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, 1998
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
(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: $1,675,131
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: Approximately $3,184,508 as of October 26, 1997.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 3,916,351 shares of class A common stock as of October 26,
1997.
Documents incorporated by reference: Exhibits to Form SB-2 Registration
Statement File # 33-00434
Part III of this report is incorporated by reference from the Registrant's
Proxy Statement to be filed on or before November 27, 1998.
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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 two years, Innovative Medical Services has launched three new
products, the Fillmaster 1000e and three products in the Company's
Nutripure line of residential drinking water systems. The Company
continued its marketing campaigns to expand into new markets while pursuing
development of future products.
Finalized in October 1998, Innovative Medical Services completed the
acquisition of AMPROMED, Rio de Janeiro, Brazil, and certain assets of
Export Company of America Inc. (EXCOA), Fort Lauderdale, FL, and
established a new Nevada corporation to hold and operate the export/import
operation. The required Contract Social was granted by the Brazilian
government in October 1998, and AMPROMED will soon resume sales of medical
products. In addition to medical supplies, Innovative Medical Services
plans to distribute water filtration products to Brazil through AMPROMED.
The principal terms of the acquisition were forgiveness of certain debt,
assumption of certain ongoing obligations of AMPROMED, and employment
contracts for former principals of the Brazilian company.
PRINCIPAL PRODUCT AND ITS MARKET
FILLMASTER(R) The Fillmaster(R) dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, 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. Pharmapure is six-stage water purification unit
featuring an electronic water purity testing module and an auxiliary faucet
for dispensing purified water. Fillmaster is a calibrated volumetric
measuring and dispensing apparatus. The entire system (the "'Fillmaster
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 dispenser and Pharmapure water system. The end-user installs the
equipment following step-by-step illustrated instructions using common
household tools.
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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
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 dispenser, combined with the Pharmapure water system,
greatly reduces these hazards of contamination in the pharmacy's water
source. The system produces and dispenses "Purified Water", eliminating
the problem of incorrect source. The 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 dispenser's cleanable and disposable dispensing
tips.
Extensive testing performed by the Company shows that use of the Fillmaster
System saves a pharmacist more than 20 seconds of actual filling time for
each liquid antibiotic prescription. When multiplied by over 12,000
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 System enhances profitability of liquid
antibiotics and multiplies pharmacist time for patient counseling and other
activities.
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Direct and indirect costs associated specifically with bottled water are
reduced or eliminated by use of the Fillmaster System. 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" using the Fillmaster System 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
System 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 Fillmaster Systems 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. The Company has established
long-term agreements with national chain pharmacies to specify installation
of the Fillmaster as standard pharmacy equipment in new and remodeled
stores.
The Fillmaster System carries a suggested list price of $659, and the
Company offers discounts for volume purchase agreements.
There are approximately 72,000 pharmacies in the United States and Canada,
with many thousands more worldwide. 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 9,500 Fillmaster systems have been sold to date, and the
Fillmaster is specified as standard equipment for all newly constructed and
remodeled pharmacies at Walgreen's, Wal-Mart, Target, Fred Meyer, Osco,
Jewel, Acme, Lucky, Sav-On, Kroger, Dillon Stores, United Supermarkets,
Phar-Mor, Giant Eagle, Giant Foods, Meijer, City Markets and Eckerd. In
addition, Fillmaster systems have been purchased and are now being used by
such pharmacy chains as Smith's Food and Drug, Longs Drugs, CVS, Rite-Aid,
Drug Emporium, Fry's, Hi-School Pharmacies and Snyders. Also included in
the customer base are many 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 SYSTEM FILTERS The Company also markets unique and proprietary
filter replacements for the Pharmapure water 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. More than half of the Company's current
customers have signed up for this automatic filter shipment program, and
most new customers subscribe to the program upon purchase of a system.
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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 Pharmapure 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. Full production began in May 1998, and
since June the Company has been selling Fillmaster 1000e dispensers both as
upgrades to existing Fillmaster Systems and as new sales to new customers.
The upgrade list price of the Fillmaster 1000e dispenser is $399, and the
list price for the Fillmaster 1000e electronic dispenser with the
Pharmapure water system is $899. The Fillmaster 1000e was developed with
bar code reading capabilities, and an upgrade scanning module will be
released later this year.
NUTRIPURE(R) ELITE The Nutripure(R) Elite line of residential drinking
water systems 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 Elite systems produce at
least 150 gallons of clean, healthy water per month. The Company's
drinking water systems provide the best reverse osmosis technology
available today at a moderate price, and are therefore strong value
purchases. Incorporating the same filtration technology as the Company's
Fillmaster pharmaceutical water purification system, Nutripure Elite
systems provide healthy, safe and great tasting drinking water.
The Company distributes Nutripure Elite systems 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 Elite systems 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 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(R) ELITE 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
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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 program in which
the Company automatically ships replacement filters annually on the
anniversary date of the system purchase.
