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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, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ to ____
Commission file number 0-25852
THE MED-DESIGN CORPORATION
(Name of business issuer in its charter)
Delaware 23-2771475
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2810 Bunsen Avenue, Ventura, CA 93003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 339-0375
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
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 registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of voting stock held by non-affiliates of the
Registrant (computed by reference to the last reported sale price of such stock
on March 10, 2001) was $114,230,089. The number of shares of Registrant's common
stock outstanding as of March 10, 2001 was 10,537,520.
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders (which is expected to be filed with the
Commission not later than 120 days after the end of the registrant's last fiscal
year) are incorporated by reference into Part III of this Form 10-K.
1
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that address, among other
things, acceptance of safety products by health care professionals; our
expectations regarding manufacturing certain specialty devices; the ability to
manufacture certain specialty devices using our assembly system; plans to rely
on our joint venture partners to pursue regulatory approvals; expectations
regarding the ability of our products to compete with the products of our
competitors; acceptance of our products by the marketplace as cost effective;
the generation of royalty revenues from our licensees; factors affecting the
ability of Becton Dickinson to sell products licensed from us; sufficiency of
available resources to fund operations; factors affecting the availability of
capital; plans regarding the raising of capital; the size of the market for our
products; our plans regarding sales and marketing; our strategic business
initiatives; our intentions regarding dividends and the launch dates of our
licensed products. These statements may be found under "Item 1-Business," "Item
1-Risk Factors" and "Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as in this Report generally. We
generally identify forward looking statements in this Report using words like
"believe," "anticipate," "will," "expect," "may," "could," "intend" or similar
statements. There are important factors that could cause actual results to
differ materially from those expressed or implied by such forward looking
statements including lack of demand or low demand for our products or for safety
products generally; a determination of Becton Dickinson to focus its marketing
efforts on products other than those licensed from us; delays in introduction of
products licensed by us due to manufacturing difficulties or other factors; our
inability to license or enter into joint venture or similar arrangements
regarding our other products; unanticipated expenses relating to our
manufacturing effort and other factors discussed in "Item 1 - Risk Factors" and
matters set forth in this Report generally. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We undertake no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof.
PART I
ITEM 1. BUSINESS
BUSINESS
We are principally engaged in the design, development and licensing of
safety medical devices intended to reduce the incidence of accidental
needlesticks. Each safety medical device we design and develop incorporates our
proprietary needle retraction technology. Our technology enables health care
professionals to retract a needle into the body of the medical device for safe
disposal without any substantial change in operating technique. Our products
generally can be categorized into the following four groups:
o hypodermic syringes used to inject drugs and other fluids into the body;
o fluid collection devices used to draw blood or other fluids from the body;
o venous and arterial access devices used to provide access to patients'
veins and arteries; and
o specialty safety devices for other needle based applications.
We design our products to be similar to standard non-safety medical
devices in appearance, size, performance and operation. We believe that this
similarity is important, because health care professionals are more likely to
accept safety products that do not require a change in operating technique from
products they have traditionally used.
Becton, Dickinson and Company, a major medical technology company, is
the principal licensee of our patented products. The licensing agreements we
have entered into with Becton Dickinson grant Becton Dickinson the exclusive
worldwide rights to manufacture and sell eleven of our patented products and, in
addition to up-front cash payments, provide for continuing royalty payments
based upon Becton Dickinson's net sales of the licensed products. We have
entered into a licensing agreement with MedAmicus, Inc., granting MedAmicus the
right to manufacture and market our Safety Seldinger Introducer Needle for
certain uses and are seeking to license our other products to pharmaceutical and
medical device companies or to enter into joint venture arrangements with these
companies under which our needle retraction technology would be applied to their
existing products.
2
The Problem of Accidental Needlesticks
There is an increasing awareness of the risk of infection from
needlesticks and the need for safer medical devices to reduce the risk of
accidental needlesticks. The Centers for Disease Control and Prevention (CDC)
estimated that 600,000 to 800,000 needlestick injuries occur among health care
workers annually.
Accidental needlesticks may result in the spread of infectious diseases
such as hepatitis B and C, HIV, and tuberculosis. In March 2000, CDC estimated
that, depending on the type of device used and the procedure involved, 62% to
88% of needlestick injuries could be prevented by the use of safer medical
devices. We design our products to address the demand for safer medical devices
that reduce the risk of accidental needlesticks that result in exposure to
bloodborne diseases.
Med-Design Strategy
Our goal is to become the leading developer of safety medical devices
designed to reduce the incidence of accidental needlesticks. The principal
elements of our strategy are to:
o license some of our currently unlicensed products to the leading
manufacturers of hypodermic syringes, fluid collection devices and infusion
therapy devices in the pharmaceutical and medical device industries;
o modify and improve our current products under development in response to
market research and input provided by medical professionals;
o develop additional safety medical devices based on our core technology in
response to the specific requests and needs of our current and potential
licensees and potential joint venture partners;
o enter into joint ventures or similar arrangements with major pharmaceutical
and medical device companies in situations where such arrangements would
provide for greater revenue opportunities than licensing; and
o explore opportunities to manufacture selected products pursuant to joint
venture or similar arrangements in which our joint venture partners will be
responsible for marketing and distribution.
Med-Design Products
We have designed and developed a number of products incorporating our
needle retraction technology. Our products are similar in appearance, size and
performance to standard non-safety products and are operated in essentially the
same manner. A brief description of each of our products follows:
Hypodermic Syringes
Safety Syringe (fixed needle). When the plunger of the Safety Syringe
has reached its final destination, and the medication in the syringe
has been delivered, the user applies a light amount of additional
pressure in order to move the plunger slightly beyond the normal stop
point. This additional pressure causes the needle of the syringe to
automatically and fully retract into the body of the syringe. The
needle seals in place rendering it harmless and inoperable. The fixed
needle Safety Syringe can be manufactured with needles of various
gauges and sizes, and barrels with various sizes.
Safety Syringe (luer needle). The luer needle Safety Syringe is a
hypodermic needle with a mating needle/hub assembly. The retraction
mechanism of the luer needle Safety Syringe operates in the same manner
as the mechanism on the fixed needle Safety Syringe.
Safety Tuberculin/Insulin Syringe. The Safety Tuberculin/Insulin
Syringe is a smaller version (1cc) of the fixed needle Safety Syringe.
The retraction mechanism of the Safety Tuberculin/Insulin Syringe
operates in the same manner as the mechanism on the fixed needle
syringe.
3
Safety Pre-filled Glass Syringe. After the medication in the syringe
has been delivered, a user can cause the needle of the syringe to
automatically and fully retract into the body of the syringe by
removing his or her thumb from the rear of the plunger. The needle
seals in place rendering it harmless and inoperable.
Safety Plunger Syringe. The Safety Plunger Syringe is a syringe that
uses the plunger of the syringe as the fluid containing component. The
retraction mechanism of the Safety Plunger Syringe operates in the same
manner as the retraction mechanism on the Safety Pre-filled Glass
Syringe.
Safety Pre-filled Vial Injector. The Safety Pre-filled Vial Injector
allows medication to be injected directly into a patient from
pre-filled vials produced by many pharmaceutical manufacturers. The
pre-filled vial is threaded onto the rear end of the stationary plunger
and becomes integrated as a functional part of the plunger. After the
medication in the vial has been delivered, the needle of the syringe
automatically and fully retracts into the body of the syringe. The
needle seals in place rendering it harmless and inoperable. The Safety
Pre-filled Vial Injector can be manufactured with needles of various
gauges and sizes.
Safety Pre-filled Cartridge Injector. The Safety Pre-filled Cartridge
Injector allows medication to be injected directly into a patient from
pre-filled cartridges produced by many pharmaceutical manufacturers.
The pre-filled cartridge is threaded onto the rear end of the
stationary plunger and becomes integrated as a functional part of the
plunger. After the medication in the cartridge has been delivered, the
needle of the syringe automatically and fully retracts into the body of
the syringe. The needle seals in place rendering it harmless and
inoperable. The Safety Pre-filled Cartridge Injector can be
manufactured with needles of various gauges and sizes.
Safety Dental Cartridge Syringe. The Safety Dental Cartridge Syringe is
used to administer anesthetics in dental procedures. After the
anesthetic has been fully delivered, the needle automatically and fully
retracts into the device. The Safety Dental Cartridge Syringe uses
standard dental needles and anesthetic cartridges and allows for fluid
removal. The Safety Dental Cartridge Syringe allows for multiple
anesthetic injections, while rendering the needle safe in between
injections.
Safety Pre-filled Dual Chamber Injector. The Safety Pre-filled Dual
Chamber Injector allows medication to be injected directly into a
patient from lyophilized powders produced by many pharmaceutical
manufacturers. In the first step, sterile water, in one chamber, is
introduced into the lyophilized powder chamber. This introduction
quickly mixes the water and powder, allowing for the injection. After
the medication in the vial has been delivered, the needle of the
syringe automatically and fully retracts into the body of the syringe.
The needle seals in place rendering it harmless and inoperable. The
Safety Pre-filled Dual Chamber Injector can be manufactured with
needles of various gauges and sizes.
Fluid Collection Devices
Safety Blood Collection Needle. The Safety Blood Collection Needle is
compatible with substantially all standard blood collection needle
accessories. After sufficient fluids have been extracted from the body,
by depressing a conveniently located button on the barrel of the
device, the needle automatically and fully retracts into the body of
the device. The needle seals in place rendering it harmless and
inoperable.
Safety Winged Blood Collection Set. The Safety Winged Blood Collection
Set uses a smaller diameter needle and is an alternative to the Safety
Blood Collection Needle. It is compatible with substantially all
standard blood collection needle accessories. The retraction mechanism
on the Safety Winged Blood Collection Set operates in the same manner
as the mechanism on the Safety Blood Collection Needle.
Safety Arterial Blood Gas Syringe. Arterial blood gas syringes are used
to collect small samples of arterial blood and deliver the blood to a
blood gas analyzer. By depressing a conveniently located button on the
barrel of the device, a user can cause the needle to automatically and
fully retract into the needle housing. The sealed needle housing can be
separated from the syringe barrel and safely discarded into a sharps
container. The filled syringe barrel is then ready for delivery to a
laboratory for analysis. The Safety Arterial Blood Gas Syringe is
designed for conventional laboratory processing and attaches to any
standard blood gas syringe with a luer fitting, as would a non-safety
needle.
4
Safety Blood Donor Needle Set. The Safety Blood Donor Needle Set is
used to collect large volumes of blood for blood bank storage. After
the needle is removed from the patient, a user can cause the needle to
automatically and fully retract into the device by depressing a
conveniently placed button on the side of the barrel. The Safety Blood
Donor Needle Set is compatible with all standard blood bag tubing sets
and can be manufactured to include a safety blood sampling adapter.
Safety Winged A-V Fistula Needle. Safety Winged A-V Fistula Needles are
used to access veins and arteries to perform a hemodialysis procedure.
Hemodialysis removes toxic wastes from the blood of patients in renal
failure. The mechanism of the Safety Winged A-V Fistula Needle operates
in the same manner as the mechanism on the Safety Blood Donor Needle
Set.
Venous and Arterial Access Devices
Safety IV Catheter. Catheters are inserted into veins or other areas of
the body using a catheter insertion needle located within the flexible
catheter tube. After the insertion needle is partially removed from the
Safety IV Catheter, the needle automatically and fully retracts into
the body of the catheter insertion device. The needle seals in place
rendering it harmless and inoperable.
Safety PICC Introducer. The Safety PICC Introducer is a catheter
insertion device used to insert a peripherally inserted control
catheter (PICC) for long term venous access to deliver fluids into a
patient. The retraction mechanism of the Safety PICC Introducer
operates in the same manner as the mechanism on the Safety IV Catheter.
Safety Seldinger Needle. The Safety Seldinger Needle consists of a
barrel-like structure within which the needle is retracted and
protected once it has been inserted into the patient's vein or artery.
Once the needle is placed in the patient, the guidewire is introduced
into the patient's vein or artery, enabling an arterial or venous
catheter to slide over the guidewire into the patient's vein or artery.
