FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended July 31, 1997
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
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(Exact name of registrant as specified in its charter)
California 33-0530289
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (619)-596-8600
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Class A Warrants
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(Title of Class)
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 of 1934 during the preceding 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
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Indicate by check mark if 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
amendments to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $1,024,667
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: Approximately $4,475,045 as of October 27, 1997.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 3,532,851 shares of class A common stock as of
October 27, 1997.
Documents incorporated by reference: Exhibits to Form SB-2 Registration
Statement
File #333-00434
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Innovative Medical Services (the Company) is engaged principally in the
business of manufacturing and marketing the Fillmaster(r), a water
purification, measuring and dispensing apparatus used in pharmacies to
reconstitute oral antibiotic suspensions. Innovative Medical Services has
also entered the consumer market with NutriPure(r), a residential drinking
water system. The Company markets, for both products, proprietary filters
that require changing at intervals of nine to twelve months or whenever
indicated by the systems' water quality monitors. The filter replacements
represent a significant continuing source of sales and cash flow to the
Company.
HISTORY
Innovative Medical Services was incorporated in the State of California on
August 24, 1992, to pursue the immediate business of manufacturing and
marketing the Fillmaster and subsequently a broadly based business of
delivering advanced technology, equipment and supplies to the pharmacy
industry, in addition to pursuing the business of residential water
filtration. During its first three years, the Company established the
production and design, entered into contracts with its parts suppliers and
manufacturers, developed its initial assembly process and implemented its
marketing program for the Fillmaster.
In August, 1996 the Company completed its initial public offering whereby
it sold 1,387,000 shares of its common stock at a public offering price of
$4.00 per share and 1,437,500 Class A Warrants at a public offering price
of $0.10 per Class A Warrant.
In the past year, Innovative Medical Services has launched two new
products, the Fillmaster 1000e and the NutriPure residential drinking water
system, and corresponding national marketing campaigns; expanded into new
markets; and invested in research and development of future products.
PRINCIPAL PRODUCT AND ITS MARKET
FILLMASTER(r) The Fillmaster(r) apparatus provides measured amounts of
"Purified Water" as defined by the United States Pharmacopoeia, ("USP")
for reconstitution of liquid oral antibiotics and certain other pharmacy
applications. It consists of a six-stage water purification unit, an
electronic water purity testing module, an auxiliary faucet for dispensing
purified water and a calibrated volumetric measuring and dispensing
apparatus. The entire system integrates with the building's tap water
plumbing, is closed and pressurized and, according to the Company's
testing, has a fill rate at least three times that of current
bottle-and-hose methods - the only know competition. The Company
manufactures, sells and distributes the Fillmaster. The end-user installs
the system following step-by-step illustrated instructions using common
household tools.
The United States Pharmacopoeia (USP), a comprehensive reference work, has
established the standards for pharmacy practices and supplies in the United
States for over one hundred years. The USP is recognized as the official
standard for pharmacy practice and supply by various federal statutes,
including the Food Drug and Cosmetic Act, and by virtually all states. The
USP requires pharmacists to use "Purified Water" in reconstituting
powdered medications such as antibiotics. "Purified Water" is defined as
"...water obtained by distillation, ion-exchange treatment, reverse osmosis
or other suitable process." Also, ". . .Purified Water contains no added
substances." Previously, the only realistic source of "Purified Water"
conforming to the USP standard was bottled distilled water or expensive
bagged sterile water. Other forms of bottled water prepared through
purification have minerals and other substances added to them for taste
purposes.
Historically, pharmacists have either hand-poured water for reconstitution
directly from a bottle into a measuring container and then into the
medicine bottle, or they used a wall-mounted measuring and gravity-flow
dispensing cylinder connected by a system of rubber siphon tubing and pinch
clamps to a water bottle. Traditional methods produce inaccurate
measurements either because two hands are required or because the
gravity-fed system can produce a variable fill rate due to variation in
siphon pressure.
Also, prior methods pose the risk of accidental use of "spring" or bottled
"drinking water" due to label similarities, simple mistakes in supply
purchasing, or the pharmacy staff's unawareness of the differences in water
types. Water that does not qualify as "Purified Water" contains minerals
and other impurities that reduce the stability and potency of the
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prescription medicine. The use of such water adulterates the medication by
introduction of foreign materials and violates the Federal Food Drug and
Cosmetic Act.
Even when using the intended conforming water, unsealed bottle-and-hose
methods allow bacteria, mold and other airborne contaminants to enter and
grow within the water supply. In addition, the dispensing tips of the other
methods can accumulate residue from the various prescriptions being mixed
and cause cross-contamination of the medications, creating the potential
for serious reactions by the patient.
The Fillmaster greatly reduces these hazards of contamination in the
pharmacy's water source. The pharmaceutical water purification system
consists of a sediment filter, two multi-stage carbon block filters and a
fine-pore reverse osmosis membrane. The system produces "Purified Water",
eliminating the problem of incorrect source. The Fillmaster's closed,
pressurized system eliminates the airborne contamination problem, and the
rate of filling is increased dramatically. Finally, cross-contamination of
medications is easily prevented by the Fillmaster's cleanable and
disposable dispensing tips.
Pharmacy competition and the proliferation of "third party" reimbursement
plans have combined to reduce pharmacy margins nationwide to dangerously
low levels, mandating efficiency and higher volumes as the only practical
means to continued profitability. In this context, time becomes valuable in
the extreme. Recent federal legislation (OBRA-90) and conforming state
mandates requiring pharmacists to counsel each patient receiving a new
prescription has resulted in the realignment of time resources for the
pharmacist. The time spent filling liquid antibiotics for which the
Fillmaster is used is disproportionately time-consuming and difficult when
compared with the time necessary to fill other prescriptions. In addition,
virtually all liquid antibiotic prescriptions are new prescriptions, and
each requires an additional expenditure of time for patient counseling as
required by OBRA-90.
Extensive testing performed by the Company shows that use of the Fillmaster
saves a pharmacist more than 20 seconds of actual filling time for each
liquid antibiotic prescription. When multiplied by over 6,000 antibiotics
per year (on average), the resulting time savings are dramatic. Coupled
with the time savings generated by eliminating water bottle changes (once
for each 28 to 30 prescriptions -- approximately 5 minutes for each
change), use of the Fillmaster enhances profitability of liquid antibiotics
and multiplies pharmacist time for patient counseling and other activities.
The burdensome nature of these medications is compounded by their natural
instability once reconstituted. Post-reconstitution shelf life is extremely
limited and, once reconstituted, the medications require refrigeration. A
pharmacy will generally add water to the medication only when the patient
is physically present. If the patient is delayed or does not pick up the
prescription, the medication often must be discarded. As a result, the
workflow related to these medications is determined not by efficiency, but
by the arrival of the patient. Furthermore, the efficiencies and time
savings generated by use of the Fillmaster have a dramatic effect on
customer satisfaction because of the reduced waiting time at the pickup
window.
Direct and indirect costs associated specifically with bottled water are
reduced or eliminated by use of the Fillmaster. Pharmacy storage space can
be reallocated to more profitable items, and the expense of bottled water
purchases of up to $1.25 for each gallon is replaced by one annual filter
replacement currently costing $65. Under optimum usage, the cost of
"Purified Water" is reduced to approximately $.04 per gallon.
Based on the Company's surveys of Fillmaster users, customer satisfaction
levels are extremely high. Users agree unanimously that the Fillmaster is
faster, easier to use, cleaner, and that the elimination of the aggravation
and difficulties associated with all other methods of reconstitution make
the Fillmaster well worth the investment in its acquisition.
New sales of the Fillmaster continue to rise. More significantly, however,
the number of chain pharmacies testing the product continues to grow.
Company records show that more than 85% of pharmacies that test the
Fillmaster place orders within 8 months. This year, the Company finalized
several long-term agreements with national chain pharmacies to specify
installation of the Fillmaster as standard pharmacy equipment in new and
remodeled stores.
The Fillmaster carries a suggested list price of $659, and the Company
offers quantity for volume purchase agreements. This price level was
established to provide reasonable gross profit margins even after the
negotiation of volume discounts. These margins have been calculated at
actual production levels and are likely to increase through a reduction
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of costs associated with higher volumes.
There are approximately 72,000 pharmacies in the United States and Canada,
with many thousands more world-wide. Water-mixed antibiotic prescriptions,
for which the Fillmaster is primarily used, make up approximately 12.6% of
a pharmacy's total prescriptions and approximately 25% of a pharmacy's
gross profit.
More than 7,000 Fillmaster systems have been sold to date, and the
Fillmaster is specified as standard equipment for all newly constructed and
remodeled pharmacies at Walgreens, Target, Eckerd, SavOn/Osco, Walmart,
Giant Foods, Wegman's and Fry's. In addition, Fillmaster systems have been
purchased and are now being used by such pharmacy chains as Thrifty
PayLess, Thrift Drug, Dillon Stores, City Market, Kroger, Smith's Food and
Drug, Longs Drugs, Rite-Aid, Revco, Drug Emporium and Acme Markets. Also
included in the customer base are United States Military Clinics, including
Bethesda Naval Hospital; the Kaiser Foundation for Medical Care; the Mayo
Clinic and several hundred Independent and Hospital Pharmacies.
