UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended FEBRUARY 29, 2004 ----------------- 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. [ ] Based on the closing sales price of February 29, 2004, the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was $3,679,650. The number of issued outstanding of the registrant's common stock, $.01 par value was 24,531,000 at February 29, 2004 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 ..................................11 Item 3. Legal Proceedings ........................................12 Item 4. Submission of Matters to a Vote of Security Holders ......12 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters ......................................12 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................13 Item 7. Financial Statements .....................................17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures .....................18 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance With Section 16(a) of the Exchange Act .............................................18 Item 10. Executive Compensation ...................................19 Item 11. Security Ownership of Certain Beneficial Owners and Management ...........................................19 Item 12. Certain Relationships and Related Transactions ...........21 PART IV Item 13. Exhibits and Reports on Form 8-K .........................23 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 additional products into this market. The Gyneco gynecological instrument product line was acquired in 1986 and sales continue primarily through repeat business. The table below presents the product mix for the last two fiscal years. 2004 2003 % of Sales % of sales ---------- ---------- Infusion Therapy 21% 16% Emergency Medical 62% 70% Contract Manufacturing 7% 3% Gynecological Instruments 9% 11% Male Impotency Treatments Less than 1% < 1% We have also been developing other new proprietary medical 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 have been temporarily suspended for some new products 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 internal cash flow or outside financing. 3 FREEDOM60 SYRINGE INFUSION SYSTEM The FREEDOM60 Syringe Infusion Pump was designed for ambulatory infusions. Ambulatory infusion pumps are most prevalent in the home care market. We are also considering using the FREEDOM60 for pain control applications and chemotherapy. 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. The agreement called for CHCA to assist us to market the FREEDOM60 to its members and ended December 2002. Currently eight of the hospitals continue to actively use the system, and we will continue to pursue other CHCA-affiliated hospitals as independent customers. 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 and have developed them into our largest FREEDOM60 customer. We have leveraged our relationship and currently provide the FREEDOM60 to five additional centers. 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. This distributor has secured the CE mark for sales into Europe of FREEDOM60 and has begun initial sales of the product into Italy, France, Spain, Germany and Greece. We are working with this distributor to introduce new additions to the FREEDOM60 product line. We have expanded the use of the FREEDOM60 to cover most antibiotics including the widely used and somewhat difficult to administer vancomycin. We have also found a following for FREEDOM60 for use in treating thalissemia with the drug desferal. In Europe, our distributor has found great success in using the FREEDOM60 for pain control, specifically post-operative epidural pain administration. Europe is also using the FREEDOM60 for chemotherapy. 4 We are looking to increase our marketing penetration into home care in the domestic market, and introduce pain control and chemotherapy into our market as well. We believe we are well-positioned to meet the needs of the current medical realities: low reimbursement and an aging population. 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. 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 We have sold approximately 2,700 pumps since March, 2000. We sold approximately 550 pumps during the past fiscal year. At the moment, we estimate that, after allowing for lost pumps and those no longer in use by the purchaser, there are approximately 1,300 FREEDOM60 pumps currently in operation. The FREEDOM60 pump is designed for a minimum use of 4,000 cycles which at our list price is amortized at a low $.06 per use. The tubing sets currently have a list price of $3.20. In the past, we have noted that each pump is used an average of 12 times per month. However, customers are becoming much more cost-conscious and are increasing the number of uses per set through sterile filters, changes in protocols and other means. We now 5 estimate that each pump uses an average of six sets per month. This monthly rate amounts to annual usage of 72 sets producing typical gross revenues to the distributor of $230 per pump. If the pump is operated up to four times per day, the total uses per month would be 48, and thus the pump life expectancy is anticipated to be over six and a half years. Installed bases for various levels of pumps produce the following sales: Pumps In Annual Sales Market of Disposables ------ -------------- 5000 $1,152,000 10000 $2,304,000 50000 $11,520,000 100000 $23,040,000 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. 