U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934 [Fee Required]
For the fiscal year ended April 30, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 33-75276
Creative Medical Development, Inc.
----------------------------------
(Name of Small Business Issuer 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) (Zip Code)
(Issuer's Telephone Number (503) 230-8034
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
- ----------------------------- -----------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.01 Par Value
- --------------------------------------------------------------------------------
(Title of class)
Warrants to purchase Common Stock $.01 Par Value
- --------------------------------------------------------------------------------
(Title of class)
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
Check if there is no disclosure of delinquent filers in response to Item
405 of regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10KSB.
State issuer's revenues for its most recent fiscal year. $16,448,876 .
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of July 31, 1998. $884,000.
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
FORM 10-KSB
ANNUAL REPORT FOR THE FISCAL YEAR ENDED April 30, 1998
PART I Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II Item 5. Market for Common Equity
and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7. Financial Statements 18
Independent Auditor's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-19
Item 8. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure 19
PART III Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) in the Exchange Act 19
Item 10. Executive Compensation 21
Item 11. Security Ownership of Certain Beneficial Owners
and Management 22
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 25
Index of Exhibits 25
Signatures 28
<PAGE>
PART I
------
Item 1. Description of Business:
------------------------
Introduction
------------
This Form 10-KSB contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-KSB that are not
statements of historical fact may be deemed to be forwarding looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate" or "continue" of comparable
terminology are intended to identify forward-looking statements. These
statements, by their nature, involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
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 highway/rail grade 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, an Oregon corporation, was formed in 1994 to acquire the OMNI premium
crossing business from Reidel 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 directors of the Company and its
subsidiary.
2
<PAGE>
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.
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 the Company's 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 completion of the transaction, former OMNI security holders owned
approximately 67% of the total outstanding shares of the Company on a fully
diluted basis, prior to valuation adjustment. The initial ownership ratio
was contingent on adjustment one year after the close of the transaction.
The final ownership ratio was subject to adjustment resulting from: (a)
differences between the assumed value of the Company's net assets at the
time of the merger and a final accounting made as of April 30, 1998; and
(b) differences in the value of OMNI's assets based on OMNI's
indemnification requirements under the Agreement. Subsequent to the end of
the fiscal year, the final ownership ratio after valuation adjustment
differed from the initial ownership ratio in favor of the Company. As a
result, all the Company's common stock and Series B preferred stock issued
to escrow for OMNI's Shareholders was canceled pursuant to the provision of
the merger agreement. In addition, substitute options were adjusted
downward by 10%.
Company Restructuring
---------------------
During Fiscal 1998, the Company began a restructuring plan to reduce the
over-capacity in its recycled rubber manufacturing operations and to
increase its concrete production capabilities. The refocus of business
stems from changes in industry demand away from rubber and more toward
concrete crossings. The Company has ceased production of recycled rubber at
its Portland, Oregon, and Lancaster, Pennsylvania plants and is liquidating
its recycled rubber manufacturing equipment and real estate at both
locations. Some equipment, primarily concrete forms, were transferred to
the Company's remaining facilities. At the same time the Company has
extended an agreement with a pre-cast concrete company to produce the
Company's proprietary concrete and rubber grade crossings.
3
<PAGE>
The Company in conjunction with its restructuring recorded certain charges.
These include a write down of assets to be liquidated, a write-off of
excess and obsolete recycled rubber inventory and accrual of expected
shutdown and liquidation costs. The asset write-down and inventory
write-off did not have an impact on the Company's liquidity. Other charges
were recorded as liabilities and are expected to be paid out during fiscal
year 1999.
The Company has been in material default of certain financial and
non-financial loan covenants under its Security and Loan Agreement with its
senior lender Finova Financial Corporation ("Finova"). Subsequent to the
Company's fiscal year end, it entered into a Forbearance Agreement with
Finova that defers Finova taking any action against the Company by reason
of the existing defaults. In addition, under the terms of the Forbearance
Agreement, the Company is permitted an overadvance of up to $400,000 beyond
the normal terms of the line of credit. The Forbearance Agreement also
eliminates the monthly principal payment requirements on Finova's term
debt. As part of the Forbearance Agreement, the Company is subject to
additional covenants that require, among other things, the Company to raise
an additional $250,000 in equity capital or subordinated debt, requires the
disposal of certain assets (proceeds must go to pay down various loans with
Finova) and requires the Company to meet certain projected financial goals.
As part of the Forbearance Agreement, and as part of the Company's
restructuring plan, the Company entered into Modification Agreements and,
in some cases, Subordination and Standstill Agreements with certain
unsecured creditors. These agreements place each creditor into a
subordinate position with Finova and extend payoff of any obligation over a
five-year period.
Products
--------
The Company through its subsidiary OMNI Products, Inc. designs, engineers,
manufactures, markets and installs premium grade crossing surface products
for the U.S. and international markets. The Company's products cover a
range of premium crossing materials that include crossings manufactured
from virgin rubber, reinforced concrete and a combination of rubber and
concrete.
4
<PAGE>
All major North American Class 1 railroads, such as Burlington
Northern-Santa Fe and Union Pacific and many regional railroads and transit
systems approve the Company's products.
Rail Crossing Market
--------------------
Grade crossings are an important part of the transportation infrastructure
wherever rail and road traffic intersect. Premium grade crossings made from
recycled rubber, virgin rubber or reinforced concrete provide a smooth,
safe and quiet means for vehicles to quickly pass over railroad tracks. The
choice of rubber or concrete depends on the application and is primarily a
matter of customer preference. The longer life of rubber or concrete
premium crossing surfaces significantly reduces maintenance costs compared
to the traditional surfaces of timber or asphalt. Premium grade crossings
are replacing the more common timber, asphalt or poured-in-place concrete
surfaces, as they provide better safety, convenience, durability, low
maintenance and lower life cycle costs. Premium surfaces are commonly used
in areas with high road traffic densities and within industrial facilities
to speed the movement of lift trucks and to reduce cargo spillage and
damage.
Many major U.S. railroads have recently moved from solid rubber crossings
to concrete crossings with rubber next to the rail. This trend has
accelerated over the past several years as a result of industry
consolidation. Combination concrete/rubber crossing materials now represent
the majority of the premium grade crossing surface market.
Based on the Federal Railroad Administration publication the Highway-Rail
Crossing Inventory Data, there are approximately 170,000 public and 100,000
private rail crossings in the U.S. In addition there are an estimated
100,000 other rail crossings on industrial properties, ports, intermodal
and terminal yards, and on rail transit systems. With 370,000 estimated
rail crossings in the U.S. and with an average 1.5 tracks per crossing,
there are 555,000 total crossing surfaces in the U.S. With an average
estimated crossing length of 54 feet for each crossing surface, the total
potential domestic market is approximately 30 million track feet.
Industry estimates of useful life of a non-premium rail-crossing surface
are 10 years. This means that approximately 10%, or 3 million track feet,
of all railroad crossings are refurbished each year. Management believes
that 12% or approximately 360,000 track feet of annual refurbishment is
done in Premium Surfaces. Assuming an average price of $150 per track foot,
the current annual domestic market for premium grade crossing surfaces is
approximately $54 million and is growing at 5% per year. The Company
believes its revenues currently represent approximately 30% of the total
domestic market for all premium grade crossing surfaces and is nearly twice
the size of the next largest competitor in North America.
5
<PAGE>
The vast majority of grade crossings are maintained or retrofitted with
asphalt, timber planks, concrete pavement or consolidated materials. This
market segment is estimated at over $400 million in the U.S. and Canada.
Because of their benefits, this market segment is rapidly converting to
premium grade crossings. The Company believes that, at the current rate of
growth and acceptance by customers, within five years as much as 20% of
this market segment will convert to premium crossings.
Crossing safety is increasingly scrutinized at the federal level and
legislative action is likely to mandate certain safety standards for
crossings. Such legislation may increase the market for premium crossing
surfaces.
The federal government and many state governments recognize the importance
of safe and well maintained rail crossings. Through the Federal Highway
Administration and the Intermodal Surface Transportation Efficiency Act,
the federal government provides direct financial support to rehabilitate
public rail crossings, fund mass transit construction and maintain the
country's transportation infrastructure. The Company estimates that as much
as 50% of domestic rail crossing system installations are funded in part by
government programs at the federal, state or municipal level. The remainder
of the installations are made by railroads as part of their ongoing
maintenance programs and by industrial concerns as part of the construction
or maintenance of their facilities.
Where customers formerly relied on government funding to pay for most
premium crossing surfaces, there is a growing recognition that premium
crossing surfaces significantly reduce installation and ongoing maintenance
costs over the life of the crossing. They have discovered significant long
term cost savings by installing premium crossing surfaces using their own
operating funds. Major railroads such as Burlington Northern/Santa Fe and
Union Pacific are expected to increase their premium crossing installations
in the future. At the same time, the market for premium crossing surface
materials can be volatile. The major railroads are not consistent about
their maintenance policy which can cause large fluctuations in a railroad's
demand for premium surface materials, or in the type of premium surface
material required.
Sales and Marketing
-------------------
U.S. sales and marketing is implemented through a system of four regions
designed to provide comprehensive coverage of key railroad customers. Sales
manager employees manage two regions and independent sales representatives
manage two. In addition, the Company has an independent account
representative working in Omaha solely to service Union Pacific, one of the
largest users of grade crossing materials. All report to the Vice President
of Sales and Marketing.
6
<PAGE>
The Company's sales employees are compensated on a base salary plus
commission. Independent sales representatives are compensated solely on
commission. Commissions are not paid until funds are collected from the
customer.
Another component of the Company's sales and marketing effort is its unique
customer oriented program using part-time field technical representatives
who serve as an extension of the regional sales force for technical needs
such as installations and problem solving. These individuals have strong
backgrounds in track construction and maintenance and are primarily retired
railroad employees. Their prior relationships, loyalty to OMNI and customer
service has significantly enhanced the Company's sales efforts.
Although the Company has over 300 customers, approximately 77% of its
fiscal 1998 sales were concentrated in its five largest customers. Sales to
the Company's five largest customers as a group for the fiscal year ended
April 30, 1997 was 43%. Burlington Northern-Santa Fe represented
approximately 38% and 11%, respectively, of the Company's fiscal 1998 and
1997 sales. CSX Transportation represented approximately 27% and 17%,
respectively, of the Company's fiscal 1998 and 1997 sales.
Material Supplies
-----------------
Basic raw materials required for manufacturing the Company's products
include off-spec virgin rubber obtained from rubber brokers, polyurethane
binder, concrete, steel rebar and steel angle.
Concrete and steel materials are available from many sources in multiple
locations. However, availability of these materials as well as off-spec
virgin rubber is subject to seasonal demand and market variations. The
Company believes that there is an adequate supply of all basic raw
materials to meet its needs.
