U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended October 31, 1998
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from _______________ to
Commission File number 0-21019
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INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 3,916,351 as of
December 14, 1998.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1998 and October 31, 1998
Statements of Operations for the three months and nine
months ended October 31, 1997 and 1998
Statements of Cash Flows for the three months and nine
months ended October 31, 1997 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
(UNAUDITED)
OCTOBER 31 JULY 31
1998 1998
---------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 41,567 $ 48,250
Restricted cash 204,722 206,230
Accounts receivable, net of allowance
for doubtful accounts of $17,850 637,037 276,619
Notes receivable 123,428 106,918
Inventories 525,341 360,566
Prepaid expenses 10,526 11,556
----------- -----------
Total current assets 1,542,620 1,010,139
----------- -----------
Property, Plant and Equipment
Property, plant and equipment 810,079 791,599
----------- -----------
Total property, plant and equipment 810,079 791,599
----------- -----------
Noncurrent Assets
Deposits 17,075 14,075
Patents and licenses 405,077 57,806
Goodwill 261,322 -
Other intangible assets 360,000 -
Deferred acquisition costs 45,430 1,096,852
----------- -----------
Total noncurrent assets 1,088,904 1,168,733
----------- -----------
Total assets $ 3,441,603 $ 2,970,471
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 656,458 $ 495,287
Accrued liabilities 5,647 47,060
Notes payable 508,620 294,986
----------- -----------
Total current liabilities 1,170,724 837,333
----------- -----------
Long-Term Debt - -
----------- -----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares, issued
and outstanding 3,916,351 6,125,718 6,125,718
Class A warrants: issued and outstanding
3,687,500 warrants 108,750 108,750
Accumulated deficit (3,963,589) (4,101,330)
----------- -----------
Total stockholders' equity 2,270,879 2,133,138
----------- -----------
Total liabilities and stockholders' equity $ 3,441,603 $ 2,970,471
=========== ===========
<PAGE>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1998 1997
---------------------------
Net sales $ 795,519 $ 435,259
Cost of sales 282,289 248,418
----------- -----------
Gross profit 513,230 186,841
----------- -----------
Selling expenses 71,306 152,463
General and administrative expenses 268,638 389,199
Research and development 38,037 53,265
----------- -----------
Total operating costs 377,982 594,927
----------- -----------
Operating income (loss) 135,248 (408,086)
----------- -----------
Other income and (expense)
Interest income 2,693 -
Miscellaneous income - 21,709
----------- -----------
Total other income (expense) 2,693 21,709
----------- -----------
Income (loss) before income taxes 137,941 (386,377)
Federal and state income taxes 200 200
----------- -----------
Net income (loss) $ 137,741 $ (386,577)
=========== ===========
Net income per common share (primary) $ 0.04 $ (0.11)
=========== ===========
Net income per common share (fully diluted) $ 0.02 $ (0.07)
=========== ===========
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
- -----------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS
ENDED YEAR ENDED
OCTOBER 31 JULY 31
1998 1998
---------------------------
Balance, beginning of period $(4,101,330) $(2,198,588)
Net income (loss) 137,741 (1,902,742)
----------- -----------
Balance, end of period $(3,963,589) $(4,101,330)
=========== ===========
<PAGE>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $ 137,741 $ (386,577)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 35,786 27,542
Changes in assets and liabilities:
(Increase) decrease in restricted cash 1,507 -
(Increase) decrease in accounts
receivable (360,418) (204,059)
(Increase) decrease in notes receivable (16,510) (130,105)
(Increase) decrease in prepaid expense 1,030 32,568
(Increase) decrease in inventory (164,775) (43,005)
(Increase) decrease in deposits (3,000) -
(Increase) decrease in patents and
licenses (347,271) -
(Increase) decrease in deferred
acquisition costs 1,051,422 (21,069)
Increase (decrease) in accounts payable 161,171 123,507
Increase (decrease) in accrued liabilities (41,413) (33,163)
----------- -----------
Net cash provided (used) by operating
activities 455,269 (634,361)
----------- -----------
Cash flows from investing activities
Goodwill (261,322) -
Other intangible assets (360,000) -
Purchase of property, plant and equipment (54,266) (70,215)
----------- -----------
Net cash (used) in investing
activities (675,588) (70,215)
----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable 213,634 (792)
----------- -----------
Net cash provided by financing
activities 213,634 (792)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (6,683) (705,368)
Cash and cash equivalents at beginning of period 48,250 1,982,660
----------- -----------
Cash and cash equivalents at end of period $ 41,567 $ 1,277,292
=========== ===========
Interest Paid $ 9,797 $ 120
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services, 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 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.
