-----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, A3Rsx5MGXNV+MlNq5/hhLR41LE2LbtLo+sCJz7MwA14J4yXHcSSJhtnXyNF6Uwcq 5XHd3njUQFbeYikE4gpETA== 0001079973-01-500093.txt : 20020411 0001079973-01-500093.hdr.sgml : 20020411 ACCESSION NUMBER: 0001079973-01-500093 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010731 FILED AS OF DATE: 20011115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE MEDICAL SERVICES CENTRAL INDEX KEY: 0001006028 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 330530289 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21019 FILM NUMBER: 1793373 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/A 1 form10ksba_0701.txt FORM 10KSB/A FOR THE PERIOD ENDED 07/31/01 Form 10-KSB/A Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended July 31, 2001 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 -------------- (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: $2,409,700 State the aggregate market value of the voting stock held by non-affiliates of the registrant: Approximately $15,693,000 as of October 25, 2001. Indicate the number of shares outstanding of each of the issuer's classes of common stock: 6,974,699 shares of common stock as of October 25, 2001. Documents incorporated by reference: Certain exhibits Explanatory note on amendment The Registrant has filed this Amendment in response to comments received from the staff of the U.S. Securities and Exchange Commission. The Amendment has revised the following sections: Description of Business Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements Related Transactions Exhibits PART I ITEM 1. DESCRIPTION OF BUSINESS Company Overview - ---------------- Innovative Medical Services began as a provider of pharmaceutical water purification products. Although our current revenues are still primarily from the pharmacy industry, we have expanded from our niche pharmacy market into other, broader markets with new products, including residential and commercial water filtration systems, health and wellness-related retail and e-commerce merchandise, silver ion bioscience technologies and boric acid based pesticide 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. We also market proprietary National Sanitation Foundation certified replacement filters for the Fillmaster Systems. Our 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. We distribute our various Nutripure products in several ways, including retail sales, catalogue placement, business-to-business sales, internet promotion and in-home sales presentations. Through our subsidiary Nutripure.com, we operate an e-commerce health website, Nutripure.com(TM), that distributes Bergen Brunswig products. We provide consumers a wide variety of vitamins, minerals, nutritional supplements, homeopathic remedies and natural products. In addition to merchandise, the site offers comprehensive health and wellness information in an easy-to-access, intuitive reference format. We have obtained worldwide manufacturing and marketing rights for advanced silver ion technologies. Axenohl(TM) is a patented, non-toxic aqueous disinfectant. The use dilution formulation of Axenohl is called Axen(TM). The EPA registration for use of Axenohl and Axen as hard surface disinfectants has been issued, and we plan to pursue additional EPA, USDA and FDA regulatory approvals for other applications. Additional possible uses for this product include wound care, topical infection care and personal disinfecting retail products, which may require FDA approvals, as well as municipal water treatment and point-of-use/point-of-entry water treatment products, which may require additional EPA approvals. We expanded our bioscience division by acquiring a new pesticide technology during the year. The product line contains particular formulas for specific pests and targets cockroaches, ants, palmetto bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests. We are marketing the first product from the line, the EPA-approved RoachX(TM), to the pest control industry through the two largest pest control wholesalers in the United States. We have submitted for and anticipate EPA approval for AntX(TM), the next product in the line. We are ready to begin selling AntX as soon as approval is received. 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 five 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, we launched a line of residential water treatment and filtration products and several other health related retail products. We distribute many of the new products through distribution channels established by sales of Fillmaster Systems to retailers. We also launched a strong e-commerce initiative and entered the bioscience arena with our silver ion disinfecting technologies and our boric acid based pesticide 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, we plan to distribute water treatment and silver ion products to Brazil through AMPROMED. Since the acquisition, the economic conditions in the region have declined and implementation of the project has been delayed. We no longer have immediate plans to import medical and dental supplies into Brazil but we believe, however, that Ampromed is a vital part of our plan to market and sell Axenohl, RoachX and the Nutripure line of water treatment products. In December 1999, we formed a wholly owned subsidiary, Nutripure.com, to capitalize on internet commerce opportunities focusing on health and wellness. In January 2000, we 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 eroded Management's confidence in the viability of a public market for Nutripure.com common stock. Therefore, in October 2000, our 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 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 our 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. We sell 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. This is a finite, niche market in which our significant customers to date consist primarily of domestic retail chain pharmacies. 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. We have 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's 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 We also market 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 us. 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 account status; automatic replacement filter shipments; and simplified, annual invoicing. Motivated by the cost savings and the extended warranty coverage, most of our chain customers have entered into multi-year contracts for the CSP 2000. Residential Water Treatment Products Nutripure(R) 3000S Series Innovative Medical Services' Nutripure Water Dealer 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' 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. We realize revenues from both the sale of Nutripure equipment and the financing. The Nutripure 3000S Series whole-house water softening systems, like most water softening systems on the market, are typically professionally installed in a customer's basement or garage and require electricity. The Nutripure water softening systems, comprised of a resin tank, brine tank and controller, extract minerals from the water through an ion exchange process. Nutripure 3000 systems are often installed in conjunction with Nutripure Elite systems. We have 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. We believe this marketing strategy provides consumers and independent dealers a name and image they can trust. 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. Nutripure(R) Elite The Nutripure Elite line of residential drinking water systems combines reverse osmosis technology with carbon filtration to improve the taste, smell, quality and safety of standard tap water. Reverse osmosis is a water treatment process that removes contaminants from water by using pressure to force the water molecules through a semi-permeable membrane. Carbon, sometimes referred to as activated carbon, is a water treatment medium commonly used for dechlorination and for reducing trace and soluble materials from water. The Nutripure Elite reverse osmosis filtration system is comprised of a storage tank, a faucet and a water filtration apparatus which includes a sediment filter, pre- and post-carbon filters and a reverse osmosis membrane. Nutripure Elite requires neither professional installation nor electricity to operate. The Nutripure Elite system filters to .001 micron and reduces heavy metals, chemicals and microorganisms, such as cryptosporidium and giardia, as well as reducing bad taste and odor from drinking water. A micron is a measurement unit equal to one millionth of a meter. Micron measurements are applied to water filtration systems to indicate the particle size at which suspended solids larger than that size will be removed. We distribute Nutripure Elite systems through independent pharmacists, providing them an exclusive health product. Our 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 We also market 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 water filtration technology at competitive pricing. Nutripure's professional one-micron, carbon microfilter reduces dirt, chemicals, lead and parasites to improve the taste, quality and safety of tap water. The Nutripure 2000 requires no assembly, mounts directly to a faucet and features 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. We distribute 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 We also market 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 Nutripure Filtered Sport Bottle, also offered as a private label or premium item, provides clean, great-tasting water for on-the-go consumers. The Nutripure Filtered Sport Bottle features a small carbon filter at the bottom end of the plastic straw so that, as the consumer drinks through the straw, the water is drawn up through the filter. An innovative alternative to buying expensive bottled water, Nutripure Sport filters an average of approximately 30 microns, reducing sediment and chlorine, and 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. RETAIL PRODUCTS DIVISION Medifier(TM) We also market the Medifier, a 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. In October 2001, we have elected to discontinue marketing of the Nutripure lancets, Nutripure hand soap and Nutripure hand sanitizer in oder to focus on our more productive revenue generating product lines in the water treatment and bioscience divisions. E-COMMERCE DIVISION Nutripure.com(R) We operate Nutripure.com, an e-commerce website 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. Although sales to date from Nutripure.com are non-material, we have minimized costs related to the operation and promotion of Nutripure.com, and we have plans for strategic partnership and future promotion. BIOSCIENCE DIVISION Silver Ionization Technologies Innovative Medical Services obtained worldwide manufacturing and marketing rights to Axenohl(TM) and Axen(TM), advanced silver ion technologies. Axenohl is a patented, non-toxic aqueous disinfectant. The use dilution formulation of Axenohl is called Axen. 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. The disinfection efficacy of Axenohl has been well documented by independent testing laboratories. Axenohl eliminates the following test organism strains all within one minute and with 99.9999% efficacy (complete kill): Pseudomonas aeruginosa ATCC 15422, Staphylococcus aureus ATCC 6538, Salmonella cholerasuis ATCC 10708, E. Coli ATCC 0157:H7, Listeria monocytogenes ATCC 11543, Entrococcus facium ATCC 11543, Rhino virus (common colds), and Rotavirus (infectious diarrhea). We obtained our worldwide manufacturing and marketing rights to Axenohl from NVID International, Inc., in a License Agreement dated November 24, 1999 and a Manufacturing, Licensing and Distribution Agreement dated March 26, 2000 which supersedes the November 1999 Agreement. In November 2000, we closed an acquisition agreement whereby we acquired all of the outstanding common stock of ETIH20, Inc., in exchange for 51,240 shares of its common stock and employment agreements with Andrew Arata and George Duren, the executive officers of ETIH2O, Inc. The primary objective of the ETIH2O purchase was to acquire the testing data, manufacturing rights and capacity to Axenohl held by ETIH2O and to maintain and assure product availability and quality. In March 2001, the US Patent and Trademark Office issued US Patent Number 6,197,814 for Axenohl. Patent applications have been filed in more than 50 countries and regions, and the World Intellectual Property Organization published the Axenohl International Patent Application on April 22, 1999 under publication number WO 99/18790. The inventor of Axenohl is Mr. Andrew B. Arata, President of ETIH2O Corporation, and the registered patent assignee is NVID International, Inc. Innovative Medical Services entered into a sales, marketing, distribution and manufacturing agreement for particular geographic areas and particular market segments for Axenohl/Axen with NVID International on November 24, 1999. On March 26, 2000, Innovative Medical Services entered into a superseding contract with NVID and ETI-H2O, Inc. of Florida for exclusive, worldwide sales, marketing and distribution rights for Axenohl/Axen. The latter contract is the subject of pending litigation with NVID. The lawsuit seeks a judicial declaration that the Manufacturing, Licensing and Distribution Agreement, dated March 26, 2000 between Innovative Medical Services, NVID, International, Inc. and ETI-H2O does not constitute a binding contract and seeks unspecified damages. The lawsuit does not challenge the binding effect of the Standard Manufacturing Agreements dated November 30, 1998 and September 17, 1999 between NVID, International, Inc. and ETI-H2O and the November 24, 1999 License Agreement between Innovative Medical Services and NVID, International, Inc. The dispute does not affect any of our rights associated with the EPA registrations. Under the registrations, ETI-H2O is the only EPA-approved producer of Axenohl and Axen. Registration under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) is required before a product can be sold in the United States. Should NVID prevail in its lawsuit, Innovative Medical Services would be limited by both geography and market segments in its exclusive rights to sell Axenohl. The EPA registrations for Axen and Axenohl as hard surface disinfectants were granted in June of 2001. With EPA approval the potential uses of Axen could make dramatic improvement in retail hard surface disinfecting products as well as in disinfecting hard surfaces in hospital ERs, surgeries, laboratories, dental and medical offices. We have 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, but additional EPA approvals may be required for such water treatment applications. To date, no additional EPA applications have been made. We plan to pursue FDA approval in the future, but no applications have been made to date. We are currently researching the FDA approval process and plans to hire an experienced FDA consultant to assist with the process. Potential applications for this product which may require FDA approvals include wound care, topical infection care, and personal disinfecting retail products. We have funded testing with the United Stated Department of Agriculture for use of Axenohl in poultry processing. The USDA reported that the testing was to be completed in June, and we are awaiting the final report that will document the testing results. Boric Acid Based Pesticide Technologies During the year, we completed the acquisition of a new pesticide technology. The EPA-approved RoachX(R) was the first product to launch from the line, and we have submitted for and anticipate EPA approval for AntX. RoachX is over 96% effective in three to four days with one application for indoor and outdoor eradication of cockroaches, and can be used near children and food preparation areas. Boric acid is a well-known and effective deterrent of cockroaches and will kill them on contact, but cockroaches do not naturally eat the repellent. Although many pesticide products contain boric acid as the listed active ingredient, we believe RoachX to be new because of the combination of boric acid and glycerin in a colloidal suspension to create three unique results: 1) The formula protects the boric acid from water and humidity, 2) The cockroaches perceive formulation as food and will actually eat the glycerin-encapsulated boric acid, and 3) The formula acts as a time-released pesticide, allowing the cockroach to return to the nest before it dies and then becomes a "bait station" for other roaches in the colony. We believe the product line, containing particular formulas for specific pests, is effective against cockroaches, ants, palmetto bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests. RoachX is available through Vopak (formerly Van, Waters & Rogers) and members of the Speckoz group of nine regional independent wholesalers. We believe that with RoachX and AntX we are well positioned to capitalize on the recent federal restrictions on poisonous pesticides and the subsequent industry trend of eliminating spray pesticides and increasing the use of bait-style products like RoachX and AntX. The U.S. Environmental Protection Agency classifies chemicals according to its published "Toxicity Rating Scale". The scale lists Categories I, II, III and IV and defines them as Highly Toxic, Moderately Toxic, Slightly Toxic and Not Toxic. The EPA has placed Boric Acid, the active ingredient in RoachX, in Toxicity Category III: Slightly Toxic. Boric Acid is in the "least toxic" EPA category and is 96-100% effective, as tested by the USDA. Many states, including California, New York and Florida, have legislated to eliminate pesticide spraying in public schools and move to 100% IPM (integrated pest management) practices, such as using baits. Competition We face a significant competitor in the pharmacy water treatment market, Freshwater Systems. This new competition had a significant effect on our revenues in fiscal year 2000, but our sales have begun to recover. Fillmaster system sales increased 6% from fiscal year 2000 to fiscal year 2001, and Fillmaster replacement filter sales increased 24% from fiscal year 2000 to fiscal year 2001. Although we have only one known competitor in our pharmaceutical water purification market, we face very strong competition in the residential water treatment markets where many large, long-established competitors currently hold most of the market share and have the capital resources available to invest in large national marketing campaigns. The market for Axenohl is highly competitive because we must work to displace traditional disinfecting technologies sold by well-known international industry leaders. The market is similar for RoachX. Although recent changes in EPA regulations may ease our ability to enter the market, ongoing strong market presence of existing pesticide companies may make it difficult to compete. On June 8, 2000, the United States EPA reclassified the Dow Chemical product Dursban (also sold as Lorsban). Over 800 products containing the organophosphate pesticide chlorpyrifos are reclassified and now may only be sold in a significantly diluted form. Sales of original, stronger formulations of such products to retailers ended February 1, 2001, and retailers must remove the products from shelves by December 31, 2001. The current formulations are also banned for commercial and agriculture professionals as of December 31, 2000. Professional pest control companies must use a 100 to 1 diluted version of the current product strength and obtain a waiver of responsibility from the home or business owner. As of June 6, 2001, the product underwent a further 10 to 1 dilution, creating a 1000 to 1 diluted treatment. The online marketing arena is highly competitive, and with our minimal promotion of Nutripure.com, revenues are not expected to be realized in the foreseeable future. We recognize that innovative marketing methods are required in such competitive markets. We work to focus on the high quality and value price of our products in their markets. Patents and Intellectual Property We own patents on Medifier and the Fillmaster 1000e Electronic Dispenser and have a patent application pending for Roach X. Except for the Nutripure whole-house water treatment systems, our other water treatment products are comprised of combinations of our own proprietary components, custom made components and patented, off-the-shelf components and are assembled and packaged by us. The Nutripure whole-house water treatment system sold through the Nutripure dealer program is purchased from USFilter as a private label product manufactured specifically for Innovative Medical Services. USFilter uses patented key components in its product. The Medifier patent, which expires in March 2010, protects a device for use as a magnifying implement which has a housing member designed to accommodate prescription bottles of various popular sizes therein in a fixed position. A longitudinally moveable magnifying lens slideably mounted in the housing member is utilized to magnify the print contained on an instruction label located on the side of the prescription bottle. Alternate embodiments allow different size medicine bottles to be alternately mounted in concentric fashion, or with the side of the medicine bottles facing the lens in a fixed position. The Fillmaster 1000e patent expires in August 2017 and protects a method and apparatus for dispensing fluids in response to a user request for a specified amount of the fluid. A microprocessor opens and closes a fluid port for predetermined amounts of time to control the amount of fluid dispensed. The microprocessor monitors the elapsed time and the amount of fluid that has been dispensed since the last time the filter was serviced. In one preferred embodiment, the amount of fluid that is dispensed is measured by continuously monitoring the volume of fluid flowing through the apparatus. A pressure measurement device allows the microprocessor to monitor the fluid pressure. The microprocessor prevents fluid from being dispensed if the pressure is not within a predetermined range of tolerances. The fluid port is opened and closed by activating and deactivating a solenoid. A keypad allows the user to input the amount of fluid that is to be dispensed. A "Wait" period is imposed between the time that the user initiates the first stage and the time the user may initiate the second stage. The microprocessor does not open the fluid port if a "Failure" condition exists. An LCD is provided to display the amount of fluid that the user has requested. In an alternative embodiment, a bar code scanner or other input device allows the user to automatically input the amount of fluid that is to be dispensed. A patent application for RoachX and related products was filed in February 1998 to protect a nonaqueous form of insecticide consisting of a desiccant, preferably boric acid, with additional ingredients for binding, stability and target insect attraction. We have licensed patented Axenohl/Axen silver ion technology from NVID International, Inc. The patent for Axenohl/Axen expires in March 2018 and protects a non-toxic environmentally friendly aqueous disinfectant for specific use as prevention against contamination by potentially pathogenic bacteria and virus. The aqueous disinfectant is formulated by electrolytically generating silver ions in water in combination with a citric acid. The aqueous disinfectant may include a suitable alcohol and/or a detergent. We obtained our worldwide manufacturing and marketing rights