SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange of 1934
Date of earliest reported event: July 22, 1997
Creative Medical Development, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-75276 68-0281098
- -------------- ----------- ------------------
(State of (Commission (IRS Employer
incorporation) File Number) Identification No.)
975 SE Sandy Blvd., Portland, Oregon 97214
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 230-8034
-------------
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
(a) (i) On July 22, 1997, the Registrant's board of directors adopted a
resolution to change independent accountants from Perry-Smith & Co. to KPMG Peat
Marwick LLP ("KPMG") because the Company's previously announced merger
transaction with OMNI International Rail Products, Inc. ("OMNI") which closed
April 30, 1997 resulted in Registrant's principal office and operations being
outside the regional area served by Perry-Smith & Co.
(ii) The principal accountant's report for the last two years did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
(iii) The decision to change accountants was approved by the board of
directors.
(iv) There were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreement(s) in connection with its report.
(v) None of the events listed in paragraphs (a)(1)(iv) of Item 304 of
Regulation S-K has occurred.
(b) On July 22, 1997, the Registrant's board of directors adopted a
resolution to change independent accountants from Perry-Smith & Co. to KPMG for
the reasons described above. Prior to the closing of the merger transaction,
KPMG provided OMNI limited accounting services.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Financial Statements
April 30, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
Independent Auditors' Report
The Board of Directors
Creative Medical Development, Inc.:
We have audited the accompanying consolidated balance sheet of Creative Medical
Development, Inc. and subsidiary as of April 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended April 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Medical
Development, Inc. and subsidiary as of April 30, 1997, and the results of their
operations and their cash flows for the years ended April 30, 1997 and 1996 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 11 to
the consolidated financial statements, the Company suffers liquidity
constraints, due to the unexpected acceleration of certain debt maturities, that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also disclosed in note 11. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Portland, Oregon
June 27, 1997, except as to
note 12(c) to the consolidated
financial statements as to
which the date is July 24, 1997
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1997
Assets
------
Current assets:
Cash $ 139,635
Investment securities 755,123
Accounts receivable, less allowance for doubtful
accounts of $37,863 1,818,109
Inventories, net 2,494,743
Prepaid expenses and deposits 20,680
------------
Total current assets 5,228,290
Real estate held for sale 1,500,000
Property, plant and equipment, net 4,286,656
Organization costs, net of $328,040 accumulated amortization 237,955
------------
$ 11,252,901
------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable 1,364,079
Accrued liabilities 1,150,604
Notes payable 4,376,723
Current portion of long-term debt 31,000
------------
Total current liabilities 6,922,406
------------
Long-term debt, less current portion 2,845,276
Non-current accrued liabilities 265,950
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series B, 1,000,000 shares authorized,
622,066 shares issued and outstanding 6,221
Common stock, 10,000,000 shares authorized, $.01 par
value, 5,554,337 shares issued and outstanding 55,543
Additional paid-in capital 2,444,606
Retained deficit (1,287,101)
------------
Total stockholders' equity 1,219,269
------------
$ 11,252,901
============
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended April 30, 1997 and 1996
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 12,902,491 13,565,411
Cost of sales 10,557,688 9,598,110
------------ ------------
Gross profit 2,344,803 3,967,301
------------ ------------
Selling expenses 1,323,070 1,499,061
Administrative expenses 1,257,227 1,461,650
Research and development 61,646 70,852
------------ ------------
2,641,943 3,031,563
(Loss) earnings from operations (297,140) 935,738
------------ ------------
Other income (expense):
Interest expense (687,095) (713,825)
Legal settlement (334,500) --
Miscellaneous expense (6,781) (40,051)
Loss on sale of assets (25,156) (27,690)
------------ ------------
Total other expense (1,053,532) (781,566)
------------ ------------
(Loss) earnings before income taxes (1,350,672) 154,172
(Benefit) provision for income taxes (55,607) 36,517
------------ ------------
Net (loss) earnings $ (1,295,065) 117,655
============ ============
Net (loss) earnings per share $ (.41) .04
============ ============
Weighted average common shares outstanding 3,126,294 2,808,516
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended April 30, 1997 and 1996
Preferred stock
Series B Common stock Additional Retained Total
-------------------------- -------------------------- paid-in earnings stockholders'
Shares Amount Shares Amount capital (deficit) equity
------ ------ ------ ------ ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1995 - $ - 2,688,926 $ 26,889 933,111 20,409 980,409
Issuance of common stock - - 412,095 4,121 395,879 - 400,000
Dividends - - - - - (65,100) (65,100)
Net earnings - - - - - 117,655 117,655
---------- ------- ------------ -------- ----------- ------------ ------------
Balance, April 30, 1996 - - 3,101,021 31,010 1,328,990 72,964 1,432,964
Issuance of common stock - - 111,743 1,117 116,383 - 117,500
Dividends - - - - - (65,000) (65,000)
Payment of stock dividend - - 233,428 2,334 186,478 - 188,812
Preferred and common
shares issued in
merger 622,066 6,221 2,108,145 21,082 812,755 - 840,058
Net loss - - - - - (1,295,065) (1,295,065)
---------- ------- ------------ -------- ----------- --------- ---------
Balance, April 30, 1997 622,066 $ 6,221 5,554,337 $ 55,543 2,444,606 (1,287,101) 1,219,269
========== ======= ============ ======== =========== ========= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended April 30, 1997 and 1996
1997 1996
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) earnings $(1,295,065) 117,655
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 491,642 444,785
Legal settlement 334,500 --
Loss on sale of assets 25,156 27,690
Deferred income taxes (55,607) 36,517
Change in assets and liabilities:
Accounts receivable (199,814) 747,872
Inventories 296,361 (1,126,312)
Prepaid expenses and deposits 1,876 3,734
Accounts payable 425,992 (108,902)
Accrued liabilities 306,383 68,897
----------- -----------
Net cash provided by operations 331,424 211,936
----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets 17,166 2,500
Purchase of property, plant and equipment (375,316) (680,492)
Organization costs -- 3,293
----------- -----------
Net cash used by investing activities (358,150) (674,699)
----------- -----------
Cash flows from financing activities:
Net (payment) borrowings on notes payable (116,326) 420,352
Payments on long-term debt (14,281) (481,882)
Borrowing on long-term notes -- 384,030
Proceeds from sale of stock 100,000 400,000
Acquisition costs (185,065) --
----------- -----------
Net cash (used) provided by financing activities (215,672) 722,500
----------- -----------
(Decrease) increase in cash (242,398) 259,737
Cash at beginning of year 382,033 122,296
----------- -----------
Cash at end of year $ 139,635 382,033
=========== ===========
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
1997 1996
---------- --------
Supplemental disclosure of cash flow information: Cash paid for:
<S> <C> <C>
Interest $ 677,847 726,321
Income taxes -- --
Supplemental schedule of non-cash investing and financing activities:
Stock dividend 65,000 65,100
Issuance of common stock on conversion of debt 17,500 --
Effect of acquisition:
Fair value of assets acquired 2,255,123 --
Liabilities assumed 1,230,000 --
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1997
(1) Summary of Significant Accounting Policies
(a) Description of the Company, Basis of Presentation and Change in
Reporting Entity
----------------------------------------------------------------------
Creative Medical Development, Inc. (CMD), incorporated in California
on July 20, 1992, designed, developed, manufactured and marketed
propriety ambulatory infusion therapy products for alternate site
patient care. On September 13, 1995, CMD sold substantially all of its
operating assets and technology and since that time has not had
significant operating results.