Innovative Medical Services' customer base for its pharmaceutical water
purification systems includes Wal-Mart, Walgreens, American Stores, Eckerd,
Kroger, Fred Meyer, Target and CVS, and IMS' expertise in pharmaceutical
water systems provides a strong foundation for its "pharmacist recommended"
Nutripure line of residential water filtration systems. The Company's
Nutripure Elite reverse osmosis residential water system usually retails
for $499, and is available as either a convenient, compact, unit easily
installed beneath the sink, or as an attractive, counter-top appliance
requiring no installation. The Nutripure 2000 countertop water filter
retails for $79.99 and competes with PUR(R), Brita(R) and Culligan(R)
products.
In December, the Company launched a major internet marketing strategy
beginning with its new internet shopping sites and its links to Lycos(R),
Excite(R), Netscape(R), Info Seek(R) and Alta Vista(R). The Company's
opened its first online store on Yahoo!(R) Store at
STORES.YAHOO.COM/NUTRIPURE, from which all of the Company's residential and
pharmacy water systems may be purchased. The Company's products, including
the popular Nutripure(R) 2000 residential water filtration system, may also
be purchased from its recently expanding corporate web site at
WWW.IMSPURE.COM.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 VERSUS
THREE MONTHS ENDED OCTOBER 31, 1997
Revenues of $795,500 in the first quarter ended October 31, 1998 were 83%
higher than the $435,300 in revenues reported for the same quarter ended
October 31, 1997. Fillmaster
<PAGE>
Purification System sales in the 1998 quarter were $620,100 and replacement
filter sales were $157,600. In the 1997 quarter, Fillmaster Purification
System sales were $290,000 and replacement filter sales were $125,000. The
115% increase in system sales was largely due to the popularity of the new
electronic dispenser. The 26% increase in replacement filter sales was
expected due to the continually increasing number of Fillmaster(R)
Purification Systems in use.
Gross profit in the most recent quarter was $513,200 versus $186,800 in the
year-earlier quarter. Gross profit percentage of 65% in the 1998 quarter
was higher versus the 43% gross profit percentage in the 1997 quarter. The
gross profit percentage increase reflects an increased proportion of filter
sales (associated with higher margins) during the quarter, new product
launch pricing, and lower component costs resulting from economies of scale
realized with volume purchasing.
Income for the quarter ended October 31, 1998 was $137,700 versus a net
loss of $386,600 for the same quarter in 1997. The increased income was due
to increased sales of Fillmaster pharmacy water purification and dispensing
systems and disposable filter replacements, and to growing revenues from
sales of new products, including the Nutripure line of residential water
filtration systems.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended October 31, 1998, the Company's current
assets to liabilities ratio rose from 1.21 to 1.32. Current assets
increased $532,500 from $1,010,100 to 1,542,600. Current assets at October
31, 1998 include an increase of $360,400 of accounts receivable on higher
sales volume. Inventories increased $164,700 from $360,600 to $525,300 on
anticipation of increased sales of the new electronic dispenser. Current
liabilities increased $333,400 from $837,300 to $1,170,700. The increase
in current liabilities was the result of increased accounts payable
associated with a corresponding increase in inventories. Also, the company
established an additional credit facility during the period on which it has
drawn $260,900.
Cash flows provided from operations were $455,300 in the first three months
of fiscal year 1998. Cash flows used from operations were a negative
$634,400 for the same period in 1997. For those periods, cash flows used
in investing activities included, respectively, $54,300 and $70,200 for the
purchase of machinery and equipment and for leasehold improvements. Cash
flows used in investing activities for the recent quarter also consisted of
$261,300 of goodwill and $360,000 of other intangible assets related to the
purchase of EXCOA, a privately held Florida-based distributor, and
AMPROMED, a Rio de Janeiro-based import company. The purchase did not have
a material impact on the income statement of the Company for the quarter.
