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, 2000
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
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(Exact name of registrant as specified in its charter)
California 33-0530289
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
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(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
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(Title of Class)
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, Class A Warrants
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(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: $1,661,462
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Approximately $15,181,557 as of October 25, 1999.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 5,982,728 shares of Class A common stock as of October 25, 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, 2000.
<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. The Company has expanded from its niche
pharmacy market into other, broader markets with new products, including
residential and commercial water filtration systems, health and wellness-related
retail merchandise, e-commerce products, and silver ion bioscience technologies.
The Fillmaster(R)pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R)water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM)bar code reader. The Company also markets proprietary NSF
certified replacement filters for the Fillmaster Systems.
The Company's "Pharmacist Recommended" Nutripure(R) line of water treatment and
filtration systems includes the Nutripure 3000S-Series whole-house water
softening systems, the Nutripure Elite reverse osmosis point-of-use systems, the
Nutripure 2000 countertop water filtration system and the Nutripure Sport
filtered sport bottle. The Company distributes its various Nutripure products in
several ways, including retail sales, catalogue placement, business-to-business
sales, internet promotion and in-home sales presentations.
The Company, through its subsidiary Nutripure.com(R), operates an e-commerce
health supersite, which provides consumers a wide variety of vitamins, minerals,
nutritional supplements, homeopathic remedies and natural products. In addition
to merchandise, the supersite offers comprehensive health and wellness
information in an easy-to-access, intuitive reference format.
Innovative Medical Services has obtained worldwide manufacturing and marketing
rights for advanced silver ion technologies. Potential applications for these
products include municipal and point-of-use/point-of-entry water treatment, food
processing, personal disinfecting retail products, and commercial and retail
hard surface disinfecting products. In addition, these technologies may prove to
be revolutionary in the healthcare market for treatment of including human and
animal infections and wounds, and for and disinfecting applications in
hospitals, clinics, surgical centers and other medical and health related
facilities.
History
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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 not only the pharmacy industry, but also
other healthcare markets and to retail consumers.
In the past four years, Innovative Medical Services transitioned from a
one-product company supplying a niche market to a multi-division company
managing new products and programs. In addition to expanding the Fillmaster
product line with the Fillmaster 1000e and the Scanmaster, the Company launched
a line of residential water treatment and filtration products and several other
health related retail products. The Company distributes many of the new products
through distribution channels established by sales of Fillmaster Systems to
retailers. The Company also launched a strong e-commerce initiative and entered
the bioscience arena with its silver ion disinfecting technologies.
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 treatment and silver ion
products to Brazil through AMPROMED.
<PAGE>
In December 1999, Innovative Medical Services formed a wholly owned subsidiary,
Nutripure.com, to capitalize on internet commerce opportunities focusing on
health and wellness. In January 2000, the Company began the process to spin off
Nutripure.com as a separate public company. During the intervening time, adverse
market conditions for solely internet-based ventures have eroded Management's
confidence in the viability of a public market for Nutripure.com common stock.
Therefore, in October 2000, the Company's Board of Directors elected to retain
Nutripure.com as an operating division of Innovative Medical Services in order
to minimize the substantial administrative expense associated with launching and
operating a public company.
Principal Products and Markets
WATER TREATMENT DIVISION
Pharmaceutical Water Treatment
------------------------------
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 a 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 and is closed and pressurized to prevent
contamination.
The Fillmaster System saves time and money for pharmacies. According to the
Company's testing, the Fillmaster has a fill rate at least three times that of
previous bottle-and-hose methods, and direct and indirect costs associated
specifically with bottled water are reduced or eliminated. Pharmacy storage
space can be reallocated to more profitable items, labor savings accompany the
efficiencies, and the expense of bottled water purchases of up to $1.25 per
gallon is replaced by one annual filter change. Under optimum usage, a pharmacy
reduces the cost of "purified water" to approximately $.04 per gallon.
In addition to efficiency and cost savings, the Fillmaster System increases
prescription integrity by greatly reducing the possibility of human error while
dispensing prescriptions. The patented Fillmaster 1000e employs multiple
microprocessors to provide accurate and even-flow dispensing. The Company sells
Fillmaster 1000e dispensers as an upgrade to existing installations and as a
component of new installations. The Scanmaster, launched in August 1999, is a
pager-sized, modular upgrade to the Fillmaster 1000e. A user simply scans a
prescription's NDC bar code in front of the dispenser, and the Fillmaster 1000e
displays the product name and required water quantity. The Fillmaster System
then dispenses the prescription with one touch of a button. The advanced
technology of the Fillmaster 1000e computerized dispenser and the Scanmaster bar
code reader ensures accuracy of measurement and assurance of compliance to
minimize liability.
