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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, 2001.
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 26, 2002) was $155,910,161. The number of shares of registrant's common
stock outstanding as of March 26, 2002 was 11,018,386.
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the 2002
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.
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 contract manufacturing of certain specialty devices; our
pursuit of additional collaborative arrangements; the ability to manufacture
certain specialty devices using our assembly system; plans to rely on our
strategic allies 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 collaborative 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, licensing and
manufacture (through collaborative arrangements with manufacturers) 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 (BD), a major medical technology company,
is the principal licensee of our patented products. The licensing agreements we
have entered into with BD grant BD the exclusive worldwide rights to manufacture
and market our patented products in three fields of use, Injection Syringe, IV
Catheters and Blood Collection. In addition to up-front cash payments, the
agreements with BD provide for continuing royalty payments based upon BD's net
sales of the licensed products. See "Becton Dickinson Relationship," below.
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In June 2001, we entered into a co-promotion agreement with Abbott
Laboratories to co-market our pre-filled injector products to the pharmaceutical
industry in conjunction with Abbott's pharmaceutical fill/finish technology.
In September 2001, we expanded our relationship with MedAmicus, Inc. by
granting MedAmicus the right to exclusively manufacture and distribute our
center-line retractable safety needle (Safety Seldinger Introducer Needle) into
the arterial access market. This expanded our prior agreement with MedAmicus
under which MedAmicus agreed to manufacture and market our Safety Seldinger
Introducer Needle for certain venous applications.
In connection with our efforts to enter into collaborative arrangements
for the marketing and distribution of certain of our products, we determined
that we would enhance our efforts with potential strategic allies that do not
possess manufacturing capabilities if we could offer to have the products
manufactured. We entered into two OEM Manufacturing Agreements with
Owens-Illinois Closure, Inc. for the manufacture of our Safety Pre-filled
Cartridge Injector and Safety Dental Pre-filled Cartridge Injector. Under the
terms of the agreements, we will purchase the automated equipment and molds
necessary for Owens-Illinois to manufacture the products. In connection with the
Safety Dental Pre-filled Cartridge Injector, we recently entered into a binding
term sheet with Sultan Chemists that will, upon execution of a definitive
agreement, give Sultan the right to exclusively purchase, market and sell the
product for ten years.
We continue to seek collaborative arrangements for the remaining
products in our portfolio.
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 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 strategic allies;
o enter into collaborative arrangements with major pharmaceutical
and medical device companies where such arrangements would
provide for greater revenue opportunities than licensing; and
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o pursue opportunities to manufacture or have manufactured selected
products pursuant to collaborative arrangements in which our
strategic allies 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 Safety
Syringe.
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.
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Safety Pre-filled Dual Chamber Injector. The Safety Pre-filled Dual
Chamber Injector allows medication to be injected directly into a
patient from freeze-dried powders produced by many pharmaceutical
manufacturers. In the first step, sterile water, in one chamber, is
introduced into the freeze-dried 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. The retraction mechanism of the Safety Arterial
Blood Gas Syringe operates in the same manner as the retraction
mechanism on the Safety Blood Collection Needle. 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.
Safety Blood Donor Needle Set. The Safety Blood Donor Needle Set is
used to collect large volumes of blood for blood bank storage. The
retraction mechanism of the Safety Blood Donor Needle Set operates in
the same manner as the retraction mechanism on the Safety Blood
Collection Needle. 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 Seldinger
Needle is compatible with all standard gauge needles and guidewires.
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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 of an
accidental needlestick.
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.
Sales and Marketing
Because we focus on the design, development, licensing and manufacture
(through collaborative arrangements with manufacturers) 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/or distribute our products. We seek to have these
companies license our products or enter into collaborative arrangements 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 BD have increased industry awareness of
our products. Several potential licensees and strategic allies 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 $1,073,323 in 2001 and $1,143,938 and $1,228,101 in 2000 and 1999,
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
strategic allies.
Our research and development staff consists of nine employees.
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Facilities and Manufacturing
Our primary focus has been upon the design, development, licensing and
manufacture (through collaborative arrangements with manufacturers) of safety
medical devices. We have generally sought to contract with third parties for the
manufacture and distribution of our products through licensing agreements and
collaborative arrangements. In this regard, we determined that we would enhance
our efforts with potential partners that do not possess manufacturing
capabilities if we could offer to have the products manufactured. We entered
into two OEM Manufacturing Agreements with Owens-Illinois for the manufacture of
our Safety Pre-filled Cartridge Injector and Safety Dental Pre-filled Cartridge
Injector. Under the terms of the agreements, we will purchase the automated
equipment and molds necessary for Owens-Illinois to manufacture the products. We
will continue to explore additional opportunities to manufacture selected
products pursuant to collaborative arrangements in which our strategic allies
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 BD.
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 pilot 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 could 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 BD.
However, as noted above, we have decided to utilize a contract manufacturer to
manufacture products for commercial distribution.
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 and other strategic allies to pursue regulatory
approvals and anticipate that we will rely on any strategic allies 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 pre-market 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 pre-market notification clearance or was marketed prior
to May 28, 1976, the date of enactment of the Medical Device Amendments.
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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,
pre-clinical 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,
and 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
strategic allies 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.
In the case of devices such as certain versions of the safety
pre-filled vial injector which incorporates 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 strategic allies under their names, all regulatory
compliance obligations will be borne by such licensees or strategic allies. 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 and our other strategic allies 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 Medi-Hut, Inc.,
o Bio-Plexus, Inc., and
o Johnson & Johnson.
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Developers of safety medical devices which we compete against for
license and collaborative 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 BD under
which we licensed certain of our products to BD. 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 BD's net sales of the licensed
products. In addition, the license agreement granted BD an option to license
five of our other products. On March 12, 2000, we signed a binding term letter
with BD outlining the terms for a definitive agreement under which BD would
license certain 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 BD 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 BD's net sales of the products licensed under such
agreement. We anticipate market introduction by BD of several licensed products
encompassing our safety technology during 2002.
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. To
implement the statutory mandates in the Needlestick Safety and Prevention Act,
OSHA has issued a number of further revisions to its Bloodborne Pathogens
Standard. The revised standard became effective on April 18, 2001. The new
standard provisions impose several needle device safety requirements on
employers, including:
o evaluation and implementation of safer needle devices as part of
the re-evaluation of appropriate engineering controls during an
employer's annual review of its exposure control plan;
o documentation of the involvement of non-managerial, frontline
employees in choosing safer needle devices; and
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o establishment and maintenance of a sharps injury log for
recording injuries from contaminated sharps.