FILLMASTER FILTERS The Company also markets unique and proprietary filter
replacements for the Fillmaster purification system which require changing
at intervals of approximately 9-12 months or whenever indicated by the
purity testing module. The filter replacements represent a significant
continuing source of sales and cash flow to the Company.
Revenues from the replacement filter sales, over a five-year period,
approach the revenue generated by the original sale of the Fillmaster with
much higher profit levels. Thus, Management views the sale of the
Fillmaster as occurring in two distinct stages: immediate and deferred.
The acquisition of a new customer, while generating profit during the
current year, produces a deferred income stream with at least twice as much
gross margin and minimal or no sales expense. In May 1997, the Company
established a program through which chain and independent customers can
automatically be shipped replacement filters annually on the anniversary
date of the system purchase. Already, more than half of the Company's
current customers have signed up for this automatic filter shipment program,
and approximately 90% of new customers subscribe to the program upon
purchase of a system.
NEW PRODUCTS
FILLMASTER(r) 1000e In August 1997, Innovative Medical Services launched
the Fillmaster(r) 1000e, a fully programmed, computerized dispenser for use
with the Fillmaster water purification system. Designed as an addition to
the Fillmaster dispenser product line, the battery-operated Fillmaster
1000e employs multiple microprocessors to provide accurate and even-flow
dispensing. By using the electronic dispenser, pharmacists increase
prescription integrity by greatly reducing the possibility for human error
while dispensing prescriptions. The Fillmaster 1000e was developed with
bar code reading capabilities, and an upgrade scanning module will be
available by the end of the year. Like the original Fillmaster, the
Fillmaster 1000e is manufactured, sold and distributed by Innovative
Medical Services. The filtration and dispensing system retails for under
$800.
NUTRIPURE(r) The NutriPure(r) residential drinking water system combines
high-quality reverse osmosis technology with carbon filtration to improve
the taste, smell, quality and safety of standard tap water. Designed for
residential use, NutriPure produces at least 150 gallons of clean, healthy
water per month. The Company's drinking water system provides the best
reverse osmosis technology available today at a moderate price, and is
therefore a strong value purchase. Incorporating the same filtration
technology as the Company's Fillmaster pharmaceutical water purification
system, NutriPure provides healthy, safe and great tasting drinking water.
The Company distributes NutriPure through independent pharmacists,
providing them an exclusive health product dealership with a high profit
margin. Gallup polls reflect the public's respect for pharmacists as
ethical and honest professionals, and the Company has based the marketing
of NutriPure on both the pharmacist's reputation and relationship with his
customers as well as his testimonial to the quality of the product as a
Fillmaster user. Although the market for water systems is quite
competitive, the pharmacist's recommendation of a system they use in their
pharmacy to reconstitute prescriptions sets NutriPure apart from all other
residential drinking water systems.
Innovative Medical Service's qualitative and quantitative research over the
past year reveals a strong need for independent pharmacists to find
alternative sources to pharmacy revenues. Shrinking margins on medicines
and increased competition from national chains have left the independent,
neighborhood pharmacist scrambling to maintain market share and
profitability. The Company's research shows that independent pharmacists
welcome a drinking water
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system as an addition to their home health care product lines and recognize
the powerful endorsement they provide for NutriPure as Fillmaster users.
The Company supports the independent pharmacist dealer network with a
targeted, comprehensive marketing program that includes counter top
displays, consumer brochures and health education materials. The dealer
program provides an opportunity for an independent pharmacist to realize a
significant profit without any investment, start-up or inventory costs. In
addition, the dealer program further distinguishes the independent from the
chain pharmacist.
The NutriPure drinking water system is sold by authorized independent
pharmacists at a retail price of $499 and drop-shipped by the Company
directly to the customer.
NUTRIPURE FILTERS The Company also markets unique and proprietary filter
replacements for the NutriPure residential drinking water system that
require changing every 9-12 months or whenever indicated by the water
quality monitor. The filter replacements represent a significant
continuing source of sales and cash flow to the Company. Management is
confident that future replacement filter sales will be an ongoing and
significant source of income
Revenues from the replacement filter sales, over a five-year period,
approach the revenue generated by the original sale of the system with much
higher profit levels. Thus, Management views the sale of the system as
occurring in two distinct stages: immediate and deferred. The acquisition
of a new customer, while generating profit during the current year,
produces a deferred income stream with at least twice as much gross margin
and minimal or no sales expense. NutriPure customers are encouraged
to subscribe to the Company's automatic filter shipment programs in
which the Company automatically ships replacement filters annually on
the anniversary date of the system purchase.
MEDIFIER(tm) In July 1997, the Company acquired the Medifier(tm), a unique
patented universal prescription bottle label magnifier. The Medifier holds
various sized prescription bottles in position under a magnifier strip that
enlarges dosage and use instructions to a clearly readable size. The
Company purchased the patent and all rights to manufacture and market the
product from an individual inventor for an aggregate consideration of $5,000
in cash and 12,000 shares of Class A stock. The first in a series of products
for the retail pharmacy market, the Medifier will be distributed through
Innovative Medical Services' existing sales channels, as well as through
catalogue sales.
MANUFACTURING
The Fillmaster and NutriPure systems are assembled primarily from purchased
components. It is the Company's goal to perform minor manufacturing in the
Company's facility to minimize wages, equipment expense and insurance. No
components of the systems have permanent or unequivocally restricted
availability. Most are items that are common in either design or
manufacture, and a change in suppliers would result in virtually no lost
production. There are no plans to alter production methods.
The Fillmaster dispenser apparatus is assembled mostly from parts that are
standard items stocked by wholesale supply houses or fabricated to Company
specifications from injection-molded plastic and fabricated acrylic.
The purification modules are the major components of each of the two systems
and are purchased under an agreement with its manufacturer that is exclusive
with the Company as to Pharmaceutical uses. While Management regards this
particular product as the finest of its kind, suitable alternatives are
available on the open market. This module and its accompanying hardware and
accessories are repackaged and labeled with Fillmaster or NutriPure
graphics, the dispensing apparatus is inserted, and the system is shipped
to the customer.
RESEARCH AND DEVELOPMENT
Research and Development costs that have no alternative future uses are
charged to operations when incurred and are included in operating expenses.
The total amounts charged to Research and Development expense were $64,104
and $6,483 in the fiscal years ended July 31, 1997 and 1996, respectively.
In addition, $73,876 of Research and Development related equipment
purchases were capitalized during fiscal year ended July 31, 1997. The
Company's investment in Research and Development during the past year
resulted in the release of two major additions to the Company's product
line, the Fillmaster 1000e and the NutriPure drinking water system.
Innovative Medical Services anticipates at least two more new products in
the coming year.
EMPLOYEES
As of October 27, 1997, the Company employed twenty-one people, nineteen of
whom are full-time individuals whose principal responsibilities are:
product assembly and shipping (four employees), sales, marketing and
customer service
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(seven employees), research and development (two employees) and
administration (six employees). The Company chooses to outsource more
expensive, specialized functions including public relations, graphic
design, and selected engineering projects.
ITEM 2. PROPERTIES
The Company's business operates in a 10,000 square foot facility located in
a light industrial/office park in El Cajon, California. This location
houses all administrative, executive, sales, assembly, shipping and
manufacturing functions for the Company.
ITEM 3. 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.
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of the
fiscal year.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: The Company's common stock is traded on the
NASDAQ SmallCap Market under the symbol "PURE" and its Class A
Warrants are traded under the symbol "PUREW". The Company's
common stock and Class A Warrants are also traded on the Boston
Stock Exchange. The Company's Class Z Warrants are not listed
for trading on any recognized market.
(2) High and Low Bid Prices: The following table sets forth high and
low bid prices for the first fiscal quarter, as reported by
NASDAQ, for which there has been a market for the common stock.
Such quotations represent inter-dealer prices without retail
mark-ups, mark-downs, or commissions and, accordingly, may not
represent actual transactions.
Quarter Ended High Low
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October 31, 1996 7.75 1.875
January 31, 1997 4.25 2.188
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April 30, 1997 4.625 3.5
July 31, 1997 4.375 1.688
(3) Security Holders: As of October 27, 1997, the Company had
approximately 118 holders of record of its common stock, 46
holders of its Class A Warrants and 18 holders of the Company's
Class Z Warrants. This does not include beneficial owners
holding shares or Class A Warrants in street name. The closing
price per share on October 27, 1997 was $1.625.
(4) Dividend Plans: The Company has paid no common stock cash
dividends and has no current plans to do so.
(5) Preferred Stock: There are no shares of preferred stock presently
outstanding.
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ITEM 6. 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 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) Residential 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.
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 retail pharmacy market and will be sold through the Company's current
distribution channels as well as through catalogues.
Innovative Medical Services continues to aggressively explore acquisition
opportunities, specifically in the areas of wholesale distribution of
medical supplies and international exporting of medical supplies and
devices.
