ject shall consult with and obtain the written approval, which shall not be unreasonably withheld, of Elan as to the format and content of the promotional and other material insofar as it relates to a description of, or other reference to, the application of the Elan Intellectual Property. The further consent of Elan shall not be required where the format and content of such materials is substantively similar as the materials previously furnished to and approved in writing by Elan. *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 11 2.10. Medi-Ject will use reasonable best efforts to commercialize the Devices and shall (***). In the event Medi-Ject shall fail to obtain such sub-licenses Elan shall have the right, upon ten (10) days prior written notice to Medi-Ject, to terminate the term of the license hereunder, except to the extent it relates to any sublicenses previously granted by Medi-Ject with respect to particular Products which comply with the terms hereof. At all times after Medi-Ject has satisfied the requirements set forth above, Medi-Ject shall continue to use commercially reasonable efforts to secure additional sub-licenses for the sale and marketing of Products in the Territory. 2.11. Medi-Ject will, as promptly as possible but in no event later that (***) from the date hereof, complete development of and produce a working prototype of the Devices and make a bona fide application for a Marketing Authorization for the Devices with the FDA and thereafter obtain and maintain such Marketing Authorization for the Devices. Medi-Ject and its sub-licensees shall also file, obtain and maintain Marketing Authorizations in such other countries within the Territory as shall be reasonably necessary to commercialize and market the Devices and Products. In the event that Medi-Ject or its sub- licensees shall obtain Marketing Authorization for a Product in a Major Market, Medi-Ject or its sub-licensee, as the case may be, shall also, within (***) of obtaining such Marketing Authorization, make bona fide applications for Marketing Authorizations in the other Major Markets for such Product. If (i) Medi-Ject shall fail to complete development of the Devices or develop a working prototype or make a bona fide application for a Marketing Authorization with the FDA in the time period specified above, Elan shall have the right, upon thirty (30) days written notice from Elan to Medi-Ject, to terminate the grant of the license hereunder, or (ii) Medi-Ject or its sub-licensees fail to apply for Marketing Authorization for a Product in the Major Markets, as provided herein, Elan shall have the right, upon thirty (30) days written notice from Elan to Medi-Ject, to terminate the grant of the license hereunder with respect to such Product in such country or countries, or (iii) Medi-Ject or its sub-licensees fail to effect a national commercial launch of a Product in a country in the Major Markets within the period specified in Article 2.12 below, Elan shall have the right, upon thirty (30) days written notice from Elan to Medi-Ject, to terminate the grant of the license hereunder with respect to such Product in such country or countries, then, in any such event, Medi-Ject, at the option of Elan, make available and transfer to Elan all of Medi-Ject's and, to the extent available to Medi-Ject, Medi-Ject's sub-licensee's data, information, applications, approvals, filings and the like to permit Elan to commercialize such Product in the applicable country or countries in the Major Markets or, with respect to a complete termination of the license pursuant to clause (i) above, all Products and Devices in the Territory. In such event, except as otherwise provided in Article 2.15, below, Elan shall be *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 12 entitled to an irrevocable, exclusive, perpetual, royalty free, license from Medi-Ject to the Medi-Ject Intellectual Property and the Trademark to commercialize such Product in the applicable country in the Field (or, with respect to a complete termination of the license pursuant to clause (i) above, all Products and Devices in the Field and in the Territory) on the terms set out in this Article 2.11. Elan may sublicense the rights granted to it under this Article 2.11 to one or more sub-licensees without the prior consent of Medi-Ject. Insofar as Medi-Ject has licensed or acquired third party technology, Medi-Ject shall use all commercially reasonable efforts to exclude or where applicable to minimize the extent of any limitations or restrictions on its use for such purposes. In the event that Elan acquires such a license, the Parties shall enter into a further written license and other applicable agreement which shall include customary and reasonable terms in accordance with this Article 2.11, and at Elan's option, Medi-Ject shall use commercially reasonable efforts to assign to Elan its rights under any third party supply or other agreement relating to such Product or Products. 2.12. Medi-Ject will use its commercially reasonable efforts to obtain Marketing Authorizations to commercialize the Devices and Products in the other countries of the Territory (i.e., other than the Major Markets) that it selects, having regard to the effort and expenditure required to obtain Marketing Authorizations for the Devices and Products and the commercial opportunities for the Devices and Products in such other countries of the Territory. Medi-Ject shall effect a national commercial launch of a Product within one hundred eighty (180) days of securing a Marketing Authorization for such Product in a country in a Major Market. If Medi-Ject does not make a national commercial launch of such Product in such country in a Major Market within such period, the licenses granted to Medi-Ject hereunder shall, at Elan's option exercised upon thirty (30) days written notice from Elan, terminate in such country or countries with respect to such Product and Elan shall be entitled to commercialize such Product in the Field in such countries and to receive a license in the Field to the Medi-Ject Intellectual Property and Trademark in the applicable countries on the terms set forth in Article 2.11. 2.13. In general, Medi-Ject shall employ commercially reasonable efforts to research, develop, register, market, promote and sell and maintain sales of the Products in the Territory and Medi-Ject shall employ a level of advertising, sales, marketing, and promotion efforts in each country in the Territory where Marketing Authorization for Product has been obtained which is: (i) commensurate with that used by other pharmaceutical manufacturers for products of similar market potential in that country in the Territory, and (ii) sufficient with respect to the potential for that country to fully exploit the market potential for the Product. 