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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
[X] ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2002.
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
(Exact name of registrant as specified in its charter)
Delaware 23-2771475
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
2810 Bunsen Avenue, Ventura, CA 93003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 339-0375
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
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 June 28, 2002) was $125,382,547. The number of shares of the
registrant's common stock outstanding as of March 11, 2003 was 12,623,098.
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the 2003
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 and licensing of
safety medical devices intended to reduce the incidence of accidental needle
sticks. 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 product
technologies generally can be categorized into the following five groups:
o hypodermic syringes used to inject drugs and other fluids into the
body;
o injectors used to inject drugs and other fluids into the body from a
pre-filled cartridge, vial or carpule;
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 product technologies 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.
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In two instances, we arranged for the manufacture of our products through
collaborative arrangements with manufacturers. We will continue to explore
additional opportunities to manufacture selected products in this manner.
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 established
medical device manufacturers;
o modify and improve our current product technologies 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
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.
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 product technologies to address the demand for safer
medical devices that reduce the risk of accidental needlesticks that result in
exposure to blood borne diseases.
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:
Licensed Products
Becton Dickinson
Becton, Dickinson and Company (BD), a major medical technology company, is
the principal licensee of our patented product technologies. Pursuant to two
licensing agreements, we have granted BD the exclusive worldwide rights to
manufacture and market our patented product technologies in three fields of
use, injection syringe, IV catheters and blood collection. The agreements with
BD provide for continuing royalty payments based upon BD's net sales of the
licensed product technologies, subject to annual minimums.
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The following product technologies are currently under license to BD:
o Safety Syringe (fixed needle). After 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, which causes the needle to automatically and fully
retract into the body of the syringe. The fixed needle Safety
Syringe can be manufactured with needles of various gauges and
sizes, and barrels with various sizes.
o Safety Syringe (luer needle). The luer needle Safety Syringe is a
hypodermic needle with a mating needle/hub assembly.
o Safety Tuberculin/Insulin Syringe. The Safety Tuberculin/Insulin
Syringe is a smaller version (1cc) of the fixed needle Safety
Syringe.
o 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.
o 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.
o 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.
o 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.
o Safety Wing Needle Set/Catheter. The Safety Wing Needle Set/Catheter
is used to continuously deliver fluids into a patient's vein. 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 needle stick.
During 2002, BD introduced two licensed products - the BD Integra(TM) Syringe
in May and the BD AutoGuard Pro(TM) shielded IV catheter in December - utilizing
our Safety Syringe and Safety IV Catheter technologies. In addition, BD
announced it intends to launch a winged blood collection set during 2003.
The licensing agreement with BD for the safety syringe provided for a two-
tier royalty payment. A dispute arose in July of 2002 between us and BD as to
the appropriate amount of royalty payment for the BD Integra Syringe. We
submitted the dispute to mediation and reached an agreement in January 2003
that resolved the dispute. We resolved with BD that a royalty rate of 2.5% on
all sales of the product in the U.S. and in all international markets where
our retracting needle syringe patents are in force would be paid to Med-
Design. The royalty rate is retroactive to the initial introduction date of
May 2002.
Medamicus
We licensed to Medamicus the Safety Seldinger Device initially for venous
access and subsequently for arterial access. We receive royalties from the
sale of the device by Medamicus. The Safety Seldinger Device agreement is our
initial agreement to license our technology for a product in a lower volume,
higher margin specialized niche market segment. We believe that Medamicus'
sales of the Safety Seldinger Needle may he helpful in connection with our
efforts to license similar niche market products.
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Manufactured Products Under Agreement
In connection with our efforts to enter into collaborative arrangements for
the marketing and distribution of certain of our product technologies, we
determined that we could enhance our efforts with potential strategic allies
that do not possess manufacturing capabilities if we could arrange 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 Cartridge Injector. Under the terms of
the agreements, we will purchase the automated equipment and molds necessary
for Owens-Illinois to manufacture the products.
Safety Pre-filled Cartridge Injector.
The Safety Pre-filled Cartridge Injector enables medication to be injected
directly into a patient from pre-filled cartridges produced by many
pharmaceutical manufacturers. The Safety Pre-filled Cartridge Injector can be
manufactured with needles of various gauges and sizes.
