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 January 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
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INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 4,149,476 as of March
15, 1999.
<PAGE>
Innovative Medical Services
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1998 and January 31, 1999
Statements of Operations for the three months and nine
months ended January 31, 1998 and 1999
Statements of Cash Flows for the three months and nine
months ended January 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>
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
- ----------------------------------------------------------------------------
(unaudited)
January 31, July 31,
1999 1998
ASSETS ---- ----
Current Assets
Cash and cash equivalents $ 18,877 $ 48,250
Restricted cash 203,589 $206,230
Accounts receivable, net of allowance
for doubtful accounts of $17,850 719,363 276,619
Notes receivable 125,079 106,918
Inventories 564,282 360,566
Prepaid expenses 24,101 11,556
----------- -----------
Total current assets 1,655,291 1,010,139
----------- -----------
Property, Plant and Equipment
Property, plant and equipment 808,587 791,599
----------- -----------
Total property, plant and equipment 808,587 791,599
----------- -----------
Noncurrent Assets
Deposits 18,525 14,075
Patents and licenses 405,077 57,806
Goodwill 261,322 -
Other intangible asstes 360,000 -
Deferred acquisition costs 45,430 1,096,852
----------- -----------
Total noncurrent assets 1,090,354 1,168,733
----------- -----------
Total assets $ 3,554,232 $ 2,970,471
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Account payable $ 545,286 $ 495,287
Accrued liabilities 5,449 47,060
Notes payable 552,204 294,986
----------- -----------
Total current liabilities 1,102,939 837,333
----------- -----------
Long-Term Debt - -
----------- -----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares, issued
and outstanding 4,149,476 at January 31,
1999 and 3,916,351 at July 31, 1998 6,149,730 6,125,718
Class A warrants: issued and outstanding
3,687,500 warrants 108,750 108,750
Accumulated deficit (3,807,187) (4,101,330)
----------- -----------
Total stockholders' equity 2,451,293 2,133,138
----------- -----------
Total liabilities and stockholders' equity $ 3,554,232 $ 2,970,471
=========== ===========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME (Unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
January 31 January 31
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $ 767,979 $ 423,790 $1,563,498 $ 859,048
Cost of sales 271,631 267,750 553,920 516,167
---------- ---------- ---------- ----------
Gross profit 496,348 156,040 1,009,578 342,881
---------- ---------- ---------- ----------
Selling expenses 116,466 221,826 187,772 374,289
General and Administrative
expenses 179,067 310,712 447,705 699,911
Research and development 46,902 39,321 84,939 92,586
---------- ---------- ---------- ----------
Total operating costs 342,435 571,859 720,416 1,166,786
---------- ---------- ---------- ----------
Operating income (loss) 153,913 (415,819) 289,162 (823,905)
---------- ---------- ---------- ----------
Other income and (expense)
Interest income 2,688 - 5,381 -
Dividend income - 7,894 - 29,603
---------- ---------- ---------- ----------
Total other income (expense) 2,688 7,894 5,381 29,603
---------- ---------- ---------- ----------
Income (loss) before income
taxes 156,601 (407,925) 294,543 (794,302)
Federal and state income taxes 200 200 400 400
---------- ---------- ---------- ----------
Net income (loss) $ 156,401 $ (408,125) $ 294,143 $ (794,702)
========== ========== ========== ==========
Net income per common
share(primary) $ 0.04 $ (0.10) $ 0.07 $ (0.20)
========== ========== ========== ==========
Net income per common
share (diluted) $ 0.02 $ (0.07) $ 0.04 $ (0.13)
========== ========== ========== ==========
</TABLE>
STATEMENTS OF ACCUMULATED DEFICITS
- ----------------------------------------------------------------------------
(unaudited)
Six Months
Ended Year Ended
January 31 July 31
1999 1998
---------------------------
Balance, beginning of period $(4,101,330) $(2,198,588)
Net income (loss) 294,143 (1,902,742)
