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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period
from _______ to _____
Commission File number 0-21019
INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
---------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: 5,152,117 as of March 14, 2000.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1999 and January 31, 2000
Statements of Operations for the three months ended
January 31, 1999 and 2000 Statements of Cash Flows for
the three months ended January 31, 1999 and 2000
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
ITEM 1
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
<TABLE>
<CAPTION>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31 July 31
ASSETS 2000 1999
--------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 79,400 $ 22,056
Restricted cash 203,611 205,574
Accounts receivable, net of allowance for doubtful
accounts of $ 17,850 1,015,258 790,166
Notes receivable 406,677 339,524
Inventories 716,800 719,972
Prepaid expenses 50,324 37,078
------------- -------------
Total current assets 2,472,069 2,114,370
------------- -------------
Property, Plant and Equipment
Property, plant and equipment 1,067,846 805,523
------------- -------------
Total property, plant and equipment 1,067,846 805,523
------------- -------------
Noncurrent Assets
Deposits 13,083 6,575
Patents and license 493,950 425,550
Goodwill 253,156 256,422
Other intangible asstes 348,750 353,250
Deferred acquisition costs 53,851 53,851
------------- -------------
Total noncurrent assets 1,162,790 1,095,648
------------- -------------
Total assets $ 4,702,705 $ 4,015,541
------------- -------------
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 376,992 $ 594,948
Accrued liabilities 9,602 43,068
Notes payable 425,538 446,067
------------- -------------
Total current liabilities 812,131 1,084,083
------------- -------------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
4,704,117 at January 31, 2000 and
4,392,242 at July 31, 1999 7,435,093 6,663,318
Class A warrants: issued and outstanding 3,687,500
warrants 108,750 108,750
Accumulated deficit (3,653,268) (3,840,610)
------------- -------------
Total stockholders' equity 3,890,575 2,931,458
------------- -------------
Total liabilities and stockholders' equity $ 4,702,705 $ 4,015,541
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME (Uuaudited)
For the Six Months Ended For the Three Months Ended
Jaunuary 31 Jaunuary 31
2000 1999 2000 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,551,745 $ 1,563,498 $ 646,857 $ 767,979
Cost of sales 575,053 553,920 164,840 271,631
------------- ------------- ---------- ----------
Gross profit 976,692 1,009,578 482,017 496,348
------------- ------------- ---------- ----------
Selling expenses 258,430 187,772 145,726 116,466
General and administrative expenses 488,909 447,705 290,824 179,067
Research and development 44,116 84,939 5,513 46,902
------------- ------------- ---------- ----------
-
Total operating costs 791,455 720,416 442,063 342,435
------------- ------------- ---------- ----------
Operating income (loss) 185,237 289,162 39,954 153,913
------------- ------------- ---------- ----------
Other income and (expense):
Interest income 2,504 5,381 1,426 2,688
------------- ------------- ---------- ----------
Total other income (expense) 2,504 5,381 1,426 2,688
------------- ------------- ---------- ----------
Income (loss) before income taxes 187,741 294,543 41,380 156,601
Federal and state income taxes 400 400 200 200
------------- ------------- ---------- ----------
Net income (loss) $ 187,341 $ 294,143 $ 41,180 $ 156,401
============= ============= ========== ==========
Net income (loss) per common share (basic) $ 0.04 $ 0.07 $ 0.01 $ 0.04
============= ============= ========== ==========
Net income (loss) per common share (diluted) $ 0.02 $ 0.04 $ 0.01 $ 0.02
============= ============= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
Six Months
Ended Year Ended
January 31 Ended July 31
2000 1999
-------------------------------
<S> <C> <C>
Balance, beginning of period $(3,840,610) $ (4,101,330)
Net income (loss) 187,341 260,720
------------ -------------
Balance, end of period $(3,653,269) $ (3,840,610)
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended
January 31
---------------------------------
2000 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 187,341 $ 294,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 67,301 70,550
Changes in assets and liabilities: -
(Increase) decrease in restricted cash 1,963 2,641
(Increase) decrease in accounts receivable (225,092) (442,744)
(Increase) decrease in notes receivable (67,153) (18,161)
(Increase) decrease in prepaid expense (13,245) (12,545)
(Increase) decrease in inventory 3,172 (203,716)
(Increase) decrease in deposits (6,508) (4,450)
(Increase) decrease in patent and licenses (68,400) (347,271)
(Increase) decrease in deferred acquisition costs - 1,051,422
(Increase) decrease in goodwill 3,267 (261,322)
(Increase) decrease in intangible assets 4,500 (360,000)
Increase (decrease) in accounts payable (217,957) 49,999
Increase (decrease) in accrued liabilities (33,467) (41,611)
------------- -----------
-
Net cash provided (used) by operating -
activities (364,278) (223,065)
------------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (329,624) (87,539)
------------- -----------
Net cash (used) in investing activities (329,624) (87,539)
------------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable (20,529) 257,216
Proceeds from sale of common stock 771,775 24,015
------------- -----------
Net cash provided by financing activities 751,246 281,231
------------- -----------
Net increase (decrease) in cash and cash
equivalents 57,344 (29,373)
Cash at beginning of period 22,056 48,250
------------- -----------
Cash at end of period $ 79,400 $ 18,877
============= ===========
Interest paid $ 35,514 $ 4,807
Taxes paid $ 400 $ 400
</TABLE>
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
===============================================================
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of the Company.
