U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended January 31, 1997
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission File number 0-21019
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INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 84-110928
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date 3,370,851 as of March
14, 1997.
<PAGE>
INNOVATIVE MEDICAL SERVICES
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of October 31, 1996 and January 31, 1997
Statements of Operations for the six months ended January 31,
1995 and 1996
Statements of Cash Flows for the six months ended January 31,
1995 and 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
(Unaudited)
January 31, 1997 July 31, 1996
---------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $3,157,794 $ 21,706
Accounts receivable, net of
allowance for doubtful
accounts of $9,000 123,961 81,963
Notes receivable 24,986 24,986
Due from employees 3,488 1,390
Due from shareholders and
officers 156,914 76,887
Inventories 12,801 55,660
Prepaid Expenses 341,124 7,868
---------- ----------
Total current assets 3,821,068 270,460
---------- ----------
Property, Plant and Equipment
Property, plant and equipment 546,226 163,406
---------- ----------
Total property, plant and
equipment 546,226 163,406
---------- ----------
Noncurrent Assets
Deposits 14,198 5,649
Patent Costs 10,000 -
Organizational costs, net 516 1,032
Deferred public offering costs - 376,695
---------- ----------
Total noncurrent assets 24,714 383,376
---------- ----------
Total assets $4,392,008 $ 817,242
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 173,207 $ 233,111
Accrued liabilities 201,987 307,092
Notes Payable 2,154 402,154
---------- ----------
Total current liabilities 377,348 942,357
---------- ----------
Long-Term Debt 1,402 2,978
---------- ----------
Stockholders' Equity
Class A common stock, no par value;
authorized 20,000,000 shares,
issued and outstanding
3,370,851 at January 31, 1997
and 1,833,851 shares at
July 31, 1996 5,264,374 663,181
Accumulated deficit (1,251,116) (791,274)
---------- ----------
Total stockholders' equity 4,013,258 (128,093)
---------- ----------
Total liabilities and
stockholders' equity $4,392,008 $ 817,242
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
(UNAUDITED)
For the Six Months Ended
January 31
----------------------------
1997 1996
----------------------------
Net sales $ 434,142 $ 612,657
Cost of sales 306,987 443,223
---------- ----------
Gross profit 127,155 169,434
---------- ----------
Selling expenses 188,778 47,159
General and administrative expenses 488,373 141,113
---------- ----------
Total operating costs 677,151 188,272
---------- ----------
Operating income (loss) (549,996) (18,838)
---------- ----------
Other income and (expense):
Interest income 90,954 -
Miscellaneous income and (expense) - 1
---------- ----------
Total other income
and (expense) 90,954 1
---------- ----------
Income (loss) before income taxes (459,042) (18,839)
Federal and state income taxes 800 -
---------- ----------
Net income (loss) $ (459,842) $ (18,839)
========== ==========
Net (loss) per common share $ (0.09) $ (0.01)
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF ACCUMULATED DEFICIT
(Unaudited)
Six Months
Ended Year Ended
January 31, 1997 July 31, 1996
--------------------------------
--------------------------------
Balance, beginning of year $ (791,274) $ (361,226)
Net income (loss) (459,842) (430,048)
---------- ----------
Balance, end of quarter $(1,251,116) $ (791,274)
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
January 31
----------------------------
1997 1996
----------------------------
Cash flows from operating activities
Net income (loss) $ (459,842) $ (18,839)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 24,984 8,251
Amortization 516 516
Officer wages contributed 0 33,000
Changes in assets and liabilities:
Decrease in accounts receivable (41,998) 118,844
(Increase) decrease in due from
officers and shareholders (80,027) 19,800
(Increase) in due from employees (2,098) 1,395
(Increase) in prepaid expense (333,256) (11,462)
(Increase) decrease in inventory 42,859 (10,130)
(Increase) in notes receivable - (30,487)
(Increase) decrease in deposits (8,549) (34,835)
(Increase) in patent costs (10,000) -
(Decrease) in accounts payable (159,904) (90,268)
(Decrease) increase in
accrued liabilities (105,105) (2,680)
---------- ----------
Net cash provided (used)
by operating activities (1,132,420) (16,895)
---------- ----------
Cash flows from investing activities
Purchase of property, plant
and equipment (407,804) (29,258)
---------- ----------
Net cash (used) in
investing activities (407,804) (29,258)
---------- ----------
Cash flows from financing activities
Increase (decrease) in notes
payable (401,576) -
Proceeds from sale of common stock 5,077,888 22,210
---------- ----------
Net cash provided by
financing activities 4,676,312 22,210
---------- ----------
Net increase (decrease) in
cash 3,136,088 (23,943)
Cash and cash equivalents, at
beginning of year 21,706 47,180
---------- ----------
Cash and cash equivalents, at
end of period $3,157,794 $ 23,237
========== ==========
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services is engaged principally in the business of
manufacturing and marketing the Fillmaster(R), a unique water purification,
measuring and dispensing apparatus used in pharmacies to reconstitute oral
suspensions. The Company intends to develop and market other
pharmacy-related efficiency products and other water filtration systems
worldwide.
