Exhibit 99(a)
Innovative Medical Systems Corp. Audited Financial Statements
Albertjohn DePalantino & Co.
350 South Main Street, Suite 117
Doylestown, PA 18901
January 31, 1998
Board of Directors and Stockholders
INNOVATIVE MEDICAL SYSTEMS CORP
55 Steam Whistle Drive
Ivyland, PA 18974
We have audited the accompanying balance sheets of INNOVATIVE MEDICAL SYSTEMS
CORP as of October 31, 1997 and 1996, and the related statements of income,
changes in stockholders equity, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of INNOVATIVE MEDICAL SYSTEMS CORP
as of October 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ DePalantino & Company
- --------------------------
DePalantino & Company
6
INNOVATIVE MEDICAL SYSTEMS CORP
Balance Sheet
October 31, 1997 and 1996
ASSETS
1997 1996
---------------------- ---------------------
Current assets
- --------------
Cash and cash equivalents $ 28,836 $ 376
Accounts receivable, less allowance for doubtful
accounts of $13,891 and $14,477 respectively 449,149 709,379
Inventories 1,022,660 985,836
Prepaid expenses and other 21,804 31,606
----------------- -----------------
Total current assets 1,522,449 1,727,197
----------------- -----------------
Property, plant and equipment, at cost
- --------------------------------------
Land 77,648 77,648
Building & improvements 1,780,213 1,780,213
Machinery & equipment 1,728,934 1,746,667
----------------- -----------------
3,586,795 3,604,528
Less: accumulated depreciation 1,784,736 1,622,735
----------------- -----------------
1,802,059 1,981,793
----------------- -----------------
Other assets
- ------------
Refinance cost, net of amortization of $4,677 and 65,484 70,161
$0 respectively
Covenant not-to-compete, net of amortization of
$225,000 and $175,000 respectively 0 75,000
----------------- -----------------
Total other assets 65,484 145,161
----------------- -----------------
TOTAL ASSETS $ 3,389,992 $ 3,854,151
================= =================
See accompanying notes to financial statements.
7
INNOVATIVE MEDICAL SYSTEMS CORP
Balance Sheet
October 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS EQUITY
1997 1996
---------------------- ---------------------
Current liabilities
- -------------------
Revolving loan agreement $ 389,345 $ 535,138
Current portion of long-term debt 216,007 123,129
Accounts payable 375,198 175,098
Payroll taxes due 2,594 1,758
Deferred income 175,000 0
Accrued expenses 118,074 50,270
----------------- -----------------
Total current liabilities 1,276,218 885,393
----------------- -----------------
Long-term liabilities
- ---------------------
Long-term debt, net of current portion 1,486,204 1,539,371
----------------- -----------------
Total long-term liabilities 1,486,204 1,539,371
----------------- -----------------
TOTAL LIABILITIES 2,762,422 2,424,764
----------------- -----------------
Stockholders' equity
- --------------------
Common stock, no par value, 1,000,000 shares
authorized; 627,600 21,087 21,087
Additional paid-in capital 717,795 717,795
Retained earnings 1,388,688 2,190,505
Less: treasury stock, 176,500 shares at cost (1,500,000) (1,500,000)
----------------- -----------------
Total stockholders' equity 627,570 1,429,387
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,389,992 $ 3,854,151
================= =================
See accompanying notes to financial statements.
8
INNOVATIVE MEDICAL SYSTEMS CORP
Statement of retained earnings
October 31, 1997 and 1996
1997 1996
---------------------- ---------------------
Balance - beginning $ 2,190,505 $ 2,393,333
Net loss for years ended
October 31, 1997 and 1996 (801,817) (202,828)
----------------- -----------------
Balance - ending $ 1,388,688 $ 2,190,505
================= =================
See accompanying notes to financial statements.
9
INNOVATIVE MEDICAL SYSTEMS CORP
Statement of cash flows
Years ended October 31, 1997 and 1996
1997 1996
---------------------- -----------------
Net loss after tax $ (801,817) $ (202,828)
Depreciation and amortization 259,411 291,210
Accounts receivable 260,230 205,281
Inventory (36,824) 263,158
Other current assets 9,802 15,010
Accounts payable 200,100 (12,036)
Accrued expenses 68,640 (25,377)
Income tax payable and deferred income taxes 0 (215,321)
Deferred income 175,000 0
----------------- -----------------
Operating cash flow 134,542 319,097
----------------- -----------------
Gross fixed assets 0 (33,418)
Intangible and other noncurrent assets 0 (70,161)
----------------- -----------------
Investing cash flow 0 (103,579)
----------------- -----------------
Cash flow before financing 134,542 215,518
----------------- -----------------
Short-term debt (52,915) (237,954)
Long-term debt (53,167) 22,147
----------------- -----------------
Financing cash flow $ (106,082) $ (215,807)
----------------- -----------------
Comprehensive cash flow
- -----------------------
Beginning cash $ 376 $ 665
Plus: Operating Cash Flow 134,542 319,097
Investing cash flow 0 (103,579)
Financing cash flow (106,082) (215,807)
----------------- -----------------
Ending cash $ 28,836 $ 376
================= =================
See accompanying notes to financial statements.
