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, 2000
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
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(Exact name of registrant as specified in its charter)
California 33-0530289
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (619) 596-8600
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Class A Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $1,661,462
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: Approximately $15,181,557 as of October 25, 2000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 5,982,728 shares of common stock as of October 25, 2000.
Documents incorporated by reference: Exhibits to Form SB-2 Registration
Statement File # 33-00434
Part III of this report is incorporated by
reference from the Registrant's
Proxy Statement to be filed on or before
November 29, 2000.
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
Notes to Financial Statements
Management
Security Ownership of Management
Executive Compensation
Related Transactions
Signatures
Exhibits
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Innovative Medical Services (the Company) began as a provider of pharmaceutical
water purification products. Although the Company's current revenues are still
primarily from the pharmacy industry, the Company has expanded from its niche
pharmacy market into other, broader markets with new products, including
residential and commercial water filtration systems, health and wellness-related
retail merchandise, e-commerce products, and silver ion bioscience technologies.
The Fillmaster(R) pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R) water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM) bar code reader. The Company also markets proprietary NSF
certified replacement filters for the Fillmaster Systems.
The Company's Nutripure(R) line of water treatment and filtration systems
includes the Nutripure 3000S-Series whole-house water softening systems, the
Nutripure Elite reverse osmosis point-of-use systems, the Nutripure 2000
countertop water filtration system and the Nutripure Sport filtered sport
bottle.
The Company distributes its various Nutripure products in several ways,
including retail sales, catalogue placement, business-to-business sales,
internet promotion and in-home sales presentations.
The Company, through its subsidiary Nutripure.com(R), operates an e-commerce
health website, Nutripure.com(R), distributes Bergen Brunswig products which
provides 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.
Innovative Medical Services has obtained worldwide manufacturing and marketing
rights for advanced silver ion technologies. . The EPA registration for use of
Axenohl(TM) and Axen(TM) as hard surface disinfectants has been issued, and the
Company plans 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,
point-of-use/point-of-entry water treatment products, which may require
additional EPA approvals.
Competition
Although the Innovative Medical Services has only one known competitor in its
pharmaceutical water purification market, the Company faces 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 the Company
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 the Company's ability to enter the
market, ongoing strong market presence of existing pesticide companies may make
it difficult to compete. The online marketing arena is highly competitive, and
with the Company's minimal promotion of Nutripure.com, revenues are not expected
to be realized in the foreseeable future. The Company recognizes that innovative
marketing methods are required in such competitive markets. The Company works to
focus on the high quality and value price of its products in their markets.
History
Innovative Medical Services was incorporated in the State of California on
August 24, 1992, to pursue the immediate business of manufacturing and marketing
the Fillmaster and subsequently a broadly based business of delivering advanced
technology, equipment and supplies to not only the pharmacy industry, but also
other healthcare markets and to retail consumers.
In the past four years, Innovative Medical Services transitioned from a
one-product company supplying a niche market to a multi-division company
managing new products and programs. In addition to expanding the Fillmaster
product line with the Fillmaster 1000e and the Scanmaster, the Company launched
a line of residential water treatment and filtration products and several other
health related retail products. The Company distributes many of the new products
through distribution channels established by sales of Fillmaster Systems to
retailers. The Company also launched a strong e-commerce initiative and entered
the bioscience arena with its silver ion disinfecting technologies.
In October 1998, Innovative Medical Services acquired AMPROMED, Rio de Janeiro,
Brazil, and certain assets of Export Company of America Inc. (EXCOA), Fort
Lauderdale, FL, and established a new Nevada corporation to hold and operate the
export/import operation. AMPROMED's primary business is the sale of medical,
dental and veterinary disposable products. In addition to medical supplies,
Innovative Medical Services plans to distribute water treatment and silver ion
products to Brazil through AMPROMED.
In December 1999, Innovative Medical Services formed a wholly owned subsidiary,
Nutripure.com, to capitalize on internet commerce opportunities focusing on
health and wellness. In January 2000, the Company began the process to spin off
Nutripure.com as a separate public company. During the intervening time, adverse
market conditions for solely internet-based ventures have eroded Management's
confidence in the viability of a public market for Nutripure.com common stock.
Therefore, in October 2000, the Company's Board of Directors elected to retain
Nutripure.com as an operating division of Innovative Medical Services in order
to minimize the substantial administrative expense associated with launching and
operating a public company.
Principal Products and Markets
WATER TREATMENT DIVISION
Pharmaceutical Water Treatment
Fillmaster(R) The Fillmaster dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, provides measured amounts
of "Purified Water" as defined by the United States Pharmacopoeia, ("USP") for
reconstitution of liquid oral antibiotics and certain other pharmacy
applications. Pharmapure is a six-stage water purification unit featuring an
electronic water purity testing module and an auxiliary faucet for dispensing
purified water. Fillmaster is a calibrated volumetric measuring and dispensing
apparatus. The entire system (the "Fillmaster System") integrates with the
building's tap water plumbing and is closed and pressurized to prevent
contamination.
The Fillmaster System saves time and money for pharmacies. According to the
Company's testing, the Fillmaster has a fill rate at least three times that of
previous bottle-and-hose methods, and direct and indirect costs associated
specifically with bottled water are reduced or eliminated. Pharmacy storage
space can be reallocated to more profitable items, labor savings accompany the
efficiencies, and the expense of bottled water purchases of up to $1.25 per
gallon is replaced by one annual filter change. Under optimum usage, a pharmacy
reduces the cost of "purified water" to approximately $.04 per gallon.
In addition to efficiency and cost savings, the Fillmaster System increases
prescription integrity by greatly reducing the possibility of human error while
dispensing prescriptions. The patented Fillmaster 1000e employs multiple
microprocessors to provide accurate and even-flow dispensing. The Company sells
Fillmaster 1000e dispensers as an upgrade to existing installations and as a
component of new installations. The Scanmaster, launched in August 1999, is a
pager-sized, modular upgrade to the Fillmaster 1000e. A user simply scans a
prescription's NDC bar code in front of the dispenser, and the Fillmaster 1000e
displays the product name and required water quantity. The Fillmaster System
then dispenses the prescription with one touch of a button. The advanced
technology of the Fillmaster 1000e computerized dispenser and the Scanmaster bar
code reader ensures accuracy of measurement and assurance of compliance to
minimize liability.
This is a finite, niche market in which the Company's 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. The Company
has installed over 20,000 Fillmaster dispensers in pharmacies across the nation,
including Wal-Mart, Walgreens, Albertson's/American Stores, Eckerd, Fred Meyer,
Target, CVS, Kroger, Smith'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 The Company also markets unique and proprietary NSF
certified filter replacements for the Fillmaster's Pharmapure water purification
system, which require changing at intervals of approximately 12 months or sooner
as indicated by the purity testing module. The filter replacements represent a
significant continuing source of revenues to the Company.
Customer Service Plan 2000(TM) Innovative Medical Services offers outstanding
service to its pharmacy customers with its exclusive Customer Service Plan 2000
(CSP 2000). The CSP 2000 provides an unlimited warranty on all Innovative
Medical Services pharmacy products, regardless of age or quantity; significant
discounts on maintenance item costs; free software upgrades for the Fillmaster
1000e and Scanmaster; a secure web site that allows pharmacy customers to
monitor history, scheduled maintenance and account status; automatic replacement
filter shipments; and simplified, annual invoicing. Motivated by the cost
savings and the extended warranty coverage, most of the Company's chain
customers have entered into multi-year contracts for the CSP 2000.
Residential Water Treatment Products
Nutripure(R) 3000S Series Innovative Medical Services' Nutripure Water Dealer
Program 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. The
Company realizes 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.
IMS formed alliances with independent dealer groups, finance companies and
leading equipment component manufacturers to create a marketing program to sell
and finance whole-house water treatment systems through existing dealers. The
elite marketing strategy provides consumers and independent dealers a name and
image they can trust. Combined with proven in-home marketing practices, this
strategy provides a powerful advantage to the Nutripure direct sales force. The
Nutripure 3000S Series is top-of-the line equipment that ensures excellent
performance, customer satisfaction and no-hassle installation and aftermarket
maintenance. The programmable systems come equipped with microprocessors and
electronic water meters to monitor daily water usage and provide automatic,
demand-based water conditioning. An electronic memory stores operating system
information, and battery backup keeps it current if power is lost. Dealers can
dramatically bolster their sales results by promoting the professional image and
excellent reputation of the Nutripure brand name.
