UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2002
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
(Exact name of registrant as specified in its charter)
California 33-0530289
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
(Address of principal executive offices, including Zip Code)
(619) 596-8600
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $2,409,700
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Approximately $3,107,000 as of October 25, 2002.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 8,780,899 shares of common stock as of October 25, 2002.
Documents incorporated by reference: Certain Exhibits
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Innovative Medical Services began as a provider of pharmaceutical water
purification products. Although our current revenues are still primarily from
the pharmacy industry, we have expanded from our niche pharmacy market into
other, broader markets with new products, including residential and commercial
water filtration systems, health and wellness-related retail and e-commerce
merchandise, silver ion bioscience technologies and boric acid based pesticide
technologies.
Water Treatment Division
The Fillmaster(R) pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R) water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM) bar code reader. We also market proprietary National Sanitation
Foundation certified replacement filters for the Fillmaster Systems.
Our Nutripure(R) line of water treatment and filtration systems includes the
Nutripure 3000S-Series whole-house water softening systems, the Nutripure Elite
reverse osmosis point-of-use systems, the Nutripure 2000 countertop water
filtration system and the Nutripure Sport filtered sport bottle. We distribute
our various Nutripure products in several ways, including retail sales,
catalogue placement, business-to-business sales, internet promotion and in-home
sales presentations.
E-Commerce Division
Through our subsidiary Nutripure.com, we had operated an e-commerce health
website, Nutripure.com(TM), that distributed Bergen Brunswig products. We
provided consumers a wide variety of vitamins, minerals, nutritional
supplements, homeopathic remedies and natural products. In addition to
merchandise, the site offered comprehensive health and wellness information in
an easy-to-access, intuitive reference format. In December 2001 Bergen Brunswig
Corporation requested we release it from its contract to provide the vitamins,
minerals, nutritional supplements, homeopathic remedies and natural products
sold on our Nutripure.com website. We agreed, and therefore, on January 15,
2002, Bergen Brunswig Corporation terminated the distribution license for these
products. As a result, we closed our e-commerce division.
Bioscience Division
Our bioscience division features a patented, aqueous disinfectant called
Axenohl(TM). In November 2001, we acquired the patent for Axenohl(TM). The use
dilution formulation of Axenohl is called Axen(TM). The EPA registration for use
of Axenohl and Axen as hard surface disinfectants has been issued, and we plan
to pursue additional EPA and FDA regulatory approvals for other applications.
Additional possible uses for this product include wound care, topical infection
care, personal disinfecting retail products and food processing, which may
require FDA approvals, as well as municipal water treatment and
point-of-use/point-of-entry water treatment products, which may require
additional EPA approvals.
Our bioscience division also includes a line of pesticide technologies. Branded
as Innovex(TM), the product line launched in October 2001 with our EPA-approved,
patent-pending RoachX(TM). Subsequently, we have developed and launched
additional products in the Innovex product line, including and AntX75(TM) baits,
two formulas of EPA-exempt non-toxic TrapX rodent lure, Pro's Choice(TM) caulk
for pest control operators, and EPA approved CleanKill(TM), the Axen-based hard
surface disinfectant for the pest control industry.
History
Innovative Medical Services was incorporated in the State of California on
August 24, 1992, to pursue the immediate business of manufacturing and marketing
the Fillmaster and subsequently a broadly based business of delivering advanced
technology, equipment and supplies to not only the pharmacy industry, but also
other healthcare markets and to retail consumers.
In the past five years, Innovative Medical Services transitioned from a
one-product company supplying a niche market to a multi-division company
managing new products and programs. In addition to expanding the Fillmaster
product line with the Fillmaster 1000e and the Scanmaster, we launched a line of
residential water treatment and filtration products. Through acquisition, we
have also expanded into the bioscience arena with our Axenohl antimicrobial
products and our Innovex pesticide products.
In 1997, we developed and launched the now-patented Fillmaster 1000e
computerized, electronic dispenser as an upgrade dispenser to the Fillmaster
pharmaceutical water purification and dispensing system.
In 1997 and 1998 we developed our entry-level residential water system,
Nutripure(R) NP2000CT. After 18 months of extensive market research, Innovative
Medical Services completed development of this carbon countertop system and
released the product in June 1998.
In October 1998, Innovative Medical Services acquired AMPROMED, Rio de Janeiro,
Brazil, and certain assets of Export Company of America Inc. (EXCOA), Fort
Lauderdale, FL, and established a new Nevada corporation to hold and operate the
export/import operation. AMPROMED's primary business is the sale of medical,
dental and veterinary disposable products. In addition to medical supplies, we
plan to distribute water treatment and silver ion products to Brazil through
AMPROMED. Since the acquisition, the economic conditions in the region have
declined and implementation of the project has been delayed. We no longer have
immediate plans to import medical and dental supplies into Brazil but we
believe, however, that Ampromed is a vital part of our plan to market and sell
Axenohl, RoachX and the Nutripure line of water treatment products.
In 1999 we developed and launched yet another enhancement to our Fillmaster
pharmaceutical water purification and dispensing system, the Scanmaster bar code
reader. Designed as an add-on upgrade to the Fillmaster 1000e computerized
dispenser, the Scanmaster allows the user to scan 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.
In December 1999, we formed a wholly owned subsidiary, Nutripure.com, to
capitalize on internet commerce opportunities focusing on health and wellness.
In January 2000, we began the process to spin off Nutripure.com as a separate
public company. During the intervening time, adverse market conditions for
solely internet-based ventures eroded Management's confidence in the viability
of a public market for Nutripure.com common stock. Therefore, in October 2000,
our Board of Directors elected to retain Nutripure.com as an operating division
of Innovative Medical Services in order to minimize the substantial
administrative expense associated with launching and operating a public company.
Also in 1999, we began investigating marketing opportunities for a silver-ion
based technology called Axenohl. The Axenohl patent was owned at the time by
NVID International.
Early in 2000, after concluding that we wished to pursue development and
marketing of the Axenohl technology, we engaged in a marketing and licensing
agreement with NVID International for Axenohl for specific market segments in
specific geographic areas.
In mid 1999, we launched Nutripure.com, a wholly-owned subsidiary e-commerce
venture established to market vitamins, minerals, nutritional supplements,
homeopathic remedies and natural products sold on our Nutripure.com website. We
partnered with Bergen Brunswig as our supplier for this program.
In 2000 we launched the Nutripure Dealer program which expanded our product line
to include whole-house water conditioning systems other point-of-use water
treatment equipment while expanding our distribution network by offering these
products to independent water treatment for sale to the public under IMS'
Nutripure brand.
In 2001 we acquired the marketing rights and patent to our boric acid pesticide
technologies. The first of these products developed, RoachX, launched in October
2001.
In late 2001, as part of a litigation settlement with NVID regarding the
marketing rights to Axenohl, we acquired the patent to the Axenohl technology.
In December 2001 Bergen Brunswig Corporation requested we release it from its
contract to provide the vitamins, minerals, nutritional supplements, homeopathic
remedies and natural products sold on our Nutripure.com website. We agreed, and
therefore, on January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we closed our e-commerce
division. The website is being held for resale.
In mid-2002 we expanded our Innovex line of pesticides to include RoachX,
AntX75, two formulas of TrapX, Pro's Choice silicone caulk and CleanKill, a hard
surface disinfectant for use in the pest control industry that uses Axenohl
disinfecting technology.
In 2002 we relaunched the Nutripure Dealer program and changed our Nutripure.com
wholly-owned subsidiary to Nutripure Corporation The corporation is now being
used to operate the Nutripure Dealer program.
Principal Products and Markets
WATER TREATMENT DIVISION
Pharmaceutical Water Treatment
Fillmaster(R) The Fillmaster dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, provides measured amounts
of purified water for reconstitution of liquid oral antibiotics and certain
other pharmacy applications. Pharmapure is a six-stage water purification unit
featuring an electronic water purity testing module and an auxiliary faucet for
dispensing purified water. Fillmaster is a calibrated volumetric measuring and
dispensing apparatus. The entire system (the "Fillmaster System") integrates
with the building's tap water plumbing and is closed and pressurized to prevent
contamination.
The Fillmaster System saves time and money for pharmacies. According to our
testing, the Fillmaster has a fill rate at least three times that of previous
bottle-and-hose methods, and direct and indirect costs associated specifically
with bottled water are reduced or eliminated. Pharmacy storage space can be
reallocated to more profitable items, labor savings accompany the efficiencies,
and the expense of bottled water purchases of up to $1.25 per gallon is replaced
by one annual filter change. Under optimum usage, a pharmacy reduces the cost of
"purified water" to approximately $.04 per gallon.
In addition to efficiency and cost savings, the Fillmaster System increases
prescription integrity by greatly reducing the possibility of human error while
dispensing prescriptions. The patented Fillmaster 1000e employs multiple
microprocessors to provide accurate and even-flow dispensing. We sell Fillmaster
1000e dispensers as an upgrade to existing installations and as a component of
new installations. The Scanmaster, launched in August 1999, is a pager-sized,
modular upgrade to the Fillmaster 1000e. A user simply scans a prescription's
NDC bar code in front of the dispenser, and the Fillmaster 1000e displays the
product name and required water quantity. The Fillmaster System then dispenses
the prescription with one touch of a button. The advanced technology of the
Fillmaster 1000e computerized dispenser and the Scanmaster bar code reader
ensures accuracy of measurement and assurance of compliance to minimize
liability.
This is a finite, niche market in which our significant customers to date
consist primarily of domestic retail chain pharmacies. There are approximately
72,000 pharmacies in the United States and Canada, with many thousands more
worldwide. Water-mixed antibiotic prescriptions, for which the Fillmaster is
primarily used, make up approximately 12.6% of a pharmacy's total prescriptions
and approximately 20% of a pharmacy's gross profit. We have installed over
20,000 Fillmaster dispensers in pharmacies across the nation, including
Wal-Mart, Walgreens, Albertson's/American Stores, Eckerd, Fred Meyer, Target,
CVS, Kroger, Smith's Food and Drug, Longs Drugs, Rite-Aid, Drug Emporium, Fry's,
Hi-School Pharmacies, H-E-B, Fleming, Giant and Snyders. Also included in the
customer base are many United States Military Clinics, including Bethesda Naval
Hospital; the Kaiser Foundation for Medical Care; the Mayo Clinic and several
hundred Independent and Hospital Pharmacies.
Fillmaster(R) System Filters We also market unique and proprietary NSF certified
filter replacements for the Fillmaster's Pharmapure water purification system,
which require changing at intervals of approximately 12 months or sooner as
indicated by the purity testing module. The filter replacements represent a
significant continuing source of revenues to us.
Customer Service Plan 2000(TM) Innovative Medical Services offers outstanding
service to its pharmacy customers with its exclusive Customer Service Plan 2000
(CSP 2000). The CSP 2000 provides an extended unlimited warranty on all
Innovative Medical Services pharmacy products, regardless of age or quantity;
significant discounts on maintenance item costs; free software upgrades for the
Fillmaster 1000e and Scanmaster; a secure web site that allows pharmacy
customers to monitor history, scheduled maintenance and account status;
automatic replacement filter shipments; and simplified, annual invoicing.
Motivated by the cost savings and the extended warranty coverage, most of our
chain customers have entered into multi-year contracts for the CSP 2000.
Residential Water Treatment Products
Nutripure(R) Dealer Program Innovative Medical Services' Nutripure Water Dealer
Program offers existing independent water treatment dealers a line of
residential water softening and other point-of-use water treatment equipment for
sale to the public under IMS' Nutripure brand. In addition, the program provides
complementary, industry-unique financing that extends credit to consumers for
the purchase of water treatment equipment from participating dealers. We realize
revenues from both the sale of Nutripure equipment and the financing.
The Nutripure 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 whole house systems
are often installed in conjunction with Nutripure reverse osmosis systems.
We have formed alliances with independent dealer groups, finance companies and
leading equipment component manufacturers to create a marketing program to sell
and finance whole-house water treatment systems through existing dealers. We
believe this marketing strategy provides consumers and independent dealers a
name and image they can trust. The programmable systems come equipped with
microprocessors and electronic water meters to monitor daily water usage and
provide automatic, demand-based water conditioning. An electronic memory stores
operating system information, and battery backup keeps it current if power is
lost.
Innovative Medical Services' Nutripure Water Dealer Program also offers a
Nutripure line of residential drinking water systems combines reverse osmosis
technology with carbon filtration to improve the taste, smell, quality and
safety of standard tap water. Reverse osmosis is a water treatment process that
removes contaminants from water by using pressure to force the water molecules
through a semi-permeable membrane. Carbon, sometimes referred to as activated
carbon, is a water treatment medium commonly used for dechlorination and for
reducing trace and soluble materials from water. We also market unique and
proprietary filter replacements for the Nutripure residential drinking water
systems that require changing every 12 months.
