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, 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
of incorporation or organization) (IRS Employer 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: 4,552,242 as of December 14,
1999.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1999 and October 31, 1999
Statements of Operations for the three months ended
October 31, 1998 and 1999 Statements of Cash Flows for
the three months ended October 31, 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
<PAGE>
ITEM 1
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
October 31 July 31
ASSETS 1999 1999
----------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 22,248 $ 22,056
Restricted cash 201,462 205,574
Accounts receivable, net of allowance for doubtful
accounts of $ 17,850 1,231,289 790,166
Notes receivable 339,975 339,524
Inventories 776,833 719,972
Prepaid expenses 65,559 37,078
------- ------
Total current assets 2,637,366 2,114,370
---------- ---------
Property, Plant and Equipment
Property, plant and equipment 819,487 805,523
-------- -------
Total property, plant and equipment 819,487 805,523
-------- -------
Noncurrent Assets
Deposits 13,083 6,575
Patents and license 428,550 425,550
Goodwill 254,789 256,422
Other intangible assets 351,000 353,250
Deferred acquisition costs 53,851 53,851
------- ------
Total noncurrent assets 1,101,274 1,095,648
---------- ---------
Total assets $ 4,558,126 $ 4,015,541
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 683,301 $ 594,948
Accrued liabilities 13,088 43,068
Notes payable 567,367 446,067
-------- -------
Total current liabilities 1,263,757 1,084,083
---------- ---------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
4,552,242 at October 31, 1999 and
4,392,242 at July 31, 1999 6,880,068 6,663,318
Class A warrants: issued and outstanding 3,687,500
warrants 108,750 108,750
Accumulated deficit (3,694,448) (3,840,610)
----------- -----------
Total stockholders' equity 3,294,370 2,931,458
--------- ---------
Total liabilities and stockholders' equity $ 4,558,126 $ 4,015,541
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (Uuaudited)
For the Three Months Ended
October 31
1999 1998
<S> <C> <C>
Net sales $ 904,888 $ 795,519
Cost of sales 410,213 282,289
-------- -------
Gross profit 494,675 513,230
-------- -------
Selling expenses 112,704 71,306
General and administrative expenses 198,085 268,638
Research and development 38,603 38,037
------- ------
Total operating costs 349,391 377,982
-------- -------
Operating income (loss) 145,284 135,248
-------- -------
Other income and (expense):
Interest income 1,078 2,693
------ -----
Total other income (expense) 1,078 2,693
------ -----
Income (loss) before income taxes 146,361 137,941
Federal and state income taxes 200 200
---- ---
Net income (loss) $ 146,161 $ 137,741
========== =========
Net income (loss) per common share (basic) $ 0.03 $ 0.04
======= ======
Net income (loss) per common share (diluted) $ 0.02 $ 0.02
======= ======
Three Months
Ended Year Ended
October 31 Ended July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 1999 1999
- --------------------------------------------------------------------------------------------
Balance, beginning of period $ (3,842,457) $ (4,101,330)
Net income (loss) 146,161 258,873
-------- -------
Balance, end of period $ (3,696,296) $(3,842,457)
============= =============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
October 31
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 146,161 $ 137,741,161
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 42,484 35,786
Changes in assets and liabilities:
(Increase) decrease in restricted cash 4,113 1,507
(Increase) decrease in accounts receivable (441,123) (360,418)
(Increase) decrease in notes receivable (452) (16,510)
(Increase) decrease in prepaid expense (28,481) 1,030
(Increase) decrease in inventory (56,861) (164,775)
(Increase) decrease in deposits (6,508) (3,000)
(Increase) decrease in patent and licenses (3,000) (347,271)
(Increase) decrease in deferred acquisition costs - 1,051,422
(Increase) decrease in goodwill 1,633 (261,322)
(Increase) decrease in intangible assets 2,250 (360,000)
Increase (decrease) in accounts payable 88,353 161,171
Increase (decrease) in accrued liabilities (29,980) (41,413)
-------- ---------
-
Net cash provided (used) by operating -
activities (281,410) (166,052)
-------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (56,448) (54,266)
-------- -------
Net cash (used) in investing activities (56,448) (54,266)
-------- -------
Cash flows from financing activities
Increase (decrease) in notes payable 121,300 213,634
Proceeds from sale of common stock 216,750 -
-------- -------
-
Net cash provided by financing activities 338,050 213,634
------- -------
Net increase (decrease) in cash and cash
equivalents 192 (6,684)
Cash at beginning of period 22,056 48,250
------ ------
Cash at end of period $ 22,248 $ 41,566
========= ========
Interest paid $ 16,299 $ 9,797
Taxes paid $ 800 $ 800
</TABLE>
<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 (the Company) is the nation's leader in
pharmaceutical water purification. 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 its Nutripure(R)line of residential drinking water systems.
The Company markets, for both product lines, 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.
In the past three years, Innovative Medical Services has launched five new
products: the Fillmaster(R)1000e, the Scanmaster(R), and three products in the
Company's Nutripure(R)line of residential drinking water systems. The Company
continued its marketing campaigns to expand into new markets while pursuing
development of future 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 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.
During the first quarter of the fiscal year, the Company continued its progress
on three major projects which, when fully launched, should create significant
quantum growth for the Company: 1) Retail rollout of the Nutripure 2000CT
countertop water filtration system; 2) expansion of the Company's online
retailing initiative through the addition of vitamins and supplements to the
Company's existing product line; and 3) Addition of patented ionic water
treatment and disinfecting technologies.
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 30 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.