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 20% of a pharmacy's gross profit. The
Company has installed over 20,000 Fillmaster dispensers in pharmacies across the
nation, including Wal-Mart, Walgreens, Albertson's/American Stores, Eckerd, Fred
Meyer, Target, CVS, Kroger, Smith' Food and Drug, Longs Drugs, 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 NSF
certified filter replacements for the Fillmaster's Pharmapure water purification
system, which require changing at intervals of approximately 12 months or sooner
as indicated by the purity testing module. The filter replacements represent a
significant continuing source of revenues to the Company.
<PAGE>
Customer Service Plan 2000(TM) Innovative Medical Services offers outstanding
service to its pharmacy customers with its exclusive Customer Service Plan 2000
(CSP 2000). The CSP 2000 provides an unlimited warranty on all Innovative
Medical Services pharmacy products, regardless of age or quantity; significant
discounts on maintenance item costs; free software upgrades for the Fillmaster
1000e and Scanmaster; a secure web site that allows pharmacy customers to
monitor history, scheduled maintenance and and account status; automatic
replacement filter shipments; and simplified, annual invoicing. Motivated by the
cost savings and the extended warranty coverage, most of the Company's chain
customers have entered into multi-year contracts for the CSP 2000.
Residential Water Treatment Products
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Nutripure(R) 3000S Series Innovative Medical Services has created the most
comprehensive marketing program ever introduced to the water treatment industry.
The program offers existing independent water treatment dealers a line of
residential water softening and other point-of-use water treatment equipment for
sale to the public under IMS' reputable "Pharmacist Recommended" Nutripure
brand. In addition, the program provides complementary, industry-unique
financing that extends credit to consumers for the purchase of water treatment
equipment from participating dealers. The Company realizes revenues from both
the sale of Nutripure equipment and the financing.
IMS formed alliances with independent dealer groups, finance companies and
leading equipment component manufacturers to create a marketing program to sell
and finance whole-house water treatment systems through existing dealers. The
elite marketing strategy provides consumers and independent dealers a name and
image they can trust. Combined with proven in-home marketing practices, this
strategy provides a powerful advantage to the Nutripure direct sales force. The
Nutripure 3000S Series is top-of-the line equipment that ensures excellent
performance, customer satisfaction and no-hassle installation and aftermarket
maintenance. The programmable systems come equipped with microprocessors and
electronic water meters to monitor daily water usage and provide automatic,
demand-based water conditioning. An electronic memory stores operating system
information, and battery backup keeps it current if power is lost. Dealers can
dramatically bolster their sales results by promoting the professional image and
excellent reputation of the Nutripure brand name.
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. The
Company's drinking water systems provide the best reverse osmosis technology
available at a moderate price, and are therefore strong value purchases.
Incorporating 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. Although the
market for water systems is quite competitive, the pharmacists' recommendation
of a system they use in their pharmacies to reconstitute prescriptions sets
Nutripure apart from all other residential drinking water systems. The Company's
direct sales force of independent water treatment dealers also distributes the
Nutripure Elite system in conjunction with sales of the Nutripure 3000S Series
water softening equipment.
Nutripure(R)Elite Filters The Company also markets unique and proprietary filter
replacements for the Nutripure Elite residential drinking water systems that
require changing every 12 months.
Nutripure(R)2000 Innovative Medical Services entered the retail venue with its
Nutripure 2000 Countertop Water Filtration System. Nutripure 2000, 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 tap water. Most
importantly, Nutripure is the only filtration system in its class that is
<PAGE>
"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.
The "Pharmacist Recommended" Nutripure 2000 requires no assembly and leads its
category with other unique enhancements including: a 2,000-gallon capacity
filter, an automatic bypass shutoff valve, an electronic monitor that reminds
users when to change the filter, and an exclusive filter design that prevents
leaking and contamination because water flows only through the completely sealed
filter cartridge.
Innovative Medical Services distributes Nutripure 2000 through retail outlets
and catalogues in the United States and Canada. In many cases, product placement
is established through existing channels of distribution in retail chains that
use Fillmaster equipment in their pharmacies.
Nutripure(R)2000 Replacement Filters The Company also manufactures and markets
replacement filters for the Nutripure 2000 water system. The Nutripure 2000
contains a 2,000-gallon filter that must be changed every year.
Nutripure(R)Sport Filtered Sport Bottle The "Pharmacist Recommended" Nutripure
Filtered Sport Bottle, also offered as a private label or premium item, provides
clean, great-tasting water for on-the-go consumers. An innovative alternative to
buying expensive bottled water, Nutripure Sport can be refilled 60 times before
an inexpensive filter change is required. The Nutripure Sport program provides
recurring revenue through sales of the replacement filter twin pack. Excellent
margins and high-impact merchandising, including hot colors and small-footprint
shipper/floor displays, make Nutripure Sport a category leader.
RETAIL PRODUCTS DIVISION
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.
Nutripure(R)Lancets "Pharmacist Recommended" Nutripure Lancets for diabetic
glucose testing combine superior design technology and customer satisfaction
with maximized margins. The 100-count box of sterile-tip, one-time use lancets
provides retailers with ongoing profitability.