On November 27, 2001, OSHA issued a compliance directive (CPL 2-2.69)
that advises OSHA's regional offices on the proper interpretation and
enforcement of the revised Bloodborne Pathogens Standard provisions. The
compliance directive confirms that the consideration of safer needle devices in
annually reviewing and updating the exposure control plan is a critical element
of the Bloodborne Pathogens Standard. The compliance directive also stresses
that the standard requires employers to use engineering controls (e.g., safer
needle devices) if such controls will remove or eliminate the hazards to
employees. As a result of these regulatory actions, we anticipate that the
demand for safety medical devices such as those which we produce, will increase
over the next twelve months.
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 15 United States patents covering our retractable needle
technology and specific products based upon our technology. In addition, we
have 15 foreign national patents and two European patents covering 12 countries.
We also have 21 United States, 64 foreign national, 14 European and
12 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 2, 2002, we had 19 full-time employees and 2 part-time
employees, most of whom were located at our corporate offices.
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,
2001, our accumulated deficit was $29,152,181. 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 BD several of our products. We anticipate that
several licensed products will be launched in 2002. We are unable to predict
whether BD's marketing efforts will be successful and whether the licenses will
generate meaningful revenues for us. 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 licensing agreements with BD, and if BD 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 BD. We anticipate that royalty payments from BD
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 BD
dated December 11, 1998, BD has the right to terminate the agreement upon 60
days' notice and would be subject to no further funding obligations to us with
respect to the products licensed under the agreement if it decides to terminate.
The ability of BD to sell products it has licensed from us will depend on
competitive factors and the resources BD commits to the sale of products they
have licensed from us. The extent to which BD commits its resources to the sale
of products licensed from us is entirely within BD's control. BD is not
obligated to pursue the development and commercialization of these products.
Therefore, our licensing arrangements with BD may not result in the successful
commercialization of our products and may not generate any future royalty
payments. If BD terminates the licensing agreements, 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, 2001, 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, 2002, 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,
2001.
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 or clearances. 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 do, and plan to continue in the future, to
seek to, manufacture and market some of our products, either ourselves, or
through joint ventures or other contractual arrangements under which third
parties manufacture and, in some instances, sell our products. These contractual
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 post-market 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, we 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. We may not be able to comply
with current QSR regulations or other FDA regulatory requirements, resulting in
delay or inability to manufacture the products. To the extent that we utilize
contract manufacturers, those manufacturers will be subject to the QSR and other
requirements described above.
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 lie 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 and contract manufacturers to satisfy
the necessary compliance criteria and if they do not devote sufficient resources
to this process, our ability to receive royalties or other revenues from the
sale of the products will be diminished. Furthermore, the licensees and contract
manufacturers 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 EU
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. 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. 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 time consuming, and we cannot
assure that authorization would be granted at all.
Our failure or the failure of our licensees or contract manufacturers
to comply with the FDA and other applicable regulations could cause our business
to be harmed significantly.
We are dependent on our licensees and contract manufacturers for the manufacture
of our products.
We previously have relied on our licensees to arrange for the
commercial manufacture of our products. Our licensees generally manufacture our
products at their own facilities. In addition, in 2001 we signed an agreement
with a contract manufacturer to produce two of our products if we enter into a
distribution arrangement for the products. Contracting with third parties or
relying on licensees to manufacture our products presents the following risks:
11
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,
which are described in the preceding risk factor;
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.
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.
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's time and
effort. Even unsuccessful claims against us 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.
12
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 intellectual property
from third parties. Costs associated with licensing arrangements entered into to
resolve litigation or an interference proceeding 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. Moreover, we may not be able to
successfully develop additional products or applications of our technology.
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 and others who have contracted to sell our products
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.
We are dependent on the sales and marketing efforts of our licensees and
strategic allies to sell our licensed products, and our business will suffer if
our licensees or strategic allies 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 and other strategic
allies to sell our products and generate royalties for us. If our licensees and
strategic allies 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
person 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 Med-Hut, Inc.,
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.
14
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 2, 2002, our directors and officers beneficially owned or
controlled approximately 18% of the outstanding common stock. Accordingly, such
executive officers and directors, as a group, have the ability to exert
significant influence over the election of our Board of Directors and 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.
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, 2001, there were 10,963,386 shares of our common
stock issued and outstanding. In addition, an aggregate of 2,096,413 additional
shares of our common stock are issuable pursuant to stock options granted under
our Non-Qualified Stock Option Plan and warrant agreements. Our common stock
will be subject to dilution should we offer our equity securities in the future.
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. In addition, our
certificate of incorporation provides for a classified board of directors, with
each board member serving a staggered three-year term. The issuance of preferred
stock and the existence of a classified board of directors could have the effect
of delaying, deterring or preventing a change in control.
15
ITEM 2. DESCRIPTION OF PROPERTIES
We lease 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 pilot 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 BD.
Our annual lease payments for this facility are approximately $149,712
and the lease expires on October 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the knowledge of
management, threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 2001 through the solicitation of proxies or
otherwise.
16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market under the
symbol "MEDC" on March 23, 2001. Prior to that time, our common stock was traded
on the Nasdaq SmallCap Market under the same symbol.
Market Information
Fiscal year ended December 31, 2000 High Low
- ----------------------------------- ---- ---
First Quarter....................................$ 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
Fiscal year ended December 31, 2001 High Low
- ----------------------------------- ---- ---
First Quarter....................................$ 18 7/8 $ 10 1/2
Second Quarter................................... 31 4/5 13
Third Quarter.................................... 42 3/8 13 7/16
Fourth Quarter................................... 23 1/2 11 3/4
Holders
As of February 28, 2001, we estimate that we had approximately 80
holders of record of our common stock.
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 related notes included elsewhere in this Form 10-K.
Year ended 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Revenue................. $2,330,000 $4,128,993 $ -- $4,500,000 $ --
Net Income (loss)....... ($4,026,991) ($2,793,365) ($4,247,473) $ 882,889 ($5,219,833)
Total assets............ $8,259,960 $8,565,573 $7,257,286 $8,482,885 $8,293,030
Debt.................... $ 16,806 $ 20,895 $1,073,797 $1,579,824 $ 154,674
Net Income per
common share ........... ($ 0.38) ($ 0.30) ($ 0.53) $ 0.11 ($ 0.57)
- ---------------------------------------------------------------------------------------------------------------
17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are principally engaged in the design, development, licensing and
manufacture (through collaborative arrangements with manufacturers) 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 BD.