10
INNOVATIVE MEDICAL SYSTEMS CORP
Income statement
Years ended October 31, 1997 and 1996
1997 1996
AMOUNT AMOUNT
-------------------------- --------------------------
Net sales $ 2,212,723 $ 3,445,631
---------------------- ----------------------
Direct expenses
- ---------------
Cost of goods sold
Finished goods inventory, beginning 65,728 254,299
Cost of goods manufactured 1,718,771 2,048,841
---------------------- ----------------------
Cost of finished goods available 1,784,499 2,303,140
Finished goods inventory, ending 16,625 65,728
---------------------- ----------------------
Cost of goods sold 1,767,874 2,237,412
Development costs 0 308,487
Engineering salaries 208,200 358,489
---------------------- ----------------------
Total direct expenses 1,976,074 2,904,388
---------------------- ----------------------
Gross profit 236,649 541,243
---------------------- ----------------------
Operating expenses
- ------------------
Selling 51,462 106,138
Office and administrative 793,082 636,181
---------------------- ----------------------
Total operating expenses 844,544 742,319
---------------------- ----------------------
Income from operations before
other income and expenses (607,895) (201,076)
Other income and expense
- ------------------------
Interest expense (224,550) (231,700)
Finance charge income 0 73,664
Loss on sale of fixed assets 0 (5,182)
Corporate income tax 30,628 161,466
---------------------- ----------------------
NET LOSS $ (801,817) $ (202,828)
====================== ======================
Loss per share $ (1.28) $ (0.32)
====================== ======================
Weighted average number of shares
used in computation 627,600 627,600
====================== ======================
See accompanying notes to financial statements.
11
INNOVATIVE MEDICAL SYSTEMS CORP
- --------------------------------------------------------------------------------
Notes to financial statements
October 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A summary of the company's significant accounting policies applied in the
preparation of the accompanying financial statements follows:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
INNOVATIVE MEDICAL SYSTEMS CORP was incorporated under the laws of the State of
Pennsylvania on December 8, 1976. The corporation is a C Corporation.
INNOVATIVE MEDICAL SYSTEMS CORP is primarily engaged in the design and
manufacture of medical equipment. The company's financial statements are
presented in accordance with generally accepted accounting principles.
REVENUE RECOGNITION
Revenue from the manufacture of medical equipment is generally recognized when
products are shipped to the customer. Income is reported on the accrual method
for financial statement purposes.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
generally on a first-in, first-out (FIFO) method. Valuations are based on the
cost of material, direct labor and manufacturing overhead, and do not exceed net
realizable values. Inventories are comprised of the following components:
October 31, 1997 October 31, 1996
--------------------- ---------------------
Raw materials $843,355 $794,097
Work in process 162,680 126,011
Finished goods 16,625 65,728
--------------------- ---------------------
$1,022,660 $985,836
===================== =====================
Cost of work-in-process includes purchased materials, direct labor and allocated
overhead.
ACCOUNTS RECEIVABLE - TRADE
It is the management's policy to write-off uncollected accounts receivable at
the time their collection becomes doubtful. A provision for doubtful accounts
is maintained at approximately 3% of the accounts receivable balance, an amount
management deems appropriate.
See accompanying notes to financial statements.
12
INNOVATIVE MEDICAL SYSTEMS CORP
- -------------------------------------------------------------------------------
Notes to financial statements
October 31, 1997 and 1996
FIXED ASSETS AND ACCUMULATED DEPRECIATION
Fixed assets are recorded at their cost and include expenditures for major
improvements that substantially increase their useful life. Repairs and
maintenance are expensed as incurred.
For financial reporting purposes, depreciation is provided generally on a
straight-line basis over the estimated useful lives of the related assets. For
income tax purposes, depreciation is computed by using various accelerated
methods and, in some cases, different useful lives than those used for financial
reporting purposes.
The following net fixed assets remain at October 31, 1997:
Building and improvements $1,463,309
Machinery and equipment 161,513
Tooling 99,589
DEFERRED INCOME TAXES
The company has adopted Statement of Financial Accounting Standard (SFAS) No
109, "Accounting for Income Taxes". SFAS No 109 requires under the liability
method, that deferred tax liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Deferred income taxes have been provided for timing differences, resulting from
depreciation expense which is recognized differently for income tax and
financial reporting purposes.
2. LOANS
-----
The following loans are outstanding at October 31, 1997:
Long
Current Term Total
-------------------- -------------------------- ---------------------
Mellon Bank $389,345 $ 0 $ 389,345
AT&T Small Business Lending 53,167 1,486,204 1,539,371
Shareholders 162,840 0 162,840
-------------------- -------------------------- ---------------------
Total $605,352 $1,486,204 $2,091,556
See accompanying notes to financial statements.