Nutripure(R) Elite The Nutripure Elite line of residential drinking water
systems combines high-quality reverse osmosis technology with carbon filtration
to improve the taste, smell, quality and safety of standard tap water. 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 (also referred to as activated carbon) is a water treatment medium
commonly used for dechlorination and for reducing trace and soluble materials
from water. The Company believes its drinking water systems provide excellent
reverse osmosis technology at a moderate price, and are therefore strong value
purchases. Incorporating the same filtration technology as the Company's
Fillmaster pharmaceutical water purification system, Nutripure Elite systems
provide healthy, safe and great tasting drinking water.
The 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 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.
The Company distributes Nutripure Elite systems through independent pharmacists,
providing them an exclusive health product dealership with a high profit margin.
Although the market for water systems is quite competitive, the pharmacists'
recommendation of a system they use in their pharmacies to reconstitute
prescriptions sets Nutripure apart from all other residential drinking water
systems. The Company's direct sales force of independent water treatment dealers
also distributes the Nutripure Elite system in conjunction with sales of the
Nutripure 3000S Series water softening equipment.
Nutripure(R) Elite Filters The Company also markets unique and proprietary
filter replacements for the Nutripure Elite residential drinking water systems
that require changing every 12 months.
Nutripure(R) 2000 Innovative Medical Services entered the retail venue with its
Nutripure 2000 Countertop Water Filtration System. Nutripure 2000, developed
specifically for mass merchandising, offers excellent water filtration
technology at competitive pricing through a unique marketing approach.
Nutripure's professional one-micron, carbon microfilter reduces dirt, chemicals,
lead and parasites to improve the taste, quality and safety of tap water. . The
product has been tested by Spectrum Laboratories to meet or exceed ANSI/NSF
Standard No. 53 Health Effects and ANSI/NSF Standard No. 42 Aesthetic Effects.
The Nutripure 2000 requires no assembly and mounts directly to a
faucet.Nutripure 2000 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.
Innovative Medical Services distributes Nutripure 2000 through retail outlets
and catalogues in the United States and Canada. In many cases, product placement
is established through existing channels of distribution in retail chains that
use Fillmaster equipment in their pharmacies.
Nutripure(R) 2000 Replacement Filters The Company also manufactures and markets
replacement filters for the Nutripure 2000 water system. The Nutripure 2000
contains a 2,000-gallon filter that must be changed every year.
Nutripure(R) Sport Filtered Sport Bottle The 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. Nutripure Sport Bottles offer excellent margins
and high-impact merchandising, including hot colors and small-footprint
shipper/floor displays.
RETAIL PRODUCTS DIVISION
Medifier(TM) The Company also markets the Medifier, a unique patented universal
prescription bottle label magnifier. The Medifier holds various sized
prescription bottles in position under a magnifier strip that enlarges dosage
and use instructions to a clearly readable size. The Medifier is distributed
through Innovative Medical Services' existing sales channels, as well as through
catalogue sales and promotional products distributors.
Nutripure(R) Lancets Nutripure Lancets for diabetic glucose testing combine
superior design technology and customer satisfaction with maximized margins. The
100-count box of sterile-tip, one-time use lancets provides retailers with
ongoing profitability.
Nutripure(R) Antibacterial Hand Soap Nutripure Antibacterial Hand Soap is a
hypoallergenic, all natural, gentle hand soap that provides excellent
antibacterial protection in a luxurious formula containing goat's milk and
coconut oil to smooth and soften dry skin. Available in attractive 8oz. pump
dispenser bottles and 30 oz. refills, Nutripure Antibacterial Hand Soap provides
superior quality and big profits compared to leading national brands.
Nutripure(R)Antibacterial Hand Sanitizer Nutripure Antibacterial Hand Sanitizer
provides gentle, long-lasting protection from germs. Available in 4oz. and 8 oz.
bottles, Nutripure Hand Sanitizer will maximize sales in the growing
antibacterial personal products category.
E-COMMERCE DIVISION
Nutripure.com(R) The Company operates Nutripure.com, an e-commerce 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.
BIOSCIENCE DIVISION
Axenohl(TM) Innovative Medical Services obtained worldwide manufacturing and
marketing rights to Axenohl and Axen(TM), advanced silver ion technologies.
Axenohl is a patent-pending, non-toxic aqueous disinfectant. Based upon
proprietary ionization stabilization technology, Axenohl does not include the
use of traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed.
The Company obtained its worldwide manufacturing and marketing rights to Axen
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, the Company closed an acquisition agreement whereby it
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 EPA registrations for Axen and Axenohl as hard surface disinfectants were
granted in June of 2001. The Company plans to pursue FDA approval in the future,
but no applications have been made to date. The Company is currently researching
the FDA approval process and plans to hire an experienced FDA consultant to
assist with the process. 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. The Company has 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 the Company is
awaiting the final report that will document the testing results. Additional
potential applications 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, point-of-use/point-of-entry water
treatment products, which may require additional EPA approvals..
The Company has developed equipment to dispense Axen in measured doses to
municipal, commercial and point-of-use water supplies to kill bacteria, viruses
and fungi originating from the water source or the delivery infrastructure.
Upon receiving appropriate approvals, the Company plans to launch a consumer
line of products featuring Axen. The first products to be introduced will be the
improved Nutripure antimicrobial soap and hand sanitizer featuring Axen. The
Company has also established a line of veterinary products featuring Axen
including antimicrobial shampoo, hoof spray, wound salve, and stall and kennel
spray.
In July 2000, the Company formed a Scientific Advisory Board to assist
Management with its new Bioscience division and all aspects of the development
and identification of uses for the Division's new products. The first product
under review is Axenohl. The Advisory Board will specifically examine the
potential uses and avoidance of toxicity as well as support Management's efforts
to obtain governmental approvals for Axen. Management expects the leadership and
experience of the members of the Scientific Advisory Board to play a key role in
moving Axen-containing products to market. The Company is investing aggressively
in Axen because it believes Axen, of all the Company's new products, carries the
greatest potential for explosive growth into very profitable, worldwide markets.
Competition
Although the Innovative Medical Services has only one known competitor in its
pharmaceutical water purification market, the Company faces 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 the Company
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 the Company's 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 the Company's minimal
promotion of Nutripure.com, revenues are not expected to be realized in the
foreseeable future. The Company recognizes that innovative marketing methods are
required in such competitive markets. The Company works to focus on the high
quality and value price of its products in their markets.
Patents and Intellectual Property
Most of the components used by the Company are products patented by other
companies, and all of those components are similar to other equipment available
through multiple manufacturers. However, the Company owns patents on Medifier
and the Fillmaster 1000e Electronic Dispenser and has a patent application
pending for Roach X.
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 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.
The Company has 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.
The Company obtained its 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 the Company 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.
The Company was obligated to begin paying a licensing fee of $70,000 to NVID at
the rate of $10,000 per month one month after the Company begins selling Axenohl
in the Point of Use or Healthcare Markets. As the Company had not begun sales in
these markets prior to the superceding March 2000 agreement, payment of the
licensing fee has not begun. The Company was 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. The Company has made these payments as well
as funding all other testing expenses. The Company is 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
the Company receives 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 the Company,
NVID International, Inc. and ETIH2O, Inc. ETIH20, Inc. is the manufacturer of
Axen/Axenohl. The agreement granted the Company an exclusive worldwide license
to market and distribute Axen/Axenohl and all related products for all markets.
This agreement also granted the Company the right to manufacture Axenohl in the
event NVID was unable to deliver Axenohl to the Company. The agreement included
the prior agreement obligations of the Company to begin paying a licensing fee
of $70,000 to NVID at the rate of $10,000 per month one month after the Company
begins selling Axenohl in the Point of Use or Healthcare Markets. The Company
agreed to pay up to $70,000 to the third party laboratory conducting the EPA
certification testing. The agreement also confirmed that the Company 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. The Company originally agreed to pay the Department of
Agriculture fee directly, but, subsequently, at the request of NVID, the Company
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 the Company receives granting licenses to use
Axenohl in all markets.
In November, 2000, the Company closed an acquisition agreement whereby it
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.
Manufacturing
The Fillmaster and Nutripure water systems are assembled primarily from custom
manufactured components. It is the Company's goal to perform minor manufacturing
in the Company's facility to minimize wages, equipment expense and insurance. No
components of the systems have permanent or unequivocally restricted
availability. Many manufacturers are available to produce the components, and a
change in suppliers would result in virtually no lost production.
The original Fillmaster dispenser and the new Fillmaster 1000e dispenser are
both assembled mostly from proprietary and custom parts fabricated to Company
specifications from injection-molded plastic and fabricated acrylic.