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 RES-Q-VAC products provide 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. Another competitor is Ambu, 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 6 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 June 10, 2003, we received notice that a patent approval was issued for our new FULL STOP PROTECTION. 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. On April 29, 2003, the Centers for Disease Control issued additional guidelines for the control of SARS (Sudden Acute Respiratory Syndrome) which requires all suction systems to have filtration equivalent to a HEPA filter to prevent the spread of this disease. At the current time, we believe that the RES-Q-VAC with FULL STOP PROTECTION is the only portable device to comply with the CDC directives. Since the introduction of our patented and trademarked Full Stop Protection, which prevents overflow and any pathogens from entering the pump or being dispersed in the air, the number of applications for RES-Q-VAC has substantially increased. We are making changes to our marketing to take full advantage of these new markets, and to position our product to successfully penetrate them. The main advantage of our RES-Q-VAC airway suction system is versatility. With the addition of Full Stop Protection, we increased the complexity of ordering exactly what each new customer requires. Another issue to address was the need for different product configurations for each market. These issues were solved by making specific custom RES-Q-VAC kits for each vertical market. We now offer separate product offerings based on the market served: Emergency Medicine - we make several special kits for emergency use which contain all the catheters necessary to treat adults as well was infants or children. These first responder kits are generally non-sterile. We also have special attachments available for the advanced paramedic to treat patients who are intubated. Respiratory - in homes, long term care, for situations requiring frequent suctioning such as cystic fibrosis patients, patients with swallowing disorders, elderly, patients on ventilators, tracheotomies--all can benefit 7 from the portability, cost and performance of the RES-Q-VAC. Even in the hospital, for emergency back up due to power loss or breakdown of the wall suction system, RES-Q-VAC can provide quality lifesaving care at an affordable cost. Typically for the home, these devices are non-sterile and reusable. Hospital Use - for crash carts, the emergency room, and backup for respiratory, RES-Q-VAC is available sterile with Full Stop Protection for the ultimate in performance and to meet all the OSHA regulations and CDC guidelines for use in treating patients in isolation, and in any location. We provide special hospital kits which are fully stocked to meet all hospital applications for both adult and pediatric. Nursing homes, hospice, sub-acute - we provide special configurations for dining areas, portable suctioning for outside events and travel. Chronic suction can be accommodated with RES-Q-VAC which can be left by the bed side for rapid use during critical times. Dental applications - we have configured a version called Dental-Evac which addresses the needs of oral surgeons for emergency back up suction during a procedure. Dental-Evac is supplied with the dental suction attachments such as saliva ejector and high volume evacuator. Military Applications - we recently met with the Surgeon General of the US Army who advised us that products like ours are needed for the types of non battlefield warfare currently facing our soldiers. Due to its light-weight, portability, and rapid deployment, RES-Q-VAC is ideal for many military situations. In addition, exposure to chemical weapons of mass destruction such as sarin are best treated by rapid, aggressive, repeated suctioning. We believe that the RES-Q-VAC's compact size, powerful pump, and full protection of the user from any contamination, gives us a competitive edge in this market. We have engaged the services of a retired United State Air Force Colonel to guide our military sales efforts. RES-Q-VAC is 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. 8 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 2004 and 2003, contract manufacturing for one customer amounted to 7% and 3% 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 were informed that the demand for this product has diminished. As a result, the Company has transitioned from these contracts to building and selling its own proprietary products due to the much-improved margins associated with directly marketed devices. 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 had signed a group purchasing agreement that facilitates sales presentations to approximately 38 allied members of the Child Health Corporation of America which has expired in December 2002. Currently eight of the members are using our products. We continue to pursue additional CHCA centers independently as we believe that the FREEDOM60 advantages of cost reduction and performance are benefits required to remain competitive. 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 several U.S. vendors and one supplier located in Taipei, Taiwan. 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. 9 In February 2004, we employed 19 employees, 14 were assigned to manufacturing operations, one to sales and customer support, two to administrative functions, one to quality assurance functions, one Vice President of Operations (responsible for manufacturing, warehouse and procurement operations), and one Executive Officer. 