2.14. If Medi-Ject indicates to Elan in writing that it does not intend to obtain Marketing Authorization and commercialize the Products in a particular country or countries of the Territory, or fails to commence commercialization in any country within one hundred and eighty (180) days after receiving the required Marketing Authorization therefor, Elan shall, in addition to the rights granted under Article 2.11 hereof, be entitled to license from Medi-Ject the Medi-Ject Intellectual Property and Trademark to commercialize the Products in the Field and to receive licenses in the Field in such countries on the terms set forth in Article 2.11. For purposes of this Section 2.14, the European Union shall be deemed to be one country. 2.15 Notwithstanding anything contained herein to the contrary, in the event Elan shall 13 terminate the term of the license granted by it to Medi-Ject hereunder due to the circumstances set forth in Article 2.10 or clause (i) of Article 2.11, Elan shall pay to Medi-Ject a royalty equal to (***) percent ((***)%) of the NSP for all sales in the Field, whether In Market or to third parties by Elan of Devices or Products which utilize Medi-Ject Intellectual Property. For purposes of this Article 2.15, references to Medi-Ject contained in the definition of NSP shall be deemed to refer to Elan. 3. ARTICLE III: DEVELOPMENT OF THE PRODUCT 3.1. Medi-Ject shall be responsible for the development, registration, manufacture and marketing of the Devices and Products, and the costs associated therewith, in accordance with the Plan. Medi-Ject shall use its commercially reasonable efforts to conduct the Project in accordance with the Plan. Elan's sole obligations with respect to development under this Section 3.1 shall be to (i) assist only in the process of transfer of the Technology and the related Elan Intellectual Property to Medi-Ject; and (ii) during the first year of the Term, provided he is employed by Elan, to make (***) available for consultation for a minimum of forty (40) hours at mutually agreeable times during normal business hours and, to the extent the same will not interfere with his duties at Elan or any other Elan Project, for an additional forty (40) hours on the same terms and conditions. 3.2. Each Party shall co-operate with the other in good faith particularly with respect to unknown problems or contingencies and shall perform its obligations in good faith and in a commercially reasonable, diligent and workmanlike manner. Medi-Ject will update Elan on the progress of the Project on a periodic basis, but in no event less than every six (6) months. 3.3. Medi-Ject shall mark or have marked the patent number(s) on all Products or otherwise reasonably communicate to the trade concerning the existence of any Elan Patent Rights, Medi-Ject Patent Rights or Joint Patent Rights for the countries within the Territory in such a manner as to ensure compliance with all applicable laws, including, without limitation, 35 United States Code Section 287, as the same may be amended from time to time. 4. ARTICLE IV: FINANCIAL PROVISIONS 4.1. In consideration of the rights and licenses granted to Medi-Ject to the Elan Patent Rights by virtue of this Agreement, Medi-Ject shall pay to Elan or Elan's designee the following: 4.1.1. (***) United States Dollars simultaneously with execution and delivery of this Agreement by both Parties; 4.1.2. Additional payments not to exceed (***) United States Dollars equal to (***) percent ((***)%) of all licensing, milestone, development and similar fees payable to Medi-Ject from sub-licensees or users of the Devices or the Products in excess of (***) United States Dollars; 4.1.3. After payments totaling (***) United States Dollars have been made pursuant to Article 4.1.2, a royalty equal to (***) percent ((***)%) of all licensing, milestone, *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 14 development and similar fees payable to Medi-Ject from sub-licensees or users of the Devices and/or Products; 4.1.4. An additional royalty equal to (***) percent ((***)%) of the NSP for all sales, whether In Market or to third parties by Medi-Ject of Devices or Products, exclusive of sales to Elan; and 4.1.5. If the Manufacturing Cost of a Device or Product is less than (***), then Medi-Ject will pay an additional royalty to Elan for each Device or Product equal to (***), exclusive of Devices or Products produced by Medi-Ject for Elan. For purposes of this Article 4.1.5, a Device or Product shall be deemed not to include the vial containing the medicament, the medicament itself and the needle, each of which shall be excluded from the calculation of the Manufacturing Cost of a Device or Product. 4.1.6. If Medi-Ject claims in good faith that one or more of its devices, products, parts or components thereof, compounds and/or drug products does not utilize, incorporate, apply or is not based on the Elan Intellectual Property, the Medi-Ject Intellectual Property and/or Joint Intellectual Property, then Medi-Ject shall establish such claim to the reasonable satisfaction of Elan. 4.2. Royalties, Payments, Reports and Records 4.2.1. Within ninety (90) days of the end of each quarter, Medi-Ject shall notify Elan of any licensing, milestone, development and similar fees due and payable to Medi-Ject and the NSP of Devices and Products sold or income receivable with respect to the Auto-Injector Technology, the Elan Intellectual Property, the Joint Intellectual Property and the Medi-Ject Intellectual Property in that preceding quarter. Payments and/or amounts payable to Medi-Ject shown by each calendar quarter report to have accrued shall be due and payable to Elan on the date such report is due and shall be paid to the designated bank account of Elan or its designee as instructed by Elan. All payments due under this Agreement shall be made in United States Dollars and shall be non- refundable to Medi-Ject. 4.2.2. Medi-Ject shall keep and shall cause its Affiliates and sub- licensees to keep true and accurate records of the licensing, milestone and other similar income received by Medi-Ject with respect to the Auto- Injector Technology, the Elan Intellectual Property and the Joint Intellectual Property, gross sales of Devices and Products, the items deducted from the gross amount in calculating the NSP, the NSP of Devices and Products, manufacturing costs and the royalties and licensing fees payable to Elan under this Article 4. Medi-Ject shall deliver to Elan a written statement thereof within forty-five (45) days following the end of each calendar quarter (or any part thereof in the first or last calendar quarter of this Agreement) for such calendar quarter. The said written statements shall set forth for *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 15 Devices or Products on country-by-country basis, the calculation of the NSP from gross revenues during that calendar quarter, the applicable percentage rate, a computation of the sums due to Elan, and such details of the transactions that are relevant to the calculations of NSP. The Parties' financial officers shall agree upon the precise format of such statement. 