Effective April 30, 1997, CMD and OMNI International Rail Products,
Inc. (OMNI), completed an agreement and plan of merger which provided
for the merger of OMNI with and into a wholly-owned subsidiary of CMD
(collectively, the Company). Upon consummation of the merger, OMNI's
name changed to OMNI Products, Inc. Just prior to the closing of the
merger, OMNI completed a recapitalization in which the Board of
Directors authorized the conversion of:
Series B preferred stock into Series A preferred stock (new
Series A preferred stock);
650,000 shares of new Series A preferred stock into 260,000
shares of common stock;
$188,812 in accrued dividends into 75,525 shares of common stock.
Also, at the closing of the merger, CMD completed a recapitalization
in which the Board of Directors authorized the conversion of 810,000
shares of Series A preferred stock into 270,000 shares of Series B
preferred stock.
Under the terms of the merger agreement, the shareholders and stock
option holders of OMNI exchanged all of their common stock and common
stock options for common stock and Series B preferred stock and common
and preferred stock options of the Company. OMNI's common stock and
common stock options were converted into CMD common stock and common
stock options at a ratio of 3.091 to 1.0. In addition, OMNI
shareholders and stock option holders received 352,066 shares of
Series B preferred stock and 187,934 options to purchase Series B
preferred stock, respectively.
(Continued)
<PAGE>
2
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Upon the completion of the transaction, former OMNI security holders
owned approximately 67% of the total outstanding shares of the Company
on a fully diluted basis. The initial ownership ratio is subject to
adjustment one year after the closing of the transaction. The final
ownership ratio will reflect any adjustments resulting from
differences between the assumed value of CMD's net assets at the time
of the merger and a final determination to be made as of April 30,
1998. If the final ownership ratio differs from the initial ownership
ratio in favor of OMNI, OMNI's shareholders will receive additional
shares of CMD common and Series B preferred stock as necessary to
reflect the final ownership ratio thus increasing the OMNI
shareholders' relative ownership. If the final ownership ratio differs
from the initial ownership ratio in favor of CMD, an amount up to 10%
of the CMD common stock and Series B preferred stock issued to an
escrow for OMNI's shareholders will be canceled as necessary to
reflect the final ownership ratio, thus decreasing the relative
percentage ownership of OMNI's shareholders. In no case will this
adjustment result in OMNI's shareholders owning less than 64.3% of the
total outstanding shares.
The transaction between CMD and OMNI is considered a reverse
acquisition for financial reporting purposes and has been accounted
for under the purchase method of accounting. As a result, for
financial statement purposes, i) the historical values of OMNI's net
assets have been retained; ii) the net assets of CMD immediately prior
to the merger have been recorded at their fair value on the date of
the transaction, iii) the results of the operations of CMD are
included in the results of the Company beginning on the effective date
of the transaction, iv) the dollar balance of OMNI's accumulated
deficit has been retained, and the balance of OMNI's common stock and
additional paid-in capital have been reallocated to be consistent with
the ratio of CMD's preferred and common stock. Assets acquired
consisted of investment securities and a building, while liabilities
assumed consisted of the mortgage associated with the building
acquired. The fair value of assets acquired exceeded the fair value of
liabilities assumed by approximately $1,025,000; such excess was
attributed to the shares issued in the merger. OMNI's costs associated
with the transaction, totaling approximately $185,000, were also
attributed to the shares issued in the merger.
The consolidated statements of operations and cash flows reflect only
the activity of OMNI.
Unaudited pro forma combined results of operations of the Company for
fiscal years 1997 and 1996 are presented below. Such pro forma
presentation has been prepared assuming that the acquisition had been
made as of the beginning of fiscal year 1996.
1997 1996
---- ----
Revenues $ 12,902,491 13,565,411
Net (loss) earnings (338,012) 220,874
(Continued)
<PAGE>
3
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CMD and
its wholly-owned subsidiary, OMNI Products, Inc., originally
incorporated in Oregon in 1993. OMNI Products, Inc. manufactures and
distributes, on a world-wide basis, a variety of rubber,
rubber/concrete and concrete railroad grade crossing systems. All
material intercompany transactions and balances have been eliminated
in the consolidated financial statements.
(c) Investments
-----------
The Company has adopted Statement of Financial Accounting Standards
No. 115 Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115). Accordingly, the Company has classified its
short-term investments in corporate equity securities as
available-for-sale securities. The securities' carrying value is equal
to market value.
(d) Inventories
-----------
The Company values inventories at the lower of average production cost
or market (net realizable value). The Company determines cost on the
first-in, first-out (FIFO) basis.
(e) Accounts Receivable
-------------------
Accounts receivable are from distributors of the Company's products
and customers. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses. Also,
to reduce the risk of credit loss, the Company requires letters of
credit from foreign customers for which no credit history has been
established.
(f) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Depreciation is
provided over the estimated useful lives of the assets using the
straight-line method. The estimated useful lives for furniture,
vehicles and equipment are ten years; buildings are forty years.
Expenditures for additions and major improvements are capitalized.
Expenditures for repairs and maintenance are charged to income as
incurred.
(g) Organization Cost
------------------
Organization costs are amortized over a five-year period.
(Continued)
<PAGE>
4
CREATIVE MEDICAL DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(h) Warranty
--------
The Company provides a six-year warranty for its products and
establishes an allowance at the time of sale, based on historical
warranty experience, to provide estimated warranty costs.
(i) Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Research and Development Costs
------------------------------
The Company charges all research and development costs associated with
the development of products to expense when incurred.