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. 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, 2003, we were subject to a routine QSR review by the FDA. The FDA inspection did not find any significant violations and no DD483 was issued. As a result of FDA audits, the Company is always subject to further audits and could 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. In 2002 a competitor had introduced a competitive product to the RES-Q-VAC into the market. We 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 January 14, 2003, we received notice of allowability for a patent for our new Full Stop Protection. This patent, #6,575,946, was issued on June 10, 2003. 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. 10 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 On April 29, 2003, the Centers for Disease Control issued additional guidelines for the control of SARS (Sudden Acute Respiratory Syndrome) which requires all suction systems to have filtration equivalent to a HEPA filter to prevent the spread of this disease. At the current time, we believe that the RES-Q-VAC with FULL STOP PROTECTION is the only portable device to comply with the CDC directives. The second 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. 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 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 11 annual property taxes that amounted to $47,323 for the year ended February 29, 2004. 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 29, 2004. 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 29, 2004, 24,531,000 shares were issued and outstanding and there were approximately 1,142 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 Commodity Systems, Inc. for the periods indicated. These quotations do not include retail mark-up, markdown or commission and may not represent actual transactions. High Bid Low Bid -------- ------- Year Ended February 29, 2004 ---------------------------- 1st Quarter $0.230 $0.010 2nd Quarter $0.090 $0.040 3rd Quarter $0.050 $0.040 4th Quarter $0.250 $0.040 Year Ended February 28, 2003 ---------------------------- 1st Quarter $0.140 $0.030 2nd Quarter $0.060 $0.040 3rd Quarter $0.040 $0.030 4th Quarter $0.040 $0.010 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 238,095 shares of Repro-Med common stock at $0.42 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 12 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 $0.42. 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 29, 2004, dividends on the Convertible Preferred Stock were accrued in the amount of $8,000 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. 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 2004 VS. 2003 Sales of the FREEDOM60 Syringe Infusion System increased by 20% over the prior year due to greater effort to sell the product in the field and the annuity effects of the tubing sales. Sales of our RES-Q-VAC Airway Suction System experienced a 16% decline, concentrated in the domestic market, compared to the prior year due to significant reductions in the budgets of fire departments, city and emergency services. As a result, total sales declined for the year ended February 29, 2004 to $1,528,385 from $1,656,553 in 2003. 13 As a result of the lower sales and an increase in expenses, the Net Loss of the Year Ended February 29, 2004, was $277,998, including $51,350 in stock-based compensation, as compared to the previous year's loss of $268,190 (which included an inventory adjustment of $207,519). Sales of our non-core products lines (Gyneco, Restore) declined 20% from the prior year. Sales from OEM manufacturing increased 106%. In FY2002, the company added FULL STOP PROTECTION to the RES-Q-VAC, which protects the users from any contamination from overflow and traps all pathogens inside the suction container. This 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 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. The Centers for disease control have issued Guidelines for medical personnel for the treatment of patients with SARS which include the recommendation to employ suction devices containing HEPA type filtration on the output to prevent the spread of this disease. We believe RES-Q-VAC is the only hand-held portable suction system which meets this requirement. 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 past year for RES-Q-VAC under their existing AFMLO/VA contract. The company anticipates additional orders will be placed during Fiscal year 2004. Management continues to seek 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 beginning to 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. We have begun marketing a dental version called Dental-Evac and are seeking lines of distribution for this product. 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. We have signed a distribution agreement with a large regional distributor and customer in the South East USA and anticipate improved sales potential for the line. In September 2001, the Company began selling to a major national home care agency and we continued to expand the use of the FREEDOM60 to its regional centers across the country. Currently five centers of the agency are using the FREEDOM60. Sales of the Freedom60 continue in Europe with an Italian master distributor who arranged for CE approval of the FREEDOM60 and is successfully marketing the product for use in epidural pain control and chemotherapy. 