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. Through this agreement, we can offer a combination of our
technology, Owens-Illinois' manufacturing and Abbott Laboratories' filling and
packaging capabilities. We also have the right to enter into arrangements in
which the customer performs the fill-finish of our delivery device. We are
currently in discussions with several pharmaceutical companies for the
purchase of our pre-filled devices, but have not entered into any definitive
arrangements.
Safety Dental Cartridge Injector
The Safety Dental Cartridge Injector is used to administer anesthetics in
dental procedures. The Safety Dental Cartridge Injector uses standard dental
needles and anesthetic cartridges and enables for fluid removal. The Safety
Dental Cartridge Injector allows for multiple anesthetic injections, while
rendering the needle safe in between injections.
In connection with the Safety Dental Cartridge Injector, we entered into a
definitive agreement with Sultan Chemists on May 22, 2002, giving Sultan the
exclusive right to purchase, market and sell the product for ten years. Under
the terms of the agreement, in order to maintain its exclusive rights, Sultan
is required to purchase 18 million units within the first 40 months from the
first shipment date and 6 million units a year thereafter to maintain
exclusivity. We received FDA clearance on the device in February 2003 and are
proceeding with the plan to have the product manufactured by Owens-Illinois in
accordance with the OEM Agreement. Sultan Chemists is expected to launch the
product in 2003. We will recognize revenue on the sale of the product to
Sultan.
Portfolio Products
We are seeking to license technology or enter into collaborative
arrangements for a number of additional applications of our technologies
described below. All of these products derived from these applications would
incorporate our needle retraction technology.
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. The Safety Pre-filled Dual Chamber Injector can be
manufactured with needles of various gauges and sizes.
The 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. The Safety Pre-filled Vial Injector can be
manufactured with needles of various gauges and sizes.
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Safety Arterial Blood Gas Needle. Arterial blood gas needles are used to
collect small samples of arterial blood and deliver the blood to a blood gas
analyzer, after which the filled needle barrel is ready for delivery to a
laboratory for analysis. The Safety Arterial Blood Gas Needle is designed for
conventional laboratory processing and attaches to any standard blood gas
needle 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 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.
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. 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.
Sales and Marketing
Because we focus on the design, development and licensing of safety medical
products, we are not engaged in the marketing and sale of our products
directly to health care professionals. Our marketing efforts focus upon
identifying, principally through the use of publicly available information,
market leaders in the pharmaceutical and medical device industries who we
believe have either a desire to incorporate safety applications in their
existing products or who have the ability to manufacture and/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, safety needle legislation and our
relationship with BD have increased industry awareness of our products. While
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 our needle retraction technology and the design
and development of specific applications of our technology for incorporation
into the products described above as well as in certain instances, the
equipment necessary to assemble the products. Research and development
expenses were $1,969,709, $1,073,323 and $1,143,938 in 2002, 2001 and 2000,
respectively. Our research and development efforts going forward will focus
primarily upon:
o the modification and improvement of our current product technologies
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 consisted of ten employees as of December
31, 2002.
Facilities and Manufacturing
Our primary focus has been upon the design, development and licensing of
safety medical devices. To date, in most cases our licensees have arranged for
manufacturing of products based on the technology licensed from us. In
addition, we determined that we would enhance our efforts with potential
partners that do not possess manufacturing capabilities if we could arrange to
have the products manufactured. In 2001, we entered into two OEM Manufacturing
Agreements with Owens-Illinois for the manufacture of our Safety Pre-filled
Cartridge Injector and Safety Dental Cartridge Injector. Under the terms of
the agreements, we will purchase the automated equipment and molds necessary
for Owens-Illinois to manufacture the products.
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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 in comparatively low volume, suitable 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, our strategy is 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 Cosmetic 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.
Historically, our focus has been on the development, design and licensing of
medical safety devices rather than marketing and manufacturing of the devices.
Therefore, we had not typically made the regulatory filings necessary to sell
our products. Rather, we have relied on our licensees and other strategic
allies to pursue regulatory approvals. We anticipate that we will continue to
rely on our strategic allies to seek regulatory compliance if we license our
products to them.