(k) Advertising Expenses
--------------------
Advertising expenses are charged to expense as incurred and were
$102,310 and $126,956 for 1997 and 1996, respectively.
(l) Revenue Recognition
-------------------
Revenues are recognized when products are shipped.
(m) Stock Option Plan
-----------------
Prior to May 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On May 1, 1996, the Company adopted
SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made
in 1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(Continued)
<PAGE>
5
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(n) Fair Value of Financial Instruments
-----------------------------------
At April 30, 1997, the carrying value of cash, trade receivables,
accounts payable and notes payable approximate fair value due to the
short-term nature of these instruments. At April 30, 1997, the fair
value of the Company's long-term debt approximates carrying value as
such instruments' stated interest rates do not differ significantly
from current market rates.
(o) Net (Loss) Earnings Per Common and Common Equivalent Share
----------------------------------------------------------
Net (loss) earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares assumed to be
outstanding during the period (using the treasury stock method for
dilutive common equivalent shares). Common equivalent shares consist
of convertible preferred stock, options and warrants to purchase
common stock, which have been excluded from the computation of primary
net (loss) earnings per share due to their anti-dilutive effect.
The transaction between CMD and OMNI is considered a reverse
acquisition for financial statement purposes and has been accounted
for under the purchase method of accounting. CMD's shares outstanding
and dilutive equity instruments, and convertible preferred stock, are
included in the computation of common equivalent shares from the date
of acquisition. As the acquisition was consummated on April 30, 1997,
such share and dilutive equity instruments are not included in the
computation of common equivalent shares for the fiscal years ended
April 30, 1997 and 1996.
(p) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(Continued)
<PAGE>
6
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(q) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, on May 1, 1996. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a
material impact on the Company's financial position, results of
operations, or liquidity.
(r) Prior Period Adjustments
------------------------
The accompanying consolidated financial statements were prepared in
connection with the merger agreement discussed in note 1(a) and
present for the first time the combined results of OMNI and CMD.
Certain adjustments were made to record certain prior period
adjustments to the individual entities. Prior period adjustments were
made to inventory, cost of sales, accrued income taxes and provision
for income taxes.
(s) Reclassifications
-----------------
Certain reclassifications have been made to the 1996 amounts to
conform with 1997 presentation.
(2) Inventories
-----------
Inventories consist of the following at April 30, 1997:
Raw materials $ 461,430
Finished goods 2,183,313
------------
2,644,743
Less allowance for excess or obsolete
inventory 150,000
------------
Inventories, net $ 2,494,743
============
(Continued)
<PAGE>
7
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following at April 30, 1997:
Land $ 374,201
Buildings 1,381,593
Vehicles 90,211
Office furniture and equipment 121,092
Manufacturing equipment 3,256,327
------------
5,223,424
Less accumulated depreciation 936,768
------------
$ 4,286,656
============
Certain property, plant and equipment serves as collateral for short and
long-term debt obligations.
(4) Accrued Liabilities
-------------------
Accrued liabilities consist of the following at April 30, 1997:
Warranties $ 344,950
Accrued compensation 249,391
Accrued merger costs 151,343
Other 404,920
------------
$ 1,150,604
=============
(5) Notes Payable
-------------
The Company has a revolving line of credit totaling $2,608,581 with Finova
Capital Corporation (Finova) that generally provides borrowing up to
$2,750,000 against 85% of eligible accounts receivable and 50% of eligible
inventory. Interest on the line is prime rate plus 2.25% (10.75% at April
30, 1997), with a minimum interest charge of $9,000 per month. The line's
original maturity date was April 26, 1999. However, on April 29, 1997, the
Company was notified that the revolving line of credit expires on July 31,
1997.
In addition, the Company has a term loan payable and a capital loan payable
with Finova totaling $1,153,702 and $614,440, respectively, at April 30,
1997, and are payable in monthly installments of $40,000 and $8,500,
respectively, plus interest at 11.5% per annum per loan. The loans payable
are secured by equipment and inventory. The original maturity date was
April 26, 1999. However, on April 29, 1997, the Company was notified that
the loans expire on July 31, 1997.
(Continued)
<PAGE>
8
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company can extend the debt maturities to August 31, 1997 provided that
the Company i) provides Finova with a commitment letter by July 31, 1997,
issued by a new funding source which specifically states that the Finova
loans will be paid by August 31, 1997, and ii) pays an extension fee equal
to one-quarter percent (1/4%) of the total Finova loans as of July 31,
1997.
(6) Long-term Debt
--------------
Long-term debt is comprised of the following at April 30, 1997:
Notes payable to Capital Consultants in
monthly installments of $13,631,
including interest at 10%, payable in
full in December 1998, secured by real
estate $ 1,338,776
Mortgage payable to financial institution
in monthly installments of $12,750,
including interest at 11.375%, payable
in full in December 1998, secured by
real estate 1,230,000
Note payable to an individual in monthly
installments of interest only at 10%,
plus additional "premium" interest at 7%
due each May 15th, payable in full in
April 1999 200,000
Note payable to individuals in monthly
installments of interest only at 10%,
payable in full in April 1999 107,500
------------
2,876,276
Less current portion 31,000
------------
Long-term debt, due in 1999 $ 2,845,276
===========
(7) Income Taxes
------------
The income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $ -- --
State -- --
-------- --------
-------- --------
-------- --------
Deferred:
Federal (46,039) 30,234
State (9,568) 6,283
-------- --------
(55,607) 36,517
Total income tax (benefit) expense $(55,607) 36,517
======== ========
(Continued)
</TABLE>
<PAGE>
9
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities at April 30, 1997 are as follows:
Deferred tax assets:
Investment in securities $ 232,418
Warranty reserve 132,309
Legal settlement reserve 128,318
Inventory reserve 57,534
Bad debt reserve 14,523
Self-insurance reserve 6,223
Other 1,994
Net operating loss carryforwards:
Federal 629,394
State 130,810
---------
1,333,523
Less valuation allowance 490,416
---------
Net deferred tax asset 843,107
---------
Deferred tax liability:
Property, plant and equipment, due to
differences in depreciation 651,327
Real estate held for sale 191,780
---------
Net deferred tax liability 843,107
---------
Net deferred tax assets and liabilities $ --
=========
(Continued)
<PAGE>
10
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The (benefit) provision for income taxes differs from the amount of income
tax determined by applying the applicable Federal statutory income tax rate
to (loss) earnings before income taxes as a result of the following
differences:
1997 1996
---- ----
Statutory federal income tax rate (34.0)% 34.0%
State income taxes, net of federal
income tax benefit (4.4) 4.4
Change in valuation allowance 36.2 -
Other (2.1) (14.7)
----- ----
Effective tax rates (4.3)% 23.7%
===== =====
The Company has a valuation allowance of $490,416 and $-0-, respectively,
as of April 30, 1997 and 1996 an increase of $490,416 and $-0- in the
valuation allowance for the same respective periods ended.
