Form 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended July 31, 1999
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
(Exact name of registrant as specified 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) (Zip Code)
Registrant's Telephone Number: (619) 596-8600
Securities registered pursuant to Section 12(b) of the Act:
None
--------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Class A Warrants
------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $3,379,984
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Approximately $3,934,100 as of October 26, 1999.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 4,562,242 shares of class A common stock as of October 26, 1999.
Documents incorporated by reference:
Exhibits to Form SB-2 Registration Statement File # 33-00434
Part III of this report is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before
November 29, 1999.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
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Innovative Medical Services (the Company) is the nation's leader in
pharmaceutical water purification. Innovative Medical Services 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.
History
- -------
Innovative Medical Services was incorporated in the State of California on
August 24, 1992, to pursue the immediate business of manufacturing and marketing
the Fillmaster and subsequently a broadly based business of delivering advanced
technology, equipment and supplies to the pharmacy industry, in addition to
pursuing the business of residential water filtration. During its first three
years, the Company established the production and design, entered into contracts
with its parts suppliers and manufacturers, developed its initial assembly
process and implemented its marketing program for the Fillmaster.
In August, 1996 the Company completed its initial public offering whereby it
sold 1,387,000 shares of its common stock at a public offering price of $4.00
per share and 1,437,500 Class A Warrants at a public offering price of $0.10 per
Class A Warrant.
In the past 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.
In October 1998, Innovative Medical Services acquired AMPROMED, Rio de Janeiro,
Brazil, and certain assets of Export Company of America Inc. (EXCOA), Fort
Lauderdale, FL, and established a new Nevada corporation to hold and operate the
export/import operation. AMPROMED's primary business is the sale of medical,
dental and veterinary disposable products. In addition to medical supplies,
Innovative Medical Services plans to distribute water filtration products to
Brazil through AMPROMED. The principal terms of the acquisition were forgiveness
of certain debt, assumption of certain ongoing obligations of AMPROMED, and
employment contracts for former principals of the Brazilian company.
Principal Products and Markets
- ------------------------------
FILLMASTER(R) The Fillmaster dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, provides measured amounts
of "Purified Water" as defined by the United States Pharmacopoeia, ("USP") for
reconstitution of liquid oral antibiotics and certain other pharmacy
applications. Pharmapure is six-stage water purification unit featuring an
electronic water purity testing module and an auxiliary faucet for dispensing
purified water. Fillmaster is a calibrated volumetric measuring and dispensing
apparatus. The entire system (the "'Fillmaster System") integrates with the
building's tap water plumbing, is closed and pressurized and, according to the
Company's testing, has a fill rate at least three times that of current
bottle-and-hose methods. The Company manufactures, sells and distributes the
Fillmaster dispenser and Pharmapure water system. The end-user installs the
equipment following step-by-step illustrated instructions using common household
tools.
<PAGE>
Historically, pharmacists have either hand-poured water for reconstitution
directly from a bottle into a measuring container and then into the medicine
bottle, or they used a wall-mounted measuring and gravity-flow dispensing
cylinder connected by a system of rubber siphon tubing and pinch clamps to a
water bottle. Traditional methods produce inaccurate measurements either because
two hands are required or because the gravity-fed system can produce a variable
fill rate due to variation in siphon pressure.
Also, prior methods pose the risk of accidental use of "spring" or bottled
"drinking water" due to label similarities, simple mistakes in supply
purchasing, or the pharmacy staff's unawareness of the differences in water
types. Water that does not qualify as "Purified Water" contains minerals and
other impurities that reduce the stability and potency of the prescription
medicine. The use of such water adulterates the medication by introduction of
foreign materials and violates the Federal Food Drug and Cosmetic Act.
Even when using the intended conforming water, unsealed bottle-and-hose methods
allow bacteria, mold and other airborne contaminants to enter and grow within
the water supply. In addition, the dispensing tips of the other methods can
accumulate residue from the various prescriptions being mixed and cause
cross-contamination of the medications, creating the potential for serious
reactions by the patient.
The Fillmaster dispenser, combined with the Pharmapure water system, greatly
reduces these hazards of contamination in the pharmacy's water source. The
system produces and dispenses "Purified Water", eliminating the problem of
incorrect source. The closed, pressurized system eliminates the airborne
contamination problem, and the rate of filling is increased dramatically.
Finally, cross-contamination of medications is easily prevented by the
Fillmaster dispenser's cleanable and disposable dispensing tips.
Extensive testing performed by the Company shows that use of the Fillmaster
System saves a pharmacist more than 20 seconds of actual filling time for each
liquid antibiotic prescription. When multiplied by over 12,000 antibiotics per
year (on average), the resulting time savings is dramatic. Coupled with the time
savings generated by eliminating water bottle changes (once for each 28 to 30
prescriptions -- approximately 5 minutes for each change), use of the Fillmaster
System enhances profitability of liquid antibiotics and multiplies pharmacist
time for patient counseling and other activities.
Direct and indirect costs associated specifically with bottled water are reduced
or eliminated by use of the Fillmaster System. Pharmacy storage space can be
reallocated to more profitable items, and the expense of bottled water purchases
of up to $1.25 for each gallon is replaced by one annual filter replacement
currently costing $85. Under optimum usage, the cost of "Purified Water" using
the Fillmaster System is reduced to approximately $.04 per gallon.
Based on the Company's surveys of Fillmaster users, customer satisfaction levels
are extremely high. Users agree unanimously that the Fillmaster System is
faster, easier to use, cleaner, and that the elimination of the aggravation and
difficulties associated with all other methods of reconstitution make the
Fillmaster well worth the investment in its acquisition.
New sales of Fillmaster Systems continue to rise. More significantly, however,
the number of chain pharmacies testing the product continues to grow. Company
records show that more than 85% of pharmacies that test the Fillmaster place
orders within 8 months. The Company has established long-term agreements with
national chain pharmacies to specify installation of the Fillmaster as standard
pharmacy equipment in new and remodeled stores.
The original, manual Fillmaster System carries a suggested list price of $858,
and the Company offers discounts for volume purchase agreements.
<PAGE>
There are approximately 72,000 pharmacies in the United States and Canada, with
many thousands more worldwide. Water-mixed antibiotic prescriptions, for which
the Fillmaster is primarily used, make up approximately 12.6% of a pharmacy's
total prescriptions and approximately 25% of a pharmacy's gross profit.
More than 15,000 Fillmaster systems have been sold to date, and the Fillmaster
is specified as standard equipment for all newly constructed and remodeled
pharmacies at Walgreen's, Wal-Mart, Target, Fred Meyer, Ralph's, Osco, Jewel,
Acme, Lucky, Sav-On, Kroger, Dillon Stores, United Supermarkets, Phar-Mor, Giant
Eagle, Giant Foods, Meijer, City Markets and Eckerd. In addition, Fillmaster
systems have been purchased and are now being used by such pharmacy chains as
Kroger, Smith's Food and Drug, Longs Drugs, CVS, Rite-Aid, Drug Emporium, Fry's,
Hi-School Pharmacies, H-E-B, Fleming, Giant and Snyders. Also included in the
customer base are many United States Military Clinics, including Bethesda Naval
Hospital; the Kaiser Foundation for Medical Care; the Mayo Clinic and several
hundred Independent and Hospital Pharmacies.