The Company anticipates increasing manufacturing capacity for its concrete
products. There are a number of sources available for the Company to use to
produce concrete products.
Patents and Licenses
--------------------
The Company has been issued or has patents pending on several of its
products, such as its Improved-Concrete and Standard Concrete-Rubber
products incorporating rubber next to the rail with reinforced concrete
panels. There can be no assurance that any patents issued would afford
protection against competition from similar inventions or products, or
would be infringed upon or designed around by others. However, the Company
intends to enforce all patents it has been issued.
7
<PAGE>
Pursuant to a royalty agreement with Red Hawk Rubber Co. ("Red Hawk") which
was transferred to OMNI in the acquisition from Reidel described above, the
Company is obligated to pay a royalty equal to 5% of net sales of certain
products acquired from Red Hawk. The agreement expires in June, 1999.
Research and Development
------------------------
The Company is engaged in a continuing program of research and development
to improve existing products and develop more cost effective and efficient
rail crossing products. The Company's expenditures on research and
development for the fiscal years ended April 30, 1998, 1997 and 1996 were
$127,624, $61,646 and $70,852 respectively.
Employees
---------
As of April 30, 1998, the Company had 98 full time employees and 1 part
time employee. Approximately 76 full time employees were engaged in
manufacturing and the remainder in marketing, sales, research and
development, administrative and executive positions.
Item 2. Description of Property
-----------------------
The Company owns or leases the following properties:
Approximate Own or
Location Square Footage Lease Purpose
-------------- -------------- ----- -----------------
Portland, OR (1) 3,000 Lease Executive Offices
Portland, OR (2) 15,800 Lease Manufacturing
McHenry, IL (3) 21,271 Own Manufacturing
Lancaster, PA (3) 19,348 Own Held for sale
Ennis, TX (3) 15,300 Own Manufacturing
Buena Park, CA (4) 635 Lease Sales Office
Nevada City, CA (5) 30,000 Own Held for sale
8
<PAGE>
(1) Leased on month-to-month basis.
(2) Leased through April, 2002 with an option to renew for an additional
five years.
(3) Properties are subject to a blanket mortgage loan of $866,458 payable
in monthly installments of $13,631, including interest at 10% payable
in full in December 31, 1998. Properties are also pledged as
collateral for a revolving line of credit and term and capital
expenditure loans.
(4) Leased through May, 2000. The Company has entered into a one-year
sublease on the property with option for one-year renewal.
(5) Property is subject to a mortgage loan of $1,216,668 payable in
monthly installments of $12,750 including interest at 11.375% payable
in full in December, 1998. One hundred percent of the property is
leased to others. Ron Gangemi, a shareholder of the Company, owns One
percent of the property. Property is also pledged as collateral for a
revolving line of credit and term and capital expenditure loans.
All properties are well maintained and in good condition.
Item 3. Legal Proceedings
-----------------
Approximately August 7, 1995, OMNI signed a letter agreement with
Transcontinental Capital Partners ("TCP") to provide various financial
services. Pursuant to the agreement, certain services were provided and
paid for. In addition, TCP identified a potential equity investor with whom
OMNI signed a non-binding statement of intent for a proposed transaction.
On or about June 7, 1996, OMNI terminated negotiations with the potential
equity investor and the agreement with TCP.
9
<PAGE>
In September, 1996, TCP filed an action against OMNI in the Superior Court
of California for Santa Clara County alleging that OMNI breached the
financial services agreement and is obligated to pay additional fees to TCP
for services purportedly rendered to OMNI. In response, OMNI removed the
case to the United States District Court for the Northern District of
California (Transcontinental Capital Partners v. OMNI Products, Inc., Case
No. C-96 21040 WAI (PVT)), answered the Complaint and filed a
Cross-Complaint for damages for TCP's breach of the financial services
agreement and other common law claims. The case has been referred to the
District Court's Early Neutral Evaluation program and discovery has
commenced. The Company believes that the TCP claim is unfounded and intends
to contest the case vigorously.
The Company is not aware of any other material pending or threatened
litigation to which the Company or any director, officer, or affiliate of
the Company is or would be a party.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual meeting of the Company's shareholders was held on April 29,
1998. The following three directors were elected at the meeting (all were
directors prior to the meeting):
Michael L. DeBonny
Edward S. Smith
John E. Hart
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected
and qualified.
Shareholders were also asked to approve the Company's Amended and Restated
1994 Stock Option Plan ("Amended Plan") that amends the Company's 1994
Stock Option Plan ("Plan"). The Amended Plan increases the number of shares
of Common Stock reserved for issuance under the Plan to 3,000,000 shares
(originally 400,000 shares) and reserves for issuance under the plan
500,000 of the Company's Series B Preferred Stock. Shares voting for were
4,106,942 and against were 676,480. Shareholders also voted to approve the
Company's Amended and Restated Certificate of Incorporation that increases
the authorized number of shares of the Company's Common Stock and Preferred
Stock to 50,000,000 shares and 25,000,000 shares, respectively. Shares
voting for were 4,584,107 and against were 354,840.
10
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
The Company's Common stock commenced trading on the NASDAQ Smallcap Market
on May 13, 1994. Since May, 1995, it has traded on the OTC Bulletin Board
under the symbol "CMDI." As of April 30, 1998, the Company had
approximately 300 record and beneficial stockholders holding 5,524,618
shares of the Company's common stock.
The published bid and ask quotations for the previous two fiscal years are
included in the chart below. These quotations represent prices between
dealers and do not include retail markup, markdown or commissions. In
addition, these quotations may not represent actual transactions.
---------------------------------------------------------------------
Quarterly Common Stock Bid Price Ranges
---------------------------------------------------------------------
1997 1998
---------------------------------------------------------------------
Quarter High Low High Low
------------ -------------- ------------- ------------- -------------
1st .31 .25 .50 .31
------------ -------------- ------------- ------------- -------------
2nd .31 .25 .50 .29
------------ -------------- ------------- ------------- -------------
3rd .31 .25 .38 .19
------------ -------------- ------------- ------------- -------------
4th .50 .25 .25 .17
------------ -------------- ------------- ------------- -------------
No dividends have been declared or paid on the Common Stock and none are
anticipated. The Company is restricted from paying dividends by covenant
with its senior lender.
The Company has authorized and issued 622,066 shares of Series B
Convertible Preferred Stock, par value $.01 per share with voting rights of
one common share to each preferred share, until converted or canceled. 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.
11
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
------------------------------------------------------------------------
The following Selected Financial Data for the years ended April 30, 1998,
1997 and 1996 have been derived from the financial statements of the
Company audited by KPMG Peat Marwick LLP, the Company's independent
auditors. 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.
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.
As mentioned in item 1 (The Business) 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.
The following table sets forth the Company's operating results in thousands
of dollars and as a percentage of revenue for the years ended April 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 16,449 100.0% 12,902 100.0% 13,565 100%
Cost of goods sold 13,447 81.7 10,558 81.8 9,598 70.8
Gross Profit 3,002 18.3 2,344 18.2 3,967 29.2
Selling Expenses 1,666 10.1 1,323 10.3 1,499 11.1
Administrative Expenses 1,587 9.6 1,138 8.8 1,342 9.9
Research and Development 128 .8 62 .5 71 .5
Restructuring Charge 1,685 10.2 -- -- -- --
(Loss) earnings from operations (2,063) (12.5) (178) (1.4) 1,055 7.8
Interest Expense 633 3.8 687 5.3 714 5.3
Other Expense 184 1.1 486 3.8 187 1.4
Net (loss) earnings (2,882) (17.5) (1,295) (10.0) 118 .9
Net (loss) earnings per share (.52) (.41) .04
</TABLE>
12
<PAGE>
REVENUE
The Company derives its revenues from the sale of premium highway/rail
grade crossings to railroads, general contractors and municipalities. Net
revenues for fiscal 1998 were $16,448,876 as compared to $12,902,491 in
1997 or a 27% increase. Much of the increase came from greater sales of the
Company's new, proprietary standard concrete and rubber product (called
"SCR"). This patented product is comprised of a molded concrete form with
rubber rail flangeway filler imbedded into the concrete. SCR sales
increased from $690,941 in 1997 to $6,397,770 in 1998 or an increase of
826%. At the same time, sales of the Company's other concrete products
dropped below prior year's sales. Total concrete revenues were $8,090,346
for 1998 compared to $5,121,332 in 1997, an increase of 58%. Rubber sales
declined slightly to $7,628,987 in 1998 from $7,781,159 in 1997, a drop of
less than 2%. Sales of rubber products shifted from the Company's standard,
heavy duty and steel reinforced products (full crossing material) to its
"VRA/VRAX" flangeway filler materials that are used in conjunction with
asphalt. VRA/VRAX sales increased to $3,857,219 in 1998 from $558,189, an
increase of 591%.
Revenues for 1997 were $12,902,491 as compared to $13,565,411 in 1996,
representing a decline of 4.9%. This decline is due primarily to a shift in
customer preference from the Company's rubber crossings to its recently
introduced concrete products. Sales of rubber crossings declined from
$9,477,590 in 1996 to $7,781,159 in 1997. Sales of concrete products
increased from $4,087,821 in 1996 to $5,121,332 in 1997. The Company
anticipates that this trend will continue and expects concrete to continue
to grow and become its dominant product in fiscal 1999 and beyond.
COST OF GOODS SOLD AND EXPENSES
Cost of goods sold for the year ended April 30, 1998 were $13,446,678 as
compared to $10,557,688 in 1997. Cost of sales as a percent of revenue was
the same for both years. Included in costs for both years were significant
write-offs of inventory. For 1998, the write-off was $1,085,600 or 6.6% as
a percent of revenue and for 1997 it was $571,200 or 4%. Excess rubber
inventory is a result of obsolete or out of specification material
produced, and due to reduced demand for rubber railroad crossing material.
Warranty costs are also included in cost of sales. Increased warranty cost
has become a greater component of cost of sales in the past two years.
13
<PAGE>
Cost of goods sold for the year ended April 30, 1997, were $10,557,688 as
compared to $9,598,110 in 1996. The increase in both absolute dollars and
percent of sales is due mainly to extraordinary costs incurred for warranty
expense and the write off of obsolete inventory. The table below sets forth
the Company's inventory write-off and warranty expense in dollars and as a
percent of revenues.
