<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM l0-QSB
QUARTERLY REPORT
Pursuant to sections 13 or 15(d) of The Securities Exchange Act of 1934
FOR THE QUARTER ENDED AUGUST 31, 1998
Commission File Number 0-12305
REPRO-MED SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 13-3044880
- -------------------------------- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
24 Carpenter Road, Chester, New York 10918
- ---------------------------------------- -----
(Address of principle executive offices) (Zip Code)
(914) 469-2042
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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
during the past 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 __
At August 31, 1998 the registrant had outstanding 22,142,000 shares of
Common Stock, $.01 par value.
<PAGE>
PART I
Item 1. Financial Statements
Balance Sheets - August 31, 1998, August 31, 1997 and February 28, 1998.
Statements of Income - For the three month and six month periods ended
August 31, 1998 and August 31, 1997.
Statements of Cash Flow - August 31, 1998 and August 31, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II
Item 1. Legal Proceedings
None
Item 2. Changes In Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
PART I, Item 1 - Financial Statements
Repro-Med Systems, Inc. And Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets Aug 31,1998 Aug 31,1997 Feb 28,1998
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents $ 91,165 $35,732 $ 160,567
Short-term Investments 351,513 575,363 631,289
Accounts Receivable (Less Allowance for
Doubtful Accounts of $2,976 5/98,$2,976 239,897 815,859 232,915
5/97,$2,976 2/98)
Inventory 752,594 675,611 634,109
Prepaid Expenses & Other Receivables 67,087 66,398 65,876
Deferred Taxes - Current 156,000 156,000 156,000
--------- --------- ---------
Total Current Assets 1,658,256 2,324,963 1,880,756
Property, Equipment And Other Assets
Land 290,303 290,303 290,303
Property and Equipment, Net 1,393,124 1,391,260 1,432,591
Deferred Taxes - Non-current 407,782 76,827 358,409
Other Assets, Net 62,615 70,540 69,130
--------- --------- ---------
Total Property, Equipment And Other
Assets 2,153,824 1,828,930 2,150,433
- ----------------------------------------- --------- --------- ---------
Total Assets $3,812,080 $4,153,893 $4,031,189
========= ========= ========= =========
Liabilities And Stockholders' Equity
Current Liabilities
Accounts Payable $ 84,026 $ 97,613 $ 140,440
Current Maturities of Long-term Debt 85,328 70,188 85,327
Bank Line of Credit Payable 480,000 85,000 360,000
Other Current Liabilities 155,000 171,285 218,188
--------- --------- ---------
Total Current Liabilities 804,354 424,086 803,955
Long-term Debt 1,035,695 1,059,607 1,077,605
--------- --------- ---------
Total Liabilities 1,840,049 1,483,693 1,881,560
- --------------------- --------- --------- ---------
Minority Interest In Subsidiary 240,514 310,811 280,493
- --------------------------------------- --------- --------- ---------
Stockholder's Equity
Preferred Stock, 8% Cumulative $.01 Par
Value, Authorized 2,000,000 shares,
Issued & Outstanding 10,000 shares 100 100 100
Common Stock, $.01 Par Value, Authorized
50,000,000 Shares, Issued and Outstanding
22,142,000 221,420 221,420 221,420
Warrants Outstanding 140 140 140
Additional Paid-In Capital 3,040,662 3,040,662 3,040,662
Accumulated (Deficit) (1,388,805) (760,933) (1,251,186)
Treasury Stock at Cost (2,275,000 shares) (142,000) (142,000) (142,000)
Total Stockholder's Equity 1,731,517 2,359,389 1,869,136
Total Liab.& Stockholders'Equity $3,812,080 $4,153,893 $4,031,189
========================================= ========= ========= =========
</TABLE>
<PAGE>
Repro-Med Systems, Inc. And Subsidiary
Consolidated Statements Of Income
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
---------------------- ---------------------
Aug 31,1998 Aug 31,1997 Aug 31,1998 Aug 31,1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales
- -------------------
Net Sales of Products $ 371,230 $ 422,623 $ 1,071,548 $ 755,091
Sale of Impotence Treatment 0 708,000 0 708,000
--------- --------- --------- ---------
371,230 1,130,623 1,071,548 1,463,091
Costs And Expenses:
Cost of Goods Sold 288,125 198,243 621,924 314,095
Selling, General &
Administrative Expenses 292,040 302,489 575,954 595,605
Research and Development 24,440 20,488 83,115 61,224
Depreciation and 39,380 31,471 78,760 64,324
Amortization
--------- --------- --------- ---------
643,985 552,691 1,359,753 1,035,248
--------- --------- --------- ---------
Income (Loss) From (272,755) 577,932 (288,205) 427,843
Operations
- ---------------------------
Non-Operating
Income(Expense):
Licensing Income 0 (125,000) 0 75,000
Rental Income 21,525 21,525 43,050 43,050
Interest (Expense) (33,673) (26,628) (62,887) (49,418)