By depressing a conveniently located button on the barrel of the
device, a user can cause the needle to automatically and fully retract
into a protective sheath while still in the patient. The needle seals
in place, rendering it harmless and inoperable. The Safety Seldiner
Needle is compatible with all standard gauge needles and guidewires.
Safety Wing Needle Set/Catheter. The Safety Wing Needle Set/Catheter is
used to continuously deliver fluids into a patient's vein. The catheter
is inserted into the patient's vein by a steel needle within the
flexible catheter. When the venous access has been successfully
completed, a user can cause the needle to automatically and fully
retract into the body of the device by pushing the conveniently located
button on the side of the device. The sharp end of the needle is
completely shielded within the device, allowing intravenous fluid from
a gravity bag or infusion pump to flow through the retracted steel
needle. Upon completion of the infusion therapy, the Safety Wing Needle
Set/Catheter may be removed from the patient with no possibility off an
accidental needlestick because the steel needle has been retracted into
the device.
Specialty Devices
Safety Spinal/Epidural Needle. The Safety Spinal/Epidural Needle can be
used for a variety of anesthesia and spinal procedures requiring both
fluid removal and fluid injection. After the Safety Spinal/Epidural
Needle has been removed from the patient, a user can cause the needle
to automatically and fully retract into a flexible sheath by depressing
a conveniently place button on the side of the device. The Safety
Spinal/Epidural Needle is compatible with all standard gauge size
needles and allows for fluid removal or injection with a luer syringe.
Safety Y-Port Infusion Needle. Y-Ports are devices used in intravenous
therapy that allow the delivery of secondary fluids into a primary
intravenous fluid line. The Safety Y-Port Infusion Needle consists of a
barrel with a needle assembly fixed to the barrel and tubing which
protrudes from the barrel at an angle allowing connection to the
y-port. After completion of delivery of the secondary fluid into the
y-port, the needle retraction is automatically initiated, and the
needle fully retracts into the barrel.
5
Sales and Marketing
Because we focus on the design, development and licensing of safety
medical products, we are not engaged in the marketing and sale of our products
directly to health care professionals. Our marketing efforts focus upon
identifying, principally through the use of publicly available information,
market leaders in the pharmaceutical and medical device industries who we
believe have either a desire to incorporate safety applications in their
existing products or who have the ability to manufacture and distribute our
products. We seek to have these companies license our products or enter into a
joint venture through which our needle retraction technology is applied to their
existing products.
In addition to direct marketing efforts, recent safety needle
legislation and our relationship with Becton Dickinson have increased industry
awareness of our products. Several potential licensees and strategic partners
have contacted us to discuss the possibility of applying our needle retraction
technology to their existing products. We cannot predict whether these contacts
will result in definitive agreements.
Research and Development
Our research and development efforts in the past have focused primarily
upon the design and development of the products described above and the
equipment necessary to assemble those products. Research and development
expenses were $1,143,938 in 2000 and $1,228,101 and $1,106,501 in 1999 and 1998,
respectively. Our research and development efforts going forward will focus
primarily upon:
o the modification and improvement of our current products in response to
market research and input from health care professionals; and
o the development of new safety medical devices in response to the specific
requests and needs of our licensees and potential joint venture partners.
Our research and development staff consists of eleven employees.
Facilities and Manufacturing
Our primary focus is upon the design and development of safety medical
devices. We generally seek to contract with third parties for the manufacture
and distribution of our products through licensing agreements and joint
ventures. However, we are currently exploring opportunities to manufacture
selected products pursuant to joint venture or similar arrangements in which our
joint venture partners will be responsible for marketing and distribution. These
products would involve production levels that are substantially lower than the
products of the type licensed to Becton Dickinson.
We have leased an approximately 26,000 square foot facility in Ventura,
California. In addition to our corporate offices, the facility includes space
for the following:
o a research and development laboratory equipped with assembly and test
equipment for concept modeling and product development;
o a machine shop equipped with tools for the fabrication of new product parts
for concept modeling and assembly, as well as the fabrication of prototype
molds and test fixtures;
o a 3,120 square foot class 100,000 clean room used for the assembly of
prototypes; and
o a semi-automated assembly system, which consists of a series of manual and
semi-automatic stations.
The assembly system is currently being used to manufacture limited
quantities of our products to demonstrate to potential third-party manufacturers
the economic feasibility of the commercial production of our products. With some
modifications, the semi-automated assembly system is capable of producing up to
6,000,000 units per year and can produce one or more of our products at a time.
This assembly system will enable us to manufacture the products we design for
certain niche markets which do not involve the same manufacturing scale as more
widely used products, such as those licensed to Becton Dickinson.
6
Government Regulation
Our products are subject to regulation by the United States Food and
Drug Administration (FDA) under a number of statutes including the Federal Food,
Drug and Cosmetics Act (FDCA). The FDA regulates, among other things, the
research, development, testing, manufacture, labeling, distribution, and
promotion of medical devices in the United States. Our medical devices must be
cleared or approved by the FDA before they can be sold in the United States.
Because our focus is on the development, design and licensing of
medical safety devices rather than marketing and manufacturing of the devices,
we do not typically make the regulatory filings necessary to sell our products.
We rely on our licensees to pursue regulatory approvals and anticipate that we
will rely on any joint venture partners with whom we may contract in the future
in a similar fashion unless we manufacture the product.
The FDCA provides two basic review procedures by which medical devices
can receive FDA marketing authorization. Certain products qualify for a
submission authorized by Section 510(k) of the FDCA. To receive Section 510(k)
clearance, a premarket notification must be filed with the FDA that a company
plans to begin marketing a medical device. The filing must establish that the
medical device is substantially equivalent to another medical device that has
been granted prior FDA premarket notification clearance or was marketed prior to
May 28, 1976, the date of enactment of the Medical Device Amendments. Marketing
may commence when the FDA issues a letter finding substantial equivalence. If a
product does not qualify for Section 510(k) clearance, a pre-market approval
application must be filed. Pre-market approval applications must demonstrate
that the medical device is safe and effective. The pre-market approval process
is typically more complex and time consuming than the Section 510(k) clearance
process, and requires the submission of laboratory, preclinical and clinical
data.
If we decide to commercially market and manufacture some of the
products we develop, separate from our current or any future license agreement,
we may be required to file for Section 510(k) clearance, or possibly pre-market
approval, for such products. In that case, we also would be required to comply
with FDA post-market reporting requirements, including the submission of reports
on certain adverse events and malfunctions, and requirements governing the
promotion of medical devices. In addition, modifications to our devices may
require the filing of new 510(k) submissions or pre-market approval supplements.
In addition, we will need to comply with FDA regulations governing medical
device manufacturing practices. The FDA and the California Department of Health
Services (DHS) require medical device manufacturers to register as such and
subject them to periodic FDA and DHS inspections of their manufacturing
facilities. The FDA requires that medical device manufacturers produce devices
in accordance with the FDA's current Quality System Regulation (QSR), which
governs the methods, facilities and controls used for the design, manufacture,
testing, packaging, labeling and storage of medical devices. We are not
currently required to register our pilot manufacturing facility or comply with
QSR requirements because we do not commercially manufacture and distribute the
devices we produce in our facility, but we will be required to register and
comply if we commence commercial manufacturing.
There is a different set of regulatory requirements in place for the
European Union (EU). In the EU the company putting a medical device onto the
market must comply with the requirements of the Medical Devices Directive (MDD)
and affix the CE mark to the product to attest to such compliance. To achieve
this, the medical devices in question must meet the "essential requirements"
defined under the MDD relating to safety and performance, and the relevant
company must successfully undergo a verification of its regulatory compliance by
a third party standards certification provider, a so-called "Notified Body." The
nature of the assessment will depend on the regulatory class of products
concerned which in turn determines the precise form of testing to be undertaken
by the Notified Body.
The requirements of the MDD must be complied with by the "manufacturer
of the device," which is defined as the party responsible for the design,
manufacture, packaging and labeling of the device before it is placed on the EU
market, regardless of whether these operations are carried out by this entity or
on its behalf.
Accordingly, where medical devices are marketed by our licensees or
joint venture partners under their names, compliance with the MDD will be their
responsibility. In the event that we decide to manufacture devices to be
distributed in the EU market under our name, all compliance responsibilities
will be borne by us.
7
In the case of devices such as the safety pre-filled glass syringe
which incorporate a medicinal product as one integrated product, the regulatory
requirements are those relating to medicines as opposed to devices and an
application for a marketing authorization must be made under Directive 65/65
EEC. However, the safety and performance of the device features of the integral
product are assessed in accordance with the essential requirements of Annex I of
the MDD. Again, if the device is marketed by our licensees or joint venture
partners under their names, all regulatory compliance obligations will be borne
by such licensees or joint venture partners. The party responsible for
regulatory compliance will be subject to continued surveillance by the Notified
Body and will be required to comply with additional national requirements that
are beyond the scope of the MDD.
Competition
The safety medical device market is highly competitive. Licensees of
our products will compete in the United States and abroad with the safety
products and standard products manufactured and distributed by companies such
as:
o Kendall Healthcare Products Company,
o B. Braun,
o Terumo Medical Corporation of Japan,
o Bio-Plexus, Inc., and
o Johnson & Johnson.
Developers of safety medical devices which we compete against for
license and joint venture arrangements with medical device and pharmaceutical
companies include:
o Bio-Plexus, Inc.,
o New Medical Technologies,
o Retractable Technologies, Inc., and
o Univec, Inc.
Traditionally, competition regarding non-safety medical devices was
primarily based upon price with little differentiation between products. We
expect our products to compete against both safety products and non-safety
products based upon safety and ease of use and disposal. While safety medical
devices are priced at approximately two to three times that of equivalent
standard medical devices, we believe that based upon estimated costs associated
with accidental needlesticks, our products should be considered cost effective
by the marketplace. There can be no assurance, however, that purchasers will be
willing to pay the increased price for safety medical devices unless they are
mandated to use such devices by laws such as those passed by the federal
government and those passed at the state level in California, Tennessee, Texas,
New Jersey and Maryland.
Becton Dickinson Relationship
On December 11, 1998, we entered into a license agreement with Becton
Dickinson under which we licensed certain of our products to Becton Dickinson.
In connection with the agreement, we received an up-front licensing fee of $4.5
million in addition to the right to receive royalty payments based on Becton
Dickinson's net sales of the licensed products. In addition, the license
agreement granted Becton Dickinson an option to license five of our other
products. On March 12, 2000, we signed a binding term letter with Becton
Dickinson outlining the terms for a definitive agreement under which Becton
Dickinson would license the products that we previously granted them an option
to license. We recognized $1.5 million of revenue in the form of an up-front
licensing fee upon the signing of the binding term letter. On May 11, 2000, we
entered into a definitive license agreement with Becton Dickinson based upon the
terms of the March 12, 2000 binding term letter. Under the definitive license
agreement, we received an additional $2.5 million in up-front licensing fees and
the right to receive royalty payments based on Becton Dickinson's net sales of
the products licensed under such agreement.
Recent Legislation
Recent regulatory actions at the federal and state level promote the
use of safety needles to reduce the risk of accidental needlesticks. On July 1,
1999, California, through its state Occupational Safety and Health
Administration (OSHA) program, began requiring the use of safety needles. Other
states such as Texas, Tennessee, Maryland and New Jersey have passed similar
legislation. On November 6, 2000, President Clinton signed the Needlestick
Safety and Prevention Act amending OSHA's Bloodborne Pathogens Standard to
require that employers implement the use of safer medical devices in their
facilities. As a result of these recent regulatory actions, we anticipate that
the demand for safety medical devices such as those which we produce will
increase over the next twelve months.
8
Patents and Proprietary Rights
Our success will depend in part on our ability to obtain and maintain
patent protection for our products, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. It is our policy to
protect our intellectual property and maintain the proprietary nature of our
technology by filing patent applications for technology we consider important to
the development of our business and by requiring employees and key consultants
to execute non-disclosure and non-compete agreements.