<TABLE>
<CAPTION>
WARRANTY EXPENSE AND INVENTORY WRITE OFF
Fiscal year ended April 30, 1998 April 30, 1997 April 30, 1996
--------------------- --------------------- ---------------------
Dollars Percent Dollars Percent Dollars Percent
------- of sales ------- of sales ------- of sales
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Warranty Expense $ 418,040 2.5% $ 483,528 3.7% $ 101,946 0.8%
Inventory Written Off $1,085,600 4.9% $ 571,200 4.4% $ 80,700 0.6%
</TABLE>
The Company records a percent of each sale towards the warranty expense and
places that amoun!t into an accrued liability. Actual warranty services
incurred in 1998 included several significant international warranty
obligations that exceeded $100,000 in total. Approximately $150,000 of the
1997 warranty expense related to a single order shipped more than two years
ago. The special order met customer specifications, but was replaced in
order to maintain the relationship with a significant customer. Since that
order, the Company has not manufactured and will not manufacture that
particular product. The balance of the warranty expense related to
introduction of a new manufacturing process. The Company believes that the
manufacturing process issues have been resolved and will not recur.
The Company's policy is to write off inventory that is more than two years
old. The majority of the extraordinary inventory write off in the years
ended April 30, 1998 and 1997 occurred at the end of the fiscal year and
included a $150,000 reserve in 1997 that related to overstocked inventory.
Management believes that further extraordinary write off of inventory will
not be required.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative Expenses were $1,586,956, $1,137,978 and
$1,341,931 for the fiscal years ended April 30, 1998, 1997 and 1996,
respectively. The increase for fiscal 1998 is primarily due to a $219,146
increase in consulting charges, $56,651 increase in fees and licenses,
$67,494 increase in accounting fees and a $38,076 increase in insurance
premium costs. Consulting charges are up due to the Company's employment of
various financial consultants that were hired to assist the Company in
obtaining equity or debt financing. Fees and licenses have increased due to
additional financing fees charged by the Company's senior lender, Finova
Financial Corporation. These non-recurring fees resulted from the Company
exceeding its borrowing line and deferral of certain principal payments.
Accounting fees are up due to the Company's change from a private company
to one that is publicly traded. Similarly, insurance costs have increased
due to added directors and officers liability insurance. The decrease from
fiscal 1996 to 1997 was due to a reduction in the cost of legal services
and insurance.
SELLING EXPENSE
Selling Expenses for the years ended April 30, 1998, 1997 and 1996 were
$1,665,506, $1,323,070 and $1,499,061, respectively. Commissions are a
primary component of selling costs and represented $783,284 (47% of selling
costs), $669,619 (50% of selling costs) and $740,327 (49% of selling costs)
for fiscal years ended 1998, 1997 and 1996, respectively. Commission
expense is directly tied to total sales. Additionally, payroll costs in
1998 are up $192,315 over l997 also due to greater commissions paid to
employees associated with greater sales. The decrease from 1996 to 1997 was
due to a lowering of sales commission percentages paid to the Company's
sales force.
INTEREST EXPENSE
Interest Expense was $633,316, $687,095 and $713,825 for the years ended
April 30, 1998, 1997 and 1996, respectively. The decline is due to lower
levels of principal on all the Company's term debt as well as a reduction
in borrowing on the Company's line of credit. This includes over $1 million
in principal reduction in fiscal 1998
LEGAL SETTLEMENT
On July 24, 1997, the Company entered into a settlement agreement arising
from disputed royalty payments. The terms of the settlement agreement
required the Company to pay $50,000 within sixty days of the agreement date
and $20,000 per quarter for five years thereafter. Among other benefits,
the settlement relieves the Company of contractual liability for royalty
payments that would have accrued through December, 1999. Management has
calculated the discounted present value of the settlement at $334,500 and
accrued such amount at April 30, 1997. This one-time charge accounted for
approximately twenty-six percent of the net loss for the year ended April
30, 1997.
15
<PAGE>
RESTRUCTURING CHARGES
The Company recorded restructuring charges associated with the shut down of
two factories and to record costs associated with the write down and
liquidation of manufacturing equipment. These charges are the result of the
Company's refocus of its operation into producing more concrete grade
crossings and elimination of excess capacity in the company's recycled
rubber manufacturing operations. The total restructuring charges of
$1,684,833 included $1,239,567 in write down of manufacturing equipment to
fair value, $226,950 in costs associated with plant shut downs and
equipment liquidation, $158,316 in severance costs and $60,000 in other
restructuring charges. All associated assets will be liquidated and charges
will be paid during fiscal 1999.
NET LOSS
The Company's fiscal 1998 net loss was $2,882,185 and a loss per basic
common share of $.52. One time restructuring charges and inventory
write-offs in 1998 contributed $2,497,673 to the loss or $.45 per share.
The warranty expense for 1998 impacted the loss per share by $.08.
Inefficiencies resulting from the Company's over capacity of rubber
production contributed to lower gross margins in 1998 and 1997 and directly
impacted the net loss. The Company lost $1,295,065 or $.41 per basic common
share for the year ended April 30, 1997 compared to a profit of $117,655 or
$.04 per share for the year ended April 30, 1996. The loss was caused by a
significant increase in Cost of Goods Sold that resulted from the increased
warranty expense, the inventory write-offs and the legal settlement
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's combined cash and investment balance at April 30, 1998 and
1997 amounted to $393,887 and $894,758, respectively. The Company's
operating activities generated cash of $817,183 despite a net loss for
fiscal 1998 of $2,882,185. Much of fiscal 1998's loss occurred due to write
down or write-off of non-producing assets. Cash generated from operations
in 1997 was $331,424. The Company also received $100,000 of net proceeds
from the sale of stock in fiscal 1997.
16
<PAGE>
Net working capital deficit at April 30, 1998 and 1997 amounted to
($5,062,315) and ($1,694,116), respectively. An increase in current debt
maturities and other short-term commitments exceeded the Company's liquid
assets available to pay such obligations. This was amplified in 1998 due to
coming maturity of the Company's two mortgages. This has resulted in the
Company's independent auditors issuing a "going concern" emphasis paragraph
in their report.
The Company has been in material default of certain financial and
non-financial loan covenants under its Security and Loan Agreement with its
senior lender Finova Financial Corporation ("Finova"). Subsequent to the
Company's fiscal year end, it entered into a Forbearance Agreement with
Finova that defers Finova taking any action against the Company by reason
of the existing defaults. In addition, under the terms of the Forbearance
Agreement, the Company is permitted an overadvance of up to $400,000 beyond
the normal terms of the line of credit. The Forbearance Agreement also
eliminates the monthly principal payment requirements on Finova's term
debt. As part of the Forbearance Agreement the Company is subject to
additional covenants that require, among other things, the Company to raise
an additional $250,000 in equity capital or subordinated debt, requires the
disposal of certain assets (proceeds must go to pay down various loans with
Finova) and requires the Company to meet certain projected financial goals.
The Company's capital expenditures were $231,802 and $375,316 in fiscal
1998 and 1997, respectively. Expenditures in 1997 were incurred primarily
for equipment to expand production capacity while 1998 expenditures were
mostly for necessary improvements in the Company's production facilities.
The Company also liquidated its security holdings in fiscal 1998 that
resulted in additional proceeds to the Company of $752,573. Sales of assets
generated $571,038 of proceeds in fiscal 1998. These proceeds and an
estimated $1,600,000 in gross proceeds in fiscal 1999 will be used to
retire much of the Company's term debt and mortgages. Sales of the
Company's Lancaster, Pennsylvania, and McHenry, Illinois facilities are
expected to raise additional amounts sufficient for payoff of the Company's
obligations that come due during next fiscal year.
The Company's primary source of funds is from its operations. The Company
is restricted as to the amount it can borrow from Finova based on a percent
of eligible receivables and inventory. Additionally, the Company likely
will need replacement debt or equity financing after the end of the Finova
agreement on August 31, 1999. The Company expects operations to improve
during fiscal 1999 to ensure an adequate level of asset based financing is
available.
17
<PAGE>
There can be no assurance the Company will be able to complete the
equipment sales noted above prior to the mortgage maturity dates, nor can
there be any assurance that the Company will be able to raise the
subordinated funds required pursuant to the Forbearance Agreement. The
Company's debt will require restructuring or additional financing must be
found in the event sufficient funds are not available to payoff certain
debt that comes due in fiscal 1999. The Company may extend, for 30 days,
its requirement to raise the subordinated investment pursuant to the
Forbearance Agreement by paying a $10,000 fee to Finova.
Year 2000 Compliance Issues
---------------------------
The Company's products are relatively non-technical and are produced in a
non-automated environment. The Company's only use of electronic automation
is in its administrative process. The Company has purchased or plans to
acquire proper software and hardware for its automated environment to
ensure it avoids any Year 2000 issues. In addition, the Company's board of
directors and management is committed to discovering any impact the Company
may experience from automated environments of suppliers and customers that
do not timely address the Year 2000 issues. The Company feels, however,
that it will likely not suffer any serious adverse difficulties from issues
related to the Year 2000 format changes.