We have decided to commercially market, through our strategic allies, and
manufacture some of the products we develop separate from our current or any
future license agreements in 2002. We will be required to file for marketing
authorization for these products. 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. 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 (PMAs) 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 generally requires the submission of laboratory, pre-clinical and
clinical data. Before initiating clinical trials, companies sponsoring such
trials often must seek and obtain an Investigational Device Exemption.
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Since we will commercially market and have manufactured 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 would be subject to device user
fees. The Medical Device User Fee and Modernization Act, enacted in 2002,
authorizes the FDA to assess and collect user fees for Section 510(k)
premarket notifications and premarket approval applications filed on or after
October 1, 2002. Fees for fiscal year 2003 range from $2,187 for Section
510(k) premarket notifications to $154,000 for PMAs, although fee reductions
are available for companies qualifying as small businesses. If we commercially
manufacture and market devices, 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. To ensure compliance with QSR
requirements, we would need to expend time, money and effort in the area of
production and quality control.
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, known
as "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 Tyco International, Inc. (Kendall Healthcare Products Company),
o B. Braun,
o Terumo Medical Corporation of Japan,
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o Medi-Hut, Inc., and
o Johnson & Johnson.
Developers of safety medical devices which we compete against for license
and collaborative arrangements with medical device and pharmaceutical
companies include:
o New Medical Technologies,
o Retractable Technologies, Inc.,
o Univec, Inc., and
o Specialized Health Products International.
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.
Legislation
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
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 or license, will
continue to increase for the foreseeable future.
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
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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 19 United States patents covering our retractable needle technology
and specific product applications based upon our technology. In addition, we
have 17 foreign national patents and two European patents covering 12
countries. We also have 23 United States, 87 foreign national, 18 European and
6 international patent applications pending. We also have a United States
design patent based on one of our products, in addition to four foreign
national design registrations and two pending foreign design applications.
Med-Design has 19 U.S. patents with expiration dates ranging from April 29,
2007 to April 30, 2021. Med-Design has 17 foreign national patents and two
European patents designating thirteen European countries. The foreign patents
and European patents have expiration dates ranging from November 7, 2010 to
August 28, 2019.
Employees
As of December 31, 2002, we had 20 full-time employees and 2 part-time
employees, most of whom were located at our corporate offices.
We maintain a website at www.med-design.com and make available free of
charge through this website our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after the company electronically files such
material with, or furnishes it to, the SEC. The material on our website is not
part of this report.
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,
2002, our accumulated deficit was $37,233,242. 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. Two licensed products were
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.
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
9
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, 2002, we had a revolving line of credit which makes
available up to $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. The facility expires on May 31, 2003, 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, 2002.
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 when we
license our products, 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 are required to 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.
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.
Our products manufactured under our control through a contract manufacturer
must receive regulatory approval and if we are not successful in obtaining or
maintaining approvals, the sale of our products would be impaired.
10
We plan 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 will require us to seek separate clearance or
approval by the FDA of these products, to pay user fees for applications filed
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. Compliance with QSR requirements will
involve continued expenditure of time, money, and effort. 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.
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:
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.
11
We have a number of patents and pending United States patent applications
relating to our products. Patent applications filed by us or on our behalf may
not result in patents being issued to us. Even if a patent is issued, the
patent may not afford protection against competitors with similar technology.
Furthermore, others may independently develop similar technologies or
duplicate our technology.
Our commercial success depends in part on our avoiding the infringement of
patents and proprietary rights of other parties and developing and maintaining
a proprietary position with regard to our own technologies and products. We
cannot predict with certainty whether we will be able to enforce our patents.
We may lose part or all of our patents as a result of challenges by
competitors. Patents that may be issued, or publications or other actions
could block our ability to obtain patents or to operate as we would like.
Others may develop similar technologies or duplicate technologies that we have
developed or claim that we are infringing their patents.
