-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EidrMmK1+dj/sLF/VmfutmSHnfxUv1+HUj4SE9/29M/AZT2tUCSFdbXS9PMS57ic i/QAz5ishRuMokHdj4dDcA== /in/edgar/work/0001079973-00-000111/0001079973-00-000111.txt : 20001031 0001079973-00-000111.hdr.sgml : 20001031 ACCESSION NUMBER: 0001079973-00-000111 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE MEDICAL SERVICES CENTRAL INDEX KEY: 0001006028 STANDARD INDUSTRIAL CLASSIFICATION: [3841 ] IRS NUMBER: 330530289 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21019 FILM NUMBER: 748141 BUSINESS ADDRESS: STREET 1: 1725 GILLESPIE WAY STREET 2: STE H CITY: EL CAJON STATE: CA ZIP: 92020 BUSINESS PHONE: 6195968600 MAIL ADDRESS: STREET 1: 1725 GILLESPIE WAY STREET 2: SUITE H CITY: EL CAJON STATE: CA ZIP: 92020 10KSB 1 0001.txt 10KSB FOR THE PERIOD ENDED JULY 31, 2000 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 --------------------------- (Exact name of registrant as specified in its charter) California 33-0530289 ------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1725 Gillespie Way, El Cajon, California 92020 ---------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number: (619) 596-8600 Securities registered pursuant to Section 12(b)of the Act: None ----------------- (Title of Class) Securities registered pursuant to Section 12(g)of the Act: Common Stock, Class A Warrants ------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [ X ] State issuer's revenues for its most recent fiscal year: $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. PART I ITEM 1. DESCRIPTION OF BUSINESS 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. History - ------- Innovative Medical Services was incorporated in the State of California on August 24, 1992, to pursue the immediate business of manufacturing and marketing the Fillmaster and subsequently a broadly based business of delivering advanced technology, equipment and supplies to 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. 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. 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 - ------------------------------------ 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 "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. 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 - ------------- 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. 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 - --------- 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. 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.
Fiscal 2000 Fiscal 1999 Quarter Ended High Low Quarter Ended High Low --------------------------------------- -------------------------------------- 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
(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. 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. 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 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. 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 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
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------- July 31 ASSETS 2000 1999 ---------------------------- Current Assets 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 ============ ===========
CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------------- For the Years Ended July 31 2000 1999 ----------- ----------- 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) ============= =============
CONSOLIDATED STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------------------------- For the Years Ended July 31 2000 1999 ------------- ----------- Cash flows from operating activities 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
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: 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 ========== ========= 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:
For the Years Ended July 31, 2000 July 31, 1999 ------------- -------------- 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 --------- --------- 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 ========= ========
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 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. Note 6. Debt The details relating to debt are as follows:
July 31, 2000 July 31, 1999 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 $ - $ - ============ =============
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:
Common Common Stock Stock A A Z Warrants Shares $ Warrants Warrants Issued Issued $ --------- ---------- ---------- -------- ---------- 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 ========= =========== ========= ======== =======
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 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. 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. 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 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 EX-11 2 0002.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11
For the Years Ended July 31 2000 1999 ----------- ------------ Shares outstanding 5,942,903 4,392,242 ----------- ------------ Weighted average shares outstanding 5,056,141 4,148,879 Stock Options 1,214,309 1,417,969 Warrants 1,798,125 1,798,125 ----------- ----------- Total weighted average shares outstanding 8,068,575 7,364,973 =========== =========== 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 ============= =========== 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 $ (0.36) $ 0.04 in accounting principal Cumulative effect of change in accounting principle 0.01 - ============= =========== Net income (loss) per common share $ (0.35) $ 0.04 ============= ===========
EX-13 3 0003.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 13 INNOVATIVE MEDICAL SERVICES SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION - ---- ---------------------- Export Company of America, Inc. (EXCOA) Nevada Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED) A Brazilian Limited Liability Company Rio de Janeiro, Brazil Nutripure.com Nevada EX-27 4 0004.txt FDS --
5 12-MOS JUL-31-2000 AUG-01-1999 JUL-31-2000 1,326,203 0 669,842 (225,000) 796,136 2,794,365 1,591,410 (535,158) 5,159,563 556,284 0 0 0 10,018,873 (5,477,291) 5,159,563 1,661,462 1,661,462 1,097,419 2,423,235 (5,437) 0 0 (1,826,426) 800 (1,825,326) 0 0 79,896 (1,745,430) (0.01) (0.01)
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