ITEM 7. FINANCIAL STATEMENTS
--------------------
18
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Financial Statements
April 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Creative Medical Development, Inc.:
We have audited the accompanying consolidated balance sheets of Creative Medical
Development, Inc. and subsidiary as of April 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three year period ended April 30, 1998. These
consolidated 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 1998, and the results
of their operations and their cash flows for each of the years in the three year
period ended April 30, 1998 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 12 to
the consolidated financial statements, the Company suffers liquidity
constraints, due to the 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 12. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG Peat Marwick, LLP
- --------------------------
Portland, Oregon
August 7, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
April 30, 1998 and 1997
Assets
1998 1997
------------ ------------
Current assets:
<S> <C> <C>
Cash $ 393,877 139,635
Investment securities -- 755,123
Accounts receivable, less allowance for doubtful
accounts of $68,776 in 1998 and $37,863 in 1997 1,853,280 1,818,109
Inventories, net 1,423,800 2,494,743
Prepaid expenses and deposits 52,158 20,680
------------ ------------
Total current assets 3,723,115 5,228,290
Real estate and other assets held for sale 1,618,275 1,500,000
Property, plant and equipment, net 2,272,214 4,286,656
Organization costs, net of $328,040 accumulated amortization in 1997 -- 237,955
------------ ------------
$ 7,613,604 11,252,901
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,884,679 1,364,079
Accrued liabilities 1,459,092 1,082,054
Notes payable 3,305,283 4,376,723
Current portion of long-term debt 2,136,376 99,550
------------ ------------
Total current liabilities 8,785,430 6,922,406
------------ ------------
Long-term debt, less current portion 522,342 3,111,226
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 6,221
Common stock, 10,000,000 shares authorized, $.01 par value, 5,524,618 and 5,554,337
shares issued and outstanding in 1998 and 1997, respectively 55,246 55,543
Additional paid-in capital 2,413,651 2,444,606
Accumulated deficit (4,169,286) (1,287,101)
------------ ------------
Total stockholders' equity (1,694,168) 1,219,269
------------ ------------
$ 7,613,604 11,252,901
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended April 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 16,448,876 12,902,491 13,565,411
Cost of sales 13,446,678 10,557,688 9,598,110
------------ ------------ ------------
Gross profit 3,002,198 2,344,803 3,967,301
------------ ------------ ------------
Selling expenses 1,665,506 1,323,070 1,499,061
Administrative expenses 1,586,956 1,137,978 1,341,931
Research, development and engineering 127,624 61,646 70,852
1,684,833 -- --
Restructuring charges
------------ ------------ ------------
5,064,919 2,522,694 2,911,844
------------ ------------ ------------
(Loss) earnings from operations (2,062,721) (177,891) 1,055,457
------------ ------------ ------------
Other income (expense):
Interest expense (633,316) (687,095) (713,825)
Legal settlement -- (334,500) --
Amortization of organization costs (237,955) (119,249) (119,719)
Miscellaneous income (expense) 24,018 (6,781) (40,051)
Gain (loss) on sale of assets 29,683 (25,156) (27,690)
------------ ------------ ------------
Total other expense (817,570) (1,172,781) (901,285)
------------ ------------ ------------
(Loss) earnings before income taxes (2,880,291) (1,350,672) 154,172
(Benefit) provision for income taxes 1,894 (55,607) 36,517
------------ ------------ ------------
Net (loss) earnings $ (2,882,185) (1,295,065) 117,655
============ ============ ============
Basic (loss) earnings per share $ (.52) (.41) .04
============ ============ ============
Diluted (loss) earnings per share $ (.52) (.41) .04
============ ============ ============
Basic and diluted weighted common shares outstanding 5,532,581 3,126,294 2,941,378
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended April 30, 1998, 1997 and 1996
Preferred stock
Series B Common stock Additional Retained Total
----------------------- ------------------------ paid-in earnings stockholders'
Shares Amount Shares Amount capital (deficit) equity (deficit)
---------- ---------- ---------- ---------- ---------- ---------- ---------------
<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
Repurchase of stock puts -- -- (29,719) (297) (30,955) -- (31,252)
Net loss -- -- -- -- -- (2,882,185) (2,882,185)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, April 30, 1998 622,066 $ 6,221 5,524,618 $ 55,246 2,413,651 (4,169,286) (1,694,168)
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended April 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) earnings $(2,882,185) (1,295,065) 117,655
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 587,552 491,642 444,785
Legal settlement -- 334,500 --
(Gain) loss on sale of assets (29,683) 25,156 27,690
Restructuring charges - write down of assets 1,239,567 -- --
Deferred income taxes -- (55,607) 36,517
Change in assets and liabilities:
Accounts receivable (35,171) (199,814) 747,872
Inventories 1,070,943 296,361 (1,126,312)
Prepaid expenses and deposits (31,478) 1,876 3,734
Accounts payable 520,600 425,992 (108,902)
Accrued liabilities 377,038 306,383 68,897
----------- ----------- -----------
Net cash provided by operating activities 817,183 331,424 211,936
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of Property, Plant and Equipment 571,038 17,166 2,500
Proceeds from sale of securities 752,573 -- --
Purchase of property, plant and equipment (231,802) (375,316) (680,492)
Organization costs -- -- 3,293
----------- ----------- -----------
Net cash provided used by investing activities 1,091,809 (358,150) (674,699)
----------- ----------- -----------
Cash flows from financing activities:
Net (payment) borrowings on notes payable (1,071,440) (116,326) 420,352
Payments on long-term debt (552,058) (14,281) (481,882)
Borrowing on long-term notes -- -- 384,030
Proceeds (repayment of) from sale of stock (31,252) 100,000 400,000
Acquisition costs -- (185,065) --
----------- ----------- -----------
Net cash (used) provided by financing activities (1,654,750) (215,672) 722,500
----------- ----------- -----------
(Decrease) increase in cash 254,242 (242,398) 259,737
Cash at beginning of year 139,635 382,033 122,296
----------- ----------- -----------
Cash at end of year $ 393,877 139,635 382,033
=========== =========== ===========
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 628,962 677,847 726,321
Income taxes 1,894 -- --
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>
F-5
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
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
("Substitute 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 completion of the transaction, former OMNI security holders owned
approximately 67% of the total outstanding shares of CMD on a fully diluted
basis. The initial ownership ratio was contingent on adjustment one year
after the close of the transaction. The final ownership ratio was subject
to adjustment resulting from differences between the assumed value of CMD's
net assets at the time of the merger and a final accounting made as of
April 30, 1998. This valuation adjustment was also impacted by the value of
OMNI's assets based on OMNI's indemnification requirements under the
Agreement. Subsequent to the end of the fiscal year, it was determined that
the final ownership ratio after valuation adjustment differed from the
initial ownership ratio in favor of CMD. As a result all CMD common stock
and Series B preferred stock issued to escrow for OMNI's shareholders, were
effectively canceled as necessary to reflect the final ownership ratio. In
addition, the Substitute options were also subject to a similar 10%
reduction as part of the ownership adjustment.
F-6
<PAGE>
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 resu!lt, 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 for fiscal years
1998, 1997 and 1996, 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
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 premium grade crossing systems. All material intercompany
transactions and balances have been eliminated in the consolidated
financial statements.
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.
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.
F-7
<PAGE>
Accounts Receivable
Accounts receivable are from distributors of the Company's products and
from 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.
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.
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.
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.
Research and Development Costs
The Company charges all research and development costs associated with the
development of products to expense when incurred.
Advertising Expenses
Advertising expenses are charged to expense as incurred and were $44,424,
$102,310 and $126,956 for 1998, 1997 and 1996, respectively.
Revenue Recognition
Revenues are recognized when products are shipped.
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, for options granted to employees, compensation
expense was 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.
F-8
<PAGE>
Fair Value of Financial Instruments
At April 30, 1997 and 1998, 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 and 1998, 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 available to the Company.
Basic and Diluted Net (Loss) Earnings Per Common Share
Net (loss) earnings per share ("EPS") is computed based on the provisions
of Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). Under SFAS 128, Basic EPS is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period. Contingently issuable shares, that
are issuable for little or no cash consideration are considered outstanding
common shares and included in the computation of basic EPS as of the date
that all necessary conditions have been satisfied.
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 diluted earnings per share. The computation of diluted EPS
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
However, the computation of diluted EPS shall not assume conversion,
exercise, or contingent issuance of securities that would have antidilutive
effect on earnings per share. The calculation of diluted earnings (loss)
per share excludes any potentially dilutive shares as such shares would
have an antidilutive affect.
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.
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.
F-9
<PAGE>
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 amounts to
conform with 1998 presentation.
(2) Restructuring charges
The Company recorded restructuring charges associated with the shut down of
two factories and to record costs associated with the write down and
liquidation of manufacturing equipment. These charges are the result of the
Company's refocus of its operation into producing primarily concrete grade
crossings and elimination of excess capacity in the Company's rubber
manufacturing operations. Total restructuring charges of $1,684,833
included $1,239,567 in write down of manufacturing equipment to fair value,
$226,950 in costs associated with plant shut downs and equipment
liquidation, $158,316 in severance costs and $60,000 in other restructuring
charges. Total accrued and unpaid restructuring costs at the end of 1998
were $249,295 not including severance costs that were accounted for in
accrued compensation. All associated assets were, or will be liquidated and
charges were or will be paid during fiscal 1998 and 1999. In addition, the
Company wrote off excess or out of spec inventory as part of the
restructuring.
(3) Inventories
Inventories consist of the following at April 30, 1998 and 1997:
1998 1997
---------- ----------
Raw materials $ 539,927 461,430
Finished goods 898,428 2,183,313
---------- ----------
1,438,355 2,644,743
Less allowance for excess or obsolete
inventory 14,555 150,000
---------- ----------
Inventories, net $1,423,800 2,494,743
========== ==========
In conjunction with the restructuring, the Company recorded a write-off of
$812,840 as of the end of fiscal 1998 for excess and out of spec recycled
rubber inventory. Total fiscal 1998 and 1997 inventory write-offs were
$1,085,000 and $571,200, respectively. The majority of these write-offs
occurred at the end of each fiscal year.
F-10
<PAGE>
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following at April 30, 1998
and 1997:
1998 1997
---------- ----------
Land $ 217,593 374,201
Buildings 1,163,115 1,381,593
Vehicles 18,924 90,211
Office furniture and equipment 127,310 121,092
Manufacturing equipment 1,236,681 3,256,327
---------- ----------
2,763,623 5,223,424
Less accumulated depreciation 491,409 936,768
---------- ----------
$2,272,214 4,286,656
========== ==========
Certain property, plant and equipment serves as collateral for short and
long-term debt obligations. As discussed in note 2, certain manufacturing
equipment was written down during 1998 as part of the Company's
restructuring
(5) Accrued Liabilities
Accrued liabilities consist of the following at April 30, 1998 and 1997:
1998 1997
---------- ----------
Warranties $ 268,902 344,950
Accrued compensation 486,520 249,391
Accrued restructuring charges 249,195 --
Accrued merger costs 60,000 151,343
Other 394,475 336,370
---------- ----------
$1,459,092 1,082,054
========== ==========
(6) Notes Payable
The Company has a revolving line of credit totaling $2,107,966 and
$2,608,581 as of April 30, 1998 and 1997, respectively, under a Loan and
Security Agreement ("Loan Agreemen!t") with Finova Capital Corporation
(Finova) that generally provides borrowings of up to $2,750,000 (before
amendment) against 85% of eligible accounts receivable and 50% of eligible
inventory. Interest on the line is at prime rate plus 2.25% (10.75% at
April 30, 1998 and 1997), with a minimum interest charge of $9,000 per
month. The Company also has a term loan payable and a capital loan payable
with Finova totaling $689,815 and $507,502, respectively, at April 30,
1998, and $1,153,702 and $614,440, respectively, at April 30, 1997, that
are payable in monthly installments of $55,000 and $14,625, respectively,
plus interest at 11.5% per annum per loan. The loans payable are secured by
equipment and inventory. The original maturity date was extended from April
26, 1999 to August 31, 1999 as noted below.
F-11
<PAGE>
From time to time the Company has entered into various amendments to the
Loan Agreement with Finova. On April 29, 1997, Finova signed a Consent to
Merger ("Consent") document as part of the merger between CMDI and OMNI,
that, among other things, accelerated the payment of all indebtedness under
the Loan Agreement to July 31, 1997. On August 31, 1997 the Company and
Finova entered into Amendment No. 8 to the Loan Agreement that extended the
loans' maturity dates until August 31, 1999. Amendment No. 9 was entered
into on November 1, 1997 and increased the available borrowing balance
under the revolving line of credit to $3,500,000. This amendment and
Amendment No. 10 dated February 9, 1998, permitted the Company to borrow up
to $350,000 over the permitted calculated loan balance (referred to as the
"Permitted Overadvance") through the Permitted Overadvance Period, June 30,
1998. The Company has been in violation of certain financial and
non-financial loan covenants, including negative covenants for cash
requirements for Senior Debt Coverage and Net Worth of Borrower. As
explained in footnote 13 the Company, subsequent to year end, entered into
a Forbearance agreement that permits a continued Overadvance and waives
prior and existing defaults.