RESULTS OF OPERATIONS FISCAL 1997 VS. FISCAL 1996
During fiscal year 1996/97, Innovative Medical Services focused on
implementing a growth strategy to increase current market shares, launch
new products supported by targeted marketing campaigns, and acquire new
companies and products. 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 1996, the Company moved from a 2,000 square foot production and
administration facility to a technologically-advanced 10,000 square foot
facility. Since moving to the new facility, the Company increased its
sales force by 700%, added a marketing manager, hired telemarketing
personnel and expanded its customer service department to ensure continued
support and service to its customers. The Company has also hired a director
of finance, a market research specialist and an additional research and
development technician.
Revenues of $1,024,700 in the fiscal year ending 1997 increased 24% over
the $825,700 in revenues reported for fiscal year 1996. This revenue
increase was attributable to increased sales of Fillmaster Purification
Systems and to continued growth of replacement filter sales. Fillmaster
Purification System sales in fiscal 1997 were $848,200, and replacement
filter sales were $141,200. In 1996, Fillmaster Purification System sales
were $761,300, and replacement filter sales were $64,400. While occurring
in all markets, more than 92% of the volume increase in Fillmaster
Purification System sales took place in the chain pharmacy marketplace.
The 119% increase in replacement filter sales was expected due to the
growing number of Fillmaster Purification Systems in use.
Gross profits in 1997 were $303,800 versus $207,400 in 1996. The 30% gross
profits in 1997 were higher compared to 25% 1996, in spite of the fact that
the Company offered lower penetration pricing of the product for the
initial installations of the systems in fiscal 1997. The gross profit
increase reflects increased filter sales (with associated higher margins)
during the year. As the number of Fillmaster system installations
increases, so will the volume of replacement filter sales. The Company
anticipates a strong growth of filter orders in the coming year resulting
from sales of systems during the previous three years.
Net loss for fiscal 1997 was $1,407,300 versus a net loss of $430,100 for
fiscal 1996. The decrease was due to increased costs associated with the
Company's recent expansion. Selling Expenses and General and Administrative
Expenses increased approximately $1,218,000 from 1996 to 1997 due to
continued product development costs, associated expenses for additional
management and sales personnel, and costs associated with the development
of new
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markets, new products and supporting targeted marketing campaigns. The
Company has established the necessary infrastructure to accommodate the
steadily growing Fillmaster sales and NutriPure sales. As recognition of
the Company and its products continues to increase, the Company expects
sales to follow accordingly.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current assets-to-liabilities ratio rose from 0.29 in fiscal
year 1996 to 17.85 in fiscal year 1997. Current assets grew by $2,564,000
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 $783,600 because a portion the
offering proceeds were used to pay down accounts payable and accrued
liabilities 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 by operating activities were $1,282,500 in fiscal 1996/97
and $326,900 in fiscal 1995/96. For those periods, cash flows used in
investing activities were $590,600 and $101,000 respectively. These cash
expenditures were used to purchase machinery and equipment and for
leasehold improvements. The Company generated $4,236,200 from the sale of
common stock and warrants in the public offering during the period
resulting in a net increase in cash and cash equivalents of $1,961,000 for
the year.
The Company operates on a just-in-time assembly and manufacturing basis and
therefore keeps inventory to low levels. Parts and components are brought
into the factory for assembly and shipment only after a firm customer order
has been received. As a result, the time period during which cash
resources must be utilized for inventory is compressed as much as possible.
During the past year, the Company established a pattern of sustainable
growth with its Fillmaster system and Fillmaster filter sales. The Company
recruited key marketing, sales, customer service, research, engineering and
financial professionals who have outstanding industry experience and
credibility, and who have the ability to spur the Company to achieve sales
results. In addition, the Company moved into a larger facility that houses
both production and administration. The new facility provides for
improvement of current operations, increased production capacity and
advances in the areas of research and development.
FUTURE OUTLOOK
FILLMASTER SALES TO CHAIN PHARMACIES Long term profitability of the
Fillmaster product line depends on establishing a substantial number of
Fillmaster units installed and in use. Since each unit requires a
replacement of its filters at least once a year, each new system installed
becomes a source of steady future income that potentially exceeds the
income from the initial sale of the Fillmaster. In addition, each pharmacy
using the Fillmaster becomes an easily-approachable candidate for any new
pharmacy tools developed by the Company in the future.
These multiple reasons for establishing a solid base of users have caused
the Company's sales efforts to focus primarily on the chain pharmacy
market. When combined with the short-term efficiencies inherent in
multiple-unit sales and the expanding nature of the market, chain
pharmacies were the most attractive of the options. This strategy has been
successful, as the Company continues to build an ever-increasing sales
revenue base with sales and marketing expenditures a fraction of those
necessary to reach independent and hospital pharmacies.
At the beginning of fiscal year 1994, the Company's chain pharmacy customer
base consisted of scattered individual locations in three chains. By the
end of fiscal year 1996, the Fillmaster product was installed at more than
4,500 total locations representing 6% of the total domestic market, with
approximately 3,500 of these locations being in more than 20 regional and
national chains ranging in size from 30 to 2600 stores. These customers
include the nation's largest drug store chain, Walgreens, and Wal-Mart, the
world's largest retailer. The 3,500 locations represent approximately 11%
of a total chain pharmacy market that is expanding at the rate of
approximately 10% per year. To date, Fillmaster systems are installed in
7,000 pharmacies, an increase of 55% over last year's total.
As of July 31, 1996, Walgreens, Walmart, Eckerd, Target, Sav-On/Osco, Giant
Foods, Wegman's and Fry's have installed Fillmaster systems in the majority
of their current stores and have designated the Fillmaster as standard
<PAGE>
equipment for their new and remodeled chain pharmacies. These construction
and remodeling installations will generate steady sales of Fillmaster
systems at a low cost of sales and an incremental increase in the number of
replacement filters sold. The Company expects that additional chains will
make the same specification during the balance of fiscal years1997, 1998
and 1999, expanding the ongoing base of recurring orders.
FILLMASTER SALES TO INDEPENDENT PHARMACIES The independent pharmacy market
represents more than 30,000 locations and remains an untapped market for
the Company. Targeted marketing programs focusing on the costlier-and more
difficult-to-reach independent pharmacy market will be implemented in the
coming months and will correspond with the NutriPure dealer program for
independents. Capital expenditures are often difficult for the independent
community pharmacy because of limited cash resources. Becoming a NutriPure
dealer will offer the independent a means of increasing cash flow and
thereby the means to purchase a Fillmaster. The NutriPure program depends
upon Fillmaster use by the independent pharmacists selling the residential
drinking water system, and the Company will offer extended payment terms to
dealers on their Fillmaster purchase to allow them time to sell NutriPure
units and use the proceeds to purchase the Fillmaster. Currently, the
Company's penetration is approximately 5%, and the Company expects its
independent pharmacy market share to substantially increase as the
NutriPure dealer program grows.
Other sales efforts in the independent pharmacy market have focused
primarily on offering price concessions based upon quantity sales to
members of independent buying cooperatives and quasi-chains created by
wholesale drug distributors. By accessing large numbers of pharmacies
through their cooperatives and wholesalers, the Company retains the
economies of scale associated with chain sales but generates higher margins
through higher negotiated pricing and direct sales to the customer. During
the last fiscal year, Innovative Medical Services worked to increase
exposure to independent buying groups and develop relationships with
decision-makers within the groups. The Company expects to close several
volume sales in the coming year as a result of its marketing program to
independent buying groups.
NUTRIPURE SALES THROUGH INDEPENDENT PHARMACIES For years, Gallup polls
have reflected the public's respect for pharmacists as ethical and honest
professionals, and the Company has based the marketing of NutriPure on both
the pharmacist's reputation and relationship with his customers as well as
his testimonial to the quality of the product as a Fillmaster user. The
pharmacist's recommendation of a system they use in their pharmacy to
reconstitute prescriptions sets NutriPure apart from all other residential
drinking water systems.
The Company had two dealers prior to the official NutriPure dealer program
launch in October 1997, and currently has 15 dealers. As the targeted
marketing program continues to inform independent pharmacists of this
revenue opportunity, the Company expects the dealer network to exceed 100
dealers within the next twelve months.
The Company's research shows that consumer awareness of the quality of
water they consume has risen drastically over the past decade, and
continues to rise as municipal water supplies become less reliable.
Although the water filtration industry has many players, Innovative Medical
Services' NutriPure system incorporates the highest quality reverse osmosis
equipment available on the market today, and NutriPure's moderate retail
price of $499 is very competitive. The Company believes that NutriPure's
value, combined with the powerful recommendation of the pharmacist and the
unique distribution exclusively through independent pharmacies make it
a major potential source of revenue for the Company in the coming year.
FILLMASTER AND NUTRIPURE FILTER SALES The water filtration industry sees
its highest profit margin in the aftermarket of filter sales, and as water
systems are sold to pharmacies and to home owners, filter sales for both
products will continue to increase. Filter sales during this past fiscal
year doubled sales from the year prior, and the Company expects that trend
to continue as systems are sold and customers subscribe to the automatic
filter shipment program.
MEDIFIER The Company plans to distribute the Medifier through catalogues
and existing pharmacy customers, and will market a private labeling options
should a company wish to purchase the Medifier as a promotional item. The
Company will begin marketing the Medifier by mid-1998.