FILLMASTER(R) SYSTEM FILTERS The Company also markets unique and proprietary
filter replacements for the Pharmapure water purification system which require
changing at intervals of approximately 9-12 months or whenever indicated by the
purity testing module. The filter replacements represent a significant
continuing source of sales and cash flow to the Company.
Revenues from the replacement filter sales, over a five-year period, approach
the revenue generated by the original sale of the Fillmaster with much higher
profit levels. Thus, Management views the sale of the Fillmaster as occurring in
two distinct stages: immediate and deferred. The acquisition of a new customer,
while generating profit during the current year, produces a deferred income
stream with at least twice as much gross margin and minimal or no sales expense.
The Company offers a program through which chain and independent customers can
automatically be shipped replacement filters annually on the anniversary date of
the system purchase. More than 75% of the Company's current customers have
signed up for this automatic filter shipment program, and most new customers
subscribe to the program upon purchase of a system.
New Products
- ------------
FILLMASTER(R) 1000E Designed as an addition to the Fillmaster dispenser product
line, the fully computerized, battery-operated Fillmaster 1000e dispenser
employs multiple microprocessors to provide accurate and even-flow dispensing.
By using the electronic dispenser, pharmacists increase prescription integrity
by greatly reducing the possibility for human error while dispensing
prescriptions. The Company sells Fillmaster 1000e dispensers both as upgrades to
existing Fillmaster Systems and as new sales to new customers. The upgrade list
price of the Fillmaster 1000e dispenser is $399, and the list price for the
Fillmaster 1000e electronic dispenser with the Pharmapure water system is
$1,158.
SCANMASTER(R) The Scanmaster is a pager-sized, plug-in modular upgrade to the
company's popular Fillmaster 1000e computerized pharmaceutical water dispenser.
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 a 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), Eli Lilly & Co. (NYSE: LLY) and many others. List price for the
Scanmaster bar code reader is $699.
NUTRIPURE(R) Elite The Nutripure Elite line of residential drinking water
systems combines high-quality reverse osmosis technology with carbon filtration
to improve the taste, smell, quality and safety of standard tap water. Designed
for residential use, Nutripure Elite systems produce at least 150 gallons of
clean, healthy water per month. The Company's drinking water systems provide the
best reverse osmosis technology available today at a moderate price, and are
therefore strong value purchases. Incorporating
<PAGE>
the same filtration technology as the Company's Fillmaster pharmaceutical water
purification system, Nutripure Elite systems provide healthy, safe and great
tasting drinking water.
The Company distributes Nutripure Elite systems through independent pharmacists,
providing them an exclusive health product dealership with a high profit margin.
Gallup polls reflect the public's respect for pharmacists as ethical and honest
professionals, and the Company has based the marketing of Nutripure Elite
systems on both the pharmacist's reputation and relationship with his customers
as well as his testimonial to the quality of the product as a Fillmaster user.
Although the market for water systems is quite competitive, the pharmacist's
recommendation of a system they use in their pharmacy to reconstitute
prescriptions sets Nutripure apart from all other residential drinking water
systems.
Innovative Medical Service's qualitative and quantitative research reveals a
strong need for independent pharmacists to find alternative sources to pharmacy
revenues. Shrinking margins on medicines and increased competition from national
chains have left the independent, neighborhood pharmacist scrambling to maintain
market share and profitability. The Company's research shows that independent
pharmacists welcome a drinking water system as an addition to their home health
care product lines and recognize the powerful endorsement they provide for
Nutripure as Fillmaster users.
The Company supports the independent pharmacist dealer network with a targeted,
comprehensive marketing program that includes counter top displays, consumer
brochures and health education materials. The dealer program provides an
opportunity for an independent pharmacist to realize a significant profit
without any investment, start-up or inventory costs. In addition, the dealer
program further distinguishes the independent from the chain pharmacist.
The Nutripure drinking water system is sold by authorized independent
pharmacists at a retail price of $499 and drop-shipped by the Company directly
to the customer.
NUTRIPURE(R) ELITE FILTERS The Company also markets unique and proprietary
filter replacements for the Nutripure residential drinking water system that
require changing every 9-12 months. The filter replacements represent a
significant continuing source of sales and cash flow to the Company. Management
is confident that future replacement filter sales will be an ongoing and
significant source of income.
Revenues from the replacement filter sales, over a five-year period, approach
the revenue generated by the original sale of the system with much higher profit
levels. Thus, Management views the sale of the system as occurring in two
distinct stages: immediate and deferred. The acquisition of a new customer,
while generating profit during the current year, produces a deferred income
stream with at least twice as much gross margin and minimal or no sales expense.
Nutripure customers are encouraged to subscribe to the Company's automatic
filter shipment program in which the Company automatically ships replacement
filters annually on the anniversary date of the system purchase.
NUTRIPURE(R) NP2000CT Innovative Medical Services is proud to announce its entry
into the retail venue with its Nutripure Countertop Water Filtration System
(model number NP2000CT). Nutripure NP2000CT, developed specifically for mass
merchandising, offers excellent water filtration technology at competitive
pricing through a unique marketing approach. Nutripure's professional
one-micron, carbon microfilter reduces dirt, chemicals, lead and parasites to
improve the taste, quality and safety of water. Most importantly, Nutripure is
the only filtration system in its class that is pharmacist recommended. The
product has been tested by Spectrum Laboratories to meet or exceed ANSI/NSF
standard No. 53 Health Effects and ANSI/NSF Standard No. 42 Aesthetic Effects.
Nutripure NP2000CT features enhancements that position the product to compete
well in the competitive residential water filtration market. Nutripure NP2000CT
contains a high-capacity 2,000-gallon filter that requires replacement only once
a year. Capacities of other leading filters are much less and therefore require
more frequent changing. Also, the NP2000CT incorporates a unique Automatic
Bypass Valve that shuts off after every use to prevent accidental waste of
filtered water. Other countertop filters may easily be left "on" resulting in
the use of filtered water for dishwashing or other non-consumption uses. The
NP2000CT requires no assembly, and its sealed cartridge design prevents leaking
and contamination because water flows only through the completely sealed filter
cartridge. Other filter systems are designed so that water flows not only in,
but also around the filter cartridge, increasing the potential for leaking and
also increasing the risk of contamination as the consumer must handle the filter
during assembly and replacement processes.
Several national mass merchandisers as well as department and specialty stores
have completed their evaluations of the Nutripure 2000. Trial orders have been
placed, and the Company expects to begin a nation-wide rollout of the product in
the first half of the year. The NP2000CT is be competitively priced to retail
between $59.00 and $79.99.
NUTRIPURE(R) NP2000CT REPLACEMENT FILTERS The Company also manufactures and
markets replacement filters for the Nutripure NP2000CT water system. The
NP2000CT contains a 2,000-gallon filter that must be changed every year.
Replacement filters will be sold through retail outlets along with the Nutripure
system. The replacement filters will retail for approximately $25.00 and
represent a significant continuing source of sales and cash flow to the Company.
MEDIFIER(TM) The Company also markets the Medifier, a unique patented universal
prescription bottle label magnifier. The Medifier holds various sized
prescription bottles in position under a magnifier strip that enlarges dosage
and use instructions to a clearly readable size. The Medifier is distributed
through Innovative Medical Services' existing sales channels, as well as through
catalogue sales and promotional products distributors.