The Nutripure 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 requires
neither professional installation nor electricity to operate. The Nutripure
system filters to .001 micron and reduces heavy metals, chemicals and
microorganisms, such as cryptosporidium and giardia, as well as reducing bad
taste and odor from drinking water. A micron is a measurement unit equal to one
millionth of a meter. Micron measurements are applied to water filtration
systems to indicate the particle size at which suspended solids larger than that
size will be removed.
Nutripure(R) 2000 Innovative Medical Services entered the retail venue with its
Nutripure 2000 Countertop Water Filtration System. Nutripure 2000, developed
specifically for mass merchandising, offers water filtration technology at
competitive pricing. Nutripure's filter component is a one-micron, carbon
microfilter that reduces dirt, chemicals, lead and parasites to improve the
taste, quality and safety of tap water. The Nutripure 2000 requires no assembly,
mounts directly to a faucet and features a 2,000-gallon capacity filter, an
automatic bypass shutoff valve, an electronic monitor that reminds users when to
change the filter, and an exclusive filter design that prevents leaking and
contamination because water flows only through the completely sealed filter
cartridge. We distribute Nutripure 2000 through retail outlets in the United
States.
The filter component, manufactured by Omnipure Filter Company of Caldwell,
Idaho, has been tested by Spectrum Laboratories to meet or exceed National
Sanitation Foundation Standard No. 53 Health Effects and Standard No. 42
Aesthetic Effects. These tests determine if the product meets the most stringent
standards set by the NSF for consumer water filtration. Spectrum Labs, Inc. is
an independent laboratory in New Brighton, Minnesota. The testing on the
Nutripure product was paid for by Omnipure Filter Company, Caldwell, Idaho. The
test reports were submitted by Spectrum Labs, Inc. to Omnipure on April 6, 1998.
We had no prior relationship with Spectrum Labs when the tests were conducted.
We selected the Omnipure filter component for the Nutripure 2000 in part because
it had this testing available, though there are several other similar quality
filter components readily available. Other than purchase orders there is no
written agreement between us and Omnipure.
Spectrum Labs' Product Testing Department conducted testing on the product for
chlorine reduction in accordance with test protocol contained in NSF
International Standard Number 42 "Drinking Water Treatment Units/Aesthetic
Effects," Appendix B, "Chemical Unit Test Methods," Section I, "Procedure -
Plumbed-In and Faucet Mounted Taste, Odor and Chlorine Reduction Units Without
Reservoir," revised June 1988. The product was found to meet the requirements
for compliance under Standard Number 42 for taste, odor and chlorine reduction
for Class I filters.
In addition, Spectrum Labs evaluated the product for cyst and turbidity
reduction and structural integrity in accordance with test protocol contained in
NSF International Standard Number 53, "Drinking Water Treatment Unites/Health
Effects," Section 6.12, "Mechanical Filtration Test Methods," and Section 6.6,
"Structural Integrity Performance. The filter media evaluation was performed
based on test protocol contained in NSF Standard Number 53, Section 6.7, "Filter
Media." Influent and effluent samples were analyzed for cyst reduction using
American Society for Testing and Materials Method Number F796 which is a
standard particle counting method. Samples evaluated for turbidity were analyzed
using EPA Method Number 180.1 which is a nephelometric method. NSF Standard
Number 53, Section 6.6.1.2 protocol was used to perform the pressure evaluation
for structural integrity. The product was found to meet the requirements for
compliance under NSF Standard Number 53 for cyst and turbidity reduction, filter
media evaluation and structural integrity performance.
Nutripure(R) 2000 Replacement Filters We also market replacement filters for the
Nutripure 2000 water system. The Nutripure 2000 contains a 2,000-gallon filter
that must be changed every year.
Nutripure(R) Sport Filtered Sport Bottle The Nutripure Filtered Sport Bottle,
also offered as a private label or premium item, provides clean, great-tasting
water for on-the-go consumers. The Nutripure Filtered Sport Bottle features a
small carbon filter at the bottom end of the plastic straw so that, as the
consumer drinks through the straw, the water is drawn up through the filter. An
innovative alternative to buying expensive bottled water, Nutripure Sport
filters an average of approximately 30 microns, reducing sediment and chlorine,
and can be refilled 60 times before an inexpensive filter change is required.
The Nutripure Sport program provides recurring revenue through sales of the
replacement filter twin pack.
RETAIL PRODUCTS DIVISION
Medifier(TM) We also market the Medifier, a patented universal prescription
bottle label magnifier. The Medifier holds various sized prescription bottles in
position under a magnifier strip that enlarges dosage and use instructions to a
clearly readable size. The Medifier is marketed to Innovative Medical Services'
existing sales channels, as well as through catalogue sales and promotional
products distributors.
E-COMMERCE DIVISION
Nutripure.com(R) In December 1999, we formed a wholly owned subsidiary,
Nutripure.com, to capitalize on internet commerce opportunities focusing on
health and wellness. In January 2000, we began the process to spin off
Nutripure.com as a separate public company. During the intervening time, adverse
market conditions for solely internet-based ventures eroded Management's
confidence in the viability of a public market for Nutripure.com common stock.
Therefore, in October 2000, our Board of Directors elected to retain
Nutripure.com as an operating division of Innovative Medical Services in order
to minimize the substantial administrative expense associated with launching and
operating a public company.
In December 2001 Bergen Brunswig Corporation requested we release it from its
contract to provide the vitamins, minerals, nutritional supplements, homeopathic
remedies and natural products sold on our Nutripure.com website. We agreed, and
therefore, on January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we closed our e-commerce
division.
BIOSCIENCE DIVISION
Silver Ion Technologies Our bioscience division includes a silver ion technology
called Axenohl(TM). Axenohl is a patented, aqueous disinfectant. The use
dilution formulation of Axenohl is called Axen(TM). The EPA registration for use
of Axenohl and Axen as hard surface disinfectants has been issued. The first
Axen-containing product we developed was our CleanKill(TM) hard surface
disinfectant for sale to the pest control industry. We intend not only to sell
our own Axen-based hard surface disinfectant products, but also to sell Axen as
an additive to other manufacturer's products.
The current EPA approval of Axen is based on prior testing using 12-part per
million (ppm) strength. In February and March 2002, we announced the results of
a battery of tests using an increased formula strength of 30-ppm to meet
rigorous standards of potential product partners and to achieve the shortest
possible kill times on a greater scope of microbes. The tests were performed by
nationally recognized independent laboratories Nelson Laboratories of Salt Lake
City, Utah and AppTec ATS, St. Paul, Minnesota, under AOAC protocol and GLP
regulations in accordance with EPA regulations.
Specific Axen test results include:
o 30-Second Kill Time ---At 30 ppm, Axen demonstrated a 30-second,
99.9999% kill of standard indicator organisms including
Staphylococcus aureus ATCC 6538, Pseudomonas aeruginosa ATCC 15442
and Salmonella cholerasuis ATCC 10708. Each is regarded as ever
present in nearly every person's life and is also a frequent human
pathogen.
o Residual Kill Activity --- The residual activity of Axen was tested
at 0, 1, 6, and 24 hours after application to a hard surface against
standard indicator organisms (Staphylococcus aureus ATCC 6538,
Pseudomonas aeruginosa ATCC 15442 and Salmonella cholerasuis ATCC
10708). Quantitative residual results at 24 hours after initial
application show a 99.99% reduction in all three bacteria tested.
o Bacteria---Additional testing of Axen against Methicillin Resistant
Staphylococcus aureus ATCC 700698 (MRSA), Vancomycin Resistant
Enterococcus faecium ATCC 700221 (VRE) and Escherichia coli OH157
ATCC 43888 demonstrated a 99.9999% kill in 2 minutes. These specific
bacteria are especially problematic in hospitals because of their
resistance to antibiotics. Further, Axen showed a 99.9999% kill in 30
seconds against Listeria monocytogenes ATCC 19111. Food processing
operations are challenged to keep this bacterium under control.
o Fungus --- Axen demonstrated a 99.9999% kill in 10 minutes of the
common athlete's foot fungus, Trichophyton mentagrophytes ATCC 9533.
After review and approval by the EPA, this data will allow the
Company to add a fungicidal claim to its hard surface disinfectant
label.
o Viruses --- Axen also demonstrated 99.9999% virucidal efficacy
against HIV Type 1 in 30 seconds, Herpes simplex virus type 1 in one
minute, and Influenza A virus ATCC VR-544, Rhinovirus type R 37 ATCC
VR-1147, Strain 151-1 and Poliovirus type 2 ATCC VR-1022, Strain
Lansing in 10 minutes. After review and approval by the EPA, this
data will allow the Company to add these virucidal claims to its hard
surface disinfectant label.
We are awaiting EPA approval of the 30-ppm formula. After receiving EPA
approval, we will be able to expand the existing Axen efficacy claims as a hard
surface disinfectant.
Based on the EPA toxicity categorization of antimicrobial products that ranges
from Category I (high toxicity) down to Category IV, Axen, with its combination
of the biocidal properties of ionic silver and citric acid, is an EPA Category
IV antimicrobial for which precautionary labeling statements are normally not
required. This compares with Category II warning statements for most leading
brands of antimicrobial products.
We plan to pursue additional EPA and FDA regulatory approvals for other
applications. Additional possible uses for this product include wound care,
topical infection care, personal disinfecting retail products and food
processing, which may require FDA approvals, as well as municipal water
treatment and point-of-use/point-of-entry water treatment products, which may
require additional EPA approvals.
In March 2001, we signed a five-year contract to provide Axenohl to Dodo &
Company, a Korean cosmetics manufacturer and marketer. Under the contract, Dodo
& Company would purchase approximately $1.2 million dollars of product from us
over five years. In addition to the purchase price, the contract calls for us to
receive a reimbursement for research and development and a royalty on sales of
the Axen-containing products. The contract requires Dodo & Company to obtain
appropriate regulatory clearances in South Korea, but we have no documentation
to show that this has been completed. We believe that Dodo & Company has
miscalculated the royalties due to us, and we have requested that Dodo & Company
reevaluate their royalty calculations. Dodo & Company has requested a
renegotiation of the contract including the royalty fee calculation. During the
year, Dodo & Company has continued to expand its A-Clinic Club line to include
over 10 different products, all of which contain Axenohl as an active
ingredient. Because of Dodo & Company's significant investment in the product
line, we believe we will be able to renegotiate the contract to the satisfaction
of both parties. Until this matter is resolved, however, we are unlikely to ship
additional product to Dodo & Company.
On November 30, 2001, the Company acquired the patent for Axenohl, a silver ion
based technology which is the basis for the Company's silver ion products. The
Company previously licensed the use of this patent.
The Company purchased the patent for 700,000 shares of its common stock plus
certain expenses. The Company valued the patent at $1,540,600 based on the
market price of the stock exchanged. In addition, the Company agreed to pay
royalties in the amount of 5% of gross Axenohl sales until March 2018, the end
of the life of the patent. There are minimum royalties due of $1,000,000 for the
period of November 2001 to July 31, 2004 and for each fiscal year thereafter.
Innovative Medical Services has the right, in its sole and absolute discretion,
to pay the minimum royalty in cash or in common stock at prevailing market
prices. If the Company determines it does not wish to pay the minimum royalty
payment, it has the option at any time to transfer the patent back to the prior
owner rather than pay the minimum royalty.
BORIC ACID BASED PESTICIDE TECHNOLOGIES Our bioscience division also includes a
line of pesticide technologies. The EPA-approved, patent-pending RoachX(TM) was
the first product to launch from the line. The national kickoff took place at
the National Pest Management Association meeting in New Orleans, Louisiana, in
October 2001. We are selling RoachX through Univar (formerly Vopak) and members
of the Speckoz group of nine regional independent wholesalers.
United States Department of Agriculture testing confirms that RoachX is over 96%
effective in three to four days with one application for indoor and outdoor
eradication of cockroaches, and can be used near children and food preparation
areas. Boric acid is a well-known and effective deterrent of cockroaches and
will kill them on contact, but cockroaches do not naturally eat the repellent.
Although many pesticide products contain boric acid as the listed active
ingredient, we believe RoachX to be new because of the combination of boric
acid, glycerin and a protein-based attractant in a colloidal suspension to
create three unique results: 1) The formula protects the boric acid from water
and humidity, 2) The cockroaches perceive the formulation as food and will
actually eat the glycerin-encapsulated boric acid, and 3) The formula acts as a
time-released pesticide, allowing the cockroach to return to the nest before it
dies and then becomes a "bait station" for other roaches in the colony. We
believe the product line, containing particular formulas for specific pests, is
effective against cockroaches, ants, palmetto bugs, silverfish, waterbugs,
ticks, fleas, lice and garden pests.
At the October 2001 trade show, we also launched Pro's Choice(TM) caulk for pest
control operators. We repackage an NSF, USDA and FDA approved food-grade
silicone caulk as our Pro's Choice product. Pro's Choice does not contain any
pesticide and is a convenience tool for pest control operators for "exclusion",
or the filling of cracks and crevices to create a physical barrier insects
cannot penetrate.