We have 16 United States patents covering our retractable needle
technology and specific products based upon our technology. In addition, we have
12 foreign national patents and two European patent covering 12 countries. We
also have 15 United States, 67 foreign national, 12 European and 4 international
patent applications pending. In addition, we have a pending United States design
patent application based on one of our products, and two foreign national design
registrations and three pending foreign design applications.
Employees
As of March 10, 2001, we had 16 full-time employees and 2 part-time
employees, most of whom were located at our corporate offices. Should the
Company be engaged in manufacturing it will assess its personnel requirements
and adequately increase staff.
RISK FACTORS
We have a history of net losses and anticipate we will incur continued losses
for the foreseeable future.
We have incurred significant losses since inception. As of December 31,
2000, our accumulated deficit was $25,125,190. Among other things, our ability
to achieve profitability is dependent upon:
o the successful marketing of our products by licensees;
o our ability to license additional products that are not currently subject
to licenses or have these products distributed through joint venture or
similar arrangements; and
o our ability to develop additional products based on our core technologies.
We have licensed to Becton Dickinson several of our products and
anticipate that some of these products will be launched in 2001. We are unable
to predict whether Becton Dickinson's marketing efforts will be successful and
whether the licenses will generate meaningful revenues for us. The product we
have licensed to MedAmicus, Inc. is at an earlier stage of pre-manufacturing
development, and we do not anticipate that revenues from these licenses will be
generated until at least June, 2001. Moreover, if our licensees are not
successful in marketing our products, and if we are not successful in licensing
additional products, we may never generate meaningful revenues, in which case
our long-term viability would be threatened.
We are dependent upon our license agreement with Becton Dickinson, and if Becton
Dickinson is not successful in selling, or determines not to pursue the sale of,
products licensed from us, our business will be harmed.
9
To date, substantially all of our revenues have been derived from "up
front" license payments made by Becton Dickinson. We anticipate that royalty
payments from Becton Dickinson related to sales of our products will constitute
all or a substantial portion of our revenues for the next twelve months. Under
the license agreement with Becton Dickinson dated December 11, 1998, Becton
Dickinson has the right to terminate such agreement upon 60 days' notice and
would be subject to no further funding obligations to us with respect to the
products licensed under such agreement if it were to terminate such agreement.
The ability of Becton Dickinson to sell products it has licensed from us will
depend on competitive factors and the resources Becton Dickinson commits to the
sale of products they have licensed from us. The extent to which Becton
Dickinson commits its resources to the sale of products licensed from us is
entirely within Becton Dickinson's control. Becton Dickinson is not obligated to
pursue the development and commercialization of these products. Therefore, our
license arrangement with Becton Dickinson may not result in the successful
commercialization of our products and may not generate any future royalty
payments. If Becton Dickinson terminates the license agreement, is unsuccessful
in developing or selling the licensed products or otherwise determines not to
pursue the development and sale of the licensed products, our business will be
harmed.
If we are unable to raise additional funds as required, we may have to reduce
the scope of, or cease, our operations.
We believe that we have sufficient funds to support our planned
operations and capital expenditures for at least the next twelve months. The
availability of resources over a longer term will be dependent on our ability to
enter into licensing agreements and to receive royalty payments from our current
and future licensees and our ability to enter into, and profitably operate under
joint venture or similar arrangements. If we are unsuccessful in negotiating
additional agreements, or if licensing revenues are insufficient to support
operations, we may seek to raise funds through public or private equity
offerings or debt financings.
If we raise additional capital by issuing equity securities, our
stockholders' percentage ownership will be reduced, and our stockholders may
experience substantial dilution. Any equity securities issued may provide
rights, privileges or preferences superior to our common stock. If we raise
additional funds by issuing debt securities, we may be subject to significant
restrictions on our operations. If we raise additional funds through joint
ventures or other collaborations and license arrangements, we may be required to
relinquish rights to our technologies or products or grant licenses on terms
that are not favorable to us.
At December 31, 2000, we had a revolving line of credit totaling
$3,000,000. This facility can be used to fund working capital needs and finance
capital equipment purchases. However, advances for capital equipment financing
may not exceed $600,000, and borrowings are collateralized by substantially all
of the company's assets. The facility expires on May 31, 2001, and there is no
assurance that we will be successful in negotiating a continuation of the
availability of the line of credit or the terms which will be made available to
us. There were no amounts outstanding under the credit facility at December 31,
2000.
If adequate funds are not available on acceptable terms, we may have to
reduce the scope of, or cease, our operations.
Our products must receive regulatory approval in the United States and foreign
jurisdictions; we rely on our licensees to obtain such approvals, and if they
are not successful in obtaining or maintaining approvals, the sale of our
products and our ability to realize royalty revenues would be impaired.
Our products are medical devices subject to regulation by the United
States Food and Drug Administration (FDA). The FDA regulates, among other
things, product manufacture, labeling, distribution, and promotion of medical
devices in the United States. Our medical devices must be cleared or approved by
the FDA before they can be sold in the United States.
Our licensees pursue regulatory approvals. As a result, our ability to
receive royalties from licensed products may be impaired or delayed if the
licensees do not devote sufficient resources to the regulatory approval effort.
Moreover, obtaining FDA approval or clearance to market a product can be a
lengthy and costly process which in some cases involves extensive clinical
studies. Our licensees may not be able to obtain the necessary FDA
authorizations to allow marketing of our products in a timely fashion, or at
all.
10
Even if our licensees obtain the necessary approvals or clearances,
later problems with the product could cause the FDA to suspend or revoke the
approvals or clearances. Also, if the FDA authorizes marketing of licensed
products, our licensees will be subject to continuing requirements governing,
among other things, the claims that can be made with respect to the products and
manufacturing processes. We could confront similar difficulties and obstacles
if, in connection with joint venture or similar arrangements, we directly
pursued regulatory approvals. Failing to comply with the FDA's requirements can
result in issuance of FDA Warning Letters, Agency refusal to approve or clear
products, revocation or withdrawal of approvals previously granted, product
seizures, injunctions, recalls, operating restrictions, limitations on continued
marketing and civil and criminal penalties.
Although we have a manufacturing facility at our headquarters, we have
used this facility only for prototype manufacturing and to determine the
feasibility of high volume manufacture of a product. The devices manufactured at
our facility are not used on humans. Therefore, compliance with regulatory
manufacturing requirements is not required with respect to the operation of the
manufacturing facility. However, we anticipate that, in the future, we may seek
to manufacture and market some of our products ourselves, or enter into joint
ventures or similar arrangements to manufacture and sell our products. These
joint venture arrangements may require us to seek separate clearance or approval
by the FDA of these products and to comply with ongoing FDA requirements for
submission of safety and other postmarket information. These arrangements also
may involve our assumption of commercial manufacturing responsibility with
respect to some of our products. If we engage in commercial manufacturing, will
be required to adhere to requirements pertaining to the FDA's current Quality
System Regulation, commonly known as the QSR. The current QSR requirements
govern the methods, facilities and controls used for the manufacture, testing,
design, packaging, labeling and storage of medical devices.
To market a product in the European Union (EU) a manufacturer must be
entitled to affix a CE marking to the device which is a European symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. A CE marking allows a device to be marketed in all
members states of the EU and accordingly, failure to be entitled to affix a CE
marking will prohibit the marketing of a device anywhere in the EU.
The responsibilities for compliance with the CE requirements lies with
the manufacturer of the device which is defined in the Medical Devices Directive
(MDD) as the party putting the device on the EU market under its name.
Accordingly, we rely upon our licensees to satisfy the necessary compliance
criteria and if our licensees do not devote sufficient resources to this
process, our ability to receive royalties from the sale of the products will be
diminished. Furthermore, the licensees may not be able to satisfy the necessary
requirements to allow marketing of our products in a timely fashion or at all.
In the case of devices incorporating a medicinal product as a single
integrated product, such as the safety pre-filled glass syringe, the regulatory
requirements are those relating to medicines as opposed to devices. In which
case our licensees must make an application for a marketing authorization under
Directive 65/65 EEC. The application must be made to one EU country, and if
approved, is then mutually recognized in all other remaining EU countries. The
process can be very timely, if authorization is granted at all.
Our failure or the failure of our licensees to comply with the FDA and
other applicable regulations could cause our business to be harmed
significantly.
If we are unable to protect our proprietary technology, or to avoid infringing
the rights of others, our ability to compete effectively will be impaired.
Our intellectual property consists of patents, licenses, trade secrets
and trademarks. Our success depends in part on our ability to:
o obtain and maintain patents and other intellectual property;
o establish and maintain trademarks;
o operate without infringing the proprietary rights of others; and
o otherwise maintain adequate protection of our technologies and products
in the United States and other countries.
11
We have a number of patents and pending United States patent
applications relating to our products. Patent applications filed by us or on our
behalf may not result in patents being issued to us. Even if a patent is issued,
the patent may not afford protection against competitors with similar
technology. Furthermore, others may independently develop similar technologies
or duplicate our technology.
Our commercial success depends in part on our avoiding the infringement
of patents and proprietary rights of other parties and developing and
maintaining a proprietary position with regard to our own technologies and
products. We cannot predict with certainty whether we will be able to enforce
our patents. We may lose part or all of our patents as a result of challenges by
competitors. Patents that may be issued, or publications or other actions could
block our ability to obtain patents or to operate as we would like. Others may
develop similar technologies or duplicate technologies that we have developed or
claim that we are infringing their patents.
We may become involved in litigation or interference proceedings
declared by the U.S. Patent and Trademark Office, or oppositions or other
intellectual property proceedings outside of the United States. If any of our
competitors have filed patent applications or obtained patents that claim
inventions that we also claim, we may have to participate in an interference
proceeding to determine who has the right to a patent for these inventions in
the United States. If a litigation or interference proceeding is initiated, we
may have to spend significant amounts of time and money to defend our
intellectual property rights or to defend against infringement claims of others.
Litigation or interference proceedings could divert our management time and
effort. Even unsuccessful claims could result in significant legal fees and
other expenses, diversion of management time and disruption in our business. Any
of these events could harm our ability to compete and adversely affect our
business.
An adverse ruling arising out of any intellectual property dispute
could invalidate or diminish our intellectual property position. An adverse
ruling could also subject us to significant liability for damages, prevent us
from using processes or products, or require us to license disputed rights from
third parties. Costs associated with licensing arrangements entered into to
resolve litigation or an interference may be substantial and could include
ongoing royalties. We may not be able to obtain any necessary licenses on
satisfactory terms.
In addition, we rely on trade secrets to protect technology. We attempt
to protect our proprietary technology by requiring certain of our employees and
key consultants to execute non-disclosure and non-competition agreements.
However, these agreements could be breached, and our remedies for breach may be
inadequate. In addition, our trade secrets may otherwise become known or
independently discovered by our competitors. If we lose any of our trade
secrets, our business and ability to compete could be harmed.
Because we are dependent on a single core technology, we are particularly
vulnerable to the development of competing products and technological change.
All of the products we have designed and developed to date, and
products we currently intend to design and develop, are based upon our
proprietary retraction technology. Our focus on a single core technology makes
us vulnerable to the development of superior competing products and changes in
technology that could eliminate any demand for our products. Our business would
suffer if a superior competing product were developed, or if there were a
reduced demand for products such as ours. We may not be able to successfully
develop additional products or applications.
Our products may not achieve market acceptance.
The use of safety needles is relatively new. Although the market for
syringes, fluid collection devices and infusion therapy devices is large, actual
sales of our products may not be significant. Sales of our products will depend
mostly upon our licensees' ability to demonstrate the operational and safety
advantages of our products compared to standard syringes, fluid collection
devices and infusion therapy devices and safety medical devices developed by our
competitors. Our licensees may be unable to sell our products due to the higher
cost of safety medical devices relative to standard medical devices. There may
never be a significant demand for our products.
12
We are dependent on our licensees for the manufacture of our products.