NUTRIPURE(R) NP2000CT Innovative Medical Services is proud to announce its
entry into the retail venue with its Nutripure Countertop Water Filtration
System (model number NP2000CT). Nutripure NP2000CT, developed specifically
for mass merchandising, offers excellent water filtration technology at
competitive pricing through a unique marketing approach. Nutripure's
professional one-micron, carbon microfilter removes dirt, chemicals, lead
and parasites to improve the taste, quality and safety of water. Most
importantly, Nutripure is the only filtration system in its class that is
pharmacist recommended. The product has been tested and certified by
Spectrum Laboratories to meet or exceed ANSI/NSF standard No. 53 Health
Effects and ANSI/NSF Standard No. 42 Aesthetic Effects.
Nutripure NP2000CT features enhancements that position the product to
compete well in the competitive residential water filtration market.
Nutripure NP2000CT contains a high-capacity 2,000-gallon filter that
requires replacement only once a year. Capacities of other leading filters
are much less and therefore require more frequent changing. Also, the
NP2000CT incorporates a unique Automatic Bypass Valve that shuts off after
every use to prevent accidental waste of filtered water. Other countertop
filters may easily be left "on" resulting in the use of filtered water for
dishwashing or other non-consumption uses. The NP2000CT requires no
assembly, and its sealed cartridge design prevents leaking and
contamination because water flows only through the completely sealed filter
cartridge. Other filter systems are designed so that water flows not only
in, but also around the filter cartridge, increasing the potential for
leaking and also increasing the risk of contamination as the consumer must
handle the filter during assembly and replacement processes.
Several national mass merchandisers as well as department and specialty
stores are currently evaluating the Nutripure NP2000CT. Because of its
strong pharmacy tie-in, Nutripure may be marketed as a healthcare product
in the pharmacy department as well as a home product in the general
merchandise department. Trial orders have been placed, and the Company
expects larger orders will be place in the coming year. The NP2000CT will
be competitively priced to retail between $59.00 and $79.99.
NUTRIPURE(R) NP2000CT REPLACEMENT FILTERS The Company also manufactures
and markets replacement filters for the Nutripure NP2000CT water system.
The NP2000CT contains a 2,000-gallon filter that must be changed every
year. Replacement filters will be sold through retail outlets along with
the Nutripure system. The replacement filters will retail for approximately
$25.00 and represent a significant continuing source of sales and cash flow
to the Company.
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
$4,000 in cash and 12,000 shares of common 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 and promotional products distributors.
MANUFACTURING
The Fillmaster and Nutripure systems are assembled primarily from custom
manufactured 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. Many manufacturers are available to produce the
components, and a change in suppliers would result in virtually no lost
production.
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The original Fillmaster dispenser and the new Fillmaster 1000e dispenser
are both assembled mostly from proprietary and custom parts fabricated to
Company specifications from injection-molded plastic and fabricated acrylic.
The Pharmapure purification modules are the major components of each of the
two Fillmaster systems and are purchased under agreements with several
manufacturers that are exclusive with the Company as to Pharmaceutical
uses. While Management regards this particular product as the finest of
its kind, suitable alternative manufacturers exist.
The Nutripure line of water filtration products is also assembled from
proprietary and custom parts manufactured under exclusive agreements with
several different manufacturers. Alternative manufacturers exist, and a change
in suppliers would result in virtually no lost production. There are no plans
to alter production methods.
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 $177,384
and $64,104 in the fiscal years ended July 31, 1998 and 1997, respectively.
In addition, $29,935 and $73,876 of Research and Development related
equipment purchases were capitalized during fiscal years ended July 31,
1998 and 1997. The Company's investment in Research and Development during
the past year resulted in the release of four major additions to the
Company's product line, the Fillmaster 1000e and the Nutripure line
drinking water systems. Innovative Medical Services anticipates more new
products in the coming year.
EMPLOYEES
As of October 27, 1998, the Company employed twenty-three people, nineteen
of whom are full-time individuals whose principal responsibilities are:
product assembly and shipping (four employees), sales, marketing and
customer service (six employees), research and development (three
employees) and administration (six employees). The Company chooses to
outsource more expensive, specialized functions including public relations,
investor 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.
The Company's AMPROMED subsidiary leases from an unaffiliated third party
a 39,000 square foot building, including office, warehouse, manufacturing
and showroom facilities in Rio de Janeiro, Brazil.
ITEM 3. LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas
County, Florida by Zedburn Corporation, against the Company for breach of
contract in October, 1997. The Company has filed counterclaims based upon
the Racketeer Influenced and Corrupt Organization (RICO) Act against Mr.
Reitz, Zedburn Corporation, Capital Development Group, Steven Durland and
other defendants. 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.