OVERVIEW
- --------
Innovative Medical Services (the Company), based in El Cajon, California,
markets unique water treatment and disinfecting solutions to a broad range of
customers, including pharmaceutical, healthcare and consumer markets.
The Company is the nation's leader in pharmaceutical water purification. The
Company's cornerstone products have been the Fillmaster(R), Fillmaster(R) 1000e
and Scanmaster(TM) water purification, measuring and dispensing technologies
used in pharmacies to reconstitute oral antibiotic prescriptions. The Company
markets proprietary filters for the aforementioned products, thereby gaining
another significant source of revenues and cash flow.
Innovative Medical Services has also entered the consumer market with its
Nutripure(R) line of residential drinking water systems, including the Nutripure
Elite reverse osmosis water system available as either a convenient, compact
unit easily installed beneath the sink, or as an attractive countertop appliance
requiring no installation. Brand recognition for the Nutripure products is
driven by the Nutripure 2000 countertop water filtration system. Nutripure 2000
competes with PUR(R), Brita(R) and Culligan(R) products, delivering superior
product quality and capacity to consumers.
The Company has licensed silver ion water treatment and disinfecting
technologies for the healthcare market, including hospitals, clinics, surgical
centers, dentists' and doctors' offices and other medical and health related
facilities. Innovative Medical Services has also secured rights to market the
Axenohl(TM) disinfectant technology to the healthcare, food processing, dental,
point-of-use and point-of-entry drinking water markets.
During the second quarter of the fiscal year, the Company made great strides in
three new markets which should create significant quantum growth for the
Company: 1) Expansion of the Company's online retailing initiative through the
addition of vitamins and supplements to the Company's existing product line; 2)
Licensing and marketing of patented ionic water treatment and disinfecting
technologies; and 3) Retail rollout of the Nutripure 2000CT countertop water
filtration system.
In February, Innovative Medical Services launched Nutripure.com: 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.
During the quarter, the Company formed Nutripure.com as a wholly owned
subsidiary and declared a dividend in kind of Nutripure.com shares. Holders of
Innovative Medical Services Common Stock will receive one share of Nutripure.com
Common Stock for each ten shares of Innovative Medical Services Common Stock
held as of a record date to be specified. The record date and distribution date
for the dividend will promptly follow completion of the registration of
Nutripure.com as a reporting issuer with the Securities and Exchange Commission.
A registration statement on Form 10SB relating to these securities will be filed
with the SEC in March, pending completion of the required audit of
Nutripure.com.
Also during the quarter Innovative Medical Services entered into licensing
agreements for several ionic water treatment and disinfecting technologies.
Innovative Medical Services expects to generate
<PAGE>
immediate revenues from sales of RMS technology in the hospital market because
the system solves a very serious problem in hospital infrastructures. Hospital
water systems can harbor bacteria, including Legionella -- the bacteria
responsible for Legionnaires' disease, which can be deadly to patients with
compromised immune systems. The RMS integrates with a hospital's water system to
control and eliminate bio-film buildup. Treatment of hospital water could reduce
or eliminate patient infections and death resulting from Legionella, and
national attention has focused on Legionnaires' disease as a critical threat to
hospital patients.
Axenohl is a patent-pending, non-toxic aqueous disinfectant. Based upon
proprietary ionization stabilization technology, Axenohl does not include the
use of traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed. Innovative Medical Services will market
Axenohl to the medical, dental and food processing markets in addition to the
commercial and consumer drinking water markets in conjunction with IMS'
Nutripure line of water treatment systems.