To date, we have relied on our licensees to arrange for the commercial
manufacture of our products. Our licensees generally manufacture our products at
their own facilities, although it is possible that in connection with future
licenses or joint venture or similar arrangements, we may rely on third party
manufacturers other than our licensees or manufacture selected products
ourselves. Contracting with third parties or relying on licensees to manufacture
our products presents the following risks:
o delays in the manufacture of our products could have a material adverse
effect on the marketing of our products;
o the manufacturers may not comply with requirements imposed by the Food and
Drug Administration or other governmental agencies;
o we may have to share intellectual property rights to improvements in the
manufacturing processes or new manufacturing processes for our products;
o in those instances where we seek third party manufacturers, we may not be
able to locate acceptable manufacturers or enter into favorable long-term
agreements with them; and
o we may not be able to find substitute manufacturers, if necessary.
Any of these factors could delay commercialization of our products and
adversely affect the sale of the products and our license or joint venture
revenues.
We are dependent on the sales and marketing efforts of our licensees to sell our
licensed products, and our business will suffer if our licensees do not
successfully market our products.
We currently have limited sales and marketing capabilities, and we do
not intend to build a sales and marketing infrastructure for commercial sales of
our products. Accordingly, we are dependent on our licensees to sell our
products and generate royalties for us. If our licensees do not devote
sufficient effort to the sale and marketing of our products, or are otherwise
unsuccessful in marketing our products, our business will suffer.
We are dependent on key personnel, and if we are unable to retain these
personnel, our business could be harmed.
Our success depends upon the skills, experience and efforts of our
executive officers and certain marketing and technical personnel. We are
particularly dependent upon the services of James M. Donegan, our Chief
Executive Officer. If Mr. Donegan, or any of our other key personnel, do not
continue in their present capacities, our operations could be materially
adversely affected.
We are subject to product liability claims.
The manufacture and sale of our medical devices entails an inherent
risk of liability in the event of product failure or claim of harm caused by
product operation. We may not be able to avoid product liability claims.
Although we currently maintain product liability insurance coverage ($5,000,000
per occurrence and in the aggregate), such coverage may not be sufficient to
protect us or may not remain available at a reasonable cost. If we are unable to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims, we could be severely harmed if a
plaintiff brings a successful product liability claim against us.
13
Our markets are highly competitive.
The safety medical device market is highly competitive. Our products
will compete in the United States and abroad with the safety products and
standard products manufactured and distributed by companies such as:
o Kendall Healthcare Products Company,
o B. Braun,
o Terumo Medical Corporation of Japan,
o Bio-Plexus, Inc., and
o Johnson & Johnson.
Developers of safety medical devices against which we compete include:
o Bio-Plexus, Inc.,
o New Medical Technologies,
o Retractable Technologies, Inc., and
o Univec, Inc.
Many of our competitors are substantially larger and better financed
than we are and have more experience in developing medical devices than we do.
These competitors may use their substantial resources to improve their current
products or to develop additional products that may compete more effectively
with our products. In addition, new competitors may develop products that
compete with our products, or new technologies may arise that could
significantly affect the demand for our products. We cannot predict the
development of future competitive products or companies. We will be materially
adversely affected if we are unable to compete successfully.
If we engage in any acquisition or business combination, we will incur a variety
of risks that could adversely affect our business operations.
From time to time we have considered, and we will continue to consider
in the future, strategic business initiatives intended to further the
development of our business. These initiatives may include acquiring businesses,
technologies or products or entering into a business combination with another
company. If we pursue such a strategy, we could, among other things:
o issue equity securities that would dilute our stockholders' percentage
ownership;
o incur substantial debt, which may place constraints on our operations;
o spend substantial operational, financial and management resources in
integrating new businesses, technologies and products;
o assume substantial actual or contingent liabilities; or
o merge, or otherwise enter into a business combination with, another
company, in which our stockholders would receive cash or shares of the
other company, or a combination of both, on terms that our stockholders
might not deem desirable.
Moreover, any strategic business initiative may not provide anticipated
benefits and could, if unsuccessful, hurt our long-term business prospects.
Because our officers and directors own a significant number of shares of our
common stock, they may control all major corporate decisions, and our other
stockholders may not be able to influence these decision.
As of March 10, 2001, our directors and officers beneficially owned or
controlled approximately 37% of the outstanding Common Stock. Accordingly, such
executive officers and directors, as a group, have the ability to exert
significant control over the election of our Board of Directors and to determine
corporate actions requiring stockholder approval including mergers,
consolidations and the sale of all or substantially all of the our assets. The
interests of these stockholders could conflict with the interests of our other
stockholders.
14
Our stock price is volatile.
Historically, our stock price, like the market price of the securities
of other medical device companies, has fluctuated widely, and it may be subject
to similar future fluctuations in response to:
o announcements regarding technological innovations by us or our
competitors;
o the licensing of products or the formation of joint ventures or similar
arrangements by us or our competitors;
o government regulatory action regarding our products;
o the development of new products by us or our competitors;
o general conditions in the medical device industry;
o quarter-to-quarter variations in operating results; and
o our failure to meet analysts' expectations.
Investors may lose money upon the resale of our shares.
Our common stock is subject to dilution.
As of December 31, 2000, there were 10,508,320 shares of our common
stock issued and outstanding. In addition, an aggregate of 1,789,900 additional
shares of our common stock are issuable pursuant to stock options granted under
the Non-Qualified Stock Option Plan and warrant agreements.
We are unlikely to pay dividends on our common stock.
No cash dividends have been paid on our common stock. We anticipate
that future earnings, if any, will be used to finance operations and expand our
business. Accordingly, we do not anticipate that we will pay cash dividends in
the future.
Provisions of our Certificate of Incorporation and the Delaware General
Corporation Law provide barriers to takeover offers that could be beneficial to
our stockholders.
Various provisions of our certificate of incorporation and bylaws and
Delaware law could delay or prevent a third party from acquiring shares of our
stock.
We have an authorized class of 5,000,000 shares of preferred stock,
none of which are issued and outstanding. The Board of Directors has the
authority, without shareholder approval, to issue preferred stock in one or more
series and to fix the relative rights and preferences of the preferred stock,
including their redemption, dividend and conversion rights. The preferred stock
could have the effect of delaying, deterring or preventing a change in control.
Section 203 of the Delaware General Corporation Law generally prohibits
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and other specified transactions
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns, (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. Section 203 may discourage transactions in which our
stockholders might otherwise receive a premium for their shares over the then
current price and may limit our stockholders' ability to approve transactions
even if they believe the transaction is in their best interests.
15
ITEM 2. DESCRIPTION OF PROPERTIES
We have leased an approximately 26,000 square foot facility in Ventura,
California. In addition to our corporate offices, the facility includes space
for the following:
o a research and development laboratory equipped with assembly and test
equipment for concept modeling and product development;
o a machine shop equipped with tools for the fabrication of new product parts
for concept modeling and assembly, as well as the fabrication of prototype
molds and test fixtures;
o a 3,120 square foot class 100,000 [What does this mean?] clean room used
for the assembly of prototypes; and
o a semi-automated assembly system, which consists of a series of manual and
semi-automatic stations.
The assembly system is currently being used to manufacture limited quantities of
our products to demonstrate to potential third-party manufacturers the economic
feasibility of the commercial production of our products. With some
modifications, the semi-automated assembly system is capable of producing up to
6,000,000 units per year and can produce one or more of our products at a time.
This assembly system will enable us to manufacture the products we design for
certain niche markets which do not involve the same manufacturing scale as more
widely used products, such as those licensed to Becton Dickinson.
Our annual lease payments for this facility are approximately $149,712 and the
lease expires on October 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the knowledge of
management, threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 2000 through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock has been traded on the NASDAQ SmallCap Market under
the symbol ("MEDC") since Med-Design's Initial Public Offering on June 7, 1995.
On March 23, 2001 we were notified that our Common stock has been approved for
trading on the NASDAQ National Market. The following table sets forth the high
and low sales price for our Common Stock for the quarters indicated as reported.
Market Information
Fiscal year ended December 31, 1999 High Low
----------------------------------- ---- ---
First Quarter.......................................................... $4 9/16 $2 15/16
Second Quarter......................................................... 8 1/4 3 3/16
Third Quarter.......................................................... 7 3/8 3 1/2
Fourth Quarter......................................................... 16 1/4 3 3/4
Fiscal year ended December 31, 2000 High Low
----------------------------------- ---- ---
First Quarter.......................................................... $20 3/4 $12 5/16
Second Quarter......................................................... 16 1/2 8 1/8
Third Quarter.......................................................... 15 3/4 9 1/2
Fourth Quarter......................................................... 23 11 3/4
16
Holders
As of February 28, 2000, Med-Design had 3,577 holders of record of the
Common Stock. Since a portion of Med-Design's Common Stock is held in "street"
or nominee name, Med-Design is unable to determine the exact number of
beneficial holders.
Dividends
We have never paid or declared and do not anticipate paying any cash dividends
in the foreseeable future. We currently intend to retain any future earnings for
use in our business.
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and pro forma financial information and related notes
included elsewhere in this Form 10-K.
- -----------------------------------------------------------------------------------------------------------------
Year ended 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Revenue $4,128,993 -- $4,500,000 -- --
Net Income (loss) ($2,793,365) ($4,247,473) $882,889 ($5,219,833) ($4,332,869)
Total assets $8,565,574 $7,257,286 $8,482,885 $8,293,030 $9,349,162
Debt $10,833 $1,073,797 $1,579,824 $154,674 $300,366
- -----------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are principally engaged in the design, development and licensing of
safety medical devices intended to reduce the incidence of accidental
needlesticks. To date, substantially all of our revenues have been derived from
"up front" license payments made by Becton Dickinson.
On December 11, 1998, we entered into a license agreement with Becton
Dickinson under which we licensed certain of our products to Becton Dickinson.
In connection with the agreement, we received an up-front licensing fee of $4.5
million in addition to the right to receive royalty payments based on Becton
Dickinson's net sales of the licensed products. In addition, the license
agreement granted Becton Dickinson an option to license five of our other
products. On March 12, 2000, we signed a binding term letter with Becton
Dickinson outlining the terms for a definitive agreement under which Becton
Dickinson would license the products that we previously granted them an option
to license. We recognized $1.5 million of revenue in the form of an up-front
licensing fee upon the signing of the binding term letter. On May 11, 2000, we
entered into a definitive license agreement with Becton Dickinson based upon the
terms of the March 12, 2000 binding term letter. Under the definitive license
agreement, we received an additional $2.5 million in up-front licensing fees and
the right to receive royalty payments based on Becton Dickinson's net sales of
the products licensed under such agreement.
On September 25, 2000, we entered into a license agreement with
MedAmicus, Inc. granting MedAmicus a license to manufacture and market our
Safety Seldinger Needle for certain venous applications. Under the license
agreement, we have the right to receive royalty payments based on MedAmicus' net
sales of the Safety Seldinger Introducer Needle.
Several of the products licensed to Becton Dickinson are expected to
launch in 2001, and the Safety Seldinger Needle is tentatively scheduled to
launch in the summer of 2001. With the launch of these products, we anticipate
the generation of royalty payments in 2001 under the Becton Dickinson and
MedAmicus license agreements.
17
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31,1999
Total revenue for the year ended December 31, 2000 was $4,128,993; we
had no revenue for 1999. The revenue in 2000 consisted principally of $4,000,000
in up front licensing payments made by Becton Dickinson under the May 11, 2000
license agreement.
Loss from operations for the year ended December 31, 2000 was
$3,079,662, a decrease of $1,110,852 as compared to loss from operations of
$4,190,514 for the corresponding period in 1999. The decrease was due primarily
to the receipt of license fee revenue in 2000 offset by increases in general and
administrative expenses and stock based compensation expenses described below.
General and administrative expenses for the year ended December 31,
2000 were $3,517,160, an increase of $818,746 as compared to general and
administrative expenses of $2,698,414 for the corresponding period in 1999. The
increase in general and administrative expenses from 1999 was principally due to
an increase in the general level of business activities, primarily related to
increased legal and travel expenses, to enable the Company to market its
products.