F-12
<PAGE>
<TABLE>
<CAPTION>
(7) Long-term Debt
Long-term debt is comprised of the following at April 30, 1998 and 1997
(see footnote 13):
1998 1997
---------- ----------
<S> <C> <C>
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 $ 866,458 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 1,216,668 1,230,000
Legal settlement payable in quarterly installments of
$20,000 for five years from December 31, 1997
Discounted present value assuming 11% interest 268,092 334,500
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. Subject to Subordination and Standstill
Agreement with Finova 200,000 200,000
Notes payable to two individuals, in monthly installments of
interest only at 10%, payable in full in April 1999
Subject to Subordination and Standstill Agreement
with Finova
107,500 107,500
---------- ----------
2,658,718 3,210,776
Less current portion 2,136,376 99,550
---------- ----------
Long-term debt, due in 1999 $ 522,342 3,111,226
========== ==========
</TABLE>
F-13
<PAGE>
(8) Income Taxes
The income tax (benefit) expense consists of the following:
1998 1997 1996
-------- -------- --------
Current:
Federal $ -- -- --
State 1,894 -- --
-------- -------- --------
1,894 -- --
-------- -------- --------
Deferred:
Federal -- (46,039) 30,234
State -- (9,568) 6,283
-------- -------- --------
-- (55,607) 36,517
-------- -------- --------
Total income tax
(benefit) expense $ 1,894 (55,607) 36,517
======== ======== ========
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, 1998 and 1997 are as
follows:
1998 1997
---------- ----------
Deferred tax assets:
Restructuring costs $ 143,895 --
Investment in securities -- 232,418
Warranty reserve 91,028 132,309
Legal settlement payable 123,390 128,318
Inventory write down 369,307 57,534
Bad debt reserve 26,380 14,523
Self-insurance reserve 22,490 6,223
Other 27,879 1,994
Capital loss carryforward 273,043
Net operating loss carryforwards:
Federal 737,970 629,394
State 98,391 130,810
---------- ----------
1,913,773 1,333,523
Less valuation allowance 1,657,570 490,416
---------- ----------
Net deferred tax asset 286,203 843,107
---------- ----------
F-14
<PAGE>
Deferred tax liability:
Property, plant and equipment, due to 94,423
differences in depreciation 651,327
Real estate held for sale 191,780 191,780
---------- ----------
Net deferred tax liability 286,203 843,107
---------- ----------
Net deferred tax assets and liabilities $ -- --
========== ==========
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:
1998 1997 1996
------ ------ ------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal income
tax benefit (4.3) (4.4) 4.4
Change in valuation allowance 40.5 36.2 --
Other (2.1) (2.1) (14.7)
---- ---- ----
Effective tax rates .1% (4.3)% 23.7%
==== ==== ====
The Company has a valuation allowance of $1,657,570 and $490,416,
respectively, as of April 30, 1998 and 1997 an increase of $1,167,154 and
$490,416 in the valuation allowance for the same respective periods ended.
The valuation allowance for fiscal 1996 was $-0-.
At April 30, 1998 and 1997, the Company had approximately $2,259,000 and
$1,982,000, respectively, of net operating loss carryforwards to offset
future income for federal and state income tax purposes which will expire
2009 through 2013.
A provision of the Tax Reform Act of 1986, as amended, requires that
utilization of net operating loss and credit carryforward be limited when
there is a more than 50% change in ownership of the Company. Such change in
ownership may have occurred. However, the date of the change and the amount
of loss and credits 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.
(9) Commitments and Contingencies
Operating Lease Commitments
The Company leases office space, vehicles and office equipment under
various operating lease agreements expiring over several years. The Company
also has month-to-month rental agreements on its corporate office space and
on certain manufacturing equipment under agreement with a director of the
Company. In addition, the Company leases all of its space at its Grass
Valley building, shown under Real estate and assets held for sale. Such
rental revenues exceed the costs to finance and operate the facility. Lease
expense was approximately $159,000 $108,000 and $105,000 for the years
ended April 30, 1998, 1997 and 1996, respectively. Future minimum lease
payments under non-cancelable lease agreements are as follows:
F-15
<PAGE>
Year ended April 30:
1999 $ 101,068
2000 101,474
2001 88,176
2002 86,496
2003 7,208
----------
$ 384,422
==========
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. Total royalty expense for fiscal
years ended April 30, 1998, 1997 and 1996 were $113,725, $137,994 and
$174,468, respectively.
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.
(10) Stockholders' Equity
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 Ap!ril 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.
Put Agreement
The Company entered into stock put agreements 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, and repurchased another 5,944 shares at $7,043 in April 1998. Of
the remaining 82,023 shares, 17,831 was repurchased subsequent to the end
of the fiscal year, and the remainder became subject to note modification
and subordination and standstill agreements discussed in note 13,
Subsequent Event.
F-16
<PAGE>
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
1997 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 April 30,
1998, 1997 and 1996.
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.
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 (no options were granted,
exercised, forfeited or expired during the fiscal year ended April 30,
1996):
Weighted
Average
Number Exercise
of shares Price
--------- --------
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
Granted 40,907 1.00
Exercised -- --
Forfeited -- --
Expired -- --
---------- --------
Options outstanding at April 30, 1998 2,135,505 $ 0.89
========== ========
F-17
<PAGE>
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, 1998, there
were 864,495 shares available for grant under the 1994 plan.
At April 30, 1998, the range of exercise prices and weighted average
remaining contractual life of outstanding options under the 1994 plan was
$0.25-$5.00 and 7 years, respectively.
At April 30, 1998 and 1997, the number of options exercisable under the
1994 plan was 2,135,505 and 2,094,598, respectively, and the weighted
average exercise price of those options was $0.89 for both years.
Warrants Outstanding
The following table presents warrants outstanding at April 30, 1998, 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
-------- --------- ------------
52,500 $ 6.05 May 13, 1999
46,250 .35 May 31, 1998
10,000 .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
(11) 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, 1998 and 1997, $1,317,169 (71%) and 1,077,000 (59%),
respectively, of the trade receivables were concentrated within the
domestic railroad industry, and $19,650 (1%) and $255,000 (14%),
respectively, 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 $12,851,290, $7,822,000 and
$8,690,000 or 78%, 61% and 64% of total sales, for the years ended April
30, 1998, 1997 and 1996, respectively. Sales to the Company's largest
customer were approximately $6,214,000, $2,220,000 and $1,986,000, or 38%,
17% and 15% of total sales, for the years ended April 30, 1998, 1997 and
1996, respectively. Sales to the Company's five largest customers were
approximately $12,606,383, $5,560,000 and $5,665,000, or 77%, 43% and 42%
of total sales, for the years ended April 30, 1998, 1997 and 1996,
respectively.
F-18
<PAGE>
(12) 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. To finance debt maturities,
management has and will continue to seek both debt and equity investors to
provide additional capital. The Company also started a plan to restructure
the Company, reducing over capacity in its rubber manufacturing facilities
and increasing its ability to produce and deliver concrete premium grade
crossings on a timely basis. The Company is liquidating excess assets,
reducing staff and cutting costs. Proceeds from asset sales will be used to
pay off debt commitments.
(13) Subsequent Event
Finova Forbearance Agreement
On July 15, 1998, the Company entered into a Forbearance Agreement
("Agreement") that significantly realigned the borrowing arrangement
between the Company and Finova. This Agreement, that continues through June
1, 1999, allows the Company to borrow up to an additional $400,000 over the
calculated eligible borrowing balance ("Permitted Overadvance"), defers
installment payments on the Company's term debt, waives prior and existing
defaults and puts in place a new default covenant based on the Company
achieving forecast operating results. In addition, the Company must raise
$250,000 in subordinated financing to aid in the financing of the Company.
The Permitted Overadvance is subject to an interest rate of 6.25% over
prime and the term note balance is subject to the default rate of interest
at 2% over the stated note interest rate.
Also, as part of the Agreement, and as part of the Company's restructuring
plan, the Company entered into Modification Agreements and, in some cases,
Subordination and Standstill agreements with eight unsecured creditors.
These agreements place the note holder into a subordinate position with
Finova and extends payoff of any obligation over a five-year period.
F-19
<PAGE>
Item 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
----------------------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) in the Exchange Act.
------------------------------------------------------------------------
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
William E. Cook 49 Interim CEO
Edward S. Smith 79 Chairman of the Board
Director
John E. Hart 59 Director and Secretary
Robert E. Tuzik 46 Vice President - Sales &
Marketing
M. Charles Van Rossen 42 Chief Financial Officer and
Treasurer
On December 31, 1997, Ronald G. Nutting retired from his position as Vice
President and Secretary. On January 21, 1998, Richard Kreitzberg resigned
as a director and on February 5, 1998, Joseph J. Barclay resigned as a
director. On April 2, 1998, Bryan Holland's employment as Vice
President-Manufacturing was terminated. Effective April 30, 1998, Michael
L. DeBonny resigned as Chief Executive Officer, President and Treasurer of
the Company.
Each director is elected for a period of one year and serves until the
stockholders duly elect his or her successor. The Board of Directors has no
committees. Officers of the Company are elected by, and serve at the
discretion of the Board of Directors. None of the above individuals has any
family relationship with any other.
19
<PAGE>
The principal occupations of each director and executive officer of the
Company, for at least the past five years, are as follows:
William E. Cook was retained as Interim Chief Executive Officer of the
Company in March 1998, replacing Michael DeBonny who was, up until April
30, 1998, the Company's President, CEO and Treasurer. Mr. Cook, through his
company Riptide Holdings, Inc., was hired by the Company to assist with the
restructuring and turnaround of the Company. Mr. Cook has been President of
Riptide for three years. For the four years Prior to that Mr. Cook was
President, CEO, a director and board chairman of DDL Electronics, Inc., a
New York Stock Exchange company with printed circuit board and electronic
contract assembly manufacturer operations in the United States and Europe.
Prior to that, Mr. Cook was a partner with TBM Associates, a venture
capital firm based in Boston, Massachusetts. Prior to that, Mr. Cook was
President and CEO of Signal Technology, Inc., a company he co-founded in
1981. Mr. Cook acts as a consultant and/or serves on the boards of several
private companies. Mr. Cook has both undergraduate and graduate degrees in
Engineering from North Carolina State University and a Masters degree in
Business Administration from MIT.