NEW PRODUCT INNOVATION During final quarter of the fiscal year, the
Company launched major marketing campaigns for two new products: the
Fillmaster 1000e computerized pharmacy water purification and dispensing
system and the NutriPure residential drinking water system. Revenues from
sales of these new products will begin to be realized in the second and
third quarters of this year. The Company continues to develop new and
innovative pharmacy efficiency
<PAGE>
products and plans to release two new products in the coming year.
ACQUISITIONS During the past twelve months, Innovative Medical Services
has pursued possible acquisition opportunities in the wholesale medical
distribution industry. Acquisition of such companies will provide
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, the Company has signed a letter of intent with
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 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. The Excoa acquisition is
currently in negotiation. Additional details of the transaction will be
made available as soon as the companies conclude their respective due
diligence and audit requirements.
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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INNOVATIVE MEDICAL SERVICES
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
For the Years Ended July 31, 1997 and July 31, 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California
I have audited the balance sheets of Innovative Medical Services as of July
31, 1997 and July 31, 1996, and the related statements of income,
accumulated deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based
on my audit.
I conducted the audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audits provide
a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Medical
Services as at July 31, 1997 and July 31, 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ STEVEN HOLLAND
Steven Holland
Certified Public Accountant
San Diego, California
October 25, 1997
<PAGE>
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
July 31
----------------------------
1997 1996
----------------------------
ASSETS
Current Assets
Cash and cash equivalents (Note 2) $1,982,660 $ 21,706
Accounts receivable, net of allowance for
doubtful accounts of $ 17,850 in 1997
and $ 9,000 in 1996 219,047 81,963
Notes receivable (Note 3) 25,930 24,986
Due from employees 0 1,390
Due from shareholders and officers (Note 4) 0 76,887
Inventories 23,532 55,660
Prepaid Expenses 583,333 7,868
---------- ----------
Total current assets 2,834,502 270,460
---------- ----------
Property, Plant and Equipment
Property, plant and equipment (Note 5) 685,187 163,406
---------- ----------
Total property, plant and equipment 685,187 163,406
---------- ----------
Noncurrent Assets
Deposits 25,375 5,649
Organizational costs, net (Note 1) 0 1,032
Patents 44,806 0
Deferred public offering costs (Note 1) 0 376,695
Deferred acquisition costs (Note 1) 45,431 0
---------- ----------
Total noncurrent assets 115,612 383,376
---------- ----------
Total assets $3,635,301 $ 817,242
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 91,487 $ 233,111
Accrued liabilities 64,550 307,092
Notes Payable (Note 6) 2,721 402,154
---------- ----------
Total current liabilities 158,758 942,357
---------- ----------
Long-Term Debt (Note 6) 257 2,978
---------- ----------
Stockholders' Equity
Class A common stock, no par value;
authorized 20,000,000 shares, issued
and outstanding 3,532,851 shares at
July 31, 1997 and 1,833,851 shares at
July 31, 1996 (Note 9) 5,566,124 663,181
Class A Warrants; issued and outstanding
3,687,500 warrants at July 31, 1997
(Note 9) 108,750 0
Accumulated deficit (2,198,588) (791,274)
---------- ----------
Total stockholders' equity 3,476,286 (128,093)
---------- ----------
Total liabilities and stockholders' equity $3,635,301 $ 817,242
========== ==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
For the Years Ended
July 31
----------------------------
1997 1996
----------------------------
Net sales $1,024,667 $ 825,695
Cost of sales 720,895 618,274
---------- ----------
Gross profit 303,772 207,421
---------- ----------
Selling expenses 447,249 93,940
General and administrative expenses 1,421,064 556,489
---------- ----------
Total operating costs 1,868,313 650,429
---------- ----------
Operating income (loss) (1,564,541) ( 443,008)
---------- ----------
Other income and (expense):
Interest income 1,057 1,803
Dividend income 156,744 0
Miscellaneous income 226 11,957
---------- ----------
Total other income 158,027 13,760
---------- ----------
Income (loss) before income taxes (1,406,514) ( 429,248)
Federal and state income taxes (Note 1) 800 800
---------- ----------
Net income (loss) $(1,407,314) $( 430,048)
========== ==========
Net (loss) per common share $ ( 0.26) $ ( 0.14)
========== ==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF ACCUMULATED DEFICIT
For the Years Ended
July 31
----------------------------
1997 1996
----------------------------
Balance, beginning of year $ (791,274) $ (361,226)
Net income (loss) (1,407,314) (430,048)
---------- ----------
Balance, end of year $(2,198,588) $ (791,274)
========== ==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
For the Years Ended
July 31
----------------------------
1997 1996
----------------------------
Cash flows from operating activities
Net income (loss) $(1,407,314) $( 430,048)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 68,843 29,054
Amortization 1,032 1,032
Officers wages contributed to capital 0 44,000
Stock issued for services 775,500 5,000
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable ( 137,085) 92,822
(Increase) decrease in due from
officers and shareholders 76,887 ( 56,887)
(Increase) decrease in due from
employees 1,390 2,634
(Increase) decrease in notes receivable ( 944) 0
(Increase) decrease in prepaid expense ( 575,465) ( 7,868)
(Increase) decrease in inventory 32,128 ( 32,550)
(Increase) decrease in deferred
public offering costs 376,695 ( 339,065)
(Increase) in deposits ( 19,726) ( 5,649)
(Increase) in patents ( 44,806) 0
(Increase) in deferred acquisition costs ( 45,430) 0
Increase (decrease) in accounts payable ( 12,372) 68,173
Increase (decrease) in accrued
liabilities ( 371,794) 302,488
---------- ----------
Net cash provided (used) by
operating activities (1,282,461) ( 326,864)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment ( 590,624) ( 100,962)
---------- ----------
Net cash (used) in
investing activities ( 590,624) ( 100,962)
---------- ----------
Cash flows from financing activities
Increase (decrease) in notes payable ( 402,154) 380,132
Proceeds from sale of warrants 108,750 0
Proceeds from sale of common stock 4,127,443 22,220
---------- ----------
Net cash provided by
financing activities 3,834,039 402,352
---------- ----------
Net increase (decrease) in cash
and cash equivalents 1,960,954 ( 25,474)
Cash, at beginning of year 21,706 47,180
---------- ----------
Cash and cash equivalents, at end of year $1,982,660 $ 21,706
========== ==========
Interest Paid 1,440 8,487
Taxes Paid 800 800
The accompanying notes are an integral part of the financial statements.
<PAGE>
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS
SEE ACCOUNTANTS' REPORT
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Innovative Medical Services was incorporated in San Diego, California
on August 24, 1992. The Company was organized with the purpose of
manufacturing, marketing, and sales of the Fillmaster, a unique and
proprietary pharmaceutical water purification and dispensing product.
The Company is fully operational, with more than 7,000 customers in
all fifty states, Puerto Rico, The United Kingdom, Australia, Canada,
and Europe. The Company has expanded research and development efforts
in order to further develop its product line to include an additional
10 proprietary pharmacy-related efficiency tools.
Revenue Recognition
The company recognizes revenues when products are delivered.
Research and Development
Research and development costs that have no alternative future uses
are charged to operations when incurred and are included in operating
expenses. The total amount charged to Research and Development
expense was $ 64,104 and $ 6,483 in the fiscal years ended July 31,
1997 and 1996, respectively.
Depreciation Method
The cost of property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the related
assets. The useful lives of property, plant, and equipment for
purposes computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Property held under capital lease 10.0 years
Vehicle 7.0 years
Leasehold improvements are being depreciated over the life of the
lease, which is equal to 120 months.
Depreciation is computed on the Modified Accelerated Cost Recovery
System for tax purposes.
Amortization
The cost of organizational expenses is being amortized on a straight-
line basis over the remaining lives of five (5) years. Amortization
expense charged to general and administrative expense for the years
ended July 31, 1997 and July 31, 1996 was $ 1,032 and $ 1,032,
respectively.
The cost of patents acquired will be amortized on a straight-line
basis over the remaining lives of 17 years beginning in fiscal year
ended July 31, 1999.
Inventory Cost Method
Inventories are stated at the lower of cost determined by the Average
Cost method and net realizable value.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Common Stock Public Offering
The Board of Directors authorized the Company to sell up to 1,250,000
shares of the Company's common stock and 1,250,000 Class A warrants in
a public offering pursuant to a Registration Statement on Form SB-2
under the Securities Act of 1933. The board of directors also
authorized obtaining a bridge loan of up to $ 375,000 to facilitate
the public offering (Note 12).
On August 13, 1996, the Company completed a public offering of its
common stock and Class A warrants. A registration statement covering
that offer was filed with the SEC on August 8, 1996. The IPO price to
was $ 4.00 per share of the common stock and $ .10 per share on the
warrants. The total proceeds from the IPO were $ 5,125,000 (1,250,000
shares of common and 1,250,000 Class A warrants). Each class A warrant
entitles the holder to acquire an additional common share for $ 5.25
per common share beginning August 8, 1997 and expiring August 8, 2001.
The Class A warrants will be exercisable commencing one year after the
effective date of the offering and entitles each holder to purchase
one share of common stock at $5.25 per common share during the four
year period commencing one year from the effective date of the offering.