14 Gross profit margin for the year ended February 29, 2004 was 53%, an improvement over the previous year's gross profit margin of 42%, which included an inventory write down of $207,519. Without the inventory write down, the 2003 gross profit would have been 55%. Selling, General & Administrative Expenses (SG&A) increased $48,519 year over year from $827,866 to $876,385 primarily due to the addition of salary and expenses for a sales person who worked for us for part of the year. Research and development expenses increased slightly by $1,917 from $40,269 to $42,186 in 2004. Interest expense increased by $5,433 to $31,916 in 2004 from $26,483 in 2003 as the result of our financing activities. LIQUIDITY AND CAPITAL RESOURCES For the Year Ended February 29, 2004 Net Cash from operations was ($34,925) as compared with $18,322 for the prior year. This adverse change of $53,247 was due to a $128,168 reduction in sales, slightly reduced gross margin and the higher Selling, General & Administrative Expenses. At the end of fiscal year 2004, the net working capital increased to $105,185 from $33,804 due primarily to the private placement of long-term debt securities. 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 29, 2004, $198,581 had 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, 2003. We have not received a demand for repayment of the loan and continue to make interest payments. Commencing in mid February, 2004, we started raising capital from a promissory note and stock offering which raised $225,000 by the end of the fiscal year. This five year promissory note pays 2% over prime plus four shares of common stock per year for every year the loan is in place. An additional $25,000 was raised in the first and second quarters of 2003 under similar terms. Short-term loans by related parties, maturing September 30, 2004, totaled $7,000 and were used in operations. These loans bear an interest rate of 2% over prime. Related parties made an additional $16,000 in loans bearing an 8% interest rate that now mature on March 30, 2009. Accounts Receivable, net of reserves, decreased at February 29, 2004 to $130,334 as compared to $184,103 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 29, 2004, 76% of Accounts Receivable were current, 9% were at 30-60 days and 15% were over 60 days. Prepaid expenses and other receivables increased $14,305 from $11,470 to $25,775. 15 Capital expenditures in 2004 decreased $7,090 to $16,380 as compared to $23,470 in 2003. We continued limited efforts to protect the results of our research activities; expenditures for the filing and issuance of patents and trademarks increased $6,033 to $8,840 in 2004 from $2,807 in 2003. 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 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 $47,323 for the year ended February 29, 2004. Our monthly rent is $10,000 for the first 10 years of the lease and $11,042 thereafter. SUBSEQUENT EVENTS In May, 2004, we hired an experienced Vice President of Sales who is based in Florida. We are beginning to market both RES-Q-VAC and FREEDOM60 in Florida using our existing distributors and direct selling. We believe that Florida, with its large elderly population, represents a good marketing opportunity for both of our products. In June, 2004, we engaged a marketing consultant for the FREEDOM60. By June 6, 2004, we raised an additional $100,000 under the promissory note private placement and had a commitment for another $50,000 at which time we plan to terminate this offering. The proceeds are planned for additional marketing and sales for the products, and to improve some payments to vendors. 2003 VS. 2002 We have focused on our two main products, RES-Q-VAC and FREEDOM60, for the past three years, and in 2003 we decided to write down a significant portion of our inventory associated with discontinued products. Thus the Net Loss of the Year Ended February 29, 2003, including our inventory adjustment of $207,519, was $268,190 as compared to the previous year loss of $386,075. Without the inventory write off of $207,519, the loss would have been $60,671. Total sales also declined for the year ended February 28, 2003 to $1,656,553 from $1,758,904 due to the elimination of sales of the less profitable products and a decrease in OEM sales. 16 Sales of the FREEDOM60 Syringe Infusion System increased by 34% over the prior year and sales of our RES-Q-VAC Airway Suction System increased by 9% over the prior year. These sales increases were offset by the elimination of low margin products. Gross profit margin for the year ended February 28, 2003 was 42% which included an inventory write down of $207,519. Without the inventory write down, the gross profit would have been 55%. This showed improvement over the previous year's gross profit of 25% primarily due to certain reallocations of expenses and improvements in production efficiencies. Selling, General & Administrative Expenses (SG&A) increased $192,336 year over year from $635,530 to $827,866 primarily as a result of these same reallocations. Research and development stayed essentially constant, decreasing slightly by $566 from $40,835 to $40,269. ITEM 7. FINANCIAL STATEMENTS Index to Financial Statements and Supplementary Data ---------------------------------------------------- Page ---- Report of Independent Certified Public Accountants .................F-1 Financial Statements: Balance Sheet, February 29, 2004 And February 28, 2003 ............................................F-2 Statements of Income, For the Years Ended February 29, 2004 and