The Company continues its marketing campaigns to expand into new markets while
pursuing development of future products.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2000 VERSUS THREE
MONTHS ENDED JANUARY 31, 1999
- --------------------------------------------------------------------------------
During the second quarter, Innovative Medical Services experienced an unexpected
turnover in sales personnel. Revenues of $646,900 in the first quarter ended
January 31, 2000 were 16% lower than the $768,000 in revenues reported for the
same quarter ended January 31, 1999. Fillmaster Purification System sales in the
2000 quarter were $234,600 and replacement filter sales were $74,000. In the
1999 quarter, Fillmaster Purification System sales were $475,400 and replacement
filter sales were $260,100. Net income for the quarter ended January 31, 2000
was $41,200 versus $156,400 for the same quarter 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 anticipated rapid growth
activity related to new ventures, including expanded retail distribution of the
Nutripure 2000 home water system, Nutripure.com and the new silver ion
technologies. Management believes that the quarter's results are an aberration
and not a trend. The Company took immediate action to fortify the sales
department with highly qualified and experienced sales people who will lead the
Company to greater markets and increased results. Fillmaster sales are expected
to return to normal levels.
The decrease in Fillmaster Purification System and replacement filter sales was
partially offset by the sale of an internally developed e-commerce supersite.
During the period the Company sold the website to its new subsidiary,
Nutripure.com, an initial purchase price of $1,000,000. Of this amount, $665,200
was eliminated from sales in inter-company consolidation adjustments. The
remaining $334,800 represents the cost of the website development not
capitalized in previous quarters. During the quarter Nutripure.com paid the
Company $350,000 of the purchase price for the website.
Gross profit in the most recent quarter was $482,000 versus $496,300 in the
year-earlier quarter. Gross profit percentage of 74% in the 2000 quarter was
higher versus the 65% gross profit percentage in the 1999 quarter. The gross
profit percentage increase reflects profit on the sale of the website.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2000 VERSUS SIX
MONTHS ENDED JANUARY 31, 1999
- --------------------------------------------------------------------------------
Revenues of $1,551,700 in the six months ended January 31, 1999 were 1% lower
than the $1,563,500 in revenues reported for the six months ended January 31,
1999. Fillmaster Purification System sales in the six months ended January 31,
2000 were $843,600 and replacement filter sales were $266,000. In the prior
period, Fillmaster Purification System sales were $1,099,500 and replacement
filter sales
<PAGE>
were $417,700. Sales of Fillmaster Purification System decreased 23% and sales
of filter replacements decreased 36% during the fiscal quarter 1999/2000. The
sale of the website during the period increased sales 27%.
Gross profits for the six months ended January 31, 2000 were $976,700 versus
$1,009,600 in 1999. The gross profit of 63% in 2000 was lower versus the 65%
gross profit in 1999. The gross profit decrease resulting from decreased
Fillmaster and replacement filter sales was largely offset by the website sale
described above.
Net income for first six months ended January 31, 2000 was $187,300 versus
$294,100 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the six months ended January 31, 2000, the Company's current assets to
liabilities ratio rose from 1.95 to 3.04. Current assets increased $357,700 from
$2,114,400 to $2,472,100. Current assets at January 31, 2000 include an increase
of $57,300 in cash on hand, $225,100 of accounts receivable and $67,200 of notes
receivable.. Inventories remained constant during the period. Current
liabilities decreased $272,000 from $1,084,100 to $812,100. The decrease in
current liabilities was the result of the Company's ability to pay down accounts
payable by $218,000 during the recent quarter.
Cash flows used from operations were $364,300 in the first six months of fiscal
year 2000. Cash flows used from operations were $223,100 for the same period in
1999. For those periods, cash flows used in investing activities included,
respectively, $364,300 and $87,500 for the purchase of fixed assets. Cash flows
used in investing activities for the recent quarter included $334,800
capitalized website cost by Nutripure.com. Cash flows from financing activities
were $771,800 from the sale of common stock including $500,000 from proceeds
received through a Nutripure.com private placement. In addition, approximately
$271,800 was received from exercise of outstanding stock options which
management believes were largely exercised in anticipation of the Nutripure.com
stock dividend. The total increase in cash and cash equivalents for the 2000
six-month period was $79,400 as compared to increase of $18,900 during the same
period in 1999.