----------- -----------
Balance, end of period $(3,807,187) $(4,101,330)
=========== ===========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------
For The Six Months Ended
January 31
1999 1998
------------------------
Cash flows from operating activities
Net income (loss) $ 294,143 $ (794,702)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 70,550 58,044
Stock issued for services - 450,000
Changes in assets and liabilities:
(Increase) decrease in restricted cash 2,641 -
(Increase) decrease in accounts receivable (442,744) (55,651)
(Increase) decrease in notes receivable (18,161) (392,129)
(Increase) decrease in prepaid expense (12,545) 54,696
(Increase) decrease in inventory (203,716) (61,412)
(Increase) decrease in deposits (4,450) (48,000)
(Increase) decrease in patent costs (347,271) -
(Increase) decrease in deferred
acquisition costs 1,051,422 (433,101)
Increase (decrease) in accounts payable 49,999 62,148
Increase (decrease) in notes payable 257,216 94,025
Increase (decrease) in accrued liabilities (41,610) (63,295)
----------- -----------
Net cash provided (used) by
operating activities 655,474 (1,129,377)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (87,538) (165,899)
Purchase of goodwill (261,322) -
Purchase of other intangible assets (360,000) -
----------- -----------
Net cash (used) in investing
activities (708,860) (165,899)
----------- -----------
Cash flows from financing activities
Increase (decrease) in long-term notes payable - (1,589)
Sales of common stock 24,013 -
----------- -----------
-
Net cash provided by financing
activities 24,013 (1,589)
----------- -----------
Net increase (decrease) in cash
and cash equivalents (29,373) (1,296,865)
Cash at beginning of period 48,250 1,982,660
----------- -----------
Cash at end of period $ 18,877 $ 685,795
=========== ===========
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services, through an aggressive, growth-oriented
business strategy, has built a strong market presence in the manufacturing
and marketing of pharmacy efficiency products, as well as water filtration
systems. Since its founding in August 1992, and subsequent to its initial
public offering in August 1996, the Company has invested in its research
and development department, production facilities and sales and marketing
resources. The Company's principal products are the Pharmapure(R) pharmacy
water purification system, the Fillmaster(R) dispensing units for
reconstituting oral suspensions, and the Nutripure(R) line of residential
drinking water systems. The Company also markets, for all water filtration
products, proprietary filters that require changing at intervals of nine to
twelve months. Filter replacements represent a significant continuing
source of revenue to the Company.
In addition, Innovative Medical Services markets the Medifier(TM), a unique
magnifying device for use with any size prescription bottle label, targeted
to the growing elderly population. The Medifier represents a low-cost entry
into the retail pharmacy market and will be sold through the Company's
current distribution channels as well as through catalogues and promotional
products distributors.
Innovative Medical Services also owns Export Company of America, Inc.
(EXCOA), a Nevada corporation that holds and operates the Company's
Brazilian export/import operation. The Company distributes medical, dental
and veterinary supplies into Brazil and plans to use this distribution
conduit for the Company's water filtration products.
Innovative Medical Services' customer base for its pharmaceutical water
purification systems includes Wal-Mart, Walgreens, American Stores, Eckerd,
Kroger, Fred Meyer, Target and CVS, and IMS' expertise in pharmaceutical
water systems provides a strong foundation for its "pharmacist recommended"
Nutripure line of residential water filtration systems. The Company's
Nutripure Elite reverse osmosis residential water system usually retails
for $499, and is available as either a convenient, compact, unit easily
installed beneath the sink, or an attractive, counter-top appliance
requiring no installation. The Nutripure 2000 countertop water filter
retails for $79.99 and competes with PUR(R), Brita(R) and Culligan(R)
products.