Internet Marketing Programs
- ---------------------------
Innovative Medical Services' internet market presence allows customers direct
and user-friendly access to the Company's home water filtration products. During
the past fiscal year, 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 opened its
first online store on Yahoo!(R) Store at www.stores.yahoo.com/nutripure, from
which all of the Company's residential and pharmacy water systems may be
purchased. In addition, the Company is currently engaged in contracts with major
web portals and search engines including Yahoo!(R) AOL(R) and Lycos(R) for
banner and keyword advertising that generate significant traffic on its
corporate web site, www.imspure.com.
The Company's exitsing internet exposure is easily expanded to create an avenue
for untapped revenue at minimal cost to the Company. Innovative Medical Services
will take advantage of hits on its site by presenting an expanded and integrated
product line. The Company is developing a strategic partnership with a leading
producer of vitamins and minerals to create an e-commerce medium for high
quality products at value pricing and expects the cross-marketing of water
filtration systems and vitamins, minerals and supplements will dramatically
increase traffic on the web site and maximize purchasing from online consumers.
Manufacturing
- -------------
The Fillmaster and Nutripure systems are assembled primarily from custom
manufactured components. It is the Company's goal to perform minor manufacturing
in the Company's facility to minimize wages, equipment expense and insurance. No
components of the systems have permanent or unequivocally restricted
availability. Many manufacturers are available to produce the components, and a
change in suppliers would result in virtually no lost production.
<PAGE>
The original Fillmaster dispenser and the new Fillmaster 1000e dispenser are
both assembled mostly from proprietary and custom parts fabricated to Company
specifications from injection-molded plastic and fabricated acrylic.
The Pharmapure purification modules are the major components of each of the two
Fillmaster systems and are purchased under agreements with several manufacturers
that are exclusive with the Company as to Pharmaceutical uses. While Management
regards this particular product as the finest of its kind, suitable alternative
manufacturers exist.
The Nutripure line of water filtration products is also assembled from
proprietary and custom parts manufactured under exclusive agreements with
several different manufacturers. Alternative manufacturers exist, and a change
in suppliers would result in virtually no lost production. There are no plans to
alter production methods.
Research and Development
- ------------------------
Research and Development costs that have no alternative future uses are charged
to operations when incurred and are included in operating expenses. The total
amounts charged to Research and Development expense were $157,000 and $177,400
in the fiscal years ended July 31, 1999 and 1998, respectively. The Company's
investment in Research and Development during the past year resulted in the
release of five major additions to the Company's product line, the Fillmaster
1000e, the Scanmaster and the Nutripure line of drinking water systems.
Innovative Medical Services anticipates more new products in the coming year.
Employees
- ---------
As of October 26, 1999, the Company employed twenty-three people, eighteen of
whom are full-time individuals whose principal responsibilities are: product
assembly and shipping (five employees), sales, marketing and customer service
(four employees), research and development (three employees) and administration
(six employees). The Company chooses to outsource more expensive, specialized
functions including public relations, investor relations, graphic design, and
selected engineering projects.
ITEM 2. PROPERTIES
The Company's business operates in a 10,000 square foot facility located in a
light industrial/office park in El Cajon, California. This location houses all
administrative, executive, sales, assembly, shipping and manufacturing functions
for the Company. The Space is leased from an unaffiliated third party under a
sixty-five month agreement commencing July 1, 1996. The monthly rental is $0.61
per square foot plus $0.08 per square foot for maintenance of common areas.
There is also a fixed yearly increase of 4%. The Company has also signed an
amendment to the lease to allow for an option to lease the building for an
additional five years.
ITEM 3. LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn Corporation, against the Company for breach of contract in
October, 1997. The Company has filed counterclaims based upon the Racketeer
Influenced and Corrupt Organization (RICO) Act against Mr. Reitz, Zedburn
Corporation, Capital Development Group, Steven Durland and other defendants. It
is the Company's position that Mr. Reitz and others perpetrated a scheme to
defraud the Company of cash fees and securities in connection with purported
services of arranging a public offering of the Company's common stock. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of the fiscal
year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: The Company's common stock is traded on
the NASDAQ SmallCap Market under the symbol "PURE" and its
Class A Warrants are traded under the symbol "PUREW". The
Company's common stock and Class A Warrants are also traded on
the Boston Stock Exchange. The Company's Class Z Warrants are
not listed for trading on any recognized market.
(2) High and Low Bid Prices: The following table sets forth high
and low bid prices for each fiscal quarter, as reported by
NASDAQ, for the last two fiscal years. Such quotations
represent inter-dealer prices without retail mark-ups,
mark-downs, or commissions and, accordingly, may not represent
actual transactions.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
Quarter Ended High Low Quarter Ended High Low
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 31, 1999 $2.406 $1.625 July 31, 1998 $1.313 $0.438
April 30, 1999 $2.313 $0.656 April 30, 1998 $2.000 $1.000
January 31, 1999 $4.750 $0.938 January 31, 1998 $3.125 $1.375
October 31, 1998 $1.219 $0.250 October 31, 1997 $2.688 $1.344
</TABLE>
(3) Security Holders: As of October 26, 1999, the Company had
approximately 1134 holders of record of its common stock, 428
holders of its Class A Warrants and 18 holders of the
Company's Class Z Warrants. This does not include beneficial
owners holding common stock or Class A Warrants in street
name. The closing price per share on October 26, 1999 was
$1.563.
(4) Dividend Plans: The Company has paid no common stock cash
dividends and has no current plans to do so.
(5) Preferred Stock: There are no shares of preferred stock presently
outstanding.
Change in Securities
- --------------------
In September 1999, the Company issued 160,000 shares of common stock to a single
accredited investor for $200,000 ($1.25 per share) in a private placement of the
shares offered to the one accredited investor.
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 solely to the
one accredited investor who was provided all of the current public information
available on the Company.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are not guarantees of our future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements.
The Company's objective is to maximize shareholder value by focusing on growth,
product innovation and profitability. The following discussion highlights the
Company's performance and should be read in conjunction with the Consolidated
Financial Statements and related notes included therein.
Results of operations Fiscal 1999 vs. Fiscal 1998
- -------------------------------------------------
Revenues of $3,380,000 in the fiscal year ended July 31, 1999 were 102% higher
than the $1,675,100 in revenues reported for the fiscal year ended July 31,
1998. Fillmaster Purification System sales in the year ended July 31, 1999 were
$2,320,000 and replacement filter sales were $889,000. In the prior year,
Fillmaster Purification System sales were $1,082,000 and replacement filter
sales were $439,100. Sales of the Fillmaster Purification System rose 114% over
the prior period due largely to the popularity of the new electronic dispenser
and bar code reader. Sales of filters rose 102% in fiscal 1999 as expected due
to the continually increasing number of Fillmaster Purification Systems in use.
Gross profits for the year ended July 31, 1999 were $1,936,700 versus $673,100
in 1998. Gross profit percentage of 57% in 1999 was higher versus 40% in 1998.
The gross profit increase reflects the increased proportion of electronic
dispenser and filter sales associated with higher margins in the current year.
As the number of Fillmaster system installations increases, so will the volume
of replacement filter sales and the related improved gross profit margins.