Early in the second quarter of fiscal year 1996/97, Innovative Medical
Services began designing a new, electronically automated version of the
Fillmaster(R). The new product provides easier and more precise
measurement than the original Fillmaster(R) and features bar code
technology to ensure even greater time savings in the dispensing of oral
solution prescriptions. In February, the Company announced that it filed
a patent application for the new product. The Company has completed the
design phase of development and plans to distribute prototype electronic
dispensers to beta sites by the end of April. The Company expects sales of
the electronic dispenser to begin in the third quarter.
In addition, the Company is developing a line of reverse osmosis
residential water filtration systems. The Company is currently
establishing marketing strategies and distribution channels to begin
selling the first of the systems, the "Nutri-Pure" consumer water
filtration system, later this year. Based on the technology used in the
Fillmaster(R) Water Purification System, the residential product will
filter and dispense purified water for home use.
Aside from developing new products and entering new markets, Innovative
Medical Services will continue to increase sales of the Fillmaster(R) to
national and regional chain pharmacies. In the coming weeks the Company
will implement a direct mail program to individual stores within large
national chains and expects strong profit potential as a result of
strengthened direct response capabilities. The Company continues its
campaign to gain recognition and increase Fillmaster(R) sales to the
independent pharmacy market through trade show representation, trade
publication advertising and targeted mailings.
The Company continues to actively investigate possible mergers and
acquisitions and has hired an investment banking firm to assist with
identification, evaluation and due diligence matters with regard to mergers
and acquisitions.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 1997 VERSUS SIX
MONTHS ENDED JANUARY 31, 1996
During the first half of fiscal year 1996/97, Innovative Medical Services
focused on positioning for growth. The Company expanded its production
capacity and its sales force in preparation for: 1. aggressive market
penetration of chain pharmacies, 2. increased marketing efforts aimed
toward independent pharmacies, and 3. entry into the residential water
filtration market. In October, the Company moved from a 2,000 square foot
production and administration facility to a technologically-advanced 10,000
square foot facility. Following the move to the new facility, the Company
increased its sales force by 500%, added a marketing manager, hired
telemarketing personnel and expanded its customer service department to
ensure continued support and service to its customers.
Revenues of $434,100 in the six months ended January 31, 1997 were 29% less
than the $612,600 in revenues reported for the six months ended January 31,
1996. This revenue decrease resulted because the prior period contained an
atypically large order from a major chain customer which distorted the
results of the period. Had this sale been spread over the entire year, the
first six months would actually show an increase of 5% over the same period
in fiscal 1995/96. Fillmaster(R) Purification System sales in the six
months ended January 31, 1997 were $389,100 and replacement filter sales
were $45,000. In the prior period, Fillmaster(R) Purification System sales
were $572,800 and replacement filter sales were $39,800. The revenue
generated from filter sales in the six months ended January 31, 1996 was
atypically high because replacement filters were sold with systems included
in the extraordinary order as mentioned above. Sales of filters rose in
fiscal 1996/97 as expected due to the continually increasing number of
<PAGE>
Fillmaster(R) Purification Systems in use. Although revenues from the
recent six month period are lower that those from the period prior, it is
important to note that filling such a large sales order in 1995/96 required
the Company to operate beyond its sales and production capacity. Sales
during the recent six month period reflect a much smaller percentage of
capacity as the Company has aggressively committed financial and personal
resources to build the sales and production capacity to a level at which
the Company can move ahead.
Gross profits for the first six months ended January 31, 1997 were $127,100
versus $169,400 in 1995/96. Gross profit percentages in 1996/97 (29%) were
higher versus 1995/96 (28%), in spite of the fact that the Company offered
more penetration (lower) pricing of the product for the initial
installations of the systems in the six months 1996/97. The gross profit
increase reflects increased filter sales in the recent six month period.
As the number of Fillmaster(R) system installations increases, so will the
volume of replacement filter sales. The Company anticipates a strong
influx of filter orders in the coming months resulting from sales of
systems during the second half of fiscal 1995/96.
Net loss for first six months ended January 31, 1997 was $460,000 versus a
net loss of $19,000 for the same period in 1995/96. The decrease was due
to lower sales volume as noted above. In addition, Selling Expenses and
General and Administrative Expenses increased approximately $347,000 from
1995/96 to 1996/97 due to continued product development costs, associated
expenses for additional management and sales personnel, and costs
associated with the development of new markets.
The Company has progressed through its planning and development stages and
has begun vigorously implementing its sales plan and marketing strategies.
Innovative Medical Services views this mid-point in the fiscal year as a
turning point in revenues. The investment made during the first half of
the year to position the Company for growth should begin to be realized in
the second half of the year.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended January 31, 1997, the Company's current assets
to liabilities ratio rose from .29 to 10.13. Current assets grew by
$3,550,000 which was mainly due to the increase in cash and cash
equivalents resulting from the proceeds of the Company's initial public
offering in August of 1996. Current liabilities decreased by $565,000
because a portion of the offering proceeds were used to pay down accounts
payable and to retire substantially all of the Company's short term debt
including the IPO bridge financing of $375,000. Historically, the Company
has operated without incurring significant long-term debt. Management
expects to continue this policy into the foreseeable future.