The Nutripure Sport bottle, Nutripure lancets and Nutripure antibacterial hand
soap and sanitizer are also assembled from proprietary and custom components
manufactured under exclusive agreements with several different manufacturers.
Alternative manufacturers exist, and a change in suppliers would result in
virtually no lost production. There are no plans to alter production methods.
Research and Development
Research and Development costs that have no alternative future uses are charged
to operations when incurred and are included in operating expenses. The total
amounts charged to Research and Development expense were $114,000 and $157,000
in the fiscal years ended July 31, 2000 and 1999, respectively. The Company's
investment in Research and Development during the past year resulted in the
release of five major additions to the Company's product line, the Fillmaster
1000e, the Scanmaster and the Nutripure line of drinking water systems.
Innovative Medical Services anticipates more new products in the coming year.
Employees
As of October 25, 2000, the Company employed thirty people, twenty-seven of whom
are full-time individuals whose principal responsibilities are: product assembly
and shipping (nine employees), sales, marketing and customer service (eight
employees), research and development (six employees) and administration (seven
employees). The Company chooses to outsource more expensive, specialized
functions including public relations, graphic design and selected engineering
projects.
ITEM 2. PROPERTIES
The Company's business operates in an 11,255 square foot facility located in a
light industrial/office park in El Cajon, California. This location houses all
administrative, executive, sales, assembly, shipping and manufacturing functions
for the Company. The space is leased from an unaffiliated third party under a
sixty-five month agreement commencing on July 1, 1996. The monthly rental is
$0.69 per square foot plus $0.14 per square foot for maintenance of common
areas. There is also a fixed yearly increase of 4%. The Company has also signed
an amendment to the lease to allow for an option to lease the building for an
additional five years.
ITEM 3. LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn Corporation, against the Company for breach of contract in
October 1997. The 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 the Company's common stock. The Company has 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 the Company's position that Mr. Reitz and others perpetrated a
scheme to defraud the Company of cash fees and securities in connection with
purported services of arranging a public offering of the Company's common stock.
In October 1997, Mr. Reitz and Zedburn filed for protection under the Federal
bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed his bankruptcy
and as a result thereof the Company has named Mr. Reitz as a defendant to its
counterclaims.
The Company believes that the defendants had perpetrated similar schemes against
other parties. The Company also believes it has substantially completed
discovery and complied compelling evidence to prove its claims.
Several of the Defendants filed Motions to Dismiss the Company's counterclaims.
A hearing on the Motions was held on October 1, 1998. Certain of the Motions
were granted pending the Company's amendment of its Counterclaim. The Company
amended its Counterclaims in accordance with the judge's rulings. Certain
Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing
on these latest motions was held in March 1999, before a different judge than
the judge who ruled on the first motions. On April 20,1999, Orders were entered
granting the Defendants' Motions to Dismiss. However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the Orders or a copy of the new judge's correspondence offering a "formal
ruling" upon request. In May 1999 the Company filed an Appeal of the Orders and
Motions for Reconsideration based upon inconsistency of the Orders with the
previous judge's rulings and the lack of notice to the Company. The Company
believes that its Appeal and Motions have merit and will be granted. In any
event the Company intends to pursue a trial as soon as possible. As of October
25, 2000, no ruling has been received on the Company's Appeal.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes thereof. The
Company has not done so because it does not believe there is any merit to Mr.
Reitz's claims and that the likelihood that the Company will realize a loss from
these matters is believed remote. In addition, the Company believes that in the
unlikely event that the Company settles, the amount of any such settlement would
not be material to the Company's financial statements.
The Company has filed an action against John Woodard, former Vice President of
Sales, in Superior Court in the State of California in April 2000. The Company
has alleged Mr. Woodard violated his non-competition/non-disclosure agreement
and provided proprietary information, including information regarding the
Company's Fillmaster line of products and Fillmaster customer base, to Fresh
Water Systems, Inc. The Company has alleged the misappropriation of customer
lists, equipment service and maintenance schedules, equipment data, business
plans and research and development secrets. The Company is seeking monetary
damages and injunctive relief.
The Company has also filed an action against Fresh Water Systems, Inc., Steven
Norvell, Brian Folk and Eric Norvell in Superior Court in the State of
California. The action was filed in August 2000 and amended in October 2000. The
Company alleges Fresh Water Systems and it's officers and directors
misappropriated trade secrets of the Company obtained from former employees of
the Company, engaged in unfair competition in violation of the California Unfair
Practices Act, tortious interference with contractual relations, tortious
interference with prospective business advantage, fraud, trade libel and
conspiracy with regard to the Fillmaster line of products and Fillmaster
customer base. The Company is seeking monetary damages and injunctive relief.
The Company filed an action against Eckerd Corporation in Superior Court in the
State of California in August 2000. The Company alleges Eckerd Corporation has
not paid for Fillmaster products ordered by and shipped to Eckerd pharmacies.
The Company seeks monetary damages not less than $170,000 plus interest and
attorney's fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of the fiscal
year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: The Company's common stock is traded on
the NASDAQ SmallCap Market under the symbol "PURE" and its
Class A Warrants are traded under the symbol "PUREW". The
Company's Class Z Warrants are not listed for trading on any
recognized market.
(2) High and Low Bid Prices: The following table sets forth high
and low bid prices for each fiscal quarter, as reported by
NASDAQ, for the last two fiscal years. Such quotations
represent inter-dealer prices without retail mark-ups,
mark-downs, or commissions and, accordingly, may not represent
actual transactions.
Fiscal 2000 Fiscal 1999
Quarter Ended High Low Quarter Ended High Low
------------------------- ---------- -- ---------- ----------------------- ---------- -- -----------
July 31, 2000 $1.969 $1.250 July 31, 1999 $2.406 $1.625
April 30, 2000 $4.188 $1.594 April 30, 1999 $2.313 $0.656
January 31, 2000 $6.875 $1.375 January 31, 1999 $4.750 $0.938
October 31, 1999 $4.188 $1.500 October 31, 1998 $1.219 $0.250
(3) Security Holders: As of October 25, 2000, the Company had
approximately 115 holders of record of its common stock, 45
holders of its Class A Warrants and 17 holders of the
Company's Class Z Warrants. This does not include beneficial
owners holding common stock or Class A Warrants in street
name. The closing price per share on October 25, 2000 was
$3.00.
(4) Dividend Plans: The Company has paid no common stock cash
dividends and has no current plans to do so. In January
2000, the Company declared a dividend in kind of
Nutripure.com common stock. The record date and distribution
date were to be set following completion of the registration
of Nutripure.com as a reporting issuer with the Securities
and Exchange Commission. In October 2000, the Board of
Directors of Innovative Medical Services determined that in
light of adverse market conditions for solely internet-based
enterprises, a public market for Nutripure.com common stock
may not be viable. Therefore, the Board amended its
declaration of a Nutripure.com dividend to a dividend of
Innovative Medical Services' common stock. The Company will
distribute one share of Innovative Medical Services' common
stock for every fifty shares held of record on November 6,
2000 with fractional shares rounded up to the nearest whole
share. The stock will trade ex-dividend on November 2, 2000.
Distribution, determined by NASDAQ, is anticipated for
November 20, 2000.
(5) Preferred Stock: There are no shares of preferred stock
presently outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are not guarantees of our future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements.
The Company's objective is to maximize shareholder value by focusing on growth,
product innovation and profitability. The following discussion highlights the
Company's performance and should be read in conjunction with the Consolidated
Financial Statements and related notes included therein.
Results of Operations Fiscal 2000 vs. Fiscal 1999
Revenues of $1,661,500 in the fiscal year ended July 31, 2000 were 51% lower
than the $3,380,000 in revenues reported for the fiscal year ended July 31,
1999. Fillmaster Purification System sales in the year ended July 31, 2000 were
$1,242,900 and replacement filter sales were $383,000. In the prior year,
Fillmaster Purification System sales were $2,320,000 and replacement filter
sales were $889,000. Sales of the Fillmaster Purification System decreased 46%
over the prior period. Sales of filters decreased 57% in fiscal 2000. In fiscal
year 2000, sales from other product lines were non-material. Management believes
the decline in Fillmaster revenues is due to multiple factors, including the
fact that the market for pharmacy products is maturing in that there is a
decreasing number of pharmacy chains that do not have water filtration products,
and that the Company has sold systems to most major chains. In addition, the
Company is facing its first significant competitor in the pharmacy industry,
FreshWater Systems. The competitor's impact on the market has affected the
volume of filter replacement sales of the Company. The focus for further
Fillmaster sales will be on incremental and upgrade sales to individual
pharmacies within current chain accounts, although the Company is still actively
pursuing Fillmaster sales to remaining chains. Management expects to close such
volume sales to new chains in the coming year, and, as in prior years, those
sales will result in spikes in Fillmaster revenues. The Company works to retain
customers with its Customer Service Plan 2000, a multi-year service and warranty
contract (please see "Principal Products and Markets"). The Customer Service
Plan contracts range in duration from one to four years and have little effect
on financial results. Although the Company realizes a slightly lower margin from
sales of filters under the plan, the increased volume of filter sales under the
plan makes up that difference.