The total decrease in cash and cash equivalents for the 1998 three month
period was $6,700.
<PAGE>
PART 2 OTHER INFORMATION
ITEM 1
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 it has substantially
completed discovery and complied compelling evidence to prove its claims.
Several of the Parties, including the Company, had filed Motions to Dismiss
the Zedburn and Reitz claims and the Company's counterclaims. A hearing on
the Motions was held on October 1, 1998. On November 23, 1998, the judge
ruled on the various motions. The judge denied the Company's motion to
dismiss the Zedburn claim and granted the Company's motion to dismiss Mr.
Reitz's claim. The judge granted motions to dismiss certain of the
Company's claims for rescission, constructive trust, and attorney's fees
and denied motions to dismiss the principal count of the Company's claims
including the Company's allegation that a contingent fee contract to
perform an audit is a violation of state and federal law. The judge also
granted one defendant's motion to dismiss the Company's RICO claim for
failure to allege sufficient facts to sustain the claim. All parties were
granted twenty days to amend their pleadings to correct the deficiencies as
stated in the judge's orders. The Company intends to amend its complaint
as to the one dismissed Defendant and to vigorously pursue a trial in the
State Court action as soon as possible.
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 Zedburn'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 2.
CHANGES IN SECURITIES
During the quarter in August 1998 the Company issued an option to acquire
40,000 shares of common stock to Glenn Hall in connection with a Consulting
Agreement regarding the Company's debt and receivable financing. The
option is non-transferable and permits the holder to acquire the shares for
$0.625 per share on or before August 3, 2003 and provided a registration
statement covering the underlying shares is effective at the time of
exercise. In November 1998, the Company issued an option to acquire
300,000 shares of common stock to The Minneapolis Company, Inc., in
connection with an investment banking agreement. The option is non-
transferable and permits the holder to acquire the shares for $1.1875 per
share. The option shall be exercisable upon the effective date of a
registration statement covering the underlying shares and expire as to
100,000 shares sixty
<PAGE>
days after the effective date; 100,000 shares one hundred twenty days after
the effective date; and 100,000 shares one hundred eighty days after the
effective date. The Company relied upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933, in that the
options are non-transferable and were issued with restrictive legends.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By:/s/ MICHAEL L. KRALL
----------------------------------------
Michael L. Krall, President/CEO
By:/s/ GARY BROWNELL
----------------------------------------
Gary Brownell, Chief Financial Officer
INNOVATIVE MEDICAL SERVICES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 AND 1998
For the Three Months Ended
October 31,
--------------------------
1998 1997
--------------------------
Shares outstanding 3,916,351 3,520,851
=========== ===========
Weighted average shares outstanding 3,916,351 3,284,158
Stock Options 1,514,375 406,250
Warrants 1,798,125 1,798,125
----------- -----------
Total weighted average shares outstanding 7,228,851 5,488,533
=========== ===========
Net Income (Loss) $ 137,741 $(1,407,314)
=========== ===========
Net Earnings (Loss) per share (primary) $ 0.04 $ (0.11)*
=========== ===========
Net Earnings (Loss) per share (fully diluted) $ 0.02 $ (0.07)*
=========== ===========
* SFAS 128 dictates the use of primary versus diluted shares due to loss
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 41,567
<SECURITIES> 0
<RECEIVABLES> 654,887
<ALLOWANCES> (17,850)
<INVENTORY> 525,341
<CURRENT-ASSETS> 1,542,620
<PP&E> 1,095,314
<DEPRECIATION> (285,235)
<TOTAL-ASSETS> 3,441,603
<CURRENT-LIABILITIES> 1,170,724
<BONDS> 0
0
0
<COMMON> 6,125,718
<OTHER-SE> (3,854,839)
<TOTAL-LIABILITY-AND-EQUITY> 3,441,603
<SALES> 795,519
<TOTAL-REVENUES> 282,289
<CGS> 282,289
<TOTAL-COSTS> 377,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 135,248
<INCOME-TAX> 200
<INCOME-CONTINUING> 135,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,741
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.02
</TABLE>