Research and development expenses for the year ended December 31, 2000
were $1,143,938, a decrease of $84,163 as compared to research and development
expenses of $1,228,101 for the corresponding period in 1999. Research and
development expense remained fairly constant for the year 2000 and 1999.
Stock based compensation, which resulted from the issuance and
extension of options, warrants and other stock based compensation was
$2,547,557, an increase of $2,283,558 as compared to $263,999 for the same
period in 1999. The increase was due to the extension of options and warrants
for retiring officers and employees, and the issuance of shares of common stock,
options and warrants to officers in accordance with their employment agreements.
Year Ended December 31, 1999 Compared to Year Ended December 31,1998
There were no revenues for the year ended 1999 compared to revenue of
$4,500,000 in 1998. The revenue in 1998 reflected an up front licensing payment
by Becton Dickinson.
Loss from operations for the year ended December 31, 1999 was
$4,190,514, an increase of $5,053,812 as compared to income from operations of
$863,298 for the corresponding period in 1998. The increase was due primarily to
the $4,500,000 up front licensing fee in 1998 and an increased level of general
business activity in 1999 resulting in an increase of general and administrative
expenses.
General and administrative expenses for the year ended December 31,
1999 were $2,698,414, an increase of $716,550 as compared to $1,981,864 for the
corresponding period in 1998. The increase in general and administrative
expenses from 1998 was principally due to an increase in legal and travel
expenses resulting from increased business activity to enable the Company to
market its products.
Research and development expense for the year ended December 31, 1999
was $1,228,101, an increase of $121,600 as compared to $1,106,501 for the
corresponding period in 1998. Research and development expenses remained fairly
constant for years 1999 and 1998.
Stock based compensation was $263,999 in 1999, a decrease of $202,003
as compared to $466,002 for the corresponding period in 1998. In 1998, options
and warrants were issued to an officer for services performed in 1998, resulting
in the difference.
18
Liquidity and Capital Resources
At December 31, 2000, we had cash, cash equivalents and
available-for-sale securities of $6,061,542, as compared to $4,862,382 at
December 31, 1999, an increase of $1,199,160 or 25%. The increase was due
primarily to income from operations and cash received from the exercise of
warrants and options of $3,531,078 offset principally by the repayment of
short-term borrowings of $250,000, the purchase of patents of $220,000 and
increase in insurance premiums of approximately $50,000. Cash provided by
operating activities was most significantly affected by two offsetting matters.
Our revenues in 2000 included $1,500,000 in licensing fees attributable to an
advance payment that was received in 1999. Because these revenues were recorded
in a period subsequent to the period in which the payment was received, cash
provided by operations was reduced by the amount of the $1,500,000 payment.
Conversely, stock-based compensation of $2,547,557 recorded by the Company in
2000 reflected non-cash expenditures and, accordingly, cash provided by
operations was increased by this amount.
At December 31, 2000, we had a revolving line of credit totaling
$3,000,000. This facility can be used to fund working capital needs and finance
capital equipment purchases. However, advances for capital equipment financing
may not exceed $600,000, and borrowings are collateralized by substantially all
of our assets. Any borrowings to meet working capital needs bear interest at
LIBOR plus 2.25%, while borrowings to finance capital equipment purchases bear
interest at the prime rate plus 2.5%. The facility expires on May 30, 2001, and
there is no assurance that we will be successful in negotiating a continuation
of the availability of the line of credit or the terms that will be made
available to us. There were no amounts outstanding under the agreement at
December 31, 2000.
We believe that we have sufficient funds to support our planned
operations for at least the next twelve months. The availability of resources
over a longer term will be dependent on our ability to enter into licensing
agreements and to receive royalty payments from our current and future licensees
and our ability to enter into, and profitably operate under joint venture or
similar arrangements. If we are unsuccessful in negotiating additional
agreements, or if licensing revenues are insufficient to support our operations,
we may be required to reduce the scope of, or cease, our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no amounts outstanding under our revolving line of credit at
December 31, 2000. If we were to borrow under our credit facility, borrowings to
meet working capital needs would bear interest at LIBOR plus 2.25% and
borrowings to finance capital equipment purchases would bear interest at the
prime rate plus 2.5%. As a result, any such borrowings would be subject to the
fluctuations in the market which affect LIBOR or the prime rate, respectively.
ITEM 8. FINANCIAL STATEMENTS
Incorporated by reference from the consolidated financial statements
and notes thereto of Med-Design which are attached hereto beginning on page F-1.
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
This information will be included in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders, or in an amendment to this Form
10-K, which will be filed within 120 days after the close of the Company's
fiscal year covered by this report, and is hereby incorporated by reference to
such Proxy Statement or amendment.
19
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders, or an amendment to this Form
10-K, which will be filed within 120 days after the close of the Company's
fiscal year covered by this report, and is hereby incorporated by reference to
such Proxy Statement or amendment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be included in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders, or in an amendment to this Form
10-K, which will be filed within 120 days after the close of the Company's
fiscal year covered by this report, and is hereby incorporated by reference to
such Proxy Statement or amendment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be included in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders, or in an amendment to this Form
10-K, which will be filed within 120 days after the close of the Company's
fiscal year covered by this report, and is hereby incorporated by reference to
such Proxy Statement or amendment.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements and
notes thereto of Med-Design which are attached hereto beginning on page F-1,
have been incorporated by reference into Item 8 of this Report on Form 10-K:
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Operations for years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, F-5
1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
2. All schedules are omitted because they are inapplicable, or
not required, or the information is shown in the Financial Statements or notes
thereto.
3. List of Exhibits. The following is a list of exhibits filed
as part of this annual report on Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference.
20
Exhibit
Number Description
- ------ -----------
3.1 (1) Certificate of Incorporation of Med-Design.
3.2 (1) Amendment to Certificate of Incorporation of Med-Design.
3.3 (1) Bylaws of Med-Design.
4.1 (1) Specimen of Common Stock Certificate of Med-Design.
10.5 (3) Amended and Restated Non-Qualified Stock Option Plan.
10.10 (3) Placement Agent Agreement dated as of January 8, 1997 by and between
Med-Design and Fine Equities, Inc. ("Fine").
10.12 (3) Placement Agent's Warrant Agreement dated as of January 23, 1997 by
and between the Company and Fine.
10.13 (6) Warrant dated January 23, 1997 from Med-Design for N. Scott Fine.
10.23 (2) Judgment Note dated July 26, 1995 from Med-Design in favor of MDC
Holdings.
10.35 (4) Judgement Note dated April 12, 1996 from Med-Design in favor of MDC
Holdings.
10.42 (6) Judgement Note dated November 14, 1996 from Med-Design in favor of MDC
Holdings.
10.48 (2) Lease Agreement dated June 15, 1995 between Moen Development and MDC
Research Ltd. And guaranteed by Med-Design.
10.50 (9) Warrant dated September 9, 1998 from Med-Design to John F. Kelley.
10.54 (9) Warrant dated March 19, 1997 from Med-Design to John F. Kelley.
10.55 (9) Warrant dated October 10, 1997 from Med-Design to John F. Kelley.
10.56 (9) Warrant dated January 14, 1998 from Med-Design to John F. Kelley.
10.58 (9) Repriced option agreement October 10, 1997 from Med-Design to John
Kelley.
10.61 (9) Revised warrant agreement between Med-Design and John Kelley.
10.62 (9) Revised warrant agreement January 14, 1998 between Med-Design and John
Kelley.
10.63 (9) Licensing and Option Agreement December 11, 1998 with Becton,
Dickinson and Company.
10.64 (9) Equity agreement December 11, 1998 with Becton, Dickinson and Company.
10.65 (9) Registration Rights Agreement with the Pennsylvania Merchant Group.
10.66 (9) Debenture Purchase Agreement with the Pennsylvania Merchant Group.
10.67 (9) Form of Debentures with the Pennsylvania Merchant Group.
10.68 (10) Option Agreement December 11, 1999 with Becton Dickinson and Company.
10.69 (10) Warrant dated March 5, 1999 between Med-Design and Jim Donegan.
10.70 (10) Warrant dated March 5, 1999 between Med-Design and Joseph
Bongiovanni.
10.71 (10) Warrant dated November 11, 1999, between Med-Design and Michael
Simpson.
10.72 Second Amendment to Option Agreement January 25, 2000 with Becton
Dickinson and Company.
10.73 Warrant dated April 25, 2000 between Med-Design and Lawrence Ellis.
10.74 Warrant Agreement dated April 25, 2000 between Med-Design and Michael
Simpson.
10.75 Licensing Agreement dated May 11, 2000 with Becton Dickinson and
Company.
21 (1) List of Subsidiaries of Med-Design.
21
- -----------------------
(1) Incorporated by reference to Form SB-2 filed April 7, 1995 and Amendment
Nos. 1, 2 and 3 thereto (File No. 33-901014).
(2) Incorporated by reference to Form 10-QSB filed on March 31, 1997.
(3) Incorporated by reference to Form 10-QSB filed on May 15, 1998.
(4) Incorporated by reference to Form 10-QSB filed on August 14, 1998.
(5) Incorporated by reference to Form 10-QSB filed on November 9, 1998.
(6) Incorporated by reference to Form 8-K filed January 8, 1999.
(7) Incorporated by reference to Form S-3 dated March 6, 2000.
(8) Incorporated by reference to Form S-8 dated November 2, 2000.
(9) Electronic filing only.
(10) Incorporated by reference to Form 10-KSB filed on December 31, 1999.