4.2.3. Payments due as provided above in a currency other than United States Dollars shall first be calculated in the foreign currency and then converted to United States Dollars on the basis of the exchange rate in effect for the purchase of United States Dollars with such foreign currency quoted in the Wall Street Journal (or comparable publication if not quoted in the Wall Street Journal) with respect to the sale of currency of the country of origin of such payment for the day prior to the date on which the payment by Medi-Ject is being made. 4.2.4. Any income or other taxes which Medi-Ject is required by law to pay or withhold on behalf of Elan with respect to royalties and any other monies payable to Elan under this Agreement shall be deducted from the amount of such payments, royalties and other monies due. Medi-Ject shall furnish Elan with proof of such payments. Any such tax required to be paid or withheld shall be an expense of and borne solely by Elan. Medi-Ject shall promptly provide Elan with a certificate or other documentary evidence to enable Elan to support a claim for a refund or a foreign tax credit with respect to any such tax so withheld or deducted by Medi-Ject. The Parties will reasonably cooperate in completing and filing documents required under the provisions of any applicable tax treaty or under any other applicable law, in order to enable Medi-Ject to make such payments to Elan without any deduction or withholding. 4.2.5. For the twenty four (24) month period following the close of each calendar year during the Term, but no more frequently than once per year, Medi-Ject and its sub-licensees will provide Elan's independent certified accountants with access, during regular business hours and upon reasonable prior request and subject to the confidentiality provisions as contained in this Agreement, to the books and records relating to the Devices and Products, solely for the purpose of verifying the accuracy and reasonable composition of the calculations hereunder for such calendar year then ended, including the sums payable by Medi-Ject to Elan pursuant to Article 4. 4.2.6. Any adjustment required by such inspection shall be made within thirty (30) days of the agreement of the Parties or, if not agreed, upon the determination of an arbitrator agreed to by the Parties to whom any dispute under this Article shall be submitted to arbitration. In the event the parties cannot agree upon an arbitrator, the arbitrator shall be selected by the American Arbitration Association who shall resolve the dispute pursuant to the rules of the American Arbitration Association pursuant to an arbitration to be held in the City of New York. The decision of the arbitrator shall be final and binding on all Parties. In the 16 event there is no adjustment payable to Elan, the cost of inspection and, if applicable, the arbitration, shall be borne by Elan. If there is an adjustment payable to Elan, but such adjustment is not greater than five per cent (5%) of the amount paid for the relevant period, then the cost to Elan for the inspection, and if applicable the arbitration, shall be shared equally by the Parties. If the adjustment payable to Elan is greater than five per cent (5%) of the amount paid for the relevant period, then the cost to Elan for the inspection, and if applicable, the arbitration, shall be paid by Medi-Ject. In addition, Medi-Ject shall pay interest to Elan at the rate publicly announced by Morgan Guaranty Trust Company of New York at its principal office as its prime rate plus one per cent (1%) (applicable as of the date on which payment should have been made pursuant to Article 4), from the date on which the payment should have been made pursuant to Article 4.2.1 until the date of payment. 4.2.7. Medi-Ject shall pay interest to Elan at the rate publicly announced by Morgan Guaranty Trust Company of New York at its principal office as its prime rate plus one per cent (applicable as of the date on which payment should have been made pursuant to the applicable provisions of this Agreement) from the date on which payment should have been made pursuant to the applicable provision of this Agreement until the date of payment. 5. ARTICLE V: REGISTRATION OF THE PRODUCT 5.1. Medi-Ject shall at its sole cost file, and shall use commercially reasonable efforts to prosecute to approval, the Marketing Authorizations for the Devices and Products in the Territory in accordance with the Plan. 5.2. Medi-Ject shall maintain at its own cost the Marketing Authorizations during the period that Medi-Ject is marketing the Devices. Medi-Ject shall continue to maintain the Marketing Authorizations in the applicable countries at Elan's request and expense, if Elan acquires the right to a license pursuant to Article 2.11 for such term thereafter during which Elan and/or its designees is marketing the Products, and Medi-Ject hereby agrees to provide to Elan, or transfer and assign to Elan, the Marketing Authorizations and any applications for regulatory approval within thirty (30) days of the submission thereof to the applicable authority to the extent necessary for Elan to market such Products. To the extent necessary for Elan to exercise its rights hereunder, Medi-Ject shall furnish to Elan all regulatory filings and other material correspondence with the FDA and other regulatory authorities within thirty (30) days of submission, and shall take any and all action necessary to enable Elan to receive the benefits from any such registration, including, without limitation, transferring or assigning, to the extent held by and assignable or transferable by Medi-Ject, a registration or Marketing Authorization to Elan. 5.3. During the registration procedure for Marketing Authorizations, Medi-Ject shall keep Elan promptly and fully advised of Medi-Ject's registration activities, progress and procedures. Medi-Ject shall notify Elan immediately of any inspection by the FDA or any other regulatory authority of the manufacturing or other facilities used in the clinical research, 17 manufacturing, packaging, storage or handling of the Devices or Products. Copies of all correspondence with the regulatory authority will be provided to Elan. 5.4. Medi-Ject shall indemnify and hold harmless Elan, its agents and employees from and against all claims, damages, losses, liabilities and expenses to which Elan, its agents, and employees may become subject related to or arising out of Medi-Ject's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the Marketing Authorizations. 6. ARTICLE VI: WARRANTY AND INDEMNITY. 