The Company believes that the defendants had perpetrated similar schemes
against other parties. The Company believes that it has substantially
completed discovery and complied compelling evidence to
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prove its claims. Several of the Defendants filed Motions to Dismiss the
Company's counterclaims. A hearing on the Motions was held on October 1,
1998 and the judge has not yet ruled upon the Motions. A ruling is
expected on or before November 15, 1998. It is the Company's belief that
the Motions to Dismiss will be denied and it is the Company's intention to
vigorously pursue a trial in the State Court action as soon as possible.
In October 1997, Mr. Reitz and Zedburn filed for protection under the
Federal bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed
his bankruptcy and as a result thereof the Company has named Mr. Reitz as
a defendant to its counterclaims.
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 claims and that the likelihood that the Company
will realize a loss from these matters is believed remote. In addition,
the Company believes that in the unlikely event that the Company settles,
the amount of any such settlement would not be material to the Company's
financial statements.
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
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 each fiscal quarter, as reported by NASDAQ,
for the last two fiscal years. Such quotations represent
inter-dealer prices without retail mark-ups, mark-downs, or
commissions and, accordingly, may not represent actual
transactions.
FISCAL 1998 FISCAL 1997
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW
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October 31, 1998 2.94 1.38 October 31, 1997 7.75 1.88
January 31, 1998 3.22 1.41 January 31, 1997 4.25 2.19
April 30, 1998 2.06 1.00 April 30, 1997 4.63 3.50
July 31, 1998 1.34 .044 July 31, 1997 4.38 1.69
(3) Security Holders: As of October 27, 1997, the Company had
approximately 920 holders of record of its common stock, 380
holders of its Class A Warrants and 18 holders of the Company's
Class Z Warrants. This does not include beneficial owners
holding common stock or Class A Warrants in street name. The
closing price per share on October 26, 1998 was $1.00.
(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
Pharmapure(R) pharmacy water purification system, the Fillmaster(R)
dispensing units for reconstituting oral suspensions, and the Nutripure(R)
line of residential drinking water systems. The Company also markets, for
all water filtration products, proprietary filters that require changing at
intervals of nine to twelve months. Filter replacements represent a
significant continuing source of revenue to the Company.
In addition, Innovative Medical Services markets 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 and
promotional products distributors.
Innovative Medical Services also owns Export Company of America, Inc.
(EXCOA), a Nevada corporation that holds and operates the Company's
Brazilian export/import operation. The Company distributes medical, dental
and veterinary supplies into Brazil and plans to use this distribution
conduit for the Company's water filtration products.
RESULTS OF OPERATIONS FISCAL 1998 VS. FISCAL 1997
Revenues of $1,675,100 in the fiscal year ended July 31, 1998 were 63%
higher than the $1,024,700 in revenues reported for the fiscal year ended
July 31, 1997. Fillmaster Purification System sales in the year ended July
31, 1998 were $1,082,000 and replacement filter sales were $439,100. In the
prior year, Fillmaster Purification System sales were $848,200 and
replacement filter sales were $141,200. Sales of the Fillmaster
Purification System rose 28% over the prior period. Sales of filters rose
211% in fiscal 1998 as expected due to the continually increasing number of
Fillmaster Purification Systems in use.
Gross profits for the year ended July 31, 1998 were $673,100 versus
$303,800 in 1997. Gross profit percentage of 40% in 1998 was higher versus
30% in 1997. The gross profit increase reflects increased filter sales in
the current year. As the number of Fillmaster system installations
increases, so will the volume of replacement filter sales and the related
improved gross profit margins.
Net loss for the year ended July 31, 1998 was $1,902,800 versus a net loss
of $1,407,300 for the same period in 1997. This decrease was due in part
to the $200,400 or 46% increase in Selling Expenses, which includes
marketing and advertising costs incurred to promote the Company's products.
In addition, General and Administrative Expenses increased approximately
$432,700 or 32% from 1997 to 1998 due to continued product development
costs, associated expenses for additional management and sales personnel,
and costs associated with the development of new markets. Revenues for the
year were less than previously anticipated because a large corporate order
will be recognized in the first quarter of fiscal 1999 instead of the fiscal
1998 fourth quarter. Also, the Company took a one-time charge of
approximately $450,000 by writing off remaining prepaid investment banker
fees for which management believes it will derive no further value. During
the current fiscal year the Company incurred expenses of $177,400 for
Research and Development costs associated with production and development
of new products.
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LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended July 31, 1998, the Company's current assets to
liabilities ratio fell from 17.85 to 1.21. Current assets decreased
$1,824,400 from $2,834,500 to $1,010,100. Current assets at July 31, 1998
include $360,600 of inventories consisting mainly of new electronic
dispensers built in the fourth quarter for the cancelled Walgreens order.