<PAGE>
PART 2 OTHER INFORMATION
===========================
ITEM 1
LEGAL PROCEEDINGS
- -----------------
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn Corporation, against the Company for breach of contract in
October 1997. The Company has filed counterclaims based upon the Racketeer
Influenced and Corrupt Organization (RICO) Act against Mr. Reitz, Zedburn
Corporation, Capital Development Group, Steven Durland and other defendants. It
is the Company's position that Mr. Reitz and others perpetrated a scheme to
defraud the Company of cash fees and securities in connection with purported
services of arranging a public offering of the Company's common stock. In
October 1997, Mr. Reitz and Zedburn filed for protection under the Federal
bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed his bankruptcy
and as a result thereof the Company has named Mr. Reitz as a defendant to its
counterclaims.
The Company believes that the defendants had perpetrated similar schemes against
other parties. The Company also believes it has substantially completed
discovery and complied compelling evidence to prove its claims.
Several of the Defendants filed Motions to Dismiss the Company's counterclaims.
A hearing on the Motions was held on October 1, 1998. Certain of the Motions
were granted pending the Company's amendment of its Counterclaim. The Company
amended its Counterclaims in accordance with the judge's rulings. Certain
Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing
on these latest motions was held in March 1999, before a different judge than
the judge who ruled on the first motions. On April 20,1999, Orders were entered
granting the Defendants' Motions to Dismiss. However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the Orders or a copy of the new judge's correspondence offering a "formal
ruling" upon request. In May 1999 the Company filed an Appeal of the Orders and
Motions for Reconsideration based upon inconsistency of the Orders with the
previous judge's rulings and the lack of notice to the Company. The Company
believes that its Appeal and Motions have merit and will be granted. In any
event the Company intends to pursue a trial as soon as possible. As of October
26, 1999, no ruling has been received on the Company's Appeal.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes thereof. The
Company has not done so because it does not believe there is any merit to Mr.
Reitz's claims and that the likelihood that the Company will realize a loss from
these matters is believed remote. In addition, the Company believes that in the
unlikely event that the Company settles, the amount of any such settlement would
not be material to the Company's financial statements.
ITEM 2.
CHANGES IN SECURITIES
- ---------------------
None.
<PAGE>
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
- -------------------------------
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------
Not applicable.
ITEM 5.
OTHER INFORMATION
- -----------------
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
<PAGE>
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, 1999 AND 2000
For the Six Months Ended
January 31
2000 1999
------------------------------
Shares outstanding 4,552,242 4,149,476
------------ -----------
Weighted average shares outstanding 4,451,372 3,949,293
Stock Options 1,452,500 1,306,250
Warrants 1,798,125 1,798,125
------------ -----------
Total weighted average shares outstanding 7,701,997 7,053,668
============ ===========
Net Income (Loss) $ 187,341 $ 294,143
============ ===========
Basic Net Earnings (Loss) per share $ 0.04 $ 0.07
============ ===========
Diluted Net Earnings (Loss) per share $ 0.02 $ 0.04
============ ===========
<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-01-1999 AUG-01-1999
<PERIOD-END> JAN-31-2000 JAN-31-2000
<CASH> 283,181 283,011
<SECURITIES> 0 0
<RECEIVABLES> 1,081,084 1,015,258
<ALLOWANCES> (17,850) (17,850)
<INVENTORY> 716,800 716,800
<CURRENT-ASSETS> 2,502,239 2,472,069
<PP&E> 1,217,996 1,217,996
<DEPRECIATION> (400,268) (400,268)
<TOTAL-ASSETS> 4,932,875 4,702,705
<CURRENT-LIABILITIES> 940,811 812,131
<BONDS> 0 0
0 0
0 0
<COMMON> 7,536,893 7,435,093
<OTHER-SE> (3,544,828) (3,544,518)
<TOTAL-LIABILITY-AND-EQUITY> 4,932,875 4,702,705
<SALES> 646,857 1,551,745
<TOTAL-REVENUES> 646,857 1,551,745
<CGS> 164,840 575,053
<TOTAL-COSTS> 442,063 791,455
<OTHER-EXPENSES> 1,426 2,504
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 41,380 187,741
<INCOME-TAX> 200 400
<INCOME-CONTINUING> 41,180 187,341
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 41,180 187,341
<EPS-BASIC> 0.01 0.04
<EPS-DILUTED> 0.01 0.02
</TABLE>