to Axen/Axenohl from NVID International, Inc., in a License Agreement dated November 24, 1999 and a Manufacturing, Licensing and Distribution Agreement dated March 26, 2000 which supersedes the November 1999 Agreement. The November 1999 license agreement granted us a three year marketing and distribution license for the following markets: Point of Use Market, defined as water purification and disinfectant systems for consumer and commercial use. Worldwide exclusive rights. Healthcare Market, defined as all water purification and disinfectant systems for hospitals, clinics, surgical centers, doctors' offices or other similar medical or health related facilities, including military medical and health facilities. Exclusive rights for Australia, North, Central and South America and non-exclusive rights for Costa Rica, Mexico and other world markets. Food Processing Market, defined as water purification and disinfectant systems for commercial human or animal food preparation or processing operations. Exclusive rights for Australia, North, Central and South America and non-exclusive rights for Costa Rica and other world markets. Dental Market, defined as water purification and disinfectant systems for use by dentists and oral surgeons. Worldwide exclusive rights. In accordance with this agreement and the superseding March 2000 agreement, we began paying a licensing fee of $70,000 to NVID at the rate of $10,000 per month one month after we began selling Axenohl in the Point of Use or Healthcare Markets. We were also obligated to pay up to $20,000 to NVID and $50,000 to the third party laboratory conducting the EPA certification testing and $29,500 to the Department of Agriculture for a one year research and testing agreement. We have made these payments as well as funding all other testing expenses. We are also obligated to pay a royalty to NVID equal to fifteen percent of the manufactured cost of Axenohl sold pursuant to the agreement and up to twenty percent of any licensing fees we receive granting licenses to use Axenohl in the Food Processing Market. The agreement automatically renews for additional three year terms provided there have been no breaches of the agreement which have not been cured within thirty days of notice thereof. The superseding March 2000 agreement was an agreement by and among Innovative Medical Services, NVID International, Inc. and ETIH2O, Inc. ETIH20, Inc. is the manufacturer of Axen/Axenohl. The agreement granted us an exclusive worldwide license to market and distribute Axen/Axenohl and all related products for all markets. This agreement also granted us the right to manufacture Axenohl in the event NVID was unable to deliver Axenohl to us. The agreement included the prior agreement obligations of ours to begin paying a licensing fee of $70,000 to NVID at the rate of $10,000 per month one month after we began selling Axenohl in the Point of Use or Healthcare Markets. We agreed to pay up to $70,000 to the third party laboratory conducting the EPA certification testing. The agreement also confirmed that we had paid NVID and ETIH2O approximately $80,000 which included the $29,500 which was to have been paid to the Department of Agriculture for a one year research and testing agreement. We originally agreed to pay the Department of Agriculture fee directly, but, subsequently, at the request of NVID, we paid NVID the $29,500 specifically designated for the Department of Agriculture research project. NVID acknowledged receipt of the $29,500 in the March 2000 contract. The agreement requires a royalty to NVID equal to fifteen percent of the manufactured cost of Axenohl sold pursuant to the agreement and up to fifty percent of any licensing fees we receive granting licenses to use Axenohl in all markets. In November, 2000, we closed an acquisition agreement whereby we acquired all of the outstanding common stock of ETIH20, Inc., in exchange for 51,240 shares of our common stock and employment agreements with Andrew Arata and George Duren, the executive officers of ETIH2O, Inc. The primary objective of the ETIH2O purchase was to acquire the testing data, manufacturing rights and capacity to Axenohl held by ETIH2O and to maintain and assure product availability and quality. Manufacturing The Fillmaster and Nutripure water systems are assembled in our manufacturing facility at our corporate offices primarily from custom manufactured components. It is our goal to perform minor manufacturing in our 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 in our manufacturing facility at our corporate office mostly from proprietary and custom parts fabricated to our specifications from injection-molded plastic and fabricated acrylic. The Nutripure Sport bottle is also assembled in our manufacturing facility at our corporate offices 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. We produce RoachX in our manufacturing facility at our corporate offices and outsource some of the packaging functions. The active and inactive ingredients of RoachX are readily available from chemical supply companies. We produce Axenohl in our manufacturing facility at our corporate offices. Silver, the primary active ingredient, is a readily available commodity, and the other active and inactive ingredients of Axenohl are readily available from chemical supply companies. 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 $292,964 and $114,756 in the fiscal years ended July 31, 2001 and 2000, respectively. Employees As of October 19, 2001, Innovative Medical Services employed thirty-two people, twenty-nine of whom are full-time individuals whose principal responsibilities are: product assembly and shipping (nine employees), sales, marketing and customer service (ten employees), research and development (five employees) and administration (eight employees). We choose to outsource more expensive, specialized functions including public relations, graphic design and selected engineering projects. ITEM 2. PROPERTIES Our 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. 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%. We have 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 Innovative Medical Services filed in the Circuit Court of Pinellas County, Florida by Zedburn Corporation, against us for breach of contract in October 1997. The breach of contract alleged was for payment of fees for Mr. David Reitz's and Mr. Steven Durland's services of arranging a public offering of our common stock. We have filed counterclaims based upon the Racketeer Influenced and Corrupt Organization (RICO) Act against David Reitz, Zedburn Corporation, Capital Development Group, Steven Durland and other defendants. It is our position that Mr. Reitz and others perpetrated a scheme to defraud us of cash fees and securities in connection with purported services of arranging a public offering of our 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 we have named Mr. Reitz as a defendant to our counterclaims. We believe that the defendants had perpetrated similar schemes against other parties. We also believe we have substantially completed discovery and complied compelling evidence to prove our claims. Several of the Defendants filed Motions to Dismiss our counterclaims. A hearing on the Motions was held on October 1, 1998. Certain of the Motions were granted pending our amendment of our Counterclaim. We amended our 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 our 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, we 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 us. We intend to pursue a trial as soon as possible. In August 2001, the Court of Appeals reversed the trial court's ruling and reinstated our claim against the defendants with the exception of Innovative Medical Services' RICO action. We have neither accrued a liability in our financial statements regarding this litigation nor disclosed the matter in the footnotes thereof. We have not done so because we do not believe there is any merit to Mr. Reitz's claims and that the likelihood that we will realize a loss from these matters is believed remote. In addition, we believe that in the unlikely event that we settle, the amount of any such settlement would not be material to our financial statements. We have filed an action against John Woodard, former Vice President of Sales, in Superior Court in the State of California in April 2000. We alleged Mr. Woodard violated his non-competition/non-disclosure agreement and provided proprietary information, including information regarding our Fillmaster line of products and Fillmaster customer base, to Fresh Water Systems, Inc. We alleged the misappropriation of customer lists, equipment service and maintenance schedules, equipment data, business plans and research and development secrets. We are seeking monetary damages and injunctive relief. We have 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. We allege Fresh Water Systems and its officers and directors misappropriated trade secrets obtained from former employees of ours, 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. We are seeking monetary damages and injunctive relief. On April 12, 2001, NVID, International, Inc. filed a declaratory judgment action in the Circuit Court of Pinellas County, Florida against Innovative Medical Services and ETI-H2O, Inc. The lawsuit seeks a judicial declaration that the Manufacturing, Licensing and Distribution Agreement, dated March 26, 2000 between us, NVID, International, Inc. and ETI-H2O does not constitute a binding contract and seeks unspecified damages. The lawsuit does not challenge the binding effect of the Standard Manufacturing Agreements dated November 30, 1998 and September 17, 1999 between NVID, International, Inc. and ETI-H2O and the November 24, 1999 License Agreement between us and NVID, International, Inc. On May 17, 2001, we and ETI-H2O removed NVID'S declaratory judgment action from Pinellas County Circuit Court to the United States District Court for the Middle District of Florida. We and ETI-H2O has filed a Motion To Dismiss, which is currently pending. On May 7, 2001, we and EIT-H2O filed a separate action, a Petition to Compel Arbitration, in the United States District Court for the Southern District of California based on arbitration clauses contained in the March 26, 2000 and November 24, 1999 agreements. Contemporaneously with filing the Petition, we and ETI-H2O filed a demand for arbitration against NVID, International, Inc. with the American Arbitration Association ("AAA") in San Diego, California. NVID, International, Inc. has notified AAA that it objects to the arbitration demand. Our Petition to compel Arbitration was granted in July 2001. On August 2, 2001, Innovative Medical Services and Eckerd Corporation settled the previously reported litigation. We had filed an action against Eckerd Corporation in Superior Court in the State of California in August 2000, in which we alleged Eckerd Corporation had not paid for Fillmaster products ordered by and shipped to Eckerd pharmacies. Executives of both companies determined it was in their mutual best interest to avoid the costs and risks associated with litigation and settle the dispute. The terms of the settlement include a payment to Innovative Medical Services by Eckerd of a compromised amount of the claim and a commitment by Innovative Medical Services to supply product to Eckerd. 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: Innovative Medical Services' common stock is traded on the NASDAQ SmallCap Market under the symbol "PURE". (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 2001 Fiscal 2000 Quarter Ended High Low Quarter Ended High Low ------------------------------------- -------------------- --------- ----------- July 31, 2001 $2.68 $2.52 July 31, 2000 $1.969 $1.250 April 30, 2001 $1.81 $1.75 April 30, 2000 $4.188 $1.594 January 31, 2001 $4.032 $3.75 January 31, 2000 $6.875 $1.375 October 31, 2000 $2.70 $2.21 October 31, 1999 $4.188 $1.500
(3) Security Holders: As of October 19, 2001, we had approximately 115 holders of record of our common stock. This does not include beneficial owners holding common stock in street name. The closing price per share on October 25, 2001 was $2.25. (4) Dividend Plans: We have paid no common stock cash dividends and have no current plans to do so. In January 2000, we 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. On November 20, 2000, we 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. (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 Results of Operations Fiscal 2001 vs. Fiscal 2000 During the quarter, we began to realize revenues from multiple product lines in our different divisions. In order to be more informative regarding distribution of revenues, discussion of revenues will be in terms of our water treatment, silver ionization and pesticide divisions. Revenues of $2,409,700 in the fiscal year ended July 31, 2001 were 45% higher than the $1,661,500 in revenues reported for the fiscal year ended July 31, 2000. The increase was due to increases in revenues in all of our company divisions. Water treatment division sales were $2,086,100, silver ionization division sales were $320,300 and pesticide division sales were $32,200. Currently, water dealer program sales consist mostly of sales of other manufacturers' products to independent dealers. Revenue is recognized on sales to dealers as shipped since we currently do not sell to third party customers of the dealers. Revenues of silver ion and pesticide products are recognized on shipment where the sale is made F.O.B. shipping point. Gross profit for the year ended July 31, 2001 was $1,047,100 versus $564, 000 in 2000. Gross profit percentage of 43% in 2001 was higher versus 34% in 2000. The increase in gross profit percentage was largely due to higher margins associated with our pesticide and silver ion technology product lines. Net loss for the year ended July 31, 2001 was $1,782,200 versus net loss of $2,384,100 for the same period in 2000. During the year, General and Administrative expenses increased 1% or $18,000 from $1,772,500 in fiscal 2000 to $1,790,500 in fiscal 2001. Selling expense increased approximately $186,700, or 31%, from $595,100 in 2000 to $781,800 in 2001 because of increased costs associated with development of marketing materials, hiring of additional sales personnel, trade shows and product launches for the Nutripure dealer program, and the silver ion and pesticide divisions. In addition to the ongoing expansion of the water dealer program, distribution of our other products in the Water Treatment Division continues to grow. A competitor in the industry, Freshwater Systems, had a significant effect on our revenues in fiscal year 2000, but our sales have begun to recover. Fillmaster system sales increased 6% from fiscal year 2000 to 2001, and Fillmaster replacement filter sales increased 24% from fiscal year 2000 and 2001. Although the market for our pharmacy products is maturing in that there is a decreasing number of pharmacy chains that do not have water filtration products, and that we have sold systems to most major chains, Fillmaster sales to additional chain pharmacies are steady, as are replacement filter sales to existing customers. The focus for further Fillmaster sales will be on incremental and upgrade sales to individual pharmacies within current chain accounts, although we are still actively pursuing Fillmaster sales to remaining chains. We work to retain Fillmaster customers with our Customer Service Plan 2000, a multi-year service and warranty contract. Fillmaster customers that subscribe to our Customer Service Plan have contracted to continue purchasing; otherwise, customers do not have an obligation to continue historic purchasing patterns. Although retail sales of Nutripure 2000 and Nutripure Sport Bottles comprise only 11% of Water Treatment Division Sales, we continue to receive and fulfill reorders and new orders. In addition to retail sales, we are conducting a direct mail program with these products. In October 2000, we launched our Nutripure Dealer Program. Revenues from the program began in the third quarter and continue to ramp up as we work to sign up new dealers to the program. We partnered with Automated Payment Services ("APS"), and MBNA to strengthen and streamline the financing program and administration of the Nutripure dealer program. Under the unique Nutripure program, independent water treatment dealers may now offer credit to all prospective customers because the Nutripure program offers competitive, risk-based interest rates. In addition, through APS, dealers can obtain real-time processing and approval information online for their customers. In January 2001, we announced the acquisition of a new, non-toxic pesticide technology. The acquisition was completed in April 2001 for approximately $160,000. RoachX is the first product to launch, and during the second half of the year, we focused on gaining distribution to more than 40,000 commercial pest control companies through national wholesalers. The commercial industry provides larger dollar volume potential and select and controlled distribution. During the second half of the year, we began receiving purchase orders and shipping RoachX across the United States. The national kickoff will take place at the National Pest Management Association meeting in New Orleans in October 2001. In March 2001, we signed a five-year contract to provide Axenohl to Dodo & Company, a Korean cosmetics manufacturer and marketer. Under the contract, Dodo & Company will purchase approximately $1.2 million dollars of product from us over five years. In addition to the purchase price, we will receive a royalty on sales of the Axen-containing products. We anticipate that, over the five years, the revenues from Dodo & Company cosmetics royalties will exceed $5 Million. In addition to sales to Dodo cosmetics, other recent sales of Axenohl have been to companies in South Korea for testing purposes. Regulatory clearances have not yet been issued in South Korea. Liquidity and Capital Resources Fiscal 2001 vs. 2000 From inception through July 31, 2001, we have financed our operations primarily through our initial public offering in August of 1996, by a subsequent private placement in March of 2000, and by other smaller private placement stock sales. We have operated without long-term debt and have no plans to obtain long-term financing in the next twelve months. We believe that sales from our new product lines will not provide sufficient capital resources to sustain operations and fund product development until fiscal year 2001/2002. In the short term, we expect to raise capital through equity sales as necessary to fund future growth until we operate above the break-even point. We continually evaluate opportunities to sell additional equity or debt securities, or obtain credit facilities from lenders to strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. During the fiscal year ended July 31, 2001, our current assets to liabilities ratio decreased from 5.02 to 3.15. Current assets decreased $883,000 from $2,794,400 to $1,911,400. Current assets at July 31, 2001 include a decrease of $914,200 in cash and cash equivalents and a decrease in restricted cash of $204,900 which was pledged against a line of credit which was paid off during the year. Accounts receivable increased $159,400 on increased sales volume. Inventories decreased $85,100 from $796,100 in fiscal 2000 to $711,000 in fiscal 2001 which reflects a changing product mix and more efficient purchasing. Noncurrent assets increased by $734,900 during the year mainly due to an increase in Patents and Licenses of $713,400. Current liabilities increased $50,600 from $556,300 to $606,900. The increase in current liabilities was the net result of an increase in accounts payable and accrued liabilities of $261,200 and a payoff of a line of credit of $210,600. Our liquidity is unaffected by the financing program offered to participating dealers in the Nutripure water dealer program. We receive funds from our primary lender and disperse the funds to the dealer, less a commission charged by us, upon completion of the contract. The primary lender disperses funds to us. We record a liability when the funds are received and relief of liability when funds are dispersed, and we do not retain liability on the credit extended. Cash flows used from operations were $1,108,500 in fiscal year 2001 and $1,311,900 in 2000. For fiscal year 2001 cash flows used in investing activities included $40,300 for the purchase of machinery and equipment and $621,100 for the purchase of patents and licenses. In fiscal 2000 cash flows used in investing activities included $503,100 for the purchase of machinery and equipment and for website development and $57,100 for the purchase of patents and licenses. Also, we incurred $230,000 and $148,700 in deferred acquisition costs during fiscal 2001 and fiscal 2000 respectively. Cash flows from financing activities were $1,085,700 in fiscal 2001 and $3,120,100 in fiscal 2000. Financing activities for the current year included a decrease of $210,600 in notes payable. Cash flows from financing activities during the year included the following common stock transactions: 1. A $250,000 private placement in October 2000 in which we issued 94,340 shares of common stock to six investors at $2.65 per Unit. 2. A $250,002 private placement in January 2001 in which we issued 83,334 shares of common stock to six investors at $3.00 per Unit. Each Unit contained one share of common stock and a warrant to acquire an additional share of common stock for $4.00 per share up to January 28, 2003. 3. A $225,000 private placement in April 2001 in which we issued 150,000 shares of common stock to four investors at $1.50 per Unit. As part of this registration we also issued $200,000 of convertible debentures at 10% interest due July 31, 2001. The holders of this debenture are entitled to convert all or any amount over $10,000 of principal face amount and accrued interest into Units each consisting of one share of Common Stock and a Common Stock Purchase Warrant. The conversion price for each Unit shall equal 80% of the average closing bid price for the five trading days immediately preceding the receipt of Notice of Conversion. The debentures were converted to common stock on July 31, 2001. 4. In addition, approximately $245,135 was received from exercise of outstanding stock options. In the prior year, cash flows from financing activities were $3,120,100, which included $3,355,600 received through private placements of IMS and Nutripure.com. The total decrease in cash and cash equivalents for 2001 was $914,200 as compared to an increase of $1,099,300 during the same period in 2000. Future Outlook We believe that, during fiscal year 2001, we successfully transitioned from our niche pharmacy market into other, broader markets with our expanded water treatment division and our new bioscience division. Although our Fillmaster products still comprised the majority of our sales in 2001, we believe that will change in the coming fiscal year. Looking ahead, we see a year of continued growth in the water treatment division as the Nutripure Dealer program fully develops and sales of our retail water filtration products continue to grow. We also see the bioscience division growing in the coming year. We have focused the sales efforts of our pesticide technologies on the commercial pesticide industry to take advantage of key market opportunities. We have earned the support of and are selling RoachX through the largest distributors in the United States, and we believe in the coming year RoachX will become an industry leading technology in cockroach control. This fall we plan to formally launch three new products from this division: AntX(TM), our latest development in pesticide technology, CleanKill(TM), the Axen-based hard surface disinfectant for the pest control industry, and ProChoice(TM) caulk for pest control operators. We have submitted for and anticipate receiving EPA approval for AntX. CleanKill is approved by the EPA as an additional brand name of Axen. We repackage an NSF, USDA and FDA approved food-grade silicone caulk as our ProChoice product. We believe adding sales of these products to the already climbing RoachX revenues will have a very material positive effect on revenues in the coming fiscal year. Although we think that the pesticide technologies will have the most immediate material impact on revenues in the coming year, we believe that the silver ion technologies will ultimately become the largest revenue generator for Innovative Medical Services. We intend not only to sell our own Axen-based products, like CleanKill, but also to sell Axen as an additive to other manufacture's products, like Dodo Cosmetics' acne-fighting product line. We believe that the innumerable applications for a non-toxic, tasteless, odorless, highly effective antimicrobial agent present an outstanding market opportunity for our Axenohl products. The investment necessary to pursue regulatory approval for Axenohl will be significant, but as additional US and international approvals for Axenohl uses are received, we expect revenues to develop quickly. Independent Accountants' Report Board of Directors Innovative Medical Services We have audited the accompanying consolidated balance sheets for Innovative Medical Services and Consolidated Subsidiaries as of July 31, 2001 and 2000, and the related consolidated statements of operations, statement of accumulated deficits and cash flows for the years ended July 31, 2001 and 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 audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the financial position of Innovative Medical Services and Consolidate Subsidiaries as of July 31, 2001 and July 31, 2000, and the results of its operations and its cash flows for the years ended July 31, 2001 and July 31, 2000, in conformity with generally accepted accounting principles in the United States of America. /s/ Miller and McCollom MILLER AND MCCOLLOM 4350 Wadsworth Boulevard, Suite 300 Wheat Ridge, Colorado October 19, 2001