(b) No Reports on Form 8-K were filed in the quarter ended December 31, 2000.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE MED-DESIGN CORPORATION
Date: March 15, 2001 By: /s/ James M. Donegan
-------------------------------------
James M. Donegan
President and Chief Executive Officer
Each person whose signature appears below hereby authorizes and
constitutes James M. Donegan and Lawrence D. Ellis and each of them singly, his
true and lawful attorneys-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign and file any and all amendments to this report with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and he hereby ratifies and confirms all that
said attorneys-in-fact or any of them, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James M. Donegan Chairman of the Board, President and Chief March 15, 2001
- ---------------------------------- Executive Officer (Principal Executive Officer)
James M. Donegan
/s/ Lawrence D. Ellis Vice President, Finance and Chief Financial March 15, 2001
- ---------------------------------- Officer (Principal Financial Officer and
Lawrence D. Ellis Principal Accounting Officer)
/s/ Joseph N. Bongiovanni, III Director March 15, 2001
- ----------------------------------
Joseph N. Bongiovanni, III
/s/ John F. Kelley Director March 15, 2001
- ----------------------------------
John F. Kelley
/s/ Pasquale L. Vallone Director March 15, 2001
- ----------------------------------
Pasquale L. Vallone
/s/ Gilbert M. White Director March 15, 2001
- ----------------------------------
Gilbert M. White
/s/ Ralph Balzano Director March 15, 2001
- ----------------------------------
Ralph Balzano
/s/ Vincent J. Papa Director March 15, 2001
- ----------------------------------
Vincent J. Papa
/s/ Michael Simpson Director March 15, 2001
- ----------------------------------
Michael Simpson
Index to Consolidated Financial Statements
Page
Report of Independent Accountants ......................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 .............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 ........................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 ........................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 ........................................ F-6
Notes to Consolidated Financial Statements ........................ F-7 to F-20
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
The Med-Design Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of The
Med-Design Corporation (the "Company") and its subsidiaries at December 31, 2000
and December 31, 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 23, 2001
F-2
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, December 31,
2000 1999
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,728,103 $ 682,120
Available-for-sale securities 4,333,439 4,180,262
Prepaid expenses and other current assets 300,875 172,680
----------- -----------
Total current assets 6,362,417 5,035,062
Property, plant, and equipment, net 532,003 698,571
Patents, net of accumulated amortization of $295,029 and $132,276
at December 31, 2000 and December 31, 1999, respectively 1,671,153 1,110,013
Debt issue costs, net of accumulated amortization of $151,560 -- 413,640
----------- -----------
Total Assets $ 8,565,573 $ 7,257,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 250,000
Current maturities of long-term debt and capital lease obligations $ 10,062 12,251
Accounts payable 316,607 277,031
Accrued expenses 247,463 191,650
Licensing Fee Advance -- 1,500,000
----------- -----------
Total current liabilities 574,132 2,230,932
Long-term debt and capital lease obligations, less current maturities 10,833 1,073,797
----------- -----------
Total liabilities 584,965 3,304,729
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized; No shares and
300,000 shares issued and outstanding as of December 31, 2000 and
1999, respectively -- 3,000
Common stock, $.01 par value, 20,000,000 shares authorized; 10,508,320 and
8,604,437 shares issued and outstanding at December 31, 2000 and
1999, respectively 105,083 86,045
Additional paid-in capital 32,974,796 26,165,377
Accumulated deficit (25,125,190) (22,331,825)
Accumulated other comprehensive income 25,919 29,960
----------- -----------
Total stockholders' equity 7,980,608 3,952,557
----------- -----------
Total Liabilities and Stockholders' Equity $ 8,565,573 $ 7,257,286
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
2000 1999 1998
----------- ----------- ----------
Revenue $ 4,128,993 $ -- $4,500,000
----------- ----------- ----------
Operating expense:
Marketing -- -- 82,335
General and administrative $3,517,160 2,698,414 1,981,864
Research and development 1,143,938 1,228,101 1,106,501
Stock based compensation 2,547,557 263,999 466,002
----------- ----------- ----------
Total operating expenses 7,208,655 4,190,514 3,636,702
Income (loss) from operations (3,079,662) (4,190,514) 863,298
Interest expense (31,841) (256,182)
(242,521)
Investment income 318,138 199,223 262,112
----------- ----------- ----------
Net income (loss) (2,793,365) (4,247,473) 882,889
Dividend on Series A Preferred Stock 150,000 -- --
----------- ----------- ----------
Net income (loss) applicable to common shares ($2,943,365) ($4,247,473) $ 882,889
=========== =========== ==========
Basic and diluted earnings (loss) per common share ($0.30) ($0.53) $0.11
Weighted average common shares outstanding 9,811,609 7,978,963 7,951,570
The accompanying notes are an integral part of these financial statements
F-4
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Common Paid-In Accumulated
Stock Shares Amount Stock Shares Amount Capital Deficit
------------ ------ ------------ ------ ------- -------
Balance, January 1, 1998 -- $ -- 7,951,570 $ 79,516 $21,764,194 ($18,967,241)
Debt issue costs in
connection with private
placement 489,200
Debt issue costs in connection
with private investor loan 28,158
Issuance of warrants for
services 380,802
Equity investment in
preferred stock 300,000 $3,000 1,497,000
Repricing of warrants issued 85,200
Change in unrealized gains on
available-for-sale
securities
Net Income 882,889
--------------------------------------------------------------------------------------
Balance, December 31, 1998 300,000 $3,000 7,951,570 $79,516 $24,244,554 ($18,084,352)
Debt issue costs and interest
in connection with private
investor loan 59,758
Issuance of common stock in
connection with exercise of
stock options 118,867 1,189 310,556
Issuance of common stock in
connection with the exercise
of warrants 134,000 1,340 673,260
Issuance of stock options for
services 263,999
Issuance of common stock in
connection with conversion
of convertible debentures 400,000 4,000 496,000
Issuance of warrants in
partial payment of patent 117,250
Change in unrealized gains on
available-for-sale-securities
Net Loss (4,247,473)
--------------------------------------------------------------------------------------
Balance, December 31, 1999 300,000 $3,000 8,604,437 $86,045 $26,165,377 ($22,331,825)
Preferred stock conversion (300,000) (3,000) 300,000 3,000
Interest in connection
with private investor loan 24,401
Issuance of common stock in
connection with exercise of
stock options and warrants 749,467 7,494 3,523,584
Issuance of common stock in
connection with conversion
of convertible debentures net
of debt issue costs 840,000 8,400 627,959
Issuance of warrants in
partial payment of patent 14,416 144 235,918
Stock based compensation 2,547,557
Change in unrealized gains on
available-for-sale-securities
Dividends paid on Series A
Preferred Stock (150,000)
Net loss (2,793,365)
---------------------------------------------------------------------------------------
Balance December 31, 2000 -- $ -- 10,508,320 $105,083 $32,974,796 ($25,125,190)
=======================================================================================
Other
Comprehensive Stockholders'
Income Equity
------ -------------
Balance, January 1, 1998 $12,899 $2,889,368
Debt issue costs in
connection with private
placement 489,200
Debt issue costs in connection
with private investor loan 28,158
Issuance of warrants for
services 380,802
Equity investment in
preferred stock 1,500,000
Repricing of warrants issued 85,200
Change in unrealized gains on
available-for-sale
securities (5,171) (5,171)
Net Income 882,889
--------------------------------
Balance, December 31, 1998 $7,728 $6,250,446
Debt issue costs and interest
in connection with private
investor loan 59,758
Issuance of common stock in
connection with exercise of
stock options 311,745
Issuance of common stock in
connection with the exercise
of warrants 674,600
Issuance of stock options for
services 263,999
Issuance of common stock in
connection with conversion
of convertible debentures 500,000
Issuance of warrants in
partial payment of patent 117,250
Change in unrealized gains on
available-for-sale-securities 22,232 22,232
Net Loss (4,247,473)
--------------------------------
Balance, December 31, 1999 $29,960 $3,952,557
Preferred stock conversion
Interest in connection
with private investor loan 24,401
Issuance of common stock in
connection with exercise of
stock options and warrants 3,531,078
Issuance of common stock in
connection with conversion
of convertible debentures net
of debt issue costs 636,359
Issuance of warrants in
partial payment of patent 236,062
Stock based compensation 2,547,557
Change in unrealized gains on
available-for-sale-securities (4,041) (4,041)
Dividends paid on Series A
Preferred Stock (150,000)
Net loss (2,793,365)
--------------------------------
Balance December 31, 2000 $25,919 $7,980,608
================================
The accompanying notes are an integral part of these financial statements.
F-5
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) ($2,793,365) ($4,247,473) $ 882,889
Adjustments to reconcile net loss to operating
cash flows:
Depreciation and amortization 347,917 275,994 289,022
Amortization of debt issue costs -- 97,840 53,720
Debt issue cost in connection with
private investor loan 24,401 59,758 28,158
Stock-based compensation 2,547,557 263,999 466,002
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (128,195) 327 6,545
Licensing Fee Advance (1,500,000) 1,500,000 --
Accounts payable 39,576 61,606 9,801
Accrued expenses 55,813 14,952 (36,346)
----------------------------------------------
Net cash (used in) provided by operating activities (1,406,296) (1,972,997) 1,699,791
----------------------------------------------
Cash flows from investing activities:
Sale (purchases) of property and equipment (19,016) (46,988) 36,791
Additions to patents (487,832) (255,644) (144,183)
Investments in available-for-sale securities (2,500,000) (1,500,000) --
Sale of available-for-sale securities 2,342,782 3,453,590 (499,507)
Sale of short-term investments -- -- 546,591
----------------------------------------------
Net cash (used in) provided by investing activities (664,066) 1,650,958 (60,308)
----------------------------------------------
Cash flows from financing activities:
Capital lease payments (14,733) (15,068) (17,633)
Warrants and stock options exercised 3,531,078 986,344 --
Repayment of long-term borrowings -- -- (296,546)
Repayment of short-term borrowing (250,000) -- (4,630,500)
Dividends paid on Series A Preferred Stock (150,000) -- --
Proceeds from short-term borrowing -- -- 250,000
Proceeds of private investment, debenture bonds -- -- 1,550,000
Proceeds from issuance of Series A preferred stock -- -- 1,500,000
Debt issue costs -- -- (76,000)
----------------------------------------------
Net cash provided (used in) by financing activities 3,116,345 971,276 (1,720,679)
----------------------------------------------
Increase (decrease) in cash and cash equivalents 1,045,983 649,237 (81,196)
Cash and cash equivalents, beginning of period 682,120 32,883 114,079
Cash and cash equivalents, end of period $1,728,103 $682,120 $32,883
==============================================
Cash paid during the period:
Interest $31,841 $77,274 $219,176
Non-cash investing and financing activities:
Issuance of warrants in partial payment of patents 236,062 117,250 --
Capital lease obligation incurred -- 10,800 --
Conversion of convertible debentures into
common stock 1,050,000 500,000 --
Change in unrealized gain (loss) on
available-for-sale securities (4,041) 22,232 (5,171)
Debt issue costs -- -- 489,200
The accompanying notes are an integral part of these financial statements.
F-6
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
The Med-Design Corporation ("Med-Design" or the "Company") is
principally engaged in the design, development and licensing of safety medical
devices intended to reduce the incidence of accidental needlesticks. Each safety
medical device Med-Design designs and develops incorporates Med-Design's
proprietary needle retraction technology. Med-Design's technology enables health
care professionals to retract a needle into the body of the medical device for
safe disposal without any substantial change in operating technique.
Med-Design's products generally can be categorized into the following four
groups: hypodermic syringes used to inject drugs and other fluids into the body;
fluid collection devices used to draw blood or other fluids from the body;
infusion therapy devices used to provide access to patients' vessels; and
specialty safety devices for other needle based applications.
2. Significant Accounting Policies
Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of The Med-Design Corporation and its wholly owned subsidiaries, MDC Investment
Holdings, Inc. and MDC Research Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified for comparability.
Cash and cash equivalents:
Med-Design considers all bank depository cash accounts to be cash
equivalents.
Concentrations of Credit Risk:
Financial instruments which potentially subject Med-Design to
concentration of credit risk consist principally of cash and
available-for-sale-securities. At December 31, 2000, Med-Design's cash balances
exceeded FDIC insurance limits by approximately $928,000. The Company invests
cash balances in financial institutions with high credit ratings.
Med-Design invests in high credit quality financial instruments and
through diversification, attempts to limit the extent of credit exposure on
available-for-sale-securities.
Available-for-sale-securities:
Med-Design's investments are classified as available-for-sale
securities and accordingly, any unrealized holding gains or losses, net of
taxes, are excluded from income and recognized as a separate component of
stockholders' equity until realized.
Investments in marketable securities are made consistent with
Med-Design's investment guidelines as developed by management and approved by
the Board of Directors.
Property, plant and equipment:
Property, plant and equipment are carried at cost. Assets held under
capital lease are recorded at the lower of the net present value of the minimum
lease payments or the fair value of the leased assets at the inception of the
lease. Significant additions or improvements extending the asset's useful lives
are capitalized.
F-7
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting Policies, continued
When property, plant and equipment are sold, retired or otherwise
disposed of, the applicable costs and accumulated depreciation are removed from
the accounts and the resulting gain or loss recognized.
Depreciation is computed by the straight-line method utilizing rates
based upon the estimated service life of the various classes of assets (5 to 10
years). Leasehold improvements are depreciated over the remaining lease term or
asset life if shorter.
Recoverability of long-lived assets:
Med-Design's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount may not be
recoverable. When necessary, Med-Design assesses the recoverability of its
assets by determining whether the carrying value can be recovered through
projected undiscounted future cash flows.
Patents:
Patents, patent applications, and rights are stated at acquisition
costs. Amortization of patents is recorded by the straight-line method over the
legal lives of the patents. Patent amortization expense from the years ended
December 31, 2000, 1999 and 1998 was $162,753, $51,509 and $36,602,
respectively.
Debt Issue Cost:
Debt issue costs consist of fees and other costs incurred in obtaining
convertible debt and are amortized on a straight-line basis over the life of the
debt.
Revenue Recognition:
Fees received in connection with licensing contracts for the Company's
patented, proprietary products are recorded as revenue upon the execution of a
binding agreement when the Company has fulfilled it's obligations under the
arrangement or when Med-Design's only remaining obligation is to maintain and
defend the licensed patent rights.
Royalties received on licensed products which are based on the
licensee's product volume are recorded as revenue in the period when the royalty
payments are earned. Minimum contractual royalty payments related to licensed
products are recorded as revenue during the period to which the minimum payments
relate.