On December 11, 1998, we entered into a license agreement with BD under
which we licensed certain of our products to BD. 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 BD's net sales of the licensed
products. In addition, the license agreement granted BD an option to license
five of our other products. On March 12, 2000, we signed a binding term letter
with BD outlining the terms for a definitive agreement under which BD would
license the products subject to the 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 BD 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 BD's net sales of the products licensed under such agreement.
On September 25, 2000, we entered into a development and licensing
agreement with MedAmicus, Inc. granting MedAmicus a license to manufacture and
market our Safety Seldinger Introducer Needle for certain venous applications.
Under the terms of the agreement, we have the right to receive royalty payments
based on MedAmicus' net sales of the Safety Seldinger Introducer Needle. On
September 7, 2001, we entered into an Addendum (the "Addendum") to the
development and licensing agreement with MedAmicus. The Addendum grants
MedAmicus an exclusive license to manufacture and market our Safety Seldinger
Introducer Needle in the arterial access market and other related fields. Under
the terms of the Addendum, we received an initial payment of $2,000,000,
$1,000,000 of which was paid in 68,027 shares of MedAmicus common stock and
$1,000,000 of which was paid in cash on October 15, 2001. In addition, we are
entitled to receive royalties of 20% of net sales of the product, which royalty
rate may be reduced to 17% if certain sales volumes are met.
On May 14, 2001, we entered into a five-year co-promotion agreement
with Abbott Laboratories. Under the terms of the agreement, Abbott One2One
Global Pharmaceutical Services will promote our Safety Pre-filled Cartridge
Injector in conjunction with Abbott's filling and finishing of pharmaceuticals
and biologics into vials, cartridges, syringes and intravenous bags for sale to
other pharmaceutical companies.
In September 2001, we entered into two OEM Manufacturing Agreements
with Owens-Illinois Closure Inc. for the manufacture of our Safety Pre-filled
Cartridge Injector and Safety Dental Pre-filled Cartridge Injector. Under the
terms of the agreements, we will purchase the automated equipment and molds
necessary for Owens-Illinois to manufacture the products.
In January 2002, we entered into a binding term sheet with Sultan
Chemists that will, upon execution of a definitive agreement, give Sultan the
right to exclusively purchase, market and sell the Safety Dental Pre-filled
Injector for ten years.
BD introduced the Safety I.V. Catheter using Med-Design's technology in
April 2001 as the Autoguard Pro. MedAmicus launched the venous access Seldinger
Needle Device in September 2001. We anticipate market introductions by BD of
several licensed products encompassing our safety technology during 2002.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total revenue for the year ended December 31, 2001 was $2,330,000
compared to revenue of $4,128,993 in 2000. The revenue in 2001 consisted
principally of an up front license payment from MedAmicus for the Safety
Seldinger Introducer Needle arterial access. The revenue in 2000 consisted
principally of $4,000,000 in up front licensing payments made by BD under the
May 11, 2000 license agreement.
18
Loss from operations for the year ended December 31, 2001 was
$4,245,710, an increase of $1,166,048 as compared to loss from operations of
$3,079,662 for the corresponding period in 2000. The increase in operating loss
was due primarily to a reduction in revenue that was partially offset by a
reduction in general and administrative expenses related to equity based
compensation.
General and administrative expenses, excluding stock based compensation
for the year ended December 31, 2001 were $3,710,305, an increase of $193,145 as
compared to general and administrative expenses of $3,517,160 for the
corresponding period in 2000. The increase in general and administrative
expenses was principally due to an increase in the general level of business
activities, primarily related to increased legal and travel expenses, to enable
us to market our products.
Stock based compensation, which resulted from the issuance and
extension of options, warrants and other stock based grants and awards was
$1,792,082 in 2001 and $2,547,557 in 2000, a reduction of $755,475. There were
no new agreements for stock based compensation in 2001 that resulted in expense
in the period. All expense recorded in 2001 related to the vesting of
arrangements entered into in 2000.
Research and development expenses for the year ended December 31, 2001
were $1,073,323, a decrease of $70,615 as compared to research and development
expenses of $1,143,938 for the corresponding period in 2000. The higher level of
expenses in 2000 were due primarily to research and development activities to
modify our licensed products based on specific requests of our licensees.
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 BD 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, excluding stock based
compensation, 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 was principally due to an increase in the general level of business
activities, primarily related to increased legal and travel expenses, to enable
us to market our products.
Stock based compensation for the year ended December 31, 2000, 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.
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.
Liquidity and Capital Resources
At December 31, 2001, we had cash, cash equivalents and available
securities of $5,889,766 as compared to $6,061,542 for the corresponding period
in 2000, a decrease of $171,776 or 3%. Despite losses from operations of
$4,245,710, we benefited from the receipt of $2,106,997 as a result of the
exercise of stock options and warrants. In addition, our net loss reflected
significant non-cash expense, principally consisting of $1,792,082 in
stock-based compensation offset by non-cash revenue of $1,000,000.
At December 31, 2001, 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 31, 2002, 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, 2001.
19
On March 25, 2002, we completed a private equity placement of 1,326,260
shares of our common stock for $15,000,000. Our net proceeds after giving effect
to placement agent fees totaled approximately $14,200,000.
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 collaborative
arrangements and our ability to raise additional equity or debt finance. We have
not yet generated sufficient cash flows from operations to support our
operations on an on-going basis and anticipate that we may need to seek
additional sources of funding in the future. Historically, our cash flow has
been provided by securities offerings and up-front license fees. 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. Pursuant to our OEM Manufacturing Agreements with
Owens-Illinois, we are required to purchase the automated equipment and molds
necessary for Owens-Illinois to manufacture our products. These expenditures may
be significant. However, we will not incur any such expenses until we have
entered into distribution agreements for such products.
Critical Accounting Policies
In preparing our financial statements, management is required to make
estimates and assumptions that, among other things, affect the reported amounts
of assets and liabilities and reported amounts of revenues and expenses. For a
detailed discussion of the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements in this annual
report beginning on Page F-1. These estimates are most significant in connection
with our critical accounting policies, namely those of our accounting policies
that are most important in the portrayal of our financial condition and results
and require management's most difficult, subjective or complex judgments. These
judgments often result from the need to make estimates about the effects of
matters that are inherently uncertain.
We believe that our most critical accounting policies relate to (1)
revenue recognition involving up-front license fees and royalties based on
production or sales volume and (2) stock based compensation.
