FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: February 28, 2002 Commission File Number: 0-12305 Repro-Med Systems, Inc. ----------------------- (Exact name of registrant as specified in its charter) New York 13-3044880 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 24 Carpenter Road, Chester, NY 10918 ------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (845) 469-2042 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common stock, $.01 Par Value Over the Counter Bulletin Board Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-B, is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB. [ X ] Based on the closing sales price of February 28, 2002, the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was $1,029,300. The number of issued outstanding of the registrant's common stock, $.01 par value was 23,504,000 at February 28, 2002 which includes 2,275,000 shares of Treasury Stock. Repro-Med Systems, Inc. Table of Contents PART I Page Item 1 Business ............................................... 3 Item 2 Description of Property ................................ 10 Item 3 Legal Proceedings ...................................... 10 Item 4 Submission of Matters to a Vote of Security Holders .... 10 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters .................................... 10 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 11 Item 7. Financial Statements ................................... 17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ................... 30 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance With Section 16(a) of the Exchange Act ........................................... 31 Item 10. Executive Compensation ................................. 32 Item 11. Security Ownership of Certain Beneficial Owners and Management ......................................... 33 Item 12. Certain Relationships and Related Transactions ......... 35 PART IV Item 13. Exhibits and Reports on Form 8-K ....................... 35 2 PART I Item 1. Business THE COMPANY Repro-Med Systems, Inc. went public in 1982 (OTC - symbol REPR). We design and manufacture medical devices directing resources to the global markets for emergency medical products and infusion therapy. We maintain a presence in the US markets for impotency treatments and gynecological instruments. These products are regulated by the FDA. Repro-Med Systems, Inc. was incorporated under the laws of the State of New York, March 1980. The corporate offices are located at 24 Carpenter Road, Chester, New York 10918. The telephone number is 845-469-2042, fax is 845-469-5518 and the Internet site is www.repro-med.com PRODUCTS The primary growth strategy is to develop unique, proprietary medical devices. These devices are intended to save money for the user and create a repetitive demand for replacement of the disposable component - "razor - blade model". This strategy led to our development of products for the ambulatory infusion systems and emergency medical equipment markets. Historically, contract manufacturing was a strong source of revenue, but the Company is transitioning away from this market in order to concentrate on our own proprietary devices. Male infertility and impotency treatments were the first markets entered in the early 1980's. Our presence in this market has decreased due to a shift in focus towards the RES-Q-VAC and FREEDOM60. The Company is seeking outside funding to introduce a couples sexual enhancement or dysfunction kit into this market. Gyneco, the gynecological instrument subsidiary, was acquired in 1986 and sales continue primarily through repeat business. The table below presents the product mix for the last two fiscal years. 2002 2001 % of Sales % of sales ---------- ---------- Infusion Therapy 12 % 7 % Emergency Medical 63 % 55 % Contract Manufacturing 16 % 27 % Gynecological Instruments 9 % 10 % Male Impotency Treatments Less than 1 % 1 % We have also been developing other new proprietary medical devices, which would be viewed as state-of-the-art and as fixed asset devices. These products include a device for female incontinence and a device that can be used to detect certain cancers non-invasively using special imaging techniques. Thus, we have products currently on the market, new short-term products about to be marketed, and long range products to support and enhance future growth. Research and Development efforts for our new products have been temporarily suspended for some and continue at a reduced rate for others. The Company will focus more efforts on the Research and Development front once funds become available through increased funds or outside financing. 3 AMBULATORY INFUSION SYSTEMS The FREEDOM60 Syringe Infusion Pump was designed for ambulatory infusions. Ambulatory infusion pumps are most prevalent in the home care market. The home infusion therapy market is comprised of 4,500 sites of service, including local and national organizations, hospital-affiliated organizations, and national home infusion organizations with approximately $4.5 Billion in revenue annually (Ref: www.nhianet.org). With insurance reimbursement in a severe decline, there is a tremendous need for a low-cost, effective alternative to electronic and expensive disposable IV administration devices for the home care and nursing home market. The FREEDOM60 provides a high-quality delivery to the patient at costs similar to gravity and is targeted for the home health care industry, patient emergency transportation, and for any time a low-cost infusion is required. For the home care patient, FREEDOM60 is an easy-to-use lightweight mechanical pump acting on a 60cc syringe, completely portable, cost effective and maintenance free--no batteries to replace, no cumbersome IV pole. For the infusion professional, FREEDOM60 delivers precise infusion rates and uniform flow profiles providing consistent transfer of medication. A Form 510(k) Premarket Notification for initial design of the FREEDOM60 as a Class II device was approved by the FDA in May 1994. During 