Income taxes:
Med-Design accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes ("FAS 109"). Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded for deferred taxes where it appears
more likely than not that the Company will not be able to recover the deferred
tax asset.
Research and development:
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
F-8
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Account Policies, continued
Stock Based Compensation:
The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure only provisions of Statement
of Financial Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation ("FAS 123").
Estimates utilized in the preparation of financial statements:
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 liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive Income:
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. Such items consist primarily of
unrealized gains and losses on marketable equity investments for Med-Design.
3. Available-for-Sale Securities
Gross unrealized gains for the years ended December 31, 2000, 1999 and 1998 are
as follows:
Gross
Cost Unrealized Gains Fair Value
---- ---------------- ----------
At December 31, 1998:
Corporate Debt Securities $6,103,892 $7,728 $6,111,620
---------- ------ ----------
At December 31, 1999:
Corporate Debt Securities $4,150,302 $29,960 $4,180,262
---------- ------- ----------
At December 31, 2000:
Corporate Debt Securities $4,307,520 $25,919 $4,333,439
---------- ------- ----------
Investment income for the years ended December 31, 2000, 1999 and 1998 consisted
of the following:
2000 1999 1998
---- ---- ----
Realized loss on sale of $ -- ($1,009) $ 62
available-for-sale securities
Interest income 318,138 200,232 262,050
-------- -------- --------
Total $318,138 $199,223 $262,112
F-9
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. Property, Plant and Equipment
Balances of major classes of assets and accumulated depreciation and
amortization at December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Leasehold improvements $176,878 $176,878
Machinery and equipment 655,641 668,171
Office furniture & fixtures 333,221 329,114
Computer equipment & software 382,813 368,006
------------------------------
1,548,553 1,542,169
Accumulated depreciation and amortization 1,016,550 843,598
------------------------------
$532,003 $698,571
==============================
Depreciation and amortization expense was $185,164, $224,485 and
$252,420 for the years ended December 31, 2000, 1999 and 1998, respectively.
5. Patents
On February 18, 2000, Med-Design purchased a safety syringe patent that
had been initially issued in June 1989. In consideration for the purchase, the
Company issued 14,416 shares of Common Stock valued at $236,062, the fair value
of Med-Design's Common Stock on February 18, 2000 and cash of $220,000. The
total purchase price of the patent was capitalized as patent costs and is being
amortized on a straight-line basis over 6 years, the remaining life of the
patent.
6. Short-Term Borrowings
At December 31, 2000, Med-Design had a $3,000,000 revolving line of
credit under which borrowings are collateralized by substantially all the assets
of the Company. This facility can be used to fund working capital needs and
finance capital equipment purchases, however advances for capital equipment
financing may not exceed $600,000. Any borrowing to meet working capital needs
will bear interest at LIBOR plus 2.25%, while borrowings to finance capital
equipment purchases bear interest at the prime rate plus 2.5%. There were no
borrowings under this facility during 1999 and 2000.The facility expires on May
31, 2001.
On May 29, 1998, Med-Design obtained a $250,000 loan from a private
investor who is a director of the Company, with interest at the prime rate and
included an agreement to issue the holder 33,000 shares of Common Stock which
was recorded as debt issue costs at the then fair value. The loan was renewed
and amended on May 29, 1999 with interest at the prime rate plus 810 shares of
Med-Design's Common Stock per month and was repaid in full in February 2000.
Interest expense of $24,401, $59,758 and $28,158 was recognized in connection
with the stock earned for the year ended December 31, 2000, 1999 and 1998
respectively, representing the fair value of the Company's Common Stock earned
of 6,480 shares which remained unissued at December 31, 2000.
(Continued)
F-10
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Debt
Debt at December 31, 2000 and 1999 consisted of the following:
2000 1999
---- ----
Convertible debentures $ -- $1,050,000
Capital lease obligations, at interest rates
ranging from 4.4% to 9.3%, with monthly
payments ranging from $182 to $987;
due through 2002. 20,895 36,048
----------- -------------
20,895 1,086,048
Less: current maturities 10,062 12,251
----------- -------------
$10,833 $1,073,797
=========== =============
The aggregated amount of capital lease obligations maturing in each of the next
four years, is as follows:
Capital Lease
------------------
2001 $10,062
2002 6,698
2003 2,376
2004 1,759
------------------
$ 20,895
==================
In 1998, Med-Design completed a private placement of $1,550,000
principal amount of 4% convertible debentures due July 2003 and received
proceeds of $1,474,000 with interest payable quarterly in cash or stock at
Med-Design's option, were convertible into 1,240,000 shares of Common Stock and
were collateralized by a first lien on all patents pending and issued. The
Company recorded $565,200 in debt issue costs in connection with this
transaction.
During 1999 and 2000, debentures in the amount of $500,000 and
$1,050,000 were converted into 100,000 and 840,000 shares of Common Stock,
respectively. Unamortized debt issue costs in the amount of $413,640 were
recorded as a reduction of additional paid-in capital in connection with the
conversion.
8. Commitments and Contingencies
Med-Design leases a building, office space, and other office equipment
under non-cancellable operating leases that expire at various times through
2003. The building lease provided an option to renew in October 2000 for two
additional thirty-six month periods under the same terms with an increase to
market value for rental payments at the end of each option period. In May, 2000,
Med-Design exercised it's option to extend the building lease through October,
2003.
(Continued)
F-11
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. Commitments and Contingencies, continued
Total rent expense under all operating leases for year ended December
31, 2000, 1999 and 1998 was $163,068, $160,395 and $178,318, respectively.
In August, 2000, the Company's shareholders approved an employment
contract for the Company's Chairman and CEO, which provided for the issuance of
59,700 shares of Common Stock per year for the next four years totaling 238,806
shares beginning April 1, 2000 provided Mr. Donegan remains an officer, director
or consultant of the Company.
In November 1999, the Company approved the issuance, subject to
shareholder approval, which was received in August 2000 of 200,000 shares of
Common Stock to the Chief Operating Officer. The stock vests at the earlier of
the date when the Company's Common Stock trades at $22.00 or higher for thirty
(30) days or November 11, 2004 provided he has not resigned or been discharged
for cause. In connection with this issuance, the Company recorded compensation
expense of $247,549 in 2000, based on the fair value of Med-Design's Common
Stock on August 7, 2000. These shares remain unissued as of December 31, 2000.
In August, 2000, Med-Design's shareholders approved the issuance of a
warrant to purchase 50,000 shares of Common Stock at an exercise price of $6.26
per share and the issuance of 125,000 shares of Common Stock to John F. Kelley,
a director of the Company in connection with the performance of consulting
services. This compensation arrangement was approved, subject to the conclusion
of negotiations of Mr. Kelley's consulting contract. Negotiations have not
concluded and the Company continues to discuss contract terms with Mr. Kelley.
9. Licensing Revenues
Becton Dickinson is the principal licensee of Med-Design's patented
products. On December 11, 1998, Med-Design entered into a license agreement with
Becton Dickinson for certain of Med-Design's products under which Med-Design
received an up-front licensing fee of $4.5 million in addition to the right to
receive royalty payments based on Becton Dickinson's net sales of the products
licensed under such agreement. In addition, the license agreement granted Becton
Dickinson an option to license five of Med-Design's other products.
On March 12, 2000, Med-Design signed a binding term letter with Becton
Dickinson outlining the terms for a definitive agreement pursuant to which
Becton Dickinson would license the products that Med-Design previously granted
them an option to license. Med-Design recorded as revenue $1.5 million in the
form of an up-front licensing fee upon the signing of the binding term letter.
On May 11, 2000, Med-Design entered into a definitive license agreement with
Becton Dickinson based upon the terms of the March 12, 2000 binding term letter
pursuant to which Med-Design received, and recorded as revenue, an additional
$2.5 million in up-front licensing fees and the right to receive royalty
payments based on Becton Dickinson's net sales of the products licensed under
such agreement.
(Continued)
F-12
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Income (loss) Shares EPS
2000
Basic and diluted EPS
Net loss ($2,793,365) 9,811,609 $(0.28)
Preferred dividends on Series A Preferred (150,000)
----------- --------- ------
Net income applicable to common shares ($2,943,365) 9,811,609 ($0.30)
----------- --------- ------
1999
Basic and diluted EPS
Net loss available to common shareholders $(4,247,473) 7,978,963 $(0.53)
----------- --------- ------
1998
Basic Earnings Per Share
Net Income $ 882,889
Less preferred dividends earned on (2,581)
Series A Preferred
----------- --------- ------
Net income available to common shareholders $ 880,308 7,951,570 $ 0.11
----------- --------- ------
Diluted Earnings Per Share
Preferred dividends earned $ 2,581
Interest on 4% convertible debenture 29,990
Stock issued in connection with
loan agreement 19,250
Convertible debentures 431,290
Stock options and warrants 133,290
----------- --------- ------
Diluted Earnings Per Share $ 912,879 8,535,400 $ 0.11
=========== ========= ======
Options and warrants to purchase 1,589,900, 1,639,200 and 1,580,000
shares of Med-Design's Common Stock as of December 31, 2000, 1999 and 1998,
respectively were not included in computing diluted earnings per share as the
effect of these instruments is anti-dilutive.
F-13
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Preferred Stock
In connection with the Company entering into a licensing agreement with
Becton Dickinson, Med-Design issued 300,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") for total proceeds of $1.5 million. The
Preferred Stock, which was convertible at the holders option at $5.00 per share,
was converted into 300,000 shares of Common Stock in March 2000. Dividends under
the Preferred Stock were payable semi-annually at the rate of 8% per annum in
cash or in additional shares of Preferred Stock (at the option of Med-Design).
In 2000, the Company paid a dividend of $150,000 on the Preferred Stock.
12. Stock Option Plan
In 1995, Med-Design adopted a Non-Qualified Stock Option Plan ("Stock
Option Plan") which provides for the grant of 500,000 options to directors,
officers and employees of the Company. Under the Stock Option Plan, the exercise
price of each option may not be less than the fair market value (as of the date
of grant) of the Company's Common Stock and the term of each option may be no
more than 10 years from the date of grant. Additionally, the Stock Option Plan
provides for the annual issuance of options for the purchase of 16,000 shares of
Common Stock to each non-employee director.
Options granted to employees vest at a rate of 20% per year and expire
either, in five years from the date of grant or on the vesting date. Options
granted to directors expire in five years and vest one year from the date of
grant. Activity under the Stock Option Plan during the years ended December 31,
2000, 1999 and 1998 is as follows:
2000 1999 1998
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 511,200 $2.90 481,000 $4.59 442,000 $5.53
Granted 377,167 12.56 174,667 2.78 121,000 $1.56
Exercised (180,467) 2.62 (118,867) 3.27 -- --
Canceled -- -- (25,600) 3.25 (82,000) $6.69
----------------------------------------------------------------------------------------------
Outstanding at end of year 707,900 $7.97 511,200 $2.90 481,000 $4.59
==============================================================================================
Options exercisable at
year-end 233,500 264,900 191,400
================== ============== ==============
Option price range at end
of year $0.81 to $16.375 $0.81 to $5.75 $1.56 to $8.00
================== ============== ==============
Weighted-average exercise
price of options granted
during year $12.56 $2.78 $1.56
================== ============== ==============
F-14
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. Stock Option Plan, continued
The following table summarizes information regarding stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Prices December 31, 2000 Contractual Life Price December 31, 2000 Price
- ----------------------------------------------------------------------------------------------------------------------------------
$0.81 to $1.56 127,100 4.1 $1.39 67,800 $1.25
$3.25 to $5.75 206,300 2.0 3.25 165,700 3.73
$8.25 to $16.375 374,500 .1 12.65 -- --
-----------------------------------------------------------------------------------------------------------
707,900 4.0 $7.89 233,500 $3.01
===========================================================================================================
13. Stock Based Compensation
As part of a separation package, the Company extended to February 29,
2000 the expiration date for stock options to purchase 59,000 and 1,000 shares
of Common Stock for an officer and an employee of the Company, respectively.