Interest & Other Inc (Exp) 68,953 6,804 85,821 15,356
--------- --------- --------- ---------
56,805 (123,299) 65,984 (66,012)
--------- --------- --------- ---------
Income (Loss) Before Minority
Interest Share of Operations (215,950) 454,633 (222,221) 361,831
- ---------------------------
Minority Interest In
(Income) Loss of Subsidiary 19,413 (189,844) 39,979 (191,986)
--------- --------- --------- ---------
Income (Loss) Before Income (196,537) 264,789 (182,242) 169,845
Taxes
- ---------------------------
Provision (Benefit) For
Income Taxes (49,123) 21,303 (48,623) (26,224)
--------- --------- --------- ---------
Net Income (Loss) After
Income Taxes $ (147,414) $ 243,486 $ (133,619) $ 196,069
=========================== ========= ========= ========= =========
Earnings (Loss) Per Common
Share
Primary $ (0.01) $ 0.01 $ (0.01) $ 0.01
Fully Diluted $ (0.01) $ 0.01 $ (0.01) $ 0.01
</TABLE>
<PAGE>
Repro-Med Systems, Inc. And Subsidiary
Statements Of Cash Flows
<TABLE>
<CAPTION>
For The Six Months Ended
Aug 31,1998 Aug 31,1997
Cash Flows From Operating Activities
<S> <C> <C>
Net Income (Loss) $ (133,619) $ 196,069
Adjustments To Reconcile Net Income To
Net Cash
Provided By Operating Activities:
Income (Loss) Of Minority Interests (39,979) 191,987
Depreciation and Amortization 78,760 64,324
(Increase) Decrease Short-term 279,776 60,377
Investments
Decrease (Increase) In Accounts (6,982) (669,353)
Receivable
Decrease (Increase) In Inventory (118,483) (151,644)
Decrease (Increase) In Prepaid Expenses
And Other Receivables (1,211) 11,728
Decrease (Increase) In Deferred Taxes (49,373) (53,168)
Increase (Decrease) In Accounts Payable (56,415) (21,543)
Increase (Decrease) In Other Current (63,188) 114,468
Liabilities
--------- ---------
Net Cash Provided By Operating (110,714) (256,755)
Activities --------- ---------
Cash Flows From Investing Activities
(Acquisition) of Property and Equipment (32,533) (124,638)
(Acquisition) of Other Assets (245) (3,440)
--------- ---------
Net Cash (Used) by Investing Activities (32,778) (128,078)
--------- ---------
Cash Flows From (Used By) Financing
Activities
Proceeds From Term-loan 0 250,000
Proceeds (Repayment) Line Of Credit 120,000 85,000
Repayment Of Mortgage and Term-loan (41,910) (8,771)
Preferred Stock Dividend (4,000) (4,000)
--------- ---------
Net Cash Provided (Used) by Financing 74,090 322,229
Activities --------- ---------
Net Increase (Decrease) In Cash and
Cash Equivalents (69,402) (62,604)
Cash and Cash Equivalents - Beginning of 160,567 98,336
Period --------- ---------
Cash and Cash Equivalents - End of $ 91,165 $ 35,732
period
Supplementary Data - Interest Paid $ 62,887 $ 49,418
</TABLE>
<PAGE>
Repro-Med Systems, Inc. And Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements included in the
Company's Annual Report),
(1) Management's Statement
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto included in the Company's
latest annual report on Form 10-KSB.
<PAGE>
PART I, Item 2
Repro-Med Systems, Inc. And Subsidiary
Management's Discussion and Analysis of Financial Condition and Results of
Operations for use with 10-QSB for the Quarter Ended August 31, 1998
Capital Resources and Liquidity
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Cash and equivalents on a consolidated basis were $91,165 at August 31,
1998, as compared to $35,732 at August 31, 1997. Cash and equivalents
includes cash of the Company's subsidiary, Gamogen, Inc., of $16,227 at
August 31, 1998, and $6,185 at August 31, 1997.
Net working capital on a consolidated basis at August 31, 1998 was
$853,902, as compared to $1,076,801 at February 28, 1998 and $1,900,877 at
August 31, 1997. Net working capital included Gamogen, Inc. net working
capital of $437,406 at August 31, 1998, $524,059 at February 28, 1998 and
$606,715 at August 31, 1997.
In the six month period ended August 31, 1998, the Company's liquidity
declined as reflected in the decrease in its net working capital of
$222,899, or 21%, versus the balance at February 28, 1998 of $1,076,801.
The six month decrease in net working capital of $222,899 resulted
primarily from $41,910 in scheduled repayments of long-term debt, $32,533
in purchases of production tooling for the Freedom60 Syringe Infusion
System and the OTC vacuum device (see comments below)and the effect of the
Company's pre-tax loss for the six months ended August 31, 1998 of
$182,242.
Versus the balance at August 31, 1997 the Company's net working capital
decreased $1,046,975 due to long-term debt repayments of $58,773, purchase
of production tooling for new products, and the Company's pre-tax losses
for third and fourth quarters of the year ended February 1998 which totaled
$767,344 and Company's pre-tax loss for the six months ended August 31,
1998 of $182,242.
