U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(MarkOne)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period ended October 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
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INNOVATIVE MEDICAL SERVICES
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(Name of small business issuer in its charter)
California 33-0530289
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices)
619 596 8600
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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: 6,257,739 as of December 12,
2000.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2000 and October 31, 2000
Statements of Operations for the three months ended
October 31, 1999 and 2000
Statements of Cash Flows for the three months ended
October 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
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
<PAGE>
Item 1
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
October 31 July 31
ASSETS 2000 2000
---------------- ----------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 614,440 $ 1,121,316
Restricted cash 207,923 204,887
Accounts receivable, net of allowance for doubtful
accounts of $ 225,000 305,657 411,322
Notes receivable 233,321 226,729
Inventories 888,779 796,136
Prepaid expenses 101,789 33,975
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Total current assets 2,351,909 2,794,365
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Property, Plant and Equipment
Property, plant and equipment 1,009,462 1,056,252
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Total property, plant and equipment 1,009,462 1,056,252
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Noncurrent Assets
Deposits 8,127 13,083
Patents and license 536,065 498,181
Goodwill 248,256 250,889
Other intangible assets 342,000 344,250
Deferred acquisition costs 403,694 202,542
-------- -------
Total noncurrent assets 1,538,143 1,308,946
---------- ---------
Total assets $ 4,899,514 $ 5,159,563
============ ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 413,829 $ 308,812
Accrued liabilities 55,994 36,880
Notes payable 196,009 210,592
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Total current liabilities 665,831 556,284
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Minority interest payable 46,726 61,697
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Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
6,077,068 at October 31, 2000 and
5,942,903 at July 31, 2000 10,103,805 10,018,873
Class A warrants: issued and outstanding 3,686,000
warrants 108,750 108,750
Accumulated deficit (6,025,597) (5,586,041)
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Total stockholders' equity 4,186,958 4,541,582
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Total liabilities and stockholders' equity $ 4,899,514 $ 5,159,563
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
-----------------------------------------------------------------------------------------
For the Three Months Ended
October 31
2000 1999
------------ -----------
<S> <C> <C>
Net sales $ 366,126 $ 904,888
Cost of sales 164,077 410,213
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Gross profit 202,049 494,675
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Selling expenses 174,518 112,704
General and administrative expenses 445,473 263,321
Research and development 50,985 38,603
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Total operating costs 670,976 414,628
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Operating income (loss) (468,927) 80,047
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Other income and (expense):
Interest income 14,599 1,078
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Total other income (expense) 14,599 1,078
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Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (454,328) 81,125
Federal and state income taxes 200 200
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Income (loss) before minority interest in subsidiary
operations and change in accounting principle (454,528) 80,925
Minority interest in subsidiary operations 14,972 -
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Net income (loss) before cumulative
change in accounting principle (439,556) 80,925
Cumulative effect of change
in accounting principle - 79,896
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Net income (loss) $(439,556) $ 160,821
=========== ==========
Net income (loss) per common share before change
in accounting principle (basic) $ (0.07) $ 0.02
Cumulative effect of change
in accounting principle - 0.02
------ -----
Net income (loss) per common share (basic) $ (0.07) $ 0.04
======== ========
Net income (loss) per common share before change
in accounting principal (diluted) $ (0.07) $ 0.01
Cumulative effect of change
in accounting principle - 0.01
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Net income (loss) per common share (diluted) $ (0.07) $ 0.02
======== ========
Three Months
Ended Year Ended
October 31 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2000 2000
Balance, beginning of period $ (5,586,041) $(3,840,610)
Net income (loss) (439,556) (1,745,431)
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Balance, end of period $ (6,025,597) $(5,586,041)
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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For the Three Months Ended
October 31
2000 1999
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Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (439,556) $ 160,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 21,192 -
Depreciation 47,500 42,824
Minority interest in subsidiary operations (14,972) -
Changes in assets and liabilities:
(Increase) decrease in restricted cash (3,036) 4,113
(Increase) decrease in accounts receivable 105,665 (311,123)
(Increase) decrease in notes receivable (6,592) (452)
(Increase) decrease in prepaid expense (67,814) (28,481)
(Increase) decrease in inventory (92,644) (56,861)
(Increase) decrease in deposits 4,956 (6,508)
(Increase) decrease in patent and licenses (37,884) (3,000)
(Increase) decrease in deferred acquisition costs (201,152) -
(Increase) decrease in goodwill 2,633 1,633
(Increase) decrease in intangible assets 2,250 2,250
Increase (decrease) in accounts payable 105,017 88,353
Increase (decrease) in accrued liabilities 19,114 (29,980)
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Net cash provided (used) by operating
activities (555,322) (136,751)
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Cash flows from investing activities
Purchase of property, plant and equipment (21,903) (201,107)
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Net cash (used) in investing activities (21,903) (201,107)
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Cash flows from financing activities
Increase (decrease) in notes payable (14,583) 121,300
Proceeds from sale of common stock 84,932 216,750
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Net cash provided by financing activities 70,349 338,050
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Net increase (decrease) in cash and cash
equivalents (506,876) 192
Cash at beginning of period 1,121,316 22,056
---------- -----------
Cash at end of period $ 614,440 $ 22,248
========== ==========
Interest paid $ 5,462 $ 16,299
Taxes paid $ 800 $ 800
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The financial statements included herein have been prepared by
Innovative Medical Services (the Company) without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by
such rules and regulations, and Innovative Medical Services believes
that the disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be
read in conjunction with the July 31, 2000 audited financial
statements and the accompanying notes thereto. While management
believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are in some
respects dependent upon the facts that will exist and procedures that
will be accomplished by Innovative Medical Services later in the year.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
Note 2. Stock Dividend
On October 26, 2000 Innovative Medical Services announced that the
Board of Directors voted to declare a dividend in kind of Innovative
Medical Services' common stock. This common stock dividend was
declared and distributed in lieu of the previously announced dividend
of Nutripure.com shares. The Company distributed 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, for a total of 121,961 shares.