2001, we developed a new version of the pump called the FREEDOM60-FM containing an electronic flow monitor system (occlusion and end of infusion alarm) which has opened excellent marketing avenues in nursing homes, hospitals and pediatric ambulatory applications where alarms are generally required for nursing acceptance. Nurses also appreciate being able to visualize the drug volume by reading the scale on the syringe. We signed a group purchasing agreement in December 1999 with Child Health Corporation of America (CHCA) for the FREEDOM60 Syringe Infusion System. CHCA is a cooperative and business alliance of 38 children's hospitals and home care facilities which represents $4.5 billion in annual revenues, has over 61,000 hospital employees and 19,000 pediatricians and pediatric specialists. The agreement calls for CHCA to assist us to market the FREEDOM60 to its members through December 2002. Currently eight of the hospitals are actively using the system, and we are pursuing adding other hospitals in the system prior to the agreement expiration. During August 2001, we began a trial of the FREEDOM60 at one location of a major national home healthcare agency. We received our first order, as a result of the successful trial, in September 2001. Since then we have added two more sites and have 4 trials in progress. We will be working diligently to begin trials at the remaining locations within the next six to twelve months. As a direct result of our sales efforts at the Medica Trade Show in Dusseldorf, Germany, the Company authorized an Italian distributor to obtain the CE Mark to market the FREEDOM60 in Europe. We have been advised that the distributor has obtained the CE Mark and at the end of February we shipped product to Italy for distribution and trial. Repro-Med Systems' objective is to build a product franchise with FREEDOM60 and the sale of patented disposable tubing sets. FREEDOM60 uses rate-controlled tubing with standard slide clamp and luer-lock connector. The patented syringe disc connector insures that only FREEDOM60 tubing sets sold by us will function within the pump. Non-conforming tubing sets, without the patented disc connector, are ejected from the pump and prevent an overdose or runaway pump from injuring the patient. 4 THE MARKET FOR PUMPS & DISPOSABLES The ambulatory market has been rapidly changing due to reimbursement issues. Insurance reimbursement has been drastically reduced providing opportunity for FREEDOM60. The market share of high-end electronic type delivery systems is on the decline as well as high-cost disposable non-electric devices. Market pressures have forced patients to go on low-cost gravity systems or IV push where the drug is pushed into the vein directly from a syringe. This is a low-cost option but has been associated with complications and considered by many to be a high-risk procedure. Thus, the overall trend has been towards syringe pumps due to the low-cost of disposables. FREEDOM60-FM addresses the largest market segments with the lowest cost alarm syringe pump system. The chart below summarizes the market trends of devices. Method of Market Administration Trend -------------- ----- Ambulatory Pump Flat/Declining Gravity Infusion Increasing Pole Mounted Pump Declining Elastomeric Declining Syringe Increasing Implant Increasing IV Push Increasing ECONOMIC BENEFITS OF FREEDOM60 DISPOSABLE SALES At the moment we estimate that there are approximately 1,600 Freedom60 pumps currently in use. We sold approximately 720 pumps during the past fiscal year. The Freedom60 pump is designed for a minimum use of 4,000 cycles which at our list price is amortized at a low $.05 per use. The tubing sets currently have a list price of $3.30. From past experience, we have noted that each pump is used an average of 12 times per month. If the pump is operated up to 4 times per day, the total use per month would be 48, and thus the pump life expectancy is anticipated to be over six and a half years. This monthly rate amounts to annual usage of 144 sets producing typical gross revenues to the distributor of $475 per pump. Installed bases for various levels of pumps produce the following sales: Pumps In Annual Sales Market of Disposables ------ -------------- 5000 $ 2,376,000 10000 $ 4,752,000 50000 $23,760,000 100000 $47,520,000 We have a combination of direct sales and sales through distributors. Distributors typically receive discounts from list price depending upon servicing and volumes of up to 35%. COMPETITION FOR THE FREEDOM60 FREEDOM60 competes in the United States infusion pump market based on price, service and product performance. Some of the competitors have significantly greater resources for research and development, manufacturing and marketing, and as a result may be better prepared to compete for market share even in areas in which FREEDOM60 products may be superior. 5 The industry is subject to technological changes and there can be no assurance that we will be able to maintain any existing technological lead long enough to establish our products and to sustain profitability. EMERGENCY MEDICAL PRODUCTS Emergency medical products consists of two lines; RES-Q-VAC hand powered emergency suction pump and PLUS Reusable Silicone Resuscitators. RES-Q-VAC provides a complete emergency suction system for neonates, children and adults for use in any location, as it is non-electric. RES-Q-VAC removes fluids from a patient's airway. RES-Q-VAC consists of a hand-held, portable suction pump that can be connected to various sized sterile or non-sterile catheters. The one-hand operation makes it extremely effective particularly in emergencies. The disposable features of the RES-Q-VAC reduce the risk of contaminating the technician, for example, from HIV when suctioning a patient or during post treatment cleanup. All the parts that connect to the pump are disposable. RES-Q-VAC was introduced in 1990 and is now sold in thirty-one countries. The product is generally found in emergency vehicles, hospitals and as backup support for powered