The Company has developed a non-electric, portable I.V. delivery system,
trade-named the Freedom60 Syringe Infusion System ("Freedom60 System")
which employs a unique pump, standard syringes, and proprietary disposable
tubing resulting in a very low cost per infusion. The Company has secured
the necessary FDA approvals on the Freedom60 System and completed product
engineering, the purchase of production tooling and component parts
inventory, and long-term supply agreements for the syringe and disposable
tubing. The Company initiated production of the Freedom60 System in April
1997. In May 1997 the Company initiated advertising in US infusion medical
journals and promotion at various US and international trade expositions.
Effective July 1997, the Company entered into an agreement with a large
organization of independent US medical equipment and supply dealers for the
exclusive distribution rights for the Freedom60 System in certain US
medical markets, including hospitals, nursing homes, and home infusion
service providers. No minimum purchase commitments were required under this
agreement, however, the agreement included, as a condition to maintaining
these exclusive distribution rights, minimum dealer purchase volumes of
infusion pumps and disposable syringe/tubing sets, beginning July 1997. Due
to low dealer purchase volumes, effective May 11, 1998 Repro-Med
terminated this exclusive distribution agreement. Repro-Med has retained
certain of these dealers in certain regions of the US and is seeking
alternative distribution in other areas. There can be no guarantee that
the dealers retained or new dealers will be successful in marketing and
selling of the Freedom60 Syringe I.V. Infusion System. In April 1998, the
Company hired and appointed a sales manager experienced in the infusion
market
<PAGE>
to direct and support its US distribution and sales of its infusion
products. The Company is exploring various other options for marketing and
distribution of the Freedom60 Syringe Infusion System but has not yet
finalized its plans. There can be no guarantee, however, that the Company
will be successful in establishing distribution of the Syringe I.V.
Infusion System and that if distribution is established that the Company
will be successful in marketing and selling of the device.
In the fiscal year ended February 28, 1998, the Company developed a medical
device for an OEM customer, Mission Pharmacal ("Mission"), a San Antonio
based manufacturer of pharmaceuticals and medical devices, based on the
Company's suction technology. The Company's agreement with Mission includes
advance payments to help defer Company expenditures for engineering and
production tooling costs related to the development of the medical suction
device. As of August 31, 1998 the Company has received advance payments
totaling $93,030. Based on its agreement with Mission repayment of these
advances was contingent on purchase of a certain minimum quantity of the
OEM medical suction device by September 1998. As of October 10, 1998
Mission had not purchased its minimum requirement and had previously
advised the Company that it would not purchase the minimum. As a result
Mission has forfeited the advance payments of $93,030. In the quarter ended
August 31, 1998 the Company reduced its other current liability by $93,030
to reflect elimination of its liability for these advances and recorded
other income and reduced research and development costs to reflect income
from the payment of these advances.
Under the Company's agreement with Mission, the Company will manufacture
and sell this medical suction device to Mission. The Company initiated
production of the OEM medical suction device in September 1997 and
initiated shipments in November 1997. Total sales in the fiscal year ended
February 1998 of the OEM medical suction device were $122,511. Total sales
in the three month period ended August 31, 1998 of the OEM medical suction
device were $118,800. Total sales in the six month period ended August 31,
1998 of the OEM medical suction device were $360,800. The OEM medical
suction device sold to Mission is purchased for distribution in the
impotence vacuum device market.
In the past year, impotence vacuum devices have seen increased competition
from new pharmaceutical products, specifically a urethral suppository trade
named Muse, introduced in May 1997, and an orally administered pill trade
named Viagra, introduced in March 1998. Muse, manufactured and sold by
Vivus, Inc, was highly successful in 1997. Since its introduction in March
1998, Viagra has supplanted Muse, accounting for an estimated 95% of newly
issued prescriptions for impotence medications. It is too early to predict
the impact of Viagra on the impotence vacuum device market. While Viagra
has at least temporarily substantially reduced sales of the impotence
vacuum devices, it has significantly increased public awareness of
impotence problems in general. Depending on Viagra's clinical effectiveness
and reimbursement policies adopted by healthcare insurers, the introduction
of Viagra may on a longer term basis, stimulate, or at least not interfere
with the market for the Company's OEM impotence vacuum devices.
Due to market conditions including the introduction of Muse and Viagra,
Mission, as of May 1998, had significant inventory of the OEM vacuum
erection device. As a result, Mission negotiated with the Company to
continue to purchase components and assemble product, hold Mission product
at the Company's Chester facility, and bill Mission, at the reduced
purchase rate of 1,800 units or $39,600 in sales per month, through June
1999, under 30 day payment terms. As of August 1998 the
<PAGE>
Company has recorded sales of $158,400 under this arrangement and Mission
has timely remitted payment for these purchases. The Company has purchased
components for these $158,400 in sales, but pending certain changes in the
OEM medical suction device subsequently requested by Mission, assembly of
the device by Repro-Med has been delayed until these changes are resolved.
