U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
--- act of 1934
For the quarterly period ended January 31, 1998
--- Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to _______________
Commission file number Securities Act Registration No. 33-75276
Creative Medical Development, Inc.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 68-0281098
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification NO.)
Incorporation or Organization)
975 SE Sandy Blvd. Portland, Oregon 97214 (Address of Principal
---------------------------------------------------------------
(Executive Offices)
(503) 230-8034
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,554,337 Common Shares and 622,065
Series B Preferred Shares all at $.01 par value were outstanding as of February
28, 1998.
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
INDEX
PART I. FINANCIAL
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets............................1
Unaudited Consolidated Statements of Operations..................2
Unaudited Consolidated Statements of Cash Flows..................3
Notes to Unaudited Consolidated Financial
Statements.......................................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................7
PART II. OTHER INFORMATION...................................................10
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES...................................................................10
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
January 31, 1998 April 30, 1997
(Unaudited)
Current Assets: ------------ ------------
Cash (Overdraft) $ (6,690) $ 139,635
Investment securities -- 755,123
Accounts receivable, net 1,638,619 1,818,109
Inventories, net 2,387,813 2,494,743
Prepaid expenses and deposits 93,621 20,680
------------ ------------
Total current assets 4,113,361 5,228,290
Real estate held for sale 1,500,000 1,500,000
Property, plant and equipment, net 3,821,705 4,286,656
Organization costs, net 148,723 237,955
------------ ------------
$ 9,583,789 $ 11,252,901
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,454,881 $ 1,364,079
Accrued liabilities 825,829 1,150,604
Notes payable 2,256,617 4,376,723
Current portion of long-term debt 866,876 31,000
------------ ------------
$ 5,404,203 $ 6,922,406
------------ ------------
Long-term debt, less current portion $ 2,845,350 $ 2,845,276
Deferred revenue 70,760
Non-current accrued liabilities 234,000 265,950
Stockholders' equity:
Common stock $ 55,305 $ 55,543
Preferred stock 6,221 6,221
Additional paid in capital 2,419,842 2,444,606
Retained deficit $ (1,451,892) $ (1,287,101)
------------ ------------
Total stockholders' equity $ 1,029,476 $ 1,219,269
------------ ------------
$ 9,583,789 $ 11,252,901
============ ============
1
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<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Quarter Nine months Nine months
Ended Ended Ended Ended
January 31 January 31 January 31 January 31
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 3,769,467 $ 2,385,005 $ 12,358,474 $ 10,429,042
Cost of sales 2,948,516 1,980,183 9,508,258 7,932,422
------------ ------------ ------------ ------------
Gross profit 820,951 404,822 2,850,216 2,496,620
Selling expenses 412,093 263,552 1,218,117 911,059
Administrative expenses 408,641 301,595 1,117,768 936,098
Research and development 32,909 48,120 96,504 139,606
------------ ------------ ------------ ------------
853,643 613,267 2,432,389 1,986,763
Earnings (loss) from operations (32,692) (208,445) 417,827 509,857
Other income (expense):
Interest expense (185,776) (171,094) (513,594) (522,815)
Miscellaneous expense (3,070) (27,174) (67,128) (83,832)
------------ ------------ ------------ ------------
Total other expense (188,846) (198,268) (580,722) (606,647)
Earnings (loss) before income taxes (221,538) (406,713) (162,895) (96,790)
Income taxes -- (128,879) 1,894 (8,504)
------------ ------------ ------------ ------------
Net earnings (loss) $ (221,538) $ (277,834) $ (164,789) $ (88,287)
Net earnings per share $ (0.04) $ (0.05) $ (0.03) $ (0.02)
------------ ------------ ------------ ------------
Weighted average common shares outstanding 5,530,563 5,554,337 5,535,855 5,554,337
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Nine Months
Ended Ended
January 31 January 31
1998 1997
----------- -----------
Cash flows from operating activities
<S> <C> <C>
Net earnings $ (164,789) $ (22,813)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 257,257 279,578
Amortization 89,233 89,437
Cash provided (used) by current assets
and liabilities:
Accounts receivable 179,490 60,247
Inventories 106,931 (214,824)
Prepaid expenses and deposits (72,940) (50,123)
Accounts payable (60,545) (7,113)
Accrued liabilities (104,881) 5,587
Income taxes payable -- 56,807
Deferred gain 70,760 --
----------- -----------
Net cash provided (used) by operating activities 300,516 196,783
Cash flow from investing activities
Proceeds from sale of assets 380,471 --
Purchase of plant, property & equipment (172,777) (279,779)
Proceeds from sale of investment securities 755,123 --
----------- -----------
Net cash provided (used) by operating activities 962,817 (279,779)
Cash flows from financing activities
Payments to acquire common stock (25,002) 0
Net borrowings (payments) on notes payable (351,964) 136,371
Net payments on long term debt (1,032,692) (419,229)
----------- -----------
Net cash provided (used) by financing activities (1,409,658) (282,858)
Net increase (decrease) in cash $ (146,325) $ (365,854)
Cash at beginning of period $ 139,635 $ 382,032
Cash at end of period (6,690) 16,178
3
</TABLE>
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements of Creative
Medical Development, Inc. have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. In the opinion of Management, the consolidated financial
statements include all adjustments necessary in order to make the
consolidated financial statements not misleading. Results for the period
ended January 31, 1998 are not necessarily indicative of the results that
may be expected for the fiscal year ending April 30, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto, for the fiscal year ended April 30, 1997, included in the
Company's Form 10-KSB.
