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 October 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 33-0530289
- ------------------------------- -----------------
(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 3,532,851 as of October
31, 1997.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1997 and October 31, 1997
Statements of Operations for the nine months ended
October 31, 1996 and 1997
Statements of Cash Flows for the nine months ended
October 31, 1996 and 1997
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 1. FINANCIAL INFORMATION
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
- -----------------------------------------------------------------------------
(unaudited)
October 31, July 31,
1997 1997
ASSETS ---------- ----------
Current Assets
Cash and cash equivalents $1,277,292 $1,982,660
Accounts receivable, net of allowance
for doubtful accounts of $17850 423,106 219,047
Notes receivable 156,035 25,930
Inventories 66,537 23,532
Prepaid expenses 550,765 583,333
---------- ----------
Total current assets 2,473,735 2,834,502
---------- ----------
Property, Plant and Equipment
Property, plant and equipment 727,860 685,187
---------- ----------
Total property, plant and equipment 727,860 685,187
---------- ----------
Noncurrent Assets
Deposits 25,375 25,375
Patents 44,806 44,806
Deferred acquisition costs 66,500 45,431
---------- ----------
Total noncurrent assets 136,681 115,612
---------- ----------
Total assets $3,338,277 $3,635,301
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Account payable $ 214,994 $ 91,487
Accrued liabilities 31,387 64,550
Notes payable 2,187 2,721
---------- ----------
Total current liabilities 248,568 158,758
---------- ----------
Long-Term Debt - 257
---------- ----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares, issued
and outstanding 3,532,851 5,566,124 5,566,124
Class A warrants: issued and outstanding
3,687,500 warrants 108,750 108,750
Accumulated deficit (2,585,165) (2,198,588)
---------- ----------
Total stockholders' equity 3,089,709 3,476,286
---------- ----------
Total liabilities and stockholders' equity $3,338,277 $3,635,301
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME (Unaudited)
- -----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31, 1997
1997 1996
--------------------------
Net sales $ 435,259 $ 219,668
Cost of sales 248,418 160,766
---------- ----------
Gross profit 186,841 58,902
---------- ----------
Selling expenses 152,463 33,297
General and Administrative expenses 389,199 159,248
Research and development 53,265 -
---------- ----------
Total operating costs 594,927 192,545
---------- ----------
Operating income (loss) (408,086) (133,643)
---------- ----------
Other income and (expense):
Interest income - 44,769
Dividend income 21,709 -
---------- ----------
Total other income (expense) 21,709 44,769
---------- ----------
Income (loss) before income taxes (386,377) (88,874)
Federal and state income taxes 200 200
---------- ----------
Net income (loss) $ (386,577) $ (89,074)
========== ==========
Net (loss) per common share $ - $ (0.03)
========== ==========
STATEMENTS OF ACCUMULATED DEFICIT
- -----------------------------------------------------------------------------
(unaudited)
Three Months
Ended Year Ended
October 31, July 31,
1997 1997
-------------------------
Balance, beginning of period $(2,198,588) $ (791,274)
Net income (loss) (386,577) (1,407,314)
---------- ----------
Balance, end of period $(2,585,165) $(2,198,588)
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31, 1997
1997 1996
--------------------------
Cash flows from operating activities
Net income (loss) $ (386,577) $ (89,074)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 27,542 7,299
Amortization - 258
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (204,059) 1,494
(Increase) decrease in due from
officers - (36,850)
(Increase) decrease in due from
employees - (2,278)
(Increase) decrease in notes receivable (130,105)
(Increase) decrease in prepaid expense 32,568 (8,826)
(Increase) decrease in inventory (43,005) 44,295
(Increase) decrease in deposits - 907
(Increase) decrease in deferred
acquisition costs (21,069) -
Increase (decrease) in accounts payable 123,507 (191,948)
Increase (decrease) in accrued
liabilities (33,163) 36,911
---------- ----------
Net cash provided (used)
by operating activities (634,361) (237,812)
Cash flows from investing activities
Purchase of property, plant and equipment (70,215) (291,406)
---------- ----------
Net cash (used) in investing
activities (70,215) (291,406)
---------- ----------
Cash flows from financing activities
Increase (decrease) in notes payable (792) (400,616)
Proceeds from sale of common stock - 4,888,888
---------- ----------
Net cash provided by financing
activities (792) 4,488,272
---------- ----------
Net increase (decrease) in cash
and cash equivalents (705,368) 3,959,054
Cash at beginning of period 1,982,660 21,706
---------- ----------
Cash at end of period $1,277,292 $3,980,760
========== ==========
<PAGE>
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 and related notes
included therein.