Noncurrent assets include $1,096,900 of deferred acquisition costs
comprised largely of investment banker fees related to the acquisition of
a Florida export company and a related medical supply company located in
Brazil. Current liabilities increased $678,600 from $158,800 to $837,400.
The increase in current liabilities was the result of increased accounts
payable associated with a corresponding increase in inventories. Also, the
Company has established a line of credit during the period on which it has
drawn $295,000.
Cash flows used from operations were $1,994,100 in fiscal year 1998 and
$1,282,500 in 1997. For those periods, cash flows used in investing
activities were, respectively, $232,300 and $590,600 for the purchase of
machinery and equipment and for leasehold improvements. The total decrease
in cash and cash equivalents for the 1998 period was $1,934,400 which was
largely a result of an increase in inventory and an increase in deferred
acquisition costs. The Company generated $4,236,200 from a public offering
during the 1997 period resulting in a net increase in cash equivalents of
$1,961,000.
The Company operates on a just-in-time assembly and manufacturing basis and
typically 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.
FUTURE OUTLOOK
FILLMASTER SALES TO CHAIN PHARMACIES Long term profitability of the
Fillmaster System product line depends on establishing a substantial number
of Fillmaster units installed and in use. Since each unit requires
replacement of its filters at least once a year, each new system installed
becomes a source of steady future income potentially exceeding the income
from the initial sale of the Fillmaster System. In addition, each pharmacy
using the Fillmaster becomes an easily approachable candidate for any new
pharmacy tools developed by the Company in the future. The Company
continues to build an ever-increasing sales revenue base of chain
pharmacies with sales and marketing expenditures a fraction of those
necessary to reach independent and hospital pharmacies. To date,
Fillmaster Systems are installed in approximately 9,500 pharmacies, an
increase of 36% over last year's total. The 9,500 locations represent
approximately 13% of the total pharmacy market. Although 13% constitutes
a significant hold on the pharmacy market, the Company sees significant
growth potential for the Fillmaster System in both the United States and
abroad.
The Fillmaster System is specified as standard equipment for all newly
constructed and remodeled pharmacies at Walgreen's, Wal-Mart, Target, Fred
Meyer, Osco, Jewel, Acme, Lucky, Sav-On, Kroger, Dillon Stores, United
Supermarkets, Phar-Mor, Giant Eagle, Giant Foods, Meijer, City Markets and
Eckerd. Construction and remodeling installations of Fillmaster Systems
generate steady sales at a low cost of sales and, therefore, a steady
increase in replacement filter sales. The Company expects that additional
chain stores will add Fillmaster Systems to their blueprints and
specifications for new construction and remodeling of pharmacies in the
coming year. The Company will continue to aggressively market the
Fillmaster System to chain pharmacies and expects growth to continue as the
Fillmaster becomes an industry-wide standard in pharmacy dispensing
equipment.
FILLMASTER SALES TO INDEPENDENT PHARMACIES The independent pharmacy market
represents more than 30,000 locations and remains an untapped market for
the Company. The Company continues its targeted Fillmaster System
marketing program and corresponding Nutripure Elite dealer program focusing
on the costlier-and more difficult-to-reach independent pharmacy market.
Capital expenditures are often difficult for the independent community
pharmacy because of limited cash resources. Becoming a Nutripure dealer
will offer the independent pharmacist a means of increasing cash flow and
thereby the means to purchase a
-10-
<PAGE>
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 7%, 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 continued increasing its
exposure to independent buying groups and developing its relationships with
decision-makers within the groups. The Company expects relationships with
independent pharmacy buying groups to result in volume sales of Fillmaster
Systems.
NUTRIPURE ELITE 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
Elite on both the pharmacist's reputation and relationship with his
customers as well as his testimonial as a Fillmaster user to the quality of
the product. The pharmacist's recommendation of a system they use in their
pharmacy to reconstitute prescriptions sets Nutripure Elite apart from all
other residential drinking water systems.
The Company currently has approximately 60 dealers of Nutripure Elite
products. As the targeted marketing program continues to inform
independent pharmacists of this revenue opportunity, the Company expects
the dealer network to exceed 200 dealers within the next 12 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 Elite systems incorporates the highest quality reverse
osmosis equipment available on the market today, and Nutripure Elite's
moderate retail price of $499 is very competitive. The Company believes
that Nutripure Elite's value, combined with the powerful recommendation of
the pharmacist and the unique distribution exclusively through independent
pharmacies will make it a significant 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 after-market 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 distributes the Medifier through catalogues, existing
pharmacy customers and promotional products distributors, and markets a
private labeling option for organizations wishing to purchase the Medifier
as a promotional item. The Company began marketing the Medifier during the
past fiscal year and expects sales to grow as exposure to and awareness of
the Medifier increases.