(2) 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 until May 1, 1997, did not have 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:
o Series B preferred stock into Series A preferred stock (new Series A
preferred stock);
o 650,000 shares of new Series A preferred stock into 260,000 shares of
common stock;
o $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.
4
<PAGE>
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.
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 shareholder's 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.
(3) DEBT
On September 19, 1997 the Company executed an agreement with Finova Capital
Corporation (Finova) regarding a term loan payable and a capital
expenditure loan payable. The principal balances outstanding on the two
loans as of January 31, 1998 were $753,982 and $512,065. Under the terms of
the agreement, the maturity date for both loans is extended to August 31,
1999.
5
<PAGE>
(4) PUT AGREEMENT
The Company had a stock put agreement with four individuals, three of whom
are directors of the Company. 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 from one director all of his
shares subject to the put agreement (23,774 shares) at a value of $28,571
and the agreement with the other three individuals was amended such that
the Company could be required to repurchase 87,967 shares at a value of
$120,962 on October 3, 1997. In September, 1997 the agreement was again
amended such that the Company now could be required to repurchase 87,967
shares no later than February 3, 1998 and earlier than that date upon the
occurrence of certain events. In January, 1998, the agreement was again
amended to extend the repurchase date to April 3, 1998. The price to
repurchase the shares increases at the rate of 3.58% per month.
(5) NET (LOSS) EARNINGS PER 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.
6
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Background
----------
Creative Medical Development, Inc. (the "Company") was incorporated in the
state of California on July 20, 1992 and reincorporated in the state of
Delaware on June 1, 1993. The Company designed, developed, manufactured and
marketed ambulatory infusion therapy products under the "EZ Flow" trade
name.
On September 13, 1995, the Company entered into an Asset Purchase Agreement
with Gish Biomedical, Inc. ("Gish") for sale of the EZ Flow Pump technology
and product line. Under its terms, substantially all of the Company's
manufacturing related assets (with a net book value of $680,957) were sold
for $600,000 cash and $2,000,000 of Gish Stock (240,240 shares). Pursuant
to the terms of the agreement, operation of the EZ Flow business was
transferred to Gish as of September 13, 1995 and the sale closed April 17,
1996.
On April 17, 1997, the Company entered into an agreement for merger and
reorganization with OMNI International Rail Products, Inc., ("OMNI") a
privately held company in the business of manufacturing and distributing
premium rail crossing surface products in the United States and
internationally. The agreement provided for the merger of OMNI with a
wholly owned subsidiary of the Company formed for the purposes of the
transaction. Subject to certain adjustments, the Company was valued at
$2,000,000 and OMNI was valued at $4,000,000.
OMNI was an Oregon corporation formed in 1994 to acquire the OMNI premium
crossing business from Riedel Environmental Technologies, Inc. That
business was operated by OMNI until the merger with the Company and its
operations continue under the Company's wholly owned subsidiary corporation
OMNI Products, Inc. At the time of the merger, the OMNI executive officers
became the executive officers of the Company and the subsidiary and all but
one of the OMNI directors became the directors of the Company and the
subsidiary.
The Company's transaction with OMNI closed April 30, 1997. Subsequently,
the Company changed its fiscal year to April 30, 1997 consistent with
OMNI's fiscal year to facilitate accounting and reporting financial
results.
Results of Operations
---------------------
The following Selected Financial Data for the periods ended January 31,
1998 and 1997 have been derived from the unaudited financial statements of
the Company. This Selected Financial Data should be read in conjunction
with, and is qualified in its entirety by reference to, the financial
statements and related notes thereto included elsewhere in this Report.
7
<PAGE>
Except for the historical information contained herein, the matters set
forth in this Report include forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially. These
risks and uncertainties are detailed throughout this Report and are
discussed from time to time in the Company's periodic reports filed with
the Securities and Exchange Commission. The forward-looking statements
included in this Report speak only as of the date hereof.