6.1. Elan represents and warrants to Medi-Ject as follows: 6.1.1. Elan is duly and validly existing in the jurisdiction of its incorporation and each other jurisdiction in which the conduct of its business requires such qualification (except where such failure to so qualify shall not have a material adverse affect on the business and assets of Elan), and is in compliance with all applicable laws, rules, regulations or orders relating to its business and assets; 6.1.2. Elan has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; this Agreement has been duly executed and delivered by Elan and constitutes the legal and valid obligations of Elan and is enforceable against Elan in accordance with its terms and the execution, delivery and performance of this Agreement and the transactions contemplated hereby and will not violate or result in a default under or creation of lien or encumbrance under Elan's memorandum and articles of association or any material agreement or instrument binding upon or affecting Elan or its properties or assets or any applicable laws, rules, regulations or orders affecting Elan or its properties or assets; 6.1.3. Elan is not in material default of its memorandum and articles of association, any applicable material laws or regulations or any material contract or agreement binding upon or affecting it or its properties or assets and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in any such violation; 6.1.4. As of the Effective Date, Elan is the sole and exclusive owner or licensee of, or controls all right, title and interest to the Elan Patent Rights; and to Elan's knowledge and belief without independent investigation, Elan is the sole owner or licensee of the Elan Know-How. Elan has the right to grant the licenses granted herein. Subject to existing contractual rights granted to third parties, the Elan Patent Rights, and to Elan's knowledge and belief, without independent investigation, the Elan Know-How, are free and clear of any lien, encumbrances, security interest or restriction granted by Elan; provided, however, 18 that, notwithstanding anything to the contrary contained herein, Elan warrants and represents that (***). Elan will not grant during the Term, any right, license or interest in and to the Elan Intellectual Property, or any portion thereof, inconsistent with the license granted herein; and to the best of Elan's knowledge there are no pending or threatened adverse actions, suits, investigations, claims or proceedings brought by one or more third parties related to the Elan Intellectual Property as of the Effective Date; 6.1.5. Elan represents and warrants that the execution of this Agreement will not breach or in any way be inconsistent with the terms and conditions of any license, contract, understanding or agreement, whether express, implied, written or oral between Elan and any third party; and 6.1.6. EXCEPT AS SET FORTH IN THIS ARTICLE 6.1, ELAN IS GRANTING THE LICENSES HEREUNDER ON AN "AS IS" BASIS, WITHOUT REPRESENTATION OR WARRANTY WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR INFRINGEMENT OF THIRD PARTY RIGHTS, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED. 6.2. Medi-Ject represents and warrants to Elan the following: 6.2.1. Medi-Ject is duly and validly existing in good standing in the jurisdiction of its incorporation and each other jurisdiction in which the conduct of its business requires such qualification (except where such failure to so qualify shall not have a material adverse affect on the business and assets of Medi-Ject), and Medi-Ject is in compliance with all applicable laws, rules, regulations or orders relating to its business and assets; 6.2.2. Medi-Ject has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; this Agreement has been duly executed and delivered and constitutes the legal and valid obligations of Medi-Ject and is enforceable against Medi-Ject in accordance with its terms; and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not violate or result in a default under or creation of lien or encumbrance under Medi-Ject's certificate of incorporation, by-laws or other organic documents, any material agreement or instrument binding *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 19 upon or affecting Medi-Ject, or its properties or assets or any applicable laws, rules, regulations or orders affecting Medi-Ject or its properties or assets; 6.2.3. Medi-Ject is not in default of its charter or by-laws, any applicable laws or regulations or any material contract or agreement binding upon or affecting it or its properties or assets and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in any such violation; 6.2.4. Medi-Ject has not granted any option, license, right or interest to any third party which would conflict with the terms of this Agreement; 6.2.5. As of the Effective Date, Medi-Ject is the sole and exclusive owner or licensee of, or controls all right, title and interest to the Medi-Ject Patent Rights; and to Medi-Ject's knowledge and belief without independent investigation, Medi-Ject is the sole owner or licensee of the Medi-Ject Know-How; 6.2.6. The Devices and Products shall be developed, manufactured, transported, stored, handled, packaged, marketed, promoted, distributed, offered for sale and sold in accordance with all regulations and requirements of the FDA and foreign regulatory authorities including, without limitation, cGCP, cGLP, cGMP regulations. The Products shall not be adulterated or misbranded as defined by the Federal Food, Drug and Cosmetic Act (or applicable foreign law) and shall not be a product which would violate any section of such Act if introduced in interstate commerce; and 6.2.7. Medi-Ject is, or at time of registration for any Marketing Authorization, will be, fully cognizant of all applicable statutes, ordinances and regulations of the United States of America and countries in the Territory with respect to the manufacture of the Devices and the Products in any jurisdiction in which a Marketing Authorization is being sought, including, but not limited to, the U.S. Federal Food, Drug and Cosmetic Act and regulations thereunder and similar statutes in countries outside of the United States, and cGMPs. Medi-Ject shall manufacture or procure the manufacture of the Products in conformity with the Marketing Authorizations and in a manner that fully complies with all United States of America and foreign statutes, ordinances, regulations and practices. 6.3. Subject to the provisions of Sections 6.6, 6.7 and 7.4.3 hereof, Elan shall indemnify, defend and hold harmless Medi-Ject, and its officers, directors, employees and agents from all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys' fees) due to third party claims to which Medi-Ject is or may become subject insofar as they arise out of or are alleged or claimed to arise out of (i) any breach by Elan of any of its obligations under this Agreement, and (ii) any breach of a representation or warranty of Elan made in this Agreement. 