The Company has recorded charges for the component cost of these sales and
the anticipated assembly cost of the product for the portion of the sales
recorded but not assembled. The Company anticipates resumption of assembly
of the OEM medical suction device in the quarter ended November 1998.
Based on the revised purchase quantities negotiated with Mission, which
have taken into effect the anticipated impact of Viagra and Mission's
current inventory of this product, and contingent on the successful
marketing of the device by Mission, the Company anticipates revenue of
approximately $550,000 from the sale of this device in the fiscal year
ended February 1999, an increase of approximately $427,000 versus the
fiscal year ended February 28, 1998. There can be no guarantee, however,
that Mission will be successful in marketing of the device or that sales of
vacuum erection devices can recover from the impact of Viagra. The Mission
OEM vacuum erection device may compete with the Company's other OEM
products, but in management's opinion will not directly reduce sales of
other OEM products.
In February 1998, the Company initiated the development of a vacuum
erection device and constriction ring devices for vacuum treatment of
impotence. These devices will be targeted at both impotent men and men
seeking to enhance natural or induced erections and sexual performance.
According to published reports, it is estimated that in the United States
there are 30 million men who suffer impotence with approximately 3 million
currently treated by approved prescription treatments, including vacuum
therapy. The Company's devices will offer convenient, highly effective
treatments for impotence and for individuals seeking sexual improvement
from natural or induced erections, and will be sold on an OTC basis. In
June 1998 the Company received approval of its 510(k) application to the
FDA which allows the Company to market these devices, including over-the-
counter sale ("OTC"). The Company completed development and initiated
production of its OTC-version vacuum erection device in September 1998 and
anticipates completion of the constriction ring devices in October. The
Company is in the process of developing distribution for these devices, but
has not finalized its plans.
In October 1997, the Company submitted to the FDA a 510(k) application to
market a reusable resuscitator ("resuscitator"). This 510(k) application
was approved by the FDA in June 1998. This product, developed by a
Taiwanese medical device and component supplier, will be marketed primarily
in the US emergency medical (ambulance) and homecare marketplace and in
certain foreign countries. Tradenamed the Plus resuscitator, this
respiratory device combines premium features in a low cost unit. The Plus
resuscitator is used to replace or assist normal breathing in patients
suffering from respiratory arrest or, especially in the home, as a backup
for ventilator assisted patients. The reusable resuscitator is sold through
many of the same distributors currently marketing the Company's Res-Q-Vac
suction system. The Company initiated sales of this product in the month of
August 1998. Total sales in August 1998 of the reusable resuscitator were
$11,211.
On July 10, 1993 Gamogen acquired the rights to an Oral Treatment for Male
<PAGE>
Impotence developed by Dr. Zorgniotti. On April 12, 1994 the Board of
Directors approved and on April 14, 1994 Gamogen signed with Zonagen, a
small US based biotechnology company, an agreement under which Zonagen
acquired all rights to Gamogen's Oral Treatment for Male Impotence
("Impotence Agreement"). In exchange for the above rights Gamogen received
from Zonagen $100,000 in cash and, subject to certain FDA approvals and
Gamogen's agreement not to compete, future payments of $200,000 in
restricted common stock of Zonagen, and royalties on Zonagen's future sales
of the Oral Treatment. In the year ended February 1995 Gamogen recorded
income from the Impotence Agreement of $47,107 ($100,000 in licensing
payments made by Zonagen less related expenses of $52,893). In the year
ended February 1996 no payments were received by Gamogen under the
Impotence Agreement.
On May 28, 1996 a stock payment was received by Gamogen in the form of
19,512 restricted common stock shares of Zonagen in accordance with certain
non-compete terms of the Impotence Agreement. On June 20, 1996 Gamogen sold
the 19,512 restricted shares to a small group of private investors for
$87,800, approximately 50% of the then NASDAQ market price for Zonagen,
Inc. non-restricted common stock.
On January 24, 1997 the Board of Directors approved and signed with Zonagen
a conditional amendment to the Impotence Agreement granting Zonagen the
right ("Option") to amend the Impotence Agreement eliminating the
following: 1) Gamogen's rights to royalties on Zonagen's future sales of
the Oral Treatment; 2) Gamogen's rights to market the Oral Treatment in
countries where Zonagen does not timely obtain regulatory approval for and
commence marketing of the Oral Treatment.
The Option was conditioned on the payment to Gamogen the amount of $750,000
("Option Price") if the Option were exercised by January 24, 1998 less any
Maintenance Payments (see below) received by Gamogen. The Option included
increases in the Option Price for later exercise of the Option through
January 24, 2000.
Under the conditional amendment Zonagen was granted the option, provided
however, that Zonagen make the following payments ("Maintenance Payments")
in cash to Gamogen: $75,000 upon the execution of the conditional amendment
and $75,000 on each July 24 and January 24 which occurs after the execution
of the conditional amendment and before Zonagen's exercise of the Option.