In January 2002, we formally launched CleanKill(TM), the Axen-based hard surface
disinfectant for the pest control industry. CleanKill is approved by the EPA as
an additional brand name of Axen.
In March 2002, we received EPA approval for our second pesticide product, AntX
75(TM). Targeted to pest control professionals, AntX 75 is available through
commercial distributors in the pesticide industry. AntX 75 combines our
patent-pending glycerol boric acid technology with a carbohydrate-based
attractant to create a non-drying, time-released bait. The non-drying formula
allows ants to feed until the bait is gone. The formula also completely masks
the borate in the bait and produces a time-released effect that lengthens the
kill time, giving the ants time to return to their nests before dying.
In April 2002, we launched two formulas of non-toxic TrapX rodent lure. This
conveniently packaged, non-drying EPA-exempt product is available in fruit
formula for roof rats and protein formula for Norway rats and squirrels and
eliminates the hassles of mixing and cross contamination that are currently
issues for pest management professionals. Both formulas work well for field and
house mice and may be used in all types of traps. TrapX is available through
commercial distributors in the pesticide industry.
Competition
Although we have only one known competitor in our pharmaceutical water
purification market, we face very strong competition in the residential water
treatment markets where many large, long-established competitors currently hold
most of the market share and have the capital resources available to invest in
large national marketing campaigns. The market for Axenohl is highly competitive
because we must work to displace traditional disinfecting technologies sold by
well-known international industry leaders.
The market is similar for our pesticide products. Although recent changes in EPA
regulations may ease our ability to enter the market, ongoing strong market
presence of existing pesticide companies may make it difficult to compete. On
June 8, 2000, the United States EPA reclassified the Dow Chemical product
Dursban (also sold as Lorsban). Over 800 products containing the organophosphate
pesticide chlorpyrifos are reclassified and now may only be sold in a
significantly diluted form. Sales of original, stronger formulations of such
products to retailers ended February 1, 2001, and retailers must remove the
products from shelves by December 31, 2001. The current formulations are also
banned for commercial and agriculture professionals as of December 31, 2000.
Professional pest control companies must use a 100 to 1 diluted version of the
current product strength and obtain a waiver of responsibility from the home or
business owner. As of June 6, 2001, the product underwent a further 10 to 1
dilution, creating a 1000 to 1 diluted treatment.
Our ProChoice caulk, a companion product to our pesticide products, is a
repackaged readily available food-grade silicone caulk manufactured by General
Electric. Although competition is significant because the caulk is commercially
available from multiple manufacturers in standard 10-11 ounce tubes, we have
repackaged it for the convenience of our customers into 4 ounce tubes that fit
bait guns used by the pest control operators.
We recognize that innovative marketing methods are required in such competitive
markets. We work to focus on the high quality and value price of our products in
their markets.
Patents and Intellectual Property
We own patents on the Medifier, the Fillmaster 1000e Electronic Dispenser and
the Axenohl technology. In addition, we have a patent application pending for
RoachX and related pesticide products. Except for the Nutripure whole-house
water treatment systems, our other water treatment products are comprised of
combinations of our own proprietary components, custom made components and
patented, off-the-shelf components and are assembled and packaged by us. The
Nutripure whole-house water treatment systems sold through the Nutripure dealer
program are purchased from a variety of manufacturers as private label products
for Innovative Medical Services. These manufacturers use patented key components
in their products.
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.
On November 30, 2001, the Company acquired the patent for Axenohl, a silver ion
based technology and its method of making which is the basis for the Company's
silver ion products. The Company previously licensed the use of this patent.
The Company purchased the patent for 700,000 shares of its common stock plus
certain expenses. The Company valued the patent at $1,540,600 based on the
market price of the stock exchanged. In addition, the Company agreed to pay
royalties in the amount of 5% of gross Axenohl sales until March 2018, the end
of the life of the patent. There are minimum royalties due of $1,000,000 for the
period of November 2001 to July 31, 2004 and for each fiscal year thereafter.
Innovative Medical Services has the right, in its sole and absolute discretion,
to pay the minimum royalty in cash or in common stock at prevailing market
prices. If the Company determines it does not wish to pay the minimum royalty
payment, it has the option at any time to transfer the patent back to the prior
owner rather than pay the minimum royalty.
The United States patent for Axenohl was issued on March 6, 2001, and a
supplemental patent has been filed to cover the substitution of 14 other organic
acids for citric acid in the formulation.
A patent application for RoachX and related products was filed in February 1998
to protect a nonaqueous form of insecticide consisting of a desiccant,
preferably boric acid, with additional ingredients for binding, stability and
target insect attraction.
Manufacturing
The Fillmaster and Nutripure water systems are assembled in our manufacturing
facility at our corporate offices primarily from custom manufactured components.
It is our goal to perform minor manufacturing in our facility to minimize wages,
equipment expense and insurance. No components of the systems have permanent or
unequivocally restricted availability. Many manufacturers are available to
produce the components, and a change in suppliers would result in virtually no
lost production.
The original Fillmaster dispenser and the new Fillmaster 1000e dispenser are
both assembled in our manufacturing facility at our corporate offices mostly
from proprietary and custom parts fabricated to our specifications from
injection-molded plastic and fabricated acrylic.
The Nutripure Sport bottle is also assembled in our manufacturing facility at
our corporate offices from proprietary and custom components manufactured under
exclusive agreements with several different manufacturers. Alternative
manufacturers exist, and a change in suppliers would result in virtually no lost
production. There are no plans to alter production methods.
We manufacture RoachX, AntX and TrapX in our manufacturing facility at our
corporate offices and outsource some of the packaging functions. The active and
inactive ingredients of these products are readily available multiple
manufacturers in the US and abroad.
We purchase caulk manufactured by General Electric for our ProChoice product
from a General Electric authorized distributor and repackager. This caulk is
readily available through several other manufacturers.
We blend the Axenohl products in our manufacturing facility at our corporate
offices from concentrate produced by our subsidiary, ETI-H2O. Silver, the
primary active ingredient, is a readily available commodity, and the other
active and inactive ingredients of Axenohl are readily available from chemical
supply companies.
We purchase water softening and filtering equipment from a variety of
manufacturers for the Nutripure water dealer program which they produce and
label as Nutripure equipment. We resell to participating water treatment
equipment dealers.
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 $780,500 and $293,000
in the fiscal years ended July 31, 2002 and 2001, respectively. Our investment
in Research and Development during the past year resulted in the release of 4
additions to our pesticide product line, including AntX, Pro's Choice and two
formulas of TrapX. Our investment also yielded significant testing results on
the new 30-ppm Axenohl formula which in turn allowed us to apply to the EPA for
approval of expanded efficacy claims for our hard surface disinfectant.
Employees
As of October 25, 2002, Innovative Medical Services employed thirty-one people,
twenty-seven of whom are full-time individuals: nine employees in product
assembly and shipping, six employees in sales, marketing and customer service,
six employees in research and development and ten employees in management and
administration. We choose to outsource more expensive, specialized functions
including public relations and selected engineering projects.
ITEM 2. PROPERTIES
Our business operates in a 13,067 square foot facility located in a light
industrial/office park in El Cajon, California. This location houses all
administrative, executive, sales, assembly, shipping and manufacturing
functions. The space is leased from an unaffiliated third party under a
sixty-five month agreement commencing on July 1, 1996. The monthly rental is
$0.74 per square foot plus $0.15 per square foot for maintenance of common
areas. There is also a fixed yearly increase of 4%. We have also signed an
amendment to the lease and exercised an option to lease the building for an
additional five years.
ITEM 3. LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving Innovative Medical Services filed in the Circuit Court of
Pinellas County, Florida by Zedburn Corporation, against us for breach of
contract in October 1997. The breach of contract alleged was for payment of fees
for Mr. David Reitz's and Mr. Steven Durland's services of arranging a public
offering of our common stock. We have filed counterclaims based upon the
Racketeer Influenced and Corrupt Organization (RICO) Act against David Reitz,
Zedburn Corporation, Capital Development Group, Steven Durland and other
defendants. It is our position that Mr. Reitz and others perpetrated a scheme to
defraud us of cash fees and securities in connection with purported services of
arranging a public offering of our common stock. In October 1997, Mr. Reitz and
Zedburn filed for protection under the Federal bankruptcy laws. In August 1998,
Mr. Reitz voluntarily dismissed his bankruptcy and as a result thereof we have
named Mr. Reitz as a defendant to our counterclaims.
We believe that the defendants had perpetrated similar schemes against other
parties. We also believe we have substantially completed discovery and compiled
compelling evidence to prove our claims.
Several of the Defendants filed Motions to Dismiss our counterclaims. A hearing
on the Motions was held on October 1, 1998. Certain of the Motions were granted
pending our amendment of our Counterclaim. We amended our Counterclaims in
accordance with the judge's rulings. Certain Defendants filed second Motions to
Dismiss the amended Counterclaims. A hearing on these latest motions was held in
March 1999, before a different judge than the judge who ruled on the first
motions. On April 20, 1999, orders were entered granting the Defendants' Motions
to Dismiss. However these Orders did not state the basis for the Orders, nor was
our legal counsel provided notice of the Orders or a copy of the new judge's
correspondence offering a "formal ruling" upon request. In May 1999, we filed an
Appeal of the Orders and Motions for Reconsideration based upon inconsistency of
the Orders with the previous judge's rulings and the lack of notice to us. In
August 2001, the Court of Appeals reversed the trial court's ruling and
reinstated our claim against the defendants with the exception of Innovative
Medical Services' RICO action. We intend to pursue a trial as soon as possible.
We have neither accrued a liability in our financial statements regarding this
litigation nor disclosed the matter in the footnotes thereof. We have not done
so because we do not believe there is any merit to Mr. Reitz's claims and that
the likelihood that we will realize a loss from these matters is believed
remote. In addition, we believe that in the unlikely event that we settle, the
amount of any such settlement would not be material to our financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of the fiscal
year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: Innovative Medical Services' common stock is
traded on the NASDAQ SmallCap Market under the symbol "PURE".
(2) High and Low Bid Prices: The following table sets forth high and low
bid prices for each fiscal quarter, as reported by NASDAQ, for the
last two fiscal years. Such quotations represent inter-dealer prices
without retail mark-ups, mark-downs, or commissions and, accordingly,
may not represent actual transactions.
Fiscal 2002 Fiscal 2001
Quarter Ended High Low Quarter Ended High Low
------------------------- ---------- -- ---------- ----------------------- ---------- -- -----------
July 31, 2001 $1.76 $0.47 July 31, 2000 $2.68 $2.52
April 30, 2001 $2.29 $1.58 April 30, 2000 $1.81 $1.75
January 31, 2001 $2.55 $1.85 January 31, 2000 $4.03 $3.75
October 31, 2000 $3.47 $1.90 October 31, 1999 $2.70 $2.21
(3) Security Holders: As of October 25, 2002, we had approximately 201
holders of record of our common stock. This does not include
beneficial owners holding common stock in street name. The closing
price per share on October 25, 2002 was $0.40.
(4) Dividend Plans: We have paid no common stock cash dividends and have
no current plans to do so.
(5) Preferred Stock: There are no shares of preferred stock presently
outstanding.
(6) Changes in Securities: During the fourth quarter of the fiscal year,
we conducted a private placement of common stock and as a result, we
issued 261,000 shares of common stock to seven accredited investors at
a price of $1.00 per share. With respect to the sales made, we relied
on Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the
securities. The securities were offered solely to accredited or
sophisticated investors who were provided all of the current public
information available on Innovative Medical Services.
(7) Securities Authorized for Issuance under Equity Compensation Plans
Number of securities
remaining available for
Number of securities to future issuance under
be issued upon Weighted-average equity compensation plans
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
Plan Category rights warrants and rights column (a))
(a) (b) (c)
-------------------- -------------------------- ----------------------------- ----------------------------
Equity
compensation plans
approved by
security holders 2,967,295 1.85 6,427,278
-------------------- -------------------------- ----------------------------- ----------------------------
Equity
compensation plans
not approved by
security holders 1,150,000 1.41 533,000
-------------------- -------------------------- ----------------------------- ----------------------------
Total 4,117,925 1.77 6,960,278
-------------------- -------------------------- ----------------------------- ----------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results may differ substantially from those referred to herein due to a
number of factors, including but not limited to risks described in the section
entitled Competition and elsewhere in this Form 10KSB. Our consolidated
financial data includes Export Company of America, Inc., Ampromed Comercia
Importacao e Exportacao Ltda., ETI-H2O Corporation, and Nutripure Corporation.