At April 30, 1997 and 1996, the Company had approximately $1,982,000 and
$899,000, respectively, of net operating loss carryforwards to offset
future income for federal and state income tax purposes which will expire
2010 through 2012.
A provision of the Tax Reform Act of 1986, as amended, requires that
utilization of net operating loss and credit carryforward be limited to
when there is a more than 50% change in ownership of the Company. Such
change in ownership may have occurred during the current fiscal year ended;
however, the amount subject to the limitation has not yet been determined.
Accordingly, the utilization of the net operating loss and credit
carryforwards to remaining future years may be limited. Any future change
in the equity structure of the Company may further limit the utilization of
the net operating loss and credit carryforwards.
(Continued)
<PAGE>
11
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Commitments and Contingencies
-----------------------------
(a) Employment Contract Commitments
-------------------------------
The Company has entered into employment contracts with its chief
executive officer/chairman and president, and vice president of
operations through 1999 and 1998, respectively, with automatic
extensions of one-year increments. These contracts provide for a
minimum salary with annual adjustments based on cost of living
changes, corporate and individual performance and general business
conditions. At April 30, 1997, the aggregate future commitment was
$383,500.
(b) Operating Lease Commitments
---------------------------
The Company leases office space, vehicles and office equipment under
various operating lease agreements expiring over several years. Lease
expense was approximately $108,000 and $105,000 for the years ended
April 30, 1997 and 1996, respectively. Future minimum lease payments
under non-cancelable lease agreements are as follows:
Year ended April 30:
1998 $ 88,582
1999 65,800
2000 66,100
2001 66,300
2002 66,650
--------
$ 353,432
==========
(c) Purchase Commitment
-------------------
The Company has a commitment to purchase all retreading buffings at
$108 per ton produced by a retread manufacturer through December 31,
1998. Purchases under a similar purchase agreement with the same
manufacturer totaled approximately $225,000 and $298,000 for the years
ended April 30, 1997 and 1996, respectively.
(Continued)
<PAGE>
12
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(d) Royalty Agreements
------------------
The Company acquired a royalty agreement with Red Hawk Rubber Co. (Red
Hawk), from Riedel OMNI Rubber Products, Inc. The Red Hawk agreement
provides that the Company pay a 5% royalty on all net sales of
products that were being manufactured at the time the agreement was
signed until June 1999. Any new products developed and manufactured by
OMNI are not subject to the Red Hawk royalty agreement.
(e) Medical Claims
--------------
The Company is self-insured for the cost of medical coverage up to a
maximum of $15,000 per individual per year. The Company has an excess
coverage insurance providing for claims over $15,000 per individual
per year.
(f) Litigation
----------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
(9) Stockholders' Equity
--------------------
(a) Convertible Preferred Stock Series B
------------------------------------
The Company has authorized 1,000,000 shares of Series B convertible
preferred stock, of which 622,066 are issued and outstanding. The
terms of these shares are as follows:
Voting
------
Each share of Series B convertible preferred stock, until converted or
canceled, has the right to one vote equivalent to one share of common
stock into which such preferred series could be then converted.
Conversion
----------
Each share of Series B convertible preferred stock shall be
convertible to a like number of common shares if the Company reports
gross annual revenues of $20,000,000 or annual pre-tax earnings of
$1,500,000 during either of the fiscal years ending April 30, 1998 or
1999. If conversion standards have not been met, the Series B
preferred stock shall be canceled by the Company upon the issuance of
its fiscal year ended April 30, 1999 consolidated financial
statements.
(Continued)
<PAGE>
13
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(b) Stock Options
-------------
OMNI's 1995 Stock Incentive Plan (the 1995 plan) provides for granting
to employees and consultants of either incentive stock options or
non-qualified stock options. Incentive stock options must be granted
at an exercise price not less than 100% of the fair market value per
share at the grant date. Non-qualified stock options generally must be
granted at an exercise price of not less than 100% of the fair market
value per share at the grant date, although in certain cases may be
granted at 85%. The term of options granted under the 1995 plan is
generally ten years, but in certain cases may be five years. The right
to exercise options granted is generally fully vested on the grant
date.
The per share weighted average fair value of stock options granted
during 1996 was $.10 on the date of grant using the Minimum Value
option-pricing model with the following weighted average assumptions:
expected divided yield 0%, risk-free interest rate of 7%, and expected
life of ten years. No options were granted during 1995.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. The pro forma effects on net
(loss) earnings of applying SFAS No. 123 were not material for the
years ended December 31, 1996 and 1995.
In January 1994, CMD adopted an employee stock option plan which
provided for the issuance of incentive and non-qualified stock
options. In April 1997, in connection with the merger, the Company
adopted an Amended and Restated 1994 Stock Option Plan (1994 plan).
The merger agreement calls for the exchange of options in the 1995
plan for options in the 1994 plan. For each stock option exchanged,
option holders under the 1995 plan received substitute options in the
1994 plan to purchase such number of CMD common and preferred shares
as the holder of the OMNI options would have received had the options
been exercised in full immediately prior to the merger's closing. The
terms and conditions of the 1994 plan are essentially the same as the
1995 plan. The substitute options are subject to the final ownership
adjustment discussed in note 1(a).
(Continued)
<PAGE>
14
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents historic stock option activity under the
1995 plan, converted into substitute options, and the combining effect
with CMD options outstanding under the 1994 plan:
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
------------ ---------
<S> <C> <C>
Options outstanding at April 30, 1995 651,370 $ 0.69
Granted - -
Exercised - -
Forfeited - -
Expired - -
------------ --------
Options outstanding at April 30, 1996 651,370 0.69
Granted 1,236,289 0.83
Exercised - -
Forfeited (48,061) (0.69)
Expired - -
CMD options outstanding at time of merger 255,000 1.68
------------ --------
Options outstanding at April 30, 1997 2,094,598 $ 0.89
============ ========
</TABLE>
The Company reserved 3,000,000 shares of common stock and 500,000
shares of preferred stock for issuance under the 1994 plan. At April
30, 1997, there were 905,402 shares available for grant under the 1994
plan.