The Class A Warrants are redeemable by the Company for $ .05 per warrant,
at the Company's option, commencing one year after the effective date
of the offering provided the closing bid price for the Company's
common shares shall have averaged in excess of $ 9.00 per share for
thirty consecutive business days ending within five days of the date
of a notice of redemption. The net proceeds after deducting the
underwriters fees and other costs was $ 4,525,625. On September 13,
1996, the overallottment shares were sold as per the underwriters
agreement and the Company received $ 476,760 (137,000 shares of
common at $ 4.00 per share and 137,000 Class A warrants at $ .10
per warrant, less underwriter's fees and costs).
Deferred Public Offering Cost
The company had incurred $ 376,695 of costs as of July 31, 1996
related to an initial public offering. Those costs were deferred,
pending completion of the offering. After the completion of the
offering, the total of the public offering costs $ 1,436,807 was
reclassified to shareholders' equity.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred Acquisition Costs
The Company has expended $ 45,430 in fiscal year ended July 31, 1997
during the process of evaluating certain companies for acquisition.
These costs have been capitalized and will be reclassified if the
acquisitions are successful as a cost of the investment or expensed in
the future if the acquisitions are not successful.
Net Loss Per Common Share
Pursuant to the requirements of the Securities and Exchange Commission
(SEC), common stock issued by the Company during the twelve months
immediately preceding an initial public offering, plus the number of
common equivalent shares which became issueable during the same period
pursuant to the grant of stock options and Bridge Financing (Note 12)
have been included in the calculation of the shares used in computing
net loss per common share as if these shares were outstanding for all
periods presented using the treasury stock method.
Following is a reconciliation of the weighted average number of shares
actually outstanding with the number of shares used in the
computations of loss per common share:
July 31, 1997 July 31, 1996
------------- -------------
Weighted average number of
shares actually outstanding 3,284,158 1,821,792
Stock options 406,250 31,250
Warrants 1,798,125 1,187,500
---------- ----------
5,488,533 3,040,542
========== ==========
The number of shares that would be issued from the exercise of the
warrants has been reduced by the number of shares that could have been
purchased from the proceeds at the average market price of $ 9.00 per
share for Class A warrants and $ 15.00 per share for Class Z warrants,
which represents the redemption prices.
Income Taxes
At July 31, 1997, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $ 2,199,000, $
2,056,000, and $ 1,153,000, respectively. At July 31, 1996, the
Company has financial, federal, and California tax net operating loss
carryforwards of approximately $ 791,000, $ 617,000, and $ 433,000,
respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to the capitalization
of research and development expenses and start-up expenses for tax
purposes with an amortization over five (5) years, however for
financial reporting purposes these expenses are charged to operations
as incurred. The difference between federal and California tax loss
carryforwards is primarily due to the fifty percent limitation on
California loss carryforwards. The tax loss carryforwards will begin
expiring in fiscal year ended July 31, 2009, unless previously
utilized.
The Company adopted Financial Accounting Standards Board Statement No.
109, Accounting for Income Taxes, beginning in fiscal year ended July
31, 1993. The adoption had no impact on 1993 results. In accordance
with this new standard, the Company has recorded total deferred tax
assets of $ 499,000 and $ 158,000 and a related valuation reserve of
$ 499,000 and $ 158,000 for the fiscal years ended July 31, 1997 and
1996, respectively. Realization of these deferred tax assets, which
relate to operating loss carryforwards and timing differences from the
amortization of research and development
<PAGE>
expenses and start-up expenses, is dependent on future earnings. The
timing and amount of future earnings are uncertain and therefore, the
valuation reserve has been established.
NOTE 2. CASH EQUIVALENTS
Cash equivalents represent cash deposited in the Merrill Lynch
Institutional Fund. This fund invests in securities with maturities
of 270 days or less and includes US Treasury instruments and other
governmental securities and commercial paper of large public companies.
Innovative Medical Services receives dividend income from the fund.
This cash can be withdrawn upon giving 24 hours notice. The total
cash deposited in this fund at July 31, 1997 was $ 1,903,327.
The carrying amounts for cash and cash equivalents approximate fair
value because of the short maturity of these instruments. The
Company maintains cash balances at several financial institutions.
Accounts at each institution, other than Merrill Lynch, are insured
by the Federal Deposit Insurance Corporation up to $ 100,000. At
July 31, 1997, the Company's uninsured cash equivalent balances
total $ 1,922,714.
NOTE 3. NOTES RECEIVABLE
At July 31, 1997, notes receivable of $ 25,930 represents amounts due
from employees. At July 31, 1996, notes receivable in the amount of
$ 15,858 represents amounts due from an officer and $ 9,128
represents amounts due from a shareholder. All notes receivable are
due and payable within one year. The carrying value of the notes,
based on the terms at which those same loans would be made currently,
approximate their fair value.
NOTE 4. DUE FROM SHAREHOLDERS AND OFFICERS
At July 31, 1996, due from shareholder is $ 500 and due from officers
and shareholders is $ 76,387.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment - at
cost, less accumulated depreciation:
July 31, 1997 July 31, 1996
------------- -------------
Computers and equipment $ 402,906 $ 132,715
Furniture and fixtures 80,530 47,993
Property held under capital lease 7,511 7,511
Vehicle 40,670 0
Leasehold improvements 279,353 41,751
---------- ----------
810,970 229,970
Less: accumulated depreciation 125,783 66,564
---------- ----------
Total $ 685,187 $ 163,406
========== ==========
Depreciation expense charged to general and administrative expense for
the years ended July 31, 1997 and 1996 was $ 68,843 and $ 29,054,
respectively.
<PAGE>
NOTE 6. DEBT
The details relating to debt are as follows:
July 31, 1997 July 31, 1996
------------- -------------
Note payable to stockholder with
interest at 12%. $ 0 $ 25,000
Interest is payable in monthly
installments of $ 247. The
principal is all due and payable
on January 1, 1997
Obligation under capital lease 2,978 5,132
Bridge financing (Note 12) 0 375,000
---------- ----------
Total notes payable 2,978 405,132
Less: Current maturities of
notes payable included in
current liabilities 2,721 402,154
---------- ----------
Total long term debt $ 257 $ 2,978
========== ==========
NOTE 7. CAPITAL LEASE
The company is the lessee of a display booth under a capital lease
expiring in August of 1998. The asset and liability under the capital
lease is recorded at the lower of the present values of the minimum
lease payments or the fair market value of the asset. The asset is
amortized over the estimated useful life of ten years. Depreciation of
the asset under capital lease charged to expense in the year ended
July 31, 1997 and 1996 was $ 751 and $ 474, respectively. The monthly
lease payment, which began in September 1995, is $ 262.
Minimum future lease payments under the capital lease as of July 31,
1997 for each of the next five years and in the aggregate are:
Year ended July 31
------------------
1998 $ 3,144
1999 262
----------
Total minimum lease payments $ 3,406
Less the amount representing interest 428
----------
Present value of net minimum lease payment $ 2,978
----------
The interest rate on the capital lease is approximately 23.6%.
NOTE 8. COMMITMENTS
The company leased office and warehouse facilities under an operating
lease that expired on December 31, 1996.
On May 14, 1996, the Company entered into a new operating lease
agreement for sixty-five months commencing on July 1, 1996. The rent
payment portion of the lease will be for sixty-three months which
allows for an initial building improvement period of two months. The
monthly rental for the 7,000 square foot facility will be $ .61 per
square foot plus $ .08 per square foot for maintenance of common
areas. There is also a fixed yearly increase of 4%. The company has
also signed an amendment to the lease to allow for an option to lease
the building for an additional five years. The company
<PAGE>
NOTE 8. COMMITMENTS (CONTINUED)
made improvements to the new building in the amount of $ 279,000.
The rental expense recorded in general and administrative expenses for
the years ended July 31, 1997 and July 31, 1996 was $ 70,423 and
$ 23,279, respectively.
NOTE 9. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
Common Common A Warrants A Warrants Z Warrants
Stock Shares Stock $ Options $ Options
------------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1995 1,791,851 $ 591,961 0 $ 0 0
Sale of stock 37,000 22,220 0 0 0
Stock issued for services 5,000 5,000 0 0 0
Contribution of officers
wages 0 44,000 0 0 0
Balance, July 31, 1996 1,833,851 $ 663,181 0 0 0
Bridge loan holders 0 0 2,250,000 0 750,000
Sale of stock (net of costs) 1,387,000 4,127,443 1,437,500 108,750 0
Stock issued for services 312,000 775,500 0 0 35,000
Balance, July 31, 1997 3,532,851 $5,566,124 3,687,500 $ 108,750 785,000
</TABLE>
On May 4, 1994, the Shareholders voted to increase authorized common
stock from 100,000 to 5,000,000 shares. On November 22, 1993, the
Board of Directors authorized a stock split for shareholders of record
of September 30, 1993, thereby increasing the number of issued and
outstanding shares to 2,117,520.