Net income for the year ended July 31, 1999 was $260,700 versus a net loss of
$(1,902,800) for the same period in 1998. This turnaround was the result of
increased sales and improved gross profit margins resulting from increased sales
of Fillmaster pharmacy water purification and dispensing systems and disposable
filter replacements, and to growing sales of new products, including the
Fillmaster 1000e dispenser, the Scanmaster bar code reader and the Nutripure
line of home water filtration systems. Also while increasing sales, the Company
cut Selling Expenses by $291,000 (45%) from $647,600 in the prior year to
$356,600 in the current period. In addition, the Company reduced General and
Administrative Expenses by $611,500 (34%) from $1,789,700 in the year ending
July 31, 1998 to $1,178,100 in the year ending July 31, 1999. During the current
fiscal year the Company incurred expenses of $157,000 for Research and
Development costs associated with production and development of new products
compared to $177,400 for the prior year.
Liquidity and Capital Resources Fiscal 1999 vs. 1998
- ----------------------------------------------------
During the fiscal year ended July 31, 1999, the Company's current assets to
liabilities ratio rose from 1.21 to 1.95. Current assets increased $1,104,300
from $1,010,100 to $2,114,400. Current assets at July 31, 1999 include an
increase of $513,500 in accounts receivable associated with higher sales volume.
Inventories increased $359,400 from $360,600 in fiscal 1998 to $720,000 in
fiscal 1999 on anticipated sales of the new electronic dispenser, bar code
reader and residential water systems. Noncurrent assets decreased by $73,100
during the year; however, within this item there was a large reclassification of
acquisition costs during the year due to the purchase of the Company's Brazilian
subsidiary. In October of 1998 the Company purchased the assets of Export
Company of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary supplies.
The major asset of this company was its 45% interest in Ampromed Comercio
Importacao E Exportacao Ltda (AMPROMED), a Rio de Janeiro-based import company
that sells medical, dental and veterinary supplies and water filtration products
to practitioners, retail outlets and government agencies. The Company acquired
the remaining 55% interest in AMPROMED from a private individual. To facilitate
this transaction the Company has formed EXCOA Nevada, a 100% owned subsidiary of
Innovative Medical Services incorporated in Nevada. A 99% interest in AMPROMED
will be held by EXCOA Nevada, with the remaining 1% of AMPROMED being owned by
<PAGE>
Innovative Medical Services. These business combinations were accounted for
using the purchase method. The Company reclassified $1,091,400 of acquisition
cost for these two entities. Of this amount, the Company recorded $261,300 of
goodwill and $360,000 of other intangible assets. These assets are being
amortized over a period of forty (40) years. The results of operations of the
acquired companies are included in the accompanying consolidated financial
statements beginning November 1, 1998. The purchase did not have a material
impact on the income statement of the company for the fiscal year ended July 31,
1999. Current liabilities increased $246,800 from $837,300 to $1,084,100. The
increase in current liabilities was the result of increased accounts payable
associated with a corresponding increase in inventories. Also, the Company has
established an accounts receivable financing facility during the year on which
it has drawn $250,100.
Cash flows used from operations were $556,900 in fiscal year 1999 and $1,994,100
in 1998. For those periods, cash flows used in investing activities were,
respectively, $158,000 and $232,300 for the purchase of machinery and equipment
and for leasehold improvements. Cash flows from financing activities were
$688,700 in fiscal 1999. Investing activities for the current year included an
increase of $151,100 in notes payable. Also, the Company received $360,750
($1.486 per share) from the issuance of 242,766 shares of common stock to two
accredited investors during the current year. 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. Cash flows financing
activities in fiscal 1998 of $292,000 resulted from an increase in notes
payable.
The total decrease in cash and cash equivalents for the fiscal years ended July
31, 1999 and July 31, 1998 was $26,200 and $1,934,400
Future Outlook
- --------------
STEADY GROWTH Looking forward to the year 2000, the management of Innovative
Medical Services has committed to reducing operating costs and improving
efficiencies while employing an aggressive and focused growth strategy to
realize increased sales and earnings. Innovative Medical Services has
experienced strong, steady annual growth rates over the past 7 years and expects
continued stable growth from its cornerstone products - the Fillmaster and
related components.
Long term profitability of the Fillmaster product line depends on establishing a
substantial number of Fillmaster units in the retail pharmacy market. Since each
unit requires replacement of its filters at least once a year, each new system
installed becomes a source of steady future income, eventually exceeding the
income from the initial sale of the Fillmaster system. The Fillmaster system is
specified as standard equipment for all newly constructed and remodeled
pharmacies in over a dozen national retail pharmacy chains. Construction and
remodeling installations of Fillmaster systems generate steady sales at a low
cost of sales and, therefore, a steady increase in replacement filter sales. The
Company expects additional retail pharmacies to add the Fillmaster system to
their blueprints for new construction and remodeling in the coming year.
The Company will continue to aggressively market the Fillmaster system to
independent and chain pharmacies and expects growth to continue because the
Fillmaster has become an industry-wide standard in pharmacy dispensing
equipment. To date, Fillmaster Systems are installed in approximately 15,000
pharmacies, an increase of 58% over last year's total. The 15,000 locations
represent approximately 20% of the total pharmacy market, leaving significant
growth potential for the Fillmaster system not only in the US, but also abroad.
QUANTUM GROWTH In the coming weeks, Innovative Medical Services expects to
complete two major projects which, when fully launched, should create
significant quantum growth for the Company: 1) nationwide roll-out of the
Nutripure 2000, and 2) expansion of the Company's online retailing initiative.
The Nutripure 2000 countertop residential water filtration system has been very
well received by mass merchandisers, wholesale club discounters, department
stores and specialty retailers that represent approximately 40,000 retail
locations in the US. The product has undergone final evaluation in several
national chains, and the Company expects to begin shipping to retail outlets at
the beginning of the year. The Company has made the necessary adjustments in
capacity to accommodate large orders of Nutripure 2000 and can begin fulfilling
bulk orders immediately. Revenues from nationwide retail sales of the Nutripure
2000 should dramatically accelerate the Company's growth.
The online retailing expansion should be completed by the end of the year. The
Company has teamed with an industry leader in pharmaceutical wholesale
distribution to create an online "pharmacist hosted" web supersite to provide
consumers with high-quality, value priced vitamins, minerals and supplements as
well as health resource information. The web site will also feature
cross-maketing programs for the company's nutipure line of water filtration
systems. The online retailing program is strongly supported by the Company's
internet marketing presence, including targeted advertising campaigns on major
web portals, and the company expects the supersite to become key to the
Company's escalating growth.