At April 30, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options under the 1994 plan
was $0.25-$5.00 and 8.03 years, respectively.
At April 30, 1997 and 1996, the number of options exercisable under
the 1994 plan was 2,094,598 and 651,370, respectively, and the
weighted average exercise price of those options was $0.89 and $0.69,
respectively.
(Continued)
<PAGE>
15
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(c) Warrants Outstanding
--------------------
The following table presents warrants outstanding at April 30, 1997,
all of which were issued by CMD in consideration for service rendered,
debt and debt restructuring, and stock purchases and placements:
Number of
common
shares Exercise Expiration
issuable price date
-------- ---------- --------------
20,000 $ 2.50 May 31, 1997
76,000 0.75 May 31, 1997
100,000 0.35 March 1, 1998
52,500 6.05 May 13, 1998
46,250 0.35 May 31, 1998
10,000 0.75 May 31, 1998
10,000 1.50 May 31, 1998
603,750 6.50 May 13, 1999
50,000 10.00 April 14, 2000
(10) Major Customers and Credit Concentration
----------------------------------------
The Company does business with and extends credit to a variety of
commercial customers, including all of the major railroads in the United
States, major cities and municipalities throughout the United States and
Canada, and state-owned railroads throughout Europe and Asia.
The Company sells products to customers primarily in the United States. On
April 30, 1997, $1,077,000 (59%) of the trade receivables were concentrated
within the domestic railroad industry, and $255,000 (14%) of trade
receivables were with companies and distributors located in foreign
countries. Although the Company does not currently foresee a credit risk
associated with the foreign receivables, repayment is somewhat dependent
upon the financial stability of those countries' national economics.
Sales to domestic railroads were approximately $7,822,000 and $8,690,000,
or 61% and 64% of total sales, for the years ended April 30, 1997 and 1996,
respectively. Sales to the Company's largest customer were approximately
$2,220,000 and $1,986,000, or 17% and 15% of total sales, for the years
ended April 30, 1997 and 1996, respectively. Sales to the Company's five
largest customers were approximately $5,560,000 and $5,665,000, or 43% and
42% of total sales, for the years ended April 30, 1997 and 1996,
respectively.
(Continued)
<PAGE>
16
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Going Concern
-------------
As reflected in the accompanying financial statements, current debt
maturities and other short-term commitments exceeded the Company's liquid
assets available to repay such commitments. This is due primarily to the
unexpected acceleration of certain debt maturities. To finance debt
maturities, management has and will continue to seek both debt and equity
investors to provide additional capital.
(12) Subsequent Event
----------------
(a) Sale-leaseback
--------------
On May 21, 1997, under a sale and leaseback agreement, the Company
sold its manufacturing facility in Portland, Oregon for $560,000 and
leased it back under a five-year lease agreement. The transaction
produced a gain of approximately $83,000 which will be deferred and
amortized ratably over the life of the lease. A portion of the
proceeds from the sale were used to retire $423,773 in debt and
accrued interest.
The lease is an operating lease with future minimum lease payments as
follows:
Year ended April 30:
1998 $ 86,496
1999 86,496
2000 86,496
2001 86,496
2002 86,496
-----------
Total minimum lease payments $ 432,480
===========
(b) Put Agreement
-------------
The Company has a stock put agreement with four individuals, three of
whom are board members. Under the agreement, holders of the put could
require the Company to purchase 111,741 shares valued at $134,285 in
June 1997. In June 1997, the Company repurchased 23,774 shares at a
value of $28,571, while the holders of the remaining 87,967 shares
required the Company to repurchase such shares at a value of $120,962
on October 3, 1997.
(c) Legal Settlement
----------------
On July 24, 1997, the Company entered into a settlement agreement
arising from disputed royalty payments. The terms of the settlement
agreement require the Company pay $50,000 within sixty days of the
agreement date and $20,000 per quarter for five years thereafter.
Management has reserved the discounted present value of the settlement
at April 30, 1997.
<PAGE>
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Balance Sheet
April 30, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
Independent Auditors' Report
----------------------------
The Board of Directors
OMNI International Rail Products, Inc.:
We have audited the accompanying balance sheet of OMNI International Rail
Products, Inc. as of April 30, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. An audit of a
balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of OMNI International Rail Products,
Inc. as of April 30, 1997, in conformity with generally accepted accounting
principles.
The accompanying balance sheet has been prepared assuming that the Company will
continue as a going concern. As discussed in note 11 to the financial statement,
the Company suffers liquidity constraints, due to the unexpected acceleration of
certain debt maturities, that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also disclosed in note 11. The balance sheet does not include any adjustments
that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Portland, Oregon
June 27, 1997, except as to note 12(d)
to which the date is July 24, 1997
<PAGE>
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Balance Sheet
April 30, 1997
Assets
------
Current assets:
Cash $ 139,635
Accounts receivable, net 1,818,109
Inventories, net 2,494,743
Capitalized merger costs 185,065
Prepaid expenses and deposits 20,680
-----------
Total current assets 4,658,232
Property, plant and equipment, net 4,286,656
Organization costs, net 237,955
-----------
$ 9,182,843
===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable 1,364,079
Accrued liabilities 1,150,604
Notes payable
4,376,723
Current portion of long-term debt 17,140
----------
Total current liabilities 6,908,546
----------
Long-term debt, less current portion 1,629,136
Non-current accrued liabilities 265,950
Commitments and contingencies
Stockholders' equity:
Common stock 1,666,312
Retained deficit (1,287,101)
-----------
Total stockholders' equity 379,211
-----------
$ 9,182,843
===========
See accompanying notes to balance sheet.
<PAGE>
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
April 30, 1997
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Description of the Company
--------------------------
OMNI International Rail Products, Inc., incorporated in Oregon in
1993, manufactures and distributes, on a world-wide basis, a variety
of rubber, rubber/concrete and concrete railroad grade crossing
systems.
(b) Inventories
-----------
The Company values inventories at the lower of average production cost
or market (net realizable value). The Company determines cost on the
first-in, first-out (FIFO) basis.
(c) Accounts Receivable
-------------------
Accounts receivable are from distributors of the Company's products
and customers. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses. Also,
to reduce the risk of credit loss, the Company requires letters of
credit from foreign customers for which no credit history has been
established.
(d) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Depreciation is
provided over the estimated useful lives of the assets using the
straight-line method. The estimated useful lives for furniture,
vehicles and equipment are ten years; buildings are forty years.
Expenditures for additions and major improvements are capitalized.