Nutripure(R)Antibacterial Hand Soap Nutripure Antibacterial Hand Soap is a
hypoallergenic, all natural, gentle hand soap that provides excellent
antibacterial protection in a luxurious formula containing goat's milk and
coconut oil to smooth and soften dry skin. Available in attractive 8oz. pump
dispenser bottles and 30 oz. refills, "Pharmacist Recommended" Nutripure
Antibacterial Hand Soap provides superior quality and big profits compared to
leading national brands.
Nutripure(R)Antibacterial Hand Sanitizer Nutripure Antibacterial Hand Sanitizer
provides gentle, long-lasting protection from germs. Available in 4oz. and 8 oz.
bottles, "Pharmacist Recommended" Nutripure Hand Sanitizer will maximize sales
in the growing antibacterial personal products category.
E-COMMERCE DIVISION
Nutripure.com(R)The Company operates Nutripure.com, an e-commerce supersite
providing consumers a wide variety of vitamins, minerals, nutritional
supplements, homeopathic remedies and natural products. In addition to products,
the website offers comprehensive health and wellness information in an
easy-to-access, intuitive reference format. The website also presents the
Nutripure 2000 water filtration system.
<PAGE>
Nutripure.com has formed a strategic alliance with Bergen Brunswig Corporation
to provide a seamless online interface for efficient, direct-to-consumer
distribution of products through Bergen Brunswig's strategically located
state-of-the-art distribution facility in Louisville, Kentucky. The alliance
combines the strengths of Nutripure.com's aggressive sales, marketing and
customer support programs with Bergen Brunswig's leadership, buying power and
order fulfillment and delivery system.
BIOSCIENCE DIVISION
Axenohl(TM)Innovative Medical Services obtained worldwide manufacturing and
marketing rights to Axenohl ("Axen(TM)"), an advanced silver ion technology.
Axenohl is a patent-pending, non-toxic aqueous disinfectant. Based upon
proprietary ionization stabilization technology, Axenohl does not include the
use of traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed.
Submissions have been made to the Food and Drug Administration and the
Environmental Protection Agency for a variety of Axenohl uses. If approved by
the FDA as safe and efficacious, and the EPA as non-toxic, the potential uses of
Axen could make dramatic improvement in many aspects in the treatment of wounds
and burns in humans and animals and in disinfecting hard surfaces in hospital
ERs, surgeries, laboratories, dental and medical offices and for decontamination
of municipal water supplies. Additional applications for this product include
point-of-use/point-of-entry water treatment, personal disinfecting retail
products, and commercial and retail hard surface disinfecting products.
The Company has developed equipment to dispense Axen in measured doses to
municipal, commercial and point-of-use water supplies to kill bacteria, viruses
and fungi originating from the water source or the delivery infrastructure.
Upon receiving appropriate approvals, the Company plans to launch a consumer
line of products featuring Axen. The first products to be introduced will be the
improved Nutripure antimicrobial soap and hand sanitizer featuring Axen. The
Company has also established a line of veterinary products featuring Axen
including antimicrobial shampoo, hoof spray, wound salve, and stall and kennel
spray.
In July 2000, the Company formed a Scientific Advisory Board to assist
Management with its new Bioscience division and all aspects of the development
and identification of uses for the Division's new products. The first product
under review is Axenohl. The Advisory Board will specifically examine the
potential uses and avoidance of toxicity as well as support Management's efforts
to obtain governmental approvals for Axen. Management expects the leadership and
experience of the members of the Scientific Advisory Board to play a key role in
moving Axen-containing products to market. The Company is investing aggressively
in Axen because it believes Axen, of all the Company's new products, carries the
greatest potential for explosive growth into very profitable, worldwide markets.
Manufacturing
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The Fillmaster and Nutripure water 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.
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.
<PAGE>
The Nutripure Sport bottle, Nutripure lancets and Nutripure antibacterial hand
soap and sanitizer are also assembled from proprietary and custom components
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 $114,000 and $157,000
in the fiscal years ended July 31, 2000 and 1999, 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
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As of October 25, 2000, the Company employed thirty people, twenty-seven of whom
are full-time individuals whose principal responsibilities are: product assembly
and shipping (nine employees), sales, marketing and customer service (eight
employees), research and development (six employees) and administration (seven
employees). The Company chooses to outsource more expensive, specialized
functions including public relations, graphic design and selected engineering
projects.
ITEM 2. PROPERTIES
The Company's business operates in an 11,255 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 on July 1, 1996. The monthly rental is
$0.69 per square foot plus $0.14 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.
<PAGE>
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 25, 2000, 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.
The Company has filed an action against John Woodard, former Vice President of
Sales, in Superior Court in the State of California in April 2000. The Company
has alleged Mr. Woodard violated his non-competition/non-disclosure agreement
and provided proprietary information, including information regarding the
Company's Fillmaster line of products and Fillmaster customer base, to Fresh
Water Systems, Inc. The Company is seeking monetary damages and injunctive
relief.