suction systems. The RES-Q-VAC is currently the market leader for manual, portable suction instruments. The primary competition is the V-Vac from Laerdal. The V-Vac is more difficult to use, cannot suction infants, and cannot be used while wearing heavy gloves such as in chemical warfare or extreme cold. Laerdal had more resources than Repro-Med Systems and had begun marketing the V-Vac before RES-Q-VAC entered the market. The RES-Q-VAC, however, has proven to be significantly superior and dominates the market to date. Every market leader can expect competition and recently Ambu has entered the market with the Res-Cue brand pump, a product similar to RES-Q-VAC, made in China. Management believes the product is not as well made or as versatile, and may not be purchased by the military segment of the market due to lines of supply concerns. With additional capital, management believes it will continue to maintain and build market share with an improved RES-Q-VAC (discussed below) and gain a significant portion of the electric suction pump market with the introduction of the RES-Q-VAC Plus system currently under development. On April 10, 2001, we submitted a patent application for our new FULL STOP PROTECTOR. This upgrade to the RES-Q-VAC system prevents any fluids from exiting the system. It also serves to trap airborne and fluid pathogens. We believe that the addition of the full stop design substantially separates the RES-Q-VAC from competitive units, which tend to leak fluid when becoming full or could pass air born pathogens during use. There is a heightened concern from health care professionals concerning exposure to disease and the new RES-Q-VAC provides substantially improved protection for these users. OSHA 29CFR 1910.1030 - Occupational Exposure to Bloodborne Pathogens requires that employers of "...emergency medical technicians, paramedics, and other emergency medical service providers; fire fighters, law enforcement personnel, and correctional officers... must consider and implement devices that are appropriate [to contain bloodborne pathogens], commercially available and effective." These first responders risk exposure to serious disease, and the employers may risk OSHA violations and lawsuits if they fail to consider protective measures such as Repro-Med's FULL STOP PROTECTION for RES-Q-VAC. The Company has received a letter from OSHA indicating the RES-Q-VAC meets the intent of this regulation. 6 The PLUS line is not very profitable for Repro-Med so management has decided to liquidate inventory on hand to discontinue this line. RES-Q-VAC and PLUS are sold domestically and internationally by emergency medical device distributors. These distributors generally advertise these products in their catalogs. IMPOTENCY TREATMENTS We market the RESTORE Kit for the treatment of impotency. RESTORE uses vacuum therapy to naturally induce blood flow to enable an erection. The kit includes Pro-Long constriction rings that make it possible to trap the blood and maintain the erection. The US market for impotency treatments is estimated at 30 million men. Pfizer reports that Viagra will not work for 30%-40% of impotent men. Consequently, the potential market for the RESTORE Kit in the US is approximately 10 million men. We have been compelled by limited resources to rely heavily on the web site to generate interest and sales for the RESTORE Kit. GYNECOLOGICAL INSTRUMENTS We purchased the Gyneco product line in 1986. Products included the Masterson Endometrial Biopsy Kit for in-office biopsy sampling procedures and the Thermal Cautery System used for tubal ligation procedures. Masterson Endometrial Biopsy Kit is a self-contained unit that offers a quick and easy procedure for in-office tissue sampling. The powerful vacuum pump is easily operated with one hand. The pump is supplied with sterile disposable curettes and specimen containers presented in a kit. The Thermal Cautery System is designed to provide a safe, reliable and effective method of female sterilization. The unit is small, compact and portable. A rechargeable battery supplies power. The unit uses disposable components that include the cautery hook assembly, cannula and Trocar stylette. CONTRACT MANUFACTURING Historically, we have used OEM profits to partially fund internal product development that has resulted in RES-Q-VAC and FREEDOM60. OEM sales have been as high as 70% of sales (1996). In 2002 and 2001, contract manufacturing for one customer amounted to 16% and for two customers 27% of sales, respectively. In late 1998, one customer substantially reduced marketing support for its product and consequently requested postponement of shipments. We have been manufacturing a portable, hand-operated suction pump for sale to the remaining active customer but have been informed that the demand for this product has diminished. As a result, the Company is transitioning from these contracts to building and selling its own proprietary products due to the much-improved margins associated with directly marketed devices. 7 SALES AND DISTRIBUTION Distribution channels for the products are those generally common to their respective markets. Emergency medical products are sold through a wide network of domestic and international distributors in 31 overseas countries. Ambulatory infusion systems are sold through both direct sales efforts concentrated on large national accounts and a network of medical device distributors. Gynecological instruments are sold from the corporate offices primarily through repeat business. Male impotency treatment products are marketed primarily through the web site and a limited number of distributors of personal care items. We signed a group purchasing agreement that facilitates sales presentations to approximately 38 allied members of the Child Health Corporation of America. Currently 8 of the members are using our products. The agreement will expire in December 2002 along with the substantially low prices that these centers are receiving. We are actively pursuing the addition of more of these