February 28, 2003 ..........................F-3 Statements of Changes in Stockholders' Equity, For the Years Ended February 29, 2004 and February 28, 2003 ......F-4 Statements of Cash Flows, For the Years Ended February 29, 2004 and February 28, 2003 ..........................F-5 Notes to Financial Statements ......................................F-6 17 MEYLER & COMPANY, LLC CERTIFIED PUBLIC ACCOUNTANTS ONE ARIN PARK 1715 HIGHWAY 35 MIDDLETOWN, NJ 07748 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Repro-Med Systems, Inc. Chester, NY We have audited the accompanying consolidated balance sheet of Repro-Med Systems, Inc. as of February 29, 2004 and February 28, 2003 and the related statements of operations, stockholders equity (deficit) and cash flows for the 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 the standards of the Public Company Accounting Oversight Board (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 29, 2004 and February 28, 2003, and the results of its operations and its cash flows for each of the two years in the period ended February 29, 2004, in conformity with U.S. generally accepted accounting principles. /s/ Meyler & Company, LLC June 9, 2004 Middletown, NJ F-1 REPRO-MED SYSTEMS, INC. BALANCE SHEETS ASSETS February 29, February 28, 2004 2003 ---- ---- CURRENT ASSETS Cash ............................................ $ 219,682 $ 16,738 Accounts receivable less allowance for doubtful accounts of $20,997 and $8,636 for 2004 and 2003, respectively ............................. 130,334 184,103 Inventory ....................................... 378,982 381,623 Prepaid expenses ................................ 25,775 11,470 ----------- ----------- Total Current Assets ..................... 754,773 593,934 PROPERTY AND EQUIPMENT, NET ........................ 357,735 415,755 OTHER ASSETS Patents, net of amortization of $68,861 and $63,073 for 2004 and 2003, respectively ........ 38,338 35,285 Goodwill, net of amortization of $4,488 and $4,088 for 2004 and 2003, respectively ......... 9,689 10,049 Security deposits ............................... 27,652 55,603 ----------- ----------- 75,679 100,937 ----------- ----------- $ 1,188,187 $ 1,110,626 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Note payable to bank -- demand .................. $ 198,581 $ 199,461 Notes payable to related parties ................ 7,000 - Accounts payable ................................ 325,723 267,634 Accrued expenses ................................ 51,956 35,255 Accrued interest ................................ 17,985 9,271 Current portion of capital lease obligations .... 19,079 26,492 Accrued preferred stock dividends ............... 16,000 8,000 Accrued payroll and related taxes ............... 13,264 14,017 ----------- ----------- Total Current Liabilities ................ 649,588 560,130 OTHER LIABILITIES Capital lease obligations, less current portion . 24,846 45,614 Deferred capital gain ........................... 337,215 359,696 Long-term debt - notes payable .................. 350,000 84,000 ----------- ----------- Total Liabilities ........................ 1,361,649 1,049,440 STOCKHLDERS' EQUITY Preferred stock, 8% cumulative, liquidation value $100,000, $0.01 par value, 2,000,000 shares authorized, 10,000 shares issued and outstanding at February 29, 2004 and February 28, 2003 ..... 100 100 Common stock, $0.01 par value, 50,000,000 shares authorized, 24,531,000 and 23,504,000 issued and outstanding at February 29, 2004 and February 28, 2003, respectively ................ 245,310 235,040 Additional paid-in capital ...................... 2,252,711 2,211,631 Accumulated deficit ............................. (2,529,583) (2,243,585) ----------- ----------- (31,462) 203,186 Less: Treasury stock, 2,275,000 shares at cost at February 29, 2004 and February 28, 2003 (142,000) (142,000) ----------- ----------- Total Shareholders' Equity (Deficit) ..... (173,462) 61,186 ----------- ----------- $ 1,188,187 $ 1,110,626 =========== =========== The accompanying notes are an integral part of these financial statements. F-2 REPRO-MED SYSTEMS, INC. STATEMENT OF OPERATIONS For the Year Ended February 29, February 28, 2004 2003 ---- ---- NET SALES ...................................... $ 1,528,385 $ 1,656,553 COSTS AND EXPENSES Cost of goods sold .......................... 723,555 959,538 Selling, general and administrative ......... 876,385 827,866 Research and development .................... 42,186 40,269 Stock based compensation .................... 51,350 - Depreciation and amortization ............... 80,547 81,435 ------------ ------------ Total Costs and Expenses ............. 1,774,023 1,909,108 ------------ ------------ NET OPERATING LOSS ............................. (245,638) (252,555) OTHER INCOME (EXPENSE) Interest and other income ................... 387 11,648 Interest expense ............................ (31,916) (26,483) ------------ ------------ Total Other Expenses ................. (31,529) (14,835) ------------ ------------ NET LOSS BEFORE TAXES .......................... (277,167) (267,390) STATE INCOME TAXES ............................. 831 800 ------------ ------------ NET LOSS ....................................... $ (277,998) $ (268,190) ============ ============ NET LOSS PER COMMON SHARE Basic and diluted ........................... $ (0.01) $ (0.01) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ..... 23,537,000 23,504,000 ============ ============ The accompanying notes are an integral part of these financial statements. F-3