We may become involved in litigation or interference proceedings declared by
the U.S. Patent and Trademark Office, or oppositions or other intellectual
property proceedings outside of the United States. If any of our competitors
have filed patent applications or obtained patents that claim inventions that
we also claim, we may have to participate in an interference proceeding to
determine who has the right to a patent for these inventions in the United
States. If a litigation or interference proceeding is initiated, we may have
to spend significant amounts of time and money to defend our intellectual
property rights or to defend against infringement claims of others. Litigation
or interference proceedings could divert our management'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.
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.
12
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 ($1,000,000 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.
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 Tyco International, Inc. (Kendall Healthcare Products Company),
o B. Braun,
o Terumo Medical Corporation of Japan,
o Med-Hut, Inc., and
o Johnson & Johnson.
Developers of safety medical devices against which we compete include:
o New Medical Technologies,
o Retractable Technologies, Inc.,
o Univec, Inc., and
o Specialized Health Products International, 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.
13
If we engage in any acquisition or business combination, we will incur a
variety of risks that could adversely affect our business operations.
From time to time we have considered, and we will continue to consider in
the future, strategic business initiatives intended to further the development
of our business. These initiatives may include acquiring businesses,
technologies or products or entering into a business combination with another
company. If we pursue such a strategy, we could, among other things:
o issue equity securities that would dilute our stockholders'
percentage ownership;
o incur substantial debt, which may place constraints on our
operations;
o spend substantial operational, financial and management resources in
integrating new businesses, technologies and products;
o assume substantial actual or contingent liabilities; or
o merge, or otherwise enter into a business combination with, another
company, in which our stockholders would receive cash or shares of
the other company, or a combination of both, on terms that our
stockholders might not deem desirable.
Moreover, any strategic business initiative may not provide anticipated
benefits and could, if unsuccessful, hurt our long-term business prospects.
Because our officers and directors own a significant number of shares of our
common stock, they may control all major corporate decisions, and our other
stockholders may not be able to influence these decision.
As of March 7, 2003, our directors and officers beneficially owned or
controlled approximately 17.4% 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.
14
Our common stock is subject to dilution.
As of December 31, 2002, there were 12,519,798 shares of our common stock
issued and outstanding. In addition, an aggregate of 2,611,619 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.
ITEM 2. 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 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.
Our annual lease payments for this facility are approximately $168,000 and
the lease expires on October 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
On December 21, 2001, suit was filed in California Superior Court by Michael
J. Botich, a former executive officer of Med-Design. Mr. Botich alleged that
Med-Design breached an oral agreement to employ him as a part-time consultant.
The Company settled the suit in February 2003 and the settlement payment of
$350,000 is included in 2002 financial results.
15
There are no other legal proceedings pending or, to the knowledge of
management, threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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, 2001
- ----------------------------------- High Low
------ ------
First Quarter ............................................... $18.88 $10.50
Second Quarter .............................................. 31.80 13.00
Third Quarter ............................................... 42.38 13.44
Fourth Quarter .............................................. 23.50 11.75
Fiscal year ended December 31, 2002
----------------------------------- High Low
------ ------
First Quarter ............................................... $27.20 $11.60
Second Quarter .............................................. 17.19 9.82
Third Quarter ............................................... 12.99 3.03
Fourth Quarter .............................................. 8.26 3.10
Holders
As of December 31, 2002, we estimate that we had approximately 90 holders of
record of our common stock.
Dividends
We declared and paid a dividend of $150,000 in 2000 on Series A preferred
stock, but 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 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue................................................... $ 474,325 $ 2,330,000 $ 4,128,993 $ - $4,500,000
Net Income (loss)......................................... (8,081,061) (4,026,991) (2,793,365) (4,247,473) 882,889
Total assets.............................................. 16,989,224 8,259,960 8,565,573 7,257,286 8,482,885
Debt...................................................... 4,080 16,806 20,895 1,073,797 1,579,824
Dividends on Series A preferred stock..................... 150,000 - -
Net Income (loss) per common share........................ ($ 0.67) ($ 0.38) ($ 0.30) ($ 0.53) $ 0.11
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are principally engaged in the design, development and licensing of
safety medical devices intended to reduce the incidence of accidental needle
sticks. 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. To date,
substantially all of our revenues have been derived from "up front" license
payments made by BD.