On January 24, 1997 Gamogen received from Zonagen the initial Maintenance
Payment of $75,000 which Gamogen recorded as licensing income. In July 1997
Gamogen received a second maintenance payment of $75,000 under the
conditional amendment.
In August 1997 Gamogen negotiated with Zonagen for revision to the
Conditional Amendment Number 1 of The Assignment Agreement. In September
1997 the Board of Directors approved and signed with Zonagen a conditional
amendment, Amendment Number 2 to the Assignment Agreement,
establishing an option price of $708,000 if the option were exercised on or
before September 30, 1997. On September 30, 1997 Gamogen received payment
from Zonagen for $558,000 which resulted from the sale of the impotence
oral treatment for $708,000 reduced by credits for maintenance payments
previously received of $150,000. As a result of this payment Zonagen has
exercised the Option and Gamogen has effectively sold its interest in this
product and is not entitled to further payments under the Assignment
Agreement and its amendments.
Beyond the above items, the Company's ability to increase its revenue and
develop other new products is primarily based on capital it derives from
current operations.
On April 18, 1995 Repro-Med executed a formal Contract Of Sale with Key
Bank of New York ("Key Bank") on a facility in Chester, NY ("Chester
facility") for the purpose of housing all
<PAGE>
operations of Repro-Med, Gamogen, and Gyneco. The purchase was completed on
April 30, 1996. The price for the facility was $1,030,000. The purchase of
the Chester facility was financed in part by a $900,000 mortgage loan from
Key Bank. The mortgage is a 10 year loan with a 20 year amortization rate
and interest at a rate of 8.82% for years 1-5 and for years 6-10 the Key
Bank base rate plus 0.5. Effective December 1997 the Company entered into
an interest-swap agreement with Key Bank which reduced the effective
interest rate on the mortgage to a fixed rate of 8.46% through April 2006.
The annual mortgage payment for the fiscal year ended February 1999
including principal and estimated interest of $72,000, is approximately
$106,500, payable in monthly installments. For the three months ended
August 31, 1998 a total of $17,037 in interest expense on the mortgage was
recorded. For the six months ended August 31, 1998 a total of $31,703 in
interest expense on the mortgage was recorded. Total mortgage principal
payments for the three months ended August 31, 1998 were $8,364. Total
mortgage principal payments for the six months ended August 31, 1998 were
$16,728. As of February 28, 1998 a total of $142,534 in mortgage interest
was recorded. Total principal payments made as of February 28, 1998 were
$28,674. A portion of the Chester facility is leased to Key Bank on a
net/net/net rent basis for 20 years at annual rent of $86,100 for years 1
through 10 and $99,990 for years 11 through 20. As of February 28, 1998 a
total of $158,089 in rent, exclusive of property tax rent allocations have
been paid by Key Bank. For the three months ended August 31, 1998 a total
of $21,525 in rent, exclusive of property tax rent allocations have been
paid by Key Bank. For the six months ended August 31, 1998 a total of
$43,050 in rent, exclusive of property tax rent allocations have been paid
by Key Bank. The lease contract required an $86,100 security deposit from
Key Bank and an additional rent allocation to Key Bank of 35% of all
property tax payments. Key Bank intends to maintain local branch operations
in the leased portion of the building. The new facility has improved Repro-
Med and Gyneco manufacturing efficiencies and provided additional space for
expansion of operations. The total cash expenditure in the fiscal year
ended February 1996 for this real estate purchase was $78,736, which
included a $55,000 deposit. The total cash expenditure, net of the mortgage
proceeds of $900,000, in the fiscal year ended February 1997 for this real
estate purchase and certain capital improvements, and other related legal
and engineering costs was $227,643.
In a transaction related to the purchase of the Chester facility on April
30, 1996, the Company secured from Key Bank of New York a line of credit of
$300,000. On December 1, 1997, the Company secured from Key Bank of New
York a $300,000 five-year term loan and a new line of credit of $500,000.
At February 28, 1998 the Company had an outstanding balance of $291,606 on
the 5-year term loan and $360,000 on the line of credit. At August 31,
1998, the Company had an outstanding balance of $262,227 on the 5-year term
loan and $480,000 on the line of credit.
The proceeds of the term-loan were used to pay $250,000 of the outstanding
balance of the previous line of credit of $260,000. The interest rate on
the term loan is fixed at an annual rate of 8.43%. Principal payments on
the term loan are monthly beginning January 1, 1998 at a rate of $4,197 per
month, plus accrued interest to date. The interest rate on the line of
credit is prime rate less one-quarter of one percent (currently 8.25% per
annum).
The Company's mortgage and bank loans include negative covenants and
cessation of advances and related events of default and financial
covenants, certain of which are listed below.