Our revenue recognition policy with regard to up-front license fees
calls for recognition upon the signing of a binding agreement when we have no
further obligation under the agreement other than to defend the patent rights
associated with such agreement. Our revenue recognition policy with regard to
royalties based on production or sales volume calls for recognition in the
period in which the relevant products are produced or sold. The recognition of
such revenues is dependent on our licensees and strategic allies accurately and
timely reporting sales and production volume. Inaccurate or late reporting could
result in recognition of revenue and related costs at an earlier or a later
time. Certain of our licensees and strategic allies are contractually required
to pay minimum royalties if sales or production volumes do not reach specified
levels. Our revenue recognition policy with respect to these minimum royalties
calls for recognition in the period to which the minimum royalties relate.
We periodically grant compensation to employees and non-employee
consultants in the form of equity. These grants typically consist of common
stock, stock options and warrants to purchase common stock. We apply the
guidance of APB 25 "Accounting for Stock Issued to Employees" in accounting for
stock options, warrants and common stock issued to employees. We record
compensation expense over the service period of the employee if the exercise
price of the option or warrant is less than the fair value of our common stock
on the date of the grant. We account for options and warrants issued to our
non-employee consultants and directors who perform consulting services in
accordance with Statement of Financial Accounting Standard 123, "Accounting for
Stock Based Compensation". Accordingly, we record compensation expense over the
contractual performance period and re-measure that expense at the end of each
fiscal quarter. We measure the value of these instruments using the
Black-Scholes valuations model which requires management to make estimates.
Variations in these estimates could have a material effect on the reported
expenses recorded in the financial statements in any given period, and
therefore, a material effect on our reported financial results.
20
New Accounting Standards
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 141
addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16 entitled "Business Combinations." SFAS No. 141
requires the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and establishes specific criteria for the
recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the
date of acquisition is subsequent to June 30, 2001. SFAS No. 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
and eliminates the requirement to amortize goodwill and long-lived assets with
indefinite lives. SFAS No. 142 requires an annual impairment test to be
performed to evaluate the carrying value of such assets. The provisions for SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001.
These pronouncements will not impact our financial position or results of
operations.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no amounts outstanding under our revolving line of credit at
December 31, 2001. 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 our Proxy Statement relating
to our Annual Meeting of Stockholders, or in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report, and, if applicable, is hereby incorporated by reference to such
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in our Proxy Statement relating to
our Annual Meeting of Stockholders, or an amendment to this Form 10-K, which
will be filed within 120 days after the close of the fiscal year covered by this
report, and, if applicable, 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 our Proxy Statement relating to
our 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 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 our Proxy Statement relating to
our 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 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:
22
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 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.
23
Exhibit
Number Description
------ -----------
3.1 (1) Certificate of Incorporation of Med-Design.
3.2 Certificate of 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.
10.1 (4) Amended and Restated Non-Qualified Stock Option Plan.
10.2 (2) Lease Agreement dated June 15, 1995 between Moen Development and MDC Research Ltd.
and guaranteed by Med-Design.
10.3 (3) Re-priced option agreement dated October 10, 1997 to John F. Kelley.*
10.4 (3) Warrant dated October 10, 1997 from Med-Design to John F. Kelley.*
10.5 (3) Warrant dated January 14, 1998 from Med-Design to John F. Kelley.*
10.6 (3) Revised warrant agreement dated January 14, 1998 between Med-Design and John F.
Kelley.*
10.7 (4) Warrant dated September 10, 1998 from Med-Design to John F. Kelley.*
10.8 (4) Licensing and Option Agreement December 11, 1998 with Becton, Dickinson and Company.
10.9 (4) Equity agreement dated December 11, 1998 with Becton, Dickinson and Company.
10.10 (5) Addendum to License Agreement dated December 11, 1999 with Becton, Dickinson and
Company.
10.11 (5) Warrant dated March 5, 1999 between Med-Design and Joseph Bongiovanni.*
10.12 (5) Second Addendum to License Agreement dated January 25, 2000 with Becton, Dickinson
and Company.
10.13 (6) Warrant Agreement dated April 25, 2000 between Med-Design and Lawrence Ellis.*
10.14 (6) Warrant Agreement dated April 25, 2000 between Med-Design and Michael Simpson.*
10.15 (6) Licensing Agreement dated May 11, 2000 with Becton, Dickinson and Company.
10.16 (7) 2001 Equity Compensation Plan.
21.1 (1) List of Subsidiaries of Med-Design.
23.1 Consent of PricewaterhouseCoopers LLP.**
99.1 Experts**
-----------------------
* Constitutes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K
**Filed herewith
(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-KSB filed on March 29, 1996.
(3) Incorporated by reference to Form 10-KSB filed on March 31, 1998.
(4) Incorporated by reference to Form 10-KSB filed on March 31, 1999.
(5) Incorporated by reference to Form 10-KSB filed on March 7, 2000.
(6) Incorporated by reference to Form 10-K filed March 23, 2001.
(7) Incorporated by reference to Schedule 14A filed on June 28, 2001.
(b) Reports on Form 8-K
On September 11, 2001, we filed a Form 8-K (Item 9) discussing the
execution of Addendum Number One to the Development and Licensing Agreement with
MedAmicus, Inc.
