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 April 30, 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
-------
INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 3,832,851 as of June
11, 1998.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1997 and April 30, 1998
Statements of Operations for the three months and nine
months ended April 30, 1997 and 1998
Statements of Cash Flows for the three months and nine
months ended April 30, 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: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
BALANCE SHEETS
- ----------------------------------------------------------------------------
(unaudited)
April 30, July 31,
1998 1997
--------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 302,922 $1,982,660
Accounts receivable, net of
allowance for doubtful
accounts of $17,850 182,874 219,047
Notes receivable 498,746 25,930
Inventories 125,049 23,532
Prepaid expenses 5,001 583,333
---------- ----------
Total current assets 1,114,592 2,834,502
---------- ----------
Property, Plant and Equipment
Property, plant and equipment 774,181 685,187
---------- ----------
Total property, plant and equipment 774,181 685,187
---------- ----------
Noncurrent Assets
Deposits 18,030 25,375
Patents 57,806 44,806
Deferred acquisition costs 513,555 45,431
---------- ----------
Total noncurrent assets 589,391 115,612
---------- ----------
Total assets $2,478,164 $3,635,301
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Account payable $ 203,993 $ 91,487
Line of credit 179,648 -
Accrued liabilities 53,617 64,550
Notes payable 601 2,721
---------- ----------
Total current liabilities 437,859 158,758
---------- ----------
Long-Term Debt - 257
========== ==========
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares,
issued and outstanding 3,832,851 6,016,124 5,566,124
Class A warrants: issued and
outstanding 3,687,500 warrants 108,750 108,750
Accumulated deficit (4,084,569) (2,198,588)
---------- ----------
Total stockholders' equity 2,040,305 3,476,286
---------- ----------
Total liabilities and stockholders' equity $2,478,164 $3,635,301
========== ==========
<PAGE>
STATEMENTS OF INCOME (Unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
April 30 April 30
------------------------ ------------------------
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $ 291,348 $ 273,904 $1,150,396 $ 708,046
Cost of sales 168,778 172,092 684,945 479,079
---------- ---------- ---------- ----------
Gross profit 122,570 101,812 465,451 228,967
---------- ---------- ---------- ----------
Selling expenses 164,658 233,267 538,947 422,045
General and administrative
expenses 953,597 354,122 1,653,508 842,495
Research and development 102,605 - 195,191 -
---------- ---------- ---------- ----------
Total operating costs 1,220,860 587,389 2,387,646 1,264,540
---------- ---------- ---------- ----------
Operating income (loss) (1,098,290) (485,577) (1,922,195) (1,035,573)
---------- ---------- ---------- ----------
Other income and (expense):
Interest income - 35,703 - 126,657
Dividend income 7,211 - 36,814 -
---------- ---------- ---------- ----------
Total other income (expense) 7,211 35,703 36,814 126,657
---------- ---------- ---------- ----------
Income (loss) before income
taxes (1,091,079) (449,874) (1,885,381) (908,916)
Federal and state income
taxes 200 - 600 800
---------- ---------- ---------- ----------
Net income (loss) $(1,091,279) $ (449,874) $(1,885,981) $ (909,716)
========== ========== ========== ==========
Net (loss) per common share $ (0.18) $ (0.08) $ (0.32) $ (0.16)
========== ========== ========== ==========
</TABLE>
STATEMENTS OF ACCUMULATED DEFICITS
- ----------------------------------------------------------------------------
(unaudited)
Nine Months
Ended Year Ended
April 30, July 31,
1998 1997
--------------------------
Balance, beginning of period $(2,198,588) $ (791,274)
Net income (loss) (1,885,981) (1,407,314)
---------- ----------
Balance, end of period $(4,084,569) $(2,198,588)
========== ==========
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
APRIL 30,
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $(1,885,981) $ (909,716)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 90,087 51,149
Amortization - 774
Stock issued for services 450,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable 36,175 (131,013)
(Increase) decrease in due from
officers - (68,933)
(Increase) decrease in due from
employees - (1,030)
(Increase) decrease in notes
receivable (472,816) -
(Increase) decrease in prepaid expense 578,332 (275,341)
(Increase) decrease in inventory (101,517) 34,475
(Increase) decrease in deposits 7,345 (25,111)
(Increase) decrease in patent costs (13,000) (10,000)
(Increase) decrease in deferred
acquisition costs (468,124) (2,794)
Increase (decrease) in accounts
payable 112,506 (36,654)
Increase (decrease) in line of credit 179,648 -
Increase (decrease) in accrued
liabilities (10,933) (100,893)
---------- ----------
Net cash provided (used) by
operating activities (1,498,278) (1,475,087)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (179,081) (469,586)
---------- ----------
Net cash (used) in investing activities (179,081) (469,586)
---------- ----------
Cash flows from financing activities
Increase (decrease) in notes payable (2,379) (402,361)
Proceeds from sale of common stock - 4,977,888
---------- ----------
Net cash provided by financing
activities (2,379) 4,575,527
---------- ----------
Net increase (decrease) in cash
and cash equivalents (1,679,738) 2,630,854
Cash at beginning of period 1,982,660 21,706
---------- ----------
Cash at end of period $ 302,922 $2,652,560
========== ==========
<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 water filtration systems and pharmacy
efficiency products. In addition, the Company is moving through
acquisitions into the international distribution of medical, dental and
veterinary supplies. The Company's principal products are the
Fillmaster(R) Pharmacy Water Purification and Dispensing System for
reconstituting oral suspension prescriptions, and the Nutripure(R) line
of residential drinking water systems. The Company also markets, for all
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.