The Company also experienced a substantial turnover in sales personnel during
fiscal 2000. Sales projected by the departed personnel were not realized, and
the Company subsequently established its current sales department of highly
qualified and experienced sales people. In addition, Management believes a
former Vice President of Sales misappropriated trade secrets and revealed them
to a competitor, and that Fillmaster sales were significantly impacted by these
unfair business practices (please see "Legal Proceedings"). In the last quarter
of fiscal 2000, the Company began to implement a superior competitive strategy
of multi-year customer service contracts and cross-marketing programs with
retail products.
Gross profits for the year ended July 31, 2000 were $564,000 versus $1,936,700
in 1999. Gross profit percentage of 34% in 2000 was lower versus 57% in 1999.
The decrease in gross profit percentage was largely due to fixed production and
labor costs being applied to the lower sales volume for the year.
Net loss for the year ended July 31, 2000 was $1,745,400 versus net income of
$260,700 for the same period in 1999. The decreased income was due to decreased
sales as outlined above and to an increase in General and Administrative
expenses as the Company positions for expansion into new markets with new
products (Please refer to "Principal Products and Markets" and "Future Outlook"
sections.) General and Administrative expenses increased $535,200 from
$1,178,100 in fiscal 1999 to $1,713,300 in fiscal 2000. $200,500 of these
expenses were related to Nutripure.com. $225,000 is allowance for doubtful
accounts, of which $175,000 is due from Eckerd Corporation. The Company is
actively seeking recovery, including taking legal action. The Company is
recognizing approximately $80,000 in gain from change in accounting principal as
required by a recent accounting pronouncement arising from retroactively
capitalizing part of the cost of website development. Although sales decreased
significantly during the year, selling expense increased approximately $250,000
as a result of the Company's recognition of market saturation and competition in
the pharmacy market and its subsequent efforts to transition to a
multi-dimensional company. The increased selling expenses included development
of marketing materials, hiring of additional sales personnel, trade shows and
product launches.
Liquidity and Capital Resources Fiscal 2000 vs. 1999
From inception through July 31, 2000, the Company has financed its operations
primarily through its initial public offering in August of 1996, by a subsequent
private placement in March of 2000 and by other smaller private placement stock
sales. The Company has operated without long-term debt and has no plans to
obtain long-term financing in the next twelve months. Management believes that
sales from its 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, the Company expects to raise capital through equity sales as
necessary to fund future growth until it operates above the break-even point.
The Company continually evaluates 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 the Company's stockholders.
During the fiscal year ended July 31, 2000, the Company's current assets to
liabilities ratio rose from 1.95 to 5.02. Current assets increased $680,000 from
$2,114,400 to $2,794,400. Current assets at July 31, 2000 include an increase of
$1,099,300 in cash and cash equivalents due to a private placement in the third
quarter. Accounts receivable decreased $345,300 on lower sales volume.
Inventories increased $76,200 from $720,000 in fiscal 1999 to $796,100 in fiscal
2000 on anticipated sales of new products. Noncurrent assets increased by
$213,300 during the year due to an increase in patents and deferred acquisition
costs related to silver ion technology purchases. Current liabilities decreased
$527,800 from $1,084,100 to $556,300. The decrease in current liabilities was
the result of the Company's ability to pay down accounts and note payable by
$521,600 during the period.
Cash flows used from operations were $1,557,900 in fiscal year 2000 and $556,900
in 1999. For those periods, cash flows used in investing activities were,
respectively, $462,900 and $158,000 for the purchase of machinery and equipment
and for website development. Cash flows from financing activities were
$3,120,080 in fiscal 2000 and $688,700 in fiscal 1999. Investing activities for
the current year included a decrease of $235,500 in notes payable. Also, the
Company received $3,355,600 from proceeds sales of common stock.
In September 1999, the Company issued 160,000 shares of common stock to a single
accredited investor for $200,000 ($1.25 per share) in a private placement of the
shares offered to the one accredited investor.
In December 1999, the Company's subsidiary, Nutripure.com, issued 1,000,000
shares of common stock to accredited investors for $500,000 ($0.50 per share) in
a private placement of the shares.
In March 2000, the Company issued 607,411 units, consisting of one share of
common stock and one warrant to purchase an additional share of common stock at
$5.25 per share on or before March 31, 2001 for $1,896,500 ($3.375 per unit) in
a private placement of the units to 15 accredited investors.
In addition, approximately $759,000 was received from exercise of outstanding
stock options.
Cash flows from financing activities in fiscal 1999 resulted from an increase in
notes payable of $151,100 and sale of common stock of $537,600.
The total increase in cash and cash equivalents for the fiscal years ended July
31, 2000 and July 31, 1999 was $1,131,000 and $26,200.
Future Outlook
In the first quarter of fiscal year 2001, Innovative Medical Services began
realizing revenues from the new Nutripure water treatment dealer program. The
dealer base grows steadily, and Management believes that the program will
produce notably increased revenues and earnings in the coming quarters. In
addition to the ongoing expansion of the water dealer program, retail products
currently in distribution are experiencing increased growth, and the Company
expects to see revenue from new products and new distribution channels this
year. Regarding silver ion technologies, regulatory approval is a threshold
event for the Company's commercial launch of Axenohl and related products. Once
approvals are received, Management expects revenues from Axenohl to rapidly and
substantially develop.
Throughout the past year, Innovative Medical Services focused its resources on
expanding the current and future scope of business and related growth potential.
The Company's increased selling expenses and general and administrative expenses
reflect the Company's transition from a niche market company that provides water
purification equipment to pharmacies to an international company containing
several divisions to manage new products and programs in consumer and commercial
water treatment, direct-to-consumer e-commerce and retail distribution of
multiple product lines. This investment has proved successful, as the Company
has made great strides in product development and distribution. Although
Fillmaster is the cornerstone of the Company's business, the new products have
much greater growth potential.
ITEM 7 FINANCIAL STATEMENTS
MILLER AND MCCOLLOM
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
Innovative Medical Services, Inc.
We have audited the accompanying consolidated balance sheet of Innovative
Medical Services, Inc. as of July 31, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
July 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Previously published financial statements have been restated to recognize the
impairment on certain intangible assets as described in Note 1.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Innovative Medical Services, Inc. at July 31, 2000, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted account principles.
/s/ MILLER AND MCCOLLOM
-----------------------
MILLER AND MCCOLLOM, CPAs
Lakewood, Colorado
September 20, 2000, except for Notes 1, 10, 14, 15 and 16 which are as of July
9, 2001.
2170 South Parker Road Suite 270 - Denver Colorado 80231 - 303 745-2217 -
FAX 303 745-2265
Steven Holland, CPA
3914 Murphy Canyon Rd., Ste. A126
San Diego CA 92123
Phone 619-279-1640
Fax 619-279-9221
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California
I have audited the consolidated balance sheet of Innovative Medical Services as
of July 31, 1999, and the related consolidated statements of income, accumulated
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audits.