However, principally as a result of the launch of certain of our products
licensed to BD, we realized increased revenues from minimum royalties on our
licensed product technologies, particularly during the fourth quarter. A
dispute with BD over the appropriate amount of royalty payment for the BD
Integra Syringe was resolved through mediation in January 2003, resulting in a
royalty rate of 2.5% to us on all sales of the product.
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Total revenue 2002 was $474,325 compared to revenue of $2,330,000 in 2001.
Revenue in 2002 consisted of royalty payments from the sale of our licensed
products. Revenue in 2001 consisted principally of an up-front license payment
from Medamicus for our license of the Safety Seldinger Introducer Needle for
use in arterial access.
General and administrative expenses, excluding stock based compensation were
$4,818,557 in 2002, an increase of $1,108,252 as compared to general and
administrative expenses of $3,710,305 in 2001. The increase was primarily due
to our increase in corporate, legal, consulting and travel related to the
arbitration and subsequent mediation of our dispute with BD relating to the
royalty rate for the Integra Syringe licensed to BD, hiring and relocation of
a new executive and costs related to increased marketing to allow the Company
to negotiate agreements for its portfolio products.
Stock based compensation, which resulted from the issuance and modification
of options, warrants and other stock based grants and awards was $1,783,863 in
2002 and $1,792,082 in 2001, a reduction of $8,219. Several grants issued in
2000 have been fully vested offset by three new grants.
Research and development expenses for the year ended December 31, 2002 were
$1,969,709 an increase of $896,386 as compared to research and development
expenses of $1,073,323 for the corresponding period in 2001. The increase was
due primarily to costs associated with an evaluation study, regulatory
application costs related to the Safety Dental Pre-filled Cartridge Injector,
the development of new products and payment in connection with a claim by the
former Director of Research and Development.
In accordance with FAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and consistent with the Company's accounting policy
for marketable equity securities, in the fourth quarter of fiscal 2002, the
Company determined that the decline in the fair value of its investment in
Medamicus stocks (which was received as part of a development and licensing
agreement in 2001) was other-than-temporary. Accordingly, the Company
established a new basis of $448,078 in the investment equivalent to its fair
market value at December 31, 2002. As a result, the Company realized a loss of
$331,419 or ($0.03) per basic and diluted common share.
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
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 modification
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 levels
of expenses in 2000 were due primarily to research and development activities
to modify our licensed products based on specific requests of our licensees.
Liquidity and Capital Resources
At December 31, 2002, we had cash, cash equivalents and available for sale
securities of $14,165,300 as compared to $5,889,766 at 2001, an increase of
$8,275,534 or 141%. The increase resulted from the private equity placement of
1,326,260 shares of our common stock on March 25, 2002. Med-Design received
net proceeds of approximately $14,200,000 from this offering.
For the year ended December 31, 2002, our net cash used in operating
activities was $5,187,510 consisting of net loss of $8,081,061, non-cash
depreciation and amortization of $511,307, stock based compensation and
realized loss on available-for-sale securities of $1,783,863 and $331,419,
respectively. Net cash used in investing activities of $7,725,923 consisted
primarily of additions to property, plant and equipment of $292,084 and
patents $148,577 and net investment in available-for-sale securities of
$7,035,262. Net cash provided by financing activities of $14,432,798 consisted
primarily of net proceeds from the private placement of $14,192,440 and
proceeds from warrant and stock option exercises of $253,084.
At December 31, 2002, we had a revolving line of credit which makes
available up to $3,000,000. This facility can be used to fund working capital
needs and finance capital equipment purchases. Although advances for capital
equipment financing may not exceed $600,000, 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, 2003, 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, 2002.
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, the amount of royalty payments we receive from our current and
future licensees, our ability to enter into and profitably operate under
collaborative arrangements, and our ability to raise additional equity or debt
financing. 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 almost exclusively 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.
19
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. 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, (2) stock based compensation and (3) accounting for available
for sale securities.
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.
Available-for-sale securities are reported at a fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
"Accumulated other comprehensive income (loss)" in stockholders' equity.