NEGATIVE COVENANTS:
- -------------------
Borrower covenants and agrees with Lender that while this Agreement is in
effect, Borrower shall not, without the prior written consent of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume
<PAGE>
indebtedness for borrowed money, including capital leases, (b) except as
allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrowers assets,
or (c) sell with recourse any of Borrowers accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrowers stock (other than dividends
payable in its stock), provided, however that notwithstanding the
foregoing, but only so long as no Event of Default has-occurred and is
continuing or would result from the payment of dividends, if Borrower is
a Subchapter S Corporations (as defined in the Internal Revenue Code of
1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the
shareholders to pay income taxes and make estimated income tax payments
to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d)
purchase or retire any of Borrowers outstanding shares or alter or amend
Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
to Borrower, whether under this Agreement or under any other agreement,
Lender shall have no obligation to make Loan Advances or to disburse Loan
proceeds if: (a) Borrower or any Guarantor is in default under the terms of
this Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender, (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings,
or is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrowers financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; (d) any Guarantor
seeks claims or otherwise attempts to limit, modify or revoke such
Guarantors guaranty of the Loan or any other loan with Lender; or (e)
Lender in good faith deems itself insecure, even though no Event of Default
shall have occurred.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrowers property or Borrowers or any
Grantors ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the
<PAGE>
Related Documents is false or misleading in any material respect at the
time made or furnished, or becomes false or misleading at any time
thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrowers existence as a
going
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrowers property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrowers deposit accounts with Lender However this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the Creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantors estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower s financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lenders sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
<PAGE>
FINANCIAL COVENANTS (YEARS 2002-2006). The following covenant will be in
effect for years six (the year 2002) through ten of the Loan and will be
tested annually based on fiscal year end financial statements.
Minimum Debt Coverage Ratio (DCR) of 1.50X, defined as profit before
taxes (PBT) plus interest (I) expense plus depreciation (D) divided by the
sum of the
current portion of long term debt (CPLTD) plus interest expense (I):
PBT + I + D
DCR = -----------
CPLTD + I
- ---------------------------------------------------------------------------
The Osbon Medical Systems division ("Osbon" ) of Imagyn Medical
Inc.("Imagyn"), formerly Urohealth Systems, Inc., OEM product purchases
represented 21% of the Company's total sales for the fiscal year
ending February 1998. In the fiscal year ended February 1997 the Osbon
corporation's OEM product purchases represented 61% of the Company's total
sales.
Osbon markets the Company's OEM products in the impotence vacuum device
market. Management believes that Osbon presently controls a substantial
portion of the impotence vacuum device market. Other products have recently
been developed for Osbon which compete with the Company's current OEM
products and are anticipated to be manufactured and marketed directly by
Osbon. These new products were introduced by Osbon in direct competition to
the Company's OEM products in June 1996 and are sold under the trade name
"Esteem" ("Esteem products"). As a result the Company has seen a decline in
sales of its OEM products to Osbon. Sales of OEM products to Osbon for the
fiscal year ended February 1997 were $1,468,715, a decline of $676,008, or
32%, from the previous fiscal year. For the fiscal year ended February
1998, sales to Osbon declined to $459,667. The sharp decline in sales to
Osbon in the fiscal year ended February 28, 1998 was due to three factors:
1) introduction of the Esteem products in fiscal 1997, 2) overstocking by
Osbon of the OEM products in fiscal 1997 which impacted sales in the first
quarter of fiscal 1998, and 3) an overall decline in Osbon sales in the
impotence vacuum device market in the third and fourth quarters of fiscal
1998. Osbon reported a decline of over 30% in its total sales of all vacuum
devices in the final two calendar quarters of 1997. As a result Repro-Med
did not sell any OEM products to Osbon from November 1997 through March
1998. The overall decline in Osbon sales in the impotence vacuum device
market in the third and fourth quarters of fiscal 1998 was due to a
decrease in demand for vacuum devices due to increased competition from new
pharmaceutical products, specifically a urethral suppository tradenamed
Muse introduced in May 1997 and an orally administered pill tradenamed
Viagra, introduced in March 1998. Muse, manufactured and sold by Vivus,
Inc, was highly successful in 1997. Since its introduction in March 1998,
Viagra has supplanted Muse, accounting for an estimated 95% of newly issued
prescriptions for impotence medications. Viagra is manufactured and sold by
Pfizer, Inc. It is too early to predict the impact of Viagra on the
impotence vacuum device market. While Viagra has at least temporarily
substantially reduced sales of the impotence vacuum devices, it has
significantly increased public awareness of impotence problems in general.