NEW PRODUCT INNOVATION During first quarter of the fiscal year, the
Company completed major marketing campaigns for two new products: the
Nutripure Elite line of residential drinking water systems and the
Fillmaster 1000e computerized pharmacy water dispensing system. Revenues
from sales of the Nutripure Elite products were realized throughout the
year, and revenues from sales of the Fillmaster 1000e began to be realized
in the fourth quarter of the fiscal year.
-11-
<PAGE>
Also during the year, the Company developed its entry-level water system,
Nutripure NP2000CT. After 18 months of extensive market research,
Innovative Medical Services completed development of this carbon countertop
system and released the product in June 1998. Nutripure NP2000CT,
developed specifically for mass merchandising, offers excellent water
filtration technology at competitive pricing through a unique marketing
approach: Nutripure is the only filtration system in its class of
countertop carbon systems that is "pharmacist recommended". National mass
merchandisers, drugstores, department stores and specialty stores are
currently evaluating the Nutripure NP2000CT, and Innovative Medical
Services expects sales to begin during the coming year.
The Company continues to develop new and innovative pharmacy efficiency
products and water filtration products and plans to release two new
products this year.
ACQUISITIONS In May 1998, Innovative Medical Services completed
negotiating the acquisition of AMPROMED, Rio de Janeiro, Brazil, and
certain assets of Export Company of America Inc. (EXCOA), Fort Lauderdale,
FL, and established a new Nevada subsidiary to hold and operate the
export/import operation. The government of Brazil is promoting growth and
higher quality health services by infusing $36 billion over the next five
years into a nationwide healthcare system. Innovative Medical Services
believes that the combined prospects of expanded disposable medical and
dental product sales with a massive public health initiative offers a
bright future for the AMPROMED operations. Innovative Medical Services has
been awaiting the required Brazilian business certification before
commencing sales in Brazil. The required Contract Social was granted by
the Brazilian government in October 1998, and AMPROMED will soon resume
sales of medical products. In addition to medical supplies, Innovative
Medical Services plans to distribute water filtration products to Brazil
through AMPROMED. As in other emerging areas of the world, Brazilians have
recognized clean water as an integral element of good health, and consumer
awareness is growing rapidly. Innovative Medical Services expects to begin
realizing revenues from sales of medical supplies and water filtration
products in Brazil in the second quarter of 1999. The Company anticipates
that the acquisition will result in an additional $3 million in revenue in
the next year.
Innovative Medical Services, in cooperation with its investment banking
firm, continues to explore potential acquisition opportunities for medical
supply distribution, both domestic and abroad.
-12-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INNOVATIVE MEDICAL SERVICES
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
For the Years Ended July 31, 1998 and July 31, 1997
-13-
<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, 1998 and July 31, 1997, 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 audits.
I conducted the audits 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, 1998 and July 31, 1997, 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 23, 1998
-14-
<PAGE>
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31
1998 1997
ASSETS --------------------------
Current Assets
Cash and cash equivalents (Note 2) $ 48,250 $ 1,982,660
Restricted cash (Note 3) 206,230 -
Accounts receivable, net of allowance
for doubtful accounts of $17,850 276,619 219,047
Notes receivable (Note 4) 106,918 25,930
Inventories 360,566 23,532
Prepaid expenses 11,556 583,333
----------- -----------
Total current assets 1,010,139 2,834,502
----------- -----------
Property, Plant and Equipment
Property, plant and equipment (Note 5) 791,599 685,187
----------- -----------
Total property, plant and equipment 791,599 685,187
----------- -----------
Noncurrent Assets
Deposits 14,075 25,375
Patents 57,806 44,806
Deferred acquisition costs (Note 1 & 15) 1,096,852 45,431
----------- -----------
Total noncurrent assets 1,168,733 115,612
----------- -----------
Total assets $ 2,970,471 $ 3,635,301
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 495,287 $ 91,487
Accrued liabilities 47,060 64,550
Notes payable (Note 6) 294,986 2,721
----------- -----------
Total current liabilities 837,333 158,758
----------- -----------
Long-Term Debt - 257
----------- -----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares,
issued and outstanding 3,916,351
shares at July 31, 1998 and 3,532,851
shares at July 31, 1997 (Note 9) 6,125,718 5,566,124
Class A warrants: issued and outstanding
3,687,500 warrants (Note 9) 108,750 108,750
Accumulated deficit (4,101,330) (2,198,588)
----------- -----------
Total stockholders' equity 2,133,138 3,476,286
----------- -----------
Total liabilities and stockholders' equity $ 2,970,471 $ 3,635,301
=========== ===========
The accompanying notes are an integral part of the financial statements
-15-
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Net sales $ 1,675,131 $ 1,024,667
Cost of sales 1,001,999 720,895
----------- -----------
Gross profit 673,132 303,772
----------- -----------
Selling expenses 647,637 447,249
General and administrative expenses 1,789,655 1,356,960
Research and development 177,384 64,104
----------- -----------
Total operating costs 2,614,676 1,868,313
----------- -----------
Operating income (loss) (1,941,544) (1,564,541)
----------- -----------
Other income and (expense):
Interest income 39,602 157,801
Miscellaneous income - 226
----------- -----------
Total other income (expense) 39,602 158,027