The Company records an impairment charge when it believes an investment has
experienced a decline in value that is other-than-temporary. In determining if
a decline in market value below cost for a publicly traded security is other-
than-temporary, the Company evaluates the relevant market conditions, offering
prices, trends of earnings, price multiples and other key measures. When a
decline in value is deemed to be other-than-temporary, the Company recognizes
an impairment loss in the current period to the extent of the decline below
the carrying value of the investment. Adverse changes in market conditions or
poor operating results of underlying investments could result in additional
other-than-temporary losses in future periods.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board "FASB" issued a
Statement of Financial accounting Standard "SFAS" No. 143, "Accounting for
Asset Retirement Obligation." This standard provides the accounting for the
cost of legal obligations associated with the retirement of long-lived assets.
SFAS No. 143 requires that companies recognize the fair value of a liability
for asset retirement obligations in the period in which the obligations are
incurred and capitalize that amount as a part of the book value of the long-
lived asset. That cost is then depreciated over the remaining life of the
underlying long-lived asset. The adoption of this pronouncement will have no
material impact on our financial position or results of operations.
20
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of
Disposal of Long Lived Assets." This standard supersedes SFAS No. 121 and the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" with regard to reporting the effects of a disposal of a segment
of a business. SFAS No. 144 establishes a single accounting model for assets
to be disposed of by sale and addresses several SFAS No. 121 implementation
issues. We were required to adopt SFAS No. 144 effective January 1, 2002. The
adoption of this pronouncement will have no material impact on our financial
position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses the accounting and
reporting for Costs associated with exit or disposal activities. The
provisions of this Statement are effective for fiscal years ending after
December 31, 2002. The adoption of this pronouncement will have no material
impact on our financial position or results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to a fair-value based method of accounting
for stock-based employee compensation as prescribed in SFAS 123 "Accounting
for Stock Based Compensation." Additionally, SFAS 148 requires more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of this Statement are effective for
fiscal years ending after December 15, 2002. The adoption of this
pronouncement will have no material impact on our financial position or
results of operations.
In January 2003, the Emerging Issues Task Force issued EITF 00-21 "Revenue
Arrangements with Multiple Deliverables." EITF 00-21 primarily addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. Specifically, it
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In apply EITF 00-21,
separate contracts with the same entity or related parties that are entered
into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That
presumption may be overcome if there is sufficient evidence to the contrary.
EITF 00-21 also addresses how arrangement consideration should be measured and
allocated to the separate units of accounting in the arrangement. The
provisions of EITF 00-21 are effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. We are currently evaluating
the impact this statement will have on our financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no amounts outstanding under our revolving line of credit at
December 31, 2002. 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
interest rate fluctuations which could increase our interest expense,
respectively.
We invest a portion of excess cash in marketable securities in accordance
with our investment guidelines as approved by our Board of Directors. These
investments are in highly liquid, low risk securities where our risk of loss
is at a minimum. Additionally, we have acquired shares of a publicly traded
company for which we are at risk of loss based on downward fluctuations in the
quoted market fair value of those shares based on the fair value of the equity
securities held as of December 31, 2002. If the quoted fair value of this
company's shares were to fall by 10% and 20%, we would incur an unrealized
loss of $198,948 and $397,897, respectively. Such losses are ultimately
recognized as expense in the period in which the stock is sold or in the current
period if the decline in market value is deemed to be other-than-tempory.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
21
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. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 7, 2003 was carried out by us
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are functioning effectively to
provide reasonable assurance that the information required to be disclosed by
us in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. Subsequent to the date of the most recent
evaluation of our internal controls, there were no significant changes in our
internal controls or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements and notes
thereto of Med-Design which are attached hereto beginning on page F-1,
have been incorporated by reference into Item 8 of this Report on Form 10-
K:
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for years ended December 31, 2002,
2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 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 (8) 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.
10.7 (4) Warrant dated September 10, 1998 from Med-Design to John F. Kelley.*
10.8 (4) Licensing and Option Agreement dated 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.