On April 17, 1996, the Board of Directors approved a 2 for 3 reverse
stock split of the common stock of the founding shareholders of the
corporation, thus reducing the outstanding shares. Also, the board
authorized the issuance of two classes of shares, to be designated
respectively as "Common shares" and "Preferred shares". The total
number of authorized common shares of the corporation was increased
from 5,000,000 shares to 20,000,000 shares, with no par value. The
total number of authorized preferred shares of the corporation was
increased from 1,000,000 shares to 5,000,000 shares, with no par
value. All references in the accompanying financial statements to the
number of common shares and per-share amounts have been restated to
reflect the stock splits.
<PAGE>
NOTE 10. RELATED PARTY TRANSACTIONS
On April 1, 1996, the Company entered into an employment agreement
with the President and Chief Executive Officer. The term of the
agreement is for five years with an automatic renewal of another five
years. The following are the major provisions of the agreement:
1. Compensation -
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income
before taxes earned by the corporation during each full
fiscal year, and
c. A monthly amount of not more than $500 per month for a
auto lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred
thousand dollars at 80% of the initial public offering
price of the Company's common stock, approximately
31,250 shares at $3.20 per share, which are exercisable
in April, 1997.
2. Compensation for past services -
In consideration of services which have been rendered during
the fiscal years ended July 31, 1994 and July 31, 1995 and
the eight months period ended March 31, 1996, the
corporation granted the following compensation for past
services rendered:
a. $30,000 for fiscal year ended July 31, 1994, and
b. $45,000 for fiscal year ended July 31, 1995, and
c. $60,000 for the eight months ended March 31, 1996.
The President (Mr. Krall) waived the payment of $119,000 of the
compensation for past services and contributed this amount as an
additional payment for the common stock he presently owns. In order
to reward the efforts of Director Krall for his outstanding
performance in the weeks leading to NASDAQ approval of the initial
public offering, the Compensation Committee recommended and the Board
of Directors authorized a bonus to Mr. Krall in the amount of
$ 257,500. The bonus of $ 257,500 was accrued at July 31, 1996.
On April 26, 1997, the board of directors approved the renewal of the
employment contract for Michael Krall for the position of President
and Chief Executive Officer and also increased his salary to $ 12,000
per month.
NOTE 11. STOCK OPTION PLANS
On April 17, 1996, the Board of Directors and the shareholders
approved a stock option plan for the key employees of the Company and
non-employee Directors of the Company. Under the plan the number of
shares of stock which may be issued and sold shall not exceed
1,000,000 shares, with 900,000 shares reserved for issuance to key
employees pursuant to their Incentive Stock Options and 100,000 shares
reserved for issuance to non-employee Directors pursuant to their
non-statutory options. The per share option shall be determined by
committee, but the per share exercise price shall not be less than the
fair market value of the stock on the date the option is granted. No
person shall receive options, first exercisable during any single
calendar year for stock, the fair market value of which exceeds
$100,000.
On April 26, 1997, the Board of Directors approved the option to
purchase 25,000 shares for the Vice President, Sales and Marketing as
part of the ISOP plan. It was also agreed to award stock options of up
to 300,000 shares from the ISOP to current and future employees at or
above the market price at the time of the grant.
On April 17, 1996, the Board of Directors approved a stock option plan
for the executive officers and Directors of the Company. Under the
plan the maximum number of shares of stock which may be issued and
sold shall not exceed 1,000,000 shares, with the maximum number of
shares for which an option may be granted to any one
<PAGE>
NOTE 11. STOCK OPTION PLANS (CONTINUED)
Director or officer shall be 100,000. The per share option price for
the stock subject to each option shall be $1.00 per share or such
other price as the Board of Directors may determine.
Also, on April 17, 1996, the Board of Directors approved the issuance
of 2,500 shares to each of two retiring board members for past
services.
On September 20, 1996, the Board of Directors approved, subject to
underwriter's approval, an offer to all Directors and Executive
Officers, the option of purchasing up to 50,000 shares of the
corporations stock at $ 4.00 per share. The option would be for a
period of five years with the underlying shares registered with the
SEC on Form S-8.
On August 6, 1997, the Board of Directors authorized options to
purchase 50,000 shares at $ 2.00 per share to the Board of Directors
pursuant to the Directors and Officers 1996 Stock Option Plan.
NOTE 12. BRIDGE FINANCING
In May 1996, the Company offered in a private placement 15 Bridge Loan
Units each originally consisting of one $25,000 secured promissory
note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire
one common share at $5.25 and 50,000 Class Z Warrants to acquire one
common share at $10.00 per share. On August 1, 1996 the Company
renegotiated the terms of the Bridge Financing with the investors
therein in order to address concerns of The NASDAQ SmallCap Market as
to the potential return to these investors. As a result, the Bridge
Financing investors agreed to the cancellation of the 50,000 common
shares per the Bridge Loan Unit (750,000 common shares in total) and
an increase of 100,000 Class A Warrants per Bridge Loan Unit
(1,500,000 additional Class A Warrants in total). As a result, the
Bridge Financing investors have been issued a total 2,250,000 Class A
warrants and 750,000 Class Z Warrants. In addition, the Bridge
Financing investors have each agreed to an irrevocable and complete
restriction on the transfer of each investor's Class A Warrants for a
six-month period from August 8, 1996. The promissory notes bear
interest at the rate of (5%) five percent and are due and payable on
the earlier of the closing of the public offering or October 26, 1996.
The Bridge Loan promissory notes are secured by substantially all of
the assets of the Company and a personal guaranty granted by Michael
Krall, the Company's president. The Class A and Class Z Warrants
cannot be exercised for one year and two years, respectively, and both
expire in August 2001. The Company will receive the exercise price of
the Bridge Loan Unit warrants, but will not receive any proceeds from
any sale of the Bridge Loan Unit warrants or the shares underlying the
warrants. The net proceeds to the Company from the issuance of the
promissory notes was $ 292,150, after payment of $ 82,850 for public
offering costs.
The Bridge Financing and the public offering may be deemed integrated
together and as a result, the Bridge Financing may have been in
violation of the registration requirements of Section 5 of the
Securities Act of 1933. This results in a contingent liability for the
purchase price of the securities sold in violation of section 5 in the
amount of $ 375,000 as well as other damages and litigation cost. The
Company is already contractually bound to repay the entire
consideration given for the Bridge Financing Units. No assurance can
be given that this contingent liability will not have a material
adverse effect upon the Company or its operations. On August 16, 1996,
after the closing of the initial public offering, all Bridge loans
were repaid with interest.
<PAGE>
NOTE 13. PENSION PLAN
The Company participates in a Small SEP program under which the
employer makes contributions to a SEP, which includes a salary
reduction arrangement (SARSEP). Employees who participate in the
SARSEP may elect to have the employer: (a) make contributions to the
SEP on their behalf, or (b) pay them cash. A salary reduction
arrangement may be used only in years in which the SEP meets
requirements that the IRS may impose to ensure distribution of excess
contributions. Annual contributions of an employer under a SEP are
excluded from the participant's gross income.
NOTE 14. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company markets its products to numerous customers in various
geographic regions, thereby spreading its credit risk related to
receivables. See Note 2. Cash and Cash Equivalents as to the
discussion of credit risks concerning cash equivalents.
The carrying amounts for cash and cash equivalents, receivables, and
payables approximate fair value because of the short maturity,
generally less than three months, of these instruments. The
carrying value of the Company's long-term debt approximates fair
value since the current borrowing rates available for financing are
similar in terms.
<PAGE>
Auditor's Report
on Supplementary Information
Our audits of the basic financial statements were made primarily to
form an opinion on such financial statements taken as a whole. The
supplementary information contained in the following pages is presented for
the purpose of additional analysis and, although not required for a fair
presentation of financial position, results of operations, and cash flows,
was subjected to the audit procedures applied in the examinations of the
basic financial statements. In our opinion, the supplementary information
is fairly presented in all material respects in relation to the basic
financial statements taken as a whole.
/s/ STEVEN HOLLAND
Steven Holland
Certified Public Accountant
San Diego, Ca.
October 25, 1997
<PAGE>
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
For the Years Ended
July 31
----------------------------
1997 1996
----------------------------
Schedule of Cost of Sales
Material purchases $ 548,814 $ 503,721
Production labor 99,947 73,151
Freight 62,382 41,138
Supplies and miscellaneous 9,752 264
---------- ----------
Total cost of sales $ 720,895 $ 618,274
========== ==========
Schedule of Selling Expenses
Advertising and promotion $ 124,198 $ 0
Brochures and catalogs 37,462 4,146
Demo and evaluation systems 18,080 2,185
Marketing expenses 12,485 11,516
Sales wages 184,566 46,184
Travel and entertainment 46,031 12,435
Trade shows 24,427 17,474
---------- ----------
Total selling expenses $ 447,249 $ 93,940
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
For the Years Ended
July 31
----------------------------
1997 1996
----------------------------
Schedule of General and
Administrative Expenses
Auto expenses $ 13,700 $ 15,698
Amortization 1,032 1,032
Bad debt expense 8,900 8,500
Bank charges 1,611 720
Board meetings and fees 15,142 0
Computer expenses 3,736 12,652
Contributions 2,000 205
Consulting 297,439 2,632
Credit card fees 0 165
Depreciation 68,843 29,054
Dues and subscriptions 14,926 2,711
Employee benefits 1,692 0
Equipment rental 5,316 337
Insurance 67,689 7,833
Interest expense 1,441 9,163
Legal and professional 135,794 5,368
License and permits 563 743
Miscellaneous 1,925 1,551
Office supplies and expense 25,217 15,213
Office wages and payroll taxes 320,945 38,017
Officers wages 117,000 353,500
Postage 10,157 1,089
Public relations 78,947 0
Recruiting 5,719 0
Rent Expense 70,423 23,279
Repairs and maintenance 9,365 4,360
Research and development expenses 64,104 6,483
SEC compliance costs 35,660 0
Security 308 210
Taxes: business and sales 151 4,192
Telephone expense 30,767 8,152
Utilities 10,552 3,630
---------- ----------
Total general and administrative
expenses $1,421,064 $ 556,489
========== ==========
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
PART III
- --------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company and their ages are
as follows:
Name Age Position
---- --- --------
Michael L. Krall 45 President, CEO, Director
Norman Andersen 78 Chairman of the Board, Director
Gary Brownell, CPA 49 Chief Financial Officer, Director
Dennis Atchley, Esq. 45 Secretary
Eugene Peiser, PD 66 Director
Patrick Galuska 38 Director
Dennis Brovarone 41 Director
The Directors serve until their successors are elected by the shareholders.
