<PAGE>
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, 1999
[ ] 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 (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: 4,392,242 as of June 11, 1999.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1998 and April 30, 1999
Statements of Operations for the three months and nine
months ended April 30, 1998 and 1999
Statements of Cash Flows for the three months and nine
months ended April 30, 1998 and 1999
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
2
<PAGE>
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
- --------------------------------------------------------------------------------
(unaudited)
ASSETS April 30, 1999 July 31, 1998
-------------- -------------
Current Assets
Cash and cash equivalents $ 155,572 $ 48,250
Restricted cash 104,805 206,230
Accounts receivable, net of
allowance for doubtful
accounts of $17,850 1,297,684 276,619
Notes receivable 190,317 106,918
Inventories 422,661 360,566
Prepaid expenses 12,636 11,556
------ ------
Total current assets 2,183,675 1,010,139
--------- ---------
Property, Plant and Equipment
Property, plant and equipment 796,227 791,599
------- -------
Total property, plant and equipment 796,227 791,599
------- -------
Noncurrent Assets
Deposits 18,525 14,075
Patents and licenses 424,946 57,806
Goodwill 258,055 -
Other intangible assets 355,500 -
Deferred acquisition costs 45,431 1,096,852
------ ---------
Total noncurrent assets 1,102,457 1,168,733
--------- ---------
Total assets $ 4,082,359 $ 2,970,471
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 424,233 $ 495,287
Accrued liabilities 3,133 47,060
Notes payable 656,159 294,986
------- -------
Total current liabilities 1,083,525 837,333
--------- -------
Long-Term Debt - -
--------- -------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares, issued
and outstanding 4,392,242 at
April 30, 1999 and 3,916,351 at
July 31, 1998 6,500,955 6,125,718
Class A warrants: issued and
outstanding 3,687,500 warrants 108,750 108,750
Accumulated deficit (3,610,871) (4,101,330)
---------- ----------
Total stockholders' equity 2,998,834 2,133,138
--------- ---------
Total liabilities and stockholders'
equity $ 4,082,359 $ 2,970,471
=========== ===========
3
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
April 30 April 30
1999 1998 1999 1998
------------------------- ------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,169,903 $ 291,348 $ 2,733,401 $ 1,150,396
Cost of sales 496,960 168,778 1,050,880 684,945
-------- -------- ---------- -------
Gross profit 672,943 122,570 1,682,521 465,451
-------- -------- ---------- -------
Selling expenses 101,256 164,658 289,028 538,947
General and administrative expenses 342,964 953,597 790,669 1,653,508
Research and development 34,923 102,605 119,862 195,191
------- -------- -------- -------
Total operating costs 479,143 1,220,860 1,199,559 2,387,646
-------- ---------- ---------- ---------
Operating income (loss) 193,800 (1,098,290) 482,962 (1,922,195)
-------- ----------- -------- -----------
Other income and (expense):
Interest income 2,716 - 8,097 -
Dividend income - 7,211 - 36,814
------ ------ ------ -------
Total other income (expense) 2,716 7,211 8,097 36,814
------ ------ ------ ------
Income (loss) before income taxes 196,516 (1,091,079) 491,059 (1,885,381)
Federal and state income taxes 200 200 600 600
------- -------- ------- ---------
Net income (loss) $ 196,316 $ (1,091,279) $ 490,459 (1,885,981)
========== ============= ========== ============
Net income per common share(primary) $ 0.05 $ (0.28) $ 0.12 $ (0.51)
====== ======= ====== =======
Net income per common share (fully diluted) $ 0.03 $ (0.18) $ 0.07 $ (0.32)
======= ======== ======= ========