----------- -----------
Income (loss) before income taxes (Note 1) (1,901,942) (1,406,514)
Federal and state income taxes 800 800
----------- -----------
Net income (loss) $(1,902,742) $(1,407,314)
=========== ===========
Net (loss) per common share $ (0.50) $ (0.43)
=========== ===========
STATEMENTS OF ACCUMULATED DEFICITS
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Balance, beginning of period $(2,198,588) $ (791,274)
Net income (loss) (1,902,742) (1,407,314)
----------- -----------
Balance, end of period $(4,101,330) $(2,198,588)
=========== ===========
The accompanying notes are an integral part of the financial statements
-16-
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $(1,902,742) $(1,407,314)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 125,935 68,843
Amortization - 1,032
Stock issued for services 559,595 775,500
Changes in assets and liabilities:
(Increase) decrease in restricted cash (206,230) -
(Increase) decrease in accounts receivable (57,572) (137,085)
(Increase) decrease in due from officers
and shareholders - 76,887
(Increase) decrease in due from employees - 1,390
(Increase) decrease in notes receivable (80,988) (944)
(Increase) decrease in prepaid expense 571,777 (575,465)
(Increase) decrease in inventory (337,034) 32,128
(Increase) decrease in deferred public
offering costs - 376,695
(Increase) decrease in deposits 11,300 (19,726)
(Increase) decrease in patent costs (13,000) (44,806)
(Increase) decrease in deferred
acquisition costs (1,051,421) (45,430)
Increase (decrease) in accounts payable 403,800 (12,372)
Increase (decrease) in accrued liabilities (17,490) (371,794)
----------- -----------
Net cash provided (used) by operating
activities (1,994,069) (1,282,461)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (232,347) (590,624)
----------- -----------
Net cash (used) in investing activities (232,347) (590,624)
----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable 292,007 (402,154)
Proceeds from sale of warrants - 108,750
Proceeds from sale of common stock - 4,127,443
----------- -----------
Net cash provided by financing
activities 292,007 3,834,039
----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,934,410) 1,960,954
Cash at beginning of period 1,982,660 21,706
----------- -----------
Cash at end of period $ 48,250 $ 1,982,660
=========== ===========
Interest Paid $ 8,243 $ 1,440
Taxes Paid $ 800 $ 800
The accompanying notes are an integral part of the financial statements
-17-
<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 9,500 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 $177,384 and $64,104 in the fiscal years ended July 31, 1998 and
1997, 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, 1998 and July 31, 1997 was $0 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.
-18-
<PAGE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The fair value of financial instruments, consisting primarily of the
line of credit, is based on interest rates available to the Company and
comparison to quoted prices. The fair value of these financial
instruments approximates carrying value.
Advertising and promotional Costs
Cost of advertising and promotion are expensed as incurred or the
first-time advertising and promotion takes place. Such costs were
$272,191 and $136,683 for the years ended July 31, 1998 and July 31,
1997, respectively.
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 11).
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 $0.10 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 are redeemable by the Company for $0.05 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 $0.10 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.
Deferred Acquisition Costs
During the process of evaluating certain companies for acquisition, the
Company has expended $1,096,852 and $45,430 in fiscal years ended July
31, 1998 and July 31, 1997, respectively. 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
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997.
Entities that have only common stock
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<PAGE>
outstanding are required to present basic earnings per share amounts.
All other entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is
to reduce a loss or increase the income per common share from continuing
operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year. Earnings per
share excludes the effect of outstanding warrants and stock options and
the conversion of convertible debt because the effect of their inclusion
would be antidilutive, as defined in the Statement. In conjunction with
SFAS 128, the Company has restated the accompanying financial statements
of July 31, 1997 for all per share data presented.
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, 1998 July 31, 1997
------------- -------------
Weighted average number of
shares actually outstanding 3,779,543 3,284,158
Net income (loss) $ (1,902,742) $ (1,407,314)
Net (loss) per common share $ (0.50) $ (0.43)
Potential common stock instruments at July 31, 1998, which include
1,521,250 stock options and 1,798,125 warrants, are not included in
the loss per share calculation because their inclusion would be
antidilutive. Potential common stock instruments at July 31, 1997,
which include 406,250 stock options and 1,798,125 warrants, are not
included in the loss per share calculation because their inclusion
would be antidilutive.
Income Taxes
At July 31, 1998, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $4,101,000,
$3,994,000, and $2,122,000, respectively. 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. 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 $962,000 and $499,000 and a related valuation reserve of
$962,000 and $499,000 for the fiscal years ended July 31, 1998 and
1997, respectively. Realization of these deferred tax assets, which
relate to operating loss carryforwards and timing differences from the
amortization of research and development 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.