In addition to growth by adding new products and entering new markets,
Innovative Medical Services, in cooperation with its investment banking firm,
continues to explore potential complementary acquisition opportunities for
pharmaceutical, medical and related health care product distribution in the
United States and Worldwide.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Steven Holand, CPA
3914 Murphy Canyon Rd., Ste. A126
San Diego CA 92123
Phone 619-279-1640
Fax 619-279-9221
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California
I have audited the consolidated balance sheets of Innovative Medical Services as
of July 31, 1999 and July 31, 1998, and the related consolidated statements of
income, accumulated deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted the audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Innovative Medical
Services at July 31, 1999 and July 31, 1998, and the consolidated results of its
operations and its consolidated cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ STEVEN HOLLAND
- ------------------
Steven Holland
Certified Public Accountant
San Diego, California
October 25, 1999
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31
ASSETS 1999 1998
-------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents (Note 2) $ 22,056 $ 48,250
Restricted cash (Note 3) 205,574 206,230
Accounts receivable, net of allowance for doubtful
accounts of $ 50,000 at July 31, 1999 790,166 276,619
and $ 17,850 at July 31, 1998
Notes receivable (Note 4) 339,524 106,918
Inventories 719,972 360,566
Prepaid expenses 37,078 11,556
----------- -----------
Total current assets 2,114,370 1,010,139
----------- -----------
Property, Plant and Equipment
Property, plant and equipment (Note 5) 805,523 791,599
----------- -----------
Total property, plant and equipment 805,523 791,599
----------- -----------
Noncurrent Assets
Deposits 6,575 14,075
Patents and license 425,550 57,806
Goodwill 256,422 -
Customer list 353,250 -
Deferred acquisition costs (Note 1 and 13) 53,851 1,096,852
----------- -----------
Total noncurrent assets 1,095,648 1,168,733
----------- -----------
Total assets $4,015,541 $2,970,471
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 594,948 $ 495,287
Accrued liabilities 43,068 47,060
Notes payable (Note 6) 446,067 294,986
----------- -----------
Total current liabilities 1,084,083 837,333
----------- -----------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
4,392,242 at July 31, 1999 and
3,916,351 at July 31, 1998 (Note 8) 6,663,318 6,125,718
Class A warrants: issued and outstanding 3,687,500
warrants (Note 8) 108,750 108,750
Accumulated deficit (3,840,610) (4,101,330)
----------- -----------
Total stockholders' equity 2,931,458 2,133,138
----------- -----------
Total liabilities and stockholders' equity $4,015,541 $2,970,471
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
July 31
1999 1998
--------------------------
Net sales $ 3,379,984 $ 1,675,131
Cost of sales 1,443,307 1,001,999
------------ ------------
Gross profit 1,936,677 673,132
----------- -----------
Selling expenses 356,611 647,637
General and administrative expenses 1,178,128 1,789,655
Research and development 157,049 177,384
----------- -----------
Total operating costs 1,691,788 2,614,676
------------ ------------
Operating income (loss) 244,889 (1,941,544)
------------ ------------
Other income and (expense):
Interest income 16,631 39,602
------------ ------------
Total other income (expense) 16,631 39,602
------------ ------------
Income (loss) before income taxes (Note 1) 261,520 (1,901,942)
Federal and state income taxes 800 800
------------ ------------
Net income (loss) $ 260,720 $(1,902,742)
------------ ------------
Net income (loss) per common share (basic) $ 0.06 $ (0.50)
------------ ------------
Net income (loss) per common share (diluted) $ 0.04 $ (0.27)
------------ ------------
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
Balance, beginning of period $ (4,101,330) $ (2,198,588)
Net income (loss) 260,720 (1,902,742)
------- ----------
Balance, end of period $ (3,840,610) $ (4,101,330)
------------ ------------
The accompanying notes are an integral part of the financial statements
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended
July 31
1999 1998
-----------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 260,720 $ (1,902,742)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 144,075 125,935
Changes in assets and liabilities:
(Increase) decrease in restricted cash 655 (206,230)
(Increase) decrease in accounts receivable (513,547) (57,572)
(Increase) decrease in notes receivable (232,606) (80,988)
(Increase) decrease in prepaid expense (25,522) 571,777
(Increase) decrease in inventory (359,406) (337,034)
(Increase) decrease in deposits 7,500 11,300
(Increase) decrease in patent and licenses (367,744) (13,000)
(Increase) decrease in deferred acquisition costs 1,043,001 (491,827)
(Increase) decrease in goodwill (256,422) -
(Increase) decrease in intangible assets (353,250) -
Increase (decrease) in accounts payable 99,661 403,800
Increase (decrease) in accrued liabilities (3,992) (17,490)
------------ -------------
Net cash provided (used) by operating -
activities (556,877) (1,994,071)
------------ -------------
Cash flows from investing activities
Purchase of property, plant and equipment (157,999) (232,347)
------------ -------------
Net cash (used) in investing activities (157,999) (232,347)
------------ -------------
Cash flows from financing activities
Increase (decrease) in notes payable 151,081 292,008
Proceeds from sale of common stock 537,601 -
------------ -------------
Net cash provided by financing activities 688,682 292,008
------------ -------------
Net increase (decrease) in cash and cash
equivalents (26,194) (1,934,410)
Cash at beginning of period 48,250 1,982,660
------------ -------------
Cash at end of period $ 22,056 $ 48,250
============ =============
Interest paid $ 69,591 $ 8,243
Taxes paid $ 800 $ 800
Non cash investing and financing transactions:
In fiscal year ended July 31, 1998 stocks were issued for services in the amount
of $ 559,594. The stock issued in fiscal year ended July 31, 1998 related to
acquisition costs.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Innovative Medical Services
Notes to Financial Statements
See Accountants' Report
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
----------------------------------
Innovative Medical Services was incorporated in San Diego, California
on August 24, 1992. The Company was organized with the purpose of
manufacturing, marketing, and selling the Fillmaster, a unique and
proprietary pharmaceutical water purification and dispensing product.
The Company is fully operational, with more than 15,000 customers in
all fifty states, Puerto Rico, The United Kingdom, Australia, Canada,
and Europe. The Company has expanded research and development efforts
in order to further develop its product line to include an additional 8
proprietary pharmacy-related efficiency tools.
Revenue Recognition
-------------------
The company recognizes revenues when products are shipped.
Research and Development
------------------------
Research and development costs that have no alternative future uses are
charged to operations when incurred and are included in operating
expenses. The total amount charged to Research and Development expense
was $157,049 and $177,384 in the fiscal years ended July 31, 1999 and
1998, respectively.
Depreciation Method
-------------------
The cost of property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the related
assets. The useful lives of property, plant, and equipment for purposes
of computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Property held under capital lease 10.0 years
Vehicle 5.0 years to 7.0 years
Leasehold improvements are being depreciated over the life of the
lease, which is equal to 120 months.
Depreciation is computed on the Modified Accelerated Cost Recovery
System for tax purposes.
Amortization
------------
Goodwill and Customer List are being amortized on the straight-line
basis over forty (40) years (Note 13). Amortization expense for the
years ended July 31, 1999 and July 31, 1998 was $11,650 and $0,
respectively.
The cost of patents acquired will be amortized on a straight-line basis
over the remaining lives of 17 years beginning in fiscal year ended
July 31, 2000.
Inventory Cost Method
---------------------
Inventories are stated at the lower of cost or market determined by the
Average Cost method and net realizable value. Inventories at July 31st
consisted of:
1999 1998
Finished Goods $ 212,335 $ 183,777
Work in Progress 108,770 37,246
Raw Materials 398,867 139,543
------- -------
$ 719,972 $ 360,566
------- -------
<PAGE>
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The fair value of financial instruments, consisting primarily of the
line of credit, is based on interest rates available to the Company and
comparison to quoted prices. The fair value of these financial
instruments approximates carrying value.
Advertising and Promotional Costs
---------------------------------
Cost of advertising and promotion are expensed as incurred or the
first-time advertising and promotion takes place. Such costs were
$101,063 and $272,191 for the years ended July 31, 1999 and July 31,
1998, respectively.
Deferred Public Offering Cost
-----------------------------
The company had incurred $376,695 of costs as of July 31, 1996 related
to an initial public offering. Those costs were deferred, pending
completion of the offering. After the completion of the offering, the
total of the public offering costs $1,436,807 was reclassified to
shareholders' equity.