Depending on Viagra's clinical effectiveness and reimbursement policies
adopted by healthcare insurers, the introduction of Viagra may on a longer
term basis, stimulate, or at least not interfere with the market for the
Company's OEM impotence vacuum devices. Sales of OEM products to Osbon in
the three month period ended August 31, 1998 were $0. Sales of OEM products
to Osbon in the six month period ended August 31, 1998 were
<PAGE>
$103,008, or 10% of total Company sales. Repro-Med sales of OEM products to
Osbon in the three month period ended August 31, 1997 were $159,840, or 38%
of product sales. Repro-Med sales of OEM products to Osbon in the six month
period ended August 31, 1997 were $271,725, or 36% of product sales. Based
on orders to-date and discussions with Osbon concerning anticipated
purchases, and considering the reduced level of inventory held at Osbon,
management estimates that sales to Osbon in the fiscal year ended February
1998 may be approximately 30% higher as compared to fiscal 1999. However,
on October 9, 1998 in a public press release Imagyn announced the sale of
its impotence product line to Timm Research of Eden Prairie, Minnesota. In
the press release Imagyn announced that it expects to close on this sale in
30 days. Management has no further information on this sale nor its effect
on sales of OEM products to Osbon or Timm Research Company.
Due to Osbon's continuing and projected significant operating losses, high
debt level, and unfavorable credit rating, and announcements by Imagyn
concerning its financial condition and liquidity, Repro-Med management is
cautious concerning Osbon and Imagyn's financial viability. At February 28,
1998, the Company's account receivable from Osbon were $80,843. This
account receivable was for shipments made to Osbon in December 1997.
Partial payments on this account receivable of $80,843 were made by Osbon
in March and April 1998 with final payment made on May 18, 1998. As of
August 31, 1998 account receivable from Osbon were $77,008. The August 31,
1998 account receivable was for shipments totaling $103,008 made to Osbon
in April and May 1998 reduced by partial payments received in subsequent
months. Based on Osbon's recent payment history, discussions with Osbon
concerning ongoing sales by Osbon of the OEM products, and considering
recent announcements by Imagyn concerning its liquidity and financing, the
Company anticipates that the receivable balance at August 31, 1998 of
$77,008 will be paid in full and has not established a bad debt reserve for
this receivable. As of October 10, 1998 the $77,008 account receivable at
August 31, 1998 was reduced by subsequent payments from Osbon to a balance
owing of $15,000.
During the twelve month period ended March 1996, the Company, acting in
accordance with its written agreement with Osbon for the manufacture by
Repro-Med of the Esteem products ("Esteem Agreement"), cooperated in and
provided extensive work in testing, validation, design analysis and problem
solving, prototyping and generating and providing information concerning
performance and improvements to the Esteem products design. In furtherance
of the Esteem Agreement Repro-Med provided Osbon related information
concerning Repro-Med's proprietary product design, materials, and
manufacturing processes. Management believes that Repro-Med's assistance
was vital to Osbon's attempts to complete the design and facilitate the
timely manufacture of the Esteem products. Throughout this time period the
Company advised Osbon of numerous engineering design faults related to the
manufacturability, quality, and customer use of the Esteem products which
Repro-Med had discovered through its testing and validation work on the
Esteem products. These faults were primarily the result of either design
specifications provided Osbon by its contract engineers or other items
initiated by Osbon. A number of these faults were significant and resulted
in delays throughout the program. In March 1996 the Company forthrightly
advised Osbon that, based on the Company's current knowledge of the status
of the design, that confirmation of certain production scheduling requested
by Osbon was unrealistic and could not reasonably be achieved, namely the
production and delivery of 7,000 Esteem products by May 15, 1996. In April
1996 Osbon advised that it was withdrawing its commitment to Repro-Med for
manufacture of the Esteem products and had secured
<PAGE>
other options for manufacture of these products. No prior notice was
provided the Company by Osbon. Despite repeated requests to Osbon the
Company has not received an explanation for this action. The Company has
advised Osbon that Repro-Med is due compensation for its work to-date on
the Esteem products and for use of its proprietary design and manufacturing
information. The Company has also advised Osbon that Repro-Med is available
to initiate the manufacture the Esteem products in accordance with its
written agreement. The Company intends to seek to resolve these matters on
an amicable basis with Osbon. To date no resolution has been agreed to.
Osbon remains a significant and important customer of Repro-Med.
Management believes that the Company's revenues will increase due to growth
in sales of the Res-Q-Vac and Syringe I.V. Infusion System, market
introduction of its three new products (OTC vacuum device, OTC constriction
rings and the reusable resuscitator) and also, contingent on the effect of
Viagra, Muse, and other new products on the impotence vacuum device market,
increased sales of OEM products to Osbon or Timm Research Company and
Mission. Management believes that the Company can expand, albeit at a
limited pace, on the basis of currently available funds which include
working capital of $853,902 and cash flow derived from operations.
Management anticipates that the Company's total cash position will continue
to decline during fiscal 1999, due to increases in inventory and accounts
receivable from increasing sales, new product related spending, and
scheduled long-term debt repayment of approximately $105,000. Due primarily
to the significant decline in sales of OEM products to Osbon the Company
recorded a large operating loss in the fiscal year ended February 1998. The
operating loss in the fiscal year ended February 1998 was increased as the
Company maintained staff and incurred added expenses and capital spending
to support anticipated sales of new products.
The large operating loss and capital spending for new products in the
fiscal year ended February 1998 generated a significant negative cashflow.