Results of Operations Fiscal 2002 vs. Fiscal 2001
During the year, we realized revenues from multiple product lines in our
different divisions. In order to be more informative regarding distribution of
revenues, discussion of revenues will be in terms of our water treatment segment
and our and bioscience segment which includes silver ionization and pesticide
divisions.
Revenues of $3,206,500 in the fiscal year ended July 31, 2002 were 33% higher
than the $2,409,700 in revenues reported for the fiscal year ended July 31,
2001. The increase was due to increases in revenues in all of our company
divisions with the addition of new products and increased market penetration of
existing products. Water treatment division revenues were $2,189,000, silver
ionization division revenues were $683,100 and pesticide division sales were
$334,400 in 2002. In 2001, water treatment division revenues were $2,057,100,
silver ionization division revenues were $320,300 and pesticide division
revenues were $32,200.
Our water treatment division grew 6% during the year and produced the majority
of our sales in 2002. We believe that the revenue mix will continue to shift
toward the bioscience division products in the coming fiscal year. Although we
had expected even more growth in the water treatment division with the addition
of the Nutripure dealer program, we anticipate that this division will grow at a
quicker pace in the coming year, especially as the water dealer program
continues to expand. This market continues to be very competitive, and we expect
revenues from our other commercial/retail water treatment products to continue
their historic steady growth.
We believe that during fiscal year 2002, we made good progress into our new
bioscience markets with the launch of several additions to the Innovex line of
pesticide products and increased sales of our Axenohl silver ion technology
products.
Revenues in the newly launched pesticide division rose 939% during the year.
Since the formal launch of RoachX in October 2001, we have expanded the Innovex
division from that one product to a more complete line of pest control products,
including RoachX, AntX75, CleanKill, TrapX and Pro's Choice. We believe that
during the past year we concluded the majority of the research testing and
regulatory approvals for our current Innovex pesticide products; therefore,
research and development expenditures for these products should decrease in the
coming year. We face significant competition from larger, better capitalized
companies in this market, but as we continue to gain industry acceptance of our
pesticide products, we expect that revenues will continue to increase rapidly in
the coming year.
During the year, revenues from our Axenohl technology rose 113%. The
disinfectant market is highly competitive, and we anticipate that market
acceptance of a brand new technology may be a long term achievement. In addition
to competition challenges, we believe that the investment necessary to pursue
research testing and regulatory approval for Axenohl products will continue to
be significant. As we receive additional regulatory approvals for Axenohl,
however, we expect revenues to develop quickly. For example, we are currently
awaiting EPA approval on the Clean Kill 30-part per million formulation of Axen.
We believe that approval is imminent, and we also believe that upon receipt of
that approval, sales of Clean Kill 30 will have a significant impact on revenues
in the coming year.
In March 2001, we signed a five-year contract to provide Axenohl to Dodo &
Company, a Korean cosmetics manufacturer and marketer. Under the contract, Dodo
& Company would purchase approximately $1.2 million dollars of product from us
over five years. In addition to the purchase price, the contract calls for us to
receive a reimbursement for research and development and a royalty on sales of
the Axen-containing products. The contract requires Dodo & Company to obtain
appropriate regulatory clearances in South Korea, but we have no documentation
to show that this has been completed. We believe that Dodo & Company has
miscalculated the royalties due to us, and we have requested that Dodo & Company
reevaluate their royalty calculations. Dodo & Company has requested a
renegotiation of the contract including the royalty fee calculation. During the
year, Dodo & Company has continued to expand its A-Clinic Club line to include
over 10 different products, all of which contain Axenohl as an active
ingredient. Because of Dodo & Company's significant investment in the product
line, we believe we will be able to renegotiate the contract to the satisfaction
of both parties. Until this matter is resolved, however, we are unlikely to ship
additional product to Dodo & Company.
Although we think that the pesticide technologies will have the most immediate
material impact on revenues in the coming year, we continue to believe that the
silver ion technologies will ultimately become the largest revenue generator for
Innovative Medical Services.
Gross profit for the year ended July 31, 2002 was $1,607,900 versus $1,047,100
in 2001. Gross profit percentage of 50% in 2002 was higher versus 43% in 2001.
The increase in gross profit percentage was largely due to higher margins
associated with our pesticide and silver ion technology product lines.
Loss from continuing operations for the year ended July 31, 2002 was $2,029,100
versus net loss from continuing operations of $1,821,300 for the same period in
2001. During the year, General and Administrative expenses increased 28% or
$443,300 from $1,584,600 in fiscal 2001 to $2,027,900in fiscal 2002 because of
increased costs associated with developing and marketing the water dealer
program as well as the emerging silver ion and pesticide divisions. Loss from
continuing operations also included expenses for start-up costs of $47,800 for
the year ended July 31, 2002 and $230,000 for the year ended July 31, 2001.
These costs were capitalized as Deferred Acquisition Costs and then written off
as Abandoned Projects before the restatement described in Note 2 of the
financial statements.
Selling expense decreased approximately $32,500, or 4%, from $781,800 in 2001 to
$749,300 in 2002 due primarily to a decrease in sales personnel. Research and
Development costs increased 166%, or $487,500, over the prior year rising from
$293,000 in 2001 to $780,500 in 2002. This increase was the result of continued
time and resources devoted to the development and testing of our emerging
pesticide and silver ion technology product lines.
During the year, we incurred a loss from discontinued operations of
Nutripure.com of $193,500. For the fiscal year 2001, $205,200 of the General and
Administrative expenses have been reclassified in the prior year to Loss from
Discontinued Operations as required by APB Opinion No. 30. Nutripure.com was an
e-commerce website that provided consumers a wide variety of vitamins, minerals,
nutritional supplements, homeopathic remedies and natural products. In December
2001, Bergen Brunswig Corporation requested we release it from its contract to
provide the vitamins, minerals, nutritional supplements, homeopathic remedies
and natural products sold on our Nutripure.com website. We agreed, and,
therefore, on January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we have closed our
e-commerce division. Sales to date from the e-commerce division have not been
material and closing the e-commerce division resulting in cost savings of
approximately $35,000 per quarter in maintenance and service fees, amortization
and labor costs.
Liquidity and Capital Resources Fiscal 2002 vs. 2001
From inception through July 31, 2002, we have financed our operations primarily
through our initial public offering in August of 1996, by a subsequent private
placement in March of 2000, and by other smaller private placement stock sales.
We have no long-term debt and have no plans to obtain long-term financing in the
next twelve months. We believe that sales from our new product lines will not
provide sufficient capital resources to sustain operations and fund product
development until fiscal year 2003. In the short term, we expect to raise
capital through equity sales as necessary to fund future growth until we operate
above the break-even point. We continually evaluate opportunities to sell
additional equity or debt securities, or obtain credit facilities from lenders
to strengthen our financial position. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
During the fiscal year ended July 31, 2002, our current assets to liabilities
ratio decreased from 2.98 to 1.07. Current assets decreased $620,200 from
$1,911,400 to $1,291,200. The decrease was mainly due to a decrease in accounts
receivable of $404,100 from $570,700 in 2001 to $166,600 in 2002. The decrease
was the result of lower sales volume in July of 2002 compared to July of 2001
and to a concentrated effort to collect outstanding receivables in a more
efficient and timely manner. Inventories decreased $115,900 from $711,000 in
fiscal 2001 to $595,100 in fiscal 2002 which reflects a changing product mix and
more efficient purchasing. Noncurrent assets increased by $1,382,900 during the
year. This change was mainly the result of the combination of purchases of
patents and licenses of $1,612,100 and the decrease of $277,800 of deferred
acquisition costs during the current year. Most of the increase in patents and
licenses was for the acquisition of the Axenohl patent which was purchased for
700,000 shares of our common stock valued at $1,540,600. The deferred
acquisition costs were written off as abandoned projects during the year.
Current liabilities increased $569,300 from $640,700 to $1,201,000. The increase
in current liabilities was the result of an increase in notes payable of
$500,000. The note payable was drawn against a $500,000 credit line we
established during the period, which was secured against our accounts
receivable. The terms of the line of credit required us to maintain current
accounts receivable of a minimum of $500,000. At the end of the fiscal year, we
were in technical violation with this provision. We renegotiated the line of
credit in September of 2002 and extended the line of credit to $600,000 with an
interest rate of 1 1/2 % per month secured against our entire assets excluding
the Axenohl patent.
Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our lender
and disperse the funds to the dealer, less a commission charged by us, upon
completion of the contract. The lender disperses funds to us. We record a
liability when the funds are received and relief of liability when funds are
dispersed, and we do not retain liability on the credit extended.
Cash flows used from continuing operations were $1,035,300 in fiscal year 2002
and $1,559,000 in 2001. For fiscal year 2002 cash flows used in investing
activities included $165,200 for the purchase of machinery and equipment and
$59,100 for the cash purchase of patents and licenses. In fiscal 2001 cash flows
used in investing activities included $40,300 for the purchase of machinery and
equipment and for and $621,100 for the purchase of patents and licenses. Also,
we incurred $47,800 and $230,000 in start-up costs during fiscal 2002 and fiscal
2001 respectively. The start-up costs of were expensed and are included in cash
flows used from continuing operations. Cash flows from financing activities were
$1,216,200 in fiscal 2002 and $1,272,400 in fiscal 2001. Financing activities
for the current period included the addition of $500,000 in notes payable from a
line of credit established in September 2001. Cash flows from financing
activities also included an increase of common stock of $716,200 which included
a $400,000 private placement in which we issued 250,000 shares of common stock
to eleven accredited investors at a price of $1.60 per share. In addition,
during the fourth quarter of the fiscal year, we conducted a private placement
of common stock and as a result, issued 261,000 shares of common stock to seven
accredited investors at a price of $1.00 per share. With respect to the sales
made, we relied on Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. In
addition, we issued 200,000 shares of common stock for services during the
fourth quarter of 2002 at $0.50 per share. We received approximately $68,000
from the exercise of options during the period. In the prior period, cash flows
from financing activities also included the following:
1. A $250,000 private placement in October 2000 in which we issued 94,340
shares of common stock to six investors at $2.65 per Unit.
2. A $250,000 private placement in January 2001 in which we issued 83,334
shares of common stock to six investors at $3.00 per Unit. Each Unit
contained one share of common stock and a warrant to acquire an
additional share of common stock for $4.00 per share up to January 28,
2003.
3. A $225,000 private placement in April 2001 in which we issued 150,000
shares of common stock to four investors at $1.50 per Unit. As part of
this registration we also issued $200,000 of convertible debentures at
10% interest due July 31, 2001. The holders of this debenture are
entitled to convert all or any amount over $10,000 of principal face
amount and accrued interest into Units each consisting of one share of
Common Stock and a Common Stock Purchase Warrant. The conversion price
for each Unit shall equal 80% of the average closing bid price for the
five trading days immediately preceding the receipt of Notice of
Conversion. The debentures were converted to common stock on July 31,
2001.
4. In addition, approximately $245,135 was received from exercise of
outstanding stock options. The total decrease in cash and cash
equivalents for 2002 was $55,800 as compared to a decrease of $914,200
during the same period in 2001.
Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended July 31, 2002 and July 31, 2001
Independent Accountants' Report
Board of Directors
Innovative Medical Services
We have audited the accompanying consolidated balance sheets for
Innovative Medical Services as of July 31, 2002 and 2001, and the related
consolidated statements of operations, statement of accumulated deficits and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements as of July 31, 2002 and 2001 and
for the years then ended have been restated to correct errors as described in
Note 2.
In our opinion, the consolidated financial statements, referred to
above, present fairly, in all material respects, the financial position of
Innovative Medical Services as of July 31, 2002 and July 31, 2001, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles in the United States of
America.