Expenditures for repairs and maintenance are charged to income as
incurred.
(e) Organization Cost
-----------------
Organization costs are amortized over a five-year period.
(f) Warranty
--------
The Company provides a six-year warranty for its products and
establishes an allowance at the time of sale, based on historical
warranty experience, to provide estimated warranty costs.
(Continued)
<PAGE>
2
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(g) Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(h) Research and Development Costs
------------------------------
The Company charges all research and development costs associated with
the development of products to expense when incurred.
(i) Advertising Expenses
--------------------
Advertising expenses are charged to expense as incurred.
(j) Revenue Recognition
-------------------
Revenues are recognized when products are shipped.
(k) Stock Option Plan
-----------------
Prior to May 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On May 1, 1996, the Company adopted
SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made
in 1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(Continued)
<PAGE>
3
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(l) Fair Value of Financial Instruments
-----------------------------------
At April 30, 1997, the carrying value of cash, trade receivables,
accounts payable and notes payable approximate fair value due to the
short-term nature of these instruments. At April 30, 1997, the fair
value of the Company's long-term debt approximates carrying value as
such instruments' stated interest rates do not differ significantly
from current market rates.
(m) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, on May 1, 1996. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a
material impact on the Company's financial position, results of
operations, or liquidity.
(Continued)
<PAGE>
4
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(2) Inventories
-----------
Inventories consist of the following at April 30, 1997:
Raw materials $ 461,430
Finished goods 2,183,313
-------------
2,644,743
Less allowance for excess or obsolete
inventory 150,000
-------------
Inventories, net $ 2,494,743
=============
(3) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following at April 30, 1997:
Land $ 374,201
Buildings 1,381,593
Vehicles 90,211
Office furniture and equipment 121,092
Manufacturing equipment 3,256,327
-------------
5,223,424
Less accumulated depreciation 936,768
-------------
$ 4,286,656
=============
Certain property, plant and equipment serves as collateral for short and
long-term debt obligations.
(4) Accrued Liabilities
-------------------
Accrued liabilities consist of the following at April 30, 1997:
Warranties $ 344,950
Accrued compensation 249,391
Accrued merger costs 151,343
Other 404,920
-------------
$ 1,150,604
=============
(Continued)
<PAGE>
5
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(5) Notes Payable
-------------
The Company has a revolving line of credit totaling $2,608,581 with Finova
Capital Corporation (Finova) that generally provides borrowing up to
$2,750,000 against 85% of eligible accounts receivable and 50% of eligible
inventory. Interest on the line is prime rate plus 2.25% (10.75% at April
30, 1997), with a minimum interest charge of $9,000 per month. The line's
original maturity date was April 26, 1999. However, on April 29, 1997, the
Company was notified that the revolving line of credit expires on July 31,
1997.
In addition, the Company has a term loan payable and a capital loan payable
with Finova totaling $1,153,702 and $614,440, respectively, at April 30,
1997, and are payable in monthly installments of $40,000 and $8,500,
respectively, plus interest at 11.5% per annum per loan. The loans payable
are secured by equipment and inventory. The original maturity date was
April 26, 1999. However, on April 29, 1997, the Company was notified that
the loans expire on July 31, 1997.
The Company can extend the debt maturities to August 31, 1997 provided that
the Company i) provides Finova with a commitment letter by July 31, 1997,
issued by a new funding source which specifically states that the Finova
loans will be paid by August 31, 1997, and ii) pays an extension fee equal
to one-quarter percent (1/4%) of the total Finova loans as of July 31,
1997.
(6) Long-term Debt
--------------
Long-term debt is comprised of the following at April 30, 1997:
Notes payable to Capital Consultants in
monthly installments of $13,631,
including interest at 10%, payable in
full in December 1998, secured by real
estate $ 1,338,776
Note payable to an individual in monthly
installments of interest only at 10%,
plus additional "premium" interest at 7%
due each May 15th, payable in full in
April 1999 200,000
Note payable to individuals in monthly
installments of interest only at 10%,
payable in full in April 1999 107,500
------------
1,646,276
Less current portion 17,140
------------
Long-term debt, due in 1999 $ 1,629,136
=============
(Continued)
<PAGE>
6
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(7) Income Taxes
--------------
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities at April 30, 1997 are as follows:
Deferred tax assets:
Warranty reserve $ 132,309
Legal settlement reserve 128,318
Inventory reserve 57,534
Bad debt reserve 14,523
Self-insurance reserve 6,223
Other 1,994
Net operating loss carryforwards:
Federal 629,394
State 130,810
-----------
1,101,105
Less valuation allowance 449,778
-----------
Net deferred tax asset 651,327
-----------
Deferred tax liability:
Property, plant and equipment, due to
differences in depreciation 651,327
-----------
Net deferred tax liability 651,327
-----------
Net deferred tax assets and liabilities $ -
===========
The Company has a valuation allowance of $449,778 as of April 30, 1997 and
an increase of $449,778 in the valuation allowance for the period then
ended.
At April 30, 1997 and 1996, the Company had approximately $1,982,000 and
$899,000, respectively, of net operating loss carryforwards to offset
future income for federal and state income tax purposes which will expire
2010 through 2012.
A provision of the Tax Reform Act of 1986, as amended, requires that
utilization of net operating loss and credit carryforward be limited to
when there is a more than 50% change in ownership of the Company. Such
change in ownership may have occurred during the current fiscal year ended;
however, the amount subject to the limitation has not yet been determined.
Accordingly, the utilization of the net operating loss and credit
carryforwards to remaining future years may be limited. Any future change
in the equity structure of the Company may further limit the utilization of
the net operating loss and credit carryforwards.
(Continued)
<PAGE>
7
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(8) Commitments and Contingencies
-----------------------------
(a) Employment Contract Commitments
-------------------------------
The Company has entered into employment contracts with its chief
executive officer/chairman and president, and vice president of
operations through 1999 and 1998, respectively, with automatic
extensions of one-year increments. These contracts provide for a
minimum salary with annual adjustments based on cost of living
changes, corporate and individual performance and general business
conditions. At April 30, 1997, the aggregate future commitment was
$383,500.
(b) Operating Lease Commitments
---------------------------
The Company leases office space, vehicles and office equipment under
various operating lease agreements expiring over several years. Future
minimum lease payments under non-cancelable lease agreements are as
follows:
Year ended April 30:
1998 $ 88,582
1999 65,800
2000 66,100
2001 66,300
2002 66,650
---------
$ 353,432
=========
(c) Purchase Commitment
-------------------
The Company has a commitment to purchase all retreading buffings at
$108 per ton produced by a retread manufacturer through December 31,
1998. Purchases under a similar purchase agreement with the same
manufacturer totaled approximately $225,000 and $298,000 for the years
ended April 30, 1997 and 1996, respectively.