Cash flows used from operations were $1,132,000 in the first six months of
fiscal year 1996/97 and $17,000 in 1995/96. For those periods, cash flows
used in investing activities were, respectively, $408,000 and $29,000 for
the purchase of machinery and equipment and for leasehold improvements.
The Company generated $4,489,000 from the public offering during the period
resulting in a net increase in cash equivalents of $3,100,000.
The Company believes that the expenditures necessary to achieve the sales
capacity required to implement the sales plan have been completed, and
Innovative Medical Services is now successfully positioned to dramatically
increase revenues through existing and new markets.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, the Company is a defendant in a lawsuit filed by
Durland and Company of West Palm Beach, Florida in the Circuit Court of
Palm Beach County, Florida. The action claims approximately $25,000 of
fees owed for accounting services allegedly performed between February 1994
and June 1995. The Company moved to quash service of the summons on
jurisdictional grounds. As of March 12, 1997, the Court has not ruled on
the Company's motion and has allowed discovery to proceed prior to making
its ruling.
In November 1996, the Company filed an action in Superior Court of the
State of California in and for the County of San Diego against David Reitz,
Zedburn Corporation, Capital Development Group and Does 1 through 100
seeking damages and cancellation of 140,000 shares of common stock. Mr.
Reitz moved to quash service of process and on January 27, 1997, Court
ruled that Florida would be the proper forum for the action based upon a
forum selection provision in the contract between the Company and Zedburn
Management. As a result, the Company expects the California case to be
dismissed.
In anticipation of the dismissal of the California case, the Company filed
a new action in Federal District Court in Tampa, Florida against David
Reitz, Zedburn Corporation, Capital Development Group and Does 1 through
100 seeking the same relief as requested in California State Court. Prior
to being served with the Company's Federal Court action, Mr. Reitz filed an
action in Circuit Court of Pinellas County, Florida seeking unspecified
damages from the Company for breach of contract. It is the Company's
intention to seek a stay of the State Court actions of both Mr. Reitz and
Mr. Durland and to litigate all issues in Federal Court.
It is the Company's position that Mr. Durland is owed nothing and that the
Company was fraudulently induced to engage Mr. Durland as auditor. It is
the Company's position that Mr. Durland was in fact a partner or employee
of David Reitz d.b.a. Zedburn Corporation. Zedburn Corporation is a
Florida corporation believed to be the alter ego of Mr. Reitz. It is the
Company's position that in February 1994, Mr. Reitz perpetrated a scheme to
defraud the Company of cash fees and securities in connection with his
purported services of arranging a public offering of the Company's common
stock. The Company terminated its relationships with Mr. Durland in June
of 1995 and that of Mr. Reitz in August 1995. In April of 1996, the
Company's Board of Directors voted to cancel the 140,000 shares of common
stock which Mr. Reitz obtained through fraud.
The Company has not accrued a liability in its financial statements
regarding this litigation. The Company has not done so because it does not
believe there is any merit to Mr. Durland's or Mr. Reitz'es claims and that
the likelihood that the Company will realize a loss from these matters is
believed remote. In addition, the Company believes that in the unlikely
event that the Company settles, the amount of any such settlement would not
be material to the Company's financial statements.
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ MICHAEL L. KRALL
--------------------------------
Michael L. Krall, President/CEO
By: /s/ GARY BROWNELL
--------------------------------
Gary Brownell,
Chief Financial Officer
EXHIBIT 11
INNOVATIVE MEDICAL SERVICES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE SIX MONTHS ENDED
JANUARY 31, 1996 AND 1997
For the Six Months Ended
January 31
----------------------------
1996 1997
----------------------------
Shares outstanding 1,833,851 3,370,851
========== ==========
Weighted average shares outstanding 1,782,009 3,202,938
Stock Options 31,250 31,250
Warrants 1,187,500 1,765,417
---------- ----------
Total weighted average
shares outstanding 3,000,759 4,999,605
========== ==========
Net Income (Loss) $ (18,840) $ (459,842)
========== ==========
Net Earnings (Loss) per share $ (0.01) $ (0.09)
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,157,794
<SECURITIES> 0
<RECEIVABLES> 132,961
<ALLOWANCES> 9,000
<INVENTORY> 12,801
<CURRENT-ASSETS> 3,821,068
<PP&E> 628,149
<DEPRECIATION> 81,924
<TOTAL-ASSETS> 4,392,008
<CURRENT-LIABILITIES> 377,348
<BONDS> 0
0
0
<COMMON> 5,264,374
<OTHER-SE> (1,251,116)
<TOTAL-LIABILITY-AND-EQUITY> 4,392,008
<SALES> 434,142
<TOTAL-REVENUES> 434,142
<CGS> 306,987
<TOTAL-COSTS> 677,151
<OTHER-EXPENSES> 188,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (549,996)
<INCOME-TAX> 800
<INCOME-CONTINUING> (550,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459,842)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