</TABLE>
STATEMENTS OF ACCUMULATED DEFICITS
- --------------------------------------------------------------------------------
(Unaudited)
Nine Months
Ended Year Ended
April 30 July 31
1999 1998
-------------------------------------
Balance, beginning of period $ (4,101,330) $ (2,198,588)
Net income (loss) 490,459 (1,902,742)
-------- -----------
Balance, end of period $ (3,610,871) $ (4,101,330)
============= =============
4
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30
1999 1998
---------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 490,459 $ (1,885,981)
Adjustments to reconcile net
income to net cash provided by operating activities:
Depreciation 116,189 90,087
Stock issued for services - 450,000
Changes in assets and liabilities:
(Increase) decrease in restricted cash 101,425 -
(Increase) decrease in accounts receivable (1,021,065) 36,175
(Increase) decrease in notes receivable (83,399) (472,816)
(Increase) decrease in prepaid expense (1,080) 578,331
(Increase) decrease in inventory (62,095) (101,517)
(Increase) decrease in deposits (4,450) 7,345
(Increase) decrease in patent costs (367,140) (13,000)
(Increase) decrease in deferred acquisition costs 1,051,422 (468,124)
Increase (decrease) in accounts payable (71,054) 112,506
Increase (decrease) in notes payable 361,172 179,648
Increase (decrease) in accrued liabilities (43,928) (10,933)
------------ ---------------
Net cash provided (used) by operating
activities 466,456 (1,498,279)
------------ ---------------
Cash flows from investing activities
Purchase of property, plant and equipment (120,817) (179,081)
Purchase of goodwill (258,055) -
Purchase of other intangible assets (355,500) -
------------ ---------------
Net cash (used) in investing activities (734,372) (179,081)
------------ ---------------
Cash flows from financing activities
Increase (decrease) in long-term notes payable - (2,378)
Sale of common stock 375,238 -
------------ ---------------
Net cash provided by financing activities 375,238 (2,378)
------------ ---------------
Net increase (decrease) in cash and cash
equivalents 107,322 (1,679,738)
Cash at beginning of period 48,250 1,982,660
------------ ---------------
Cash at end of period $ 155,572 $ 302,922
============ ================
</TABLE>
5
<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 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 the second quarter, 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.
Also in the second quarter, the Company placed its Nutripure 2000 countertop
water filtration system in approximately 100 Fred Meyer stores. After tracking
sale rates from its December opening order for stores in the Portland and
Seattle regions, Fred Meyer has begun reordering in multi-case lots for those
stores and has expanded retail placement of Nutripure 2000 to all Fred Meyer
Stores. Innovative Medical Services continues to negotiate placement in other
regional and national chains.
6
<PAGE>
During the third quarter, the Company introduced the ScanMaster(TM). Developed
as an enhancement to the Company's popular Fillmaster 1000e computerized
pharmaceutical water dispenser, the ScanMaster enhances prescription dispensing
by adding the assurance and efficiency of bar code reading technology. Users
simply scan a prescription's NDC bar code in front of the dispenser and the
Fillmaster 1000e displays the product name and required water quantity. The
prescription is then dispensed with one touch of button. The ScanMaster's
database contains proprietary and generic oral drug types by manufactures
including Bristol-Meyers Squibb Co. (NYSE: BMY), Apothecon, SmithKline Beecham
(NYSE: SBH), Wyeth-Ayerst Laboratories, Eli Lilly & Co. (NYSE: LLY) and many
others.