Deferred Acquisition Costs
--------------------------
During the process of evaluating certain companies for acquisition,
the Company expended $48,391 and $1,096,852 in fiscal years ended July
31, 1999 and July 31, 1998, respectively. These costs were capitalized
and will be reclassified if the acquisitions are successful as a cost
of the investment or expensed in the future if the acquisitions are
not successful. During fiscal year ended July 31, 1999, the company
completed the acquisition of Export Company of America, Inc. (EXCOA)
and reclassified $1,051,493 of the July 31, 1998 balance of deferred
acquisition costs and $39,900 of the July 31, 1999 fiscal year end
expenditures to investment in that purchase (Note 13).
Net Income (Loss) Per Common Share
----------------------------------
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997.
Entities that have only common stock outstanding are required to
present basic earnings per share amounts. All other entities are
required to present basic and diluted per share amounts. Diluted per
share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing
operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year. Earnings per
share does not exclude the effect of outstanding warrants and stock
options even though the effect of their inclusion in fiscal year ended
July 31, 1998 is antidilutive, as defined in the Statement.
Following is a reconciliation of the weighted average number of shares
actually outstanding with the number of shares used in the computations
of loss per common share:
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
Shares outstanding 4,392,242 3,916,351
Weighted average number of
shares actually outstanding 4,148,879 3,779,543
Stock Options 1,417,969 1,471,250
Warrants 1,798,125 1,798,125
--------- ---------
Total weighted average shares 7,364,972 7,048,918
--------- ---------
Net income (loss) $ 257,195 $(1,902,742)
========= ============
Basic net earnings (loss) per share $ 0.06 $ (0.50)
------- ------------
Diluted net earnings (loss) per share $ 0.03 $ (0.27)
------- ------------
</TABLE>
Potential common stock instruments at July 31, 1999, which include
1,417,969 stock options and 1,798,125 warrants, are included in the
loss per share calculation. Potential common stock instruments at July
31, 1998, which include 1,471,250 stock options and 1,798,125 warrants,
are included in the loss per share calculation even though their
inclusion is antidilutive for the fiscal year ended July 31, 1998.
Income Taxes
------------
At July 31, 1999, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $3,844,000,
$3,771,000, and $1,899,000, respectively. At July 31, 1998, the Company
has financial, federal, and California tax net operating loss
carryforwards of approximately $4,101,000, $3,994,000, and $2,122,000,
respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to the capitalization of
research and development expenses and start-up expenses for tax
purposes with an amortization over five (5) years, however for
financial reporting purposes these expenses are charged to operations
as incurred. The difference between federal and California tax loss
carryforwards is primarily due to the fifty percent limitation on
California loss carryforwards. The tax loss carryforwards will begin
expiring in fiscal year ended July 31, 2008, unless previously
utilized.
The Company adopted Financial Accounting Standards Board Statement No.
109, Accounting for Income Taxes, beginning in fiscal year ended July
31, 1993. The adoption had no impact on 1993 results. In accordance
with this new standard, the Company has recorded total deferred tax
assets of $899,000 and $962,000 and a related valuation reserve of
$899,000 and $962,000 for the fiscal years ended July 31, 1999 and
1998, respectively. Realization of these deferred tax assets, which
relate to operating loss carryforwards and timing differences from the
amortization of research and development expenses and start-up
expenses, is dependent on future earnings. The timing and amount of
future earnings are uncertain and therefore, the valuation reserve has
been established.
NOTE 2. CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate fair
value because of the short maturity of these instruments. The Company
maintains cash balances at several financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
At July 31, 1999 and July 31 1998, the Company's cash and cash
equivalents is represented by $22,580 and $48,250, respectively, in
cash or checking accounts.
NOTE 3. RESTRICTED CASH
At July 31, 1999, the Company's restricted cash consisted of a
certificate of deposit of $205,574 and at July 31, 1998 the Company's
restricted cash consisted of a certificate of deposit of $206,230.
These certificates of deposit were held by a bank, as security for a
line of credit with the same bank (Note 6).
NOTE 4. NOTES RECEIVABLE
<PAGE>
At July 31, 1999, notes receivable of $153,578 represents amounts due
from officers and $169,772 represents amounts due from employees and
$16,174 represents amount due from ex-employees and others. At July 31,
1998, notes receivable of $80,074 represents amounts due from officers
and $26,844 represent amounts due from employees. All notes receivable
are due and payable within one year. The carrying value of the notes,
based on the terms at which those same loans would be made currently,
approximate their fair value. All notes in excess of $10,000 have
interest accrued at 6%.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment - at
cost, less accumulated depreciation:
<TABLE>
<CAPTION>
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
Computers and equipment $ 719,410 $ 628,074
Furniture and fixtures 107,431 86,487
Property held under capital lease 0 7,511
Vehicle 52,670 40,670
Leasehold improvements 322,805 280,575
------- -------
1,202,316 1,043,317
Less: accumulated depreciation 396,793 251,718
------- -------
Total $ 805,523 $ 791,599
============= =============
</TABLE>
Depreciation expense charged to general and administrative expense for
the years ended July 31, 1999 and 1998 was $144,075 and $125,935,
respectively.
NOTE 6. DEBT
<TABLE>
<CAPTION>
The details relating to debt are as follows:
July 31, 1999 July 31, 1998
<S> <C> <C>
Obligation under capital lease $ 0 $ 969
Line of Credit Valle de Oro Bank
$200,000 line of credit, interest
at 7.7% Due and payable February 25, 2000
Secured by certificate of deposit of @205,574 196,009 199,484
Line of Credit Flagship Capital, Inc. for financing
of accounts payable, interest at 17% payable
at $27,052 monthly beginning September 17, 1998 0 94,533
Business Alliance Capital Corporation for accounts
receivable financing of up to 80% of
the aggregate outstanding eligible accounts
receivables at 3% plus prime beginning
September 1998 for period of one year
renewable on an annual basis 250,058 0
--------------- -------------
Total notes payable 446,067 294,986
Current maturities of notes payable included in
current liabilities 446,067 294,986
--------------- --------------
Total long term debt $ 0 $ 0
=============== =============
</TABLE>
<PAGE>
NOTE 7. COMMITMENTS
The company leased office and warehouse facilities under an operating
lease that expired on December 31, 1996. On May 14, 1996, the Company
entered into a new operating lease agreement for sixty-five months
commencing on July 1, 1996. The rent payment portion of the lease is
for sixty-three months, which allows for an initial building
improvement period of two months. The monthly rental for the 9,443
square foot facility is $0.61 per square foot plus $0.08 per square
foot for maintenance of common areas. There is also a fixed yearly
increase of 4%. The company has also signed an amendment to the lease
to allow for an option to lease the building for an additional five
years. The company made improvements to the new building in the amount
of $280,000.