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------ July 31 July 31 2001 2000 Restated ASSETS (Note 16) ----------- ------------ Current Assets Cash and cash equivalents $ 207,092 $ 1,121,316 Restricted cash -- 204,887 Accounts receivable, net of allowance for doubtful accounts of $ 115,000 at July 2001 and $225,000 at July 31, 2000 570,733 411,323 Due from officers and employees 240,001 226,729 Inventories 711,018 796,136 Prepaid expenses 182,556 33,975 --------- --------- Total current assets 1,911,400 2,794,366 --------- --------- Property, Plant and Equipment Property, plant and equipment 903,072 1,056,252 --------- --------- Total property, plant and equipment 903,072 1,056,252 --------- --------- Noncurrent Assets Deposits 8,127 14,083 Patents and licenses 1,014,282 300,910 Deferred acquisition costs 230,000 202,542 --------- --------- Total noncurrent assets 1,252,409 517,535 --------- --------- Total assets $ 4,066,881 $ 4,368,153 ============ ============ LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Accounts payable $ 543,992 $ 308,812 Accrued liabilities 62,900 36,880 Notes payable -- 210,592 ------------ ------------ Total current liabilities 606,892 556,284 ------------ ------------ Minority interest payable -- 61,697 ------------ ------------ Stockholders' Equity Common stock, no par value: authorized 20,000,000 shares, issued and outstanding 6,954,699 at July 31, 2001 and 5,942,902 at July 31, 2000 11,510,915 10,018,873 Class A warrants: issued and outstanding 3,686,000 warrants 108,750 108,750 Accumulated deficit (8,159,676) (6,377,451) ------------ ------------ Total stockholders' equity 3,459,989 3,750,172 ------------ ------------ Total liabilities and stockholders' equity $ 4,066,881 $ 4,368,153 ============ ============
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------------------- For Year Ended July 31 2001 2001 2000 Restated (Note 16) ----------- ----------- Net sales $ 2,409,721 $ 1,661,462 Cost of sales 1,362,670 1,097,419 ----------- ----------- Gross profit 1,047,051 564,043 ----------- ----------- Selling expenses 781,810 595,142 General and administrative expenses 1,790,511 1,772,536 Research and development 292,964 114,756 Impairment of long lived assets -- 505,433 ----------- ----------- Total operating costs 2,865,285 2,987,868 ----------- ----------- Operating income (loss) (1,818,234) (2,423,824) ----------- ----------- Other income and (expense): Interest income 33,738 34,763 Interest Expense (11,100) (73,990) Loss on abandoned assets -- (40,200) ----------- ----------- Total other income (expense) 22,638 (79,427) ----------- ----------- Income (loss) before income taxes, minority Interest in subsidiary operations and change in accounting principle (1,795,596) (2,503,251) Federal and state income taxes 1,600 800 ----------- ----------- Income (loss) before minority interest in subsidiary operations and change in accounting principle (1,797,196) (2,504,051) ----------- ----------- Minority interest in subsidiary operations 14,972 40,103 ----------- ----------- Net income (loss) before cumulative change in accounting principle (1,782,224) (2,463,948) Cumulative effect of change in accounting principle -- 79,896 ----------- ----------- Net income (loss) $ (1,782,224) $ (2,384,052) ============ ============ Net income (loss) per common share before change in accounting principle (basic) $ (0.28) (0.49) Cumulative effect of change in accounting principle -- 0.02 ----------- ----------- Net income (loss) per common share (basic) $ (0.28) $ (0.47) =========== =========== Net income (loss) per common share before change in accounting principal (diluted) $ (0.28) (0.49) Cumulative effect of change in accounting principle -- 0.02 ----------- ----------- Net income (loss) per common share (diluted)$ $ (0.28) $ (0.47) =========== =========== CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS - -------------------------------------------------------------------------------------------- Balance, beginning of period $ (6,377,451 $ (3,993,399) Net income (loss) (1,782,224) (2,384,052) ----------- ----------- Balance, end of period $ (8,159,676 $ (6,377,451) ============ ============
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------ For the Year Ended July 31 2001 2000 Restated (Note 16) ------------ ----------- Cash flows from operating activities Net income (loss) $ (1,782,224) $(2,384,053) Adjustments to reconcile net income to net cash provided by operating activities: Amortization 96,961 185,735 Depreciation 193,477 159,624 Minority interest in subsidiary operations (61,697) 61,697 Impairment of long lived assets -- 505,433 Loss on abandoned assets -- 40,200 Changes in assets and liabilities: (Increase) decrease in restricted cash 204,887 687 (Increase) decrease in accounts receivable (159,409) 378,843 (Increase) decrease in due from officers and employees (13,272) 112,795 (Increase) decrease in prepaid expense 60,489 3,103 (Increase) decrease in inventory 85,118 (76,163) (Increase) decrease in deposits 5,956 (7,508) Increase (decrease) in accounts payable 235,180 (286,136) Increase (decrease) in accrued liabilities 26,020 (6,188) ---------- ---------- Net cash provided (used) by operating activities (1,108,514) (1,311,931) ---------- ---------- Cash flows from investing activities Purchase of property, plant and equipment (40,297) (503,100) Purchase of patents and licenses (621,114) (57,099) Deferred acquisition costs (230,000) (148,691) ---------- ---------- Net cash (used) in investing activities (891,411) (708,890) ---------- ---------- Cash flows from financing activities Proceeds from debt obligations 200,000 275,436 Payments on debt obligations (210,592) (510,910) Proceeds from sale of common stock 1,096,293 3,355,555 ---------- ---------- Net cash provided by financing activities 1,085,701 3,120,081 ---------- ---------- Net increase (decrease) in cash and cash equivalents (914,224) 1,099,260 Cash at beginning of period 1,121,316 22,056 ---------- ---------- Cash at end of period $ 207,092 $ 1,121,316 ----------- ----------- Supplemental disclosures of cash flow information Cash paid for interest paid $ 11,100 $ 73,990 Cash paid for taxes paid $ 1,600 $ 800 Noncash investing and financing activities: Value of shares issued in exchange for Nutripure.com minority interest $ 550,011 $ -- Value of shares issued in exchange for ETI H2O $ 140,953 $ --
The accompanying notes are an integral part of these financial statements 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 is 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 costs for these two entities all of which was paid in cash. The majority of the purchase price was advanced to the previous owners in fiscal year 1998 and recorded as deferred acquisition costs until the purchase was concluded. The assets acquired and liabilities assumed are as follows: Assets: Accounts Receivable $ 32,500 Inventory 58,217 Fixed Assets 49,083 Customer List 360,000 Licenses 354,961 Goodwill 261,322 ------- Total Assets 1,116,083 Liabilities Accounts Payable 24,690 ------ Equity $ 1,091,393 =========== The above listed goodwill of $261,322 and customer list of $360,000 were being amortized over a period of forty (40) years. The licenses are being amortized over fifteen (15) years. The value of these assets and the amortization periods were reassessed at July 31, 2000 and adjusted as described in Note 16. 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. In November 2000, Innovative Medical Services acquired 100% of the stock of ETIH2O, Inc., a Florida corporation, for 56,381 shares of IMS stock valued at $140,953 ($2.50 per share). The transaction was recorded using the purchase method of accounting. The assets acquired and liabilities assumed are as follows: Assets: Notes Receivable $ 33,655 Inventories 32,077 Equipment 16,932 Licensing & Distribution Rights 118,324 ---------- Total Assets 200,988 Liabilities: Notes Payable - IMS 60,035 ---------- Equity $ 140,953 ========== Assets and liabilities were valued at historical cost and no goodwill was recorded in the transaction. Results of operations of ETIH2O Inc. are included in the current period. The acquired entity was a startup company, if results of operations were included in prior periods and shown as though the companies had been combined at the beginning of the period, it would not have a material affect on the consolidated financial statements of Innovative Medical Services. The Company merged ETI-H2O with a newly formed Nevada corporation of similar name and dissolved the Florida corporation. ETI-H2O, a privately held technology corporation, developed Axenohl and is responsible for processing, and production of Axenohl and Axen. ETI-H2O is also responsible for all supervision of all research, studies, data and quality control of the Axenohl/Axen product line. In April 2001, the Company completed the purchase of the entire right, title and interest in and to specific patent-pending boric acid pesticide technologies and all rights, title and interest in and to all patents for RoachX from a private individual, for approximately $160,000 in cash. The owner/inventor accepted a position with the Company to serve as Senior Scientist and to head the Company's new Pest Management Division. The employment agreement included bonuses at certain revenue thresholds of RoachX sales. The owner/inventor of RoachX died unexpectedly in June of 2001. Because the initial payment was primarily for the patents and for the EPA licenses, it is included in Patents and Licenses and is amortized over a period of 17 years. RoachX is a pesticide technology containing a familiar active ingredient, boric acid, bound to a masking agent and combined with an attractant fragrance and proteins in a colloidal suspension. The patent-pending time-released formulation protects the boric acid from dissolving in water and maintains the integrity of the pesticide to obtain maximum killing effect. Basis of Presentation and Principles 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. Previously published financial statements have been restated to write down certain intangible assets by $505,433. The net loss for the year ended July 31, 2000 increased to $2,384,052 from $1,745,430 that was previously reported. An explanation of the detail of the adjustment is included in Note 16. Revenue Recognition Generally, the company recognizes income based upon concluded arrangements with customers and all events have occurred by delivery or performance. Certain income is recognized upon shipment where the sale is made f.o.b. shipping point. Customer acceptance provisions and installation procedures accompanying delivery are minor in nature, and the Company has not experienced any material expense in satisfying customer satisfaction. Revenue is recognized on sales to dealers and to pharmacists as shipped, since the Company does not sell to third party customers of the dealers and pharmacies. Software upgrades are provided free to customers resulting from implants included in products which they purchase. In a minor amount of e-commerce business conducted to date, sales are recorded on a gross basis resulting from credit card sales, the Company does not charge the customer until the product is shipped and the Company has been billed. The Company began its program of providing financing to independent dealers in fiscal year ending July 31, 2001. Currently the financing is for equipment of other manufacturers and not the Company's products. The Company receives funds from its primary lender and disperses the funds to the dealer, less a commission charged by the Company, upon completion of the contract. The Company records a liability when the funds are received and relief of liability when funds are dispersed. The Company is recording only the commissions earned as revenues. Software Development Costs The Company capitalizes software development costs incurred to develop certain assets in accordance with Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Certain costs of computer software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the estimated useful life of the software. Costs for general and administrative, overhead, maintenance and training, are expensed as incurred. To date $207,707 of costs related to the Nutripure.com website have been capitalized under SOP 98-1 and are being amortized over a period of 3 years. Stock-Based Compensation The Company follows FASB Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS 123'). The provisions of FAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in APB Opinion 25, 'Accounting for Stock Issued to Employees' ('APB 25') but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option plans (Note 10). For awards that generate compensation expense as defined under APB 25, the Company calculates the amount of expenses and recognizes the expense over the vesting period of the award. In March 2000, the FASB issued FASB Interpretation No. 44, 'Accounting for Certain Transactions involving Stock Compensation' ('FIN 44'), which contains rules designed to clarify the application of APB 25. FIN 44 became effective on July 1, 2000 at which time the Company adopted it. The impact of the adoption of FIN 44 was not material to the earnings or financial position of the Company. 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 $292,964 and $114,756 in the fiscal years ended July 31, 2001 and 2000, 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 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 The cost of patents acquired is being amortized on a straight-line basis over the remaining lives of 17 years. Licenses which include the Ampromed Limitada, the right of Nutripure to distribute and disseminate certain information through its website, and costs to acquire EPA approval on Axen and Axenohl, are being amortized on a straight line basis over periods ranging from 15 to 20 years. Website development costs are being amortized on the straight-line basis over 3 years. Amortization expense for the years ended July 31, 2001 and July 31, 2000 was $97,000 and $185,700, 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. The Company has recognized impairment of the assets purchased with the Ampromed acquisition and has reassessed the value of certain assets as described in Note 16. Should there be additional 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: 2001 2000 ------------ ------------ Finished Goods $ 246,374 $ 108,528 Work in Progress 150,815 180,770 Raw Materials 313,829 507,410 ----------- ------------ $ 711,018 $ 796,136 =========== ============ 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 $276,492 and $197,908 for the years ended July 31, 2001 and July 31, 2000, respectively. Deferred Acquisition Costs During the process of evaluating certain companies for acquisition, the Company expended $230,000 and $202,542 in fiscal years ended July 31, 2001 and July 31, 2000, 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. 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, 2001 July 31, 2000 -------------- ------------ Shares outstanding 6,954,699 5,942,903 Weighted average number of shares actually outstanding 6,420,926 5,056,141 Stock Options 1,815,625 1,214,309 Warrants 1,797,500 1,798,125 ------------ ----------- Total weighted average shares 10,034,051 8,068,575 ------------ ----------- Net income (loss) before cumulative Change in accounting principle $ (1,782,224) $(2,463,949) Cumulative change in accounting principle -- 79,896 ------------ ----------- Net income (loss) $ (1,782,224) $(2,384,053) ============ =========== Basic net earnings (loss) per share Net income (loss) per common share before change in accounting principle $ (0.28) $ (0.49) Cumulative effect of change in accounting principle -- 0.02 ------------ ----------- Net income (loss) per common share $ (0.28) $ (0.47) ============ =========== Diluted net earnings (loss) per share Net income (loss) per common share before change in accounting principle $ (0.28) $ (0.49) Cumulative effect of change in accounting principle -- 0.02 ------------ ----------- Net income (loss) per common share $ (0.28) $ (0.47) ============ ===========
Potential common stock instruments at July 31, 2001, which include 1,815,625 stock options and 1,797,500 warrants, are included in the loss per share calculation for fiscal year ended July 31, 2001. 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. On August 8, 2001, the warrants expired without exercise. 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. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been previously issued. The adoption of SFAS 141 did not have a material effect on the Company's operating results or financial condition. The Company is currently assessing the impact of SFAS 142 on its operating results and financial condition. Income Taxes The current provisions for income taxes of $1,600 for fiscal year ended July 31, 2001 and $800 for July 31, 2000 is the minimum franchise tax paid to the State of California regardless of income or loss. At July 31, 2001, the Company has financial, federal, and California tax net operating loss carryforwards of approximately $6,917,000, and $6,294,000, and $2,958,000, respectively. 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. The difference between the financial reporting and the federal tax loss carryforward is primarily due to accrued expenses and valuation allowances reported in the financials but not deductible for tax purposes. The difference between federal and California tax loss carryforwards is primarily due to the fifty percent limitation on California loss carryforwards. The federal tax loss carryforwards will begin expiring in the fiscal year ended July 31, 2011, unless previously utilized and will completely expire in fiscal year ended July 31, 2020. The California tax loss carryforwards will begin expiring in fiscal year ended July 31, 2001, unless previously utilized and will completely expire in fiscal year ended July 31. 2010. 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 $ 1,263,000 and $ 1,263,000 for the fiscal years ended July 31, 2001 and 2000, respectively. Realization of these deferred tax assets, which relate to operating loss carryforwards and timing differences, is dependant on future earnings. The timing and amount of future earnings are uncertain and therefore, the valuation allowance had been established. The increase in the valuation allowance on the deferred tax asset during the fiscal year ended July 31, 2001 was $ 83,000. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: July 31 July 31 2001 2000 ----------- ----------- Net operating loss carryforward $ 1,222,000 $ 1,107,000 Depreciation and amortization 0 0 Accrued expenses and calculation allowances 36,000 71,000 Other 5,000 2000 ----- ---- Total deferred tax assets 1,263,000 1,180,000 Valuation allowance for deferred tax assets (1,263,000) (1,180,000) ----------- ----------- Net deferred tax assets $ 0 $ 0 ========= ========== 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, 2001 and July 31, 2000, the Company's cash and cash equivalents is represented by $207,092 and $1,121,316, respectively, in cash or checking accounts. Note 3. Restricted Cash At July 31, 2001, the Company had no restricted cash. At July 31, 2000, 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. Due from Officers and Employees At July 31, 2001, notes receivable of $66,561 represents amounts due from officers and $173,440 represents amounts due from employees. At July 31, 2000, notes receivable of $162,793 represents amounts due from officers and $63,936 represent amounts due from employees. Due from officers at July 31, 2001 consisted of a loan to the president of $18,379 and a loan to the chief financial officer of $48,182 due and payable at July 31, 2002. These were renewals and changes of prior year notes to $117,339 and $45,454, respectively, that were due at July 31, 2001. 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, 2001 July 31, 2000 -------------- -------------- Computers and equipment $ 1,061,197 $ 927,257 Furniture and fixtures 103,855 100,630 Website 207,916 207,916 Vehicle 50,985 50,985 Leasehold improvements 307,606 304,623 --------------- ------------- 1,731,559 1,591,411 Less: accumulated depreciation and amortization 828,487 535,159 --------------- ------------- Total $ 903,072 $ 1,056,252 --------------- ------------- Depreciation expense charged to general and administrative expense for the years ended July 31, 2001 and July 31, 2000 was $193,477 and $159,624, respectively. Note 6. Debt The details relating to debt are as follows: July 31, 2001 July 31, 2000 ------------- ------------- 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 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 Current maturities of notes payable included in current liabilities - 210,592 ------------ ------------ 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 $307,000. The rental expense recorded in general and administrative expenses for the years ended July 31, 2001 and July 31, 2000 was $133,968 and $98,835, respectively. Future minimum rental payments required for each of the 5 succeeding years assuming exercise of the option are as follows: Year Ended July 31 Amount 2002 $139,327 2003 $144,900 2004 $150,696 2005 $156,724 2006 $162,993 Note 8. Capital Stock The following schedule summarizes the change in capital stock:
Common Common Stock Stock A Warrants A Warrants Z Warrants Shares $ Issued $ Issued --------- ----------- ----------- ----------- ------------ 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 Sale of stock 245,467 640,884 Private placement 421,314 851,158 Stock Dividends 121,961 -- Acquisitions 223,054 -- ------- Balance, July 31, 2001 6,954,699 $11,510,915 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. On August 8, 2001 the total 3,687,500 Class A warrants and the total 785,000 Class Z warrants expired without exercise. Note 9. Related Party Transactions See Note 4 and Note 10. Note 10. Stock Option Plans The Company has the following stock option plans (the Plans) pursuant to which options to acquire common stock have been granted. 1996 Incentive Stock Option Plan: Approved by Shareholders in April, 1996 with 1,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one Key Employee is 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 350,125 shares under the 1996 Incentive Plan were outstanding as of July 31, 2001 with 356,125 shares remaining under this Incentive Plan for which options may be granted. 1996 Directors and Officers Stock Option Plan: Adopted by the Board in April, 1996 with 1,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. Options to acquire 549,625 shares under the 1996 D&O Plan were outstanding as of July 31, 2001 and there are no shares remaining under this Plan for which options may be granted. Amended 1998 Directors and Officers Stock Option Plan: Approved by Shareholders in December, 1998 with 2,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this 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 1,281,250 shares under this Plan were outstanding as of July 31, 2001 and there are no shares remaining under this Plan for which options may be granted. 2001 Directors and Officers Stock Option Plan: Approved by Shareholders in January 2001 with 1,000,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this 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 44,790 shares under this Plan were outstanding as of July 31, 2001 and there are 955,210 shares remaining under this Plan for which options may be granted. 2001 ETI-H2O Stock Option Plan: Adopted by the Board in January 2001 with 1,000,000 shares authorized under this Plan. Options to acquire 550,000 shares under this Plan were outstanding as of July 31, 2001 and there are 450,000 shares remaining under this Plan for which options may be granted. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January 2001 with 500,000 shares authorized under this Plan. The maximum number of shares subject to options granted under this Plan to any one participant shall not exceed 50,000 shares in any 12-month period. No options to acquire shares under this Plan were outstanding as of July 31, 2001 and there are 500,000 shares remaining under this Plan for which options may be granted. 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 at or above the fair market value for the common stock at the date of grant. The Company estimates a fair value method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with SFAS 123, the Company has chosen to continue to account for employee stock-based compensation utilizing the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company has provided footnote disclosure with respect to stock-based employee compensation. The cost of stock-based employee compensation is measured at the grant date based on the value of the award and is recognized over the service period. The value of the stock based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company accounts for non-employee stock based compensation by establishing a fair value for stock options granted. Compensation cost is measured as the excess, if any, of the fair value of the Company's stock over the amount the non-employee must pay to acquire the stock and is recognized over the anticipated service period. The effect of applying FAS 123 on the years ended July 31, 2001 and 2000 pro forma net loss as stated below is not necessarily representative of the effects on reported net loss for future years due to, among other things, the vesting period of the stock options and the fair value of additional stock options in future years. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under FAS 123, the Company's net loss in the years ended July 31, 2001 and 2000 would have been approximately $2,420,628 and $3,292,510 or $(0.38) per share and $(0.66) per share, respectively, on a diluted basis. The fair value of the options granted during the years ended July 31, 2001 and 2000 are estimated at $1.22 per share and $1.84 per share, respectively, on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants in 2001 and 2000; no dividend yield, volatility of 98.79% and 124%, respectively; a risk-free interest rate of 5.50% and 5.50%, respectively and an expected life of 3.51 year from date of vesting. A summary of stock option activity is as follows: Weighted-Average Number of Shares Exercise Price ($) Balance at July 31, 1999 1,615,000 1.17 Granted 1,246,540 1.81 Exercised (781,750) 1.78 Forfeited (44,250) 1.34 -------- Balance at July 31, 2000 2,035,540 1.55 Granted 997,000 2.21 Exercised (203,824) 1.78 Forfeited (93,750) 1.50 -------- Balance at July 31, 2001 2,734,966 1.72 =========
Outstanding Exercisable Number Weighted Average Weighted Average Weighted Range of Shares Life Exercise Number Average Exercise Prices Outstanding (in years) Price Exercisable Price $0.56 285,000 2.0 $ 0.56 235,000 $ 0.56 $1.00 553,750 1.9 $ 1.00 352,500 $ 1.00 $1.31 to $1.50 274,966 3.7 $ 1.45 176,875 $ 1.48 $1.63 to $1.90 315,000 3.6 $ 1.71 165,000 $ 1.79 $2.00 to $2.50 900,000 3.0 $ 3.01 480,000 $ 2.01 $2.93 to $3.20 406,250 3.3 $ 3.01 406,250 $ 3.01 --------- --------- 2,734,966 2.9 $ 1.72 1,815,625 $ 1.78 ========= =========
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. No employer contributions were made during the fiscal years ending July 31, 2000 and July 31, 2001. 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 Principle During fiscal years 1999 and 2000, 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 issued EITF No. 00-2 - Emerging Issues Task Force Issue titled: Accounting for Web Site Development Costs dated March 16, 2000. Note 14. Business Segment and Sales Concentrations In accordance with the provisions of SFAS No. 131, certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. In determining operating segments, the Company reviewed the current management structure reporting to the chief operating decision-maker ('CODM') and analyzed the reporting the CODM receives to allocate resources and measure performance. The Company's business activities are divided, managed and conducted in two basic business segments, the Water Treatment segment and the Bioscience segment. These two segments were determined by management based upon the inherent differences in the end use of the products, the inherent differences in the value added processes made by the Company, the differences in the regulatory requirements and the inherent differences in the strategies required to successfully market finished products. The Water Treatment segment includes Commercial Water treatment, Residential Retail products and the Nutripure Water Dealer program. Bioscience includes two new products, Axenohl (Silver Ion Technology) and RoachX (Pest Management). The Company plans to utilize multiple forms of analysis and control to evaluate the performance of the segments and to evaluate investment decisions. In general, gross margin and Earnings Before Interest Depreciation and Amortization (EBITDA) are deemed to be the most significant measurements of performance, although collection volumes and certain controllable costs also provide useful "early warning signs" of future performance. Because the Company has just recently changed to multiple segments, historical data on gross profit and income from operations is not available. However, the following is a summary of segment revenues at July 31, 2001:
% % Total Fiscal Year End Total Fiscal Year End 2000 Sales 2001 Sales Water Treatment Division Commercial Water Treatment $1,698,900 71% $1,597,500 96% Residential Retail Water Treatment $190,800 8% $29,800 2% Nutripure Dealer Program $167,400 7% $34,200 2% Bioscience Division Silver Ion Technology $320,300 13% - - Pest Management Technology $32,300 1% - - ---------------- -------------- Total Revenues $2,409,700 $1,661,500
Significant customers primarily consisted of domestic retail chain pharmacies. Sales concentrations to major chain stores were approximately $1,294,600 and export sales were $390,100 for the year ended July 31, 2001. No customer accounted for more than 10% of consolidated sales. Note 15. Stock Dividend and Share Exchange In December 1999, Innovative Medical Services formed a wholly owned subsidiary, Nutripure.com, to capitalize on internet commerce opportunities focusing on health and wellness. Total authorized capitalization of the corporation was 50,000,000 shares of common stock at $.001 par value. The Company purchased 8,000,000 shares and the newly formed board of directors of the subsidiary purchased 900,000 shares all at par value. In February of 2000 the corporation raised $550,000 in a private placement of 1,100,000 at $0.50 per share. At this point the minority interest represented 20% of the outstanding common stock of the corporation. Minority interest payable and income from operations were first recognized in the consolidated financial statements in the quarter ended April 30, 2000. On October 24, 2000, the Company issued 183,337 shares of common stock valued at $550,011 ($3.00 per share) in exchange of 1,100,000 shares of Nutripure.com stock representing the 10% minority interest outstanding shares of Nutripure.com, which were originally purchased for $.50 cents per share. Management of Nutripure.com did not exchange shares. Shares held by Management were eliminated by a reverse split, effective March 16, 2001. 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. Following the announcement of the dividend, however, adverse market conditions for solely internet-based ventures eroded Management's confidence in the viability of a public market for Nutripure.com common stock. Therefore, the Board amended its declaration of a Nutripure.com dividend to a dividend of Innovative Medical Services' common stock and the Company purchased the minority interest in Nutripure.com through an exchange of shares. The Company retains 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. 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. Note 16. Write Down of Impaired Assets And Change in Asset Lives Ampromed was purchased in October 1998 to enable the Company to take advantage of the lucrative markets for medical and dental supplies in Brazil and other South American countries and to later introduce and distribute its water purification products to these markets. Since the acquisition the economic conditions in the region have declined and implementation of the project has been delayed. The Company no longer has immediate plans to import medical and dental supplies into Brazil but believes, however, that Ampromed is a vital part of its plan to market and sell "Axenohl", RoachX and the Nutripure line of water treatment products. The Company believes there is considerable value in owning a Brazilian Limitada but has reassessed the value of the goodwill and the customer list it purchased. Statement of Financial Accounting Standards No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) requires an entity to review long-lived assets and identifiable intangible assets when, among other factors, there is a change in the extent or manner in which an asset is to be used or when there is a significant change in the business climate that could affect the value of an asset. Because the Company suspended its plans to market medical and dental supplies in Brazil in May of 2000 it believes the Goodwill and Customer List assets should be written off, and the value of the Limitada license to do business in Brazil should be written down to what it would cost to acquire in today's market. This is estimated to be approximately $150,000 and is being amortized over its expected useful life of 15 years. At the date of acquisition of Ampromed the Company established amortization periods for the assets purchased at the maximum allowable life of 40 years. We now believe these estimated lives were too long and the life of the goodwill has been set at 5 years to reflect a more reasonable amortization expense under the circumstances and the uncertainty involved in commitments from a foreign government. Also, an analysis of the customer list based on original estimates indicates that a 6 year life is a more appropriate amortization period for this intangible asset. In addition, instead of the straight-line method, the Company has computed an accelerated method of amortization for the customer list based on an analysis of expected future cash flows at July 31, 1999 and July 31, 2000. The effect of this restatement is to increase General and Administrative Expense by an increase to amortization cost of $152,800 in the year ended July 31,1999. The effect of the restatement in the year ended July 31, 2000 is a write down of impaired asset charge of $505,400 and an increase in General and Administrative Expense by an increase to amortization cost of $133,200. Note 17. Subsequent Events On August 14, 2001, 20,000 options were exercised bringing the total outstanding shares of common stock to 6,974,699 as of October 29, 2001, the date of the Form 10KSB filing. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company and their ages are as follows: Name Age Position ----------------- --- ---------------------------------- Michael L. Krall 49 President, CEO, Chairman, Director Gary Brownell, CPA 53 Treasurer CFO, Director Donna Singer 31 Executive Vice President, Director Dennis Atchley, Esq. 49 Secretary Eugene Peiser, PD 70 Director Patrick Galuska 42 Director Dennis Brovarone 45 Director The Directors serve until their successors are elected by the shareholders. Vacancies on the Board of Directors may be filled by appointment of the majority of the continuing directors. The executive officers serve at the discretion of the Board of Directors except as subject to the employment agreement with Mr. Krall. Business Experience DENNIS B. ATCHLEY, ESQ. Mr. Atchley is the Secretary of Innovative Medical Services and currently practices as a sole practitioner in Carlsbad, California handling corporate and business related litigation matters. A 1973 graduate of Loyola Marymount University in Los Angeles and a 1976 graduate of California Western School of Law in San Diego, California, Mr. Atchley is a member of the California Bar, the San Diego County Bar Association, and the Association of Business Trial Lawyers. DENNIS BROVARONE Mr. Brovarone has been practicing corporate and securities law since 1986 and as a sole practitioner since 1990. He was elected to the Company's Board of Directors in April 1996. From December 1997 to April 2001, Mr. Brovarone has served as the President and Chairman of the Board of Directors of Ethika Corporation, a publicly held, Mississippi corporation investment holding company with its office in Littleton, Colorado. From January 1995 to March 1998 Mr. Brovarone served as President (Chairman) of the Board of Directors of The Community Involved Charter School, a four year old K-12 public school located in Lakewood, Colorado, operating under an independent charter and serving approximately 350 students in an individualized, experiential learning environment. Prior to 1990, Mr. Brovarone served as in-house counsel to R.B. Marich, Inc., a Denver, Colorado based brokerage firm. Mr. Brovarone lives and works in Littleton, Colorado. GARY W. BROWNELL Mr. Brownell is a Certified Public Accountant in a private partnership practice. He is the partner in charge of taxes and municipal audits for his firm. Mr. Brownell graduated from San Diego State University in 1973 with a Bachelor of Science degree in accounting. He received his Certified Public Accountant designation in 1983. Mr. Brownell has been a partner in Brownell and Duffy since 1985. PATRICK GALUSKA Mr. Galuska is a consulting petroleum engineer in Denver, Colorado. His practice focuses mainly on the acquisition and exploitation of underdeveloped oil and gas assets in the Rocky Mountain area. He is a Registered Professional Engineer and is a member of the Society of Petroleum Engineers. Mr. Galuska earned his BS degree in petroleum engineering from the University of Wyoming and received his MBA degree in Finance from the University of Denver. Mr. Galuska resides in Littleton, Colorado with his wife and two children. MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the Board of Directors of Innovative Medical Services, a position he has held since 1993. He is responsible for the strategic planning, product development, and day-to-day operations of IMS. Previously, Mr. Krall was the President and CEO of Bettis-Krall Construction, Inc. a successful building-development company of custom homes and commercial property in San Diego County, California. He has also held numerous positions in general management in the hospitality industry. Mr. Krall attended Pepperdine University (economics, statistics mechanical engineering). He previously served 4 years in the United States Marine Corps and was elected, by general election, to a 4 year term on the Valle de Oro Planning Board. Mr. Krall lives in El Cajon, California with his wife, Connie and two children. EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent consultant to FDA regulated industries since 1974 and a Member of the Board of Innovative Medical Services since 1994. He graduated from the University of Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and has received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a wide variety of subjects, including compliance with the Prescription Drug Marketing Act and other government compliance matters, employee training and drug repackaging. Dr. Peiser furnishes expert witness services and has provides approved Pharmaceutical Continuing Education to several thousand attendees at his seminars. Dr. Peiser is a Founding Director of the Association of Drug Repackagers; is appointed as a Registered Arbitrator by the American Registry of Arbitrators; and is President of the Southwest Chapter of the Association of Military Surgeons. Dr. Peiser lives and works in Palm Harbor, Florida. DONNA SINGER Ms. Singer is the Executive Vice President of Innovative Medical Services. From 1996-1998 Ms. Singer served as Vice President of Operations for the Company. Ms. Singer is responsible for company operations, corporate communications, and investor relations. Previously, Ms. Singer served as the investor relations executive at Western Garnet International, a Toronto Stock Exchange mining company. Ms. Singer graduated from Gonzaga University with a Bachelor of Arts degree in English and lives in El Cajon, California. Committees: Meetings of the Board We have a Compensation/Administration Committee and an Audit Committee. The Compensation/Administration Committee and the Audit Committee were formed in 1995. Messrs. Brovarone, Galuska and Peiser comprise the Compensation/Administration Committee and Messrs. Brownell, Galuska and Peiser, are the Audit Committee. The Compensation/Administration Committee recommends to the Board the compensation of executive officers and will serve as the Administrative Committee for the Company's Stock Option Plans. The Audit Committee serves as a liaison between the Board and the Company's auditor. The Compensation/Administration Committee met once during the fiscal year ended July 31, 2001, and the Audit Committee met once during the fiscal year ended July 31, 2001. Our Board of Directors held five meetings during the fiscal year ended July 31, 2001, at which time all the then Directors were present or consented in writing to the action taken at such meetings. No incumbent Director attended fewer than 100% of said meetings. Compliance with Section 16(a) of Securities Exchange Act of 1934 To our knowledge, during the fiscal year ended July 31, 2001, the Company's Directors and Officers complied with all applicable Section 16(a) filing requirements except that Eugene Peiser, a director, failed to timely report two transactions. This statement is based solely on a review of the copies of such reports furnished to us by our Directors and Officers and their written representations that such reports accurately reflect all reportable transactions. Family Relationships There is no family relationship between any Director, executive or person nominated or chosen by Innovative Medical Services to become a Director or executive officer. Transactions with Management Innovtive Medcial Services did not enter into any transactions with Management during the fiscal year ended July 31, 2001. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table shows for the fiscal year ending July 31, 2001, the compensation awarded or paid by the Company to its Chief Executive Officer and any of the executive officers of the Company whose total salary and bonus exceeded $100,000 during such year (The "Named Executive Officers"):
-------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE -------------------------------------------------------------------------------------------------------- | Long Term Compensation | -------------------------------------------------------------------------------------------------------- Annual Compensation | Awards | Payouts | - --------------------------------------------------------------------------------------------------------- | | Salary | Other Annual | Securities | | Name and Principle Position | Year| (S) | Compensation | Underlying |All Other Compensation | | | | ($) | Options (#) | ($) | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 2001| 144,000 | 0 |50,000 Common | 0 | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 2000| 144,000 | 0 |50,000 Common | 0 | - --------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO| 1999| 144,000 | 0 |190,000 Common| 0 | - ---------------------------------------------------------------------------------------------------------
No other executive officer earned more than $100,000 during the current fiscal year.
- ----------------------------------------------------------------------------------------------------------------------- Option Grants in Last Fiscal Year - ----------------------------------------------------------------------------------------------------------------------- Individual Grants - ----------------------------------------------------------------------------------------------------------------------- Number of Common Shares Underlying Options Granted % of Total Options Granted to Exercise Price Expiration Name (#) Employees in Fiscal Year ($/Sh) Date - ----------------------------------------------------------------------------------------------------------------------- Michael L. Krall President/CEO 50,000 5 2.93 11/16/05 - -----------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option/Values The following table sets forth the number and value of the unexercised options held by each of the Named Executive Officers at July 31, 2001.