I conducted the audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Innovative Medical
Services at July 31, 1999, and the consolidated results of its operations and
its consolidated cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Steve Holland
Certified Public Accountant
San Diego, California
October 25, 1999
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------
July 31
ASSETS 2000 1999
Restated
(Note 16)
----------------------------
Current Assets
Cash and cash equivalents $ 1,121,316 $ 22,056
Restricted cash 204,887 205,574
Accounts receivable, net of allowance for doubtful
accounts of $ 225,000 at July 31, 2000
and $50,000 at July 31, 1999 411,322 790,166
Due from officers and employees 226,729 339,524
Inventories 796,136 719,972
Prepaid expenses 33,975 37,078
------- ------
Total current assets 2,794,365 2,114,370
---------- ---------
Property, Plant and Equipment
Property, plant and equipment 1,056,252 805,523
---------- -------
Total property, plant and equipment 1,056,252 805,523
---------- -------
Noncurrent Assets
Deposits 14,083 6,575
Patents and license 300,910 425,550
Goodwill - 256,422
Other intangible assets - 353,250
Deferred acquisition costs 202,542 53,851
-------- ------
Total noncurrent assets 517,536 1,095,648
---------- ---------
Total assets $ 4,368,152 $ 4,015,541
============ ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 308,812 $ 594,948
Accrued liabilities 36,880 43,068
Notes payable 210,592 446,067
-------- -------
Total current liabilities 556,284 1,084,083
-------- ---------
Minority interest payable 61,697 -
------- -------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
5,942,903 at July 31, 2000 and
4,392,242 at July 31, 1999 10,018,873 6,663,318
Class A warrants: issued and outstanding 3,687,500
warrants 108,750 108,750
Accumulated deficit (6,377,452) (3,840,610)
----------- -----------
Total stockholders' equity 3,750,171 2,931,458
---------- ---------
Total liabilities and stockholders' equity $ 4,368,152 $ 4,015,541
============ ===========
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------
For the Years Ended
July 31
2000 1999
Restated
(Note 16)
----------- -----------
Net sales $ 1,661,462 $ 3,379,984
Cost of sales 1,097,419 1,443,307
---------- ---------
Gross profit 564,043 1,936,677
-------- ---------
Selling expenses 595,142 356,611
General and administrative expenses 1,639,347 1,108,537
Research and development 114,756 157,049
Impairment of long lived assets 791,411 -
-------- -------
Total operating costs 3,140,657 1,622,197
---------- ---------
Operating income (loss) (2,576,614) 314,480
----------- -------
Other income and (expense):
Interest income 34,763 16,631
Interest expense (73,990) (69,591)
Loss on abandoned assets (40,200) -
-------- ------
Total other income (expense) (79,427) (52,960)
------- ------
Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (2,656,041) 261,520
Federal and state income taxes 800 800
---- ---
Income (loss) before minority interest in subsidiary
operations and change in accounting principle (2,656,841) 260,720
Minority interest in subsidiary operations 40,103 -
------- -------
Net income (loss) before cumulative
change in accounting principle (2,616,738) 260,720
Cumulative effect of change
in accounting principle 79,896 -
------- -------
Net income (loss) $ (2,536,842) $ 260,720
============= ==========
Net income (loss) per common share before change
in accounting principle (basic) (0.52) 0.06
Cumulative effect of change
in accounting principle 0.02 -
----- -----
Net income (loss) per common share (basic) $ (0.50) $ 0.06
======== =======
Net income (loss) per common share before change
in accounting principal (diluted) (0.52) 0.04
Cumulative effect of change
in accounting principle 0.01 -
----- -----
Net income (loss) per common share (diluted) $ (0.51) $ 0.04
======== =======
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
Balance, beginning of period $ (3,840,610) $ (4,101,330)
Net income (loss) (2,536,842) 260,720
----------- --------
Balance, end of period $ (6,377,452) $ (3,840,610)
============= =============
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------
For the Years Ended
July 31
2000 1999
Restated
(Note 16)
------------- -----------
Cash flows from operating activities
Net income (loss) $ (2,536,842) $ 260,720
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 52,546 11,650
Depreciation 159,624 144,075
Minority interest in subsidiary operations 61,697 -
Impairment of long li assets 791,411 -
Loss on sale of assets 40,200 -
Changes in assets and liabilities:
(Increase) decrease in restricted cash 687 655
(Increase) decrease in accounts receivable 378,843 (513,547)
(Increase) decrease in due from officers and employees 112,795 (232,606)
(Increase) decrease in prepaid expense 3,103 (25,522)
(Increase) decrease in inventory (76,163) (301,189)
(Increase) decrease in deposits (7,508) 7,500
Increase (decrease) in accounts payable (286,136) 74,971
Increase (decrease) in accrued liabilities (6,188) (3,992)
---------- ---------
Net cash provided (used) by operating
activities (1,311,932) (577,285)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (503,100) (124,808)
Purchase of patent and licenses (57,099) (12,783)
Deferred acquisition costs (148,691) -
--------- ----------
Net cash (used) in investing activities (708,890) (137,591)
--------- ----------
Cash flows from financing activities
Proceeds from debt obligations 275,436 250,058
Payments on debt obligations (510,910) (98,977)
Proceeds from sale of common stock 3,355,555 537,601
---------- ----------
Net cash provided by financing activities 3,120,081 688,682
---------- ----------
Net increase (decrease) in cash and cash
equivalents 1,099,260 (26,194)
Cash at beginning of period 22,056 48,250
---------- ----------
Cash at end of period $ 1,121,316 $ 22,056
============= =========
Supplemental disclosures of cash flow information
Interest paid $ 73,990 $ 69,591
Taxes paid $ 800 $ 800
Noncash investing and financing activities:
Acquisition of subsidiary - purchase price paid in
prior period $ 1,091,393
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Innovative Medical Services was incorporated in San Diego, California
on August 24, 1992. The Company was organized with the purpose of
manufacturing, marketing, and selling the Fillmaster, a unique and
proprietary pharmaceutical water purification and dispensing product.
The Company is fully operational, with more than 15,000 customers in
all fifty states, Puerto Rico, the United Kingdom, Australia, Canada,
and Europe. The Company has expanded research and development efforts
in order to further develop its product line to include an additional 8
proprietary pharmacy-related efficiency tools.
In October of 1998, the Company purchased the assets of Export Company
of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary
supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary
supplies and water filtration products to practitioners, retail outlets
and government agencies. The Company acquired the remaining 55%
interest in AMPROMED from a private individual. To facilitate this
transaction the Company has formed EXCOA Nevada, a 100% owned
subsidiary of Innovative Medical Services. This company was
incorporated in Nevada. A 99% interest in AMPROMED will be held by
EXCOA Nevada, with the remaining 1% of AMPROMED being owned by
Innovative Medical Services. These business combinations were accounted
for using the purchase method. The Company incurred $1,091,393 of
acquisition 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 footnote 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.
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 $791,411. The net loss for the year
ended July 31, 2000 increased to $2,536,842 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 $114,756 and $157,049 in the fiscal years ended July 31, 2000 and
1999, respectively.
Depreciation Method
The cost of property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the related
assets. The useful lives of property, plant, and equipment for purposes
of computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Website 3.0 years
Vehicle 5.0 years to 7.0 years
Leasehold improvements are being depreciated over the life of the
lease, which is equal to 120 months.
Depreciation is computed on the Modified Accelerated Cost Recovery
System for tax purposes.
Amortization
Goodwill and customer list were being amortized on the straight-line
basis over 40 years for the year ending July 31, 1999 (see note 16).
The cost of patents acquired are being amortized on a straight-line
basis over the remaining lives of 17 years. Licenses which include the
Ampromed Limitada and the right of Nutripure to distribute and
disseminate certain information through it's website 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, 2000 and July 31,
1999 was $52,546 and $11,650, respectively.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the carrying value of intangible assets and
other long-lived assets will be reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally,
that may suggest impairment. The Company has recognized impairment of
the assets purchased with the Ampromed acquisition and has reassessed
the value of certain assets as described in footnote 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:
2000 1999
------------ -------------
Finished Goods $ 108,528 $ 212,335
Work in Progress 180,198 108,770
Raw Materials 494,743 398,867
------------ -------------
$ 783,469 $ 719,972
------------ -------------
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The fair value of financial instruments, consisting primarily of the
line of credit, is based on interest rates available to the Company and
comparison to quoted prices. The fair value of these financial
instruments approximates carrying value.
Advertising and Promotional Costs
Cost of advertising and promotion are expensed as incurred or at the
first-time advertising and promotion takes place. Such costs were
$197,908 and $101,063 for the years ended July 31, 2000 and July 31,
1999, respectively.
Deferred Public Offering Cost
The company had incurred $376,695 of costs as of July 31, 1996 related
to an initial public offering. Those costs were deferred, pending
completion of the offering. After the completion of the offering, the
total of the public offering costs $1,436,807 was reclassified to
shareholders' equity.
Deferred Acquisition Costs
During the process of evaluating certain companies for acquisition, the
Company expended $133,573 and $49,391 in fiscal years ended July 31,
2000 and July 31, 1999, respectively. These costs were capitalized and
will be reclassified if the acquisitions are successful as a cost of
the investment or expensed in the future if the acquisitions are not
successful. During fiscal year ended July 31, 1999, the company
completed the acquisition of Export Company of America, Inc. (EXCOA)
and reclassified $1,051,493 of the July 31, 1998 balance of deferred
acquisition costs and $39,900 of the July 31, 1999 fiscal year end
expenditures to investment in that purchase.
Net Income (Loss) Per Common Share
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997.