The Company has also filed an action against Fresh Water Systems, Inc., Steven
Norvell, Brian Folk and Eric Norvell in Superior Court in the State of
California. The action was filed in August 2000 and amended in October 2000. The
Company alleges Fresh Water Systems and it's officers and directors
misappropriated trade secrets of the Company obtained from former employees of
the Company, engaged in unfair competition in violation of the California Unfair
Practices Act, tortious interference with contractual relations, tortious
interference with prospective business advantage, fraud, trade libel and
conspiracy with regard to the Fillmaster line of products and Fillmaster
customer base. The Company is seeking monetary damages and injunctive relief.
The Company filed an action against Eckerd Corporation in Superior Court in the
State of California in August 2000. The Company alleges Eckerd Corporation has
not paid for Fillmaster products ordered by and shipped to Eckerd pharmacies.
The Company seeks monetary damages not less than $170,000 plus interest and
attorney's fees.
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 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.
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
Quarter Ended High Low Quarter Ended High Low
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
July 31, 2000 $1.969 $1.250 July 31, 1999 $2.406 $1.625
April 30, 2000 $4.188 $1.594 April 30, 1999 $2.313 $0.656
January 31, 2000 $6.875 $1.375 January 31, 1999 $4.750 $0.938
October 31, 1999 $4.188 $1.500 October 31, 1998 $1.219 $0.250
</TABLE>
(3) Security Holders: As of October 25, 2000, the Company had approximately 115
holders of record of its common stock, 45 holders of its Class A Warrants
and 17 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 25, 2000 was $3.00.
(4) Dividend Plans: The Company has paid no common stock cash dividends and has
no current plans to do so. In January 2000, the Company declared a dividend
in kind of Nutripure.com common stock. The record date and distribution
date were to be set following completion of the registration of
Nutripure.com as a reporting issuer with the Securities and Exchange
Commission. In October 2000, the Board of Directors of Innovative Medical
Services determined that in light of adverse market conditions for solely
internet-based enterprises, a public market for Nutripure.com common stock
may not be viable. Therefore, the Board amended its declaration of a
Nutripure.com dividend to a dividend of Innovative Medical Services' common
stock. The Company will distribute one share of Innovative Medical
Services' common stock for every fifty shares held of record on November 6,
2000 with fractional shares rounded up to the nearest whole share. The
stock will trade ex-dividend on November 2, 2000. Distribution, determined
by NASDAQ, is anticipated for November 20, 2000.
(5) Preferred Stock: There are no shares of preferred stock presently
outstanding.
<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 2000 vs. Fiscal 1999
-------------------------------------------------
Revenues of $1,661,500 in the fiscal year ended July 31, 2000 were 51% lower
than the $3,380,000 in revenues reported for the fiscal year ended July 31,
1999. Fillmaster Purification System sales in the year ended July 31, 2000 were
$1,242,900 and replacement filter sales were $383,000. In the prior year,
Fillmaster Purification System sales were $2,320,000 and replacement filter
sales were $889,000. Sales of the Fillmaster Purification System decreased 46%
over the prior period. Sales of filters decreased 57% in fiscal 2000. Management
believes the decline in Fillmaster revenues is due to multiple factors,
including the fact that the market for pharmacy products is maturing in that
there is a decreasing number of pharmacy chains that do not have water
filtration products, and that the Company has sold systems to most major chains.
The focus for further Fillmaster sales will be on incremental and upgrade sales
to individual pharmacies within current chain accounts, although the Company is
still actively pursuing Fillmaster sales to remaining chains. Management expects
to close such volume sales to new chains in the coming year, and, as in prior
years, those sales will result in spikes in Fillmaster revenues. The Company
works to retain customers with its Customer Service Plan 2000, a multi-year
service and warranty contract (please see "Principal Products and Markets).
The Company also experienced a substantial turnover in sales personnel during
fiscal 2000. Sales projected by the departed personnel were not realized, and
the Company subsequently established its current sales department of highly
qualified and experienced sales people. In addition, Management believes a
former Vice President of Sales misappropriated trade secrets and revealed them
to a competitor, and that Fillmaster sales were significantly impacted by these
unfair business practices (please see "Lega Proceedings"). In the last quarter
of fiscal 2000, the Company began to implement a superior competitive strategy
of multi-year customer service contracts and cross-marketing programs with
retail products.
Gross profits for the year ended July 31, 2000 were $564,000 versus $1,936,700
in 1999. Gross profit percentage of 34% in 2000 was lower versus 57% in 1999.
The decrease in gross profit percentage was largely due to fixed production and
labor costs being applied to the lower sales volume for the year.