/s/ Miller and McCollom
-----------------------------------
MILLER AND MCCOLLOM, CPAs
4350 Wadsworth Boulevard, Suite 300
Wheat Ridge, Colorado
October 27, 2002, except for the third paragraph above and Note 2, which is as
of June 13, 2003
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------
July 31
2002 2001
Restated Restated
(Note 2) (Note 2)
------------ -------------
ASSETS
Current Assets
Cash and cash equivalents $ 151,257 $ 207,092
Accounts receivable, net of allowance for doubtful
accounts of $ 111,000 at July 31, 2002
and $115,000 at July 31, 2001 166,601 570,734
Due from officers and employees 209,437 240,001
Inventories 595,071 711,018
Prepaid expenses 177,445 182,555
---------- ----------
Total current assets 1,299,811 1,911,399
---------- ----------
Property, Plant and Equipment
Property, plant and equipment 613,909 903,072
---------- ----------
Total property, plant and equipment 613,909 903,072
---------- ----------
Noncurrent Assets
Deposits 8,955 8,127
Patents and licenses 2,626,376 1,014,282
---------- ----------
Total noncurrent assets 2,635,330 1,022,409
---------- ----------
Total assets $ 4,549,050 $ 3,836,881
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 591,031 $ 543,992
Accrued liabilities 118,975 96,691
Loans from shareholders 500,000 --
---------- ----------
Total current liabilities 1,210,006 640,683
---------- ----------
Stockholders' Equity
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
8,400,899 at July 31, 2002 and
6,954,699 at July 31, 2001 13,976,448 11,619,665
Warrants: issued and outstanding 15,000 warrants 8,610 --
Accumulated deficit (10,646,014) (8,423,467)
---------- ----------
Total stockholders' equity 3,339,044 3,196,198
---------- ----------
Total liabilities and stockholders' equity $ 4,549,050 $ 3,836,881
============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------
For the Years Ended
July 31
2002 2001
Restated Restated
Note 2 Note 2
--------------- -----------------
Net revenues $ 3,206,448 $ 2,409,721
Cost of sales 1,598,553 1,362,670
----------- -----------
Gross profit 1,607,895 1,047,051
----------- -----------
Selling expenses 749,348 781,810
General and administrative expenses 2,027,875 1,584,591
Research and development 780,510 292,964
Start-up Costs 47,831 230,000
----------- -----------
Total operating costs 3,605,563 2,889,365
----------- -----------
Loss from operations (1,997,668) (1,842,314)
----------- -----------
Other income and (expense):
Interest income 9,999 33,738
Interest Expense (39,024) (11,100)
Other (2,400) (1,600)
----------- -----------
Total other income (expense) (31,425) 21,038
----------- -----------
Loss from continuing operations before minority
interest in subsidiary (2,029,093) (1,821,276)
----------- -----------
Minority interest in subsidiary operations -- 14,972
Loss from continuing operations (2,029,093) (1,806,304)
----------- -----------
Discontinued operations:
Loss from discontinued operations 152,405 205,191
Loss from disposal of discontinued operations 41,049 --
----------- -----------
Total discontinued operations 193,454 205,191
----------- -----------
Net loss $(2,222,547) $(2,011,495)
=========== ===========
Net loss per common share, basic and diluted
Continuing operations $ (0.27) $ (0.28)
Discontinued operations (0.02) (0.03)
----------- -----------
Net loss $ (0.29) $ (0.31)
=========== ===========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------
For the Years Ended
July 31
2002 2001
Restated Restated
Note 2 Note 2
------------- --------------------
Cash flows from operating activities
Net loss $ (2,222,547) $ (2,011,495)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 187,870 96,961
Depreciation 266,530 193,477
Minority interest in subsidiary operations - (61,697)
Services paid for with stock 100,000 42,168
Changes in assets and liabilities:
(Increase) decrease in restricted cash - 204,887
(Increase) decrease in accounts receivable 404,133 (159,409)
(Increase) decrease in due from officers and employees 30,564 (13,272)
(Increase) decrease in prepaid expense 5,110 (168,358)
(Increase) decrease in inventory 115,947 85,118
(Increase) decrease in deposits (827) 5,956
(Increase) decrease in goodwill - -
(Increase) decrease in intangible assets - -
Increase (decrease) in accounts payable 47,039 235,180
Increase (decrease) in accrued liabilities 22,283 25,291
------------ ----------
Net cash provided (used) by operating
activities (1,035,287) (1,525,193)
------------ ----------
Cash flows from investing activities
Purchase of patents and licenses (71,495) (621,114)
Purchase of property, plant and equipment (165,236) (40,297)
------------ ----------
Net cash (used) in investing activities (236,731) (661,411)
------------ ----------
Cash flows from financing activities
Proceeds from debt obligations 500,000 200,000
Payments on debt obligations - (210,592)
Proceeds from sale of common stock 716,183 1,282,972
------------ ----------
-
Net cash provided by financing activities 1,216,183 1,272,380
------------ ----------
Net increase (decrease) in cash and cash equivalents (55,835) (914,224)
------------ ----------
Cash and cash equivalents at beginning of period 207,092 1,121,316
------------ ----------
Cash and cash equivalents at end of period $ 151,257 $ 207,092
============== ==========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 39,024 $ 11,100
Cash paid for taxes paid $ 2,400 $ 1,600
Noncash investing and financing activities:
Value of shares issued in exchange for Silver Ion Technology patent $1,540,600
Value of shares issued for services $ 100,000
Value of options issued for services $ 209,070
Value of shares issued in exchange for Nutripure.com minority interest $ 550,011
Value of shares issued in exchange for ETI H2O $ 140,953
The accompanying notes are an integral part of these financial statements.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 1. Organization and Summary of Significant Accounting Policies
This summary of significant accounting policies of Innovative Medical Services
is presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles in the United
States of America and have been consistently applied in the preparation of the
financial statements. The financial statements are stated in United States of
America dollars.
Organization and Business Activity
Innovative Medical Services was incorporated in San Diego, California on August
24, 1992 as a provider of pharmaceutical water purification products. Based on
revenues, the Company's primary business is the sale and manufacture of
residential and commercial water filtration systems. In addition, the Company
produces, manufactures and licenses silver ion bioscience technologies (Axenohl
and Axen) and produces products for the pesticide industry (Innovex).
In October of 1998, the Company formed a subsidiary, EXCOA Nevada to purchase
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 and transferred it to EXCOA Nevada.
In December 1999, the Company incorporated NUTRIPURE.COM in the state of Nevada
to pursue the creation of a health products e-commerce website. The Company
discontinued operation of the website in January of 2002.
In November 2000, Innovative Medical Services acquired 100% of the stock of
ETIH2O, Inc, a privately held technology corporation that developed Axenohl and
is responsible for processing, and production of Axenohl and Axen. ETI-H2O is
also responsible for all supervision of all research, studies, data and quality
control of the Axenohl/Axen product line.
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.
Revenue Recognition
Generally, the company recognizes income based upon concluded arrangements with
customers and when all events have occurred by delivery or performance. Certain
income is recognized upon shipment where the sale is made f.o.b. shipping point
including sales to dealers and pharmacists. Customer acceptance provisions and
installation procedures accompanying delivery are minor in nature, and the
Company has not experienced any material expense in satisfying warranties and
returns.
The Company has a program of providing financing to independent dealers 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 the commissions earned as revenues when received.
Most of the Company's chain customers have entered into multi-year contracts for
the Customer Service Plan 2000. The CSP 2000 provides an extended warranty on
Innovative Medical Services Fillmaster pharmacy products; significant discounts
on maintenance item costs; free software upgrades for the Fillmaster 1000e and
Scanmaster; automatic replacement filter shipments; and simplified, annual
invoicing. When the customer buys a dispenser on the Customer Service Plan 2000
they agree to pay a fixed annual fee that covers replacement filters and parts.
The filters should be replaced once a year. In order to match income with
related costs (and for simplicity in accounting and billing) the Company bills
the customer the annual fee, and recognizes the revenue, in the same month that
it ships the replacement filters to the store. This is done one year after the
store is added to the Plan and each year thereafter. Future warranty costs
associated with the CSP 2000 Plan are discussed in Note 18. Accounts Receivable
The Company sells on terms of cash or net 30 days. Invoices not paid within
stated terms are considered delinquent. The Company analyzes its accounts
receivable periodically and recognizes an allowance for doubtful accounts based
on estimated collectibility. Individual accounts deemed uncollectible are
charged to the allowance.
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. 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 $780,500 and $293,000 in
the fiscal years ended July 31, 2002 and 2001, 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.
Amortization of Intangible Assets
The cost of patents acquired is amortized on a straight-line basis over the
remaining lives of the patents. Licenses are amortized on a straight-line basis
over periods ranging from 15 to 20 years. The weighted average amortization
period for all patents and licenses is 17.71 years. The estimated amortization
expense over each of the next five years is $145,700.
Amortization expense for the years ended July 31, 2002 and July 31, 2001 was
$187,900 and $97,000, 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, the Company
periodically analyzes its intangible assets and long-lived assets for potential
impairment, assessing the appropriateness of lives and recoverability of
unamortized balances through measurement of undiscounted operation cash flows on
a basis consistent with accounting principles generally accepted in the United
States of America.
Inventory
Inventories are stated at the lower of cost or net realizable value using the
average cost method. Inventories at July 31 consisted of:
2002 2001
------------ ------------
Finished Goods $ 257,600 $ 246,400
Work in Progress 29,900 150,800
Raw Materials 334,600 313,800
------------ ------------
$ 622,100 $ 711,000
------------ ------------
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 carrying amounts for 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 line of credit
approximates fair value since the current borrowing rates available for
financing are similar in terms.
Advertising and Promotional Costs
Cost of advertising and promotion are expensed as incurred. Such costs were
$448,800 and $276,500 for the years ended July 31, 2002 and July 31, 2001,
respectively. Deferred Acquisition Costs The Company capitalizes costs incurred
to evaluate and acquire other businesses and technologies. If the acquisitions
are successful these costs are reclassified as a cost of the investment or
expensed as loss on abandoned projects when the acquisitions are not successful.
Deferred costs were zero at July 31, 2002 and $230,000 at July 31, 2001.
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.
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, 2002 July 31, 2001
------------------ -------------------
Shares outstanding 8,400,899 6,954,699
Weighted average number of shares
actually outstanding 7,607,146 6,420,926
Stock Options 3,691,250 1,815,625
Warrants 0 1,797,500
------------- ------------
Total weighted average shares 11,298,396 10,034,051
------------- ------------
Loss from continuing operations (2,251,439) (1,577,033)
Loss from discontinued operations (193,454) (205,191)
--------- ---------
Net loss $(2,444,893) $(1,782,224)
------------ ------------
Net loss per common share, basic
and diluted
Continued operations $ (0.30) $ (0.25)
Discontinued operations (0.02) (0.03)
--------- ---------
Net loss $ (0.32) $ (0.28)
========= =========
On August 8, 2001, all outstanding warrants expired without exercise.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and is effective for all business combinations initiated after
June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under
certain circumstances, and written off when impaired, rather than being
amortized as previous standards required. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001 provided that the first interim
period financial statements have not been previously issued. The adoption of
SFAS's 141 and142 did not have a material effect on the Company's operating
results or financial condition.
Income Taxes
The Company records deferred taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
statement requires recognition of deferred tax assets and liabilities for
temporary differences between the tax bases of assets and liabilities and the
amounts at which they are carried in the financial statements, based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Other
The Company's fiscal year end is July 31.
The Company paid no cash dividends during the periods presented.
Shipping and handling costs payable by the Company are charged to cost of sales.
Certain comparative figures have been reclassified to conform to the current
year presentation.
All of the Company's assets are located in the United States.
Note 2. Restatement of Financial Statements - Start-up Costs and Warranty
Liability
The accompanying financial statements have been restated to correct an error in
the recording and reporting of Start-up Costs and the Warranty Liability of the
Company.
The Company expended $230,000 during the year ended July 31, 2001 and an
additional $47,831 during the July 31, 2002 fiscal year in an effort to acquire
and setup a Korean corporation. The Company capitalized these costs as Deferred
Acquisition costs as incurred. The Company later determined the venture was not
feasible and decided not to go forward with the project. The total costs of
$277,831 were written-off as Abandoned Projects at July 31, 2002. We now believe
the treatment of these costs was not correct. The accompanying financial
statements now show these costs as expensed when incurred as Start-up Costs. The
effect of this restatement is to increase the net loss at July 31, 2001 by
$230,000 and to decrease the net loss at July 31, 2002 by $230,000.
In previous years the Company had not recorded a liability for its future
warranty obligation. Because the Company has now computed and booked this
liability the accompanying financial statements have been restated to include
this obligation. The warranty liability was $34,520 at July 31, 2000 and is
shown in the Equity and Common Stock footnote (Note 8) as a prior period
adjustment. A liability of $33,791 at July 31, 2001 and $41,445 at July 31, 2002
are now included in Accrued Liabilities. The income statement effect of theses
items was to reduce net loss at July 31, 2001 in $729 and to increase net loss
at July 31, 2002 of $7,654.
The accompanying financial statements also include 15,000 warrants issued for
$8,310 that were omitted from the July 31, 2002 balance sheet in error.
Note 3. Cash and Cash Equivalents
For purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. At July 31, 2002, the Company has
deposits of $30,052 in excess of FDIC insured limits. At July 31, 2001, the
Company had no deposits in excess of FDIC insured limits.
Note 4. Due from Officers and Employees (Related Parties)
At July 31, 2002, notes receivable of $64,075 represents amounts due from
officers and $145,362 represents amounts due from employees. At July 31, 2001,
notes receivable of $66,561 represents amounts due from officers and $173,440
represent amounts due from employees. Increases in the officer loans during the
current year were $17,644, pay-downs of these loans totaled $20,100 in the same
period. 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%. Advances to employees of amounts under $10,000 are not
charged interest. The total of these loans to employees of under $10,000 was
$7,620 at July 31, 2002 and $15,268 at July 31, 2001.
Notes receivable includes $32,606 from terminated employees for which the
Company is litigating for repayment.