- ------------------------------------------------------------------------------------------------------------------------ Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values - ------------------------------------------------------------------------------------------------------------------------ Shares Value Number of Securities Underlying Value of Unexercised In-the Money Acquired on Realized at Unexercised Options at FY-End (#) Options at FY-End ($) Name Exercise (#) FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable - ------------------------------------------------------------------------------------------------------------------------ Michael L. Krall 0 0 531,250 Common Shares/Exercisable 901,500/Exercisable (1) President/CEO - ------------------------------------------------------------------------------------------------------------------------
(1) Option value based on the difference between the exercise price of unexercised options and the average closing price of $3.01 for the 30 trading days ending July 31, 2001. Employment Agreements and Executive Compensation In April 1996, the Board of Directors approved a five-year employment agreement for Michael Krall, its President. Mr. Krall receives a salary of $144,000 per year, an amount equal to 3% of the Company's net income before taxes, if any, plus other benefits. The Board of Directors has extended Mr. Krall's employment agreement on identical terms for an additional year. Compensation of Directors Directors are entitled to receive $300 plus reimbursement for all out-of-pocket expenses incurred for attendance at Board of Directors meetings. Other Arrangements 1996 Directors And Officers Stock Option Plan: On April 17, 1996, the Company's Board of Directors approved a Directors and Officers Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company who are ineligible to participate in the above Incentive Stock Option Plan, the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Plan is administered by the entire Board of Directors. The Plan became effective on April 17, 1996 by the Board of Directors, was not subject to Shareholder approval and shall terminate on April 17, 2006. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Directors and Officers. The maximum number of shares subject to Options granted to any one Director or Officer shall not exceed 200,000 shares in any 12-month period. The exercise price for Options shall be set by the Board of Directors but shall not be for less than eighty-five (85%) of the fair market value per share on the date of grant. The period in which Options can be exercised shall be set by the Board of Directors not to exceed five years from the date of Grant. The Plan may be terminated, modified or amended by the Board of Directors. The Innovative Medical Services 1998 Directors And Officers Stock Option Plan: On December 19, 1998, the Company's Shareholders approved the Amended Innovative Medical Services 1998 Officers and Directors Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Innovative Medical Services 2001 Directors And Officers Stock Option Plan: On January 8, 2001, the Company's Shareholders approved the Innovative Medical Services 2001 Officers and Directors Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Options granted are not "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The issuance of such non-qualified options pursuant to this Plan is not expected to be a taxable event for recipient until such time that the recipient elects to exercise the option whereupon the recipient is expected to recognize income to the extent the market price of the shares exceeds the exercise price of the option on the date of exercise. The Plans are administered by an Administrative Committee whom shall serve a one year term. The Administrative Committee is composed of the Board's Compensation/Administration Committee. Subject to anti-dilution provisions, each Plan may issue Options to acquire up to 2,000,000 shares to Directors and Officers. The exercise price for Options shall be set by the Administrative Committee but shall not be for less than the fair market value of the shares on the date the Option is granted. Fair market value shall mean the average of the closing price for ten consecutive trading days at which the Stock is listed in the NASDAQ quotation system ending on the day prior to the date an Option is granted. The period in which Options can be exercised shall be set by the Administrative Committee not to exceed five years from the date of Grant. Options granted to new executive officers or directors shall vest one year from date of appointment or election. Shares issuable under options granted to continuing officers or directors are immediately exercisable and vest upon exercise. The maximum number of shares subject to Options granted to any on Director of Officer shall not exceed 200,000 shares in any 12-month period. The Executive Officers and Directors of the Company are eligible to participate in the Plans. The Administrative Committee first granted the Executive Officers and Directors an option to purchase 100,000 shares of common stock at $1.00 per share in 1998. The Administrative Committee shall grant to individuals newly appointed as Executive Officers or as Directors, an option to purchase 100,000 shares of common stock at fair market value. Upon each subsequent anniversary thereof, each such Officer and Director will receive an option to purchase 50,000 shares of common stock at fair market value. The Plans also give the Administrative Committee discretion to award additional options. The aggregate number and kind of shares within the Plans and the rights under outstanding Options granted hereunder, both as to the number of shares and Option price, will be adjusted accordingly in the event of a reverse split in the outstanding shares of the Common Stock of the Company. The Board may at any time terminate the Plans. The approval of the majority of shareholders is required to increase the total number of shares subject to the Plans, change the manner of determining the option price or to withdraw the administration of the Plans from the Administrative Committee. Termination of Employment and Change of Control Arrangement There is no compensatory plan or arrangement with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with the Company, or from a change in the control of the Company. ITEM 11. Security Ownership of Certain Beneficial Owners and of Management The following table sets forth the number of shares of the Company's Common Stock beneficially owned as of July 31, 2001 by individual directors and executive officers and by all directors and executive officers of the Company as a group. Based upon a review of the Company's shareholders list as of July 31, 2001, there are no other registered holders of five percent or more of the Company's Common Stock. As of July 31, 2001 there were 6,954,699 shares outstanding.
Name and Address of Common Stock Percentage of Shares Beneficial Owner Title Ownership Outstanding - ---------------------------- ------------------------- -------------- -------------------- Dennis Atchley Secretary 93,860 (1) 1.3% 1725 Gillespie Way El Cajon, CA 92020 Dennis Brovarone Director 309,483 (2) 4.4% 18 Mountain Laurel Littleton, CO 80127 Gary Brownell Treasurer, CFO/Director 250,321 (3) 3.6% 1725 Gillespie Way El Cajon, CA 92020 Patrick Galuska Director 210,690 (4) 3.0% 8137 S. Downing St. Littleton, CO 80122 Michael L. Krall President, CEO/Chairman 1,153,560 (5) 16.6% 1725 Gillespie Way El Cajon, CA 92020 Eugene Peiser Director 276,136 (6) 4.0% 1725 Gillespie Way El Cajon, CA 92020 Donna Singer Executive VP, Director 178,356 (7) 2.6% 1725 Gillespie Way El Cajon, CA 92020 Directors and Officers as a Group (7 individuals) 2,472,406 (8) 35.6%
(1) Includes presently exercisable options to acquire up to 50,000 shares. (2) Includes presently exercisable options to acquire up to 235,000 shares. (3) Includes presently exercisable options to acquire up to 200,000 shares. (4) Includes presently exercisable options to acquire up to 150,000 shares. (5) Includes presently exercisable options to acquire up to 531,250 shares. (6) Includes presently exercisable options to acquire up to 200,000 shares (7) Includes presently exercisable options to acquire up to 150,000 shares (8) Includes presently exercisable options held by all of the above officers and directors to acquire up to 1,516,250 shares ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS At July 31, 2001, notes receivable included $66,561 which represents amounts due from officers of Innovative Medical Services. In July 1999, the Board of Directors authorized a personal loan to Michael L. Krall, President and CEO of $110,697. Interest accrues at 6% per annum. On July 31, 2000, the accrued interest was added to the loan balance, bringing the outstanding balance to $117,339. During Fiscal 2001, this loan was paid down to $18,379. In July 1999, the Board of Directors authorized a personal loan to Gary Brownell, Chief Financial Officer of $42,881. Interest accrues at 6% per annum. On July 31, 2000, the accrued interest was added to the loan balance, bring the outstanding balance to $45,454. On July 31, 2001, the accrued interest was added to the loan balance, bring the outstanding balance to $48,182. Mr. Krall and Mr. Brownell requested of and were granted by the Board of Directors a one-year extension on the loan balances. Both loans are due and payable at July 31, 2002. The loans to Mr. Krall and Mr. Brownell were made so that these executive officers could meet personal financial obligations. The carrying value of the notes, based on the terms at which those same loans would be made currently, approximate their fair value. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws 4.3 (1) -- Form of Common Stock Certificate 4.5 (2) -- March 2000 Warrant 4.6 (3) -- January 2001 Warrant 4.7 (4) -- Convertible Debenture 4.8 (5) -- Convertible Debenture Purchase Agreement 4.9 (6) -- Convertible Debenture Warrant 10.1 (1) -- Employment Contract/Michael L. Krall 10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated March 26, 2001 10.3 (8) -- Axenohl License Agreement 10.4 (9) -- Weaver - Roach X Assignment 10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN OMITTED INFORMATION FILED SEPARATELY] 10.6 (8) -- Promissory Note of Michael Krall 10.7 (8) -- Promissory Note of Gary Brownell 10.8 (9) -- Nutripure Dealer Agreement 10.9 (9) -- Sales Finance Agreement 10.10 -- ETIH2O, Inc. Acquisition Agreement 11 -- Statement re: Computation of per share earnings (Previously filed) 21 -- Subsidiaries of the registrant (Previously filed) (1) Incorporated by reference from Form SB-2 registration statement SEC File # 333-00434 effective August 8, 1996 (2) Incorporated by reference from S-3 registration statement, SEC File #333-36248 effective on May 17, 2000 (3) Incorporated by reference from S-3 registration statement, SEC File #333-55758 effective on February 26, 2001 (4) Incorporated by reference from S-3 registration statement, SEC File #333-61664 filed on May 25, 2001 (5) Incorporated by reference from pre-effective amendment no. 1 to S-3 registration statement, SEC File #333-61664 filed on July 10, 2001 (6) Incorporated by reference from pre-effective amendment no. 2 to S-3 registration statement, SEC File #333-61664 filed on August 13, 2001 (7) Incorporated by reference from Current Report on Form 8-K filed on May 24, 2001 as amended on October 19, 2001 (8) Incorporated by reference from the Amended Annual Report on Form 10KSB for the fiscal year ended July 31, 2000 filed on October 19, 2001 (9) Incorporated by reference from Amended Form 10QSB for the nine month period ended April 30, 2001 filed on October 19, 2001 B. Reports on Form 8-K: A Current Report on Form 8-K was filed on May 24, 2001 and amended on October 19, 2001 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 November 14, 2001 - ---------------------------------------- ----------------- 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 November 14, 2001 - -------------------------- ---------------- Dennis Brovarone /s/ GARY BROWNELL Chief Financial Officer and Director November 14, 2001 - -------------------------- ---------------- Gary Brownell /s/ PATRICK GALUSKA Director November 14, 2001 - -------------------------- ---------------- Patrick Galuska /s/ MICHAEL L. KRALL President/CEO and Director November 14, 2001 - -------------------------- ---------------- Michael L. Krall /s/ EUGENE PEISER Director November 14, 2001 - -------------------------- ---------------- Eugene Peiser /s/ DONNA SINGER Executive Vice President and Director November 14, 2001 - -------------------------- ---------------- Donna Singer
EX-10.10 3 acquisitiona_agmt.txt ETIH2O, INC. ACQUISITION AGREEMENT AGREEMENT AND PLAN OF REORGANIZATION This Agreement is made as of the 1st day of August, 2000 by and among Innovative Medical Services, a California corporation (hereinafter referred to as "IMS"), ETIH20, Inc., a Florida corporation (hereinafter referred to as "ETIH20"), George Duren and Andy Arata and the holders of one hundred percent of the outstanding shares of common stock of ETIH2O, being 31,240 Shares (hereinafter referred to individually by name or as the "ETIH20 Shareholders" collectively). This Agreement provides for the acquisition of all of the outstanding common stock of ETIH20 by a wholly owned subsidiary of IMS for shares of thirty-one thousand two hundred forty shares of common voting stock of IMS, and other valuable consideration, all for the purpose of and the establishment of the contractual relationship by and between ETIH20 and IMS as set forth herein. The Boards of Directors of ETIH20 and IMS have agreed, subject to the conditions set forth in this Agreement, and by these premises do hereby evidence their agreement, that it is desirable and in the best interests of said corporations and their stockholders, that ETIH20 be held as a wholly owned subsidiary of IMS held by another wholly owned subsidiary of IMS. AGREEMENT Now, therefore, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the parties to be derived here from, it is hereby agreed as follows: ARTICLE 1: REPRESENTATIONS AND WARRANTIES OF IMS As an inducement to, and to obtain the reliance of ETIH20, IMS represents and warrants as follows: 1.1. Organization, Good Standing, Power, Etc. IMS (i) is a corporation duly organized, validly existing and in good standing under the law of the State of California; (ii) is qualified or authorized to do business as a foreign corporation and is in good standing in all jurisdictions in which qualification or authorization may be required; and (iii) has all requisite corporate power and authority, licenses and permits to own or lease and operate its properties and carry on its business as presently being conducted and to execute, deliver and perform this Agreement and consummate the transactions contemplated hereby. 1.2. Certificate of Incorporation and Bylaws. Prior to execution of this Agreement by both parties, IMS has furnished to ETIH20's representatives complete and correct copies of (i) its Certificate of Incorporation, as amended to date, and (ii) its Bylaws, as amended to date. IMS' Certificate of Incorporation and Bylaws are in full force and effect, and they are not in violation of any of the provisions thereof. 1.3 Capitalization. The authorized capital stock of IMS consists solely of 20,000,000 shares of Common Stock, no par value, (the "IMS Common Stock"), of which, on the date hereof 6,416,939 shares are issued and outstanding and no shares are held in the treasury of IMS. In addition the Company has 5,000,000 shares of Preferred Stock authorized, none of which are presently outstanding. At the Closing of this Agreement, 31,240 shares of IMS Common Stock will have been lawfully and validly issued to the Shareholders of ETIH20. All of such issued and outstanding shares of the IMS Common Stock have been duly authorized and validly issued and are fully paid and non-assessable with no personal liability attaching to the ownership thereof and were not issued in violation of the preemptive or other rights of any person. 1.4. Authorization of Agreement. This Agreement has been or will be at Closing, duly and validly authorized, executed and delivered by IMS. 1.5. Tax Matters. On or before Closing, IMS will have prepared and filed with the appropriate United States, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns required to be filed; IMS will have paid all taxes shown on such tax returns to be payable or which have become due pursuant to any assessment, deficiency, notice, 30 day letter or similar notice received by it; and the provisions for income taxes payable in the Balance Sheets of IMS delivered to ETIH20 are sufficient for all accrued and unpaid taxes, whether or not disputed and for all periods to and including the date of such Balance Sheet. On or before Closing, IMS will provide true and accurate copies of all tax returns filed for the last three fiscal years, together with a balance sheet and income statement as of the date of this Agreement. The balance sheet and income statement of IMS shall be updated through Closing. 1.6. Compliance with Applicable Laws. The conduct by IMS of their business does not violate or infringe on any domestic (federal, state or local) or foreign law, statute, ordinance or regulation now in effect, or, to the knowledge of IMS proposed to be adopted, the enforcement of which would materially and adversely affect its business or the value of its properties or assets. 1.7. Litigation. There is no material claim, action, suit, proceeding, arbitration, investigation or inquiry pending before any federal, state, municipal, foreign or other court or governmental or administrative body or agency, or any private arbitration tribunal, or to the knowledge of IMS, threatened, against, relating to or affecting IMS or any of its properties or business, or the transactions contemplated by this Agreement; nor to the knowledge of IMS is there any basis for any such material claim, action, suit, proceeding, arbitration, investigation or inquiry which may have any adverse effect upon the assets, properties or business of IMS, or the transactions contemplated by this Agreement. The foregoing notwithstanding, IMS has disclosed to ETIH20, the litigation in which IMS is the plaintiff presently pending in U.S. Federal Court in the State of Florida. Neither IMS nor any officer, director, partner or employee of IMS, have been permanently or temporarily enjoined by order, judgment or decree of any court or other tribunal or any agency from engaging in or continuing any conduct or practice in connection with the business engaged in by IMS. There is not in existence at present any order, judgment or decree of any court or other tribunal or any agency enjoining or requiring IMS to take any material action of any kind or to which IMS or its business, properties or assets are subject or bound. IMS is not in default under any order, license, regulation or demand of any federal, state or municipal or other governmental agency or with respect to any order, writ, injunction or decree or any court which would have a materially adverse impact upon IMS' operations or affairs. 1.8. Other Information. As disclosed to ETIH20, IMS presently has the potential of material contractual commitment with respect to the proposed acquisition of subsidiary companies and or the assets thereof. IMS has the executive officer and employee benefit commitments as disclosed to ETIH20. In addition, none of the information and documents made or to be made available by IMS or any of its representatives to ETIH20 or any of its representatives in connection with the transactions contemplated by this Agreement is materially false or misleading or contains any material misstatements of fact or omits any material fact necessary to be stated in order to make the statements therein not misleading. 1.9. No Adverse Changes. Since the date of IMS' most recent financial statements, there has been no material adverse change in IMS' financial condition, assets, liabilities, or business. 1.10. Exchange Act Filings and Financial Statements. On or before Closing, IMS has delivered to ETIH20 true and accurate copies of all Financial Statements and reports filed by IMS with the United States Securities and Exchange Commission (the SEC) pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the 1934 Act) including without limitation, registration statements, 10-K's, 10-Q's, Form 8's, etc. for each of the annual, quarterly or other fiscal periods from the first to latest such filings since IMS first so registered as a public company. IMS financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of prior years or periods and fairly present the financial position and results of operations of IMS as of the respective dates and for the periods indicated in such statements. The Balance Sheets of IMS included in the statements make full and adequate provision for all obligations, liabilities or commitments (fixed and contingent) of IMS as of their respective dates. As of the date of such financial statements, IMS had no material obligations, liabilities or commitments (fixed or contingent) not required to be reserved against in the foregoing financial statements or disclosed in the notes thereto in accordance with generally accepted accounting principles, and since the date of the most recent balance sheet has not incurred any material obligations, liabilities or commitments except the transactions contemplated by this Agreement. IMS will file all reports required of it under the 1934 Act as a result of this transaction, including a Form 8-K. ARTICLE 2: REPRESENTATIONS AND WARRANTIES OF ETIH20 As an inducement to, and to obtain the reliance of IMS, ETIH20 represent and warrant as follows: 2.1. Organization, Good Standing, Power, Etc. ETIH20 (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and (ii) has all requisite corporate power and authority, licenses, permits and franchises to own or lease and operate its properties and carry on its business as presently being conducted and to execute, deliver and perform this Agreement and consummate the transactions contemplated hereby. 2.2. Certificate of Incorporation and Bylaws. Prior to execution of this Agreement by both parties, ETIH20 will furnish to IMS' representatives a complete and correct copy of (i) ETIH20's Certificate of Incorporation, as amended to date; and, (ii) ETIH20's Bylaws, as amended to date. As of such date and the date of Closing, ETIH20's Certificate of Incorporation and Bylaws are and shall be in full force and effect, and ETIH20 is not and shall not be in violation of any of the provisions thereof. 2.3. Capitalization. As of the date hereof the authorized capital stock of ETIH20 will consist solely of 250,000 Common Shares with a par value of $0.0 per share. By Closing 31,240 shares of Common Stock will have been issued and outstanding and no shares are held in the treasury of ETIH20. All of such issued and outstanding shares of ETIH20 Common Stock have been duly authorized and validly issued and are fully paid and non-assessable with no personal liability attaching to the ownership thereof. 2.4. Options, Warrants, Rights, Etc. By closing, ETIH20 will not have outstanding any options, warrants or other rights to purchase or convert any obligation into, any shares of the ETIH20 Common Stock, nor any instruments or obligations to confer or create such rights. 2.5 Subsidiaries. ETIH20 does not have any subsidiaries and does not own a controlling interest in any capital stock of any corporation. 