centers so that they may institute the product at their center and enjoy the low prices for several months before the agreement expires. During the past year, we signed agreements with other distribution groups for various marketing efforts of our different products, but these proved not to be fruitful and the Company has decided to take a more active role in the sales and marketing process. We are still open to outside distributors but we have no assurance that they will be able to produce and at what sales levels they will be able to produce. MANUFACTURING AND EMPLOYEES Electromechanical assembly, calibration, pre- and post-assembly quality control inspection and testing, and final packaging for all products are performed at the facility by the employees. Products are assembled using molded plastic parts acquired from one supplier located in Taipei, Taiwan and several U.S. vendors. The availability of parts has not been a problem. The cost and time required to fabricate molds to manufacture parts can slow the development of new products and might temporarily limit supply if we determine it is advisable to seek alternate sources of supply for existing products. Our policy has been to have multiple vendors as suppliers, where practicable, that also offer mold-building capabilities as a service. In February 2002, we employed 25 employees, 20 were assigned to manufacturing operations, 3 to administrative functions, 1 Vice President of Operations (responsible for manufacturing, warehouse and procurement operations), and 1 Executive Officer (Andrew Sealfon). The Company is dependent on the services of Andrew Sealfon who serves as President and the head of Research and Development and is also instrumental in marketing and finance. The Company does not have insurance on the life of Andrew Sealfon and may not be able to replace him if the need arose. REGULATIONS GOVERNING THE MANUFACTURING OPERATIONS The Food, Drug and Cosmetic Act governs the development and manufacturing of all medical products. The Act requires us to register the facility, list devices, file notice of intent to market new products, track the locations of certain products and to report any incidents of death or serious injury relating to the products with the FDA. We are subject to civil and criminal penalties and/or recall seizure or injunctions if we fail to comply with regulations of the FDA. The most recent Form 510(k) filings with the FDA were for the resuscitator and the vacuum erection device and constriction rings, both approved in 1998. 8 We are required to comply with federal, state and local environmental laws; however, there is no significant effect of compliance on capital expenditures, earnings or competitive position. We do not use significant amounts of hazardous materials in the assembly of these products. Periodically we are subject to inspections and audits by FDA inspectors. During the year ended February 28,2002, we were subject to an audit that was triggered by a recall. The FDA issued the Company a 483 at the end of the audit, which we responded to, and the FDA accepted the response. The FDA will verify our accepted response on their next inspection, which could occur at any time. As a result of FDA audits, the Company may be subject to further audits and may be impacted by adverse findings. PATENTS AND TRADEMARKS We have filed and received U.S. protection for many of our products and in some cases, where it was no longer deemed economically beneficial, we have allowed certain patent protections to lapse. The RES-Q-VAC, an emergency medical product, is susceptible in the international market to imitation. A competitor has introduced a competitive product to the RES-Q-VAC into the market within the last year. We have responded with the introduction of new innovative features for the RES-Q-VAC that enhances the product and places it steps above the competition in safety. On April 10, 2001, we submitted a patent application for our new Full Stop Protector. This addition to the RES-Q-VAC system prevents any fluids from exiting the system. It also serves to trap airborne and fluid pathogens. We believe that the addition of the flow block design substantially separates the RES-Q-VAC from competitive units, which tend to leak fluid when becoming full or could pass air born pathogens during use. There is a heightened concern from health care professionals concerning exposure to disease and the new RES-Q-VAC provides improved protection for these users. OSHA 29CFR 1910.1030 - Occupational Exposure to Bloodborne Pathogens requires that employers of "...emergency medical technicians, paramedics, and other emergency medical service providers; fire fighters, law enforcement personnel, and correctional officers...must consider and implement devices that are appropriate [to contain bloodborne pathogens], commercially available and effective." These first responders risk exposure to serious disease, and the employers may risk OSHA violations and lawsuits if they fail to consider protective measures such as Repro-Med's Full Stop Protection for RES-Q-VAC The Company has received a letter from OSHA indicating the RES-Q-VAC meets the intent of this regulation. The most recent patent granted to us was # 5,336,189 for a "Combination IV Pump & Disposable Syringe" which confers a unique syringe to IV pump interface design. This patent is for the FREEDOM60 Infusion System, an infusion therapy product. The cost of filing and maintaining applications has deterred pursuing international patents. The patent position of small companies is highly uncertain and involves complex legal and factual questions. Consequently, there can be no assurance that patent applications relating to products or technology will result in patents being granted or that, if issued, the patents will afford protection against competitors with similar technology. 