-20-
<PAGE>
NOTE 2. CASH AND CASH EQUIVALENTS
At July 31, 1997 cash equivalents represented 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 government securities and commercial paper of
large public companies. Innovative Medical Services receives interest
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.
At July 31, 1998, the Company's cash and cash equivalents is
represented by $48,250 in cash or checking accounts.
NOTE 3. RESTRICTED CASH
At July 31, 1998, the Company's restricted cash consisted of a
certificate of deposit of $206,229. The certificate of deposit is held
by a bank, as security for a line of credit with the same bank.
NOTE 4. NOTES RECEIVABLE
At July 31, 1998, notes receivable of $80,074 represents amounts due
from officers and $26,844 represent amounts due from employees. At
July 31, 1997, notes receivable of $25,930 represents amounts due from
employees. 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 5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment - at
cost, less accumulated depreciation:
July 31, 1998 July 31, 1997
------------- -------------
Computers and equipment $ 628,074 $ 402,906
Furniture and fixtures 86,487 80,530
Property held under capital lease 7,511 7,511
Vehicle 40,670 40,670
Leasehold improvements 280,575 279,353
----------- -----------
1,043,317 810,970
Less: accumulated depreciation 251,718 125,783
----------- -----------
Total $ 791,599 $ 685,187
=========== ===========
Depreciation expense charged to general and administrative expense for
the years ended July 31, 1998 and 1997 was $125,935 and $68,843,
respectively.
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<PAGE>
NOTE 6. DEBT
The details relating to debt are as follows:
July 31, 1998 July 31, 1997
------------- -------------
Obligation under capital lease $ 969 $ 2,978
Line of Credit Valle de Oro Bank,
$ 200,000 line of credit,
Interest at 7.7% due and payable
February 25, 1999
Secured by certificate of
deposit of $ 206,230 199,483 0
Line of Credit Flagship Capital, Inc.
for financing of accounts
payable, interest at 17% payable
at $27,052 monthly beginning
September 13, 1998 94,533 0
----------- -----------
Total notes payable 294,985 2,978
Less: Current maturities of
notes payable included in
current liabilities 294,985 2,721
----------- -----------
Total long term debt $ 0 $ 257
=========== ===========
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, 1998 and 1997 was $751 and $751, respectively. The monthly
lease payment, which began in September 1995, is $262. At July
31,1998 the remaining lease is represented by 2 payments of $262 plus
a buyout of $407. 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 9,443
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 made improvements to the new
building in the amount of $280,000.
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<PAGE>
The rental expense recorded in general and administrative expenses for
the years ended July 31, 1998 and July 31, 1997 was $ 76,400 and $
70,423, respectively.
NOTE 9. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
Common Common
Stock Stock A Warrants A Warrants Z Warrants
Shares $ 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
Stock issued for services 383,500 559,594 0 0 0
Balance, July 31, 1998 3,916,351 6,125,718 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.
-23-
<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
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
-24-
<PAGE>
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
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 November 12, 1997, the Board of Directors and
officers agreed to forfeit their options to purchase shares at $4.00
per share.
On August 6, 1997, the Board of Directors authorized options to
purchase 50,000 shares be issued $2.00 per share to each of the Board
of Directors pursuant to the Directors and Officers 1996 Stock Option
Plan.
On July 15, 1998, the Board of Directors authorized options to
purchase 50,000 shares be issued at $1.00 per share to each of the
Board of Directors pursuant to the Directors and Officers 1996 Stock
Option Plan.
On July 15, 1998, the Board of Directors also authorized 360,000
options to purchase shares at $0.563 per share to members of the Board
of Directors that worked directly on the EXCOA acquisition, 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
-25-
<PAGE>
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.
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.
NOTE 15. SUBSEQUENT EVENTS
After July 31, 1998 the Company has purchased the assets of Export
Company of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary
supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary
supplies and water filtration products to practitioners, retail
outlets and government agencies. The Company has acquired the
remaining 55% interest in AMPROMED from a private individual. To
facilitate this transaction the Company has formed EXCOA Nevada, a
100% owned subsidiary of Innovative Medical Services. This company
was incorporated in Nevada. A 99% interest in AMPROMED will be held
by EXCOA Nevada, with the remaining 1% of AMPROMED being owned by
Innovative Medical Services. The Company has $1,051,422 of
acquisition costs as of July 31, 1998 for these two entities plus an
additional $39,900 incurred after the balance sheet date. The final
documents needed for AMPROMED to conduct business in Brazil under its
new ownership were executed on October 16, 1998.