The company, on April 30, 1997, completed an agreement and plan of merger
with OMNI International Rail Products, Inc. (OMNI). For financial reporting
purposes, the transaction is considered a reverse acquisition and has been
accounted for under the purchase method of accounting. Thus, the operating
results presented and discussed herein reflect only the activity of OMNI.
Results of Operations -- Quarter ended January 31, 1998
Compared with the Quarter ended January 31, 1997
As of and for the Quarters Ended
January 31
----------------------------------------
1998 1997
----------- ------------
Revenue $ 3,769,467 $ 2,385,005
Gross profit 21.8% 16.9%
Earnings from operations (0.8%) (8.7%)
Net (loss) earnings ($ 221,538) ($ 277,834)
Net (loss) earnings per share ($ 0.04) ($ 0.05)
REVENUE
The Company derives its revenues from the sale of premium grade rail crossings
to railroads, general contractors and municipalities. Revenues for the quarter
ended January 31, 1998 were $3,769,467 as compared to $2,385,005 for the quarter
ended January 31, 1997 representing an increase of 58%.
COST OF SALES
Cost of sales increased from $1,980,183 in the quarter ended January 31, 1997 to
$2,948,516 in the quarter ended January 31, 1998. As a percentage of sales, cost
of sales decreased from 83.1% to 78.2%. This decrease was due mainly to lower
charges for inventory write offs and warranty-related costs.
8
<PAGE>
SELLING EXPENSES
Selling expenses for the quarter ended January 31, 1998 were $412,093 compared
to $263,552 for the quarter ended January 31, 1997, an increase of $148,541.
Most of the increase is due to increased sales commissions as a result of the
higher level of sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended January 31, 1998
increased to $408,641 which was a 35% increase over the quarter ended January
31, 1997. Most of the increase was due to higher levels of spending on legal
expenses and consulting fees in connection with financing transactions.
INTEREST EXPENSE
Interest expense in the quarter ended January 31, 1998 was $185,776 as compared
to $171,094 in the quarter ended January 31, 1997. The increase reflects the
interest cost associated with the stock put agreement discussed at note 4 to the
unaudited consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998 the Company had an overdraft of $6,690 in its cash account.
Cash provided by operations during the quarter was $472,966.
Net working capital at January 31, 1998 amounted to ($1,290,842) because current
debt maturities and other short-term commitments exceeded the Company's liquid
assets available to pay such obligations.
The Company believes that it needs to raise additional equity capital to fund
its working capital and capital expenditure needs. Depending upon the Company's
results of operations, its future capital needs and available marketing
opportunities, the Company may use various financing sources to raise equity
capital. Such sources could include mergers or private equity placements. There
can be no assurance that such funds will be available on a favorable basis, if
at all. In the event that the Company is unable to obtain such additional equity
capital, its operations may be significantly reduced.
The Company's capital expenditures during the quarter ended January 31, 1998
were $7,485. Those expenditures were primarily for equipment to expand
production capacity.
The Company's stock is traded on the OTC Electronic Bulletin Board.
9
<PAGE>
OTHER INFORMATION - PART II
Item 1. Legal Proceedings
- -------------------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
Not applicable
Item 3. Defaults on Senior Securities
- -------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
Item 5. Other Information
- -------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
27.07 Financial Data Schedule January 31, 1998.
(b) Reports on Form 8-K
-------------------
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Creative Medical Development, Inc.
- ----------------------------------
Registrant
March 12, 1998 /s/ Michael L. DeBonny
- ---------------------- --------------------------------------
Date Michael L. DeBonny
Chief Executive Officer
March 12, 1998 /s/ Jeff Edwards
- ---------------------- --------------------------------------
Date Jeff Edwards, CFO
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTERS ENDED JANUARY 31, 1998 AND 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> (6,690)
<SECURITIES> 0
<RECEIVABLES> 1,690,859
<ALLOWANCES> 52,240
<INVENTORY> 2,387,813
<CURRENT-ASSETS> 4,113,361
<PP&E> 5,016,089
<DEPRECIATION> 1,194,025
<TOTAL-ASSETS> 9,583,789
<CURRENT-LIABILITIES> 5,404,203
<BONDS> 2,845,350
0
6,221
<COMMON> 55,305
<OTHER-SE> 967,950
<TOTAL-LIABILITY-AND-EQUITY> 9,583,789
<SALES> 3,769,467
<TOTAL-REVENUES> 3,769,467
<CGS> 2,948,516
<TOTAL-COSTS> 853,643
<OTHER-EXPENSES> 3,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,776
<INCOME-PRETAX> 2,515
<INCOME-TAX> 0
<INCOME-CONTINUING> (221,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (221,538)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