Note 5. Property, Plant and Equipment
The following is a summary of property, plant, and equipment - at cost, less
accumulated depreciation:
July 31, 2002 July 31, 2001
--------------- -----------------
Computers and equipment $ 1,076,466 $ 1,061,197
Furniture and fixtures 103,855 103,855
Website 207,916 207,916
Vehicle 50,985 50,985
Leasehold improvements 307,606 307,606
--------------- -----------------
1,746,828 1,731,559
Less: accumulated depreciation
and amortization 1,091,870 828,487
--------------- -----------------
Total $ 654,958 $ 903,072
--------------- -----------------
Depreciation expense charged to general and administrative expense for the years
ended July 31, 2002 and July 31, 2001 was $266,500 and $193,500, respectively.
Note 6. Loans from Shareholder The details relating to debt are as follows:
July 31, 2002 July 31, 2001
------------- -------------
Line of Credit (from shareholder)
$500,000 line of credit, interest at 12%
Due and payable September 13, 2002
Secured by accounts receivable $ 500,000 $ -
Current maturities of notes payable included in
current liabilities 500,000 -
------------- -------------
Total long term debt $ - $ -
------------- -------------
The terms of the line of credit required the Company to maintain current
accounts receivable of a minimum of $500,000. At the end of year, the Company
was in technical violation with this provision. The Company renegotiated the
line of credit in September of 2002 and extended the line of credit to $600,000
with an interest rate of 1 1/2 % per month secured against the entire assets of
the Company excluding the Axenohl patent.
Note 7. Commitments
On May 14, 1996, the Company entered into an operating lease agreement for its
home office which expires (under extension) in October 2006. The lease includes
a yearly increase of 4%. The rental expense recorded in general and
administrative expenses for the years ended July 31, 2002 and July 31, 2001 was
$144,348 and $133,968, 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
------------------ ------
2003 $144,348
2004 $150,122
2005 $156,127
2006 $162,372
2007 $ 37,970
The Company has an employment contract with its Chief Executive
Officer/President which includes a provision for him to be paid an amount equal
to 3% of the Company's net income before taxes, if any.
During the year the Company acquired the patent for Axenohl, a silver ion based
technology (Note 14). The Company agreed to pay royalties in the amount of 5% of
gross Axenohl sales until March 2018, the end of the life of the patent. There
are minimum royalties due of $1,000,000 for the period of November 2001 to July
31, 2004 and for each fiscal year thereafter. Future minimum royalty payments
required for each of the 5 succeeding years are as follows:
Year Ended July 31 Amount
------------------ ------
2003 $ 0
2004 $1,000,000
2005 $1,000,000
2006 $1,000,000
2007 $1,000,000
The maximum royalty payments cannot be estimated because they are based on
future sales.
Note 8. Equity and Common Stock
The following schedule summarizes the change in equity:
Common Common
Stock Stock Warrants Warrants Accumulated Total
Shares $ Issued $ Deficit
------------- --------------- ------------- ------------------------------------------
Balance, July 31, 2000 5,942,903 $10,018,873 4,472,500 $ 108,750 $(6,377,452) $(3,750,171)
Prior Period
Adjustment
(See Note 2) (34,520) (34,520)
Sale of Stock 180,967 431,814 431,814
Private Placement 421,314 851,158 851,158
Options Issued for
Services 64,500 209,070 209,070
Stock Dividends 121,961
Acquisitions 223,054
Net Loss 0 0 0 0 (2,011,495) (2,011,495)
-------------- -------------- -------------- -------------- ----------- -----------
Balance, July 31, 2001 6,954,699 $11,510,915 4,472,500 108,750 $(8,423,467) (3,196,198)
--------- ----------- --------- ------- ------------ -----------
Sale of Stock 35,200 75,183 75,183
Private Placement 511,000 641,000 641,000
Shares Issued for
Services 200,000 100,000 100,000
Warrants Issued for
Services 15,000 8,610 8,610
Expiration of Warrants 108,750 (4,472,500) (108,750)
Purchase of Patents 700,000 1,540,600 1,540,600
Net Loss 0 0 0 0 (2,222,547) (2,222,547)
-------------- -------------- -------------- -------------- ----------- ----------
Balance, July 31, 2002 8,400,899 $13,976,448 $ 15,000 $ 8,610 $(10,646,014) $(3,339,044)
========= =========== ======== ======== ============= ============
The Company had issued Class A warrants which entitled 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 were 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.
The Company had issued Class Z warrants which entitled 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 were 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.
The Company also has 5,000,000 shares of preferred stock authorized, no
preferred stock has been issued.
On August 8, 2001 the total 3,687,500 Class A warrants and the total 785,000
Class Z warrants expired without exercise.
On October 26, 2000, Innovative Medical Services distributed a dividend of one
share of Innovative Medical Services' common stock for every fifty shares held
of record on November 6, 2000, with fractional shares rounded up to the nearest
whole share, for a total of 121,961 shares. ARB 43 specifies that stock
dividends in small percentages are to be accounted for by transferring an
appropriate amount from earned surplus to permanent capital. The Company has no
earned surplus, and therefore the Company did not feel this accounting was
possible or appropriate. Nor could we find any basis or authority for charging
the dividend to the accumulated deficit account. Therefore the Company has
accounted for the dividend as a recapitalization with no dollar entries made to
capital accounts since the Company has no-par stock. The amount that would have
been charged to Earned Surplus and credited to Paid in Capital would have been
the 121,961 shares multiplied by market price of the stock at the time
(approximately $3.00 per share) or $356,883.
Note 9. Related Party Transactions
See Note 4.
Note 10. Stock Option Plans
The Company has the following stock option plans (the Plans) pursuant to which
options to acquire common stock have been granted.
1996 Incentive Stock Option Plan: Approved by Shareholders in April, 1996 with
1,000,000 shares authorized under this Plan. The options have a five-year term
with vesting ratably over a five-year period.
1996 Directors and Officers Stock Option Plan: Adopted by the Board in April,
1996 with 1,000,000 shares authorized under this Plan. The maximum number of
shares subject to options granted under this Plan to any one Director or Officer
shall not exceed 200,000 shares in any 12-month period. The options have a
five-year term with vesting ratably over a five-year period.
Amended 1998 Directors and Officers Stock Option Plan: Approved by Shareholders
in December, 1998 with 2,000,000 shares authorized under this Plan. The maximum
number of shares subject to options granted under this Plan to any one Director
or Officer shall not exceed 200,000 shares in any 12-month period. The options
have a five-year term with vesting ratably over a five-year period.
2001 Directors and Officers Stock Option Plan: Approved by Shareholders in
January 2001 with 1,000,000 shares authorized under this Plan. The maximum
number of shares subject to options granted under this Plan to any one Director
or Officer shall not exceed 200,000 shares in any 12-month period. The options
have a five-year term with vesting ratably over a five-year period.
2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001 with
1,000,000 shares authorized under this Plan. The options have a five-year term
with vesting ratably over a five-year period.
2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January
2001 with 500,000 shares authorized under this Plan. The maximum number of
shares subject to options granted under this Plan to any one participant shall
not exceed 50,000 shares in any 12-month period. The options have a five-year
term with vesting ratably over a five-year period.
On March 11, 2002, the Company's shareholders approved the Innovative Medical
Services 2002 Employee Incentive 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 key employees and non-employee directors 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 "Incentive Stock Options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, for certain key employees.
The Plan is administered by an Administrative Committee whom shall serve a
one-year term. Subject to anti-dilution provisions, the Plan may issue Options
to acquire up to 4,000,000 shares to Key Employees. 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. 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. The Plan may be
terminated, modified or amended by the Board of directors upon the
recommendation of the Administrative Committee. The options vest ratably over a
five-year period.
On March 11, 2002, the Company's shareholders approved the Innovative Medical
Services 2002- Non-Qualified Stock Option Plan. The purpose of the Plan is to
advance the business and development of the Company and its shareholders by
affording Eligible Plan Participants the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. Eligible Plan Participants include the Directors and
Officers of the Company, consultants, advisors and other individuals deemed by
the Compensation Committee to provide valuable services to the Company but who
are not otherwise eligible to participate in the Employee Incentive Stock Option
Plan.
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 Eligible Plan
Participants. The Company will not receive any consideration for the grant of
options under the Plan and approximate market value of the shares to be reserved
for the plan is $4,000,000 based upon the average thirty trading day closing
price for the Company's common stock for the period ending January 31, 2002. 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.
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 recording the
fair value of the stock options granted over the anticipated service period.
The effect of applying FAS 123 on the years ended July 31, 2002 and 2001 pro
forma net loss as stated below is not necessarily representative of the effects
on reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under FAS 123, the Company's
net loss in the years ended July 31, 2002 and 2001 would have been approximately
$2,856,400 and $2,420,600 or $(0.38) per share and $(0.38) per share,
respectively, on a diluted basis. Compensation cost for non-employees of $27,300
was charged to income in the year ended July 31, 2002 and zero in the year ended
July 31, 2001. The weighted average fair value of the options granted during the
years ended July 31, 2002 and 2001 are estimated at $1.13 per share and $1.22
per share, respectively, on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for grants in 2002 and
2001; no dividend yield, volatility of 101.48% and 98.79%, respectively; a
risk-free interest rate of 5.25% and 5.50%, respectively and an expected life of
2.98 years from date awarded.
A summary of stock option activity is as follows:
Weighted-Average
Number of Shares Exercise Price ($)
--------------------- --------------------
Balance at July 31, 2000 2,035,540 1.55
Granted 997,000 2.21
Exercised (203,824) 1.78
Forfeited (93,750) 1.50
--------
Balance at July 31, 2001 2,734,966 1.72
==========
Granted 1,850,000 1.56
Exercised (35,200) 1.93
Forfeited (338,091) 1.63
---------
Balance at July 31, 2002 4,21,675 1.74
==========
Outstanding Exercisable
Weighted Weighted
Range of Number Average Average Weighted
Exercise Shares Remaining Life Exercise Number Average
Prices Outstanding (in years) Price Exercisable Price
-------------------- ------------------- ---------------- ----------- --------------- ---------
$0.56 to $0.74 635,000 3.49 $0.59 335,000 $0.56
$1.00 533,125 1.81 $1.00 523,125 $1.00
$1.31 to $1.90 547,300 2.39 $1.72 532,500 $1.73
$2.00 1,600,000 3.25 $2.00 1,300,000 $2.00
$2.10 to $2.50 460,000 4.18 $2.11 460,000 $2.11
$2.93 to $3.56 436,250 2.17 $3.05 436,250 $3.05
4,211,675 2.98 $1.74 3,586,875 $1.82
========== ==========
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, 2001 and July 31, 2002.
Note 12. Income Taxes
The current provisions for income taxes of $2,400 for fiscal year ended July 31,
2002 and $1,600 for July 31, 2001 is the minimum franchise tax paid to the State
of California regardless of income or loss. The Company files federal and
California consolidated tax returns with its subsidiaries.
At July 31, 2002, the Company had federal, and California tax net operating loss
carryforwards of approximately $8,968,100 and $3,789,500 respectively. At July
31, 2001, the Company had federal, and California tax net operating loss
carryforwards of approximately $7,107,301 and $2,766,100 respectively. The
difference between the financial reporting and the federal tax loss
carryforwards 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
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, 2021. The
California tax loss carryforwards will begin to expiring in fiscal year ended
July 31, 2011, unless previously utilized and will completely expire in fiscal
year ended July 31, 2021.
The Company has total deferred tax assets of $3,325,700 and $1,263,000 for the
fiscal years ended July 31, 2002 and 2001, 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, 2002 was $2,062,700.
Significant components of the Company's deferred tax assets are as follows:
July 31, 2002 July 31, 2001
============= =============
Net operating loss carryforward $ 3,547,800 $ 1,222,000
Depreciation and amortization 90,500 0
Accrued expenses and calculation allowances (342,400) 36,000
Other 29,800 5,000
------ -----
Total deferred tax assets 3,325,700 1,263,000
Valuation allowance for deferred tax assets (3,325,700) (1,263,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
========== ==========
A reconciliation of income taxes computed using the statutory income tax
compared to the effective tax rate is as follows:
2002 2001
----- ----
Federal tax benefit at the expected statutory rate 34 % 34 %
State income tax, net of federal tax benefit 9 9
Valuation allowance (43) (43)
---- ----
Income tax benefit - effective rate 0 % 0 %
==== ====
Note 13. Risks and Uncertainties
The Company faces competitive risks for its Axenohl and pesticide products
because the products displace traditional technologies sold by better
capitalized and established companies.
A significant part of the Company's revenues are from pharmaceutical water
products.
Note 14. Business Segment and Sales Concentrations
In accordance with the provisions of SFAS No. 131, certain information is
disclosed based on the way management organizes financial information for making
operating decisions and assessing performance. In determining operating
segments, the Company reviewed the current management structure reporting to the
chief operating decision-maker ('CODM') and analyzed the reporting the CODM
receives to allocate resources and measure performance.