-26-
<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, California
October 23, 1998
-27-
<PAGE>
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED
JULY 31,
--------------------------
1998 1997
--------------------------
Schedule of Cost of Sales
Material purchases $ 809,528 $ 548,814
Production labor 100,562 99,947
Freight 82,752 62,382
Supplies and miscellaneous 9,157 9,752
----------- -----------
Total cost of sales $ 1,001,999 $ 720,895
=========== ===========
Schedule of Selling Expenses
Advertising and marketing $ 272,191 $ 136,683
Brochures and catalogs 146 37,462
Demo and evaluation 4,053 18,080
Sales wages 335,098 184,566
Travel and entertainment 9,037 46,031
Trade shows 27,112 24,427
----------- -----------
Total selling expenses $ 647,637 $ 447,249
=========== ===========
-28-
<PAGE>
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED
JULY 31,
--------------------------
1998 1997
--------------------------
Schedule of General and Administrative Expenses
Accounting fees $ 17,181 $ 13,700
Amortization - 1,032
Auto expenses 1,621 -
Bad debts - 8,900
Bank charges and processing fees 2,640 1,611
Board meetings and fees 33,864 15,142
Cleaning 60 -
Computer expense 5,712 3,736
Contributions - 2,000
Consulting fees 654,565 297,439
Depreciation 125,935 68,843
Dues & subscriptions 15,072 14,926
Employee benefits 6,521 1,692
Equipment rent 10,579 5,316
Insurance 54,083 67,689
Interest expense 8,243 1,441
Investor relations 14,410 -
Legal and professional 71,433 135,794
Licenses and fees 130 563
Miscellaneous 2,474 1,925
Office supplies and expense 14,893 25,217
Office wages and payroll taxes 271,133 320,945
Officers wages 146,215 117,000
Payroll processing service 3,040 -
Postage/shipping 36,373 10,157
Printing 4,377 -
Public relations 56,946 78,947
Recruiting - employment 936 5,719
Rent expense 76,700 70,423
Repairs and maintenance 5,765 9,365
SEC compliance costs 62,201 35,660
Security 428 308
Small tools 1,667 -
Taxes: business 6,313 151
Telephone 61,751 30,767
Utilities 16,395 10,552
----------- -----------
Total general and administrative expenses $ 1,789,655 $ 1,356,960
=========== ===========
-29-
<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 information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before November 27,
1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before November 27,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before November 27,
1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before November 27,
1998.
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
(13) Subsidiaries of the Registrant
(27) Financial Data Schedule
B. Reports on Form 8-K: None
-30-
<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 DATE
/s/ MICHAEL L. KRALL October 26, 1998
- -------------------------------- ----------------
Michael L. Krall, Chairman/President/CEO
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/ DENNIS BROVARONE Director October 26, 1998
- ---------------------------- ----------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer October 26, 1998
- ---------------------------- and Director ----------------
Gary Brownell
/s/ PATRICK GALUSKA Director October 26, 1998
- ---------------------------- ----------------
Patrick Galuska
/s/ EUGENE PEISER Director October 26, 1998
- ---------------------------- ----------------
Eugene Peiser
-31-
INNOVATIVE MEDICAL SERVICES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
FOR THE YEARS ENDED
JULY 31,
--------------------------
1998 1997
---- ----
Shares outstanding 3,916,351 3,520,851
----------- -----------
Weighted average shares outstanding 3,779,543 3,284,158
Stock Options 1,471,250 406,250
Warrants 1,798,125 1,798,125
----------- -----------
Total weighted average shares outstanding 7,048,918 5,488,533
=========== ===========
Net Income (Loss) $(1,902,742) $(1,407,314)
=========== ===========
Primary Net Earnings (Loss) per share $ (.50) $ (0.43)
=========== ===========
Fully Diluted Net Earnings (Loss) per share $ (0.27) $ (0.26)
=========== ===========
INNOVATIVE MEDICAL SERVICES EXHIBIT 13
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
Export Company of America, Inc. (EXCOA) Nevada
Ampromed Comercio Importacao E Exportacao Ltda A Brazilian Limited
(AMPROMED) Liability Company
Rio de Janeiro, Brazil
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 48,250
<SECURITIES> 0
<RECEIVABLES> 294,469
<ALLOWANCES> (17,850)
<INVENTORY> 360,566
<CURRENT-ASSETS> 1,010,139
<PP&E> 1,043,317
<DEPRECIATION> (251,718)
<TOTAL-ASSETS> 2,970,471
<CURRENT-LIABILITIES> 837,333
<BONDS> 0
0
0
<COMMON> 6,125,718
<OTHER-SE> (3,992,580)
<TOTAL-LIABILITY-AND-EQUITY> 2,970,471
<SALES> 1,675,131
<TOTAL-REVENUES> 1,001,999
<CGS> 1,001,999
<TOTAL-COSTS> 2,614,676
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,941,544)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,940,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,902,742)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.27)
</TABLE>