Edward S. Smith has been a director of the Company since closing of the
merger with OMNI on April 30, 1997. He had been a director of OMNI from
1994 to the closing of the merger. Mr. Smith is President/Owner of Ted
Smith & Company. He is the former chairman and CEO of Omark Industries,
Inc., an international manufacturer of cutting chain for chain saws,
hydraulic log loaders and sporting ammunition. His business activity during
the last five years has been concentrated on private investing and board
memberships. Currently he serves on the Board of Directors of Georgia Gulf
Corporation and Expert Systems Publishing Company.
John E. Hart has been a director of the Company since closing of the merger
with OMNI on April 30, 1997. Prior to the merger, he had been general
counsel to CMD since October 1993 and its Secretary and Treasurer since
June, 1994. From 1985 to 1994 he was engaged in the private practice of
law. He resumed his law practice in May, 1997. Mr. Hart holds a J.D. degree
from the University of Southern California and a BA degree from the
University of Redlands.
Robert E. Tuzik has been Vice President - Sales and Marketing of the
Company since closing of the merger with OMNI on April 30, 1997. He had
been Vice President - Sales and Marketing from 1996 to the closing of the
merger. From 1995 to 1996 he owned and operated Talus Associates,
specializing in railway marketing and media relations. Prior to that he
spent six years as editor of Railway Track and Structures, a
railroad-engineering journal. Mr. Tuzik holds a BA in English and MS in
Journalism from the University of Illinois at Chicago and Northwestern
University.
20
<PAGE>
M. Charles Van Rossen was appointed Chief Financial Officer and Treasurer
of the Company on August 11, 1998. From 1995 to 1998 he was a private
financial and management consultant. Prior to that he spent four years as
Chief Financial Officer and Controller of DDL Electronics, Inc., a New York
Stock Exchange company with printed circuit board and electronic contract
assembly manufacturer operations in the United States and Europe. Prior to
that he spent seven years with the Pacificorp group of companies working in
various management positions for that company's many subsidiaries. Prior to
that Mr. Van Rossen was an audit manager with KPMG Peat Marwick. He is a
Certified Public Accountant and holds a BS degree in Accounting and
Quantitative Methods from the University of Oregon.
Item 10. Executive Compensation
----------------------
The following table sets forth remuneration paid to certain executive officers
for the fiscal years ended April 30, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------------------------ ------------------
Other
Year Annual
Ended Compen- Options LTIP All other
Name and Principal Position April 30 Salary Bonus sation SARs Payments Comp.
- --------------------------- -------- ------ ----- ------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Cook 1998 30,000 0 0 0 0 0
Interim CEO
Michael L. DeBonny 1998 150,000 0 0 0 0 0
CEO, President 1997 151,814 0 0 618,144 0 0
and Treasurer 1996 120,918 8,026 0 0 0 0
Ronald G. Nutting (1) 1998 66,702 0 0 0 0 0
Executive Vice President 1997 106,544 0 0 0 0 0
and Secretary 1996 88,179 5,538 0 0 0 0
21
</TABLE>
<PAGE>
(1) Mr. Nutting retired from the Company in January 1998.
The Company's nonsalaried directors receive $1,000 for each Board meeting
attended, and receive $2,500 annually, together with reimbursement for
out-of-pocket expenses in attending Board meetings.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and Series B Preferred
Stock as of the date hereof, by (i) each person who is known by the Company
to own of record or beneficially more than 5% of the Company's Common
Stock, (ii) each of the Company's directors and (iii) all directors and
officers of the Company as a group. The stockholders listed in the table
have sole voting and investment powers with respect to the shares
indicated.
Name and Address of Number of
Beneficial Owner(1)(2) SharesOwned Percent of Class
---------------------- ----------- ----------------
Michael L. DeBonny (3) 1,791,702 22%
16101 Parelius Circle
Lake Oswego, OR 97034
John E. Hart (4) 133,039 1.7%
Box 2495
Grass Valley, CA 95945
Edward S. Smith (5) 630,532 8%
921 SW Washington St., Ste. 762
Portland, OR 97205
Richard A. Kreitzberg (6) 919,910 11.5%
3332 El Dorado Loop South
Salem, OR 97032
22
<PAGE>
Ronald J. Gangemi (7) 697,788 8.7%
11950 Willow Valley Road
Nevada City, CA 95959
Steven F. Rosendahl (8) 630,532 8%
Dynasty Capital Corporation
1000 SW Broadway, Suite 960
Portland, OR 97205
Ronald G. Nutting (9) 384,233 5%
7400 SW Barnes Rd. Apt. 1213
Portland, OR
Dean Witter Reynolds, Custodian
for R. Andrew Davis (10) 384,233 5%
253 East 31st Street #1D
New York, NY 10016
All officers and directors 797,636 10%
as a group (2 persons)
----------
(1) Assumes no exercise or conversion of (i) common stock purchase warrants
and underwriter's warrants issued in conjunction with the Company's 1994
public offering, outstanding warrants, options or other commitments of the
Company that are convertible into or exercisable for shares of Common
Stock, except that Common Stock obtainable by persons named in the above
table upon exercise of options is deemed outstanding and beneficially owned
by such persons in calculating their percentage ownership; or (ii) the
Series B Preferred Stock.
(2) Includes shares of series B Preferred Stock held by the person listed.
(3) Includes options held by Mr. DeBonny to purchase 942,670 shares of
Common Stock and 96,304 shares of Series B Preferred Stock under the
Company's Incentive Stock Option Plan.
(4) Includes options held by Mr. Hart to purchase 60,000 shares under the
Company's Incentive Stock Option Plan.
23
<PAGE>
(5) Includes options held by Mr. Smith to purchase 92,722 shares of Common
Stock and 9,473 shares of Series B Preferred Stock under the Company's
Incentive Stock Option Plan.
(6) Includes shares owned by Mr. Kreitzberg's spouse. Also includes options
held by Mr. Kreitzberg to purchase 30,907 shares Common Stock and 3,158
shares of Series B Preferred Stock under the Company's Incentive Stock
Option Plan.
(7) Includes shares owned by Mr. Gangemi's spouse and children.
(8) Includes options held by Mr. Rosendahl to purchase 463,608 shares of
Common Stock and 47,363 shares of Series B Preferred Stock under the
Company's Incentive Stock Option Plan.
(9) Includes options held by Mr. Nutting to purchase 46,361 shares of
Common Stock and 4,736 shares of Series B Preferred Stock under the
Company's Incentive Stock Option Plan.
(10) Includes options held by Mr. Davis to purchase 15,454 shares of Common
Stock and 1,579 shares of Series B Preferred Stock under the Company's
Incentive Stock Option Plan.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
In February, 1997, three OMNI directors (Messrs. DeBonny, Kreitzberg and
Smith) purchased shares in OMNI for a total of $99,617 at $3.50 per share.
Simultaneously, put agreements were executed requiring the Company to
purchase those shares at a price equivalent to $4.00 per share 120 days
following the investment. Mr. Kreitzberg exercised his put and his shares
were repurchased in June, 1997. The put agreements with Messrs. DeBonny and
Smith were extended 120 days and the put price increased to the equivalent
of $4.25 per OMNI share, or a total of $88,272.
24
<PAGE>
In March, 1997, OMNI entered into a short-term equipment rental agreement
with one of its directors, Edward S. Smith.
As a condition of the merger transaction with OMNI, the Company entered
into agreements with Messrs. Hart and Gangemi to exchange all of their
Series A preferred stock (60,000 and 750,000 shares respectively) for
20,000 and 250,000 shares, respectively, of Series B preferred stock.
Management is of the opinion that all transactions described above between
the Company and its officers, directors or stockholders were on terms at
least as fair to the Company as had the transactions been concluded with an
unaffiliated party. All material transactions effected in the future
between the Company and its officers, directors and principal stockholders
will be subject to approval by a majority of the Company's outside
directors not having an interest in the transaction.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
a. The Exhibits listed on the accompanying Index of Exhibits are filed as
part of this annual report.
b. No reports on Form 8-K were filed during the quarter ended April 30,
1997.
Index of Exhibits
-----------------
Exhibit # Description
--------- -----------
1.01 Form of Underwriting Agreement with Oak Ridge Investments,
Inc. (1)
1.02 Form of Selected Dealers Agreement (1)
1.03 Form of Representative's Warrant (1)
1.04 Consulting Contract (1)
2.01 Certificate of Incorporation of the Registrant (1)
25
<PAGE>
Exhibit # Description
--------- -----------
2.02 Bylaws of the Registrant (1)
2.04 Bylaws of the Registrant as amended December 10, 1994 (1)
2.05 Certificate of Designation of Preferences of Series B
Preferred Shares (9)
2.06 Amended and Restated Certificate of Incorporation (8)
4.01 Form of Warrant Agreement (1)
5.01 Opinion of John Hart, Esq., regarding legality of the Common
Stock and Warrants (includes Consent) (1)
10.01 Incentive Stock Option Plan (1)
10.03 Agreement with LBI general partnership (1)
10.06 Merger Agreement and Plan of Reorganization (5)
10.07 Letter from Perry-Smith & Co. (former accountant dated July
24, 1997) pursuant to Item 304 (a) (3) of Regulation S-K (6)
10.08 Employment Agreement (Mr. DeBonny) (9)
10.09 Lease Agreement for Portland, Oregon Facility, dated May 21,
1997(7)
10.10 Amended and Restated 1994 Stock Option Plan (8)
10.11 FINOVA Forbearance Agreement
27.05 Financial Data Schedule--April 30, 1998
(1) Previously filed as part of the Company's SB-2 Registration Statement
filed on February 11, 1994, as amended and effective on May 13, 1994.
(2) Previously filed as Exhibits to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1994.
(3) Previously filed as an Exhibit to the Company's Post Effective
Amendment No. 1 to Form SB-2 Registration Statement filed on March 10, 1995
and effective on March 28, 1995.
26
<PAGE>
(4) Previously filed as an Exhibit to the Company's Preliminary Proxy
Statement filed October 24, 1995.
(5) Previously filed as an Exhibit to the Company's Form 8-K filed May
2, 1997.
(6) Previously filed as an Exhibit to the Company's Form 8-K filed
July 30, 1997.
(7) Previously filed as an Exhibit to the Company's annual or
quarterly report for the period ending the indicated date.