(d) Royalty Agreements
------------------
The Company acquired a royalty agreement with Red Hawk Rubber Co. (Red
Hawk), from Riedel OMNI Rubber Products, Inc. The Red Hawk agreement
provides that the Company pay a 5% royalty on all net sales of
products that were being manufactured at the time the agreement was
signed until June 1999. Any new products developed and manufactured by
OMNI are not subject to the Red Hawk royalty agreement.
(Continued)
<PAGE>
8
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(e) Medical Claims
--------------
The Company is self-insured for the cost of medical coverage up to a
maximum of $15,000 per individual per year. The Company has an excess
coverage insurance providing for claims over $15,000 per individual
per year.
(f) Litigation
----------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
(9) Stockholders' Equity
--------------------
(a) Stock Options
-------------
OMNI's 1995 Stock Incentive Plan (the 1995 plan) provides for granting
to employees and consultants of either incentive stock options or
non-qualified stock options. Incentive stock options must be granted
at an exercise price not less than 100% of the fair market value per
share at the grant date. Non-qualified stock options generally must be
granted at an exercise price of not less than 100% of the fair market
value per share at the grant date, although in certain cases may be
granted at 85%. The term of options granted under the 1995 plan is
generally ten years, but in certain cases may be five years. The right
to exercise options granted is generally fully vested on the grant
date.
The per share weighted average fair value of stock options granted
during 1996 was $.10 on the date of grant using the Minimum Value
option-pricing model with the following weighted average assumptions:
expected divided yield 0%, risk-free interest rate of 7%, and expected
life of ten years. No options were granted during 1995.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. The pro forma effects on net
(loss) earnings of applying SFAS No. 123 were not material for the
years ended December 31, 1996 and 1995.
(Continued)
<PAGE>
9
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
Stock option activity for the years ended April 30, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
--------- ---------
<S> <C> <C>
Options outstanding at April 30, 1995 651,370 $ 0.69
Granted - -
Exercised - -
Forfeited - -
Expired - -
------------ --------
Options outstanding at April 30, 1996 651,370 0.69
Granted 1,236,289 0.83
Exercised - -
Forfeited (48,061) (0.69)
Expired - -
------------ --------
Options outstanding at April 30, 1997 1,839,598 $ 0.78
============ ========
</TABLE>
The Company reserved 3,090,720 shares of common stock for issuance under
the 1995 plan. At April 30, 1997, there were 1,251,122 shares available for
grant under the 1995 plan.
At April 30, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options under the 1995 plan was
$0.65-$1.05 and 8.54 years, respectively.
At April 30, 1997 and 1996, the number of options exercisable under the
1995 plan was 1,839,598 and 651,370, respectively, and the weighted average
exercise price of those options was $0.78 and $0.69, respectively.
(Continued)
<PAGE>
10
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(10) Major Customers and Credit Concentration
----------------------------------------
The Company does business with and extends credit to a variety of
commercial customers, including all of the major railroads in the United
States, major cities and municipalities throughout the United States and
Canada, and state-owned railroads throughout Europe and Asia.
The Company sells products to customers primarily in the United States. On
April 30, 1997, $1,077,000 (59%) of the trade receivables were concentrated
within the domestic railroad industry, and $255,000 (14%) of trade
receivables were with companies and distributors located in foreign
countries. Although the Company does not currently foresee a credit risk
associated with the foreign receivables, repayment is somewhat dependent
upon the financial stability of those countries' national economics.
Sales to domestic railroads were approximately $7,822,000 and $8,690,000,
or 61% and 64% of total sales, for the years ended April 30, 1997 and 1996,
respectively. Sales to the Company's largest customer were approximately
$2,220,000 and $1,986,000, or 17% and 15% of total sales, for the years
ended April 30, 1997 and 1996, respectively. Sales to the Company's five
largest customers were approximately $5,560,000 and $5,665,000, or 43% and
42% of total sales, for the years ended April 30, 1997 and 1996,
respectively.
(11) Going Concern
-------------
As reflected in the accompanying financial statements, current debt
maturities and other short-term commitments exceeded the Company's liquid
assets available to repay such commitments. This is due primarily to the
unexpected acceleration of certain debt maturities. To finance debt
maturities, management has and will continue to seek both debt and equity
investors to provide additional capital.
(Continued)
<PAGE>
11
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(12) Subsequent Event
----------------
(a) Merger
------
Effective April 30, 1997, Creative Medical Development, Inc. (CMD) and
OMNI International Rail Products, Inc. (OMNI), completed an agreement
and plan of merger which provided for the merger of OMNI with and into
a wholly-owned subsidiary of CMD (collectively, the Company). Upon
consummation of the merger, OMNI's name changed to OMNI Products, Inc.
Just prior to the closing of the merger, OMNI completed a
recapitalization in which the Board of Directors authorized the
conversion of:
Series B preferred stock into Series A preferred stock (new
Series A preferred stock);
650,000 shares of new Series A preferred stock into 260,000
shares of common stock;
$188,812 in accrued dividends into 75,525 shares of common stock.
Also, at the closing of the merger, CMD completed a recapitalization
in which the Board of Directors authorized the conversion of 810,000
shares of Series A preferred stock into 270,000 shares of Series B
preferred stock.
Under the terms of the merger agreement, the shareholders and stock
option holders of OMNI exchanged all of their common stock and common
stock options for common stock and Series B preferred stock and common
and preferred stock options of the Company. OMNI's common stock and
common stock options were converted into CMD common stock and common
stock options at a ratio of 3.091 to 1.0. In addition, OMNI
shareholders and stock option holders received 352,066 shares of
Series B preferred stock and 187,934 options to purchase Series B
preferred stock, respectively.
(Continued)
<PAGE>
12
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
Upon the completion of the transaction, former OMNI security holders
owned approximately 67% of the total outstanding shares of the Company
on a fully diluted basis. The initial ownership ratio is subject to
adjustment one year after the closing of the transaction. The final
ownership ratio will reflect any adjustments resulting from
differences between the assumed value of CMD's net assets at the time
of the merger and a final determination to be made as of April 30,
1998. If the final ownership ratio differs from the initial ownership
ratio in favor of OMNI, OMNI's shareholders will receive additional
shares of CMD common and Series B preferred stock as necessary to
reflect the final ownership ratio thus increasing the OMNI
shareholders' relative ownership. If the final ownership ratio differs
from the initial ownership ratio in favor of CMD, an amount up to 10%
of the CMD common stock and Series B preferred stock issued to an
escrow for OMNI's shareholders will be canceled as necessary to
reflect the final ownership ratio, thus decreasing the relative
percentage ownership of OMNI's shareholders. In no case will this
adjustment result in OMNI's shareholders owning less than 64.3% of the
total outstanding shares.