24
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 29, 2002 By: /s/ James M. Donegan
--------------------
James M. Donegan
President and Chief Executive Officer
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 29, 2002
- ------------------------------------ Executive Officer (Principal Executive Officer)
James M. Donegan
/s/ Lawrence D. Ellis Vice President, Finance and Chief Financial March 29, 2002
- ------------------------------------ Officer (Principal Financial Officer and Principal
Lawrence D. Ellis Accounting Officer)
/s/ Joseph N. Bongiovanni, III Director March 29, 2002
- ------------------------------------
Joseph N. Bongiovanni, III
/s/ John F. Kelley Director March 29, 2002
- -----------------------------------
John F. Kelley
/s/ Pasquale L. Vallone Director March 29, 2002
- ------------------------------------
Pasquale L. Vallone
/s/ Gilbert M. White Director March 29, 2002
- -------------------------------------
Gilbert M. White
/s/ Ralph Balzano Director March 29, 2002
- -------------------------------------
Ralph Balzano
/s/ Vincent J. Papa Director March 29, 2002
- ------------------------------------
Vincent J. Papa
/s/ Michael Simpson Director March 29, 2002
- ------------------------------------
Michael Simpson
/s/ James E. Schleif Director March 29, 2002
- ------------------------------------
James E. Schleif
/s/ John Branton Director March 29, 2002
- ------------------------------------
John Branton
/s/ Richard Bergman Director March 29, 2002
- ------------------------------------
Richard Bergman
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants........................................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ............................... F-3
Consolidated Statements of Operations for years ended
December 31, 2001, 2000 and 1999....................................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years
ended December 31, 2001, 2000 and 1999................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................................................... F-6
Notes to Consolidated Financial Statements.................................................. F-7 to F-21
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, comprehensive loss
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, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 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 our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 22, 2002, except for Footnote 18 for which the date is March 25, 2002
F-2
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
-------------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ 397,765 $ 1,728,103
Available-for-sale securities ............................................ 5,492,001 4,333,439
Prepaid expenses and other current assets ................................ 289,801 300,875
------------ ------------
Total current assets .................................................. 6,179,567 6,362,417
Property, plant, and equipment, net ...................................... 391,817 532,003
Patents, net of accumulated amortization of $486,608 and $295,029
at December 31, 2001 and December 31, 2000, respectively .............. 1,688,576 1,671,153
------------ ------------
Total Assets ............................................................. $ 8,259,960 $ 8,565,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion capital lease obligations ................................ $ 12,720 $ 10,062
Accounts payable ......................................................... 198,141 316,607
Accrued payroll and vacation ............................................. 139,046 111,868
Other accrued expenses ................................................... 22,408 135,595
------------ ------------
Total current liabilities ............................................. 372,315 574,132
Long-term debt and capital lease obligations, less current maturities .... 4,086 10,833
------------ ------------
Total liabilities ..................................................... 376,401 584,965
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
No shares outstanding as of December 31, 2001 and 2000, respectively .. -- --
Common stock, $.01 par value, 20,000,000 shares authorized; 10,963,386 and
10,541,320 shares issued and outstanding at December 31, 2001 and 2000,
respectively .......................................................... 109,304 105,413
Additional paid-in capital ............................................... 36,869,656 32,974,466
Accumulated deficit ...................................................... (29,152,181) (25,125,190)
Accumulated other comprehensive income ................................... 56,780 25,919
------------ ------------
Total stockholders' equity ................................................... 7,883,559 7,980,608
------------ ------------
Total Liabilities and Stockholders' Equity ................................... $ 8,259,960 $ 8,565,573
============ ============
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,
2001 2000 1999
------------- -------------- --------------
Revenue................................................ $ 2,330,000 $ 4,128,993 $ --
------------- -------------- --------------
Operating expense:.....................................
General and administrative........................ 5,502,387 6,064,717 2,962,413
Research and development.......................... 1,073,323 1,143,938 1,228,101
Total operating expenses.......................... 6,575,710 7,208,655 4,190,514
Loss from operations.............................. (4,245,710) (3,079,662) (4,190,514)
Interest expense.................................. (10,645) (31,841) (256,182)
Investment income................................. 229,364 318,138 199,223
------------- -------------- --------------
Net loss............................................... (4,026,991) (2,793,365) (4,247,473)
Dividend on Series A Preferred Stock.............. -- 150,000 --
------------- -------------- --------------
Net loss applicable to common shares................... ($ 4,026,991) ($ 2,943,365) ($ 4,247,473)
============= ============== ==============
Basic and diluted loss per common share ............... ($0.38) ($0.30) ($0.53)
Weighted average common shares outstanding............. 10,666,754 9,831,536 7,978,963
The accompanying notes are an integral part of these financial statements.
F-4
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
ACCUMLATED OTHER COMPREHENSIVE INCOME (LOSS)
Additional
Preferred Common Paid/In Accumulated
Shares Amount Shares Amount Capital Deficit
-------- ------- --------- ------- ----------- ------------
Balance, January 1, 1999 ............ 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
Debt issue costs and
interest in connection
with private investor loan ..... 33,000 330 24,071
Issuance of common stock in
connection with exercise of stock
options, warrants and grants..... 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............ -- $ -- 10,541,320 $105,413 $32,974,466 ($25,125,190)
Issuance of common stock in
connection with exercise of stock
options and warrants............. 422,066 4,221 2,102,778
Stock based compensation... 1,792,082
Change in unrealized gains on
available-for-sale-securities ...
Net loss........................... (4,026,991)
-------- ------- --------- ------- ----------- ------------
Balance December 31, 2001............ $ -- 10,963,386 $109,634 $36,869,326 ($29,152,181)
======== ======= ========= ======= =========== ============
[RESTUBBED TABLE]
Unrealized
Gains &
Loss On
Available-
For-Sale Stockholders' Comprehensive
Securities Equity Income (Loss)
-------- ---------- ----------
Balance, January 1, 1999 ............ $ 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 22,232
Net loss............................. (4,247,473) (4,247,473)
-------- ---------- ----------
Balance, December 31, 1999......... $ 29,960 $3,952,557 (4,255,241)
Preferred stock conversion.........