Net loss for the year ended July 31, 2000 was $1,745,400 versus net income of
$260,700 for the same period in 1999. The decreased income was due to decreased
sales as outlined above and to an increase in General and Administrative
expenses as the Company positions for expansion into new markets with new
products (Please refer to "Principal Products and Markets" and "Future Outlook"
sections.) General and Administrative expenses increased $535,200 from
$1,178,100 in fiscal 1999 to $1,713,300 in fiscal 2000. $200,500 of these
expenses were related to Nutripure.com. $225,000 is allowance for doubtful
accounts, of which $175,000 is due from Eckerd Corporation. The Company is
actively seeking recovery, including taking legal action. The Company is
recognizing approximately $80,000 in gain from change in accounting principal as
required by a recent accounting pronouncement arising from retroactively
capitalizing part of the cost of website development. Selling expense increased
approximately $250,000 as a result of increased sales personnel, trade shows,
marketing materials and product launches.
<PAGE>
Liquidity and Capital Resources Fiscal 2000 vs. 1999
----------------------------------------------------
During the fiscal year ended July 31, 2000, the Company's current assets to
liabilities ratio rose from 1.95 to 5.02. Current assets increased $680,000 from
$2,114,400 to $2,794,400. Current assets at July 31, 2000 include an increase of
$1,099,300 in cash and cash equivalents due to a private placement in the third
quarter. Accounts receivable decreased $345,300 on lower sales volume.
Inventories increased $76,200 from $720,000 in fiscal 1999 to $796,100 in fiscal
2000 on anticipated sales of new products. Noncurrent assets increased by
$213,300 during the year due to an increase in patents and deferred acquisition
costs related to silver ion technology purchases. Current liabilities decreased
$527,800 from $1,084,100 to $556,300. The decrease in current liabilities was
the result of the Company's ability to pay down accounts and note payable by
$521,600 during the period.
Cash flows used from operations were $1,557,900 in fiscal year 2000 and $556,900
in 1999. For those periods, cash flows used in investing activities were,
respectively, $462,900 and $158,000 for the purchase of machinery and equipment
and for website development. Cash flows from financing activities were
$3,120,080 in fiscal 2000 and $688,700 in fiscal 1999. Investing activities for
the current year included a decrease of $235,500 in notes payable. Also, the
Company received $3,355,600 from proceeds sales of common stock.
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.
In December 1999, the Company's subsidiary, Nutripure.com, issued 1,000,000
shares of common stock to accredited investors for $500,000 ($0.50 per share) in
a private placement of the shares.
In March 2000, the Company issued 607,411 units, consisting of one share of
common stock and one warrant to purchase an additional share of common stock at
$5.25 per share on or before March 31, 2001 for $1,896,500 ($3.375 per unit) in
a private placement of the units to 15 accredited investors.
In addition, approximately $759,000 was received from exercise of outstanding
stock options.
Cash flows from financing activities in fiscal 1999 resulted from an increase in
notes payable of $151,100 and sale of common stock of $537,600.
The total increase in cash and cash equivalents for the fiscal years ended July
31, 2000 and July 31, 1999 was $1,131,000 and $26,200.
Future Outlook
--------------
In the first quarter of fiscal year 2001, Innovative Medical Services began
realizing revenues from the new Nutripure water treatment dealer program. The
dealer base grows steadily, and Management believes that the program will
produce notably increased revenues and earnings in the coming quarters. In
addition to the ongoing expansion of the water dealer program, retail products
currently in distribution are experiencing increased growth, and the Company
expects to see revenue from new products and new distribution channels this
year. Regarding silver ion technologies, regulatory approval is a threshold
event for the Company's commercial launch of Axenohl and related products. Once
approvals are received, Management expects revenues from Axenohl to rapidly and
substantially develop.
Throughout the past year, Innovative Medical Services focused its resources on
expanding the current and future scope of business and related growth potential.
The Company's increased selling expenses and general and administrative expenses
reflect the Company's transition from a niche market company that provides water
purification equipment to pharmacies to an international company containing
several divisions to manage new products and programs in consumer and commercial
<PAGE>
water treatment, direct-to- consumer e-commerce and retail distribution of
multiple product lines. This investment has proved successful, as the Company
has made great strides in product development and distribution. Although
Fillmaster is the cornerstone of the Company's business, the new products have
much greater growth potential.