The transaction between CMD and OMNI is considered a reverse
acquisition for financial reporting purposes and has been accounted
for under the purchase method of accounting. As a result, for
financial statement purposes, i) the historical values of OMNI's net
assets have been retained; ii) the net assets of CMD immediately prior
to the merger have been recorded at their fair value on the date of
the transaction, iii) the results of the operations of CMD are
included in the results of the Company beginning on the effective date
of the transaction, iv) the dollar balance of OMNI's accumulated
deficit has been retained, and the balance of OMNI's common stock and
additional paid-in capital have been reallocated to be consistent with
the ratio of CMD's preferred and common stock. Assets acquired
consisted of investment securities and a building, while liabilities
assumed consisted of the mortgage associated with the building
acquired. The fair value of assets acquired exceeded the fair value of
liabilities assumed by approximately $1,025,000; such excess was
attributed to the shares issued in the merger. OMNI's costs associated
with the transaction, totaling approximately $185,000, were also
attributed to the shares issued in the merger.
CMD, incorporated in California on July 20, 1992, designed, developed,
manufactured and marketed propriety ambulatory infusion therapy
products for alternate site patient care. On September 13, 1995, CMD
sold substantially all of its operating assets and technology and
since that time has not had significant operating results.
(Continued)
<PAGE>
13
OMNI INTERNATIONAL RAIL PRODUCTS, INC.
Notes to Balance Sheet
(b) Sale-leaseback
--------------
On May 21, 1997, under a sale and leaseback agreement, the Company
sold its manufacturing facility in Portland, Oregon for $560,000 and
leased it back under a five-year lease agreement. The transaction
produced a gain of approximately $83,000 which will be deferred and
amortized ratably over the life of the lease. A portion of the
proceeds from the sale were used to retire $423,773 in debt and
accrued interest.
The lease is an operating lease with future minimum lease payments as
follows:
Year ended April 30:
1998 $ 86,496
1999 86,496
2000 86,496
2001 86,496
2002 86,496
----------
Total minimum lease payments $ 432,480
==========
(c) Put Agreement
-------------
The Company has a stock put agreement with four individuals, three of
whom are board members. Under the agreement, holders of the put could
require the Company to purchase 111,741 shares valued at $134,285 in
June 1997. In June 1997, the Company repurchased 23,774 shares at a
value of $28,571, while the holders of the remaining 87,967 shares
required the Company to repurchase such shares at a value of $120,962
on October 3, 1997.
(d) Legal Settlement
----------------
On July 24, 1997, the Company entered into a settlement agreement
arising from disputed royalty payments. The terms of the settlement
agreement require the Company pay $50,000 within sixty days of the
agreement date and $20,000 per quarter for five years thereafter.
Management has reserved the discounted present value of the settlement
at April 30, 1997.
<PAGE>
(b) Pro forma financial information.
Creative Medical Development, Inc.
Pro Forma Financial Information
(Unaudited)
The following unaudited pro forma information reflects the business combination
between Omni International Rail Products, Inc (OMNI) and Creative Medical
Development, Inc (CMD) under the purchase method of accounting. The pro forma
information is based on the companies' historical financial statements and the
notes thereto, which are included elsewhere in this Form 8K. The pro forma
information combines OMNI's historical consolidated statement of operations for
the year ended April 30, 1997 and CMD's historical unaudited statement of
operations for the year ended April 30, 1997 as if the transaction was
consummated at the beginning of the period presented.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have occurred if the
combination had been consummated at the beginning of the period presented, nor
is it necessarily indicative of future operating results. This pro forma
information should be read in conjunction with the consolidated financial
statements and notes thereto of CMD and subsidiary included elsewhere herein.
Pursuant to Article 11, Rule 11.02 (c)(1) pro forma balance sheet information is
not presented because the transaction is already reflected in the consolidated
balance sheet presented elsewhere in this Form 8K. Because of the limited number
of pro forma adjustments and the ease with which those adjustments are
understood, a narrative description of the pro forma effects of the transaction
is being furnished in lieu of the statements described by Article 11.
In compliance with the reporting requirement of this item, financial results
from discontinued operations are excluded for purposes of presenting pro forma
information. Thus, the statements of operations presented in the consolidated
financial statements of CMD and subsidiary included elsewhere herein are
essentially the same as the required pro forma information.
CMD's net loss on leasing activities during fiscal 1997 totaling $29,263
represents CMD's only results included in the pro forma statement of operations.
Accordingly, pro forma loss for the year ended April 30, 1997 is $1,324,328.
Given the pro forma weighted average number of shares outstanding of 5,234,439
for the year ended April 30, 1997, net loss per share is $.25.
<PAGE>
Exhibit 10.7 Letter from Perry-Smith & Co. (former accountant dated
July 24, 1997, pursuant to Item 304(a)(3) of Regulation S-K.
<PAGE>
Item 8. Change in Fiscal Year.
On July 22, 1997, the Registrant's board of directors adopted a resolution
to change the Registrant's fiscal year end to April 30, beginning with April 30,
1997. Registrant will file a Form 10-KSB covering the transition period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Creative Medical Development, Inc.
Date: July 24, 1997 By: /S/ JEFF EDWARDS
--------------------------------
Jeff Edwards, CFO
PERRY-SMITH & CO.
Certified Public Accountants
July 24, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Creative Medical Development, Inc.
File Ref. No. 33-75276
We were previously the principal accountant for Creative Medical
Development, Inc. and, under the date of November 27, 1996, we reported on the
financial statements of Creative Medical Development, Inc. as of and for the
years ended September 30, 1996 and 1995. On July 22, 1997, our appointment as
principal accountant was terminated. We have read Creative Medical Development,
Inc.'s statement included under Item 4 of Form 8-K dated July 24, 1997 and we
agree with such statements.
/S/ Perry-Smith & Co.
----------------------------------
Certified Public Accountants
400 Capital Mall - Suite 1200 - Sacramento, CA 95815 - 916-441-1000
916-441-1110 FAX