The Company's business activities are divided, managed and conducted in two
basic business segments, the Water Treatment segment and the Bioscience segment.
These two segments were determined by management based upon the inherent
differences in the end use of the products, the inherent differences in the
value added processes made by the Company, the differences in the regulatory
requirements and the inherent differences in the strategies required to
successfully market finished products. The Water Treatment segment includes
Commercial Water and Residential Retail products and the Nutripure Water Dealer
program. Bioscience includes Axenohl (Silver Ion Technology) and the Innovex
line of pest control products.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including internal profit and
loss statements prepared on a basis not consistent with U.S. generally accepted
accounting principles. Reconciling amounts consist of unallocated general and
administrative expenses.
Water Reconciling
Treatment Biosciences Amounts Consolidated
----------- ----------- ----------- ------------
2001
----
Revenues
Commercial Water Treatment
--------------------------
Fillmaster Products $1,224,200 $1,224,200
---------- ----------
Replacement Filters (Includes CSP 2000) 474,700 474,700
---------- ----------
Residential Water Treatment 190,800 190,800
---------------------------
Water Dealer Program 167,400 167,400
--------------------
Silver Ionization $320,300 320,300
-----------------
Pesticide 32,300 - 32,300
--------- ---------- -------- ----- --------
Total Revenues $2,057,100 $352,600 $ 0 $ 2,409,700
------------------- ========== ======== ===== ===========
Operating Income/(Loss) $ 210,600 $(360,600) $(1,632,200) $(1,782,200)
----------------------- --------- ---------- ------------ ------------
Segment Assets $1,127,500 $789,900
-------------- ---------- --------
Water Reconciling
Treatment Biosciences Amounts Consolidated
----------- ----------- ----------- ------------
2002
----
Revenues
Commercial Water Treatment
--------------------------
Fillmaster Products $1,161,800 $1,161,800
---------- ----------
Replacement Filters (Includes CSP 2000) 524,000 524,000
---------- ----------
Residential Water Treatment 106,400 106,400
---------------------------
Water Dealer Program 396,700 396,700
--------------------
Silver Ionization $683,100 683,100
-----------------
Pesticide 334,400 - 334,400
--------- ---------- -------- ----- --------
Total Revenues $2,188,900 $1,017,500 $ 0 $ 3,206,400
------------------- ========== ======== ===== ===========
Operating Income/(Loss) $ 186,100 $(717,300) $(1,913,700) $(2,444,900)
----------------------- --------- ---------- ------------ ------------
Segment Assets $ 790,200 $2,450,100
-------------- ---------- ----------
Significant customers primarily consisted of domestic retail chain pharmacies.
Sales concentrations to major chain stores were approximately $1,107,200 and
export sales were $584,600 for the year ended July 31, 2002. Sales
concentrations to major chain stores were approximately $1,294,600 and export
sales were $390,100 for the year ended July 31, 2001 No customer accounted for
more than 10% of consolidated sales.
Note 15. Patent Acquisition
On November 30, 2001, the Company acquired the patent for Axenohl, a silver ion
based technology which is the basis for the Company's silver ion products. The
Company previously licensed the use of this patent.
The Company purchased the patent for 700,000 shares of its common stock plus
certain expenses. The Company valued the patent at $1,540,600 based on the
market price of the stock exchanged. In addition, the Company agreed to pay
royalties in the amount of 5% of gross Axenohl sales until March 2018, the end
of the life of the patent. There are minimum royalties due of $1,000,000 for the
period of November 2001 to July 31, 2004 and for each fiscal year thereafter.
Innovative Medical Services has the right, in its sole and absolute discretion,
to pay the minimum royalty in cash or in common stock at prevailing market
prices. If the Company determines it does not wish to pay the minimum royalty
payment, it has the option at any time to transfer the patent back to the prior
owner rather than pay the minimum royalty.
Note 16. Business Combinations
In November 2000, Innovative Medical Services acquired 100% of the stock of
ETIH2O, Inc., a Florida corporation, for 56,381 shares of IMS stock valued at
$140,953 based on market value of the stock exchanged ($2.50 per share). The
transaction was recorded using the purchase method of accounting. Assets and
liabilities were recorded based on fair value and no goodwill was recorded in
the transaction. The Company merged ETI-H2O with a newly formed Nevada
corporation of similar name and dissolved the Florida corporation. ETI-H2O, a
privately held technology corporation, developed Axenohl and is responsible for
processing, and production of Axenohl and Axen. ETI-H2O is also responsible for
all supervision of all research, studies, data and quality control of the
Axenohl/Axen product line. The results of operations for ETI-H2O are included in
the consolidated financial statements since the date of acquisition. The
acquired entity was a startup company, if results of operations were included in
prior periods and shown as though the companies had been combined at the
beginning of the period, it would not be materially different from the
consolidated financial statements of Innovative Medical Services.
The assets acquired and liabilities assumed are as follows:
Assets:
Notes Receivable $ 33,655
Inventories 32,077
Equipment 16,932
Licensing & Distribution Rights 118,324
-----------
Total Assets 200,988
-----------
Liabilities $ 60,035
-----------
Note 17. Discontinued Operations
In December 1999, the Company formed NUTRIPURE.COM as a wholly owned subsidiary
to operate an e-commerce health website, composed primarily of Bergen Brunswig
products. On January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we closed our e-commerce
division. The Nutripure subsidiary now is holding the website for resale, which
is its only remaining asset. Assets of the subsidiary were zero at July 31, 2002
and at $187,600 July 31, 2001. Revenues from discontinued operations were $1,800
in 2002 and $7,000 in 2001. No income tax expense was allocated to discontinued
operations because of the uncertainty of realizing net operating loss
carryforwards.
Note 18. Subsequent Events
On August 30, 2002, 60,000 shares of common stock were issued in exchange for a
1 year agreement for EPA regulatory consulting. On September 18, 2002, 120,000
shares were issued in exchange for a 1-year consulting agreement to facilitate
the identification and facilitation of sponsored research relationships and
outlicensing opportunities for the Company. On September 18, 2002, 65,000 shares
were issued in exchange for a 1-year marketing and business development
consulting agreement. On September 18, 2002, options on 135,000 shares were
exercised.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors Innovative Medical Services and their ages
are as follows:
Name Age Position
------------------------- ---------- ------------------------------------------
Michael L. Krall 50 President, CEO, Chairman, Director
Gary Brownell, CPA 54 Treasurer CFO, Director
Gene Auerbach 58 Chief Operating Officer
Donna Singer 32 Executive Vice President, Director
Dennis Atchley, Esq. 50 Secretary
Greg Barnhill 49 Director
Dennis Brovarone 47 Director
Patrick Galuska 43 Director
Eugene Peiser, PD 71 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.
GENE AUERBACH Mr. Auerbach is the Chief Operating Officer of Innovative Medical
Services. Prior to joining the Company in June 2002, Mr. Auerbach served as
Senior Vice President, Global Supply Chain for Estee Lauder Companies (NYSE: EL)
in New York City. Previously, he served as Senior Vice President for Development
and International Development at AutoZone (NYSE: AZO) in Memphis, Tennessee.
Prior to joining AutoZone, Mr. Auerbach gained significant international
experience as Regional Director, Asia for Dairy Farm International (Jardines),
where he played a key role in the executive management of 1400 retail stores in
eight countries, including supermarkets, drug stores, convenience stores and
restaurants. Before joining Dairy Farm International, Mr. Auerbach held the
position of Senior Vice President at Costco (NasdaqNM: COST) and, prior thereto,
Executive Vice President for Price Club. Before joining Price Club/Costco, Mr.
Auerbach served 22 years in the US Navy where he was, and still is, the youngest
officer ever selected for Captain (06) in the history of the Navy Supply Corps.
Mr. Auerbach holds a BA degree in Business Administration from University of
Washington and an MBA degree from Wharton School of Finance and Commerce.
GREGORY H. BARNHILL Mr. Barnhill is Managing Director of North American Equity
Sales at Deutsche Bank Securities, Inc., Baltimore, MD. He joined the firm in
1975, following his graduation from Brown University with an AB degree in
economics.
DENNIS BROVARONE Mr. Brovarone has been practicing corporate and securities law
since 1986 and as a sole practitioner since 1990. He was elected to the
Company's Board of Directors in April 1996. From December 1997 to April 2001,
Mr. Brovarone served as the President and Chairman of the Board of Directors of
Ethika Corporation, a publicly held, Mississippi corporation investment holding
company with its office in Littleton, Colorado. From January 1995 to March 1998,
Mr. Brovarone served as President (Chairman) of the Board of Directors of The
Community Involved Charter School, a four year old K-12 public school located in
Lakewood, Colorado, operating under an independent charter and serving
approximately 350 students in an individualized, experiential learning
environment. Prior to 1990, Mr. Brovarone served as in-house counsel to R.B.
Marich, Inc., a Denver, Colorado based brokerage firm. Mr. Brovarone lives and
works in Littleton, Colorado.
GARY W. BROWNELL Mr. Brownell is a Certified Public Accountant in a private
partnership practice. He is the partner in charge of taxes and municipal audits
for his firm. Mr. Brownell graduated from San Diego State University in 1973
with a Bachelor of Science degree in accounting. He received his Certified
Public Accountant designation in 1983. Mr. Brownell has been a partner in
Brownell and Duffy since 1985.
PATRICK GALUSKA Mr. Galuska is a consulting petroleum engineer in Denver,
Colorado. His practice focuses mainly on the acquisition and exploitation of
underdeveloped oil and gas assets in the Rocky Mountain area. He is a Registered
Professional Engineer and is a member of the Society of Petroleum Engineers. Mr.
Galuska earned his BS degree in petroleum engineering from the University of
Wyoming and received his MBA degree in Finance from the University of Denver.
Mr. Galuska resides in Littleton, Colorado with his wife and two children.
MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the Board of
Directors of Innovative Medical Services, a position he has held since 1993. He
is responsible for the strategic planning, product development, and day-to-day
operations of IMS. Previously, Mr. Krall was the President and CEO of
Bettis-Krall Construction, Inc. a successful building-development company of
custom homes and commercial property in San Diego County, California. He has
also held numerous positions in general management in the hospitality industry.
Mr. Krall attended Pepperdine University (economics, statistics, mechanical
engineering). He previously served 4 years in the United States Marine Corps and
was elected, by general election, to a 4 year term on the Valle de Oro Planning
Board. Mr. Krall lives in El Cajon, California with his wife, Connie, and two
children.
EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent
consultant to FDA regulated industries since 1974 and a Member of the Board of
Innovative Medical Services since 1994. He graduated from the University of
Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and
has received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a
wide variety of subjects, including compliance with the Prescription Drug
Marketing Act and other government compliance matters, employee training and
drug repackaging. Dr. Peiser furnishes expert witness services and has provided
approved Pharmaceutical Continuing Education to several thousand attendees at
his seminars. Dr. Peiser is a Founding Director of the Association of Drug
Repackagers; is appointed as a Registered Arbitrator by the American Registry of
Arbitrators; and is President of the Southwest Chapter of the Association of
Military Surgeons. Dr. Peiser lives and works in Palm Harbor, 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 and marketing. 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 and lives in El Cajon, California.
Committees: Meetings of the Board
We have a Compensation/Administration Committee and an Audit Committee. The
Compensation/Administration Committee and the Audit Committee were formed in
1995. Messrs. Barnhill, Brovarone, Galuska and Peiser comprise the
Compensation/Administration Committee and Messrs. Barnhill, 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, 2002, and the Audit Committee met once during the fiscal year ended July 31,
2002.
Our Board of Directors held five meetings during the fiscal year ended July 31,
2002, at which time all the then Directors were present or consented in writing
to the action taken at such meetings. No incumbent Director attended fewer than
100% of said meetings.
Compliance with Section 16(a) of Securities Exchange Act of 1934
To our knowledge, during the fiscal year ended July 31, 2002, our Directors and
Officers complied with all applicable Section 16(a) filing requirements except
that Dennis Brovarone, a director, failed to timely report one transaction. This
statement is based solely on a review of the copies of such reports furnished to
us by our Directors and Officers and their written representations that such
reports accurately reflect all reportable transactions.
Family Relationships
There is no family relationship between any Director, executive or person
nominated or chosen by Innovative Medical Services to become a Director or
executive officer.
Transactions with Management
Innovative Medical Services did not enter into any transactions with Management
during the fiscal year ended July 31, 2002.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the fiscal year ending July 31, 2002, the
compensation awarded or paid by the Company to its Chief Executive Officer and
any of the executive officers of the Company whose total salary and bonus
exceeded $100,000 during such year (The "Named Executive Officers"):
--------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------
| Long Term Compensation |
--------------------------------------------------------------------------------------------------------
Annual Compensation | Awards | Payouts |
---------------------------------------------------------------------------------------------------------
| | Salary | Other Annual | Securities | |
Name and Principle Position | Year| (S) | Compensation | Underlying |All Other Compensation |
| | | ($) | Options (#) | ($) |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2002| 144,000 | 0 |150,000 Common| 0 |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2001| 144,000 | 0 |50,000 Common | 0 |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2000| 144,000 | 0 |50,000 Common | 0 |
---------------------------------------------------------------------------------------------------------
No other executive officer earned more than $100,000 during the current fiscal
year.