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
MILLER AND MCCOLLOM
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Innovative
Medical Services, Inc. as of July 31, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
July 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Innovative Medical Services, Inc. at July 31, 2000, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Miller and McCollom
Denver, Colorado
September 28, 2000
2170 South Parker Road Suite 270 - Denver Colorado 80231 - 303 745-2217 -
FAX 303 745-2265
<PAGE>
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 sheet of Innovative Medical Services as
of July 31, 1999, 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 audit 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 the consolidated results of its operations and
its consolidated cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ STEVE HOLLAND
-----------------
Steve Holland
Certified Public Accountant
San Diego, California
October 25, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------
July 31
ASSETS 2000 1999
----------------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,121,316 $ 22,056
Restricted cash 204,887 205,574
Accounts receivable, net of allowance for doubtful
accounts of $ 225,000 444,842 790,166
Notes receivable 193,210 339,524
Inventories 796,136 719,972
Prepaid expenses 33,975 37,078
------- ------
Total current assets 2,794,366 2,114,370
---------- ---------
Property, Plant and Equipment
Property, plant and equipment 1,056,252 805,523
---------- -------
Total property, plant and equipment 1,056,252 805,523
---------- -------
Noncurrent Assets
Deposits 13,083 6,575
Patents and license 498,181 425,550
Goodwill 250,889 256,422
Other intangible assets 344,250 353,250
Deferred acquisition costs 202,542 53,851
-------- ------
Total noncurrent assets 1,308,945 1,095,648
---------- ---------
Total assets $ 5,159,563 $ 4,015,541
============ ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 308,812 $ 594,948
Accrued liabilities 36,880 43,068
Notes payable 210,592 446,067
-------- -------
Total current liabilities 556,284 1,084,083
-------- ---------
Minority interest payable 61,696 -
------- -------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
5,942,903 at July 31, 2000 and
4,392,242 at July 31, 1999 10,018,873 6,663,318
Class A warrants: issued and outstanding 3,687,500
warrants 108,750 108,750
Accumulated deficit (5,586,040) (3,840,610)
----------- -----------
Total stockholders' equity 4,541,583 2,931,458
---------- ---------
Total liabilities and stockholders' equity $ 5,159,563 $ 4,015,541
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------
For the Years Ended
July 31
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 1,661,462 $ 3,379,984
Cost of sales 1,097,419 1,443,307
---------- ---------
Gross profit 564,043 1,936,677
-------- ---------
Selling expenses 595,142 356,611
General and administrative expenses 1,713,337 1,178,128
Research and development 114,756 157,049
-------- -------
Total operating costs 2,423,235 1,691,788
---------- ---------
Operating income (loss) (1,859,192) 244,889
----------- -------
Other income and (expense):
Interest income 34,763 16,631
Loss on sale of assets (40,200) -
-------- ------
Total other income (expense) (5,437) 16,631
------- ------
Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (1,864,629) 261,520
Federal and state income taxes 800 800
---- ---
Income (loss) before minority interest in subsidiary
operations and change in accounting principle (1,865,429) 260,720
Minority interest in subsidiary operations 40,103 -
------- -------
Net income (loss) before cumulative
change in accounting principle (1,825,326) 260,720
Cumulative effect of change
in accounting principle 79,896 -
------- -------
Net income (loss) $ (1,745,430) $ 260,720
============= ==========
Net income (loss) per common share before change
in accounting principle (basic) (0.36) 0.06
Cumulative effect of change
in accounting principle 0.02 -
----- -----
Net income (loss) per common share (basic) $ (0.34) $ 0.06
======== =======
Net income (loss) per common share before change
in accounting principal (diluted) (0.36) 0.04
Cumulative effect of change
in accounting principle 0.01 -
----- -----
Net income (loss) per common share (diluted) $ (0.35) $ 0.04
======== =======
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
Balance, beginning of period $ (3,840,610) $ (4,101,330)
Net income (loss) (1,745,430) 260,720
----------- --------
Balance, end of period $ (5,586,040) $ (3,840,610)
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------
For the Years Ended
July 31
2000 1999
------------- -----------
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (1,745,430) $ 260,720
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 52,546 -
Depreciation 159,624 144,075
Minority interest in subsidiary operations 61,696 -
Changes in assets and liabilities:
(Increase) decrease in restricted cash 687 655
(Increase) decrease in accounts receivable 345,324 (513,547)
(Increase) decrease in notes receivable 146,314 (232,606)
(Increase) decrease in prepaid expense 3,103 (25,522)
(Increase) decrease in inventory (76,163) (359,406)
(Increase) decrease in deposits (6,508) 7,500
(Increase) decrease in patent and licenses (72,631) (367,744)
(Increase) decrease in deferred acquisition costs (148,691) 1,043,001
(Increase) decrease in goodwill 5,533 (256,422)
(Increase) decrease in intangible assets 9,000 (353,250)
Increase (decrease) in accounts payable (286,136) 99,661
Increase (decrease) in accrued liabilities (6,187) (3,992)
---------- ---------
Net cash provided (used) by operating
activities (1,557,919) (556,877)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (462,901) (157,999)
--------- ----------
Net cash (used) in investing activities (462,901) (157,999)
--------- ----------
Cash flows from financing activities
Increase (decrease) in notes payable (235,475) 151,081
Proceeds from sale of common stock 3,355,555 537,601
---------- ----------
Net cash provided by financing activities 3,120,080 688,682
---------- ----------
Net increase (decrease) in cash and cash
equivalents 1,099,260 (26,194)
Cash at beginning of period 22,056 48,250
---------- ----------
Cash at end of period $ 1,121,316 $ 22,056
============= =========
Interest paid $ 73,990 $ 69,591
Taxes paid $ 800 $ 800
</TABLE>
<PAGE>
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent 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.