2.6. Authorization of Agreement. This Agreement has been or will be at Closing duly and validly authorized, executed and delivered by ETIH20. 2.7. Financial Statements. ETIH20 shall deliver within 50 days of Closing, to IMS unaudited financial statements of ETIH20 for its most recent fiscal year ending December 31, 1999. These financial statements have been prepared to the best of ETIH20's ability in accordance with generally accepted accounting principles applied on a basis consistent with that of prior years or periods, are correct and complete and to the best knowledge of ETIH20's management fairly present the financial position and results of operations of ETIH20 as of the date thereof and for the periods indicated in such statements. The Balance Sheets of ETIH20 included in the statements makes full and adequate provisions for all obligations, liabilities or commitments (fixed and contingent) of ETIH20 as of their respective dates. As of the date of such financial statements, ETIH20 has no undisclosed obligations, liabilities or commitments (fixed or contingent) not required to be reserved against in the foregoing financial statements or disclosed in the notes thereto in accordance with generally accepted accounting principles, except the transactions contemplated by this Agreement. 2.8. Tax Matters. On or before Closing, ETIH20 will have prepared and filed with the appropriate United States, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns required to be filed; ETIH20 will have paid all taxes shown on such tax returns to be payable or which have become due pursuant to any assessment, deficiency, notice, 30 day letter or similar notice received by it; and the provisions for income taxes payable in the Balance Sheets of ETIH20 delivered to IMS are sufficient for all accrued and unpaid taxes, whether or not disputed and for all periods to and including the date of such Balance Sheet. On or before Closing, ETIH20 will provide true and accurate copies of all tax returns filed since its date of incorporation, together with a balance sheet and income statement as of the date of this Agreement. The balance sheet and income statement of ETIH20 shall be updated through Closing. 2.9. Material Contracts. There has not occurred any default by ETIH20 of any event which with the lapse of time or the election of any person other than ETIH20 or any combination thereof, will become a default, except defaults, if any, which will not result in any material loss to or liability of ETIH20. 2.10 Permits, Licenses, Etc. ETIH20 have all permits, licenses, orders and approvals of federal, state, local or foreign governmental or regulatory bodies that are required in order to permit it to carry on their business as presently conducted. 2.11. Compliance with Applicable Laws. The conduct by ETIH20 of their business does not violate or infringe upon any domestic (federal, state or local) or foreign law, statute, ordinance or regulation now in effect, or, to the knowledge of ETIH20 proposed to be adopted, the enforcement of which would materially and adversely affect its business or the value of their properties or assets. 2.12. Litigation. There is no material claim, action, suit, proceeding, arbitration, investigation or inquiry pending before any federal, state, municipal, foreign or other court or governmental or administrative body or agency, or any private arbitration tribunal, or to the knowledge of ETIH20 threatened, against, relating to or affecting ETIH20 or any of their properties or business, or the transactions contemplated by this Agreement; nor to the knowledge of ETIH20 is there any basis for any such material claim, action, suit, proceeding, arbitration, investigation or inquiry which may have any adverse effect upon the assets, properties or business of ETIH20, or the transactions contemplated by this Agreement. Neither ETIH20 nor any officer, director, partner or employee of ETIH20, has been permanently or temporarily enjoined by order, judgment or decree of any court or other tribunal or any agency from engaging in or continuing any conduct or practice in connection with the business engaged in by ETIH20. There is not in existence at present any order, judgment or decree of any court or other tribunal or any agency enjoining or requiring ETIH20 to take any material action of any kind or to ETIH20 and their respective business, properties or assets are subject or bound. ETIH20 is not in default under any order, license, regulation or demand of any federal, state or municipal or other governmental agency or with respect to any order, writ, injunction or decree of any court which would have a materially adverse impact upon ETIH20's 's operations or affairs. 2.13. Other Information. None of the information and documents which have been furnished or made available by ETIH20 or any of its representatives to IMS or any of their representatives in connection with the transactions contemplated by this Agreement is materially false or misleading or contains any material misstatements of fact or omits any material fact necessary to be stated in order to make the statements therein not misleading. 2.14. Investment Representation by ETIH20 Shareholders. The ETIH20 shareholders are acquiring shares of IMS Common Stock issuable hereunder for their own account and agree not to distribute any shares issuable there under within the meaning of the Securities Act of 1933 (the 1933 Act), except as otherwise provided herein, unless an appropriate registration statement has been filed with the SEC or unless an exemption from registration under the 1933 Act is available according to opinion of counsel for IMS. Each certificate for shares issued shall be stamped or otherwise imprinted with the following or a substantially similar legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933 (the "Act") nor any state securities laws. These shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an opinion of counsel acceptable to IMS that an exemption from such registration is available." The foregoing restriction on transfer shall remain in existence for a period of one (1) year only from the date of Closing, after the expiration of which all shares then owned or thereafter acquired pursuant to this Agreement shall be registered on the books of IMS without any further restraint of alienation. Any shares issued containing the foregoing Restrictive Legend may be exchanged for shares without Restrictive Legend at any time after the expiration of two (2) year from the date of closing at the option of the holder. By execution of this Agreement and the Subscription Agreement attached hereto as Exhibit 2,14, the ETIH20 shareholders represent that they have sufficient investment sophistication and ability to take the financial risks associated with this transaction and those representations contained in this Section 2.14, which meet the standards for availability of an exemption from the registration requirements of the 1933 Act and from the registration and/or qualification requirements of any other applicable securities law. The foregoing notwithstanding, the Shares issuable hereunder may be registered in the name of or transferred to family members, trusts and other related parties. 2.15. Investment Representation by IMS. IMS is acquiring the shares of ETIH20 Common Stock issuable hereunder for its own account and agrees not to distribute any shares within the meaning of the Securities Act of 1933 (the 1933 Act) unless an appropriate registration statement has been filed with the SEC or unless an exemption from registration under the 1933 Act is available according to opinion of counsel for ETIH20. Each certificate for shares issued shall be stamped or otherwise imprinted with the following or a substantially similar legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933 (the "Act") nor any state securities laws. These shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an opinion of counsel acceptable to IMS that an exemption from such registration is available." By execution of this Agreement IMS represents that it has sufficient investment sophistication and ability to take the financial risks associated with this transaction and those representations contained in this Section 2.15, which meet the standards for availability of an exemption from the registration requirements of the 1933 Act and from the registration and/or qualification requirements of any other applicable securities law. ARTICLE 3: PLAN OF EXCHANGE AND CLOSING 3.1. The Exchange. The issued and outstanding shares of common stock of ETIH20 shall be exchanged as follows for the consideration set forth herein: A). At Closing, the ETIH20 Shareholders shall deliver to IMS, certificates representing all of the outstanding common stock of ETIH20 properly endorsed for transfer to ETI-Nevada as described below and executed Subscription Agreements for the IMS shares. The ETIH2O Shares shall be exchanged on a one for one basis for IMS Shares. B). At Closing, IMS shall deliver to the ETIH20 Shareholders, IMS common shares in the form attached hereto. 3.2. Closing. The Closing of the transactions contemplated by this Agreement shall take place on such date as may be agreed upon by the parties, but no later than November 30 2000 (herein called the "Closing Date"), at the offices of IMS, 1725 Gillespie Way, El Cajon, California or such other time and location as the parties may mutually agree. 3.3. Closing Events. At the Closing, each of the respective parties hereto shall execute, acknowledge, and deliver (or shall cause to be executed, acknowledged, and delivered) any agreements, resolutions, or other instruments required by this Agreement to be so delivered at or prior to the Closing, together with such other items as may be reasonably requested by the parties hereto and their respective legal counsel in order to effectuate or evidence the transactions contemplated hereby. Directors of ETIH20. Effective on the Closing Date of this transaction, ETI shall deliver certified resolutions to IMS to the effect that the Board of Directors of ETIH20 shall consist of the following individuals: George Duren Director Andy Arata Director Michael Krall Director Donna Singer Director Gary Brownell Director IMS agrees that so long as either George Duren and/or Andy Arata are employees of ETIH20 as hereinafter provided, it shall vote its shares to cause both of them to be elected to the Board of Directors of ETIH20 for such time as they are willing and able to serve. 3.5. Officers of ETIH20. Effective on the Closing Date of this transaction ETI shall deliver certified resolutions to IMS to the effect that all existing executive officers and employees of ETIH20 shall have submitted their resignations effective on Closing, and the above Board shall have elected new officers of ETIH20 to consist of the following persons: Andrew B. Arata President, Chief Executive Officer George Duren Executive Vice President Dennis Atchley Secretary Gary Brownell Treasurer IMS agrees that so long as either George Duren and/or Andy Arata are employees of ETIH20 as hereinafter provided, it shall vote its shares to cause to be elected directors who will vote to cause each of them to be elected to the Offices set forth above for such time as they are willing and able to serve. 3.6 Existing Liabilities of ETIH20. The parties acknowledge that as of the date of Closing, ETIH20 will have outstanding liabilities for both unpaid operational expenses and loans extended to ETIH20 during its formative period. GEORGE DUREN and ANDY ARATA agree that they will execute and deliver to IMS at Closing an Indemnification Agreement in form mutually satisfactory holding ETIH20 and IMS harmless from any and all liabilities incurred by ETIH20 prior to Closing excepting only those liabilities incurred in the ordinary course of business subsequent of July 20, 2000, any and all amounts which may have been advanced by IMS pursuant to its obligations as set forth above in paragraph 3.2 above, all of which shall remain obligations of ETIH20 to be re-paid in the ordinary course of its business. Provided further that at Closing, a determination shall be made by the parties of the amount of all current assets of ETIH20, including accounts receivable, loans receivable and inventory, and such amounts (or the proceeds therefrom) shall be and shall remain available to GEORGE DUREN and ANDY ARATA when same is received by ETIH20 for satisfaction of the outstanding liabilities referred to herein. ARTICLE 4: SPECIAL COVENANTS 4.1. Due Diligence. The parties hereto shall have up to and including MONTH DAY, 2000 within which to complete their due diligence investigations on the other party and the transaction contemplated hereunder. In the event either party hereto decides, in its sole discretion, not to proceed with the Closing based on its due diligence investigation, it shall notify the other in writing on or before 5:00 P.M. Pacific Time, July 20, 2000 of such decision and this Agreement. 4.2. Exchange of Information. Each party shall cooperate fully by exchanging information requested by the other party in a timely manner. Without in any manner reducing or otherwise mitigating the representations contained herein, each party and/or its attorneys shall have the opportunity to meet with the accountants and attorneys of the other party to discuss its respective legal and financial condition and this transaction. If this transaction is not completed, all documents received by each party and/or its attorney shall be returned to the other party and all such information so received shall be treated as confidential in accordance with Section 6.10. 4.3. Conduct of Business. Prior to Closing, IMS and ETIH20 shall each conduct their business in the normal course, and shall not sell, pledge, or assign any assets, without the prior written approval of the other party, except in the regular course of business. Neither IMS and ETIH20 shall amend their Articles of Incorporation or Bylaws, declare dividends, redeem or sell stock or other securities, incur additional or newly-funded liabilities, acquire or dispose of fixed assets, change employment terms, enter into any material or long-term contract, guarantee obligations of any third party, settle or discharge any balance sheet receivable for less than its stated amount, pay more on any liability than its stated amount, or enter into any other transaction other than in the regular course of business and with notice to the other party. ARTICLE 5: CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES 5.1. ETIH20 and ETIH20'S SHAREHOLDERS' Closing Conditions. The obligations of ETIH20 and ETIH20'S SHAREHOLDERS hereunder are subject to fulfillment prior to or at the Closing of each of the following conditions: A). Closing Date. The transactions contemplated by this Agreement shall be closed on or before November 30, 2000. B). Representations and Warranties. The representations and warranties of IMS made pursuant to Article 1 above shall be true and accurate in all material respects as of the Closing Date. C). Performance. IMS shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing. D). No Adverse Changes. There shall not have been, since the date of the latest audited financial statements of IMS, any materially adverse change in IMS' financial condition, assets, liabilities or business. E). Opinion of IMS' Counsel. IMS shall have delivered to ETIH20 an opinion of IMS' counsel, Dennis Brovarone, Attorney at Law, dated the Closing Date to the effect that: (i) IMS is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has all requisite power to carry on its business as now being conducted and to execute, deliver and perform this Agreement and to perform its obligations thereunder; (ii) IMS is duly qualified to do business as a foreign corporation and is good standing in each jurisdiction in which the nature of the business conducted by it or the property owned, operated or leased by it makes such qualification necessary; (iii) this Agreement has been duly authorized by all necessary corporate action on the part of IMS, has been duly executed and delivered by IMS and constitutes the legal, valid and binding obligation of IMS enforceable in accordance with its terms except as enforceability thereof may be limited by the insolvency or other laws affecting the rights of creditors and the enforcement of remedies; (iv) IMS has prepared and filed with the SEC all periodic reports required of it under the 1934 Act; (v) the Shares issuable hereunder have been duly authorized and will be validly issued; fully paid and non-assessable with no personal liability attaching to the ownership thereof; (vi) neither the execution, delivery and performance by IMS of this Agreement, nor compliance by IMS with the terms and provisions hereof, will conflict with, or result in a breach of the terms, conditions or provisions of, or will constitute a default under, the Articles of Incorporation or Bylaws of IMS or any agreement or instrument known to such counsel to which IMS is a party or by which IMS or any of its properties or assets are bound; (vii) there are no actions, suits or proceedings pending or, to the knowledge of such counsel, threatened against IMS before any court or administrative agency, which have, in the opinion of such counsel, if adversely decided, will have any material adverse effect on the business or financial condition of IMS or which questions the validity of this Agreement or the Shares issuable hereunder. In rendering his opinion, counsel shall be allowed to rely on written representations of officers and directors of the Company as to factual matters without independent verification thereof. F). Current Status with Securities and Exchange Commission. IMS shall have prepared and filed with the SEC all periodic reports required under the 1934 Act pursuant to Section 12(g) thereof. G). Due Diligence. ETIH20 and ETIH20'S SHAREHOLDERS shall have completed and be satisfied with its due diligence investigation of IMS pursuant to Article 4.1. H). Employment Agreements of Andrew Arata and George Duren. IMS shall have executed and delivered the Andrew Arata and George Duren Employment Agreements attached hereto as Exhibit 5.1.H.1 and 5.1.H.2. 5.2. IMS' Closing Conditions. The obligations of IMS hereunder are subject to fulfillment prior to or at the Closing of each of the following conditions: A). Closing Date. The transactions contemplated by this Agreement shall be closed on or before November 30, 2000. B). Representations and Warranties. The representations and warranties of ETIH20 made pursuant to Article 2 above, shall be true and accurate in all material respects as of the Closing Date. C). Performance. ETIH20 and ETIH20 Shareholders shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing including but not limited to: (1) Employment Agreements of Andrew Arata and George Duren. IMS shall have executed and delivered the Andrew Arata and George Duren Employment Agreements attached hereto as Exhibit 5.1.H.1 and 5.1.H.2. (2). EXCLUSIVE SUPPLIER AGREEMENT. SISTECAM and ETIH20 shall have entered into the Exclusive Supplier Agreement whereby ETIH2O agrees to buy the capacity of Axenohl products manufactured by SISTECAM and not utilized or sold within the country of Costa Rica except as with the prior written consent of the Chief Executive Officer of IMS. D). No Adverse Changes. There shall not have been, since the date of the latest audited financial statements of ETIH20, any materially adverse change in their financial condition, assets, liabilities or business; E). Opinion of ETIH20's Counsel. ETIH20 shall have delivered to IMS, an opinion of their counsel, Dale C. Ferguson, Attorney at Law, dated the Closing Date to the effect that: (i) ETIH20 is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida, have all requisite power to carry on their business as now being conducted and to execute, deliver and perform this Agreement and to perform their obligations thereunder; (ii) ETIH20 are duly qualified to do business in each jurisdiction in which the nature of the business conducted by it or the property owned, operated or leased by it makes such qualification necessary; (iii) this Agreement has been duly authorized by all necessary corporate action on the part of ETIH20, have been duly executed and delivered by ETIH20 and constitutes the legal, valid and binding obligation of ETIH20, enforceable in accordance with its terms except as enforceability thereof may be limited by the insolvency or other laws affecting the rights of creditors and the enforcement of remedies; (iv) neither the execution, delivery and performance by ETIH20 of this Agreement, nor compliance by ETIH20 with the terms and provisions hereof, will conflict with, or result in a breach of the terms, conditions or provisions of, or will constitute a default under, the Articles of Incorporation or Bylaws of ETIH20 or any agreement or instrument known to such counsel to which ETIH20 is a party or by which ETIH20 or any of their properties or assets are bound; (v) there are no actions, suits or proceedings pending or, to the knowledge of such counsel, threatened against ETIH20 before any court or administrative agency, which, in the opinion of such counsel, if adversely decided, will have any material adverse effect on the business or financial condition of ETIH20 or which questions the validity of this Agreement. In rendering their opinion, counsel shall be allowed to rely on written representations of officers and directors of the Company as to factual matters without independent verification thereof; and F). Due Diligence. IMS shall have completed and be satisfied with its due diligence investigation of ETIH20 pursuant to Article 4.1. ARTICLE 6: MISCELLANEOUS 6.1. Expenses and Further Assurances. The parties hereto shall each bear their respective costs and expenses incurred in connection with the transactions contemplated by this Agreement. Each party hereto will use its best efforts provide any and all additional information, execute and deliver any and all documents or other written material and perform any and all acts necessary to carryout the intent of this Agreement. 6.2. Survival of Representations, Warranties and Covenants. All of the representations, warranties and covenants made as of the date of this Agreement and as of Closing, shall survive the closing of this transaction. 6.3. Successors and Assigns. All representations, warranties, covenants and agreements in this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, representatives, successors and assigns whether so expressed or not. 6.4. Governing Law. This Agreement is to be governed by and interpreted under the laws of the State of California, without giving effect to the principles of conflicts of laws thereof. In addition, the parties agree to jurisdiction in the State or Federal Courts of the State of California and the County of San Diego. 6.5. Section and Other Headings. The section and other headings herein contained are for convenience only and shall not be construed as part of this Agreement. 6.6. Counterparts. This Agreement may be executed in any number of counterparts and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute but one and the same instrument. 6.7. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended or modified, except by a written agreement signed by all parties hereto. 6.