Last year, Innovative Medical Services began designing an electronically
automated version of the Fillmaster. The new, Fillmaster 1000E (patents
pending) provides easier and more precise measurement than the original
Fillmaster and features bar code technology to ensure even greater time
savings in dispensing oral solution prescriptions. The Company
originally planned to distribute the new product in April; however, based
on feedback from the beta testing sites, the Company upgraded the
hardware to be compatible with industry standards and added features that
were recommended by pharmacists. Response from recent testing has been
very positive, and the release delay resulted in a backlog of orders for
the 1000E that will be filled in the fourth quarter.
For years, pharmacists across the US have been asking Innovative Medical
Services for a home water filtration system. In response to that demand,
Innovative Medical Services developed the Nutripure(R) line of
residential water filtration products, which includes both high-end
reverse osmosis systems and entry-level carbon systems. Based on
technology used in the Fillmaster system, the residential products filter
and dispense drinking water for home use. Innovative Medical Services
completed test marketing for the "pharmacist-recommended" Nutripure Elite
reverse osmosis systems last year and has established a beta test network
of independent pharmacist dealer/distributors for these more expensive
water systems. To date, the beta sites have proved successful, and the
Company plans to continue to expand its distribution of its Nutripure
Elite reverse osmosis products through independent pharmacies.
<PAGE>
In addition to the reverse osmosis Nutripure Elite products, the Company
has developed an entry-level water system. After 18 months of extensive
market research, Innovative Medical Services has completed development of
its entry-level carbon countertop system and is releasing this 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 and drugstores are
currently evaluating the Nutripure NP2000CT, and Innovative Medical
Services expects sales to begin in the fourth quarter.
In May, Innovative Medical Services announced that it completed the
acquisition of AMPROMED, Rio de Janeiro, Brazil, and certain assets of
Export Company of America Inc. (EXCOA), Fort Lauderdale, FL. EXCOA is a
Florida-based distributor of medical, dental and veterinary supplies
which distributes its products to Brazil through AMPROMED, a Rio de
Janeiro import company. Innovative Medical Services 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 closed the EXCOA
operation during May to reorganize management, implement consistent
accounting controls and upgrade computer hardware and software systems.
Operations resumed June 1, 1998, and Innovative Medical Services expects
to begin realizing revenues from the acquisition toward the end of the
fourth quarter.
Innovative Medical Services continues to pursue additional acquisition
opportunities in the wholesale medical distribution industry. As
announced in September, Innovative Medical Services has signed a letter
of intent to purchase the assets of Xetal, Inc., an Oceanside, New York--
based wholesale distributor of medical, dental and veterinary supplies.
To date, the Company is involved in ongoing negotiations with Xetal and
continues its investigation of other medical supply acquisitions, both
domestic and international.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED APRIL 30, 1998 VERSUS QUARTER
ENDED APRIL 30, 1997
Revenues of $291,300 in the third quarter ended April 30, 1998 were 6%
higher than the $273,900 in revenues reported for the same quarter ended
April 30, 1997. Fillmaster Purification System sales in the 1998 quarter
were $138,000 and replacement filter sales were $111,500. In the 1997
quarter, Fillmaster Purification System sales were $215,700 and
replacement filter sales were $58,100. The 92% increase in replacement
filter sales was expected due to the continually increasing number of
Fillmaster(R) Purification Systems in use. The Company also had sales of
$41,000 during the quarter from the Medifier, one of its new products.