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.
In December 1999, the Company formed NUTRIPURE.COM as a wholly owned
subsidiary, incorporated in the state of Nevada. NUTRIPURE.COM is an
e-commerce web supersite providing consumers a wide variety of vitamins,
minerals, nutritional supplements, homeopathic remedies and natural
products. In addition to products, the website offers comprehensive health
and wellness information in an easy-to-access, intuitive reference format.
The website will also present the Nutripure line of water filtration
systems.
Basis of Presentation and Principals of Consolidation
-----------------------------------------------------
The accompanying financial statements include the consolidated accounts of
Innovative Medical Services and its subsidiaries. All inter-company
balances and transactions have been eliminated.
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 $114,756
and $157,049 in the fiscal years ended July 31, 2000 and 1999,
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:
<PAGE>
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Website 3.0 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. The cost of patents acquired are being amortized on
a straight-line basis over the remaining lives of 17 years. Website
development costs are being amortized on the straight-line basis over three
(3) years.
Amortization expense for the years ended July 31, 2000 and July 31, 1999
was $47,801 and $11,650, respectively.
Long-Lived Assets
-----------------
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, the carrying value of intangible assets and other long-lived assets
will be reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment.
To date, no such impairment has been indicated. Should there be an
impairment in the future, the Company will measure the amount of the
impairment based on undiscounted expected future cash flows from the
impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions
and projections at the time.
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 31
consisted of:
2000 1999
---------- ---------
Finished Goods $ 108,528 $ 212,335
Work in Progress 180,198 108,770
Raw Materials 494,743 398,867
---------- ---------
$ 783,469 $ 719,972
========== =========
<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 at the
first-time advertising and promotion takes place. Such costs were $197,908
and $101,063 for the years ended July 31, 2000 and July 31, 1999,
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 $133,573 and $49,391 in fiscal years ended July 31, 2000
and July 31, 1999, 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.
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.
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:
<TABLE>
<CAPTION>
For the Years Ended
July 31, 2000 July 31, 1999
------------- --------------
<S> <C> <C>
Shares outstanding 5,942,903 4,392,242
Weighted average number of shares actually
outstanding 5,056,141 4,148,879
Stock Options 1,214,309 1,417,969
Warrants 1,798,125 1,798,125
--------- ---------
<PAGE>
Total weighted average shares 8,068,575 7,364,973
--------- ---------
Net income (loss) before cumulative
Change in accounting principle $ (1,825,326) $ 260,720
Cumulative change in accounting principle 79,896 -
Net income (loss) $ (1,745,430) $ 260,720
============ =========
Basic net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.36) $ 0.06
Cumulative effect of change in
accounting principle 0.02 -
--------- ---------
Net income (loss) per common share $ (0.34) $ 0.06
========= =========
Diluted net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.36) $ 0.04
Cumulative effect of change in
accounting principle 0.01 -
Net income (loss) per common share $ (0.35) $ 0.04
========= ========
</TABLE>
Potential common stock instruments at July 31, 2000, which include
1,214,309 stock options and 1,798,125 warrants, are included in the loss
per share calculation for fiscal year ended July 31, 2000. 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 for
fiscal year ended July 31, 1999.
Recent Accounting Pronouncements
--------------------------------
In June of 1998, the FASB issued Statement of Accounting Standards No. 133
("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance
sheet at their value. This statement, as amended by SFAS 137, is effective
for financial statements for all fiscal quarters to all fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of
this standard to have a material impact on its results of operation,
financial position, or cash flows as the Company currently does not engage
in any derivative or hedging activities.
Income Taxes
------------
At July 31, 2000, the Company has financial, federal, and California tax
net operating loss carryforwards of approximately $5,589,000, $5,071,000,
and $2,374,000, respectively. 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. 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
<PAGE>
standard, the Company has recorded total deferred tax assets of $1,180,000
and $899,000 and a related valuation reserve of $1,180,000 and $899,000 for
the fiscal years ended July 31, 2000 and 1999, 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.
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" FAS No.130 requires that the
components and total amounts of comprehensive income be displayed in the
financial statements beginning in 1998. Comprehensive income includes net
income and all changes in equity during a period that arise from nonowner
sources, such as foreign currency items and unrealized gains and losses on
certain investments in equity securities. The Company does not have any
components of comprehensive income other than net income.
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, 2000 and July 31 1999, the Company's cash and cash equivalents
is represented by $1,121,316 and $22,056, respectively, in cash or checking
accounts.