In December, the Company launched a major internet marketing strategy
beginning with its new internet shopping sites and its links to Lycos(R),
Excite(R), Netscape(R), Info Seek(R) and Alta Vista(R). The Company's
opened its first online store on Yahoo!(R) Store at
STORES.YAHOO.COM/NUTRIPURE, from which all of the Company's residential and
pharmacy water systems may be purchased. The Company's products, including
the popular Nutripure(R) 2000 residential water filtration system, may also
be purchased from its recently expanding corporate web site at
WWW.IMSPURE.COM. The Company also contracted with Yahoo!(R), Lycos(R) and
AOL.com(R) to develop an internet advertising campaign to dramatically
increase brand awareness of Nutripure 2000 and to drive targeted consumers
to the online store sites.
<PAGE>
Also in December, the Company placed its Nutripure 2000 countertop water
filtration system in approximately 100 Fred Meyer stores. After tracking
sale rates from its December opening order for stores in the Portland and
Seattle regions, Fred Meyer has begun reordering in multi-case lots for
those stores and has expanded retail placement of Nutripure 2000 to all
Fred Meyer Stores. Innovative Medical Services continues to negotiate
placement in other regional and national chains.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1999 VERSUS
THREE MONTHS ENDED 31 JANUARY, 1998
Revenues of $768,000 in the first quarter ended January 31, 1999 were 81%
higher than the $424,800 in revenues reported for the same quarter ended
January 31, 1998. Fillmaster Purification System sales in the 1999 quarter
were $475,400 and replacement filter sales were $260,100. In the 1998
quarter, Fillmaster Purification System sales were $289,000 and replacement
filter sales were $113,000. The 64%increase in systems sales was largely
due to the popularity of the new electronic dispenser. The 130% increase
in replacement filter sales was expected due to the continually increasing
number of Fillmaster(R) Purification Systems in use.
Gross profit in the most recent quarter was $496,300 versus $156,000 in the
year-earlier quarter. Gross profit percentage of 65% in the 1998 quarter
was higher versus the 37% gross profit percentage in the 1998 quarter. The
gross profit percentage increase reflects the increased proportion of
dispenser and filter sales associated with higher margins during the
quarter.
Income for the quarter ended January 31, 1999 was $156,400 versus a net
loss of $408,100 for the same quarter in 1998. The increased income was due
to increased sales of Fillmaster pharmacy water purification and dispensing
systems and disposable filter replacements, and to growing revenues from
sales of new products, including the Nutripure line of residential water
filtration systems.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 1999 VERSUS SIX
MONTHS ENDED JANUARY 31, 1998
Revenues of $1,563,500 in the six months ended January 31, 1999 were 82%
higher than the $859,000 in revenues reported for the six months ended
January 31, 1998. Fillmaster(R) Purification System sales in the six
months ended January 31, 1999 were $1,099,500 and replacement filter sales
were $417,700. In the prior period, Fillmaster(R) Purification System
sales were $579,000 and replacement filter sales were $238,000. Sales of
filters rose 143% in fiscal 1998/99 as expected due to the continually
increasing number of Fillmaster(R) Purification Systems in use.
Gross profits for the six months ended January 31, 1999 were $1,009,600
versus $342,900 in 1997/98. The gross profit of 65% in 1998/99 was higher
versus the 39% gross profit in 1997/98. The gross profit increase reflects
increased filter sales in the recent six-month period. As the number of
Fillmaster(R) system installations increases, so does the volume of
replacement filter sales. The Company anticipates a strong influx of
filter orders in the coming months resulting from sales of systems during
the second half of fiscal 1997/98.
Net income for first six months ended January 31, 1999 was $294,100 versus
a net loss of $794,700 for the same period last year. This turnaround was
the result of increased sales and improved gross profit margins. Also,
while increasing sales, the Company cut Selling Expenses by $186,500, or
50%, from $374,300 in the prior six-month period to $187,800 in the current
period. The Company also reduced General and Administrative expenses by
$252,200, or 36%, from
<PAGE>
$699,900 to $447,700. The Company expensed $84,900 of Research and
Development costs associated with production and development of new
products during the current six-month period.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended January 31, 1999, the Company's current assets
to liabilities ratio rose from 1.21 to 1.50. Current assets increased
$645,200 from $1,010,100 to $1,655,300. Current assets at January 31, 1999
include an increase of $442,800 of accounts receivable due mainly to a
large order from a major drug store chain during the quarter. Inventories
increased $203,700 from $360,600 to $564,300 on anticipation of increased
sales of the new electronic dispenser. Current liabilities increased
$265,600 from $837,300 to $1,102,900. The increase in current liabilities
was the result of increased accounts payable associated with a
corresponding increase in inventories. Also, the company established an
additional credit facility during the period on which it has drawn
$202,700.