20 6.4. Subject to the provisions of Sections 6.6, Medi-Ject shall indemnify, defend and hold harmless Elan and its officers, directors, employees and agents from all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys' fees) due to third party claims to which Elan is or may become subject insofar as they arise out of or are alleged or claimed to arise out of (i) any breach by Medi-Ject of any of its obligations under the Agreement, (ii) any breach of any representation or warranty of Medi-Ject made in this Agreement, (iii) any activities conducted by Medi-Ject in connection with the Project, except to the extent due to the negligence or willful misconduct of Elan, and (iv) claims by sub-licensees of Medi-Ject, wholesales, retailers, distributors or end-users of the Products, to which Elan is or may become subject insofar as they arise out of or are alleged or claimed to arise out of the development, manufacture, transport, packaging, storage, handling, distribution, promotion, marketing, offer for sale or sale, or use of the Devices or Products, including any product liability claim or any claim relating to any recall of Devices or a Product. 6.5. As a condition of obtaining an indemnity in the circumstances set out above or elsewhere in the Agreement, the Party seeking an indemnity shall: 6.5.1. fully and promptly notify the other Party of any claim or proceeding, or threatened claim or proceeding; 6.5.2. permit the indemnifying Party to take full care and control of such claim or proceeding; 6.5.3. reasonably assist in the investigation and defense of such claim or proceeding; and 6.5.4. not compromise or otherwise settle any such claim or proceeding without the prior written consent of the other Party, which consent shall not be unreasonably withheld; and take all reasonable steps to mitigate any loss or liability in respect of any such claim or proceeding. 6.6. Notwithstanding anything to the contrary contained in this Agreement, neither Elan nor Medi-Ject shall be liable to the other for any punitive, consequential or incidental loss or damage (whether for loss of profit or otherwise) by reason of any representation or warranty, condition or other term or any duty of common law, or under the express or implied terms of this Agreement, and whether occasioned by the negligence of the respective Parties, their employees or agents or otherwise. 6.7. Notwithstanding anything to the contrary contained in this Agreement, in no event shall Elan be liable to Medi-Ject for any actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys' fees) which exceed, in the aggregate, amounts paid to Elan by Medi-Ject pursuant to this Agreement. 7. ARTICLE VII: PATENTS 21 7.1. Title: Subject to the terms and conditions of this Agreement, title to the various inventions and intellectual property are set forth below as follows: (i) title to the Elan Patent Rights shall be owned by Elan; (ii) title to all inventions and other intellectual property made solely by Medi-Ject in connection with the Project shall be owned by Medi-Ject; and (iii) title to all inventions and other intellectual property made jointly by Elan and Medi-Ject in connection with the Project shall be owned by jointly by Elan and Medi-Ject. 7.2. Preparation, Filing, Prosecution and Maintenance of Patents 7.2.1. Each Party shall timely inform the other in writing of any improvement or development made by such Party relating, respectively, to the Elan Intellectual Property, and/or the Medi-Ject Intellectual Property so that any patent protection that may be available for any such improvement or development is not compromised. 7.2.2. Except as provided below, Medi-Ject shall prepare, file, prosecute and maintain, at its sole cost and expense, all patents applications and issued patents relating to the inventions, improvements and other intellectual property set forth in paragraphs (ii) and (iii) in Article 7.1. With respect to such preparation, filing, prosecution and maintenance activities, Medi-Ject shall timely apprise Elan of the status of any such activity. In the event Medi-Ject shall decide not to seek patent protection for any such intellectual property, Elan shall have the option to take control of such preparation, filing, prosecution and maintenance. In the event that Elan shall determine, in good faith, that any patents applications and issued patents relating to the inventions, improvements and other intellectual property set forth in paragraphs (ii) and (iii) in Article 7.1 predominantly relates to an area other than the Field, Elan shall have the option to take control of such, preparation, filing, prosecution and maintenance of patent protection directed to such intellectual property in its own name. In the event that Elan does not exercise such right, Medi-Ject shall have the option to take responsibility for the preparation, prosecution and maintenance of patent protection directed to such intellectual property. 7.2.3. Medi-Ject shall prepare, file, prosecute and maintain, at the sole cost and expense of Medi-Ject, all patents applications and issued patents relating to the inventions, improvements and other intellectual property set forth in paragraph (i) in Article 7.1 other than Retained Elan Intellectual Property; provided, however, that Elan shall reimburse Medi-Ject for up to one-half of the costs incurred by Medi-Ject incurred in connection therewith, but, together with amounts reimbursed under Article 7.2.4 below, such reimbursement shall in no event exceed (***) in the aggregate, at the rate of (***) for each product for which Elan utilizes the Elan Intellectual Property. With respect to such preparation, filing, *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 22 prosecution and maintenance activities, Medi- Ject shall timely apprise Elan of the status of any such activity. In the event Medi-Ject shall decide not to seek patent protection for any such intellectual property, Elan shall have the option to take control of such prosecution, at Medi-Ject's sole cost and expense. 7.2.4. Elan shall prepare, file, prosecute and maintain, at the sole cost and expense of Medi-Ject for all reasonable costs and expenses (including attorney's fees) incurred in connection therewith, all patents applications and issued patents relating to the Retained Elan Intellectual Property; provided, however, that Elan shall reimburse Medi-Ject for up to one-half of the costs incurred by Medi-Ject in connection therewith, but, together with amounts reimbursed under Article 7.2.3 above, such reimbursement shall in no event exceed (***) United States Dollars in the aggregate, at the rate of (***) for each product for which Elan utilizes the Retained Elan Intellectual Property. With respect to such preparation, filing, prosecution and maintenance activities, Elan shall timely apprise Elan of the status of any such activity and shall provide documentation to Medi-Ject of all expenses incurred by Elan in connection therewith. 7.3. Enforcement of Intellectual Property Rights; Third Party Infringement. 