Vacancies on the Board of Directors may be filled by appointment of the
majority of the continuing directors. The executive officers serve at the
discretion of the Board of Directors.
DENNIS B. ATCHLEY Mr. Atchley, 45, is a civil litigation attorney. He has
been a sole practitioner from 1985 to 1997, was formerly a partner in the
firm of Winters ad Atchley and served as an associate attorney with several
larger law firms. He became an officer of Innovative Medical Services in
1992. Mr. Atchley graduated from Loyola University of Los Angeles in 1973
with a Bachelor of Arts degree in political science. He received his Juris
Doctorate in 1976 from California Western University School of Law. Mr.
Atchley is a member of the American Bar Association and the American
Arbitration Association. Mr. Atchley resides in San Diego with his wife and
two children.
GARY W. BROWNELL Mr. Brownell, 48, is a Certified Public Accountant in
a private partnership practice. He is the partner in charge of taxes and
municipal audits for his firm. Mr. Brownell graduated from San Diego State
University in 1973 with a Bachelor of Science degree in accounting. He
received his Certified Public Accountant designation in 1983. Mr. Brownell
has been a partner in Brownell and Duffy since 1985.
MICHAEL L. KRALL Mr. Krall, 45, is the President and CEO of Innovative
Medical Services, a position he has held since 1993. He is responsible for
the strategic planning, product development, and day-to-day operations of
IMS. Previously, Mr. Krall was the President and CEO of Bettis-Krall
Construction, Inc. a successful building-development company of custom
homes and commercial property in San Diego County, California. He has also
held numerous positions in general management in the hospitality industry.
Mr. Krall attended Pepperdine University (economics, statistics mechanical
engineering). He previously served 4 years in the United States Marine
Corps and was elected, by general election, to a 4 year term on the Valle
de Oro Planning Board. Mr. Krall lives in El Cajon, California with his
wife, Connie and two children.
NORMAN L. ANDERSEN Mr. Andersen, 78, currently retired, was from 1974
until September of 1994, Chairman of the Board of Cord North American
Moving and Storage, Inc., in Earth City, MO, a suburb of St. Louis. Prior
to serving solely as Chairman of the Board from 1987 until this year, he
also served as its Chief Executive Officer. Cord North American is a
holding company for several moving and storage concerns in the St. Louis
area. Mr. Andersen served for many years and in several capacities in the
Al Bahr Shrine. He is widowed and lives in Fairview Heights, IL.
EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser, 66, has been an
independent consultant to FDA regulated industries since 1974 and a Member
of the Board of Innovative Medical Services since 1994. He graduated from
the University of Tennessee College of Pharmacy with a Bachelor of Science
in Pharmacy in 1951 and has received his Doctorate of Pharmacy. Dr.
Peiser's consultancy advises on a wide variety of subjects, including
compliance with the Prescription Drug Marketing Act and other government
compliance matters, employee training and drug repackaging. Dr. Peiser
furnishes expert witness services and has provides approved Pharmaceutical
Continuing Education to several thousand attendees at his seminars. Dr.
Peiser is a Founding Director of the Association of Drug Repackagers; is
appointed as a Registered Arbitrator by the American Registry of
Arbitrators; serves as a member of the Surgeon General's Speakers Bureau;
and is President of the Southwest Chapter of the Association of Military
Surgeons. Dr. Peiser lives and works in Palm Harbor, FL.
PATRICK GALUSKA Mr. Galuska, 38, is a Petroleum Engineer and has been
with Meridian Oil Inc., since 1982. He is responsible for the financial
viability of numerous properties located in the Rocky Mountains and has
also been involved in many property acquisitions and contract negotiations.
He is a Registered Professional Engineer and is a member of the Society of
Petroleum Engineers. Mr. Galuska graduated from the University of Wyoming
in 1982 with a Bachelor of Science degree in Petroleum Engineering. He
received his Masters in Business Administration, specializing in Finance
<PAGE>
from the University of Denver in 1992. Mr. Galuska resides in Denver,
Colorado with his wife.
DENNIS BROVARONE Mr. Brovarone, 41 has been practicing corporate and
securities law since 1986 and as a solo practitioner since 1990. He was
elect to the Company's Board of Directors in April, 1996. Prior to 1990,
Mr. Brovarone served as in-house counsel to R.B. Marich, Inc., a Denver,
Colorado based brokerage firm. Mr. Brovarone also serves as President
(Chairman) of the Board of Directors of The Community Involved Charter
School, a four year old K-12 public school located in Lakewood, Colorado,
operating under an independent charter and serving approximately 350
students in an individualized, experiential learning environment. Mr.
Brovarone lives and works in Denver, Colorado.
COMPENSATION OF DIRECTORS
Directors are entitled to receive $300 plus reimbursement for all
out-of-pocket expenses incurred for attendance at Board of Directors meetings.
Mr. Anderson receives a salary of $2,000 for services as Chairman of the
Board and of the Board's Compensation and Budget Committees. In September
1996, the Board of Directors, and Executive Officers were each granted
50,000 five-year options to purchase stock at $4.00 per share, exercisable
September 1996. In September 1997, the Directors and executive officers
were each granted an additional 50,000 five-year options to purchase stock
at $2.00 per share, exercisable September 1997. No options granted to
Directors or Officers of the Company have been exercised to date.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows for the past three fiscal years ending July 31,
the compensation awarded or paid by the Company to its Chief Executive
Officer and its executive officers during such years:
Restricted
Name & Position Total Annual Cash Compensation Stock or
- --------------- (Year ended 7/31) ($ Amt.) Options Granted
----------------- -------- ---------------
Michael L. Krall 1995 45,000 0
1996 96,000 (2) 31,250 shares (1)
1997 117,000 50,000 options (3)
Dennis Atchley 1995 0 0
1996 0 0
1997 24,000 50,000 options (3)
Gary Brownell 1995 0 14,000
1996 0 0
1997 52,000 50,000 options (3)
(1) Five year Options exerciseable after April, 1997 at $3.20 per share.
See EMPLOYMENT CONTRACTS below.
(2) A bonus awarded in September, 1996 by the Board of Directors.
(3) Five year Options exercisable September 1996 at $4.00 per share as part
of grant to directors and officers made on that date. No options from that
grant have been exercised to date.
No other executive officer earned more than $100,000 during the current
fiscal year.
EMPLOYMENT AGREEMENTS
In April, 1996, the Board of Directors approved a five year employment
agreement for Michael Krall, its President. Mr. Krall is to receive a
salary of $108,000 per year, an amount equal to 3% of the Company's net
income before taxes if any plus other benefits. In addition, the Board of
Directors awarded Mr. Krall compensation in the amount of $30,000, $45,000
and $60,000 for the fiscal years ended July 31, 1994, 1995 and the eight
month period ended March 31, 1996. Mr. Krall has contributed these amounts
back to the Company as additional paid in capital for shares previously
issued to Mr. Krall. Mr. Krall was also awarded five year options to
acquire 31,250 common shares at $3.20 per share which are first
exerciseable in April, 1997. In September, 1996, the Board of Directors
awarded Mr. Krall a bonus of $257,500 as compensation for his extraordinary
work in the weeks preceding the Initial Public Offering. The Board of
Directors increased Mr. Krall's salary to $144,000 per year, effective May
1997.
<PAGE>
INCENTIVE STOCK OPTION PLAN
On April 17, 1996, the Shareholders approved the Company's 1995 Incentive
Stock Option Plan (the Plan). The purpose of the Plan is to advance the
business and development of the Company and its shareholders by affording
to the key employees of the Company the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. The Options granted are "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, for certain key employees. The Plan is administered by an
Administrative Committee whom shall serve a one year term. Subject to
anti-dilution provisions, the Plan may issue Options to acquire up to
1,000,000 shares to Key Employees. The maximum number of shares subject to
Options granted to any one Key Employee shall not exceed 100,000 shares.