Cash flows from operations were $294,100 in the first six months of fiscal
year 1998/99. Cash flows used from operations were a negative $794,700 for
the same period in 1997/98. For those periods, cash flows used in
investing activities included, respectively, $87,500 and $165,900 for the
purchase of machinery and equipment and for leasehold improvements. Cash
flows used in investing activities for the recent quarter also included
$261,300 of goodwill and $360,000 of other intangible assets related to the
purchase of EXCOA, a privately held Florida based distributor, and AMPROMED
a Rio de Janeiro based import company. The purchase did not have a
material impact on the income statement of the company for the period. The
company has temporarily minimized its current activity in Brazil due to
recent economic developments in the region. The total decrease in cash and
cash equivalents for the 1999 six month period was $29,400 as compared to
decrease of $1,296,900 during the same period in 1998. *
<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 believes that 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 is scheduled for
March 1999. It is the Company's belief that the latest Motions to Dismiss
will be denied and it is the Company's intention to vigorously pursue a
trial in the State Court action as soon as possible.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes
thereof. The Company has not done so because it does not believe there is
any merit to 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
None
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.
<PAGE>
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ MICHAEL L. KRALL
----------------------------------------
Michael L. Krall, President/CEO
By: /s/ GARY BROWNELL
----------------------------------------
Gary Brownell, Chief Financial Officer
INNOVATIVE MEDICAL SERVICES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE SIX MONTHS ENDED JANUARY 31, 1998 AND 1999
For the Six Months Ended
January 31
--------------------------
1999 1998
---- ----
Shares outstanding 4,149,476 3,832,851
----------- -----------
Weighted average shares outstanding 3,949,293 3,655,134
Stock Options 1,306,250 406,250
Warrants 1,798,125 1,798,125
----------- -----------
Total weighted average shares outstanding 7,053,668 5,859,509
=========== ===========
Net Income (Loss) $ 294,143 $ (794,702)
=========== ===========
Primary Net Earnings (Loss) per share $ 0.07 $ (0.22)
=========== ===========
Fully Diluted Net Earnings (Loss) per share $ 0.04 $ (0.14)
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
<PERIOD-START> NOV-01-1998 AUG-01-1998
<PERIOD-END> JAN-31-1999 JAN-31-1999
<CASH> 222,466 222,466
<SECURITIES> 0 0
<RECEIVABLES> 719,363 719,363
<ALLOWANCES> (17,850) (17,850)
<INVENTORY> 564,282 564,282
<CURRENT-ASSETS> 1,655,291 1,655,291
<PP&E> 1,128,493 1,128,493
<DEPRECIATION> (319,906) (319,906)
<TOTAL-ASSETS> 3,554,232 3,554,232
<CURRENT-LIABILITIES> 1,102,939 1,102,939
<BONDS> 0 0
0 0
0 0
<COMMON> 6,149,730 6,149,730
<OTHER-SE> (3,698,437) (3,698,437)
<TOTAL-LIABILITY-AND-EQUITY> 3,554,232 3,554,232
<SALES> 767,979 1,563,498
<TOTAL-REVENUES> 767,979 1,563,498
<CGS> 271,631 553,920
<TOTAL-COSTS> 342,435 720,416
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 156,601 294,543
<INCOME-TAX> 200 400
<INCOME-CONTINUING> 156,401 294,143
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 156,401 294,143
<EPS-PRIMARY> 0.04 0.07
<EPS-DILUTED> 0.02 0.04
</TABLE>