Interest in connection
with private investor loan ..... 24,401
Issuance of common stock in
connection with exercise of stock
options, warrants and grants..... 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) (4,041)
Dividends paid on Series A
Preferred Stock.................. (150,000)
Net loss........................... (2,793,365) (2,793,365)
-------- ---------- ----------
Balance December 31, 2000............ $ 25,919 $7,980,608 $2,797,406
Issuance of common stock in
connection with exercise of stock
options and warrants............. 2,106,999
Stock based compensation... 1,792,082
Change in unrealized gains on
available-for-sale-securities ... 30,861 30,861 30,861
Net loss........................... (4,026,991) (4,026,991)
-------- ---------- ----------
Balance December 31, 2001............ $ 56,780 $7,883,559 ($3,996,130)
======== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net loss ............................................. ($4,026,991) ($2,793,365) ($4,247,473)
Adjustments to reconcile net loss to operating
cash flows:
Depreciation and amortization .................. 350,514 347,917 275,994
Amortization of debt issue costs ............... -- -- 97,840
Debt issue cost in connection with
private investor loan ........................ -- 24,401 59,758
Stock-based compensation ....................... 1,792,082 2,547,557 263,999
Common stock received as licensing fee ....... (1,000,000) -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets .... 11,073 (128,195) 327
Licensing fee advance ........................ -- (1,500,000) 1,500,000
Accounts payable ............................. (118,466) 39,576 61,606
Accrued expenses ............................. (86,009) 55,813 14,952
----------- ----------- -----------
Net cash used in operating activities .......... (3,077,797) (1,406,296) (1,972,997)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ............... (18,749) (19,016) (46,988)
Additions to patents ............................. (209,001) (487,832) (255,644)
Investments in available-for-sale securities ..... (1,570,600) (2,500,000) (1,500,000)
Sale of available-for-sale securities ............ 1,442,899 2,342,782 3,453,590
----------- ----------- -----------
Net cash (used in) provided by investing
activities ................................... (355,451) (664,066) 1,650,958
----------- ----------- -----------
Cash flows from financing activities:
Capital lease payments ........................... (4,087) (14,733) (15,068)
Warrants and stock options exercised ............. 2,106,997 3,531,078 986,344
Repayment of short-term borrowing ................ -- (250,000) --
Dividends paid on Series A Preferred Stock ....... -- (150,000) --
----------- ----------- -----------
Net cash provided by financing activities ...... 2,102,910 3,116,345 971,276
Increase in cash and cash equivalents ................ 1,330,338 1,045,983 649,237
Cash and cash equivalents, beginning of period ....... 1,728,103 682,120 32,883
----------- ----------- -----------
Cash and cash equivalents, end of period ............. $ 397,765 $ 1,728,103 $ 682,120
=========== =========== ===========
Cash paid during the period:
Interest paid .................................... $ 10,644 $ 31,841 $ 77,274
----------- ----------- -----------
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 .................. 30,861 (4,041) 22,232
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, licensing and manufacture
(through collaborative arrangements with contract manufacturers) 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 with initial
maturities of less than three months 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 times, Med-Design's cash balances exceed FDIC
insurance limits. 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.
(Continued)
F-7
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.
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, 2001, 2000 and 1999 was $191,579, $162,753, and $51,509,
respectively.
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, and when the Company has fulfilled its 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.
(Continued)
F-8
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting 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 in the United States of America 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 (loss) 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.
New Accounting Standards:
- ---------------------------
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 141
addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16 entitled "Business Combinations." SFAS No. 141
requires the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and establishes specific criteria for the
recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the
date of acquisition is subsequent to June 30, 2001. SFAS No. 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
and eliminates the requirement to amortize goodwill and long-lived assets with
indefinite lives. SFAS No. 142 requires an annual impairment test to be
performed to evaluate the carrying value of such assets. The provisions for SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001.
These pronouncements will not impact our financial position or results of
operations.
3. Available-for-Sale Securities
Gross unrealized gains for the years ended December 31, 2001, 2000 and 1999 are
as follows:
Gross
Cost Unrealized Gains Fair Value
---------- -------- ----------
At December 31, 2001:
Corporate Debt Securities.......... $5,435,221 $ 56,780 $5,492,001
---------- -------- ----------
At December 31, 2000:
Corporate Debt Securities.......... $4,307,520 $ 25,919 $4,333,439
---------- -------- ----------
At December 31, 1999:
Corporate Debt Securities.......... $4,150,302 $ 29,960 $4,180,262
---------- -------- ----------
(Continued)
F-9
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. Available-for-Sale Securities, continued
Investment income for the years ended December 31, 2001, 2000 and 1999 consisted
of the following:
2001 2000 1999
----------------- --------------- ---------------
Realized loss on sale of available-for-sale $ -- $ -- ( $ 1,009)
securities
Investment income.......................... 229,364 318,138 200,232
----------------- --------------- ---------------
Total...................................... $ 229,364 $ 318,138 $ 199,223
================= =============== ===============
4. Property, Plant and Equipment
Balances of major classes of assets and accumulated depreciation and
amortization at December 31, 2001 and 2000 are as follows:
Estimated
Useful Lives in
Years 2001 2000
----------- ----------- -----------
Leasehold improvements................................... 3 $ 176,878 $ 176,878
Machinery and equipment.................................. 5-7 630,247 655,641
Office furniture & fixtures.............................. 7 322,345 333,221
Computer equipment & software............................ 2-5 315,250 382,813
----------- -----------
1,444,720 1,548,553
Accumulated depreciation and amortization................ 1,052,903 1,016,550
----------- -----------
$ 391,817 $ 532,003
=========== ===========
Depreciation and amortization expense was $158,935, $185,164, and
$224,485 for the years ended December 31, 2001, 2000 and 1999, respectively.
5. Short-Term Borrowings
At December 31, 2001, 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 2001 and 2000. The facility expires on May
31, 2002.
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. In
connection with the loan, the Company issued 33,000 shares of common stock to
the holder. The fair value of the shares was recorded as debt issue costs. 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 and $59,758 was recognized for the
years ended December 31, 2000 and 1999, respectively, representing the fair
value of 6,480 shares of the Company's common stock that remained unissued at
December 31, 2001.
(Continued)
F-10
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt
Debt at December 31, 2001 and 2000 consisted of the following:
2001 2000
---------- -----------
Capital lease obligations, at interest rates ranging from 8.3% to 12.66%,
with monthly payments ranging from $243 to $987; due through 2004........ $ 16,806 $ 20,895
Less: current maturities................................................... 12,720 10,062
---------- -----------
$ 4,086 $ 10,833
========== ===========
The aggregated amount of capital lease obligations maturing in each of the next
four years, is as follows:
Capital Lease
---------------
2002................................ $ 12,720
2003................................ 2,581
2004................................ 1,505
2005................................ --
---------------
$ 16,806
===============
7. Commitments and Contingencies
Med-Design leases a building, office space, and other office equipment
under non-cancelable operating leases that expire at various times through 2003.
Total rent expense under all operating leases for years ended December
31, 2001, 2000 and 1999 was $160,975, $163,068, and $160,395, 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. The fair value of Med-Design common stock at the
date of shareholder approval of this grant was $12.63.
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. On July 6, 2001, Med-Design stock maintained a market price of $22.00
or higher for thirty (30) days and this agreement was revised to provide that a
third of the stock vests on August 6, 2001 and the remaining shares will vest in
two equal tranches on August 6, 2002 and August 6, 2003. In connection with the
August 6, 2001 issuance, the Company recorded compensation expense of $944,812
during the year ended December 31, 2001, (based on the fair value of
Med-Design's common stock on August 7, 2000 of $12.63).
(Continued)
F-11
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Commitments and Contingencies, continued
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 yet
concluded.
8. 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 subject to the 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.
MedAmicus is also a licensee of Med-Design's patented products. On
September 25, 2000, Med-Design entered into a development and licensing
agreement granting MedAmicus a license to market and manufacture the Company's
Safety Seldinger Introducer Needle for certain venous applications. Under the
terms of the agreement, Med-Design has the right to receive royalty payments
based on the net sales of the Safety Seldinger Introducer Needle by MedAmicus,
Inc.