As announced in November and December 1999, Innovative Medical Services is
entering into licensing agreements for three ionic water treatment and
disinfecting technologies. Innovative Medical Services expects to generate
immediate revenues from sales of RMS technology in the hospital market because
the system solves a very serious problem in hospital infrastructures. Hospital
water systems can harbor bacteria, including Legionella-- the bacteria
responsible for Legionnaires' disease, which can be deadly to patients with
compromised immune systems. The RMS integrates with a hospital's water system to
control and eliminate bio-film buildup. Treatment of hospital water could reduce
or eliminate patient infections and death resulting from Legionella, and
national attention has focused on Legionnaires' disease as a critical threat to
hospital patients.
<PAGE>
Axenohl is a patent-pending, non-toxic aqueous disinfectant. Based upon
proprietary ionization stabilization technology, Axenohl does not include the
use of traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed. Innovative Medical Services will market
Axenohl to the medical, dental and food processing markets in addition to the
commercial and consumer drinking water markets in conjunction with IMS'
Nutripure line of water treatment systems.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 VERSUS THREE
MONTHS ENDED OCTOBER 31, 1998
Total revenues of $904,900 in the first quarter ended October 31, 1999 were 14%
higher than the $795,500 in revenues reported for the same quarter ended October
31, 1998. Fillmaster Purification System sales in the 1999 quarter were $609,000
and replacement filter sales were $192,300. In the 1998 quarter, Fillmaster
Purification System sales were $620,100 and replacement filter sales were
$157,600. Although system sales decreased 2% during the current period,
replacement filter sales rose 22% as expected due to the continually increasing
number of Fillmaster(R) Purification Systems in use. The decrease in Fillmaster
system revenues reflects the Company's offering of penetration pricing to gain
access to a new national chain customer during the quarter. The remaining sales
during the current period came from retail and international sales that were not
available to the company during the prior quarter ending October 31, 1998.
Gross profit in the most recent quarter was $494,700 versus $513,200 in the
year-earlier quarter. Gross profit percentage of 55% in the 1999 quarter was
lower versus the 65% gross profit percentage in the 1998 quarter. The gross
profit percentage decrease reflects the combination of penetration pricing as
mentioned above and the Company's addition of sophisticated technology
components in its newer products.
Income for the quarter ended October 31, 1999 was $146,200 versus $137,700 for
the same quarter in 1998. The increased income was due to increased sales volume
during the period.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended October 31, 1999 the Company's current assets to
current liabilities ratio rose from 1.32 to 2.09. Current assets increased
$523,000 from $2,114,400 to $2,637,400. Current assets at October 31, 1999
include an increase of $441,100 of accounts receivable on higher sales volume.
Inventories increased $56,900 from $720,000 to $776,900 on anticipation of
increased sales of the new electronic dispenser. Current liabilities increased
$179,700 from $1,084,100 to $1,263,800. The increase in current liabilities was
the result of increased accounts payable associated with a corresponding
increase in accounts receivables and inventories. Also, the company borrowed an
additional $121,300 on its credit facility during the period.
Cash flows used by operations were $284,400 in the first three months of fiscal
year 1999. Cash flows used by operations were $166,100 for the same period in
1998. For those periods, cash flows used in investing activities included,
respectively, $56,400 and $54,300 for the purchase of machinery and equipment
and for leasehold improvements. Investing activities included an increase of
$121,300 in notes payable in the current quarter compared to an increase of
$213,600 in the prior quarter ending October 31, 1998. Also, during the current
quarter, the Company received $200,000 ($1.25 per share) from the issuance of
160,000 shares of common stock to an accredited investor during the current
quarter. With respect to the sale 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 investor who was provided all of the current public information
available on the Company.
The total increase in cash and cash equivalents for the quarter ended October
31, 1999 was $200 as compared to a decrease of cash and cash equivalents of
$6,700 for the same period in the prior fiscal year. u
<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 Appeal and Motions have merit and will be granted. In any
event the Company intends to pursue a trial as soon as possible. As of October
26, 1999, no ruling has been received on the Company's Appeal.
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 September 1999, the Company issued 160,000 shares of common stock to an
accredited investor for $200,000 ($1.25 per share) in a private placement of the
shares.
With respect to the sale, 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 an accredited investor
was were provided all of the current public information available on the
Company.
<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
<PAGE>
INNOVATIVE MEDICAL SERVICES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1999
For the Three Months Ended
October 31
1999 1998
Shares outstanding 4,552,242 3,916,351
---------- ---------
Weighted average shares outstanding 4,451,372 3,916,351
Stock Options 1,452,500 1,514,375
Warrants 1,798,125 1,798,125
--------- ---------
Total weighted average shares outstanding 7,701,997 7,048,918
========= =========
Net Income (Loss) $ 146,161 $ 137,742
========== =========
Basic Net Earnings (Loss) per share $ 0.03 $ 0.04
========== ========
Diluted Net Earnings (Loss) per share $ 0.02 $ 0.02
========== ========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 223,710
<SECURITIES> 0
<RECEIVABLES> 1,231,289
<ALLOWANCES> (17,850)
<INVENTORY> 776,833
<CURRENT-ASSETS> 2,637,366
<PP&E> 1,193,798
<DEPRECIATION> (374,311)
<TOTAL-ASSETS> 4,558,126
<CURRENT-LIABILITIES> 1,263,757
<BONDS> 0
0
0
<COMMON> 6,880,068
<OTHER-SE> (3,585,698)
<TOTAL-LIABILITY-AND-EQUITY> 4,558,126
<SALES> 904,888
<TOTAL-REVENUES> 904,888
<CGS> 366,763
<TOTAL-COSTS> 392,841
<OTHER-EXPENSES> 1,078
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 146,361
<INCOME-TAX> 200
<INCOME-CONTINUING> 146,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,161
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.02
</TABLE>