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffectual to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 6.9. Confidentiality. Each party hereto agrees with the other parties that, unless and until this Agreement has been consummated, or for a period of one (1) year from the date of this Agreement if the transaction contemplated by this Agreement is not consummated it and its representatives will hold in strict confidence all data and information obtained with respect to the other party from any representative, Officer, Director or employee, or from any books or records or from personal inspection, of such other party, and shall not use such data or information or disclose the same to others, except: (i) to the extent such data or information has theretofore been publicly disclosed, is a matter of public knowledge or is required by law to be publicly disclosed; and (ii) to the extent that such data or information must be used or disclosed in order to consummate the transactions contemplated by this Agreement. The foregoing notwithstanding, IMS shall be authorized to publicly announce the execution and closing of this Agreement, details thereof and a description of ETIH20 and the business conducted thereby. IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement to be executed by their respective Officers, hereunto duly authorized, as of the date first above written. INNOVATIVE MEDICAL SERVICE By: /s/ MICHAEL L. KRALL ---------------------------- Michael L. Krall, President ATTEST: /s/ DENNIS ATCHLEY ------------------------- Dennis Atchley, Secretary ETIH20, INC. By: /s/ ANDY ARATA ---------------------- Andy Arata , President ATTEST /s/ CHERYL C. ARATA ------------------------------------ Cheryl C. Arata, Secretary/Treasurer ETIHH2O Acquisition Agreement Exhibit 2.14 SECURITIES SUBSCRIPTION AGREEMENT , 2000 - ------------------ Innovative Medical Services 1725 Gillespie Way El Cajon, California 92020 1. _______ Innovative Medical Services, a California corporation (the "Company"), has offered to exchange ____________ shares of its common stock (the "IMS Shares") to the undersigned subscriber (the "Subscriber) for _________________________ shares of ETIH2O, Inc., common stock legally and beneficially owned by the Subscriber pursuant to the Agreement and Plan of Reorganization by and between the Company and ETIH2O, Inc., dated __, 2000, a copy of which has been provided to the Subscriber together with the attached Disclosure Package. Together with this Subscription Agreement, the Subscriber is delivering to the Company a certificate representing all of the Subscriber's ETIH2O, Inc. shares. 2. _______ The Offer to Exchange is being conducted in reliance upon the exemption from the registration requirements of the Securities Act of 1933 (the Act) set forth in Rule 505 of Regulation D promulgated under the Act. 3. Representations and Warranties of Subscriber. In order to induce the Company to accept this subscription, the Subscriber hereby represents and warrants to, and covenants with, the Company as follows: A. The Subscriber is subscribing for the IMS Shares for its own account for investment purposes and not with a view towards distribution and has no present arrangement or intention to sell the Common Stock; B. The Subscriber acknowledges and agrees that the IMS Shares and the securities contained therein have not been registered under the Act and may not be offered or sold in the United States or to U.S. Persons unless registered under the Act or an exemption from the registration requirements of the Act is available; C. The Subscriber is not an officer, director or "affiliate" (as that term is defined in Rule 403 under the Act) of the Company; D. Subscriber is qualified to purchase the Shares under the laws of its jurisdiction of residence and the offer and sale of the Shares will not violate the securities or other laws of such jurisdiction; E. All invitations, offers and sales of or in respect of, any of the IMS Shares, by Subscriber and any distribution by Subscriber of any documents relating to the offer by it of any of the IMS Shares will be in compliance with applicable laws and regulations and will be made in such a manner that no prospectus need be filed and no other filing need be made by Company with any regulatory authority or stock exchange in any country or any political subdivision of any country; F. The Subscriber has received and carefully reviewed the Company's 1999 Annual Report and fiscal year to date SEC filings and has had the opportunity to ask and receive answers to any and all questions the Subscriber had with respect to the Company, its business, management and current financial condition; G. The Subscriber is either an accredited investor as defined by Regulation D and has completed and provided herewith the Accredited Investor Questionnaire attached hereto or the Subscriber represents that it has such knowledge and expertise in financial and business matters that the Subscriber is capable of evaluating the merits and risks involved in an investment in the Common Stock and acknowledges that an investment in the IMS Shares entails a number of very significant risks and Subscriber is able to withstand the total loss of its investment; H. Except as set forth in this Agreement, no representations or warranties have been made to the Subscriber by the Company, or any agent, employee or affiliate of the Company and in entering into this transaction the Subscriber is not relying upon any information, other than that which is contained in the attached Disclosure Package, the receipt of which is hereby acknowledged and the results of any independent investigation by the Subscriber; I. The Subscriber understands that the IMS Shares are being offered and sold to it in reliance on specific exemptions from the registration requirements of the United States Federal and State securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of the Subscriber to acquire the IMS Shares, and the Subscriber acknowledges that it is Subscriber's responsibility to satisfy itself as to the full observance by this Offering and the sale of the IMS Shares to Subscriber of the laws of any jurisdiction outside the United States and Subscriber has done so; J. The Subscriber has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and this Agreement is a legally binding obligation of the Subscriber enforceable against the Subscriber in accordance with its terms; and K. Subscriber understands that in the view of the SEC the statutory basis for the exemption claimed for the transaction would not be present if the Offering, although in technical compliance with Regulation D, is part of a plan or scheme to evade the registration provisions of the 1933 Act and Subscriber confirms that its purchase is not part of any such plan or scheme. Subscriber has no present intention to sell the IMS Shares. 4. Representations of the Company. The Company represents and warrants: A. The Company is in full compliance, to the extent applicable, with all reporting obligations under California and federal law; B. The execution, delivery and performance of this Agreement and the consummation of the issuance of the IMS Shares and the transactions contemplated by this Agreement are within the Company's corporate powers and have been duly authorized by all necessary corporate and stockholder action on behalf of the Company; C. All documents provided to the Subscriber do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statement therein in light of the circumstances under which they were made, not misleading; 5. Non-Binding Until Acceptance. The Subscriber understands that this subscription is not binding upon the Company until the Company accepts it, which acceptance is at the sole discretion of the Company and is to be evidenced by the Company's execution of this Agreement where indicated. This Agreement shall be null and void if the Company does not accept it as aforesaid. Upon acceptance by the Company and receipt of the ETIH2O Shares of the Subscriber, the Company will issue one or more certificates for the full number of subscribed IMS Shares. 6. Non-Assignability. Neither this Agreement nor any of the rights of the Subscriber hereunder may be transferred or assigned by the Subscriber. 7. Governing Law. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. IN WITNESS WHEREOF, the Subscriber has executed this Securities Subscription Agreement on the date set forth below. (Print Name of Subscriber) By: ---------------------------------------- (Signature) Print Name & Title: --------------------------------- (for corporate subscribers) Address for Shareholder Records: -------------------------- Number of IMS Shares Subscribed: -------------------------- (1 IMS for 1 ETIH20) -------------------------- # of ETIH2O Shares Exchanged -------------------------- (1 IMS for 1 ETIH20) -------------------------- The foregoing Subscription is accepted this day of July 2000 by ------- INNOVATIVE MEDICAL SERVICES BY: ------------------------------------ Michael L. Krall, President ACCREDITED INVESTOR DECLARATION The undersigned as the Subscriber of the Innovative Medical Services Subscription Agreement dated _________ __, 2000, represents that the Subscriber qualifies as an "Accredited Investor," as defined in Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, because the Subscriber is: - --------- (1) A private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940; - --------- (2) An organization described in Section 501(c)(3) of the Internal Revenue Code, Corporation, Massachusetts or similar business trust, or Partnership not formed for the purpose of investing in the Securities, with total assets in excess of $5,000,000; - --------- (3) A director, executive officer, or general partner of the issuer of the Securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; - --------- (4) A natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase, exceeds $1,000,000; - --------- (5) A natural person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person's spouse of $300,000 in each of those years and has a reasonable expectation of reaching those levels in the current year; - --------- (6) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities offered, whose purchase is directed by a sophisticated person as described in Section 506(b)(2)(ii); or - --------- (7) Any entity in which all of the equity owners are accredited investors. Date: ------------------------ Signed: ----------------------------------------------------------- Please print name: -------------------------------------------------- Address: -------------------------------------------------- Tax I.D. No.: -------------------------------------------------- ETIHH2O Acquisition Agreement Exhibit 5.1.H.1 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement") is made and entered into as of August 1, 2000, by and among ANDREW B. ARATA (the "Executive"), INNOVATIVE MEDICAL SERVICES, a California corporation (the "Company") and ETI H2O Corporation., a soon to be incorporated in the state of Nevada, with regard to the following: A. The Company desires to employ Executive to act as President of the newly formed company known as ETI H2O Corporation. (Nevada). B. The Executive wishes to act as President of ETIH2O Corporation on behalf of the Company. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs the Executive as President, and the Executive accepts the duties described herein, and agrees to discharge the same faithfully and in the best of his ability. The Executive shall perform such other duties as shall be from time to time prescribed by the board of directors of the Company or the chief executive officer. The Executive shall devote his full business time and attention to the business and affairs of the Company. 2. Term. The Company shall employ the Executive under the terms of this Agreement on August 1, 2000 through July 31, 2002, subject to the terms of this Agreement. The parties may, by mutual agreement, extend the term of this Agreement beyond such date for additional periods of time as set forth in any extension of this Agreement. However, the Company may terminate this Agreement immediately upon written notice to Executive as set forth in Paragraph 4. If at the end of the Term the Executive continues to be employed by the Company, then the terms of this Agreement shall be deemed to have been renewed on a month-to-month basis and shall remain in effect for as long as the Executive continues to be so employed. 3. Compensation and Benefits. In consideration for the services to be rendered by the Executive to the Company, the Company agrees to pay the Executive the following compensation and benefits: 3.1 Salary. Employment package includes the following : The Company shall pay the Executive a salary at the rate of Sixty Thousand Dollars ($60,000 .00) per year, due and payable bi-weekly, or as mutually agreed upon by the Company and the Executive as follows: 3.1.1 Vesting of 25K share options upon employment. 3.1.2 Vesting of 25K share options and salary increase to 72k per year upon production levels and sales of concentrate reaching 50 barrels per month. 3.1.3 Vesting of 25K share options and salary increase to 84k per year upon production levels and sales of concentrate reaching 100 barrels per month 3.1.4 Vesting of 25K share options and salary increase to 96k per year upon production levels and sales of concentrate reaching 150 barrels per month 3.1.5 Vesting of 25K share options upon production levels and sales reaching 200 barrels per month 3.16. Vesting of 50K share options upon production levels and sales reaching 1000 barrels per month 3.2. Withholding and Deductions. The Company shall withhold and/or deduct from any and all salary or other payments, all taxes which may be required to be deducted or withheld under any provision of law (including, but not limited to, social security payments and income tax withholding) now in effect or which may become effective any time during the term of this Agreement. All taxes based on employment out of the State of Florida. 3.3.Executive Incentive Compensation. The Company agrees to evaluate the performance of the Executive with regard to additional compensation for superior performance within six months after the commencement of the agreement. The Company shall consider the overall performance of the Company in determining whether the Executive is entitled to receive added compensation. The basis of granting such added compensation will be to reward the Executive for outstanding work and to provide an incentive for continued performance. Any additional incentive compensation to be paid pursuant to this Agreement, shall be made within the Company's discretion since such added compensation would be affected by general and specific economic conditions, changes in management policies and other considerations. In the event incentive compensation is awarded, it shall be set forth in a separate written addendum to this Agreement, signed by both parties. As well as the following: 20k options will vest upon hiring and 20k options will vest every six months for 4 additional time periods totaling 100k options. This does not in any way exclude the Executive from any other option bonuses that are received company wide. 3.4. Stock Options. The Executive shall be entitled to participate in an incentive stock option or similar plan to be set forth in a separate written agreement and approved by the compensation committee of the board of directors, stockholders, if required by law, and on such terms and conditions as are established by the Company in its complete discretion. 3.5. Benefits. The Company shall provide the Executive, at no cost to the Executive, group health insurance for the Executive and group dental insurance for the Executive. 3.6. Expense Reimbursement. The Company agrees to reimburse the Executive for all ordinary and necessary expenses incurred by the Executive on behalf of the Company, including entertainment, meals, and travel expenses. Any costs incurred by the Executive for conventions, meetings, seminars, club dues and special social entertainment expenses, shall be reimbursed provided the board of directors of the Company approve such as outlined in the company's policy manual. 3.7. Vacation. The Executive shall be entitled to 5 days of vacation in the first year, accrued monthly. After three years of employment, Executive shall be entitled to 15 days of vacation. Vacation days shall accrue pro rata each calendar month beginning in December 1996. The parties agree that the Executive shall take all vacation days during the calendar year earned, to the extent practical, and agree that notwithstanding the failure to use vacation days in a calendar year, not more than [thirty (30)] vacation days shall be carried forward into any calendar year from the previous year or years. Once this maximum is reached, all further accruals will cease. Vacation accruals will recommence after Executive has taken vacation and the accrued hours have dropped below the [30] day maximum. 4. Termination. 4.1. Employer Right to Terminate Employment. Executive's employment shall terminate one (1) year from the commencement date of this Agreement as set forth in Paragraph 2, above. In addition, upon written notice to the Executive (except in the case of death of the Executive, in which event termination shall automatically occur at the date of death), the Agreement may be terminated immediately for any of the following grounds as determined in the sole discretion of the Company: 4.1.1. Willful breach or habitual neglect or inability (except where such inability is due to Disability or death) to perform the Executive's duties hereunder; 4.1.2. Malfeasance or misfeasance in the performance of the Executive's duties hereunder; 4.1.3. Immoral or illegal conduct; 4.1.4. Disability or death; 4.2. Termination by the Executive. The Executive may terminate his employment hereunder prior to the date it would otherwise terminate under this Agreement by delivering written notice to the Company six (6) months in advance of the date such termination is to take effect. 5. Post-Termination Payments and Benefits. 5.1. Salary and Benefits. 5.1.1. In the event the employment of the Executive is terminated under Paragraphs 4.1.1., 4.1.2., 4.1.3., or 4.1.4., the Company shall pay the Executive the salary due him at the end of the month in which such termination occurs, plus any pay in lieu of vacation accrued or carried forward to, but not taken as of the date of termination with the exception of the options. All options will be due on the scheduled timetable as long as the employee is not terminated for cause. 5.2. Death. In the event the employment of the Executive is terminated as a result of death, the Company shall pay to Executive's designated beneficiary, payments equal to the amount of salary otherwise payable under Paragraph 3.1 for a period of six (6) months following the date of death of the Executive. In addition all options will be due to the estate or designated heir on the scheduled time table as prescribed in this agreement. 6. Dispute Resolution. 6.1. The parties agree that if a dispute arises concerning any provision of this Agreement, the alleged breach thereof, or the rights and duties of any person or entity hereunder, the parties agree first to try in good faith to settle the dispute. In the event that the parties cannot settle the dispute, any party shall have the right to submit the dispute, to binding arbitration. Such arbitration shall be held before a single arbitrator agreed upon by the parties to the dispute, and if they cannot agree, any party may petition a California Superior Court in San Diego County for appointment of an arbitrator. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, subject to any contrary and/or additional terms of this Paragraph 6 and Paragraph 9.10. 6.2. The rules of evidence shall not apply to any arbitration under this Paragraph 6. However, in all other respects, the arbitrator shall follow applicable law. 6.3. Subject to Paragraph 9.10, each party shall bear their own costs and expenses of arbitration. 6.4. The decision of the arbitrator shall be binding, enforceable, and may be entered in any court having jurisdiction thereof. 6.5. Payment of any and all amounts granted by an arbitrator hereunder shall be made within fifteen (15) days following the date of the decision, and thereafter, shall bear interest at the then current maximum legal rate per month until paid in full. 6.6. The arbitrator shall not have the power to award damages to the Executive for emotional distress or pain and suffering or to award consequential or punitive damages, but shall be empowered to award the Executive only direct economic damages. 6.7. Any arbitration conducted under this Paragraph 6 shall be conducted in a confidential private proceeding and the fact of the proceeding and the substance of the matters addressed in the proceeding shall be kept confidential by the parties, provided that disclosure may be made by any party upon notice to the other party or parties in the event that such disclosure is required by applicable law or regulation or legal process. 7. Proprietary Information. 7.1. Unfair Competition. Because of his employment by the Company, Executive will have access to trade secrets and confidential information about the Company, its products, its customers and its methods of doing business. In consideration of his access to this information, Executive agrees that for a period of five (5) years after termination of his employment, he will not, directly or indirectly compete with Company in the field of pharmaceutical water filtration sales in the USA. 7.1.1. Competition. Executive understands and agrees that direct competition means the design, development, production, promotion or sale of products or services competitive with those of the Company. Indirect competition means employment by any competitor or third party providing products competing with the Company's products, for whom Executive will perform the same or similar function as he will perform for the Company. 7.1.2. Additional Trade Secrets. In the course of his employment, Executive will have access to confidential records and data pertaining to the Company's customers and the relationship between these customers and the Company. Such information is considered secret and is disclosed to Executive in confidence. During his employment by the Company and for five (5) years after termination of that employment, Executive shall not directly or indirectly disclose or use any such information except as required in the course of his employment by the Company. In addition, during the five (5) years after termination of his employment, Executive shall not induce or attempt to induce any account executive of the Company to discontinue representing the Company for purpose of representing any competitor of the Company. 8. Return of Documents. The Executive expressly agrees that all manuals, documents, files, reports, studies, instruments or other materials used and/or developed by the Executive during the term of this Agreement are solely the property of the Company and the Executive has no right, title or interest therein. The Executive hereby further acknowledges that all such items constitute confidential trade secrets the wrongful use or disclosure of which to the public or competitors of the Company would materially adversely affect the business and prospects of the Company. Upon termination of employment of the Executive, the Executive or the Executive's representatives shall promptly deliver possession of all such property to the Company in good condition. 9. General Provisions. 