(8) Previously filed as an Exhibit to the Company's Proxy filed
pursuant to Regulation 14A on April 3, 1998
(9) Previously filed as an Exhibit to the Company's Form 10-KSB filed
for the fiscal year ended April 30, 1997.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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)
By /S/ William E. Cook
-------------------------------------
(Signature and Title)
Interim Chief Executive Officer
Date August 21, 1998
-----------------------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By /s/ M. Charles Van Rossen By /s/ William E. Cook
------------------------------- ------------------------------------
(Signature and Title) (Signature and Title)
M. Charles Van Rossen William E. Cook,
Chief Financial Officer Interim Chief Executive Officer
Date August 21, 1998 Date August 21, 1998
----------------------------- -----------------------------------
By /S/ JOHN E. HART By /S/ EDWARD S. SMITH
------------------------------- ------------------------------------
(Signature and Title) (Signature and Title)
John E. Hart, Director Edward S. Smith, Director
Date August 21, 1998 Date August 21, 1998
----------------------------- ----------------------------------
28
Exhibit 10.11 FINOVA Forbearance Agreement
FORBEARANCE AGREEMENT
This Forbearance Agreement is entered into as of June 1, 1998 between OMNI
PRODUCTS, INC., an Oregon corporation ("Borrower") and FINOVA CAPITAL
CORPORATION, a Delaware corporation, formerly known as Greyhound Financial
Corporation, a Delaware corporation ("Finova"), with reference to the following
facts:
A. Finova and the Borrower are parties to that certain Loan and Security
Agreement dated April 26, 1994 (as amended, the "Loan Agreement"). (Capitalized
terms used in this Agreement, which are not defined herein, shall have the
meanings set forth in the Loan Agreement. The Loan Agreement, this Agreement,
and all other present and future documents, instruments and agreements relating
hereto or thereto are referred to in this Agreement, collectively, as the "Loan
Documents".)
B. Material Events of Default have occurred and are continuing under the
Loan Documents, including without limitation the following (the "Existing
Defaults"): failure to comply with Borrower's net worth, senior debt service
coverage and total debt service coverage financial covenants.
C. Borrower has requested that Finova defer taking action by reason of the
Existing Defaults and continue to provide financing to the Borrower for a
limited time. Finova is willing to do so for the term and on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Plan. Attached hereto as Exhibit "A" is the forward looking Operating Plan
which Borrower has prepared and presented to Finova (the "Plan"). (The Plan does
not reflect the proceeds of the New Sub Debt (as defined below), which will
reduce the cash shortfalls shown in the Plan. Accordingly, the term "Plan" as
used herein means the Plan attached as Exhibit "A", modified to reflect the
proceeds of the New Sub Debt.) Borrower represents and warrants that the Plan
has been prepared by the Borrower in good-faith and that the same represents
reasonable projections and expectations as to performance based on the
information available to Borrower.
2. Forbearance. Finova agrees to forbear from exercising its rights and remedies
under the Loan Documents, as a result of the Existing Defaults, until 90 days
after the date of this Agreement (the "Forbearance Period"), provided that no
Additional Default (as defined below) shall occur. In agreein~ to forbear from
exercising its rights and remedies, Finova is not waiving the Existing Defaults
29
<PAGE>
or any rights or remedies in connection therewith, all of which are expressly
reserved. The Forbearance Period may be extended from time to time by Finova,
but only by specific written agreements signed by Finova and Borrower; provided,
however, that a Forbearance Period will automatically renew if, at the
expiration of the then Forbearance Period there is not then in existence any
Additional Default. The term "Forbearance Period" shall include all extensions
of the original ninety-day forbearance period. Upon the expiration of the
Forbearance Period, Finova may, at its option, exercise any and all rights or
remedies in connection with the Existing Defaults, without further notice.
3. Continued Loans.
3.1. Loans. Notwithstanding the Existing Defaults, Finova agrees, during
the Forbearance Period, to continue to provide Loans to the Borrower, in
accordance with, and subject to all of the terms and conditions set forth in,
the Loan Agreement and the other Loan Documents, provided no Additional Default
(as defined below) has occurred. After the expiration of the Forbearance Period
or upon the occurrence of any Additional Default (whichever first occurs),
without limiting Finova's other rights or remedies, Finova may cease making
Loans or providing any other financial accommodations to the Borrower, without
further notice.
3.2. Temporary Overadvance Facility. Notwithstanding anything in Section
2.1 of the Loan Agreement or elsewhere therein to the contrary, commencing on
the date hereof and continuing through the earlier of the following dates
("Permitted Overadvance Period"): (i) June 1, 1999, or (ii) expiration of the
Forbearance Period, Borrower shall be entitled to maintain an Overadvance (as
defined in Paragraph 2.1.1(b) (iv) of the Loan Agreement) in a total amount not
to exceed $400,000 at any time outstanding without the immediate repayment
obligation under Paragraph 2.1.1(b)(iv) of the Loan Agreement. The unpaid
principal balance of the Overadvances pursuant hereto shall bear interest at a
rate equal to the Prime Rate plus 6.25% per annum, calculated on the basis of a
360-day year for the actual number of days elapsed.
3.3. Deferral of Regular Principal Payments on Term Loan. During the
Forbearance Period, Borrower shall not be obligated to make the regular monthly
principal payments on the Term Loan. Interest shall continue to be paid monthly
on the Term Loan, and principal and interest shall continue to be paid on the
Cap Ex Loans and all other Loans in accordance with the terms thereof. Principal
payments shall be made with respect to the Term Loan as provided below in
Section 4.1 regarding proceeds of sale of equipment and real estate of the
Borrower. Effective on July 15, 1998, the interest rate applicable to the Term
Loan shall be increased by an additional 2% per annum.
30
<PAGE>
3.4. Fees. In consideration for Finova entering into this Agreement, the
Borrower agrees to pay Finova the following fees (the "Fees"): (i) an
Overadvance Fee in an amount equal to $12,000, and (ii) a Term Loan Fee in an
amount equal to 3% of the unpaid principal balance of the Term Loan at the date
hereof. Borrower acknowledges and agrees that the Fees are fully earned on the
date hereof and are non-refundable. The Fees are in addition to all interest and
all other fees provided for herein or in the other Loan Documents. The Fees
shall be paid by the Borrower to Finova in six equal monthly installments,
commencing on July 1, 1998 and continuing on the same day of each succeeding
month until the earlier of the date paid in full or the date an Additional
Default occurs or the date the Loan Agreement terminates by its terms or is
terminated, on which date the entire unpaid balance of the Fees shall be due and
payable. Repayment of the Term Loan shall not trigger any of the fees set in
Section 2.6 of the Loan Agreement.
3.5. Liquidation Fee. Finova shall be entitled to payment of an additional
fee, in the amount of $100,000, if Borrower ceases operations for a period of
more than five (5) consecutive days, voluntarily or involuntarily goes out of
business, liquidates substantially all of its assets, or if Finova forecloses
its security interest in a material portion of the Collateral.
3.6. Concentration Limit-Burlington Northern. Effective on the date hereof,
notwithstanding clause (xii) of the definition of Eligible Accounts set forth in
the Loan Agreement, Accounts with Burlington Northern as account debtor may
constitute up to 40~/~~ of all Accounts of the Borrower and will be deemed to be
eligible for borrowing purposes under the Loan Agreement provided that such
Accounts are otherwise determined to be Eligible Accounts.
4. Additional Covenants of Borrower
4.1. Sales of Equipment and Real Estate. Borrower shall proceed to sell its
excess real estate located at (i) 3901 5. Highway 1-45, Enis, Texas 75119, (ii)
223 Wohlsen Way, Lancaster, Pennsylvania 17603, (iii) 3911 Dayton St., McHenry,
Illinois 60050, and (iv) 870 Gold Flat Road, Nevada City, California 95959, and
its excess equipment, but only in good faith arm's length transactions.
31
<PAGE>
(Proceeds of the sale of equipment and real estate are shown on the Plan as
reductions in the principal amount of the Term Loan.) The entire proceeds of
said sales, net of reasonable expenses in connection therewith (in the case of
equipment not to exceed 4% of the gross sale price), net of real property or
personal property taxes and net of the sums due on the first trust deeds or
other liens or assessments which have priority over Finova's lien, shall be
applied first to the unpaid principal payments on the Term Loan (in the inverse
order of their maturity), next to the unpaid principal payments on the Cap Ex
Loans (in the inverse order of their maturity), and next to the other Borrower's
Obligations in such order as Finova shall determine in its discretion. Sales of
real estate shall be subject to the prior written approval of Finova.
4.2. Additional Subordinated Debt.
(a) On or before July 15, 1998 (the "Sub Debt Deadline"), Borrower
shall raise at least $250,000 cash proceeds from the issuance of subordinated
debt or stock of the Borrower (the "New Sub Debt"). Borrower may extend the Sub
Debt Deadline for up to three additional 30-day periods, by paying Finova an
extension fee of $10,000 for each such 30-day extension. The extension fee shall
be payable on the first day of each 30-day extension period. Borrower shall not
be entitled to any such extension if the applicable extension fee is not paid on
the date due.
(b) The New Sub Debt shall be on such terms and conditions as Finova
shall reasonably specify, shall be fully and completely subordinated to the
Borrower's Obligations, shall remain so subordinated in the event of, and
during, any insolvency proceeding covering Borrower and, until such time as
Borrower's Obligations have been fully, completelY and indefeasibly paid in
full, any holder of the New Sub Debt shall have no right to accelerate or
otherwise enforce the Sub Debt. 100% of the proceeds of the New Sub Debt shall
be paid to Finova, immediately upon receipt thereof, and shall be applied first
to any outstanding Overadvances, and next to outstanding revolving loans with
respect Borrower's Accounts and Inventory.
4.3. Subordination of Certain Outstanding Debt. On or before July 15, 1998,
Borrower shall cause the holders of the indebtedness of Borrower listed on
Exhibit "B" to agree to payment terms with respect to such debt reasonably
acceptable to Finova and to execute and deliver to Finova subordination
agreements on Finova's standard form, with respect to such debt.
32
<PAGE>
4.4. Consulting Fees. Borrower shall limit the consulting and other fees
paid to W. Cook, Riptide Holdings, Inc. and all other consultants to an amount
not to exceed a total of $15,000 per month, from and after the date hereof and
continuing until the earlier of: (i) one year after the date hereof or (ii)
payment in full of the Borrower's Obligations. Thereafter, so long as there is
any outstanding balance under the Term Loan or any outstanding Overadvance,
Borrower shall advise Finova of any changes to said consulting fees.
5. "Additional Default." As used in this Agreement, "Additional Default" means
any of the following: (i) any material default or Event of Default under any
Loan Document which has occurred as of this date, is not listed in Recital B
above and was not known by Finova, and which individually or in the aggregate
reduces or adversely affects the value of any of Finova's Collateral by the sum
of $100,000 or more, (ii) any material default or Event of Default under any
Loan Document occurring after the date of this Forbearance Agreement (including,
without limitation, any breach of any term or provision of this Agreement) which
individually or in the aggregate reduces or adversely affects the value of any
of Finova's Collateral by the sum of $100,000 or more, (iii) any failure of the
Borrower to meet the monthly operating income and Term Loan principal payments
projections set forth in the Plan by the dates specified, subject to a permitted
variance of not more than 20% on a cumulative basis since May 1, 1998, and (iv)
any material breach of any representation or warranty in this Agreement or any
other Loan Document. Without limiting any other provision of this Agreement,
Finova may, in its sole and absolute discretion, waive an Additional Default,
but only in a specific written waiver signed by Finova, and no such waiver shall
imply or constitute an agreement on the part of Finova to waive any other
Additional Defaults, whether or not similar to the Additional Default waived.