9 Furthermore, some patent licenses held may be terminated upon the occurrence of certain events or become non-exclusive after a specified period. There can be no assurance that we will have the financial resources necessary to enforce any patent rights we may hold. Our product names are registered trademarks. There can be no assurance that patents or trademarks will provide competitive advantages for the products covered or that they will not be challenged or circumvented by competitors. Item 2. Description of Property In February 1999, we executed a sale-leaseback for our masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. The facility is the only location and is used for our headquarters and manufacturing operations. Under terms of the contract of sale, we have the option to re-purchase the building, beginning on the second anniversary of the sale and ending on the eighth anniversary. We are required to give 12 months prior notice of the intent to re-purchase the building. The agreed upon amount for re-purchase is as follows: Year Four $2,205,000 Year Five $2,315,250 Year Six $2,431,013 Year Seven $2,552,563 The property is currently subject to a 20-year lease. We are responsible for repairs, maintenance and upkeep of the space we occupy. The terms of the lease call for monthly lease payments of $10,000 per month and 65% of the annual property taxes that amounted to $40,614 for the year ended February 28, 2002. Our monthly rent is $10,000 for the first 10 years of the lease and $11,042 thereafter. Item 3. Legal Proceedings We are not a party to any material litigation, nor to the knowledge of the officers and directors, is there any material litigation threatened against us. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fiscal year ended February 28, 2002. PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters We are authorized to issue 50,000,000 shares of Common Stock, $.01 par value. As of February 28, 2002, 23,504,000 shares were issued and outstanding and there were approximately 1,160 holders of record. Our Common Stock is traded in the over-the-counter market and is quoted through the National Daily Quotation Service. The following table sets forth the high and low closing bid quotations for the Common Stock as reported by the National Quotation Bureau, Inc. for the periods indicated. These quotations represent interdealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. 10 Year Ended February 28, 2001: High Bid Low Bid ----------------------------- -------- ------- 1st Quarter ................ $ 0.280 $ 0.280 2nd Quarter ................ $ 0.490 $ 0.450 3rd Quarter ................ $ 0.160 $ 0.160 4th Quarter ................ $ 0.180 $ 0.150 Year Ended February 28, 2002 ---------------------------- 1st Quarter ................ $ 0.260 $ 0.150 2nd Quarter ................ $ 0.230 $ 0.110 3rd Quarter ................ $ 0.230 $ 0.110 4th Quarter ................ $ 0.140 $ 0.070 On February 2, 1993 we issued 10,000 shares of 8% Cumulative Convertible Preferred Stock in a private placement for $100,000. We are obligated to pay semi-annual dividend payments of $4,000 until conversion by shareholders or redemption by us. The 10,000 shares of Cumulative Convertible Preferred Stock are convertible to 294,117 shares of Repro-Med common stock at $0.36 per share. The 10,000 shares of Cumulative Convertible Preferred Stock are convertible based on the following formula: multiply the number of shares of Preferred Stock to be converted by $10.00, divide the result by the conversion price of $0.20 per share (or by the conversion price as last adjusted and in effect at the date any shares are surrendered for conversion). The Conversion Price shall increase by $.02 for each year that the Preferred Stock is outstanding. The current conversion price is $.38. We have not declared or paid any cash dividends on our Common Stock and do not anticipate that any dividends will be paid in the foreseeable future. During the fiscal year ended February 28, 2002, dividend payments on the Convertible Preferred Stock amounted to $8,000 and an additional $4,000 were accrued on the balance sheet. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations This Annual Report on Form 10-KSB contains certain "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made by and information currently available. Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as, recent operating losses, uncertainties associated with future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, limited liquidity, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, market acceptance of FREEDOM60, availability of sufficient capital to continue operations and dependence on key personnel. When used in this report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect current views with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. 11 These statements involve risks and uncertainties with respect to the ability to raise capital to develop and market new products, acceptance in the market place of new and existing products, ability to penetrate new markets, our success in enforcing and obtaining patents, obtaining required Government approvals and attracting and maintaining key personnel that could cause the actual results to differ materially. Repro-Med does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS 2002 vs. 2001 For the year ended February 28 , 2002 we showed a loss of $386,075 as compared to a loss for the previous year of $104,457. This decline was mainly a result of a decrease in total net sales for the year ended February 28,2002 due to a reduction in sales for less profitable products. Sales of our key products have significantly increased this year. Sales of the Freedom60 Syringe Infusion System increased by 37% over the prior year and sales of our RES-Q-VAC Airway Suction System increased by 13% over the prior year. These sales increases were offset by the elimination of low margin products and recognition of an OEM sale, which resulted in overall sales this year decreasing 16% to $1,758,904 for 2002 from $2,085,912 for 2001. Without the OEM sale recognized during fiscal year 2001, net sales would have decreased by only 4% overall as a result of