Entities that have only common stock outstanding are required to
present basic earnings per share amounts. All other entities are
required to present basic and diluted per share amounts. Diluted per
share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing
operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year.
Following is a reconciliation of the weighted average number of shares
actually outstanding with the number of shares used in the computations
of loss per common share:
For the Years Ended
July 31, 2000 July 31, 1999
------------------ -----------------
Shares outstanding 5,942,903 4,392,242
Weighted average number of shares
actually outstanding
5,056,141 4,148,879
Stock Options 1,214,309 1,417,969
Warrants 1,798,125 1,798,125
--------- ---------
Total weighted average shares 8,068,575 7,364,973
--------- ---------
Net income (loss) before cumulative
Change in accounting principle $(2,616,738) $ 260,720
Cumulative change in accounting principle 79,896 -
------------ ----------
Net income (loss) $(2,536,842) $ 260,720
============ ==========
Basic net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.52) $ 0.06
Cumulative effect of change in
accounting principle 0.02 -
------------ ---------
Net income (loss) per common share $ (0.50) $ 0.06
========= =========
Diluted net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.52) $ 0.04
Cumulative effect of change in
accounting principle 0.01 -
--------- --------
Net income (loss) per common share $ (0.51) $ 0.04
========= ========
Potential common stock instruments at July 31, 2000, which include
1,214,309 stock options and 1,798,125 warrants, are included in the
loss per share calculation for fiscal year ended July 31, 2000.
Potential common stock instruments at July 31, 1999, which include
1,417,969 stock options and 1,798,125 warrants, are included in the
loss per share calculation for fiscal year ended July 31, 1999.
Recent Accounting Pronouncements
In June of 1998, the FASB issued Statement of Accounting Standards No.
133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their value. This statement, as
amended by SFAS 137, is effective for financial statements for all
fiscal quarters to all fiscal years beginning after June 15, 2000. The
Company does not expect the adoption of this standard to have a
material impact on its results of operation, financial position, or
cash flows as the Company currently does not engage in any derivative
or hedging activities.
Income Taxes
The current provisions for income taxes of $800 for fiscal years ended
July 31, 1999 and July 31, 2000 is the minimum franchise tax paid to
the State of California regardless of income or loss.
At July 31, 2000, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $ 5,589,000, and
$ 5,071,000, and $2,374,000, respectively. At July 31, 1999, the
Company has financial, federal, and California tax net operating loss
carryforwards of approximately $ 3,844,000. $3,771,000, and $1,899,000,
respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to 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 $ 1,180,000 and $ 899,000 for the fiscal years ended July 31,
2000 and 1999, respectively. Realization of these deferred tax assets,
which relate to operating loss carryforwards and timing differences, 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, 2000 was $ 281,000.
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
2000 1999
---- ----
Net operating loss carryforward $ 1,107,000 $ 888,000
Depreciation and amortization 0 2,000
Accrued expenses and calculation allowances 71,000 8,000
Other 2,000 1,000
----- -----
Total deferred tax assets 1,180,000 899,000
Valuation allowance for deferred tax assets (1,180,000) (899,000)
----------- ---------
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, 2000 and July 31 1999, the Company's cash and cash
equivalents is represented by $1,121,316 and $22,056, respectively, in
cash or checking accounts.
Note 3. Restricted Cash
At July 31, 2000, the Company's restricted cash consisted of a
certificate of deposit of $204,887 and at July 31, 1999 the Company's
restricted cash consisted of a certificate of deposit of $205,574.
These certificates of deposit were held by a bank, as security for a
line of credit with the same bank (Note 6).
Note 4. Due from Officers and Employees
At July 31, 2000, notes receivable of $162,793 represents amounts due
from officers and $30,417 represents amounts due from employees. At
July 31, 1999, notes receivable of $153,578 represents amounts due from
officers and $185,946 represent amounts due from employees. Due from
officers at July 31, 2000 consisted of a loan to the president of
$117,339 and a loan to the chief financial officer of $45,454 due and
payable at July 31, 2001. These were renewals and increases of prior
year notes to $110,697 and $42,881, respectively, that were due at July
31, 2000. All notes receivable are due and payable within one year. The
carrying value of the notes, based on the terms at which those same
loans would be made currently, approximate their fair value. All notes
in excess of $10,000 have interest accrued at 6%
Note 5. Property, Plant and Equipment
The following is a summary of property, plant, and equipment - at
cost, less accumulated depreciation:
July 31, 2000 July 31, 1999
--------------- -----------------
Computers and equipment $ 927,257 $ 719,410
Furniture and fixtures 100,630 107,431
Website 182,166 -
Vehicle 50,985 52,670
Leasehold improvements 304,623 322,805
------------- ------------
1,565,661 1,202,316
Less: accumulated depreciation
and amortization 535,159 396,793
------------- ------------
Total $ 1,030,502 $ 805,523
------------- ------------
Depreciation expense charged to general and administrative expense for
the years ended July 31, 2000 and 1999 was $159,624 and $144,075,
respectively.
Note 6. Debt
The details relating to debt are as follows:
July 31, 2000 July 31, 1999
----------------- ----------------
Line of Credit Community 1st Bank
$200,000 line of credit, interest
at 8.35% Due and payable
February 25, 2001 Secured by
certificate of deposit of $205,574
$ 196,009 $ 196,009
Line of Credit Flagship Capital, Inc.
for financing of accounts payable,
interest at 9% payable at $15,823
monthly beginning March 17, 2000. 14,583 -
------------ ------------
Total notes payable 210,592 446,067
Current maturities of notes payable
included in current liabilities 210,592 446,067
------------ ------------
Total long term debt $ - $ -
------------ ------------
Note 7. Commitments
The company leased office and warehouse facilities under an operating
lease that expired on December 31, 1996. On May 14, 1996, the Company
entered into a new operating lease agreement for sixty-five months
commencing on July 1, 1996. The rent payment portion of the lease is
for sixty-three months, which allows for an initial building
improvement period of two months. The monthly rental for the 11,255
square foot facility is $0.69 per square foot plus $0.14 per square
foot for maintenance of common areas. There is also a fixed yearly
increase of 4%. The company has also signed an amendment to the lease
to allow for an option to lease the building for an additional five
years. The company made improvements to the new building in the amount
of approximately $305,000.
The rental expense recorded in general and administrative expenses for
the years ended July 31, 2000 and July 31, 1999 was $98,835 and
$78,393, respectively. Future minimum rental payments required for each
of the 5 succeeding years assuming exercise of the option are as
follows:
Year Ended July 31 Amount
2001 $102,804
2002 $106,916
2003 $111,192
2004 $115,640
2005 $120,266
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, 1997 3,532,851 $5,566,124 3,687,500 $108,750 785,000
Stock issued for services
383,500 559,594 - - -
------- ------- ------------- ------------- -----------
Balance, July 31, 1998 3,916,351 6,125,718 3,687,500 108,750 785,000
Sale of stock 233,125 189,375 - - -
Private placement 242,766 348,225 - - -
------- ------- ------------- ------------- ----------
Balance, July 31, 1999 4,392,242 6,663,318 3,687,500 $108,750 785,000
Sale of stock 783,250 759,055 - - -
Private placement 767,411 2,596,500 - - -
------- --------- ------------- ------------- ----------
Balance, July 31, 2000 5,942,903 $10,018,873 3,687,500 $108,750 785,000
========= =========== ========= ======== =======
Each Class A warrant entitles the holder to acquire an additional
common share for $5.25 per common share beginning August 8, 1997 and
expiring August 8, 2001. The Class A Warrants are redeemable by the
Company for $0.05 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$9.00 per share for thirty consecutive business days ending within five
days of the date of notice of redemption.
Each Class Z warrant entitles the holder to acquire an additional
common share for $10.00 per common share beginning August 8, 1998 and
expiring August 8, 2001. The Class Z Warrants are redeemable by the
Company for $0.10 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$15.00 per share for thirty consecutive business days ending within
five days of the date of notice of redemption.
Note 9. Related Party Transactions
On April 1, 1996, the Company entered into an employment agreement with
the President and Chief Executive Officer. The term of the agreement is
for five years with an automatic renewal of another five years. The
following are the major provisions of the agreement:
1. Compensation
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income before
taxes earned by the corporation during each full fiscal
year, and
c. A monthly amount of not more than $500 per month for an auto
lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred thousand
dollars at 80% of the initial public offering price of the
Company's common stock, approximately 31,250 shares at $3.20
per share, which are exercisable in April, 1997.