On September 7, 2001, Med-Design entered into an Addendum ("the
Addendum") to the development and licensing agreement with MedAmicus, Inc. The
Addendum grants MedAmicus an exclusive license to manufacture and market the
Company's Safety Seldinger Introducer Needle in the arterial access market.
Under the terms of the Addendum, Med-Design received an initial payment of
$2,000,000, $1,000,000 of which was paid in 68,027 shares of MedAmicus common
stock valued at the closing price on the date we entered into the Addendum and
$1,000,000 of which was paid in cash on October 15, 2001. In addition,
Med-Design is entitled to receive royalties of 20% of net sales of the product,
which royalty rate may be reduced to 17% if certain sales volumes are met.
During 2001, the Company sold 2,000 shares of MedAmicus common stock received in
this transaction at a gain of $2,600. At December 31, 2001, Med-Design held
66,027 shares of MedAmicus stock valued at $1,027,380 and included in Available
for Sale Securities at December 31, 2001.
(Continued)
F-12
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted loss per
share:
Weighted average
Loss shares outstanding EPS
------------- ------------------ --------------
2001
Basic and diluted EPS
Net loss ($ 4,026,991) 10,666,754 ($0.38)
------------- ------------------- --------------
2000
Basic and diluted EPS
Net loss ($ 2,793,365) 9,831,609 ($0.28)
Preferred dividends on Series A Preferred ( 150,000) -- --
------------- ------------------- --------------
Net loss applicable to common shares ($ 2,943,365) 9,831,609 ($0.30)
------------- ------------------- --------------
1999
Basic and diluted EPS
Net loss applicable to common shareholders ($ 4,247,473) 7,978,963 ($0.53)
------------- ------------------- --------------
Options and warrants to purchase 2,096,413, 1,589,900, and 1,639,200
shares of Med-Design's common stock as of December 31, 2001, 2000 and 1999,
respectively were not included in computing diluted earnings per share as the
effect of these instruments is anti-dilutive.
10. Preferred Stock
In December 1999 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 declared and paid a dividend of
$150,000 in cash on the Preferred Stock.
(Continued)
F-13
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. 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.
On June 11, 2001, the Board adopted the 2001 Equity Compensation Plan.
The 2001 Plan will be administered by the Company's Compensation Committee. The
Compensation Committee has the authority to (i) determine the individuals to
whom grants will be made under the 2001 Plan; (ii) determine the type, size and
terms of each grant; (iii) determine the time when grants will be made and the
duration of any applicable exercise or restriction period; (iv) amend the terms
of any previously issued grant; and (v) deal with any other matters arising
under the Plan. As of December 31, 2001 there were 778,460 shares available for
future grants which may be applied to either plan.
Options granted to employees under the Non-qualified Option Plan 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, 2001, 2000 and 1999 is as follows:
2001 2000 1999
----------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- --------------- ------ ---------------- ------ -------------- -----
Outstanding at beginning
of year................. 707,900 $ 7.97 511,200 $ 2.90 481,000 $4.59
Granted.................... 656,773 14.86 377,167 12.56 174,667 2.78
Exercised.................. 192,700 5.16 (180,467) 2.62 (118,867) 3.27
Forfeited.................. 56,000 3.25 -- -- (25,600) 3.25
Expired.................... 16,000 3.25 -- -- --
--------------- ------ ---------------- ------ -------------- -----
Outstanding at end of
year.................... 1,099,973 $12.54 707,900 $ 7.97 511,200 $2.90
=============== ====== ================ ====== ============== =====
Options exercisable at
year-end................ 350,100 233,500 264,900
=============== ================ ==============
Option price range at end
of year.................... $0.81 to $17.97 $0.81 to $16.375 $0.81 to $5.75
=============== ================ ==============
Weighted-average fair value
of options granted during
year....................... $10.75 $8.35 $3.10
=============== ================ ==============
(Continued)
F-14
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Stock Option Plan, continued
The following table summarizes information regarding stock options outstanding
at December 31, 2001:
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, 2001 Contractual Life Price December 31, 2001 Price
--------------- ----------------- ---------------- --------- ----------------- --------
$0.81 to $1.56........ 74,300 2.7 $ 1.28 47,900 $1.12
$3.25 to $5.75........ 59,500 3.7 3.92 50,000 4.05
$8.38 to $17.97....... 966,173 4.7 13.94 252,200 10.93
--------- --- ------- ------- -----
1,099,973 4.5 $ 12.54 350,100 $8.61
========= === ======= ======= =====
12. Stock Based Compensation
The Company entered into arrangements, subject to shareholder approval,
which was obtained on August 7, 2000, for the issuance of shares of common
stock, stock options and warrants to purchase shares of common stock to officers
of the Company during 2000. Compensation expense in the amount of $1,792,082 and
$886,807 was recorded during the years ended December 31, 2001 and 2000 based on
the difference between the exercise price of the option or warrant and the fair
value of Med-Design's common stock on August 7, 2000 of $12.63 and calculated in
accordance with the individual vesting schedules of these grants.
In connection with the termination of employment of an officer and
employee, the Company extended to February 29, 2000 the expiration date 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
during the year ended December 31, 2000, 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 during the year 2000, based on the
fair value of the warrant, calculated using a Black-Scholes valuation model in
accordance with FAS 123.
The Company issued a warrant to Edward Allard for consulting services
on February 19, 2000 and recorded compensation expense during the year ended
December 31, 2000 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. Compensation expense of $263,999 was recorded based on the fair
value of the options using a Black-Scholes valuation model in accordance with
FAS 123 during the year ended December 31, 1999.
(Continued)
F-15
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. Stock Based Compensation, continued
Had compensation expense for Med-Design's Stock Option Plan and warrant
grants been recorded based on the fair value of the options or warrants at the
grant dates in 2001, 2000 and 1999, consistent with the provisions of FAS 123,
Med-Design's net loss and net loss per share would have reflected the pro forma
amounts indicated below:
2001 2000 1999
---- ---- ----
Net loss - as reported................................ ($ 4,026,991) ($ 2,793,365) ($ 4,247,473)
Net loss - pro forma.................................. ($ 5,104,307) ($ 4,244,109) ($ 4,675,874)
Basic and diluted loss per share - as reported........ ($0.38) ($0.30) ($0.53)
Basic and diluted loss per share - pro forma.......... ($0.48) ($0.43) ($0.58)
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 during the years ended December 31, 2001, 2000 and
1999: dividend yield of 0%; expected volatility of 90.66% and range of risk free
interest rate of 4.32% to 5.11% in 2001: 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 2000: dividend yield of 0.00%; expected volatility of 82.64% and risk
free interest rate of 5.69% in 1999. Expected lives are based on actual terms of
options and warrants granted.