Compensation expense of $825,000 was recorded, based on the difference between
the exercise price of the options and the fair value of the Company's Common
Stock at the date of the modification, in accordance with APB 25.
The Company extended to August 31, 2000 the expiration date on a
warrant issued to a consultant to purchase 100,000 shares of Common Stock.
Compensation expense of $823,270 was recorded, based on the fair value of the
warrant, calculated using a Black-Scholes valuation model in accordance with FAS
123.
The Company issued, subject to shareholder approval, which was obtained
on August 7, 2000 and certain vesting requirements, shares of Common Stock,
stock options and warrants to purchase Common Stock to officers of the Company
during the year 2000. Compensation expense in the amount of $886,807 was
recorded, based on the difference between the exercise price of the option or
warrant and the fair value of the Med-Design's Common Stock on August 7, 2000 or
the value of the Common Stock being granted as of August 7, 2000.
The Company issued a warrant to Edward Allard for consulting services
on February 19, 2000 and recorded compensation expense in the amount of $12,480,
based on the fair value of the warrant, calculated using a Black-Scholes
valuation model in accordance with FAS 123.
In connection with the resignation of a director and termination of
certain employees in July 1999, the Company extended the date of expiration of
certain options. Accordingly, the options were valued using a Black-Scholes
valuation model and the Company recorded a compensation expense of $263,999 in
1999.
F-15
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. Stock Based Compensation, continued
In connection with consulting services performed by a director of the
Company in 1998, Med-Design issued warrants to purchase 300,000 shares of the
Company's Common Stock and also repriced warrants to purchase 200,000 Shares of
Common Stock, previously issued to the director for consulting services.
Compensation expense of $466,002 was recorded, based on the fair value of the
warrants at issuance and at the time of repricing, calculated using a
Black-Scholes valuation model in accordance with FAS 123.
Had compensation expense for Med-Design's Stock Option Plan and warrant
grants been recorded based on the fair value of the options or warrants at the
grant dates in 2000, 1999 and 1998, consistent with the provisions of FAS 123,
Med-Design's net loss and net income (loss) per share would have reflected the
pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net income (loss) - as reported ($2,793,365) ($4,247,473) $882,889
Net income (loss) - pro forma ($4,244,109) ($4,675,874) $479,735
Basic and diluted income (loss) per share - as reported ($0.30) ($0.53) $0.11
Basic and diluted income (loss) per share - pro forma ($0.43) ($0.58) $0.06
The fair value of each option or warrant grant was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumption used for grants in 2000: dividend yield of 0.00%; expected volatility
of 89.80% to 95.02% and range of risk free interest rate of 5.85% to 6.74%; in
1999: dividend yield of 0.00%; expected volatility of 82.64% and range of risk
free interest rate of 5.69%; and in 1998: dividend yield of 0.00%; expected
volatility of 84.45% to 92.88% and risk free interest rate of 5.13% to 5.5%.
Expected lives are based on actual terms of options and warrants granted.
14. Warrants outstanding
As of December 31, 2000, warrants to purchase a total of 882,000 shares
of Med-Design's Common Stock were outstanding with various vesting and
expiration periods as outlined below.
On January 23, 1997, Med-Design completed the sale of 1,000,000 shares
of Common Stock. In connection with the sale, Med-Design also sold to the
placement agent, for nominal consideration, warrants to purchase 100,000 shares
of Common Stock, of which warrants to purchase 10,000 shares remain unexercised
as of December 31, 2000. This warrant is exercisable at a price of $5.50 per
share through January 22, 2002.
On March 19, 1997, Med-Design issued a warrant to purchase 100,000
shares of Common Stock at an exercise price of $7.50 per share to a director of
the Company who was engaged to perform consulting services. The warrant was
exercisable on issuance and was repriced to $2.88 per share on January 14, 1999.
A warrant to purchase 50,000 shares remained unexercised at December 31, 2000
and expires on March 19, 2002.
On October 10, 1997, Med-Design issued a warrant to purchase 100,000
share of Common Stock at an exercise price of $5.44 to a director of the Company
who was engaged. The warrant was exercisable upon issuance, expires on October
10, 2002 and was repriced to $2.88 per share on January 14, 1999.
On January 14, 1998, Med-Design issued a warrant to purchase 100,000
shares of Common Stock at an exercise price of $2.88 per share to a director of
the Company who was engaged to perform consulting services. The warrant was
exercisable upon issuance and expires on January 14, 2003.
F-16
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. Warrants outstanding, continued
On September 9, 1998, Med-Design issued a warrant to purchase 200,000
shares of Common Stock at a price of $1.25 per share to a director of the
Company who was engaged to perform consulting services. This warrant vested upon
completion of performance on December 23, 1998 and expires on September 9, 2003.
On January 21, 1999 the Med-Design issued a warrant to purchase 50,000
shares of Common Stock at an exercise price of $3.25 to a director of the
Company who was engaged to perform consulting services. The warrant was
exercisable upon issuance and expires on January 21, 2004.
On March 5, 1999 Med-Design issued a warrant to purchase 100,000 shares
of Common Stock at $3.94 per share to the Company's Corporate Secretary. The
warrant vested on March 5, 2000 and expires on March 5, 2004. A warrant to
purchase 75,000 shares remained unexercised at December 31, 2000.
On November 5, 1999, in connection with the acquisition of a patent,
Med-Design issued a warrant to purchase 25,000 shares of Common Stock at an
exercise price of $8.00 per share. The warrant is exercisable on or before
November 5, 2004.
On February 18, 2000 the Company issued a warrant to purchase 40,000
shares of Common Stock to a director of Med-Design in connection with his
separation from the Company. The warrant vested upon issuance, expires on
February 18, 2005 and has an exercise price of $16.375.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000
shares of Common Stock at $11.875 per share to the Chief Operating Officer. The
warrant vested 33,000 on November 2000 with the remainder vesting in November
2001 and expires April 25, 2005.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000
shares of Common Stock at $11.875 per share to the Chief Financial Officer. The
warrant vested 33,000 on November 2000 with the remainder vesting in November
2001 and expires on April 25, 2005.
On April 25, 2000 the Company issued warrants for the purchase of
50,000 shares to each of the Vice President of Research and Development and the
Vice President of Design at an exercise price of $11.875. These warrants vest at
the earlier of the date when the price of the Company's Common Stock trades at
$22.00 or higher for thirty (30) consecutive trading days or April 25, 2000, the
expiration date.
14. Defined Contribution Benefit Plan
Med-Design sponsors a 401(K) defined contribution benefit plan.
Participation in the plan is available to substantially all employees. There
have been no Company contributions to this plan to date.
15. Income Taxes
The following is a summary of the components of income taxes from
operations:
F-17
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. Income Taxes, continued
2000 1999 1998
----------- ------------ -----------
Current Provision
- ----------------------------------------------
Federal $ -- $ -- $ --
State -- -- --
----------------------------------------------
-- -- --
Deferred tax provision (benefit)
- ----------------------------------------------
Federal (630,071) (1,856,958) 309,012
State (171,923) (517,778) 83,875
--
----------------------------------------------
Total provision (benefit) for income taxes (801,994) (2,374,736) 392,887
Less: Valuation allowance 801,994 2,374,736 (392,887)
----------------------------------------------
$ -- $ -- $ --
==============================================
The deferred income tax assets and liabilities recorded in the consolidated
balance sheets at December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
----------- ------------ -----------
Assets
- ------------------------------------------
Loss carryforwards $ 5,500,622 $ 5,798,729 $ 2,672,376
Research and development tax credit 355,139 268,631 225,549
Amortization 1,113,560 1,274,251 2,000,856
Deferred compensation expense 466,227 133,792 207,371
Other 29,473 5,485
---------------------------------------------
Total deferred tax assets 7,465,021 7,480,888 5,106,152
Valuation allowance 7,465,021) (7,480,888) (5,106,152)
---------------------------------------------
Net deferred tax assets (liabilities) $ -- $ -- $ --
---------------------------------------------
The tax effect of option and warrant exercises was $3,790,949, $754,448
and $0 in 2000, 1999 and 1998, respectively. However, these benefits were
deferred because the Company is in a net operating loss position. Also, such
benefits will be credited to additional paid-in capital in the year in which the
benefits are realized.
F-18
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 2000, the Company has a federal net operating loss
carry forward of approximately $22.6 million which will expire, if unused, in
the years 2010 through 2020. At December 31, 2000, the Company has $22 million
in net operating losses for state purposes which will expire, if unused, in the
years 2001 through 2010.
In addition, the Company experienced an ownership change in accordance
with Internal Revenue Code Section 382 in 1996. The Utilization of some of the
federal net operating losses will be limited by IRC Section 382.
The Company has unused research tax credit in the amount of $355,139
which will expire, if unused in the years 2010 through 2020.
A reconciliation of the Federal statutory rate to the effective tax rate is as
follows:
2000 1999 1998
----------- ----------- ------------
U.S. statutory federal income tax rate ($1,075,784) ($1,386,243) $ 309,011
State taxes (net of federal taxes) (376,266) 83,854
Research and development expenses 47,085 492,392
Deferred compensation (438,924) 207,391
Utilization of net operating losses (220,388) (1,092,648)
Other 445,712
Increase in Valuation Allowance (Federal 630,072 2,374,736
Gross for 2000)
------------------------------------------------------
$ -- $ -- $ --
======================================================
16. Related Party Transactions
During 2000 and 1999, The Company paid $54,924 and $57,719
respectively, for legal services to a firm, of which a partner is a director,
officer and stockholder of Med-Design
17. Fair Value of Financial Instruments
The following methods and assumptions were considered by Med-Design in
determining its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates fair value;
Marketable securities: Available-for-sale securities consist of
corporate bonds and commercial paper. Fair value is based on quoted market
prices.
F-19
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Quarterly Information (unaudited)
For the fiscal quarters ended March 31, 2000 and June 30, 2000, the
Company's unaudited financial statements reflected extraordinary losses on
extinguishment of debt in the amounts of $336,609 and $77,031, respectively,
related to the unamortized debt issue costs at the time of the conversion of
convertible debt to Common Stock. It has been determined that the unamortized
debt issue costs should have reduced Additional paid in capital at the time of
the conversion.
The effect of this revision is to decrease the Company's net loss and
basic and diluted loss per share for the fiscal quarter ended March 31, 2000
from $1,657,445 to $1,320,836 and from $0.19 to $0.15, respectively, and to
increase net income and basic and diluted earnings per share for the fiscal
quarter ended June 30, 2000 from $1,379,404 to $1,456,435, from $0.12 to $0.13
and from $0.11 to $0.12, respectively. This adjustment reduced Additional paid
in capital and had no effect on cash or total Stockholders Equity. The Company
will amend its reports filed with the Securities and Exchange Commission. The
following presents the quarterly information as reported and giving effect to
the revision.
F-20
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Quarterly Information (unaudited)
As reported, Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------
Revenue $1,500,000 $2,500,000 $ -- $ 128,993
Operating income (loss) ($1,369,718) $1,382,038 ($1,713,608) ($1,378,374)
Net income (loss) ($1,657,445) $1,379,404 ($1,646,418) ($1,282,546)
Basic earnings (loss) per share ($0.19) $0.12 ($0.16) ($0.13)
Diluted earnings per share $ -- $0.11 $ -- $ --
After revision, Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------
Revenue $1,500,000 $2,500,000 $ -- $ 128,993
Operating income (loss) ($1,369,718) $1,382,038 ($1,713,608) ($1,378,374)
Net income (loss) ($1,320,836) $1,456,435 ($1,646,418) ($1,282,546)
Basic earnings (loss) per share ($0.15) $0.13 ($0.16) ($0.13)
Diluted earnings per share $ -- $0.12 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------
Revenue
Operating Loss ($952,483) ($845,530) ($909,130) ($1,483,371)
Loss ($962,631) ($853,340) ($948,277) ($1,483,225)
Basic and diluted loss per share ($0.12) ($0.11) ($0.12) ($0.18)
- --------------------------------------------------------------------------------------------------------------------
F-21