10.17 Employment Agreement dated October 10, 2002 between Med-Design and James Donegan.
10.18 Employment Agreement dated October 10, 2002 between Med-Design and Joseph Bongiovanni.
10.19 Employment Agreement dated October 10, 2002 between Med-Design and Lawrence D. Ellis.
21.1 List of Subsidiaries of Med-Design.
23.1 Consent of PricewaterhouseCoopers LLP.**
99.1 Experts**
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adapted to Section 906 of the Sarbanes-Oxley Act of 2002.**
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adapted to Section 906 of the Sarbanes-Oxley Act of 2002.**
- ---------------
* 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.
24
(6) Incorporated by reference to Form 10-K filed March 23, 2001.
(7) Incorporated by reference to Schedule 14A filed on June 28, 2001.
(8) Incorporated by reference to Form 10-K filed April 1, 2002.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the last quarter of the
period covered by this report.
25
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 25, 2003 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 Executive March 25, 2003
- -------------------------- Officer (Principal Executive Officer)
James M. Donegan
/s/ Lawrence D. Ellis Vice President, Finance and Chief Financial Officer March 25, 2003
- -------------------------- (Principal Financial Officer and Principal Accounting
Lawrence D. Ellis Officer)
/s/ Joseph N. Bongiovanni, III Director March 25, 2003
- -------------------------------
Joseph N. Bongiovanni, III
/s/ D. Walter Cohen Director March 25, 2003
- --------------------------
D. Walter Cohen
/s/ Pasquale L. Vallone Director March 25, 2003
- --------------------------
Pasquale L. Vallone
/s/ Gilbert M. White Director March 25, 2003
- --------------------------
Gilbert M. White
/s/ Ralph Balzano Director March 25, 2003
- --------------------------
Ralph Balzano
/s/ Vincent J. Papa Director March 25, 2003
- --------------------------
Vincent J. Papa
/s/ James E. Schleif Director March 25, 2003
- --------------------------
James E. Schleif
/s/ John Branton Director March 25, 2003
- --------------------------
John Branton
/s/ Paul Castignani Director March 25, 2003
- --------------------------
Paul Castignani
THE MED-DESIGN CORPORATION CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION
I, Lawrence D. Ellis, certify that:
1. I have reviewed this annual report on Form 10-K of The Med-Design
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 /s/ Lawrence D. Ellis
-----------------------------
Lawrence D. Ellis, Chief Financial
Officer
THE MED-DESIGN CORPORATION CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION
I, James M. Donegan, certify that:
1. I have reviewed this annual report on Form 10-K of The Med-Design
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 /s/ James M. Donegan
------------------------------
James M. Donegan, Chief Executive
Officer
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 2002
and 2001............................................. F-3
Consolidated Statements of Operations for years ended
December 31, 2002, 2001 and 2000..................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31,
2002, 2001 and 2000.................................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000............... F-6
Notes to Consolidated Financial Statements............. F-7 to F-23
Exhibit 99.1........................................... F-24
Exhibit 99.2........................................... F-25
Exhibit 99.3........................................... F-26
F-1
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Med-Design Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under item 15(a)(1) on page 23 present fairly, in all material
respects, the financial position of The Med-Design Corporation and its
subsidiaries (the Company) at December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 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 and financial statement schedules 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
March 14, 2003
F-2
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ...................... $ 1,917,130 $ 397,765
Available-for-sale securities .................. 12,248,170 5,492,001
Prepaid expenses and other current assets ...... 564,177 289,801
------------ ------------
Total current assets ......................... 14,729,477 6,179,567
Note receivable - related party ................ 250,000 --
Property, plant, and equipment, net ............ 345,130 391,817
Patents, net of accumulated amortization of
$659,144 and $486,608 at December 31, 2002 and
December 31, 2001, respectively................ 1,664,617 1,688,576
------------ ------------
Total Assets ................................ $ 16,989,224 $ 8,259,960
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion capital lease obligations ...... $ 2,574 $ 12,720
Accounts payable ............................... 290,775 198,141
Accrued compensation and benefits .............. 467,086 139,046
Other accrued expenses ......................... 189,447 22,408
------------ ------------
Total current liabilities ................... 949,882 372,315
Capital lease obligations, less current
maturities..................................... 1,506 4,086
------------ ------------
Total liabilities ........................... 951,388 376,401