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,
Innovative Medical Services declared a dividend in kind of
Nutripure.com common stock as the Company began the process to spin
off Nutripure.com as a separate public company. 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. During the last several months,
however, 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, the Board has
amended its declaration of a Nutripure.com dividend to a dividend of
Innovative Medical Services' common stock. The Company will 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.
Note 3. Subsequent Events
In November of 2000 Innovative Medical Services acquired 100% of the
stock of ETIH2O, Inc., a Florida corporation, for approximately
$228,000. The transaction was recorded using the purchase method of
accounting. The Company intends to place the assets of ETIH2O into a
newly formed Nevada corporation of similar name and dissolve the
Florida corporation. ETI-H2O, a privately held technology corporation,
developed Axenohl and previously manufactured the product in
cooperation with NVID. ETI-H2O is an industry leader in research and
development of varied water treatment applications, including
electronic RF scale control, copper/silver ionization and filtration
technologies.
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services (the Company) is the nation's leader in
pharmaceutical water purification. The Company 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.
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. The Company recently received notice from Wal-Mart that the rollout of
Nutripure 2000 will continue to additional stores in the coming year.
Regarding silver ion technologies, regulatory approval is a threshold event for
the Company's commercial launch of Axenohl and related products. EPA approval of
Axenohl for use as a hard surface disinfectant is believed imminent. If
approvals are received, Management expects revenues from Axenohl to rapidly and
substantially develop.
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 VERSUS THREE
MONTHS ENDED OCTOBER 31, 1999
Total revenues of $366,100 in the first quarter ended October 31, 2000 were 60%
lower than the $904,900 in revenues reported for the same quarter ended October
31, 1999. Fillmaster Purification System sales in the 2000 quarter were $239,400
and replacement filter sales were $121,700. In the 1999 quarter, Fillmaster
Purification System sales were $609,100 and replacement filter sales were
$192,300. 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).
Gross profit in the most recent quarter was $202,000 versus $494,700 in the
year-earlier quarter. Gross profit percentage of 55% in the 2000 quarter
remained unchanged from the gross profit percentage in the 1999 quarter.
Net loss for the quarter ended October 31, 2000 was $439,600 versus a net income
of $160,800 for the same quarter in 1999. The decreased income was due to
decreased sales 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. General and Administrative
expenses increased $182,200 from $263,300 in fiscal 1999 to $445,500 in fiscal
2000, $75,100 of these expenses were related to Nutripure.com, a wholly owned
subsidiary incorporated in the state of Nevada in December 1999. 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 also
presents the Nutripure line of water filtration systems.
Throughout the quarter, 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
water treatment, direct-to-consumer e-commerce and retail distribution of
multiple product lines.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended October 31, 2000 the Company's current assets to
liabilities ratio decreased from 5.02 to 3.53. Current assets decreased $442,500
from $2,794,400 to $2,351,900. Current liabilities increased $109,600 from
$556,300 to $665,800.
Cash flows used by operations were $555,30 in the first three months of fiscal
year 2000. Cash flows used by operations were $136,800 for the same period in
1999. For those periods, cash flows used in investing activities included,
respectively, $21,900 and $201,100 for the purchase of machinery and equipment
and for leasehold improvements. Financing activities included a decrease of
$14,600 in notes payable in the current quarter compared to an increase of
$121,300 in the prior quarter ending October 31, 1999. The Company also received
$84,900 from the sale of common stock resulting from the exercising of employees
options.
<PAGE>
The total decrease in cash and cash equivalents for the quarter ended October
31, 2000 was $506,900 as compared to an increase of cash and cash equivalents of
$200 for the same period in the prior fiscal year.
<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 December
12, 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.
<PAGE>
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 2.
CHANGES IN SECURITIES
In November 2000, the Company issued 94,340 shares of common stock at $2.625 per
share for $1,896,500 in a private placement to five investors.
In November 2000, the Company issued 31,240 shares of common stock to eight
investors in exchange for their shares in ETI H2O, Inc. An additional 3,143
shares were issued to a single investor in satisfaction of debt of ETI H2O, Inc.
Also in November 2000, the Company issued 121,961 shares in a dividend payment
to holders of Innovative Medical Services common stock. The Company distributed
one share of Innovative Medical Services common stock for every fifty shares
held of record on November 6, 2000
With respect to the sales made, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The securities were offered solely to
accredited or sophisticated investors who were provided all of the current
public information available on the Company.
<PAGE>
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ Michael L. Krall
-------------------------------
Michael L. Krall, President/CEO
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
<PAGE>