-----------------------------------------------------------------------------------------------------------------------
Option Grants in Last Fiscal Year
-----------------------------------------------------------------------------------------------------------------------
Individual Grants
-----------------------------------------------------------------------------------------------------------------------
Number of
Common Shares
Underlying
Options Granted % of Total Options Granted to Exercise Price Expiration
Name (#) Employees in Fiscal Year ($/Sh) Date
-----------------------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO 50,000 7.0 2.10 11/08/06
-----------------------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO 100,000 14.0 2.00 1/31/07
-----------------------------------------------------------------------------------------------------------------------
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, 2002.
------------------------------------------------------------------------------------------------------------------------
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------------------------------------------------------
Shares Value Number of Securities Underlying Value of Unexercised In-the Money
Acquired on Realized at Unexercised Options at FY-End (#) Options at FY-End ($)
Name Exercise (#) FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------------------------
Michael L. Krall 0 0 681,250 Common Shares/Exercisable 40,000/Exercisable (1)
President/CEO
------------------------------------------------------------------------------------------------------------------------
(1) Option value based on the difference between the exercise price of
unexercised options and the average closing price of $0.72 for the 30
trading days ending July 31, 2002.
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 Innovative Medical Services' net income before
taxes, if any, plus other benefits. The Board of Directors has extended Mr.
Krall's employment agreement for an additional year.
Compensation of Directors
Directors are entitled to receive $300 plus reimbursement for all out-of-pocket
expenses incurred for attendance at Board of Directors meetings.
Other Arrangements
1996 Directors And Officers Stock Option Plan: On April 17, 1996, the Company's
Board of Directors approved a Directors and Officers Stock Option Plan. The
purpose of the Plan is to advance the business and development of the Company
and its shareholders by affording to the Directors and Officers of the Company
who are ineligible to participate in the above Incentive Stock Option Plan, the
opportunity to acquire a propriety interest in the Company by the grant of
Options to acquire shares of the Company's common stock. The Plan is
administered by the entire Board of Directors. The Plan became effective on
April 17, 1996 by the Board of Directors, was not subject to Shareholder
approval and shall terminate on April 17, 2006. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 1,000,000 shares to
Directors and Officers. The maximum number of shares subject to Options granted
to any one Director or Officer shall not exceed 200,000 shares in any 12-month
period. The exercise price for Options shall be set by the Board of Directors
but shall not be for less than eighty-five (85%) of the fair market value per
share on the date of grant. The period in which Options can be exercised shall
be set by the Board of Directors not to exceed five years from the date of
Grant. The Plan may be terminated, modified or amended by the Board of
Directors.
The Innovative Medical Services 1998 Directors And Officers Stock Option Plan:
On December 19, 1998, the Company's Shareholders approved the Amended Innovative
Medical Services 1998 Officers and Directors Stock Option Plan. The purpose of
the Plan is to advance the business and development of the Company and its
shareholders by affording to the Directors and Officers of the Company the
opportunity to acquire a propriety interest in the Company by the grant of
Options to acquire shares of the Company's common stock.
The Innovative Medical Services 2001 Directors And Officers Stock Option Plan:
On January 8, 2001, the Company's Shareholders approved the Innovative Medical
Services 2001 Officers and Directors Stock Option Plan. The purpose of the Plan
is to advance the business and development of the Company and its shareholders
by affording to the Directors and Officers of the Company the opportunity to
acquire a propriety interest in the Company by the grant of Options to acquire
shares of the Company's common stock.
The Innovative Medical Services 2002 Non-Qualified Stock Option Plan: On March
11, 2002, the Company's Shareholders approved the Innovative Medical Services
2002- Non-Qualified Stock Option Plan. The purpose of the Plan is to advance the
business and development of the Company and its shareholders by affording
Eligible Plan Participants the opportunity to acquire a propriety interest in
the Company by the grant of Options to acquire shares of the Company's common
stock. Eligible Plan Participants include the Directors and Officers of the
Company, consultants, advisors and other individuals deemed by the Compensation
Committee to provide valuable services to the Company but who are not otherwise
eligible to participate in the Employee Incentive Stock Option Plan.
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 the recipient until such time that the recipient elects to exercise
the option whereupon the recipient is expected to recognize income to the extent
the market price of the shares exceeds the exercise price of the option on the
date of exercise.
The Plans are administered by an Administrative Committee whom shall serve a one
year term. The Administrative Committee is composed of the Board's
Compensation/Administration Committee. Subject to anti-dilution provisions, each
Plan may issue Options to acquire up to 2,000,000 shares to Directors and
Officers. The exercise price for Options shall be set by the Administrative
Committee but shall not be for less than the fair market value of the shares on
the date the Option is granted. Fair market value shall mean the average of the
closing price for ten consecutive trading days at which the Stock is listed in
the NASDAQ quotation system ending on the day prior to the date an Option is
granted. The period in which Options can be exercised shall be set by the
Administrative Committee not to exceed five years from the date of Grant.
Options granted to new executive officers or directors shall vest one year from
date of appointment or election. Shares issuable under options granted to
continuing officers or directors are immediately exercisable and vest upon
exercise. The maximum number of shares subject to Options granted to any one
Director of Officer shall not exceed 200,000 shares in any 12-month period.
The Executive Officers and Directors of the Company are eligible to participate
in the Plans. The Administrative Committee first granted the Executive Officers
and Directors an option to purchase 100,000 shares of common stock at $1.00 per
share in 1998. The Administrative Committee shall grant to individuals newly
appointed as Executive Officers or as Directors, an option to purchase 100,000
shares of common stock at fair market value. Upon each subsequent anniversary
thereof, each such Officer and Director will receive an option to purchase
50,000 shares of common stock at fair market value. The Plans also give the
Administrative Committee discretion to award additional options. The aggregate
number and kind of shares within the Plans and the rights under outstanding
Options granted hereunder, both as to the number of shares and Option price,
will be adjusted accordingly in the event of a reverse split in the outstanding
shares of the Common Stock of the Company.
The Board may at any time terminate the Plans. The approval of the majority of
shareholders is required to increase the total number of shares subject to the
Plans, change the manner of determining the option price or to withdraw the
administration of the Plans from the Administrative Committee.
Termination of Employment and Change of Control Arrangement
There is no compensatory plan or arrangement with respect to any individual
named above which results or will result from the resignation, retirement or any
other termination of employment with the Company, or from a change in the
control of the Company.
ITEM 11. Security Ownership of Certain Beneficial Owners and of Management
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of July 31, 2002 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 October
25, 2002, there is one other registered holder of five percent or more of the
Company's Common Stock. As of October 25, 2002 there were 8,780,899 shares
outstanding.
Name and Address of Common Stock Percentage of Shares
Beneficial Owner Title Ownership Outstanding (%)
---------------------------- ------------------------- --------------------- ------------------------
Dennis Atchley Secretary 193,860 (1) 2.21
1725 Gillespie Way
El Cajon, CA 92020
Gene Auerbach Chief Operating Officer 125,000 (2) 1.42
1725 Gillespie Way
El Cajon, CA 92020
Gregory Barnhill Director 225,000 (3) 2.56
10801 Stevenson Road
Stevenson, MD 21153
Dennis Brovarone Director 456,483 (4) 5.20
18 Mountain Laurel
Littleton, CO 80127
Gary Brownell Treasurer, CFO/Director 400,321 (5) 4.56
1725 Gillespie Way
El Cajon, CA 92020
Patrick Galuska Director 370,690 (6) 4.22
8137 S. Downing St.
Littleton, CO 80122
Michael L. Krall President, CEO/Chairman 1,303,560 (7) 14.85
1725 Gillespie Way
El Cajon, CA 92020
Eugene Peiser Director 426,136 (8) 4.85
1725 Gillespie Way
El Cajon, CA 92020
Donna Singer Executive VP, Director 353,356 (9) 4.02
1725 Gillespie Way
El Cajon, CA 92020
Directors and Officers as a Group
(9 individuals) 3,854,406 (10) 43.90
Charles Siddle 475,000 (11) 5.41 (12)
5364 N. 31st Place
Phoenix, AZ 85016
(1) Includes presently exercisable options to acquire up to 150,000 shares.
(2) Includes presently exercisable options to acquire up to 100,000 shares.
(3) Includes presently exercisable options to acquire up to 200,000 shares.
(4) Includes presently exercisable options to acquire up to 385,000 shares.
(5) Includes presently exercisable options to acquire up to 350,000 shares.
(6) Includes presently exercisable options to acquire up to 300,000 shares.
(7) Includes presently exercisable options to acquire up to 681,250 shares.
(8) Includes presently exercisable options to acquire up to 350,000 shares.
(9) Includes presently exercisable options to acquire up to 325,000 shares.
(10) Includes presently exercisable options held by all of the above
officers and directors to acquire up to 2,814,250 shares.
(11) Includes 350,000 shares owned by Colt Communications LLC; 50,000 shares
owned by Colt Communications Money Purchase Pension Plan; 25,000 shares
owned by Siddle Family Trust and 50,000 shares owned by SPS LLC - all
of which are affiliates of Charles Siddle.
(12) Percentage ownership is based only on shares outstanding and does not
include exercisable options held by Directors and Officers.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At July 31, 2001, notes receivable included $66,561 which represented amounts
due from officers of Innovative Medical Services. This amount includes personal
loans authorized by the Board of Directors of $18,379 to Michael L. Krall,
President and CEO and $48,182 to Gary Brownell, Chief Financial Officer.
Interest accrues at 6% per annum.
Mr. Krall's loan increased during fiscal year 2002 by $13,817 to $32,196 and was
subsequently paid down during the year by $8,100 to $24,096. On July 31, 2002,
the accrued interest was added to the loan balance, bringing the year-end
balance to $25,723.
Mr. Brownell's loan was paid down during fiscal year 2002 by $12,000 to $36,182.
On July 31, 2002, the accrued interest was added to the loan balance, bringing
the year-end balance to $38,352.
As of October 25, 2002, Mr. Krall has made additional pay-downs on his loan,
bringing the current balance to $17,623.
As of October 25, 2002, Mr. Brownell has made additional pay-downs on his loan,
bringing the current balance to $26,352.
ITEM 13. EXHIBITS.
The following Exhibits are filed as part of this registration statement pursuant
to Item 601 of Regulation S-B:
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
3.1.1 -- Articles of Amendment dated March 11, 2002
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 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [Confidential treatment requested for
certain omitted information filed
separately.]
10.6 (8 -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
10.10 (10) -- ETIH2O, Inc., Acquisition Agreement
10.11 (11) -- NVID Litigation Settlement Agreement
10.12 (12) -- Addendum #1 to NVID Settlement Agreement
11 -- Statement re: Computation of 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 as amended on October 19, 2001
(8) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2000 filed on October 19, 2001
(9) Incorporated by reference from Amended Form 10QSB for the nine month period
ended April 30, 2001 filed on October 19, 2001
(10) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2001 filed on November 13, 2001
(11) Incorporated by reference from Current Report on Form 8-K filed on December
6, 2001
(12) Incorporated by reference from Amended Current Report on Form 8-K filed on
December 7, 2001
B. Reports on Form 8-K: No Reports on Form 8-K were filed during the
fourth quarter of the fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES DATE
/s/ MICHAEL L. KRALL June 13, 2003
---------------------------------------- -------------------------
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/ GREGORY BARNHILL Director June 13, 2003
------------------------------------------- ----------------
Gregory Barnhill
/s/ DENNIS BROVARONE Director June 13, 2003
------------------------------------------- ----------------
Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer and Director June 13, 2003
------------------------------------------- ----------------
Gary Brownell
/s/ PATRICK GALUSKA Director June 13, 2003
------------------------------------------- ----------------
Patrick Galuska
/s/ MICHAEL L. KRALL President/CEO and Director June 13, 2003
------------------------------------------- ----------------
Michael L. Krall
/s/ EUGENE PEISER Director June 13, 2003
------------------------------------------- ----------------
Eugene Peiser
/s/ DONNA SINGER Executive Vice President and Director June 13, 2003
------------------------------------------- ----------------
Donna Singer
CERTIFICATIONS
I, Michael L. Krall, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of Innovative Medical
Services;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ Michael L. Krall
--------------------
Michael L. Krall
President/CEO
CERTIFICATIONS
I, Gary Brownell, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of Innovative Medical
Services;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ Gary Brownell
-----------------
Gary Brownell
Chief Financial Officer