7.3.1. Medi-Ject and Elan shall promptly inform the other in writing of any alleged infringement or unauthorized use of which it shall become aware by a third party of Elan Intellectual Property, Medi-Ject Intellectual Property, and/or Joint Intellectual Property and provide such other with any available evidence of such unauthorized activity. 7.3.2. During the Term, Medi-Ject shall have the first right to pursue at its own expense any enforcement activities of the Elan Intellectual Property, the Medi-Ject Intellectual Property and/or the Joint Intellectual Property within the Field. Elan shall agree to be named as a necessary party in an action brought by and fully financed by Medi-Ject and will reasonably co-operate with such action. Any expenses borne by Elan shall be reimbursed by Medi-Ject. Elan shall have the right to participate in and have input in decisions relating to the prosecution of any such enforcement action and Medi-Ject shall not compromise or settle any claim or proceedings relating thereto without Elan's prior written consent, which shall not be unreasonably withheld or delayed. Any recovery remaining after the deduction by and reimbursement to Medi-Ject and Elan of their respective reasonable expenses (including attorney's fees) incurred in relation to such action shall be treated as (***) for all the purposes of this Agreement. Should Medi-Ject decide not to enforce the Elan Intellectual Property and/or the Medi-Ject Intellectual Property and/or the Joint Intellectual Property within the Field, Elan may do so and for its own benefit, and Medi-Ject will reasonably co-operate with such action and shall bear (***) of all costs, including reasonable attorney's fees incurred by Elan in connection with such action, and, in such event, any recovery remaining after the *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 23 deduction by and reimbursement to Medi-Ject and Elan of their respective reasonable expenses (including attorney's fees) incurred in relation to such action shall be divided equally between Elan and Medi-Ject. 7.4. Infringement of Third Party Patents 7.4.1. In the event that a claim or proceedings are brought against Medi-Ject or Elan by a third party alleging that the manufacture, use, offer for sale, sale or other activity relating to the Products in the Field constitute an unauthorized use of an intellectual property right owned by such a third party in the Territory, Medi-Ject shall promptly advise Elan of such threat or suit. 7.4.2. Medi-Ject shall indemnify, defend and hold Elan harmless against all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys fees) relating directly or indirectly to all such claims or proceedings referred to in this Article 7.4; provided that Elan shall not acknowledge to the third party or to any other person the validity of any claims of such a third party, and shall not compromise or settle any claim or proceedings relating thereto without the prior written consent of Medi-Ject, not to be unreasonably withheld or delayed. Elan, at its own cost and expense, shall have the right to participate in and have input in decisions relating to the defense of any such action. At its option, Elan may elect to take over the conduct of such proceedings from Medi-Ject; provided that Medi- Ject's indemnification obligations shall continue; the costs of defending such claim shall be borne by Elan; and Elan shall not compromise or settle any such claim or proceeding without the prior written consent of Medi-Ject, not to be unreasonably withheld or delayed. 7.4.3. Elan shall have no liability to Medi-Ject whatsoever or howsoever arising for any losses incurred by Medi-Ject as a result of having to cease selling Products or having to defer the launch of selling Products, whether as a result of a court order or otherwise. Subject to the provisions of Articles 6.6 and 6.7 hereunder, in the event Medi-Ject incurs any loss or is obligated to indemnify Elan due to a successful claim by a third party of infringement by the Elan Intellectual Property, Medi-Ject shall be entitled to receive and Elan's liability hereunder shall be limited to an amount equal to (***)%) per cent of the losses incurred by Medi-Ject. 8. ARTICLE VIII: MISCELLANEOUS CLAUSES 8.1. Secrecy 8.1.1. Any information, whether written or oral (provided that oral information shall be reduced to writing within one month by the party giving the oral information and the written form shall be furnished to the other party) pertaining to the Products that has been or will be communicated or delivered by *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 24 Elan to Medi-Ject, or by Medi-Ject to Elan, including, without limitation, trade secrets, business methods, and cost, supplier, manufacturing and customer information (collectively, "Confidential Information'), shall be treated by Medi-Ject and Elan, respectively, as confidential information, and shall not be disclosed or revealed to any third party whatsoever or used in any manner except as expressly provided for herein; provided, however, that such confidential information shall not be subject to the restrictions and prohibitions set forth in this Article to the extent that such Confidential Information: (A) is available to the public in public literature or otherwise, or after disclosure by one Party to the other becomes public knowledge through no default of the Party receiving such Confidential Information; or (B) was known to the Party receiving such Confidential Information prior to the receipt of such Confidential Information by such Party, whether received before or after the Effective Date; or (C) is obtained by the Party receiving such Confidential Information from a third party not subject to a requirement of confidentiality with respect to such Confidential Information; or (D) is required to be disclosed pursuant to: (1) any order of a court having jurisdiction and power to order such information to be released or made public; or (2) any lawful action of a governmental or regulatory agency. 8.1.2. Each Party shall take all such precautions with Confidential Information disclosed to it by the other Party as it normally takes with its own confidential information to prevent any improper disclosure of the Confidential Information disclosed to it by the other Party to any third party; provided, however, that such Confidential Information may be disclosed within the limits required to obtain any authorization from the FDA or any other United States of America or foreign governmental or regulatory agency or, with the prior written consent of the other Party, which shall not be unreasonably withheld, or as may otherwise be required in connection with the purposes of this Agreement. 