Overview
Innovative Medical Services, through an aggressive, growth-oriented business
strategy, has built a strong market presence in the manufacturing and
marketing of pharmacy efficiency products, as well as in water filtration
systems. Since its founding in August 1992, and subsequent to its initial
public offering in August 1996, the Company has invested in its research and
development department, production facilities and sales and marketing
resources. The Company's principal products are the Fillmaster(R) Pharmacy
Water Purification and Dispensing System for reconstituting oral suspensions,
and the NutriPure(R) Home Drinking Water System. The Company also markets,
for both products, proprietary filters that require changing at intervals of
nine to twelve months or whenever indicated by the purity testing module.
The filter replacements represent a significant continuing source of revenue
to the Company.
During the first quarter of this fiscal year, Innovative Medical Services
launched two new products: the Fillmaster 1000e computerized pharmacy water
purification and dispensing system and the NutriPure home drinking water
system. In August, the Company introduced the Fillmaster 1000e at the
National Association of Chain Drug Stores (NACDS) 1997 Pharmacy Conference in
Boston, Massachusetts. In October, at the National Community Pharmacists
Association meeting in Denver, Colorado, Innovative Medical Services launched
the NutriPure home drinking water system. Both product launches were very
well received, and the Company anticipates revenues from sales of these
products early in 1998.
In addition, Innovative Medical Services has acquired the patent,
manufacturing and marketing rights to the Medifier(TM), a unique magnifying
device for use with any size prescription bottle label, targeted to the
growing elderly population. The Medifier represents a low-cost entry into
the premium/promotional product market and will be sold through the Company's
current distribution channels as well as through catalogues and independent
dealers.
During the past year, Innovative Medical Services has pursued possible
acquisition opportunities in the wholesale medical distribution industry.
Acquisition of such companies provides Innovative Medical Services the means
to expand into related markets and enhance current product offerings and
lines of distribution within the medical market.
As announced in September, Innovative Medical Services has signed a letter of
intent to purchase the assets of Xetal, Inc. and its wholly owned
subsidiaries, an Oceanside, New York based wholesale distributor of medical,
dental and veterinary supplies. To date, the Company is involved in ongoing
negotiations with Xetal, and continues its investigation of other medical
supply acquisitions.
In addition to domestic medical supply markets, Innovative Medical Services
plans to expand into the global marketplace with its current and future
products. To this end, in November, the Company signed a definitive
agreement to acquire Export Company of America, Inc. (EXCOA), a Fort
Lauderdale, Florida based distributor of medical, dental and veterinary
supplies. EXCOA's products are distributed to Brazil through Ampromed, a Rio
de Janeiro based import company which is 45% owned by EXCOA. EXCOA's
products are sold to practitioners, retail outlets and government agencies.
The Brazilian government is actively promoting growth and higher quality
health services by infusing $36 billion over the next five years into a
nationwide healthcare
<PAGE>
upgrade. This massive public health initiative will increase demand for a
wide range of medical and dental supplies and offers a bright forecast for
EXCOA product sales. The Company also plans to tap Brazil's agricultural
market with specialized veterinary supplies sold by EXCOA. The Company
anticipates that this acquisition will result in an additional $3 million in
revenue in the first 12 months.
Innovative Medical Services, in cooperation with its investment banking firm,
continues its pursuit of potential acquisition opportunities for medical
supply distribution, both domestic and abroad.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 VERSUS
THREE MONTHS ENDED OCTOBER 31, 1996
Revenues of $435,300 in the three months ended October 31, 1997 were 98%
greater than the $219,700 in revenues reported for the three months ended
October 31, 1996. This revenue increase resulted because of increased sales
of Fillmaster Pharmacy Water Purification and Dispensing Systems and to
continued growth of replacement filter sales. Purification System sales in
the 1997 quarter were approximately $290,000 and replacement filter sales
were $125,000. In the 1996 quarter, Fillmaster Purification System sales
were $197,000 and replacement filter sales were $23,000. The increase of
443% in replacement filters was expected due to the continually increasing
number of Fillmaster Purification Systems in use.
While occurring in all markets, more than 75% of the volume increase in
Fillmaster Purification System sales took place in the chain pharmacy
marketplace, bringing the total number of Fillmaster Systems in use to
approximately 8,000. In spite of this substantial market share, about 80% of
America's pharmacies remain as potential customers of the Company.
Gross profits in 1997 were $186,800 versus $58,900 in 1996. Gross profit
percentages in 1997 (43%) were higher versus 1996 (27%) because the Company
offered more penetration (lower) pricing of the product for the initial
installations of the systems in the 1996 quarter. The gross profit percentage
increase also reflects increased filter sales (associated with higher
margins) during the year.