The Company continued its progress on two major projects which, when fully
launched, should create significant quantum growth for the Company: 1) Nutripure
2000CT countertop water filtration system and 2) expansion of the Company's
online retailing intiative through the addition of vitamins and supplements to
the Company's existing product line. The Nutripure 2000CT residential countertop
water filtration system has been very well received by the mass merchandisers
and is undergoing final evaluations in several chains. The online retailing
expansion to include vitamins and supplements should be completed within 60
days. Both retail programs are strongly supported by IMS' internet market
presence, and the Company expects these two projects to dramatically accelerate
the Company's growth. As mentioned earlier, marketing for the Company's products
is supported by consumer targeted, e-commerce advertising campaigns on AOL(R)
(NYSE: AOL), Yahoo(R) (NASDAQ: YHOO) and Lycos(R) (NASDAQ: LCOS). The Company's
products can be purchased online from IMS' Yahoo!(R) Store at
stores.yahoo.com/nutripure or from its web site at www.imspure.com.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1999 VERSUS THREE
MONTHS ENDED APRIL 30, 1998
Revenues of $1,169,900 in the third quarter ended April 30, 1999 were 302%
higher than the $291,300 in revenues reported for the same quarter ended April
30, 1998. Fillmaster Purification System sales in the 1999 quarter were $922,100
and replacement filter sales were $247,800. In the 1998 quarter, Fillmaster
Purification System sales were $138,000 and replacement filter sales were
$111,500. The 568%increase in systems sales was largely due to the popularity of
the new electronic dispenser. The 122% 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 $672,900 versus $122,600 in the
year-earlier quarter. Gross profit percentage of 58% in the 1999 quarter was
higher versus the 42% gross profit percentage in the 1998 quarter. The gross
profit percentage increase reflects the increased proportion of electronic
dispenser and filter sales associated with higher margins during the quarter.
Income for the quarter ended April 30, 1999 was $196,300 versus a net loss of
$(1,091,300) for the same quarter in 1998. 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.
The increase in income was accompanied by a 61% decrease in total operating
costs from $1,220,860 in the third quarter of 1998 to $479,142 in 1999.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1999 VERSUS NINE
MONTHS ENDED APRIL 30, 1998
Revenues of $2,733,400 in the nine months ended April 30, 1999 were 138% higher
than the $1,150,400 in revenues reported for the nine months ended April 30,
1998. Fillmaster(R) Purification System sales in the nine months ended April 30,
1999 were $2,035,500 and replacement filter sales were $665,400. In the prior
period, Fillmaster Purification System sales were $758,000 and replacement
filter sales were $330,500. Sales of filters rose 101% during the period as
expected due to the continually increasing number of Fillmaster Purification
Systems in use.
Gross profits for the nine months ended April 30, 1999 were $1,682,500 versus
$465,500 in 1998. The gross profit margin in 1999 was 62% compared to 41% gross
profit margin in 1998. The gross profit margin increase reflects increased sales
of electronic dispensers and replacement filters in the recent nine-month
period. As the number of Fillmaster system installations increases, so does the
volume of replacement filter sales.
Net income for first nine months ended April 30, 1999 was $490,500 versus a net
loss of $(1,886,000) for the same period last year. This turnaround was the
result of increased sales and improved gross profit margins. Also, while
increasing sales, the Company cut Selling Expenses by $249,900, or 46%, from
$538,900 in the prior nine-month period to $289,000 in the current period. The
Company also reduced General and Administrative expenses by $862,800, or 52%,
from $1,653,500 to $790,700. The Company expensed $119,900 of Research and
Development costs associated with production and development of new products
during the current nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended April 30, 1999, the Company's current assets to
liabilities ratio rose from 1.21 to 2.02. Current assets increased $1,173,500
from $1,010,100 to $2,183,700. Current assets at April 30, 1999 include an
increase of $1,021,000 of accounts receivable due to sharply increased sales
during the quarter. Inventories increased $62,100 from $360,600 to $422,700 on
anticipation of increased sales of the new electronic dispenser. Current
liabilities increased $246,200 from $837,300 to $1,083,500. The increase in
current liabilities was the result of increased use of the Company's credit
facility associated with a corresponding increase in accounts receivable and
inventories.
Cash flows from operations were $466,500 in the first nine months of fiscal year
1999. Cash flows used from operations were a negative $1,498,300 for the same
period in 1998. For those periods, cash flows used in investing activities
included, respectively, $120,800 and $179,100 for the purchase of machinery and
equipment and for leasehold improvements. Cash flows used in investing
activities for the recent period also included $258,100 of goodwill and $355,500
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 period. The company has temporarily minimized its current
activity in Brazil due to recent economic developments in the region.