the elimination of low margin products offset by significant increases in our key products. The company has recently added a new Full Stop Protector to the RES-Q-VAC, which protects the users from any contamination from overflow and traps all pathogens inside the suction container. This new feature is also a requirement of the Occupational Safety and Health Administration under OSHA 29CFR 1910.1030 - Occupational Exposure to Bloodborne Pathogens. The RES-Q-VAC is the only hand-held non-electric suction system with sterile catheters for infants, large catheters for adults, and meets the intent of the OSHA requirements with the Full Stop Protection device. The Company has recently received a letter from OSHA confirming that the Full Stop Protector falls under the engineering controls of the Bloodborne Pathogen regulation and therefore would be required by any employer of medical personnel to protect their employees from potentially infectious materials. In August 2001, we received our first military order for the RES-Q-VAC from one base location of the US Air Force. We received several small orders from other bases during the last half of the year for RES-Q-VAC under their existing AFMLO/VA contract. The company anticipates additional orders will be placed during Fiscal year 2003. Management is seeking funds to design a new improved RES-Q-VAC suction device to expand the market substantially, although there is no assurance that such funding can be obtained, or obtained at terms acceptable to us, or that if funded, the markets would develop as expected. We are also planning to further promote the RES-Q-VAC in the home care market, for which the RES-Q-VAC is ideally suited due to its low cost, portability and convenience. 12 We have been marketing FREEDOM60 directly to national providers, other distributors, and regional home care agencies. Sales of FREEDOM60 are expected to continue to improve as new pump sales and restocking orders for disposables are received. Furthermore, we are negotiating with a national distributor, which would additionally improve sales potential for the line. In September 2001, the Company began selling to a major national home care agency that anticipates expanding the use of the FREEDOM60 to its regional centers across the country. Currently three centers of the agency are using the FREEDOM60 and four others are on trials. We anticipate starting trials in the remaining centers within the next six to twelve months. We have also begun sales into Europe with an Italian master distributor who arranged for CE approval of the FREEDOM60. Gross profit decreased to 25% of net sales for the year ended February 28,2002 from 38% for the year ended February 28,2001 primarily as a result of the timing of the recognition of an OEM sale during the year ended February 28,2001. When excluding this OEM sale for the year ended February 28,2001, the current gross profit percentage is indicative of our current core business. Selling, General & Administrative Expenses (SG&A) decreased year over year 2% primarily as a result of a reduction in administrative personnel. Research and development increased 14% to $40,835 from $35,843 as a result of the use of outside engineering personnel during the year and for final developments on the Full Stop Protection device for the RES-Q-VAC. Net loss increased 270% to $386,075 for the year ended February 28,2002 from $104,457 for the year ended February 28,2001, primarily as a result of the decrease in net sales for the year ended February 28,2002. For the year ending February 28, 2002, one customer's, Timm Medical, sales were 16% of the total sales. Management has been informed that Timm Medical has sufficient inventory on hand to cover sales through September and that future orders will be at a significantly reduced rate. As a result management has decided to shift Company focus to its own proprietary products and markets. LIQUIDITY AND CAPITAL RESOURCES At the end of fiscal year 2002, we had net working capital of $183,120 a decrease of $348,225 from the previous year. During June 2000, we negotiated a $200,000 line of credit with M&T Bank that is guaranteed by the President and one of the directors. As of February 28,2002, $200,000 has been advanced on the line of credit. In accordance with the agreement the line of credit was to be renewed or paid off by June 30, 2001. We have received a verbal continuance from the bank through June 30,2002. We negotiated a settlement with a lender that was remitted on October 29, 1999. As part of the agreement, we signed a promissory note for $66,000 that becomes due through October 2002 only upon the sale of either of our two major product lines. If neither of the two product lines is sold, the note payable terminates. 13 We maintained our operations during Fiscal Year 2002 by borrowing approximately 200,000 from outside sources. We are attempting to achieve positive cash flow by continuing to increase sales for the FREEDOM60 and RES-Q-VAC, decreasing material costs and by pursuing capital investment through debt or equity. The Company is working with outside distributors to increase market share in the European markets for the RES-Q-VAC, and to introduce the FREEDOM60 into the European market. We are in the process of validating new lower-cost and more efficient vendors for our raw materials, which will assist us in improving our margins on our current products. Sales of our key products increased significantly for the first quarter ended May 31,2002 versus the prior year first quarter ended May 31,2001. Sales of the Freedom60 Syringe Infusion System increased by 31% over the prior year and sales of our RES-Q-VAC Airway Suction System increased by 37% over the prior year. Total sales for the first quarter ended May 31,2002 were the same as the first quarter ended May 31,2001 despite the loss in sales of $81,000 from a major OEM customer for the first quarter 2002 and reduced sales for a low margin product line that we have been phasing out over the last year. Accounts Receivable