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized;
No shares issued and outstanding as of
December 31, 2002 and 2001, respectively...... -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; 12,519,798 and 10,963,386 shares
issued and outstanding at December 31, 2002
and 2001, respectively........................ 125,198 109,634
Additional paid-in capital ..................... 53,083,149 36,869,326
Accumulated deficit ............................ (37,233,242) (29,152,181)
Accumulated other comprehensive income ......... 62,731 56,780
------------ ------------
Total stockholders' equity ...................... 16,037,836 7,883,559
------------ ------------
Total Liabilities and Stockholders' Equity ...... $ 16,989,224 $ 8,259,960
============ ============
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,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenue $ 474,325 $ 2,330,000 $ 4,128,993
----------- ------------ -----------
Operating expense:
General and administrative......................................................... 6,602,420 5,502,387 6,064,717
Research and development........................................................... 1,969,709 1,073,323 1,143,938
----------- ------------ -----------
Total operating expenses........................................................ 8,572,129 6,575,710 7,208,655
Loss from operations................................................................ (8,097,804) (4,245,710) (3,079,662)
Interest expense.................................................................... (1,042) (10,645) (31,841)
Investment income................................................................... 349,204 229,364 318,138
Realized loss on investments........................................................ (331,419) -- --
----------- ------------ -----------
Net loss............................................................................ (8,081,061) (4,026,991) (2,793,365)
Dividend on Series A Preferred Stock............................................... -- -- 150,000
----------- ------------ -----------
Net loss applicable to common shares................................................ ($ 8,081,061) ($ 4,026,991) ($ 2,943,365)
=========== ============ ===========
Basic and diluted loss per common share............................................. ($0.67) ($0.38) ($0.30)
Weighted average common shares outstanding.......................................... 12,116,143 10,666,754 9,831,536
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 COMPREHENSIVE LOSS
Preferred Additional
--------- Common Paid-In
Shares Amount Shares Amount Capital
--------- ------- ---------- -------- -----------
Balance, December 31, 1999 ................................... 300,000 $ 3,000 8,604,437 $ 86,045 $26,165,377
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 and warrants......................................... 749,467 7,494 3,523,584
Issuance of common stock in connection with conversion of
convertible debentures net of debt issue costs............... 840,000 8,400 627,959
Issuance of warrants in partial payment of patent ............ 14,416 144 235,918
Stock based compensation ..................................... 2,547,557
Change in unrealized gains (loss) on available-for-sale-
securities...................................................
Dividends paid on Series A Preferred Stock ................... (150,000)
Net loss .....................................................
-------- ------- ---------- -------- -----------
Balance December 31, 2000 ..................................... - $ - 10,541,320 $105,413 $32,974,466
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 (loss) on Available-for-sale-
securities...................................................
Net loss .....................................................
-------- ------- ---------- -------- -----------
Balance December 31, 2001 ..................................... - $ - 10,963,386 $109,634 $36,869,326
Issuance of common stock in connection with exercise of stock
options and warrants......................................... 103,784 1,038 252,046
Issuance of common stock in connection with private
placement, net............................................... 1,326,260 13,262 14,179,178
Issuance of stock in connection with employment agreements ... 126,368 1,264 (1,264)
Stock based compensation ..................................... 1,783,863
Change in unrealized gains (loss) on Available-for-sale-
securities...................................................
Net loss .....................................................
-------- ------- ---------- -------- -----------
Balance December 31, 2002 ..................................... $ - 12,519,798 $125,198 $53,083,149
======== ======= ========== ======== ===========
Unrealized
Gains &
Loss On
Available- Stockholders' Comprehensive
Accumulated For-Sale ------------- Income
Deficit Securities Equity (Loss)
------------ ---------- ------------- -------------
Balance, December 31, 1999 ................................... ($22,331,825) $29,960 $ 3,952,557 ($ 4,255,241)
Preferred stock conversion ...................................
Debt issue costs and interest in
connection with private investor loan........................ 24,401
Issuance of common stock in connection with exercise of stock
options and warrants................................