13
INNOVATIVE MEDICAL SYSTEMS CORP
- --------------------------------------------------------------------------------
Notes to financial statements
October 31, 1997 and 1996
The $1,539,371 loan due to AT&T Small Business Lending Corp is a mortgage on the
building. This is a 15-year mortgage. The interest rate is 10.25%. The
Building, equipment and machinery and all contract rights and general
intangibles are held as collateral for this mortgage.
The $389,345 due to Mellon Bank is owed pursuant to a line of credit. The
inventory and accounts receivable are collateral for this loan. The formula
used to determine the borrowing base is 80% of eligible accounts receivable and
20% of eligible inventory. At October 31, 1997 Innovative Medical Systems Corp
was in default of this loan.
On September 30, 1994 the company bought back a large portion of stock from a
major shareholder. At that time the company entered into an agreement to pay
$225,000 over three years for a covenant not-to-compete. At October 31, 1997
the balance owed was $45,156.
There are additional shareholders loans due of $117,684 at October 31, 1997.
They are all due within one year. Interest is due at 10%.
The aggregate annual maturates of long-term debt during the years ending October
31, 1999 to 2002 are as follows: 1999 - $57,752; 2000 - $63,958; 2001 -
$70,830; 2002 - $78,441.
3. PENSION
-------
The company sponsors a 401(k)-pension plan. An employee can contribute up to
6% of their annual pay. The company will match 10% of an employees
contribution. For 1997 the amount of pension expense included in administrative
expenses was $2,195.
4. DEFERRED INCOME
---------------
Revenues received in advance from engineering projects are recognized on
engineering hours. This method is used because management considers hours
incurred to be the best available measure of progress on these projects.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
The $175,000 in Deferred Income was a payment in advance for units not completed
or shipped at October 31, 1997. These units were included in the Work in
Process inventory.
See accompanying notes to financial statements.
14
INNOVATIVE MEDICAL SYSTEMS CORP
- -------------------------------------------------------------------------------
Notes to financial statements
October 31, 1997 and 1996
5. INCOME
------
The Net Sales includes both the sale of equipment and development income in the
following amounts:
October 31, 1997 October 31, 1996
---------------------- ---------------------
Manufacturing Sales $1,913,025 $2,845,875
Engineering fees 299,698 599,756
---------------------- ---------------------
Net Sales $2,212,723 $3,445,631
====================== =====================
The "Net Sales" is the total sales net of discounts, returns and allowances and
royalty payments.
6. OTHER ASSETS
------------
Covenant not-to-compete
- -----------------------
A covenant-not-to-compete was entered into with the previous shareholder of
INNOVATIVE MEDICAL SYSTEMS CORP. This amount, valued at $225,000, has been
capitalized and is being amortized over the three-year term of the agreement.
The refinance costs were incurred on the refinancing of the mortgage to AT&T and
the refinance of the line of credit with Mellon Bank. These costs are being
amortized over fifteen years.
7. INCOME TAXES (BENEFIT)
----------------------
The provision for income taxes (benefit) is as follows:
October 31, 1997 October 31, 1996
------------------------- --------------------------
Currently payable $ 0 $ 0
Deferred (30,628) (161,466)
------------------------ -------------------------
$ (30,628) $(161,466)
======================== =========================
The losses of Innovative Medical Systems Corp for income tax purposes resulted
in the recognition of deferred income tax for October 31, 1996 and a refund of
income taxes for October 31. 1997. There is a loss carryforward for tax
purposes of $727,334. The entire carryfoward expires October 31, 2012.
See accompanying notes to financial statements.
15
INNOVATIVE MEDICAL SYSTEMS CORP
- --------------------------------------------------------------------------------
Notes to financial statements
October 31, 1997 and 1996
Deferred Taxes Deferred taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating losses and tax credit carryforwards.
The tax effects of significant items comprising Innovative Medical Systems
Corp`s deferred taxes as of October 31, 1997 were as follows:
October 31, 1997 October 31, 1996
-------------------------- --------------------------
Deferred tax assets:
Federal net operating loss carryforward $ 247,284 $ 0
Impact of temporary differences 96,968 117,586
-------------------------- --------------------------
Total 344,252 117,586
Valuation allowance (344,252) (117,586)
-------------------------- --------------------------
Net deferred taxes $ 0 $ 0
========================== ==========================
Temporary differences result from depreciation of fixed assets.
Statement of Financial Accounting Standards No 109 requires that the tax benefit
of net operating losses and temporary differences be recorded as an asset to the
extent that management assesses that realization is "more likely than not".
Realization of the future tax benefits is dependent on Innovative Medical
Systems Corp's ability to generate sufficient taxable income within the
carryforward. Because of Innovative Medical Systems Corp's recent history of
operating losses, management has provided a valuation allowance for its net
deferred tax assets.
8. SUBSEQUENT STOCK EXCHANGE
-------------------------
On December 31, 1997 100% of the outstanding stock of Innovative Medical Systems
Corp was exchanged for stock of OXIS International Inc. At that date Oxis
International Inc became the 100% shareholder of Innovative Medical Systems
Corp.
See accompanying notes to financial statements.
16