decreased at February 28, 2002 to $190,938 as compared to $207,588 for the previous year. Domestic sales are made primarily on net 30-day payment terms. A variety of terms continue to be employed for export sales including cash prepayments and net 45 days to allow for increased delays due to transportation and communications. As of February 28, 2002, 69% of Accounts Receivable were current, 25% were at 30-59 days and 6% were over 60 days. Prepaid expenses and other receivables decreased $26,680 from $39,587 to $12,907. Capital expenditures in 2002 were $80,927 as compared to $73,060 in 2001. We purchased tooling and a new phone system through outside leasing programs. Other assets decreased $1,012. In February 1999, we executed a sale-leaseback for our masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. The facility is our only location and is used for our headquarters and manufacturing operations. Under terms of the contract of sale, we have the option to re-purchase the building, beginning on the second anniversary of the sale and ending on the eighth anniversary. We are required to give 12 months prior notice of the intent to re-purchase the building. The agreed upon amount for re-purchase is as follows: Year Four $2,205,000 Year Five $2,315,250 Year Six $2,431,013 Year Seven $2,552,563 The property is currently subject to a 20-year lease. We are responsible for repairs, maintenance and upkeep of the space occupied. The terms of the lease call for monthly lease payments of $10,000 per month and 65% of the annual property taxes that amounted to $40,614 for the year ended February 28, 2002. Our monthly rent is $10,000 for the first 10 years of the lease and $11,042 thereafter. 14 SUBSEQUENT EVENTS NEW BOARD OF DIRECTOR MEMBERS During March 2002, the Board agreed to elect two new Board members; Joseph Drohan and David Florman. Mr. Drohan is the President and Co-Founder of Healthwave, Inc. , healthcare technology and services company, located in Long Island, New York. He held several positions with the North Shore Long Island Jewish Health System and has been a Director for various health organizations. Mr. Florman is currently employed by Empire Blue Cross Blue Shield of New York as the Senior Vice President of Medical Delivery and Medicare Risk. He has held various positions with Aetna US Healthcare, Inc. as well. 2001 vs. 2000 For the year ended February 28, 2001 we showed a loss of $104,457 as compared to a profit for the previous year of $250,300. This decline was mainly a result of equity based compensation of $133,000 associated with the issuance of stock and stock options for services rendered, during the year ended February 28, 2001, coupled with the sale of a subsidiary, and a favorable debt settlement of a line a credit for the year ended February 29, 2000. Total net sales increased slightly to $2,085,912 from $2,065,400. FREEDOM60 sales increased 17% to $146,111 from $125,021, RESTORE sales increased 111% to $64,360 from $30,483 and OEM sales increased 15% to $569,839 from $493,378. Resuscitator sales decreased 31% to $160,790 from $233,336, GYNECO sales decreased 7% to $203,611 from $219,851 and RES-Q-VAC sales decreased a slight 2% to $947,019 from $963,341. Cost of Goods Sold (COGS) decreased 2% to $1,106,972 from $1,125,552 due to improved manufacturing processes, aggressive purchasing, and other production efficiencies. Selling, General & Administrative Expenses (SG&A) decreased year over year 18% primarily as a result of decreased payroll due to reductions in management staff. Research and development decreased 56% to $35,335 from $80,944. Factors in this decrease were due to a salary reduction, the departure of a senior engineer, and a planned decrease in new products until we experience an improvement in available capital. We have placed development and research on hold pending the infusion of new investment capital for such programs. Net loss for operations decreased 57% to $102,351 from $237,337, which was primarily the result of decreased payroll, decreased research & development and a decrease in overall spending for the period. Non-operating income decreased significantly to ($2,106) from $370,745 primarily resulting from the sale of the Gamogen subsidiary and the joint venture for RESTORE in the previous year. The current year non-operating income and expense consisted primarily of interest expense for the credit line and equipment lease and interest and other income. 15 For the year ending February 28, 2001, there were two customers whose combined sales were 27% of the total sales, Timm Medical and Mission Pharmacal. Sales are expected to continue with Timm Medical, however, Mission has advised us that they have reduced market support of their product and no additional purchases are anticipated for the fiscal year ending 2002. On August 28, 2000, we were notified of an Indefinite Delivery, Indefinite Quantity (IDIQ) Contract #RFP-797-FDF3-00-0089 awarded on August 25, 2000 by the AFMLO/VA Services Division. This material contract covers three of the Company's patented products, RES-Q-VAC Manual Suction System, FREEDOM60 Syringe Infusion System and Masterson Endometrial Biopsy System, which are now available to all government agencies. We continue in the process of contacting the various branches of the government that have continued to express interest in these products. On September 29, 2000, we were notified that the U. S. Defense Logistics Information Service in Battle Creek, MI had assigned National Stock Numbers to our FREEDOM60 and RES-Q-VAC products and accessories. This now facilitates orders from any U. S. military agency to be able to acquire our products from a national military catalog listing. On November 5th, 2000, the Health Care Financing Administration (HCFA) had advised us that after the ninety day review process of our application, the SADMERC and the four Durable Medical Equipment Regional Carriers DMERCs) completed the HCPCS coding re-review and advised us that the correct billing code for the RES-Q-VAC was E1399, a durable equipment miscellaneous reimbursement code. Subsequently, three weeks later HCFA advised us that it was rescinding the previous correspondence because we didn't prove the use of RES-Q-VAC in a home setting. The Company is gathering further information and home care user testimonials. Once we have secured sufficient testimonials we will reapply. 