2. Compensation for past services
a. In consideration of services which have been rendered during
the fiscal years ended July 31, 1994 and July 31, 1995 and
the eight months period ended March 31, 1996, the
corporation granted the following compensation for past
services rendered:
i. $30,000 for fiscal year ended July 31, 1994, and
ii. $45,000 for fiscal year ended July 31, 1995, and
iii. $60,000 for the eight months ended March 31, 1996.
The President (Mr. Krall) waived the payment of $119,000 of the
compensation for past services and contributed this amount as an
additional payment for the common stock he presently owns. In order to
reward the efforts of Mr. Krall for his performance in the weeks
leading to NASDAQ approval of the initial public offering, the
Compensation Committee recommended and the Board of Directors
authorized a bonus to Mr. Krall in the amount of $257,500. The bonus of
$257,500 was accrued at July 31, 1996.
On April 26, 1997, the board of directors approved the renewal of the
employment contract for Michael Krall for the position of President and
Chief Executive Officer and increased his salary to $12,000 per month.
Note 10. Stock Option Plans
The Company has three stock option plans (the Plans) pursuant to which
options to acquire common stock have been granted. These are the 1996
Incentive Stock Option Plan (the 1996 Incentive Plan) approved by the
Company's Shareholders in April, 1996, the 1996 Directors and Officers
Stock Option Plan (the 1996 D&O Plan) adopted by the Board in April,
1996 and the Amended Innovative Medical Services 1998 Directors and
Officers Stock Option Plan (the 1998 D&O Plan) approved by the
Company's Shareholders in December, 1998. The Plans are administered by
a Committee of the Board of Directors or the entire Board. The exercise
price of options granted under any of the Plans must be the fair market
value for the common stock at the date of grant.
1996 Incentive Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1996 Incentive Plan is 1,000,000
Shares. The maximum number of shares subject to Options granted to any
one Key Employee shall not exceed 100,000 shares. The Options granted
are "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, for certain key employees.
All Key Employees of the Company and its subsidiaries are eligible to
participate in the 1996 Incentive Plan. A Key Employee is defined in
the Plan as a Company employee who in the judgment of the
Administrative Committee has the ability to positively affect the
profitability and economic well-being of the Company. Part time
employees, independent contractors, consultants and advisors performing
bona fide services to the Company shall be considered employees for
purposes of participation in the Plan. No Executive Officer or Director
of the Company has received options pursuant to this Plan. Options to
acquire 143,125 shares under the 1996 Incentive Plan were outstanding
as of July 31, 1999 with 673,750 shares remaining under the 1996
Incentive Plan for which options may be granted.
1996 D&O Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1996 D&O Plan was 1,000,000 Shares.
The maximum number of shares subject to options granted under the 1996
D&O Plan to any one Director or Officer shall not exceed 200,000 shares
in any 12-month period. Options to acquire 400,000 shares under the
1996 D&O Plan were outstanding as of July 31, 1999 and there are no
shares remaining under the 1996 D&O Plan for which options may be
granted.
1998 D&O Plan: The maximum number of shares which may be offered
pursuant to stock options under the 1998 D&O Plan is 2,000,000 shares.
The maximum number of shares subject to options granted under the 1998
D&O Plan to any one Director or Officer shall not exceed 200,000 shares
in any 12-month period. Upon the election of a continuing director or
the further appointment of a continuing executive officer, the
continuing director or officer will receive an additional option for
50,000 shares. A newly elected director or newly appointed executive
officer is entitled to receive an option for 100,000 shares. Options to
acquire 991,250 shares under the 1998 D&O Plan were outstanding as of
July 31, 1999 and there are 958,750 shares remaining under the 1998 D&O
Plan for which options may be granted.
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, 2000 and
1999 pro forma net income (loss) as stated below is not necessarily
representative of the effects on reported net income (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, 2000 and 1999 would have
been approximately $3,292,510 and $133,682 or $(0.66) per share and
$(0.02) per share, respectively, on a diluted basis. The fair value of
the options granted during the years ended July 31, 2000 and 1999 are
estimated at $1.84 per share and $0.72 per share, respectively, on the
date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for grants in 2000 and 1999; no
dividend yield, volatility of 1.24% and 1.80%, respectively; a
risk-free interest rate of 5.50% and 5.25%, respectively and an
expected life of 1.2 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, 1998 1,731,875 $ 1.14
Granted 80,000 .081
Exercised (188,125) .076
Forfeited (8,750) 1.00
-------
Balance at July 31, 1999 1,615,000 1.17
Granted 1,246,540 1.81
Exercised (781,750) 1.18
Forfeited (44,250) 1.34
--------
Balance at July 31, 2000 2,035,540 1.55
==========
Outstanding Exercisable
Number Weighted Average Weighted Average Weighted
Range of Shares Life Exercise Number Average
Exercise Prices Outstanding (in years) Price Exercisable Price
--------------- ----------- ---------- ----- ----------- -----
$0.56 235,000 2.9 $ 0.56 235,000 $ 0.56
$1.00 406,875 2.7 $ 1.00 406,875 $ 1.00
$1.31 to $1.50 215,000 4.2 $ 1.41 215,000 $ 1.41
$1.63 to $1.90 335,000 4.1 $ 1.73 175,000 $ 1.81
$2.00 to $2.50 320,000 2.1 $ 2.20 320,000 $ 2.20
$2.93 to $3.25 523,665 4.6 $ 2.96 492,415 $ 2.93
-------------- --- ------ -------------- ----------
2,035,540 3.51 $ 1.81 1,844,290 $ 1.79
============= ==== ====== ============= ==========
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, 1999 and July 31, 2000.
Note 12. Credit Risk and Fair Value of Financial Instruments
The Company markets its products to numerous customers in various
geographic regions, thereby spreading its credit risk related to
receivables. See Note 2 Cash and Cash Equivalents as to the discussion
of credit risks concerning cash equivalents.
The carrying amounts for cash and cash equivalents, receivables, and
payables approximate fair value because of the short maturity,
generally less than three months, of these instruments. The carrying
value of the Company's long-term debt approximates fair value since the
current borrowing rates available for financing are similar in terms.
Note 13. Cumulative Change in Accounting Policy
The Company incurred approximately $208,000 in development costs
related to construction of the Nutripure.com website. These costs were
originally expensed as incurred. In the accompanying financial
statements, these costs have been retroactively capitalized and
included in fixed assets at July 31, 2000 in compliance with SOP 98-1
(Statement of Position issued by the Accounting Standards Executive
Committee). Of these costs, $79,900 were incurred in prior years and
are shown as a change in accounting principle consistent with the newly
issued EITF Issue No. 00-2 - Emerging Issues Task Force Issue titled:
Accounting for Web Site Development Costs dated March 16, 2000.
Note 14. Business Segment and Sales Concentrations
The Company operates in a single operating segment and is engaged in
the development, manufacturing and marketing of water purification and
dispensing equipment and related filter sales to independent pharmacies
and large chain drug stores. Although the Company has expanded from its
niche pharmacy market into other, broader markets with new products,
including residential and commercial water filtration systems, health
and wellness-related retail merchandise, e-commerce products, and
silver ion bioscience technologies, at the July 31, 2000 revenues from
these future segments were not material to the consolidated financial
statements and no disaggregated information was reviewed.
Significant customers consisted primarily of domestic retail chain
pharmacies. Sales concentration to major chain stores were
approximately $1,348,400 and $607,700, respectively, for the years
ended July 31, 1999 and 2000. No customer accounted for more than 10%
of consolidated sales in 1999 or 2000. Export sales were $13,500 in
fiscal year 1999 and $65,800 in fiscal year 2000.
Note 15. Interim Adjustments
During the fourth quarter ending July 31, 2000, certain adjustment was
made which changed the amount of sales for the three months. Prior to
the adjustment, sales were $152,074 and was reduced by an adjustment of
$65,826 resulting from a change in a customer contract which had not
been accounted for according to the changes made in the contract. Also
adjustments were made to cost of sales during the fourth quarter
increasing cost of sales by $115,368 and $63,237. The former adjustment
was to correct a credit to cost of sales made earlier in the year which
should have been to made to general and administrative expenses. The
latter adjustment of $65,826 resulted from a write-down of year-end
inventory,
Note 16. Write Down of Impaired Assets
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 made its
last sale in the region in October of 1999 and in May of 2000
terminated its lease in Rio de Janeiro and did not replenish the
Ampromed inventory. 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 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. The statement requires an entity
estimate the future cash flows expected to result from the use of the
asset and to recognize an impairment loss when the sum of the future
cash flows is less than the carrying amount of the asset. Because of
the unique nature of the products to be introduced, the Company does
not believe it has enough quantifiable historical information to
reliably predict future cash flows from this operation. For this reason
the Company 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 which
will be amortized over its expected useful life of 15 years. The total
charge to income for this restatement is $791,411 in the year ended
July 31, 2000.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 6, 2000, Steven Holland, CPA, the Registrant's independent
accountant, for the fiscal years ended July 31, 1998, 1997 and 1996 declined to
stand for re-election as auditor. Also, effective on June 6, 2000 the
Registrant's Board of Directors approved the engagement of Miller and McCollom,
Certified Public Accountants as its new auditors. No consultation regarding
accounting policy or procedures with new auditors occurred prior to their
engagement.