The exercise price for Options shall be set by the Administrative Committee
but shall not be for less than the fair market value of the shares on the
date the Option is granted. The period in which Options can be exercised
shall be set by the Administrative Committee not to exceed five years from
the date of Grant. The Plan may be terminated, modified or amended by the
Board of directors upon the recommendation of the Administrative Committee.
The issuance of options pursuant to this Plan is not expected to be a
taxable event for recipient until such time that the recipient elects to
exercise the option whereupon the recipient is expected to recognize income
to the extent the market price of the shares exceeds the exercise price of
the option on the date of exercise. All Key Employees of the Company and
its subsidiaries are eligible to participate in the Incentive Stock
Options. A Key Employee is defined in the Plan as a Company employee who
in the judgment of the Administrative Committee has the ability to
positively affect the profitability and economic well-being of the Company.
Part time employees, independent contractors, consultants and advisors
performing bona fide services to the Company shall be considered employees
for purposes of participation in the Plan.
DIRECTORS AND OFFICERS STOCK OPTION PLAN
On April 17, 1996, the Company's Board of Directors approved a Directors
and Officers Stock Option Plan. The purpose of the Plan is to advance the
business and development of the Company and its shareholders by affording
to the Directors and Officers of the Company who are ineligible to
participate in the above Incentive Stock Option Plan, the opportunity to
acquire a propriety interest in the Company by the grant of Options to
acquire shares of the Company's common stock. The Plan is administered by
the entire Board of Directors. The Plan became effective on April 17, 1996
by the Board of Directors, was not subject to Shareholder approval and
shall terminate on April 17, 2006. Subject to anti-dilution provisions,
the Plan may issue Options to acquire up to 1,000,000 shares to Directors
and Officers. The maximum number of shares subject to Options granted to
any one Director or Officer shall not exceed 100,000 shares. The exercise
price for Options shall be set by the Board of Directors but shall not be
for less than eighty-five (85%) of the fair market value per share on the
date of grant. The period in which Options can be exercised shall be set
by the Board of Directors not to exceed five years from the date of Grant.
The Plan may be terminated, modified or amended by the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the stock ownership of each person known by
the Company to be the beneficial owner of five percent or more of the
Company's Common Stock, all Directors individually and all Directors and
Officers of the Company as a group.
Name and Address Common Stock Percentage
of Beneficial Owner Ownership of Class
- ------------------- --------- --------
Norman Anderson 51,334 1.45%
1725 Gillespie Way
El Cajon, CA 92020
Dennis Atchley 22,000 0.62%
1725 Gillespie Way
El Cajon, CA 92020
<PAGE>
Gary Brownell 32,334 .92%
1725 Gillespie Way
El Cajon, CA 92020
Michael L. Krall 618,307 17.50%
1725 Gillespie Way
El Cajon, CA 92020
Thomas E. Smith 618,307 17.50%
9408 Lightwood Cove
Austin, TX 78748
Eugene Peiser 6,334 0.18%
1725 Gillespie Way
El Cajon, CA 92020
Patrick Galuska 35,334 1.00%
8137 S. Downing St.
Littleton, CO 80122
Dennis Brovarone 13,334 0.38%
11249 W. 103rd Dr.
Westminster, CO 80021
Officers and Directors
as a group (7 Persons) 778,977 22.05%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December, 1995, Dennis Brovarone was issued 20,000 (pre-split) shares of
common stock in consideration of services rendered to the Company with
respect to corporate financing plans and federal securities law compliance.
Since inception, the Company has periodically made loans to Mr. Krall and
Thomas E. Smith, (Jr.) which accrued interest at the rate of 7% per annum.
These debt balances were also periodically reduced by Mr. Krall and Thomas
E. Smith,(Jr.) by cash payments to the Company. These loans were made by
the Company to insure Mr. Krall and Mr. Smith's availability to the Company
and the proceeds were used by Mr. Krall and Mr. Smith for personal expenses
unrelated to the Company. While the Company does not make loans to
unrelated parties, it believes that the terms of these loans were favorable
to the Company.
As of July 31, 1994, Thomas E. Smith, (Jr.)'s balance was $21,449.23 and
the Company received a Promissory Note in the principal amount of
$21,449.23 from Thomas E. Smith, (Jr.). The Note accrued interest at the
rate of 7% per annum was payable in one installment on or before September
30, 1995. In November, 1994, Thomas E. Smith, (Jr.) partially repaid his
balance by contribution of $29,000 of proceeds from the sale of 29,000 of
Thomas E. Smith, (Jr.)'s shares of the Company's common stock. As of July
31, 1995, Thomas E. Smith, (Jr.)'s balance owed was $9,128.19 and Thomas E.
Smith, (Jr.) issued a new Promissory Note dated July 31, 1995 in the
principal amount of $9,128.19 which accrues interest at the rate of 7% per
annum and is payable on or before September 30, 1996. As of April 30,
1996, the balance owed on this note was $9,628. As of July 31, 1997, the
balance owed on this note was $0.00.
As of July 31, 1994, Mr. Krall had a debt balance of $0.00 and had
contributed an additional $16,620.40 to the Company. On July 31, 1994, the
Company issued Mr. Krall a Promissory Note in the principal amount of
$16,620.40. The Note accrued interest at the rate of 7% per annum was
payable on or before September 30, 1995. In November, 1994, Mr. Krall
contributed $29,000 of proceeds from the sale of 29,000 of Mr. Krall's
shares of the Company's common stock. As of July 31, 1995 and as a result
of additional borrowing by Mr. Krall, Mr. Krall's balance owed was
$15,857.71 and Mr. Krall issued a new Promissory Note dated July 31, 1995
in the principal amount of $15,857.71 which accrued interest at the rate of
7% per annum and is payable on or before September 30, 1996. As of July
31, 1996, the balance owed on this note was $76,387. As of July 31, 1997,
the balance owed on this note was $0.00.
On January 1, 1994, the Company issued a Promissory Note with a principal
amount of $30,000 to Thomas E. Smith,
<PAGE>
Sr., a Director of the Company. The Note accrued interest at the rate of
9.873% per annum. The Note was repaid by the conversion of $5,000 into
5,000 shares of common stock in November, 1994 and the issuance on January
1, 1995, of another Promissory Note for the remaining principal amount of
$25,000. This Note accrued interest at the rate of 11.848% per annum and
is payable in monthly interest with the principal due on or before January
1, 1997. This note was paid off during fiscal year ended July 31, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(3) (i) Articles of Incorporation (Incorporated by reference from Form
SB-2 Registration SEC File # 333-00434 effective August 8, 1996)
(3) (ii) By-Laws of Corporation (Incorporated by reference from Form SB-2
Registration SEC File # 333-00434 effective August 8, 1996)
(11) Statement Re: Computation of Per Share Earnings
(23) Auditor's Consent
(27) Financial Data Schedule
B. Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ NORMAN ANDERSEN, CHAIRMAN
------------------------------------
Norman Andersen, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ MICHAEL L. KRALL Chief Executive Officer, October 29, 1997
- -------------------------- Director and President
Michael L. Krall
/s/ EUGENE PEISER Director October 29, 1997
- --------------------------
Eugene Peiser
/s/ PATRICK GALUSKA Director October 29, 1997
- --------------------------
Patrick Galuska
/s/ DENNIS BROVARONE Director October 29, 1997
- --------------------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer October 29, 1997
- -------------------------- and Director
Gary Brownell
EXHIBIT 11
INNOVATIVE MEDICAL SERVICES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE YEAR ENDED
JULY 31, 1997 AND 1996
For the Year Ended
July 31,
----------------------------
1997 1996
----------------------------
Shares outstanding 3,532,851 3,220,851
========== ==========
Weighted average shares outstanding 3,284,153 1,821,792
Stock Options 406,250 31,250
Warrants 1,798,125 1,187,500
---------- ----------
Total weighted average
shares outstanding 5,488,533 3,040,542
========== ==========
Net Income (Loss) $(1,407,314) $ (430,048)
========== ==========
Net Earnings (Loss) per share $ (0.26) $ (0.14)
========== ==========
EXHIBIT 23
STEVEN HOLLAND, CPA
3914 MURPHY CANYON RD., STE. A126
SAN DIEGO, CA 92123
(619) 279-1640
I have prepared the attached audited financial statements for
Innovative Medical Services for the fiscal year ended July 31, 1997
included in said Company's Annual Report on Form 10-KSB. I hereby
consent to their inclusion in the Company's Form 10-KSB.
/s/ STEVEN HOLLAND
Steven Holland, CPA
October 27, 1997
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 1,982,660
<SECURITIES> 0
<RECEIVABLES> 236,897
<ALLOWANCES> 17,850
<INVENTORY> 23,532
<CURRENT-ASSETS> 2,834,502
<PP&E> 820,594
<DEPRECIATION> 135,407
<TOTAL-ASSETS> 3,635,301
<CURRENT-LIABILITIES> 158,758
<BONDS> 0
0
0
<COMMON> 5,566,124
<OTHER-SE> (2,089,838)
<TOTAL-LIABILITY-AND-EQUITY> 3,635,301
<SALES> 1,024,667
<TOTAL-REVENUES> 1,024,667
<CGS> 720,895
<TOTAL-COSTS> 1,868,313
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<INCOME-PRETAX> (1,406,514)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,407,314)
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