The rental expense recorded in general and administrative expenses for
the years ended July 31, 1999 and July 31, 1998 was $78,393 and
$76,700, respectively. Future minimum rental payments required for each
of the 5 succeeding years assuming exercise of the option are as
follows:
Year Ended July 31, Amount
2000 $ 85,026
2001 88,428
2002 91,965
2003 95,644
2004 99,470
NOTE 8. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
Common Common
Stock Stock A A Z Warrants
Shares $ Warrants Warrants Issued
Issued $
--------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1997 3,532,851 $5,566,124 3,687,500 $108,750 785,000
Stock issued for services 383,500 559,594 0 0 0
Balance, July 31, 1998 3,916,351 6,125,718 3,687,500 108,750 785,000
Sale of stock 233,125 189,375 0 0 0
Private placement 242,766 348,225 0 0 0
Balance, July 31, 1999 4,392,242 $6,663,318 3,687,500 $108,750 785,000
</TABLE>
Each class A warrant entitles the holder to acquire an additional
common share for $5.25 per common share beginning August 8, 1997 and
expiring August 8, 2001. The Class A Warrants are redeemable by the
Company for $0.05 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$9.00 per share for thirty consecutive business days ending within five
days of the date of notice of redemption.
Each class Z warrant entitles the holder to acquire an additional
common share for $10.00 per common share beginning August 8, 1998 and
expiring August 8, 2001. The Class A Warrants are redeemable by the
Company for $0.10 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$15.00 per share for thirty consecutive business days ending within
five days of the date of notice of redemption.
<PAGE>
NOTE 9. RELATED PARTY TRANSACTIONS
On April 1, 1996, the Company entered into an employment agreement with
the President and Chief Executive Officer. The term of the agreement is
for five years with an automatic renewal of another five years. The
following are the major provisions of the agreement:
1. Compensation
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income before
taxes earned by the corporation during each full fiscal year, and
c. A monthly amount of not more than $500 per month for an auto
lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred thousand dollars
at 80% of the initial public offering price of the Company's
common stock, approximately 31,250 shares at $3.20 per share,
which are exercisable in April, 1997.
2. Compensation for past services
a. In consideration of services which have been rendered during the
fiscal years ended July 31, 1994 and July 31, 1995 and the eight
months period ended March 31, 1996, the corporation granted the
following compensation for past services rendered:
i. $30,000 for fiscal year ended July 31, 1994, and
ii. $45,000 for fiscal year ended July 31, 1995, and
iii. $60,000 for the eight months ended March 31, 1996.
The President (Mr. Krall) waived the payment of $119,000 of the
compensation for past services and contributed this amount as an
additional payment for the common stock he presently owns. In order to
reward the efforts of Director Krall for his performance in the weeks
leading to NASDAQ approval of the initial public offering, the
Compensation Committee recommended and the Board of Directors
authorized a bonus to Mr. Krall in the amount of $257,500. The bonus of
$257,500 was accrued at July 31, 1996.
On April 26, 1997, the board of directors approved the renewal of the
employment contract for Michael Krall for the position of President and
Chief Executive Officer and increased his salary to $12,000 per month.
NOTE 10. STOCK OPTION PLANS
The Company has three stock option plans (the Plans) pursuant to which
options to acquire common stock have been granted. These are the 1996
Incentive Stock Option Plan (the 1996 Incentive Plan) approved by the
Company's Shareholders in April, 1996, the 1996 Directors and Officers
Stock Option Plan (the 1996 D&O Plan) adopted by the Board in April,
1996 and the Amended Innovative Medical Services 1998 Directors and
Officers Stock Option Plan (the 1998 D&O Plan) approved by the
Company's Shareholders in December, 1998. The Plans are administered by
a Committee of the Board of Directors or the entire Board. The exercise
price of options granted under any of the Plans must be the fair market
value for the common stock at the date of grant.
1996 Incentive Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1996 Incentive Plan is 1,000,000
Shares. The maximum number of shares subject to Options granted to any
one Key Employee shall not exceed 100,000 shares. The Options granted
<PAGE>
are "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, for certain key employees.
All Key Employees of the Company and its subsidiaries are eligible to
participate in the 1996 Incentive Plan. A Key Employee is defined in
the Plan as a Company employee who in the judgment of the
Administrative Committee has the ability to positively affect the
profitability and economic well-being of the Company. Part time
employees, independent contractors, consultants and advisors performing
bona fide services to the Company shall be considered employees for
purposes of participation in the Plan. No Executive Officer or Director
of the Company has received options pursuant to this Plan. Options to
acquire 143,125 shares under the 1996 Incentive Plan were outstanding
as of July 31, 1999 with 673,750 shares remaining under the 1996
Incentive Plan for which options may be granted.
1996 D&O Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1996 D&O Plan was 1,000,000 Shares.
The maximum number of shares subject to options granted under the 1996
D&O Plan to any one Director or Officer shall not exceed 200,000 shares
in any 12-month period. Options to acquire 400,000 shares under the
1996 D&O Plan were outstanding as of July 31, 1999 and there are no
shares remaining under the 1996 D&O Plan for which options may be
granted.
1998 D&O Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1998 D&O Plan is 2,000,000 shares.
The maximum number of shares subject to options granted under the 1998
D&O Plan to any one Director or Officer shall not exceed 200,000 shares
in any 12-month period. Upon the election of a continuing director or
the further appointment of a continuing executive officer, the
continuing director or officer will receive an additional option for
50,000 shares. A newly elected director or newly appointed executive
officer is entitled to receive an option for 100,000 shares. Options to
acquire 991,250 shares under the 1998 D&O Plan were outstanding as of
July 31, 1999 and there are 958,750 shares remaining under the 1998 D&O
Plan for which options may be granted.
During fiscal year ended July 31, 1999 employees and officers
exercised options on 233,125 shares of stock.
NOTE 11. PENSION PLAN
The Company participates in a Small SEP program under which the
employer makes contributions to a SEP, which includes a salary
reduction arrangement (SARSEP). Employees who participate in the SARSEP
may elect to have the employer: (a) make contributions to the SEP on
their behalf, or (b) pay them cash. A salary reduction arrangement may
be used only in years in which the SEP meets requirements that the IRS
may impose to ensure distribution of excess contributions. Annual
contributions of an employer under a SEP are excluded from the
participant's gross income.
NOTE 12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company markets its products to numerous customers in various
geographic regions, thereby spreading its credit risk related to
receivables. See Note 2 Cash and Cash Equivalents as to the discussion
of credit risks concerning cash equivalents.
The carrying amounts for cash and cash equivalents, receivables, and
payables approximate fair value because of the short maturity,
generally less than three months, of these instruments. The carrying
value of the Company's long-term debt approximates fair value since the
current borrowing rates available for financing are similar in terms.
<PAGE>
NOTE 13. ACQUISITIONS
In October of 1998 the Company purchased the assets of Export Company
of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary
supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary
supplies and water filtration products to practitioners, retail outlets
and government agencies. The Company acquired the remaining 55%
interest in AMPROMED from a private individual. To facilitate this
transaction the Company has formed EXCOA Nevada, a 100% owned
subsidiary of Innovative Medical Services. This company was
incorporated in Nevada. A 99% interest in AMPROMED will be held by
EXCOA Nevada, with the remaining 1% of AMPROMED being owned by
Innovative Medical Services. These business combinations were accounted
for using the purchase method. The Company incurred $1,091,393 of
acquisition cost for these two entities. Of this amount the Company
recorded $261,322 of goodwill and $360,000 of other intangible assets.
These assets are being amortized over a period of forty (40) years.
The results of operations of the acquired companies are included in
the accompanying consolidated financial statements beginning November
1st of 1998. The Company has made a substantial investment to
establish a facility and obtain access to Brazilian markets. However,
due to recent economic conditions in the region, activities in Brazil
were temporarily scaled back.