<PAGE>
Gross profit in the most recent quarter was $122,500 versus $101,800 in
the year-earlier quarter. Gross profit percentage of 42% in the 1998
quarter was higher versus the 37% gross profit percentage in the 1997
quarter. The gross profit percentage increase reflects the increased
proportion of filter sales (associated with higher margins) during the
quarter.
Net loss for the quarter ended April 30, 1998 was $1,091,300 versus a net
loss of $449,900 for the same quarter in 1997. The increased loss was due
to increases in Selling Expenses, which includes marketing and
advertising costs incurred to promote the Company and its products, as
well as a $102,600 increase in Research and Development costs associated
with production and development of new products. Also, the Company took a
one-time charge of approximately $450,000 by writing off remaining
prepaid investment banker fees.
As mentioned in the Overview, the Company expected to begin selling its
Fillmaster 1000E computerized pharmaceutical water dispenser during the
third quarter. Design adjustments and enhancements, however, postponed
the release of the product until after quarter end and created a backlog
of orders from customers preferring to wait for the computerized
Fillmaster rather than install the original manual version. Although the
backlog resulted in a sharp decline in sales during the quarter, pent-up
demand for the new product will be fulfilled in the fourth quarter,
significantly raising fourth quarter revenues. The Company expects that
the sales decrease in the third quarter will be more than made up for in
the fourth quarter.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1998 VERSUS
NINE MONTHS ENDED APRIL 30, 1997
Revenues of $1,150,400 in the nine months ended April 30, 1998 were 62%
higher than the $708,100 in revenues reported for the nine months ended
April 30, 1997. Fillmaster Purification System sales in the nine months
ended April 30, 1998 were $758,000 and replacement filter sales were
$330,500. In the prior period, Fillmaster Purification System sales were
$589,900 and replacement filter sales were $118,100. Sales of the
Fillmaster Purification System rose 28% over the prior period in spite of
the decline in the third quarter as discussed in the quarter end analysis
above. Sales of filter replacements rose 180% in fiscal 1998 as expected
due to the continually increasing number of Fillmaster Purification
Systems in use.
<PAGE>
Gross profit for the nine months ended April 30, 1998 was $465,500 versus
$229,000 in 1997. Gross profit percentage of 40% in 1998 was higher
versus 32% in 1997. The gross profit increase reflects increased filter
sales in the recent nine-month period. 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 nine months ended April 30, 1998 was $1,886,000 versus a
net loss of $909,700 for the same period in 1997. The increased loss was
due in part to the $116,900 (28%) 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 $811,000 (96%) 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. This amount also includes the write off of approximately
$450,000 of prepaid expenses discussed in the quarter end analysis.
During the current fiscal year, the Company incurred expenses of $195,200
for Research and Development costs associated with production and
development of new products.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended April 30, 1998, the Company's current assets
to liabilities ratio fell from 17.85 to 2.55. Current assets decreased
$1,719,900 from $2,834,500 to $1,114,600. Current assets at April 30,
1998 include $498,700 of notes receivable. Of this amount, $316,000
represents loans made to EXCOA, certain assets of which the Company has
since acquired. Non-current assets include $513,500 of deferred
acquisition costs comprised largely of investment banker fees related to
the acquisition of AMPROMED and certain assets of EXCOA. Current
liabilities increased $279,100 from $158,800 to $437,900. The increase
in current liabilities was the result of increased accounts payable
associated with a corresponding increase in inventories. Also, the
company established a line of credit during the period on which it has
drawn $179,600.
Cash flows used from operations were $1,498,300 in the first nine months
of fiscal year 1998 and $1,475,100 in 1997. For those periods, cash
flows used in investing activities were, respectively, $179,100 and
$469,600 for the purchase of machinery and equipment and for leasehold
improvements. The total decrease in cash and cash equivalents for the
1998 nine month period was $1,679,700 which was largely a result of an
increase in notes receivable, inventory, and an increase in deferred
acquisition costs associated with the EXCOA acquisition. The Company
generated $4,977,900 from a public offering during the 1997 period
resulting in a net increase in cash equivalents of $2,630,900.