Steven Holland, CPA's report for the fiscal years ended July 31, 1998, 1997 and
1996 did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
Nor has there been any disagreement with Steven Holland, CPA on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure or reportable events during the Registrant's most recent
fiscal year through June 6, 2000 which if not resolved to the satisfaction of
Steven Holland, CPA would have caused them to make reference thereto in their
report on the financial statements for such period.
The Registrant has provided Steven Holland, CPA with a copy of the disclosure
contained herein and has requested that Steven Holland, CPA provide the
Registrant with a letter addressed to the U.S. Securities and Exchange
Commission stating whether or they agree with the disclosure. Steven Holland,
CPA has provided such a letter, which was filed as an Exhibit to the Current
Report on Form 8-K dated June 6, 2000.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company and their ages are
as follows:
Name Age Position
------------------------- ----------- ------------------------------------
Michael L. Krall 48 President, CEO, Chairman, Director
Gary Brownell, CPA 52 Treasurer CFO, Director
Donna Singer 30 Executive Vice President, Director
Dennis Atchley, Esq. 48 Secretary
Eugene Peiser, PD 69 Director
Patrick Galuska 41 Director
Dennis Brovarone 44 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 solo practitioner since 1990. He was elected to the
Company's Board of Directors in April 1996. From December 1997 to April 2000,
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 Littletons, 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; serves as a member of the Surgeon General's Speakers Bureau; and is
President of the Southwest Chapter of the Association of Military Surgeons. Dr.
Peiser lives and works in Palm Harbor, FL.
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, investor relations, marketing and sales. 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
The Company has 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, 2000, and the Audit Committee met once during the fiscal year ended July 31,
2000.
The Company's Board of Directors held six meetings during the fiscal year ended
July 31, 2000, 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 the Company's knowledge, during the fiscal year ended July 31, 2000, the
Company's Directors and Officers complied with all applicable Section 16(a)
filing requirements. This statement is based solely on a review of the copies of
such reports furnished to the Company by its 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 the Company to become a Director or executive officer.
Transactions with Management
The Company did not enter into any transactions with Management during the
fiscal year ended July 31, 2000.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the fiscal year ending July 31, 2000, 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 $100,000 during such year (The "Named Executive Officers"):
-------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------
| Long Term Compensation
|
------------------------------------------------------------------------------------------------------
| Annual Compensation | Awards | Payouts
| | |
--------------------------------------------------------------------------------------------------------
| Salary Other Annual | Securities |
Name and Principle Position | Year ($) Compensation | Underlying | All Other Compensation
| n($) | Option (#) | ($)
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO | 1998 144,000 0 | 200,000 Common| 0
--------------------------------------------------------------------------------------------------------
No other executive officer earned more than $100,000 during the current fiscal
year.
-------------------------------------------------------------------------------------------------
Option Grants in Last Fiscal Year
-------------------------------------------------------------------------------------------------
Individual Grants
-------------------------------------------------------------------------------------------------
Name Number of
Common Shares
Underlying
Options Granted % of Total Options Granted to Exercise Price Expiration
(#) Employees in Fiscal Year ($/Sh) Date
-------------------------------------------------------------------------------------------------
Michael L. Krall
President/CEO 50,000 6.7 1.90 11/16/04
-------------------------------------------------------------------------------------------------
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,
2000.
--------------------------------------------------------------------------------------------------------------------
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
--------------------------------------------------------------------------------------------------------------------
Shares Value Number of Securities Underlying Value of Unexercised In-the
Acquired on Realized at Unexercised Options at FY-End (#) Money Options at FY-End ($)
Name Exercise (#) FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------------------------------------------------------------------------------------------------
Michael L. Krall 50,000 135,000 431,250 Common 767,400/Exercisable (1)
President/CEO Shares/Exercisable
--------------------------------------------------------------------------------------------------------------------
(1) Option value based on the difference between the exercise price of
unexercised options and the average closing price of $2.70 for the 30 trading
days ending July 31, 2000.
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 have 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
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 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 Plan is 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, the
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 Plan. The Administrative Committee has granted the present Executive
Officers and Directors an option to purchase 100,000 shares of common stock at
$1.00 per share. 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 plan also gives the
Administrative Committee discretion to award additional options. The aggregate
number and kind of shares within the Plan 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 plan. The approval of the majority of
shareholders is required to increase the total number of shares subject to the
plan, change the manner of determining the option price or to withdraw the
administration of the plan 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 June 30, 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 June 30,
2001, there are no other registered holders of five percent or more of the
Company's Common Stock. As of June 30, 2001 there were 6,785,799 shares
outstanding.
Name and Address of Common Stock Percentage of Shares
Beneficial Owner Title Ownership Outstanding
---------------------------- ----------------------- --------------------- ------------------------
Dennis Atchley Secretary 97,940 (1) 1.4%
1725 Gillespie Way
El Cajon, CA 92020
Dennis Brovarone Director 313,983 (2) 4.5%
18 Mountain Laurel
Littleton, CO 80127
Gary Brownell Treasurer, CFO/Director 225,321 (3) 3.2%
1725 Gillespie Way
El Cajon, CA 92020
Patrick Galuska Director 160,690 (4) 2.3%
8137 S. Downing St.
Littleton, CO 80122
Michael L. Krall President, CEO/Chairman 1,103,560 (5) 15.0%
1725 Gillespie Way
El Cajon, CA 92020
Eugene Peiser Director 239,555 (6) 3.5%
1725 Gillespie Way
El Cajon, CA 92020
Donna Singer Executive VP, Director 153,356 (7) 2.2%
1725 Gillespie Way
El Cajon, CA 92020
Directors and Officers as a Group
(7 individuals) 2,294,405 (8) 28.2%
(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 175,000 shares.
(4) Includes presently exercisable options to acquire up to 100,000 shares.
(5) Includes presently exercisable options to acquire up to 481,250 shares.
(6) Includes presently exercisable options to acquire up to 150,000 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 1,341,250 shares
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At July 31, 2000, notes receivable of $162,793 represents amounts due
from officers of Innovative Medical Services. These loans from the
Company to officers consist of a loan to Michael L. Krall, President
and CEO of $117,339 and a loan to Gary Brownell, Chief Financial
officer of $45,454. Both loans are due and payable at July 31, 2001.
These were renewals and increases of prior year notes of $110,697 and
$42,881, respectively, that were due at July 31, 2000. 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%.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
4.1 (1) -- Form of Class A Warrant
4.2 (1) -- Form of Class Z Warrant
4.3 (1) -- Form of Common Stock Certificate
4.4 (1) -- Warrant Agreement
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 -- Axenohl License Agreement dated November 24, 1999
10.4 (8) -- Weaver - Roach X Assignment dated January 4, 2001
10.5 (9) -- Dodo Agreement dated March 5, 2001 [CONFIDENTIAL TREATMENT
REQUESTED FOR CERTAIN SECTIONS]
10.6 -- Promissory Note of Michael L. Krall
10.7 -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
11 -- Statement re: computation of per shares earnings
21 -- Subsidiaries of the Registrant
(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
(8) Incorporated by reference from Form 10-QSB/A for the six month period ended
January 31, 2001 filed on August 13, 2001
(9) Incorporated by reference from Form 10-QSB/A for the nin month period ended
April 30, 2001 filed on August 13, 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
/s/ MICHAEL L. KRALL August 10, 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 August 10, 2001
------------------------ ----------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer and Director August 10, 2001
------------------------ ----------------
Gary Brownell
/s/ PATRICK GALUSKA Director August 10, 2001
------------------------ ----------------
Patrick Galuska
/s/ MICHAEL L. KRALL President/CEO and Director August 10, 2001
------------------------ ----------------
Michael L. Krall
/s/ EUGENE PEISER Director August 10, 2001
------------------------ ----------------
Eugene Peiser
/s/ DONNA SINGER Executive Vice President and Director August 10, 2001
------------------------ ----------------
Donna Singer