Additionally a significant increase in inventory, due primarily to the
Company's new Freedom60 I.V. and Mission OEM vacuum device, resulted in
increased borrowing under the Company's bank line of credit. These items
have severely reduced the Company's liquidity and available cash to expand
operations and improve profitability. The Company recorded a loss of
$133,619 in the six month period ended August 31, 1998. This loss is due in
part to the Company maintaining staff and expense spending to support
anticipated sales of its new products. The Company has taken actions to
reduce expenses and effected certain staff reductions in May and June 1998.
To further conserve cash, the Company is limiting inventory for the OTC
vacuum erection device until firm sales orders are secured and is
investigating other means of increasing cash flow, including further
reducing operating costs and deferring non-essential expenditures. The
expense and staff reductions taken to date (see above) are not sufficient
to return the Company to consistent profitability. The Company expects,
however, that when coupled with anticipated increases in new product sales,
these expense and staff reductions, will enable the Company to return to
profitable levels in the fourth quarter of the current fiscal year.
However, if no significant increase in product sales versus current levels
is seen, then management will have to consider additional steps to attempt
to return the Company to profitability. In addition, management is seeking
additional sources of capital in order to enable the Company to continue
its product development efforts, market its products more aggressively, and
accelerate a return to consistent profitability. In its efforts to expand
its operations to a level to return the Company to profitability, the
Company is continuing development of new products. However, cash and other
working capital
<PAGE>
limitations may inhibit development and marketing of these new products,
which also face risks inherent in bringing new medical devices to market.
In particular, due to the significant inventory investment required,
marketing of the OTC vacuum erection and constriction ring devices and
resuscitator may be restricted.
Any statements which are not historical facts contained in this report are
forward looking statements that involve risks and uncertainties, including
but not limited to those relating to the uncertainty of expected purchases
of OEM products by Osbon, its successor, or Mission, other unexpected
increases or decreases in sales or manufacturing costs of the Company's
products, market acceptance and product demand for the Company's Syringe
I.V. Infusion System, OTC vacuum erection and constriction ring devices,
and resuscitator, uncertainty related to Food and Drug Administration or
other government regulation, and other risks identified in the Company's
Securities and Exchange Commission filings.
Results of Operations
- -----------------------
Results For Three Months Ended August 31, 1998 As Compared With Three
Months Ended August 31, 1997:
In the three months ended August 31, 1998 the loss from operations was
$147,414 as compared to income from operations of $243,486 in the three
months ended August 31, 1997, an decline of $390,900. The decline of
$390,900 resulted primarily from $708,000 in revenues from sale of the
Company's impotence treatment technology in the quarter ended August 31,
1997 which did not repeat in the quarter ended August 31, 1998. Selling,
general, and administrative expenses were $292,040, a decrease of $10,449,
versus the same quarter of the prior year, due primarily to decreased
marketing and administrative costs. Research and development increased
$3,952 to $24,440 due to product development expenses. Depreciation and
amortization increased $7,909 to $39,380 due to depreciation of production
tooling for the Freedom60 and OEM vacuum products.
In the quarter ended August 31, 1998, the Company's net loss was $147,414,
as compared to net income of $243,486 in the quarter ended August 31, 1997.
The loss per common share was $0.01 as compared to income per share of
$0.01 in the fiscal quarter ended August 31, 1997.
Results For Six month period Ended August 31, 1998 As Compared With Six
month period Ended August 31, 1997:
In the six month period ended August 31, 1998 the loss from operations was
$133,619 as compared to income from operations of $196,069 in the six month
period ended August 31, 1997, an decline of $329,688. The decline of
$329,688 resulted primarily from $708,000 in revenues from sale of the
Company's impotence treatment technology in the six month period ended
August 31, 1997 which did not repeat in the six month period ended August
31, 1998. Selling, general, and administrative expenses were $575,954, a
decrease of $19,651, versus the same six month period of the prior year,
due primarily to decreased marketing and administrative costs. Research and
development increased $21,891 to $83,115 due to product development
expenses. Depreciation and amortization increased $14,436 to $78,760 due to
tooling for the Freedom60 and OEM vacuum products.
In the six month period ended August 31, 1998, the Company's net loss was
<PAGE>
$133,619, as compared to net income of $196,069 in the six month period
ended August 31, 1997. The loss per common share was $0.01 in the current six
month period as compared to income per share of $0.01 in the six month
period ended August 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the following persons, thereunto duly authorized.
REPRO-MED SYSTEMS, INC.
/s/ Andrew I. Sealfon Oct 12, 1998
Andrew I. Sealfon, President, Treasurer, Chairman of
the Board, Director, and Chief Executive Officer
/s/ Jesse A. Garringer Oct 12, 1998
Jesse A. Garringer, Executive Vice-President, General
Manager, Secretary, Director, and Chief Financial
Officer
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<PERIOD-END> Aug-31-1998
<CASH> 91,165
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<RECEIVABLES> 242,873
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<TOTAL-LIABILITY-AND-EQUITY> 3,812,080
<SALES> 1,071,548
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<CGS> 621,924
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