The assets acquired, including the cost in excess of net assets
acquired in the acquisition of AMPROMED are as follows:
Tangible assets acquired at fair value $122,801
Intangible assets acquired (Licenses and customer list) 707,271
Costs in excess of net assets acquired 261,322
Total purchase price $1,091,394
Selected unaudited pro forma combined results of operations for the
years ended July 31, 1999 and 1998, assuming AMPROMED acquisition
occurred on August 1, 1998 and 1997, are presented as follows:
Total Revenues $ 3,379,984 $ 1,763,515
Net income (loss) $ 257,502 $ (1,996,119)
Basic net earnings (loss) per share $ 0.06 $ (0.53)
NOTE 14. YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using
Year 2000 date are a known risk. The Company is addressing this risk to
the availability and integrity of financial systems and the reliability
of operational systems even though the newly acquired in-house software
system is Year 2000 compliant. The Company has established processes
for evaluating and managing the risks and costs associated with this
problem. The Company is also communicating with suppliers, dealers,
financial institutions and others with which it does business to ensure
their systems will be Year 2000 compliant. The cost of compliance will
be incurred through December 31, 1999.
<PAGE>
Steven Holland, CPA
3914 Murphy Canyon Rd., Ste. A126
San Diego, CA 92123
Phone 619-279-1640
Fax 619-279-9221
Auditor's Report
on Supplementary Information
My audits of the basic financial statements were made primarily to form
an opinion on such financial statements taken as a whole. The supplementary
information contained in the following pages is presented for the purpose of
additional analysis and, although not required for a fair presentation of
consolidated financial position, results of operations, and cash flows, was
subjected to the audit procedures applied in the examinations of the basic
financial statements. In my opinion, the supplementary information is fairly
presented in all material respects in relation to the basic financial statements
taken as a whole.
/s/ STEVEN HOLLAND
- ------------------
Steven Holland
Certified Public Accountant
San Diego, California
October 25, 1999
<PAGE>
COST OF SALES AND SELLING EXPENSES SCHEDULE
For the Years Ended
July 31
1999 1998
--------------------------------
Schedule of Cost of Sales
Material purchases $ 1,152,821 $ 809,528
Production labor 143,017 100,562
Freight 138,653 82,752
Supplies and miscellaneous 8,816 9,157
----------- -----------
Total cost of sales $ 1,443,307 $ 1,001,999
=========== ============
Schedule of Selling Expenses
Advertising and marketing $ 101,063 $ 276,390
Sales wages 216,895 335,098
Travel and entertainment 31,758 9,037
Trade shows 6,895 27,112
----------- -----------
Total selling expenses $ 356,611 $ 647,637
=========== ===========
<PAGE>
SCHEDULE OF GENERAL AND ADMINSTRATIVE EXPENSES
For the Years Ended
July 31
1999 1998
-----------------------------
Schedule of General and Administrative Expenses
Accounting fees $ 42,330 $ 17,180
Amortization 11,650 -
Auto expenses 747 1,621
Bad debts 32,400 -
Bank charges and processing fees 3,122 2,640
Board meetings and fees 7,038 33,864
Cleaning 1,314 60
Computer expense 2,320 5,712
Contributions 205 -
Consulting fees 40,500 654,565
Depreciation 144,075 125,935
Dues & subscriptions 10,583 15,072
Employee benefits 12,386 6,521
Equipment rent 16,649 10,579
Insurance 56,617 54,083
Interest expense 69,591 8,243
Investor relations 31,182 14,410
Legal and professional 66,875 71,433
Licenses and fees - 130
Miscellaneous 2,466 2,474
Office supplies and expense 8,737 14,893
Office wages and payroll taxes 287,241 271,133
Officers wages 144,000 146,215
Overhead application to WIP (74,559) -
Payroll processing service 3,074 3,040
Postage/shipping 16,554 36,373
Printing 3,019 4,377
Public relations 24,009 56,946
Recruiting - employment 3,496 936
Rent expense 78,393 76,700
Repairs and maintenance 792 5,765
SEC compliance costs 37,560 62,201
Security 240 428
Services charges 33,000 -
Small tools 361 1,667
Taxes: business 6,241 6,313
Telephone 38,844 61,751
Travel 778 -
Utilities 14,298 16,395
----------- -----------
Total general and administrative expenses $1,178,128 $1,789,655
=========== ===========
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Registrant's Proxy Statement to be filed on or before November 29, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(3) (i) Articles of Incorporation (Incorporated by reference from
Form SB-2 Registration SEC File # 333-00434 effective August
8, 1996)
(3) (ii) By-Laws of Corporation (Incorporated by reference from
Form SB-2 Registration SEC File # 333-00434 effective August
8, 1996)
(11) Statement Re: Computation of Per Share Earnings
(13) Subsidiaries of the Registrant
(27) Financial Data Schedule
B. Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES DATE
/s/ MICHAEL L. KRALL October 28, 1999
- --------------------
Michael L. Krall, Chairman/President/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ DENNIS BROVARONE Director October 28, 1999
- --------------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer and Director October 28, 1999
- -----------------
/s/ PATRICK GALUSKA Director October 28, 1999
- -------------------
Patrick Galuska
/s/ EUGENE PEISER Director October 28, 1999
- -----------------
Eugene Peiser
/s/ DONNA SINGER Executive Vice President and Director October 28, 1999
- ----------------
Donna Singer
<PAGE>
Exhibit 11
Computation of Earnings per Common share for fiscal years ended July 31, 1999
and July 31, 1998
For the Years Ended
July 31
1999 1998
-----------------------------
Shares outstanding 4,392,242 3,916,351
------------ --------------
Weighted average shares outstanding 4,148,879 3,779,543
Stock Options 1,417,969 1,471,250
Warrants 1,798,125 1,798,125
------------ --------------
Total weighted average shares outstanding 7,364,972 7,048,918
============ ==============
Net Income (Loss) $ 260,720 $ (1,902,742)
=========== ==============
Basic Net Earnings (Loss) per share $ 0.06 $ (0.50)
============ ==============
Diluted Net Earnings (Loss) per share $ 0.04 $ (0.27)
============ ==============
<PAGE>
EXHIBIT 13
INNOVATIVE MEDICAL SERVICES
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
Export Company of America, Inc. (EXCOA) Nevada
Ampromed Comercio Importacao E Exportacao Ltda A Brazilian Limited Liability
(AMPROMED) Company
Rio de Janeiro, Brazil
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 227,630
<SECURITIES> 0
<RECEIVABLES> 840,166
<ALLOWANCES> (50,000)
<INVENTORY> 719,972
<CURRENT-ASSETS> 2,114,370
<PP&E> 1,202,316
<DEPRECIATION> (396,793)
<TOTAL-ASSETS> 4,015,541
<CURRENT-LIABILITIES> 1,084,083
<BONDS> 0
0
0
<COMMON> 6,663,318
<OTHER-SE> (3,731,860)
<TOTAL-LIABILITY-AND-EQUITY> 4,015,541
<SALES> 3,379,984
<TOTAL-REVENUES> 3,379,984
<CGS> 1,443,307
<TOTAL-COSTS> 1,691,788
<OTHER-EXPENSES> 16,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 261,520
<INCOME-TAX> 800
<INCOME-CONTINUING> 260,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 260,720
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.04
</TABLE>