13. Warrants Outstanding
As of December 31, 2001 and 2000, warrants to purchase a total of
684,000 and 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, 2001. This warrant is exercisable at a price of $5.50 per
share and remained unexercised at December 31, 2001.
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.
Of the shares underlying the warrant, 50,000 shares remained unexercised at
December 31, 2001.
On October 10, 1997, Med-Design issued a warrant to purchase 100,000
shares of common stock at an exercise price of $5.44 to a director of the
Company who was engaged to perform consulting services. The warrant was
exercisable upon issuance, expires on October 10, 2002 and was repriced to $2.88
per share on January 14, 1999. The warrant remained unexercised at December 31,
2001.
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. The warrant remained
unexercised at December 31, 2001.
(Continued)
F-16
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.
The warrant remained unexercised at December 31, 2001.
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. The warrant remained
unexercised at December 31, 2001.
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. The warrant
remained unexercised as to 75,000 shares at December 31, 2001.
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. The warrant remained unexercised as to 10,000 shares at
December 31, 2001.
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. The warrant remained
unexercised at December 31, 2001.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000
shares of common stock at $11.875 per share to its Chief Operating Officer. The
warrant vested as to 33,000 shares in November 2000 and 33,000 shares in
November 2001 and expires April 25, 2005. The warrant remained unexercised as to
33,000 at December 31, 2001.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000
shares of common stock at $11.875 per share to its Chief Financial Officer. The
warrant vested as to 33,000 shares on November 2000 and 33,000 shares in
November 2001 and expires on April 25, 2005. The warrant remained unexercised as
to 16,000 shares at December 31, 2001.
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.
(Continued)
F-17
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. Income Taxes
The following is a summary of the components of income taxes from
operations:
2001 2000 1999
---------------- --------------- -------------
Current Provision
Federal.................................... $ -- $ -- $ --
State...................................... -- -- --
------------ ----------- ------------
-- -- --
Deferred tax provision (benefit)
Federal.................................... (2,320,636) (630,071) (1,856,958)
State...................................... (334,607) (171,923) (517,778)
-- -- --
------------ ----------- ------------
Total provision (benefit) for income taxes. (2,655,243) (801,994) (2,374,736)
Less: Valuation allowance.................. 2,655,243 801,994 2,374,736
------------ ----------- ------------
$ -- $ -- $ --
============ =========== ============
The deferred income tax assets and liabilities recorded in the consolidated
balance sheets at December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
--------------- --------------- -------------
Assets
Loss carryforwards.......................... 8,256,135 $ 5,500,622 $ 5,798,729
Research and development tax credit......... 457,593 355,139 268,631
Amortization................................ 866,213 1,113,560 1,274,251
Deferred compensation expense............... 572,716 466,227 133,792
Other....................................... (32,393) 29,473 5,485
Total deferred tax assets................... 10,120,264 7,465,021 7,480,888
------------ ----------- ------------
Valuation allowance......................... (10,120,264) (7,465,021) (7,480,888)
------------ ----------- ------------
Net deferred tax assets (liabilities)....... $ -- $ -- $ --
============ =========== ============
The tax effect of option and warrant exercises was $4,592,942,
$3,790,949, and $754,448 in 2001, 2000 and 1999, 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.
(Continued)
F-18
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. Income Taxes, continued
At December 31, 2001, the Company has a federal net operating loss
carry forward of approximately $39.4 million which will expire, if unused, in
the years 2010 through 2021. At December 31, 2001, the Company has $42.1 million
in net operating losses for state purposes which will expire, if unused, in the
years 2002 through 2011.
In addition, the Company experienced an ownership change in accordance
with Internal Revenue Code Section 382 in 1997. Losses incurred through January
23, 1997 amounting to $4,853,939 are generally limited in their utilization to
$1,738,559 per year.
The Company has unused research tax credit in the amount of $457,593
which will expire if unused in the years 2010 through 2021.
A reconciliation of the Federal statutory rate to the effective tax rate is as
follows:
2001 2000 1999
----------- ------------- -----------
U.S. statutory federal income tax rate..... (1,409,447) (1,075,784) ($1,386,243)
State taxes (net of federal taxes)......... (376,266)
Research and development expenses.......... 47,085
Deferred compensation...................... (438,924)
Utilization of net operating losses........ (220,388)
True-up of net operating losses - relating
to permanent difference................. (844,977)
Other...................................... (66,212) 445,712
Increase in Valuation Allowance (Federal
Gross for 2001).......................... 2,320,636 630,072 2,374,736
----------- ------------- -----------
$ -- $ -- $ --
=========== ============= ===========
16. Related Party Transactions
During 2001 and 2000, The Company paid $44,265 and $54,924
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, common stock and commercial paper. Fair value is based on
quoted market prices.
(Continued)
F-19
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Subsequent Events
On January 15, 2002, Med-Design signed a binding term sheet agreement
with Sultan Chemists that, upon execution of a definitive agreement, will give
the Company the right to exclusively market and sell Med-Design's Safety Dental
Pre-filled Cartridge for ten years. Sultan is committed to purchase a minimum of
6,000,000 units per year for the next ten years.
On March 25, 2002, Med-Design successfully completed a private equity placement
of the Company's common stock. Med-Design sold 1,326,260 shares of its common
stock for $15,000,000. The net proceeds to the Company after giving effect to
placement agent fees were approximately $14,200,000.
19. Quarterly Information (unaudited)
Quarter Ended
-------------------------------------------------------------
2001 March 31 June 30 September 30 December 31
- ---- ---------- ----------- ------------ ------------
Revenue........................................ $ 50,000 $ -- $2,040,000 $ 240,000
Operating income (loss)........................ ($1,683,749) ($1,524,076) $ 168,147 ($1,206,032)
Net income (loss).............................. ($1,595,393) ($1,483,817) $ 226,335 ($1,174,112)
Basic earnings (loss) per share................ ($0.15) ($0.14) $0.02 ($0.11)
Diluted earnings per share..................... $ -- $ -- $0.02 $ --
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 $ -- $ --
F-20