The Company received $375,200 from financing activities during the period. In
February 1999, the Company issued 242,800 shares of common stock to two
accredited investors for $360,750 ($1.486 per share) in a private placement of
the shares offered to the two accredited investors. With respect to the sales
made, the Company relied on Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The securities were offered to accredited investors who were
provided all of the current public information available on the Company.
The total increase in cash and cash equivalents for the 1999 nine month period
was $107,300 as compared to decrease of $(1,679,700) during the same period in
1998.
7
<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. 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 believes that the defendants had perpetrated similar schemes against
other parties. The Company also believes it has substantially completed
discovery and complied compelling evidence to 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. Certain of the Motions
were granted pending the Company's amendment of its Counterclaim. The Company
amended its Counterclaims in accordance with the judge's rulings. Certain
Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing
on these latest motions was held in March 1999, before a different judge than
the judge who ruled on the first motions. On April 20,1999, Orders were entered
granting the Defendants' Motions to Dismiss. However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the Orders or a copy of the new judge's correspondence offering a "formal
ruling" upon request. In May 1999 the Company filed an Appeal of the Orders and
Motions for Reconsideration based upon inconsistency of the Orders with the
previous judge's rulings and the lack of notice to the Company. The Company
believes that its Motions have merit and will be granted. In any event the
Company intends to pursue a trial 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 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 2.
CHANGES IN SECURITIES
In February 1999, the Company issued 242,766 shares of common stock to two
accredited investors for $360,750 ($1.486 per share) in a private placement of
the shares offered to the two accredited investors.
With respect to the sales made, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The securities were offered to accredited
investors who were provided all of the current public information available on
the Company.
8
<PAGE>
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
9
<PAGE>
INNOVATIVE MEDICAL SERVICES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND 1999
For the Nine Months Ended
April 30
-------------------------------
1999 1998
-------------------------------
Shares outstanding 4,392,242 3,832,851
========= =========
Weighted average shares outstanding 4,056,349 3,713,071
Stock Options 1,415,000 406,250
Warrants 1,798,125 1,798,125
--------- ---------
Total weighted average shares outstanding 7,269,474 5,917,446
========= =========
Net Income (Loss) $ 490,459 $ (1,885,981)
============ =============
Primary Net Earnings (Loss) per share $ 0.12 $ (0.51)
============ =============
Fully Diluted Net
Earnings (Loss) per share $ 0.07 $ (0.32)
============ =============
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001006028
<NAME> Innovative Medical Services
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-START> FEB-01-1999 AUG-01-1998
<PERIOD-END> APR-30-1999 APR-30-1999
<CASH> 260,376 260,376
<SECURITIES> 0 0
<RECEIVABLES> 1,287,874 1,287,874
<ALLOWANCES> (17,850) (17,850)
<INVENTORY> 359,777 359,777
<CURRENT-ASSETS> 2,110,981 2,110,981
<PP&E> 1,089,922 1,089,920
<DEPRECIATION> (355,749) (355,749)
<TOTAL-ASSETS> 4,082,359 4,082,359
<CURRENT-LIABILITIES> 1,083,525 1,083,525
<BONDS> 0 0
0 0
0 0
<COMMON> 6,500,955 6,500,955
<OTHER-SE> (3,502,121) (3,502,121)
<TOTAL-LIABILITY-AND-EQUITY> 4,082,359 4,082,359
<SALES> 1,169,903 2,733,401
<TOTAL-REVENUES> 1,169,903 2,733,401
<CGS> 496,960 1,050,880
<TOTAL-COSTS> 479,142 1,199,558
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 196,516 491,059
<INCOME-TAX> 200 600
<INCOME-CONTINUING> 196,316 490,459
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 196,316 490,459
<EPS-BASIC> 0.05 0.12
<EPS-DILUTED> 0.03 0.07
</TABLE>