8.1.3. Notwithstanding the above, each Party hereto may use or disclose Confidential Information disclosed to it by the other Party to the extent such use or disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sub-license or otherwise exercising its rights hereunder, provided that if a Party is required to make any such disclosure of the other party's Confidential Information, 25 other than pursuant to a confidentiality agreement, it will given reasonable advance notice to the latter Party of such disclosure and, except to the extent inappropriate in the case of patent applications, will use its best efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise). 8.1.4. Each Party agrees that it will not use, directly or indirectly, any Confidential Information disclosed by the other Party pursuant to this Agreement, other than as expressly provided herein. 8.1.5. Medi-Ject and Elan will not publicize the existence of this Agreement in any way without the prior written consent of the other subject to the disclosure requirements of applicable laws and regulations. The Parties agree that promptly following the execution of this Agreement they shall issue an agreed press release that will not disclose the financial terms of this Agreement. In the event that one of the Parties wishes to make an announcement concerning the Agreement, that Party will seek the consent of the other Party. The terms of any such announcement shall be agreed in good faith. 8.2. Assignments/Subcontracting. This Agreement shall not be assigned by Elan, or Medi-Ject to any third party without the prior written consent of the other Party hereto. Notwithstanding the above and subject to the following sentence, Elan may assign this Agreement, without the consent of Medi-Ject, to an Affiliate or to an entity that acquires all or substantially all of the business or assets of Elan to which this Agreement pertains, whether by merger, reorganization, acquisition, sale, or otherwise. Notwithstanding the foregoing, Medi-Ject and Elan will, subject to any confidentiality obligations to third parties, discuss any assignment prior to its implementation in order to consider how to avoid or reduce any additional tax liability to either Party resulting solely from different tax law provisions applying after such assignment. For the purpose hereof, an additional tax liability to either Party means that such Party would be subject to a higher net tax on payments made hereunder after taking into account any applicable tax treaty and available tax credits, than the said Party was subject to before the proposed assignment. 8.3. Parties Bound. This Agreement shall be binding upon and inure for the benefit of Parties hereto, their successors and permitted assigns. 8.4. Severability. If any provision in this Agreement is agreed by the Parties to be, or is deemed to be, or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, (i) such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the Parties, it will be deleted, with effect from the date of such agreement or such earlier date as the Parties may agree, and (ii) the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 26 8.5. Duration and Termination. 8.5.1. Subject to the other provisions of Article 8.5, this Agreement shall remain in full force and effect on a Product by Product and country by country basis, for a period commencing as of the Effective Date and expiring fifteen (15) years from the date of the first commercial sale of such Product in such country in the Territory, or for the last to expire of the Elan Patent Rights, whichever is longer (the "Term"). 8.5.2. In addition to the rights of early or premature termination provided for elsewhere in this Agreement, the Term of this Agreement may be terminated immediately upon written notice of termination given by: (A) the non-defaulting party in the event that the other party shall: (1) commit a material breach or default under a Definitive Document, which breach or default shall not be remedied within sixty (60) days after the receipt of written notice thereof by the party in breach or default; or (2) have made a material misrepresentation of any representation or warranty contained herein or any Definitive Document; or (B) Elan, in the event that (1) a change of "control" of Medi-Ject shall occur (the term "control" shall have the meaning set forth in the definition of "Affiliate"), or (2) a Technological Competitor acquires directly or indirectly voting stock or equivalent securities in Medi-Ject representing (***)%) percent or more of the stock which carries entitlement to vote, (or, in the case of (***)%) per cent); or (3) if such Technological Competitor otherwise controls Medi-Ject's board of directors. (C) Elan on the one hand, and Medi-Ject on the other hand, as the case may be, if the other shall at any time be Insolvent, dissolved, liquidated, discontinued, or when any proceeding is filed or commenced by either Party under bankruptcy, insolvency or debtor relief laws. For purposes of this Agreement, "Insolvent" shall mean (1) a Party is unable, or has reason to believe it is unable, to pay its debts as such debts mature, or (2) a Party does not have sufficient capital with which to conduct its business. (D) Medi-Ject upon thirty (30) days prior written notice to Elan. 8.5.3. Upon exercise of those rights of termination as set forth in this Agreement with respect to any country or countries or the entire Agreement as the case may be, this Agreement shall, subject to the other provisions of the Agreement, automatically terminate forthwith in the applicable country or countries or the entire Agreement as the case may be, and be of no further legal force or effect. 8.5.4. Upon termination of the Term of this Agreement: *** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this Exhibit have been deleted and filed separately with the Securities Exchange Commission pursuant to a request for confidential treatment. 27 (A) any sums that were due from Medi-Ject to Elan prior to the exercise of the right to terminate this Agreement shall be paid in full within sixty (60) days of termination of this Agreement; (B) all confidentiality provisions set out herein shall remain in full force and effect for a period of five (5) years; (C) all indemnities shall survive the termination of this Agreement and shall remain in full force and effect; (D) the rights of inspection and audit shall continue in force for the period referred to in the relevant provisions of this Agreement; (E) termination of the Term of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination nor preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement; (F) except as is necessary to enable Elan to exercise the licenses granted by Medi-Ject to Elan under this Agreement, upon any termination of this Agreement, Medi-Ject and Elan shall promptly return to the other Party all Confidential Information received from the other Party (except one copy of which may be retained for archival purposes); (G) in the event the Term of this Agreement is terminated for any reason, Medi-Ject shall have the right