Note 3. Restricted Cash
At July 31, 2000, the Company's restricted cash consisted of a certificate
of deposit of $204,887 and at July 31, 1999 the Company's restricted cash
consisted of a certificate of deposit of $205,574. 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
At July 31, 2000, notes receivable of $162,793 represents amounts due from
officers and $30,417 represents amounts due from employees. At July 31,
1999, notes receivable of $153,578 represents amounts due from officers and
$185,946 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:
July 31, 2000 July 31, 1999
-------------- ---------------
Computers and equipment $ 927,257 $ 719,410
Furniture and fixtures 100,630 107,431
Website 182,166 -
Vehicle 50,985 52,670
Leasehold improvements 304,623 322,805
-------------- ---------------
1,565,661 1,202,316
Less: accumulated depreciation
and amortication 535,159 396,793
-------------- ---------------
Total $ 1,030,502 $ 805,523
============== ===============
Depreciation expense charged to general and administrative expense for the
years ended July 31, 2000 and 1999 was $159,624 and $144,075, respectively.
<PAGE>
Note 6. Debt
The details relating to debt are as follows:
<TABLE>
<CAPTION>
July 31, 2000 July 31, 1999
<S> <C> <C>
Line of Credit Community 1st Bank
$200,000 line of credit, interest at 8.35%
Due and payable February 25, 2001
Secured by certificate of deposit of $205,574 $ 196,009 $ 196,009
Line of Credit Flagship Capital, Inc. for
financing of accounts payable, interest at 9%
payable at $15,823 monthly beginning March
17, 2000 14,583 -
------------ -------------
Total notes payable 210,592 446,067
Current maturities of notes payable included in
current liabilities 210,592 446,067
------------ -------------
Total long term debt $ - $ -
============ =============
</TABLE>
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 11,255 square foot facility is $0.69 per
square foot plus $0.14 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 approximately $305,000.
The rental expense recorded in general and administrative expenses for the
years ended July 31, 2000 and July 31, 1999 was $98,835 and $78,393,
respectively. Future minimum rental payments required for each of the 5
succeeding years assuming exercise of the option are as follows:
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 - - -
--------- ---------- --------- -------- ----------
Balance, July 31, 1998 3,916,351 6,125,718 3,687,500 108,750 785,000
Sale of stock 233,125 189,375 - - -
Private placement 242,766 348,225 - - -
--------- --------- --------- -------- -------
Balance, July 31, 1999 4,392,242 6,663,318 3,687,500 $108,750 785,000
Sale of stock 783,250 759,055 - - -
Private placement 767,411 2,596,500
--------- ----------- --------- -------- -------
Balance, July 31, 2000 5,942,903 $10,018,873 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 Z 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.
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
<PAGE>
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 Mr. 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 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.
<PAGE>
During the fiscal year ended July 31, 2000, employees and officers
exercised options on 691,750 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.
Note 13. Cumulative Change in Accounting Policy
The Company incurred approximately $208,000 in development costs related to
construction of the Nutripure.com website. These costs were originally
expensed as incurred. In the accompanying financial statements, these costs
have been retroactively capitalized and included in fixed assets at July
31, 2000 in compliance with SOP 98-1 (Statement of Position issued by the
Accounting Standards Executive Committee). Of these costs, $79,900 were
incurred in prior years and are shown as a change in accounting principle
consistent with the newly issued EITF Issue No. 00-2 - Emerging Issues Task
Force Issue titled: Accounting for Web Site Development Costs dated March
16, 2000.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 6, 2000, Steven Holland, CPA, the Registrant's independent
accountant, for the fiscal years ended July 31, 1998, 1997 and 1996 declined to
stand for re-election as auditor. Also, effective on June 6, 2000 the
Registrant's Board of Directors approved the engagement of Miller and McCollom,
Certified Public Accountants as its new auditors. No consultation regarding
accounting policy or procedures with new auditors occurred prior to their
engagement.
Steven Holland, CPA's report for the fiscal years ended July 31, 1998, 1997 and
1996 did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
Nor has there been any disagreement with Steven Holland, CPA on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure or reportable events during the Registrant's most recent
fiscal year through June 6, 2000 which if not resolved to the satisfaction of
Steven Holland, CPA would have caused them to make reference thereto in their
report on the financial statements for such period.
The Registrant has provided Steven Holland, CPA with a copy of the disclosure
contained herein and has requested that Steven Holland, CPA provide the
Registrant with a letter addressed to the U.S. Securities and Exchange
Commission stating whether or they agree with the disclosure. Steven Holland,
CPA has provided such a letter, which was filed as an Exhibit to the Current
Report on Form 8-K dated June 6, 2000.
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, 2000.
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, 2000.
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, 2000.
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, 2000.
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
Change in Auditor filed June 12, 2000 and amended July 20, 2000
<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 25, 2000
--------------------
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 25, 2000
--------------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer
----------------- and Director October 25, 2000
Gary Brownell
/s/ PATRICK GALUSKA Director October 25, 2000
-------------------
Patrick Galuska
/s/ EUGENE PEISER Director October 25, 2000
-----------------
Eugene Peiser
/s/ DONNA SINGER Executive Vice President
---------------- and Director October 25, 2000
Donna Singer
<PAGE>