Borrower acknowledges that Finova's obligations to make Loans are subject to all
of the terms and conditions in this Agreement and the other Loan Documents and
that none of the same are modified by any amounts that may be shown on the Plan.
It is the intent of the parties that any of the Existing Defaults will not
constitute an Additional Default unless such Existing Default falls within the
definition of Additional Default contained in subdivision (i) of this paragraph
5.
6. Acknowledgment of Default. Borrower acknowledges that: (i) material Events of
Default have occurred and presently exist under the Loan Documents, (ii) the
unpaid principal balance of the Borrower's Obligations is $2,924,688.15 as of
June 1, 1998 plus interest accruing after J;une 1, 1998, plus reasonabie costs
and attorneys fees as set forth in the Loan Documents; (iii) the Borrower's
Obligations are due and owing from Borrower to Finova without any defense,
offset or counterclaim of any kind; (iv) pursuant to the Loan Documents, to the
best of Borrower's knowledge, Finova has a valid perfected first priority
security interest in all of the Borrower's present and future accounts, general
33
<PAGE>
intangibles, inventory, equipment, documents, instruments, and all other
property and assets of the Borrower described in the Loan Agreement and the
proceeds and products thereof (collectively, the "Collateral"), subject to
Permitted Liens; (v) subject to the forbearance agreement set forth in Section 2
above, Finova has the rightto take immediate possession of all of the
Collateral, pursuant to the Loan Documents and to exercise all other rights and
remedies granted to it under the Loan Documents and by law; and (vi) Finova is
not obligated to make any additional Loans to the Borrower, under the Loan
Documents or otherwise, except as specifically provided in this Agreement.
7. General Release.
7.1. General Release. In consideration for Finova entering into this
Agreement, the Borrower hereby irrevocably releases and forever discharges
Finova, and its successors, assigns, agents, shareholders, directors, officers,
employees, agents, attorneys, parent corporations, subsidiary corporations,
affiliated corporations, affiliates, and each of them, from any and all claims,
debts, liabilities, demands, obligations, costs, expenses, actions and causes of
action, of every nature and description, known or reasonably known to Borrower,
which Borrower now has or at any time may hold, by reason of any matter, cause
or thing occurred, done, omitted or suffered to be done prior to the date of
this Agreement (collectively, the "Released Claims"). Borrower hereby
irrevocably waives the benefits of California Civil Code Section 1542 which
provides: "A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor." This release is fully effective on the date hereof.
7.2. Additional Waivers. Borrower irrevocably waives and affirmatively
agrees not to allege or otherwise pursue any and all defenses, affirmative
defenses, counterclaims, claims, causes of action, set-offs or other rights that
they may have as of the date hereof relating to the Borrower's Obligations or
the Loan Documents, including (but not limited to) any right to contest any
Events of Default which have been declared or could have been declared by Finova
at the date hereof, any provision of any of the Loan Documents, Finova's lien
and security interest under the Loan Documents, and any acts or omissions of
Finova in connection with the Loan Documents. Borrower ackno~edges and agrees to
~e continuing authenticity and enforceability of the Loan Documents and ratifies
and confirms the Loan Documents in their entirety, and agrees that the Loan
Documents shall remain in full force and effect until all Borrower's Obligations
have been paid and performed in full (except that no further loans will be made
to the Borrower under the Loan Dpcuments, except as set forth in this
Agreement).
34
<PAGE>
7.3. No Prior Assignments. Borrower represents and warrants that it has not
assigned to any person, partnership, corporation, or other entity any Released
Claim. In the event that the foregoing representation and warranty is, or is
purported to be, untrue, then the Borrower agrees to indemnify and hold harmless
Finova against, and to pay, any and all actions, demands, obligations, causes of
action, decrees, awards, claims, liabilities, losses and costs, including but
not limited to reasonable expenses of investigation, reasonable attorneys' fees
of counsel of Finova's choice and costs, which Finova may sustain or incur as a
result of the breach or purported breach of the foregoing representation and
warranty.
8. Bankruptcy and Related Waivers. Borrower acknowledges that a material part of
the consideration to Finova in entering into this Agreement is to settle and
resolve disputes between the parties in an expeditious way and to avoid, for all
parties, the economic detriment and the costs and expenses of a bankruptcy or
reorganization proceeding. Accordingly, as a material part of the consideration
to Finova in entering into this Agreement, Borrower agrees as follows:
BORROWER WAIVES ANY RIGHT TO FILE, AND AGREES NOT TO FILE, ANY BANKRUPTCY,
REORGANIZATION, DISSOLUTION OR SIMILAR PROCEEDING, INCLUDING WITHOUT LIMITATION
ANY VOLUNTARY PROCEEDING UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
(THE "BANKRUPTCY CODE"), AND BORROWER AGREES NOT TO INDUCE ANY OTHER PERSON,
FIRM, CORPORATION OR OTHER ENTITY TO FILE ANY INVOLUNTARY BANKRUPTCY,
REORGANIZATION, DISSOLUTION OR SIMILAR PROCEEDING, INCLUDING WITHOUT LIMITATION
ANY INVOLUNTARY PROCEEDING UNDER CHAPTER 11 OF THE BANKRUPTCY CODE, AND NOT TO
COOPERATE IN OR CONSENT TO ANY SUCH FILING.
9. General Provisions.
9.1. Integration; Amendment. This Agreement and the other Loan Documents
set forth in full the terms of agreement between the parties and are intended as
the full, complete and exclusive contract governing the relationship between the
parties. This Agreement and the other toan Documents supersede all other
discussions, promises, representations, warranties, agreements and
understandings between the parties. All of the Borrower's Obligations, and all
of the Loan Documents and all terms and provisions thereof shall continue in
35
<PAGE>
full force and effect and the same are hereby ratified and confirmed (except
that, by reason of the defaults of the Borrower, Finova has no further
obligation to make any Loans to the Borrower under any of the Loan Documents,
except as set forth in this Agreement). This Agreement may not be modified or
amended, nor may any rights hereunder be waived, except in a writing signed by
the party against whom enforcement of the modification, amendment or waiver is
sought.
9.2. Investigation. Each of the parties acknowledges that it and its
counsel have had an adequate opportunity to make whatever investigation or
inquiry they may deem necessary or desirable in connection with the subject
matter of this Agreement prior to the execution hereof and the delivery and
acceptance of the consideration specified herein. Each party acknowledges that
(i) each has been represented by independent counsel of its own choice
throughout all of the negotiations which preceded the execution of this
Agreement, (ii) each has executed this Agreement with the consent and on the
advice of such independent legal counsel, and (iii) each has executed this
Agreement voluntarily and knowingly.
9.3. Waivers. Any waiver of any condition in, or breach of, this Agreement
or any of the other Loan Documents in a particular instance shall not operate as
a waiver of other or subsequent conditions or breaches of the same or a
different kind. Finovas exercise or failure to exercise any rights under this
Agreement or any of the other Loan Documents in a particular instance shall not
operate as a waiver of its right to exercise the same or different rights in
subsequent instances.
9.4. Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns, provided, however, that Borrower may
not assign or transfer any rights hereunder without the prior written consent of
Finova.
9.5. Costs and Expenses. Borrower shall reimburse Finova for all of the
reasonable costs, fees and expenses (including without limitation reasonable
attorneys fees) which Finova has incurred or hereafter incurs in connection with
the negotiation, drafting or enforcement of this Agreement, or otherwise in
connection with this Agreement or the other Loan Documents, whether or not there
is any litigation between the parties hereto.
9.6. No Third Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
36
<PAGE>
9.7. Separability. If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal or unenforceable, the remaining
provisions of this Agreement shall nevertheless remain in full force and effect.
9.8. Time of the Essence. Time is of the essence of each of the obligations
of the parties under, and each of the provisions of, this Agreement.
9.9. Headings; CounterDarts. The headings in this Agreement are solely for
convenience and shall be given no effect in the construction or interpretation
of this Agreement. This Agreement may be executed in any number of counterparts,
which together shall constitute one and the same agreement.
9.10. Governing Law; Forum Selection. This Agreement is being entered into
in the State of California. This Agreement shall be governed by the laws of the
State of California. As a material part of the consideration to the parties for
entering into this Agreement, each party (1) agrees that, at the option of
Finova, all actions and proceedings based upon, arising out of or relating in
any way directly or indirectly to, this Agreement shall be litigated exclusively
in courts located within Los Angeles County, California, (2) consents to the
jurisdiction of any such court and consents to the service of process in any
such action or proceeding by personal delivery, first-class mail, or any other
method permitted by law, and (3) waives any and all rights to transfer or change
the venue of any such action or proceeding to any court located outside Los
Angeles County, California.
9.11. Interpretation. Notwithstanding the fact that one party has drafted
it, each side has participated in the negotiation of and revisions to this
Agreement, and no rule of interpretation will be applied by one party against
the other.
9.12. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. EACH PARTY TO THIS AGREEMENT
HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR
37
<PAGE>
AGREEMENT BETWEEN OR AMONG THEM; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF ANY
PARTY TO THIS AGREEMENT OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH THEM; IN EACH OF THE FOREGOING
CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
FINOVA CAPITAL CORPORATION OMNI PRODUCTS, INC.
By By
Title Title
By
Title
38
<PAGE>
Acknowledgment
The undersigned, parties to subordination agreements in favor of FINOVA
Capital Corporation, hereby acknowledge that their consent to the foregoing
Agreement is not required, but the undersigned nevertheless do consent to the
foregoing Agreement and agree that their respective subordination agreements
shall remain in full force and effect. The undersigned agree that no
modifications, amendments or waivers of any of the provisions of the foregoing
Agreement shall require the further consent of the undersigned. This
Acknowledgment may be executed in counterparts. The signature of the undersigned
shall be fully effective even if other persons named below fail to sign this
Acknowledgment.
James R. Coonan Steve Rosendahl
39
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 393,887
<SECURITIES> 0
<RECEIVABLES> 1,922,056
<ALLOWANCES> 68,776
<INVENTORY> 123,800
<CURRENT-ASSETS> 3,723,115
<PP&E> 4,381,898
<DEPRECIATION> 491,409
<TOTAL-ASSETS> 7,613,604
<CURRENT-LIABILITIES> 8,785,430
<BONDS> 522,342
0
6,221
<COMMON> 55,246
<OTHER-SE> (1,755,635)
<TOTAL-LIABILITY-AND-EQUITY> 7,613,604
<SALES> 16,448,876
<TOTAL-REVENUES> 16,448,876
<CGS> 13,446,678
<TOTAL-COSTS> 5,064,919
<OTHER-EXPENSES> 184,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633,316
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