<PAGE>
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation the Company filed in Federal District Court in Tampa, Florida
against David 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.
Prior to being served with the Company's Federal Court action, Mr. Reitz
filed an action in the Circuit Court of Pinellas County, Florida against
the Company for breach of contract. This State Court action was stayed
and all issues were to be litigated in Federal Court. In October 1997,
Mr. Reitz then filed a motion to dismiss the federal action based upon a
choice of venue provision in the Zedburn contract. The Company opposed
the motion to dismiss on grounds that because the Company's claims were
based upon fraud, the choice of venue provisions should not apply and
that jurisdiction and venue were proper in the Federal District Court.
The Federal District Court Judge allowed discovery to proceed for
approximately one year while the Reitz motion to dismiss was awaiting the
Judge's decision on the Motion. In April 1998, the Federal District
Court ruled in favor of the Motion to Dismiss and directed the Company to
proceed with its case in the Florida State Court.
The Company has been informed by its legal counsel that the Judge's
ruling is based upon a mistake of law and may be appealed. In order to
proceed rapidly with an adjudication on the merits of its claims, in June
1998, the Company filed counterclaims based upon the Racketeer Influenced
and Corrupt Organization (RICO) Act in the State Court action against
Zedburn, Durland and other defendants, while taking all necessary steps
to preserve its right to appeal the Judge's order.
The State Court action counterclaims are based upon information derived
from discovery in the Federal court action, 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 prove its claims. It is the Company's
intention to vigorously pursue a trial in the State Court action as soon
as possible now that there can be no further procedural delays.
In October 1997, Mr. Reitz and Zedburn also filed for protection under
the Federal bankruptcy laws. The bankruptcy court had lifted the
automatic stay of legal proceedings against Zedburn so that the Company
could pursue its fraud claim against Zedburn in the Federal Court action.
As a result of the choice of venue ruling, this stay was temporarily
re-instated. The Company moved for relief from stay so as to proceed
against Zedburn in the State Court action and in May 1998, the Bankruptcy
Court granted the relief from stay. In June 1998 the counterclaim
against Zedburn was filed in the State Court action. The Company is also
opposing the plan of reorganization filed by Mr. Reitz and has moved the
Bankruptcy Judge to dismiss his bankruptcy filing due to fraud and other
substantial deficiencies. If the Company is successful in having Mr.
Ritz's bankruptcy dismissed it will amend its State Court action to name
Mr. Reitz as a defendant to its counterclaims.
<PAGE>
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.
<PAGE>
ITEM 2.
CHANGES IN SECURITIES
Not applicable.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ MICHAEL L. KRALL
----------------------------------------
Michael L. Krall, President/CEO
By: /s/ GARY BROWNELL
----------------------------------------
Gary Brownell, Chief Financial Officer
EXHIBIT 11
INNOVATIVE MEDICAL SERVICES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE NINE MONTHS ENDED APRIL 3O, 1997 AND 1998
For the Nine Months Ended
April 30,
----------------------------
1998 1997
----------------------------
Shares outstanding 3,832,851 3,520,851
========== ==========
Weighted average shares outstanding 3,713,071 3,231,111
Stock Options 406,250 576,250
Warrants 1,798,125 1,765,417
---------- ----------
Total weighted average
shares outstanding 5,917,446 5,572,778
========== ==========
Net Income (Loss) $(1,885,981) $ (909,716)
========== ==========
Net Earnings (Loss) per share $ (0.32) $ (0.16)
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 302,922
<SECURITIES> 0
<RECEIVABLES> 200,724
<ALLOWANCES> (17,850)
<INVENTORY> 125,049
<CURRENT-ASSETS> 1,114,592
<PP&E> 990,051
<DEPRECIATION> 215,870
<TOTAL-ASSETS> 3,338,277
<CURRENT-LIABILITIES> 437,859
<BONDS> 0
0
0
<COMMON> 6,016,124
<OTHER-SE> (2,476,415)
<TOTAL-LIABILITY-AND-EQUITY> (3,975,819)
<SALES> 1,150,396
<TOTAL-REVENUES> 1,150,396
<CGS> 684,945
<TOTAL-COSTS> 2,387,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,922,195)
<INCOME-TAX> 600
<INCOME-CONTINUING> (1,921,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,885,981)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
</TABLE>