9.1. Notices. Unless otherwise specifically permitted by this Agreement, all notices or other communications required or permitted under this Agreement shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid return receipt requested, or sent by facsimile, provided that the facsimile cover sheet contains a notification of the date and time of transmission, and shall be deemed received: (i) if personally delivered, upon the date of delivery to the address of the person to receive such notice, (ii) if mailed in accordance with the provisions of this paragraph, two (2) business days after the date placed in the United States mail, (iii) if mailed other than in accordance with the provisions of this paragraph or mailed from outside the United States, upon the date of delivery to the address of the person to receive such notice, or (iv) if given by facsimile, when sent. Notices shall be given at the following addresses: If to the Company: Innovative Medical Services 1725 Gillespie Way El Cajon, California 92020 Attention: Michael Krall With a copy to: Dennis B. Atchley 1725 Gillespie Way El Cajon, CA 92020 If to Executive: George Duren 2531 216th ST Lake City, Fl 32024 -------------------------- The addresses for delivery of notices may be changed by the relevant parties by giving notice of such change in accordance with this paragraph. 9.2. Complete Agreement; Modifications. This Agreement and written agreements, if any, entered into concurrently herewith (i) constitute the parties' entire agreement, including all terms, conditions, definitions, warranties, representations, and covenants, with respect to the subject matter hereof, (ii) merge all prior discussions and negotiations between or among any or all of them as to the subject matter hereof, and (iii) supersede and replace all terms, conditions, definitions, warranties, representations, covenants, agreements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Agreement may not be amended, altered or modified except by a writing signed by the party to be bound. With regard to such amendments, alterations, or modifications, telecopied signatures shall be effective as original signatures. Any amendment, alteration, or modification requiring the signature of more than one party may be signed in counterparts. 9.3. Further Actions. Each party agrees to perform any further acts and execute and deliver any further documents reasonably necessary to carry out the provisions of this Agreement. 9.4. Assignment. No party may assign its rights under this Agreement without the prior written consent of the other parties hereto. 9.5. Successors and Assigns. Except as explicitly provided herein to the contrary, this Agreement shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 9.6. Severability. If any portion of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law if enforcement would not frustrate the overall intent of the parties (as such intent is manifested by all provisions of the Agreement including such invalid, void, or otherwise unenforceable portion). 9.7. Extension Not a Waiver. No delay or omission in the exercise of any power, remedy, or right herein provided or otherwise available to any party shall impair or affect the right of such party thereafter to exercise the same. Any extension of time or other indulgence granted to a party hereunder shall not otherwise alter or affect any power, remedy or right of any other party, or the obligations of the party to whom such extension or indulgence is granted except as specifically waived. 9.8. Time of Essence. Time is of the essence of each and every term, condition, obligation and provision hereof. 9.9. No Third Party Beneficiaries. This Agreement and each and every provision hereof is for the exclusive benefit of the parties hereto and not for the benefit of any third party. 9.10. Attorneys' Fees. Should any litigation (including any proceedings in a bankruptcy court) or arbitration be commenced between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity hereunder, the party or will bear their own legal expenses and cost attributed to any action.. 9.11. Headings. The headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular provision hereof. 9.12. References. A reference to a particular paragraph of this Agreement shall be deemed to include references to all subordinate paragraphs, if any. 9.13. Counterparts. This Agreement may be signed in multiple counterparts with the same force and effect as if all original signatures appeared on one copy; and in the event this Agreement is signed in counterparts, each counterpart shall be deemed an original and all of the counterparts shall be deemed to be one agreement. 9.14. Applicable Law. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California. 10. Severance Pay. Should the employee be terminated or terminate their employment for any reason the severance pay will be calculated as follows: The last six months pay divided by six paid for the length of the non-compete. All benefits that were being paid by the company, health, dental, etc. will continue as if the employee where still employed for the length of the non-compete. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. EXECUTIVE By: /s/ ANDREW B.ARATA ------------------ Andrew B. Arata INNOVATIVE MEDICAL SERVICES By: /s/ MICHAEL L. KRALL --------------------------- Michael L. Krall, President ETIHH2O Acquisition Agreement Exhibit 5.1.H.2 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement") is made and entered into as of August 1, 2000, by and among GEORGE DUREN (the "Executive"), INNOVATIVE MEDICAL SERVICES, a California corporation (the "Company") and ETI H2O Corporation., a soon to be incorporated in the state of Nevada, with regard to the following: A. The Company desires to employ Executive to act as President of the newly formed company known as ETI H2O Corporation. (Nevada). B. The Executive wishes to act as President of ETIH2O Corporation on behalf of the Company. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs the Executive as Executive Vice President, and the Executive accepts the duties described herein, and agrees to discharge the same faithfully and in the best of his ability. The Executive shall perform such other duties as shall be from time to time prescribed by the board of directors of the Company or the chief executive officer. The Executive shall devote his full business time and attention to the business and affairs of the Company. 2. Term. The Company shall employ the Executive under the terms of this Agreement on August 1, 2000 through July 31, 2002, subject to the terms of this Agreement. The parties may, by mutual agreement, extend the term of this Agreement beyond such date for additional periods of time as set forth in any extension of this Agreement. However, the Company may terminate this Agreement immediately upon written notice to Executive as set forth in Paragraph 4. If at the end of the Term the Executive continues to be employed by the Company, then the terms of this Agreement shall be deemed to have been renewed on a month-to-month basis and shall remain in effect for as long as the Executive continues to be so employed. 3. Compensation and Benefits. In consideration for the services to be rendered by the Executive to the Company, the Company agrees to pay the Executive the following compensation and benefits: 3.1 Salary. Employment package includes the following : The Company shall pay the Executive a salary at the rate of Sixty Thousand Dollars ($60,000 .00) per year, due and payable bi-weekly, or as mutually agreed upon by the Company and the Executive as follows: 3.1.1 Vesting of 25K share options upon employment. 3.1.2 Vesting of 25K share options and salary increase to 72k per year upon production levels and sales of concentrate reaching 50 barrels per month. 3.1.3 Vesting of 25K share options and salary increase to 84k per year upon production levels and sales of concentrate reaching 100 barrels per month 3.1.4 Vesting of 25K share options and salary increase to 96k per year upon production levels and sales of concentrate reaching 150 barrels per month 3.1.5 Vesting of 25K share options upon production levels and sales reaching 200 barrels per month 3.16. Vesting of 50K share options upon production levels and sales reaching 1000 barrels per month 3.2. Withholding and Deductions. The Company shall withhold and/or deduct from any and all salary or other payments, all taxes which may be required to be deducted or withheld under any provision of law (including, but not limited to, social security payments and income tax withholding) now in effect or which may become effective any time during the term of this Agreement. All taxes based on employment out of the State of Florida. 3.3.Executive Incentive Compensation. The Company agrees to evaluate the performance of the Executive with regard to additional compensation for superior performance within six months after the commencement of the agreement. The Company shall consider the overall performance of the Company in determining whether the Executive is entitled to receive added compensation. The basis of granting such added compensation will be to reward the Executive for outstanding work and to provide an incentive for continued performance. Any additional incentive compensation to be paid pursuant to this Agreement, shall be made within the Company's discretion since such added compensation would be affected by general and specific economic conditions, changes in management policies and other considerations. In the event incentive compensation is awarded, it shall be set forth in a separate written addendum to this Agreement, signed by both parties. As well as the following: 20k options will vest upon hiring and 20k options will vest every six months for 4 additional time periods totaling 100k options. This does not in any way exclude the Executive from any other option bonuses that are received company wide. 3.4. Stock Options. The Executive shall be entitled to participate in an incentive stock option or similar plan to be set forth in a separate written agreement and approved by the compensation committee of the board of directors, stockholders, if required by law, and on such terms and conditions as are established by the Company in its complete discretion. 3.5. Benefits. The Company shall provide the Executive, at no cost to the Executive, group health insurance for the Executive and group dental insurance for the Executive. 3.6. Expense Reimbursement. The Company agrees to reimburse the Executive for all ordinary and necessary expenses incurred by the Executive on behalf of the Company, including entertainment, meals, and travel expenses. Any costs incurred by the Executive for conventions, meetings, seminars, club dues and special social entertainment expenses, shall be reimbursed provided the board of directors of the Company approve such as outlined in the company's policy manual. 3.7. Vacation. The Executive shall be entitled to 5 days of vacation in the first year, accrued monthly. After three years of employment, Executive shall be entitled to 15 days of vacation. Vacation days shall accrue pro rata each calendar month beginning in December 1996. The parties agree that the Executive shall take all vacation days during the calendar year earned, to the extent practical, and agree that notwithstanding the failure to use vacation days in a calendar year, not more than [thirty (30)] vacation days shall be carried forward into any calendar year from the previous year or years. Once this maximum is reached, all further accruals will cease. Vacation accruals will recommence after Executive has taken vacation and the accrued hours have dropped below the [30] day maximum. 4. Termination. 4.1. Employer Right to Terminate Employment. Executive's employment shall terminate one (1) year from the commencement date of this Agreement as set forth in Paragraph 2, above. In addition, upon written notice to the Executive (except in the case of death of the Executive, in which event termination shall automatically occur at the date of death), the Agreement may be terminated immediately for any of the following grounds as determined in the sole discretion of the Company: 4.1.1. Willful breach or habitual neglect or inability (except where such inability is due to Disability or death) to perform the Executive's duties hereunder; 4.1.2. Malfeasance or misfeasance in the performance of the Executive's duties hereunder; 4.1.3. Immoral or illegal conduct; 4.1.4. Disability or death; 4.2. Termination by the Executive. The Executive may terminate his employment hereunder prior to the date it would otherwise terminate under this Agreement by delivering written notice to the Company six (6) months in advance of the date such termination is to take effect. 5. Post-Termination Payments and Benefits. 5.1. Salary and Benefits. 5.1.1. In the event the employment of the Executive is terminated under Paragraphs 4.1.1., 4.1.2., 4.1.3., or 4.1.4., the Company shall pay the Executive the salary due him at the end of the month in which such termination occurs, plus any pay in lieu of vacation accrued or carried forward to, but not taken as of the date of termination with the exception of the options. All options will be due on the scheduled timetable as long as the employee is not terminated for cause. 5.2. Death. In the event the employment of the Executive is terminated as a result of death, the Company shall pay to Executive's designated beneficiary, payments equal to the amount of salary otherwise payable under Paragraph 3.1 for a period of six (6) months following the date of death of the Executive. In addition all options will be due to the estate or designated heir on the scheduled time table as prescribed in this agreement. 6. Dispute Resolution. 6.1. The parties agree that if a dispute arises concerning any provision of this Agreement, the alleged breach thereof, or the rights and duties of any person or entity hereunder, the parties agree first to try in good faith to settle the dispute. In the event that the parties cannot settle the dispute, any party shall have the right to submit the dispute, to binding arbitration. Such arbitration shall be held before a single arbitrator agreed upon by the parties to the dispute, and if they cannot agree, any party may petition a California Superior Court in San Diego County for appointment of an arbitrator. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, subject to any contrary and/or additional terms of this Paragraph 6 and Paragraph 9.10. 6.2. The rules of evidence shall not apply to any arbitration under this Paragraph 6. However, in all other respects, the arbitrator shall follow applicable law. 6.3. Subject to Paragraph 9.10, each party shall bear their own costs and expenses of arbitration. 6.4. The decision of the arbitrator shall be binding, enforceable, and may be entered in any court having jurisdiction thereof. 6.5. Payment of any and all amounts granted by an arbitrator hereunder shall be made within fifteen (15) days following the date of the decision, and thereafter, shall bear interest at the then current maximum legal rate per month until paid in full. 6.6. The arbitrator shall not have the power to award damages to the Executive for emotional distress or pain and suffering or to award consequential or punitive damages, but shall be empowered to award the Executive only direct economic damages. 6.7. Any arbitration conducted under this Paragraph 6 shall be conducted in a confidential private proceeding and the fact of the proceeding and the substance of the matters addressed in the proceeding shall be kept confidential by the parties, provided that disclosure may be made by any party upon notice to the other party or parties in the event that such disclosure is required by applicable law or regulation or legal process. 7. Proprietary Information. 7.1. Unfair Competition. Because of his employment by the Company, Executive will have access to trade secrets and confidential information about the Company, its products, its customers and its methods of doing business. In consideration of his access to this information, Executive agrees that for a period of five (5) years after termination of his employment, he will not, directly or indirectly compete with Company in the field of pharmaceutical water filtration sales in the USA. 7.1.1. Competition. Executive understands and agrees that direct competition means the design, development, production, promotion or sale of products or services competitive with those of the Company. Indirect competition means employment by any competitor or third party providing products competing with the Company's products, for whom Executive will perform the same or similar function as he will perform for the Company. 7.1.2. Additional Trade Secrets. In the course of his employment, Executive will have access to confidential records and data pertaining to the Company's customers and the relationship between these customers and the Company. Such information is considered secret and is disclosed to Executive in confidence. During his employment by the Company and for five (5) years after termination of that employment, Executive shall not directly or indirectly disclose or use any such information except as required in the course of his employment by the Company. In addition, during the five (5) years after termination of his employment, Executive shall not induce or attempt to induce any account executive of the Company to discontinue representing the Company for purpose of representing any competitor of the Company. 8. Return of Documents. The Executive expressly agrees that all manuals, documents, files, reports, studies, instruments or other materials used and/or developed by the Executive during the term of this Agreement are solely the property of the Company and the Executive has no right, title or interest therein. The Executive hereby further acknowledges that all such items constitute confidential trade secrets the wrongful use or disclosure of which to the public or competitors of the Company would materially adversely affect the business and prospects of the Company. Upon termination of employment of the Executive, the Executive or the Executive's representatives shall promptly deliver possession of all such property to the Company in good condition. 9. General Provisions. 9.1. Notices. Unless otherwise specifically permitted by this Agreement, all notices or other communications required or permitted under this Agreement shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid return receipt requested, or sent by facsimile, provided that the facsimile cover sheet contains a notification of the date and time of transmission, and shall be deemed received: (i) if personally delivered, upon the date of delivery to the address of the person to receive such notice, (ii) if mailed in accordance with the provisions of this paragraph, two (2) business days after the date placed in the United States mail, (iii) if mailed other than in accordance with the provisions of this paragraph or mailed from outside the United States, upon the date of delivery to the address of the person to receive such notice, or (iv) if given by facsimile, when sent. Notices shall be given at the following addresses: If to the Company: Innovative Medical Services 1725 Gillespie Way El Cajon, California 92020 Attention: Michael Krall With a copy to: Dennis B. Atchley 1725 Gillespie Way El Cajon, CA 92020 If to Executive: George Duren 2531 216th ST Lake City, Fl 32024 -------------------------- The addresses for delivery of notices may be changed by the relevant parties by giving notice of such change in accordance with this paragraph. 9.2. Complete Agreement; Modifications. This Agreement and written agreements, if any, entered into concurrently herewith (i) constitute the parties' entire agreement, including all terms, conditions, definitions, warranties, representations, and covenants, with respect to the subject matter hereof, (ii) merge all prior discussions and negotiations between or among any or all of them as to the subject matter hereof, and (iii) supersede and replace all terms, conditions, definitions, warranties, representations, covenants, agreements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Agreement may not be amended, altered or modified except by a writing signed by the party to be bound. With regard to such amendments, alterations, or modifications, telecopied signatures shall be effective as original signatures. Any amendment, alteration, or modification requiring the signature of more than one party may be signed in counterparts. 9.3. Further Actions. Each party agrees to perform any further acts and execute and deliver any further documents reasonably necessary to carry out the provisions of this Agreement. 9.4. Assignment. No party may assign its rights under this Agreement without the prior written consent of the other parties hereto. 9.5. Successors and Assigns. Except as explicitly provided herein to the contrary, this Agreement shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 9.6. Severability. If any portion of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law if enforcement would not frustrate the overall intent of the parties (as such intent is manifested by all provisions of the Agreement including such invalid, void, or otherwise unenforceable portion). 9.7. Extension Not a Waiver. No delay or omission in the exercise of any power, remedy, or right herein provided or otherwise available to any party shall impair or affect the right of such party thereafter to exercise the same. Any extension of time or other indulgence granted to a party hereunder shall not otherwise alter or affect any power, remedy or right of any other party, or the obligations of the party to whom such extension or indulgence is granted except as specifically waived. 9.8. Time of Essence. Time is of the essence of each and every term, condition, obligation and provision hereof. 9.9. No Third Party Beneficiaries. This Agreement and each and every provision hereof is for the exclusive benefit of the parties hereto and not for the benefit of any third party. 9.10. Attorneys' Fees. Should any litigation (including any proceedings in a bankruptcy court) or arbitration be commenced between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity hereunder, the party or will bear their own legal expenses and cost attributed to any action.. 9.11. Headings. The headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular provision hereof. 9.12. References. A reference to a particular paragraph of this Agreement shall be deemed to include references to all subordinate paragraphs, if any. 9.13. Counterparts. This Agreement may be signed in multiple counterparts with the same force and effect as if all original signatures appeared on one copy; and in the event this Agreement is signed in counterparts, each counterpart shall be deemed an original and all of the counterparts shall be deemed to be one agreement. 9.14. Applicable Law. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California. 10. Severance Pay. Should the employee be terminated or terminate their employment for any reason the severance pay will be calculated as follows: The last six months pay divided by six paid for the length of the non-compete. All benefits that were being paid by the company, health, dental, etc. will continue as if the employee where still employed for the length of the non-compete. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. EXECUTIVE By: /s/ GEORGE DUREN ---------------- George Duren INNOVATIVE MEDICAL SERVICES By: /s/ MICHAEL L. KRALL --------------------------- Michael L. Krall, President -----END PRIVACY-ENHANCED MESSAGE-----