16 Item 7. Financial Statements Index to Financial Statements and Supplementary Data Page ---- Report of Independent Certified Public Accountants ................ 18 Financial Statements: Balance Sheet, February 28, 2002 .................................. 19 Statements of Income, For the Years Ended February 28, 2002 & February 28, 2001 ........................... 20 Statements of Changes in Stockholders' Equity, For the Years Ended February 28, 2002 and February 28, 2001 ..... 21 Statements of Cash Flows, For the Years Ended February 28, 2002 & February 28, 2001 ........................... 22 Notes to Financial Statements ..................................... 23 17 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS REPRO-MED SYSTEMS, INC. We have audited the accompanying balance sheet of Repro-Med Systems, Inc. as of February 28, 2002 and the related statements of operations; stockholders' equity and cash flow for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Repro-Med Systems, Inc. as of February 28, 2002 and the results of their operations and their cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered from recurring losses from operations, including net losses of $386,075 and $104,457 for the years ended February 28,2002 and 2001, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Radin, Glass & Co., LLP New York, NY April 15, 2002 18 Repro-Med Systems, Inc. Balance Sheet ASSETS February 28, 2002 - ------ ----------------- CURRENT ASSETS Cash ......................................................... $ 25,670 Accounts Receivable, net ..................................... 190,938 Inventory .................................................... 600,635 Prepaid Expenses & Other Receivables ......................... 12,907 ------ TOTAL CURRENT ASSETS ............................................. 830,150 ------- EQUIPMENT & OTHER ASSETS Equipment-net ................................................ 467,985 Other Assets ................................................. 49,064 Deposits ..................................................... 52,000 TOTAL EQUIPMENT & OTHER ASSETS ................................... 569,049 ------- TOTAL ASSETS ..................................................... $ 1,399,199 =========== LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES Accounts Payable ............................................. $ 189,111 Demand Loan from President ................................... 69,000 Bank Line of Credit Payable .................................. 200,000 Accrued Expenses ............................................. 144,792 Current Portion of Capital Gain .............................. 22,481 Current Portion of Leases Payable ............................ 21,646 ------ Total Current Liabilities ........................................ 647,030 Deferred Capital Gain ....................................... 359,695 Long Term Leases Payable ......................................... 55,098 ------ TOTAL LIABILITIES ................................................ 1,061,823 --------- COMMITMENTS AND CONTINGENCIES .................................... 0 - STOCKHOLDERS' EQUITY Preferred Stock, 8% Cumulative $.01 Par Value Authorized 2,000,000 Issued & Outstanding 10,000 Shares (liquidation value $100,000) ....... 100 Common Stock, $.01 Par Value, Authorized 50,000,000 Shares, Issued & Outstanding 23,504, 000 Respectively ................................................. 235,040 Additional Paid-in Capital ................................... 2,211,631 Accumulated Deficit .......................................... (1,967,395) Treasury Stock at Cost ....................................... (142,000) -------- TOTAL STOCKHOLDERS' EQUITY ....................................... 337,376 ------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ......................... $ 1,399,199 =========== *See accompanying notes to consolidated financial statements 19 Repro-Med Systems, Inc. Statements of Operations For The Years Ended February 28, February 28, 2002 2001 ---- ---- Sales Net Sales of Products ...................... $ 1,758,904 $ 2,085,912 Costs and Expenses: Cost of Goods Sold ......................... 1,330,960 1,286,475 Selling, General & Administrative .......... 635,530 647,974 Research & Development ..................... 40,835 35,843 Depreciation & Amortization ................ 84,839 84,971 Equity Based Compensation .................. 41,000 133,000 ------ ------- Total Costs And Expenses ..................... 2,133,164 2,188,263 Net Operating Loss ........................... (374,260) (102,351) Non-Operating Income (Expense) Interest Expense ........................... (20,252) (5,483) Interest & Other Income .................... 9,009 3,377 ----- ----- Total Non-Operating Income (Expense) ........ (11,243) (2,106) ------- ------ (Loss) before Taxes ........................ (385,503) (104,457) (Provision) Benefit for Income Taxes ....... (572) 0 ---- - Net (Loss) (386,075) (104,457) Preferred Dividend ........................... (12,000) (8,000) ------- ------ Net (Loss) Available to Common Shareholders .......................... ($ 398,075) ($ 112,457) ============ ============ Weighted average number of shares outstanding Basic ...................................... 23,504,000 23,354,000 Diluted .................................... 23,504,000 23,354,000 (Loss) Per Common Share Basic- ..................................... ($ 0.02) ($ 0.00) Diluted .................................... ($ 0.02) ($ 0.00) *See accompanying notes to consolidated financial statements 20 Repro-Med Systems, Inc. Statement of Changes in Stockholders' Equity For the Years Ended February 28, 2002 & February 28, 2001