Net loss for the quarter ended October 31, 1997 was $386,600 versus a net
loss of $89,100 for the same quarter in 1996. This decrease was due in part
to the $119,200 increase in Selling Expenses which includes marketing and
advertising costs incurred to promote the Company and the Company's products.
In addition, General and Administrative Expenses increased approximately
$230,000 from 1996 to 1997 due to continued costs incurred to position the
Company for growth. The Company also expensed $53,300 of Research and
Development costs associated with production and development of new products.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended October 31, 1997, the Company's current asset
to liabilities ratio fell from 17.85 to 9.95. Current assets decreased
$360,800 from $2,834,500 to $2,473,700. Current liabilities increased $89,800
from $158,800 to $248,700. Although the dollar amount of increase in current
liabilities is modest, it represents a substantial percentage change for the
period resulting in the large fluctuation in the Company's current ratio. The
increase in current liabilities was the result of increased accounts payable
associated with a corresponding increase in accounts receivable.
Cash flows used from operations were $634,400 in the first quarter of fiscal
year 1997 and $237,800 in 1996. For those quarters, cash flows used in
investing activities were, respectively, $70,200 and $291,400 for the
purchase of machinery and equipment and leasehold improvements. The total
decrease in cash and cash equivalents for the 1997 quarter was $705,400 which
was
<PAGE>
largely a result of a decrease in accounts payable and an increase in
accounts and notes receivable. The Company generated $4,489,000 from a public
offering during the 1996 quarter resulting in a net increase in cash
equivalents of $3,959,000.
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In February 1997, the Company filed an action in Federal District Court in
Tampa, Florida against David Reitz, Zedburn Corporation, Capital Development
Group and Does 1 through 100 seeking damages and cancellation of 140,000
shares of common stock. Zedburn Corporation is a Florida corporation
believed to be the alter ego of Mr. Reitz. 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. The State Court action of Mr. Reitz has been stayed and
all issues will be litigated in Federal Court. The Company amended its
complaint to include Steven Durland as an individual defendant. Based upon
information derived from discovery that the defendants had perpetrated
similar schemes against other parties, the Company moved the Court for leave
to file a second amended complaint in September 1997 based upon the Racketeer
Influenced and Corrupt Organization (RICO) Act against the existing
defendants and additional defendants. In October 1997 Mr. Reitz and Zedburn
filed a counterclaim against the Company for breach of contract and claim
against some of the Company's directors alleging fraud in the cancellation of
the stock certificates previously issued to Mr. Reitz. The Company has moved
to dismiss the fraud count of the counterclaim for failure to state a claim
as well as sanctions against Mr. Reitz's legal counsel for filing a frivolous
counterclaim. In October 1997 Mr. Reitz and Zedburn filed for protection
under the federal bankruptcy laws. The Company is pursuing discovery in the
bankruptcy proceeding.
It is the Company's position that Mr. Reitz and others perpetrated a scheme
to defraud the Company of cash fees and securities in connection with
purported services of arranging a public offering of the Company's common
stock. It is also the Company's position that it was fraudulently induced to
execute an engagement of Mr. Durland as auditor. The Company terminated its
relationships with Mr. Durland in June 1995 and that of Mr. Reitz in August
1995. In April of 1996, the Company's Board of Directors authorized the
cancellation of the 140,000 shares of common stock which Mr. Reitz obtained
through fraud.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes thereof.
The Company has not done so because it does not believe there is any merit to
Mr. Reitz's counterclaim 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.
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.
<PAGE>
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 THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
For the Year Ended
October 31,
----------------------------
1997 1996
----------------------------
Shares outstanding 3,532,851 3,220,851
========== ==========
Weighted average shares outstanding 3,532,851 1,821,792
Stock Options 406,250 31,250
Warrants 1,798,125 1,187,500
---------- ----------
Total weighted average
shares outstanding 5,737,226 3,040,542
========== ==========
Net Income (Loss) $ (386,577) $ (89,074)
========== ==========
Net Earnings (Loss) per share $ (0.07) $ (0.03)
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 1,277,292
<SECURITIES> 0
<RECEIVABLES> 440,956
<ALLOWANCES> (17,850)
<INVENTORY> 66,537
<CURRENT-ASSETS> 2,473,735
<PP&E> 881,155
<DEPRECIATION> 150,796
<TOTAL-ASSETS> 3,338,277
<CURRENT-LIABILITIES> 248,568
<BONDS> 0
0
0
<COMMON> 5,566,124
<OTHER-SE> (2,476,415)
<TOTAL-LIABILITY-AND-EQUITY> 3,338,277
<SALES> 435,259
<TOTAL-REVENUES> 435,259
<CGS> 248,418
<TOTAL-COSTS> 594,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (386,377)
<INCOME-TAX> 200
<INCOME-CONTINUING> (386,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (386,577)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