for a period of six (6) months from termination to sell or otherwise dispose of the stock of any Product then on hand, which such sale shall be subject to Article 4 and Article 5 and the other applicable terms of this Agreement; (H) the Elan Intellectual Property and all of the rights granted to Medi-Ject hereunder shall immediately revert to Elan and, unless this Agreement is terminated due to the breach by Elan beyond any cure or grace period in accordance with the terms of this Agreement, Medi-Ject shall immediately be deemed to have assigned and transferred, to the extent held by Medi-Ject and assignable and transferable, to Elan the Marketing Authorizations (together with all applications for regulatory approvals), the Trademark, the Medi-Ject Intellectual Property, the Joint Intellectual Property, all rights under supply or other agreements 28 relating to the Products, and all other transactions and documents relating to the foregoing and/or contemplated thereby; (I) all sublicenses of the Elan Intellectual Property shall, except to the extent provided in Section 2.10 hereof, terminate, provided, however, that Elan agrees to enter into licenses with all sub-licensees of Medi-Ject on terms no less favorable to the sub-licensees than those contained in the sublicense agreements with Medi-Ject; provided such sublicense agreements have been entered into in accordance with this Agreement; and (J) the following Articles shall survive the termination of the Term of or expiration of the Term of this Agreement for any reason: Article 1; Articles 2.2, 2.4 and 2.9; Articles 4.2.5; 4.2.6; and 4.2.7; Article 5.4; Articles 6.3, 6.4, 6.5, 6.6 and 6.7; Article 7.4, and Article 8. 8.6. Force Majeure. Neither Party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay results from causes beyond its reasonable control, including, without limitation, acts of God, fires, strikes, acts of war, or intervention of a Government Authority, non availability of raw materials, but any such delay or failure shall be remedied by such Party as soon as practicable. 8.7. Relationship of the Parties. Nothing contained in this Agreement is intended or is to be construed to constitute Elan or Medi-Ject as partners or joint venturers or either Party as an employee of the other. Neither Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind the other Party to any contract, agreement or undertaking with any third party. 8.8. Amendments. No amendment, modification or addition hereto shall be effective or binding on either Party unless set forth in writing and executed by a duly authorized representative of both Parties. 8.9. Waiver. No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the Party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any future breach or failure to perform or of any other right arising under this Agreement. 8.10. No effect on other agreements. No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between the Parties unless specifically referred to, and solely to the extent provided, in any such other agreement. 29 8.11. Applicable Law. This Agreement is construed under and ruled by the laws of the state of New York. For the purpose of any dispute arising out of or related to this Agreement, the Parties submit to the personal jurisdiction of the United States District Court for the State of New York. The Parties each further irrevocably consent to the service of any complaint, summons, notice or other process by delivery thereof to it by any manner in which notices may be given pursuant to this Agreement. 8.12. Notices. Any notice to be given under this Agreement shall be sent in writing in English by registered airmail or faxed to: - If to Elan, at Elan Corporation, plc. Lincoln House, Lincoln Place, Dublin 2, Ireland. Attention: President, Elan Pharmaceutical Technologies, a division of Elan Corporation plc Telefax : 353 1 662 4960 - If to Medi-Ject, at Medi-Ject Corporation 161 Cheshire Lane Suite 100 Minneapolis, Minnesota 55441 Attention: Chief Executive Officer Telefax: (612) 476-1009 or to such other address(es) and telefax numbers as may from time to time be notified by either Party to the other hereunder. Any notice sent by registered air-mail shall be deemed to have been delivered within seven (7) working days after dispatch and any notice sent by telefax (with confirmed answer back) shall be deemed to have been delivered within twenty four (24) hours of the time of the dispatch. Notice of change of address shall be effective upon receipt. 8.13. No Implied Rights. No rights or licenses are granted or deemed granted hereunder or in connection herewith, other than those rights expressly granted in this Agreement. 8.14. Further Assurances. At any time or from time to time on and after Effective Date, each party shall at the request of the other (i) deliver such records, data or other documents consistent with the provisions of this Agreement, (ii) execute, and deliver or cause to be 30 delivered, all such consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such actions, as the other Party may reasonably deem necessary or desirable in order for it to obtain the full benefits of this Agreement and the transactions contemplated hereby. 8.15. Entire Agreement. This Agreement including its Appendices, together with the Definitive Documents, sets forth the entire agreement and understanding of the Parties with respect to the subject matter hereof, and supersedes all prior discussions, agreements and writings in relating thereto, including the Letter Agreement. 31 8.16. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in duplicate as of the date first set forth above. MEDI-JECT CORPORATION By: /s/ Franklin Pass ---------------------------- Name: ____________________________ Title: ____________________________ ELAN CORPORATION, PLC By: /s/ Donal J. Geaney ---------------------------- Name: ____________________________ Title: ____________________________ 32 EX-23 7 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders Medi-Ject Corporation We consent to incorporation by reference in the registration statements (Nos. 333-20389 and 333-40483) on Form S-8 of Medi-Ject Corporation of our report dated February 26, 1999, except as to note 12(c) which is as of March 26, 1999, relating to the balance sheets of Medi-Ject Corporation as of December 31, 1997 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report is included in the annual report on Form 10-K of Medi-Ject Corporation. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota March 30, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,852,285 0 300,694 25,000 592,185 3,772,170 2,451,971 1,173,515 5,334,431 704,423 0 0 10 14,248 4,615,750 5,334,431 2,223,504 3,042,389 1,852,026 6,944,673 13,755 0 1,398 (5,769,463) 0 (5,769,463) 0 0 0 (5,769,463) (4.07) (4.07) INCLUDES $291,521 OF INTEREST INCOME FOR PE 12-31-98.
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