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, 2001
Commission file number 0-21019
INNOVATIVE MEDICAL SERVICES
(Exact name of registrant as specified in its charter)
California 33-0530289
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1725 Gillespie Way, El Cajon, California 92020
(Address of principal executive offices, 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
Explanatory note on amendment
The Registrant has filed this amendment to correct typographical errors in
Exhibit 31 filed with a previous amendment filed on August 19, 2003 to
reflect changes made to its financial statements for the fiscal year ended
July 31, 2002 with respect to the writing off of certain start up costs
which had been previously capitalized and include the Sarbanes Oxley
certifications as exhibits. The Amendment revises and replaces the
following sections:
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations ;
Item 7. Financial Statements and Notes to Financial Statements ;
Item 13. Exhibits and Reports on Form 8-K
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations Fiscal 2001 vs. Fiscal 2000
During the quarter, we began to realize revenues from multiple product lines in
our different divisions. In order to be more informative regarding distribution
of revenues, discussion of revenues will be in terms of our water treatment,
silver ionization and pesticide divisions.
Revenues of $2,409,700 in the fiscal year ended July 31, 2001 were 45% higher
than the $1,661,500 in revenues reported for the fiscal year ended July 31,
2000. The increase was due to increases in revenues in all of our company
divisions. Water treatment division sales were $2,086,100, silver ionization
division sales were $320,300 and pesticide division sales were $32,200.
Currently, water dealer program sales consist mostly of sales of other
manufacturers' products to independent dealers. Revenue is recognized on sales
to dealers as shipped since we currently do not sell to third party customers of
the dealers. Revenues of silver ion and pesticide products are recognized on
shipment where the sale is made F.O.B. shipping point.
Gross profit for the year ended July 31, 2001 was $1,047,100 versus $564, 000 in
2000. Gross profit percentage of 43% in 2001 was higher versus 34% in 2000. The
increase in gross profit percentage was largely due to higher margins associated
with our pesticide and silver ion technology product lines.
Net loss for the year ended July 31, 2001 was $2,011,500 versus net loss of
$2,389,400 for the same period in 2000. During the year, General and
Administrative expenses increased 1% or $11,800 from $1,789,800 in fiscal 2000
to $1,778,000 in fiscal 2001. Selling expense increased approximately $186,700,
or 31%, from $595,100 in 2000 to $781,800 in 2001 because of increased costs
associated with development of marketing materials, hiring of additional sales
personnel, trade shows and product launches for the Nutripure dealer program,
and the silver ion and pesticide divisions.
During the year ended July 31, 2001 the Company expended $230,000 in an effort
to acquire and setup a Korean corporation. The Company originally capitalized
these costs as Deferred Acquisition costs. The Company later determined the
venture was not feasible and decided not to go forward with the project. The
total costs were written-off as Abandoned Projects at July 31, 2002. As
discussed in Note 2 of our financial statements, 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 income statement
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. The balance
sheet effect is to show a decrease in Deferred Acquisition Costs in 2001 of
$230,000.
In addition to the ongoing expansion of the water dealer program, distribution
of our other products in the Water Treatment Division continues to grow. A
competitor in the industry, Freshwater Systems, had a significant effect on our
revenues in fiscal year 2000, but our sales have begun to recover. Fillmaster
system sales increased 6% from fiscal year 2000 to 2001, and Fillmaster
replacement filter sales increased 24% from fiscal year 2000 to 2001. Although
the market for our pharmacy products is maturing in that there is a decreasing
number of pharmacy chains that do not have water filtration products, and that
we have sold systems to most major chains, Fillmaster sales to additional chain
pharmacies are steady, as are replacement filter sales to existing customers.
The focus for further Fillmaster sales will be on incremental and upgrade sales
to individual pharmacies within current chain accounts, although we are still
actively pursuing Fillmaster sales to remaining chains. We work to retain
Fillmaster customers with our Customer Service Plan 2000, a multi-year service
and warranty contract. Fillmaster customers that subscribe to our Customer
Service Plan have contracted to continue purchasing; otherwise, customers do not
have an obligation to continue historic purchasing patterns.
Although retail sales of Nutripure 2000 and Nutripure Sport Bottles comprise
only 11% of Water Treatment Division Sales, we continue to receive and fulfill
reorders and new orders.. . In addition to retail sales, we are conducting a
direct mail program with these products.
In October 2000, we launched our Nutripure Dealer Program. Revenues from the
program began in the third quarter and continue to ramp up as we work to sign up
new dealers to the program. We partnered with Automated Payment Services
("APS"), and MBNA to strengthen and streamline the financing program and
administration of the Nutripure dealer program. Under the unique Nutripure
program, independent water treatment dealers may now offer credit to all
prospective customers because the Nutripure program offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers.
In January 2001, we announced the acquisition of a new, non-toxic pesticide
technology. The acquisition was completed in April 2001 for approximately
$160,000. RoachX is the first product to launch, and during the second half of
the year, we focused on gaining distribution to more than 40,000 commercial pest
control companies through national wholesalers. The commercial industry provides
larger dollar volume potential and select and controlled distribution. During
the second half of the year, we began receiving purchase orders and shipping
RoachX across the United States. The national kickoff will take place at the
National Pest Management Association meeting in New Orleans in October 2001.
In March 2001, we signed a five-year contract to provide Axenohl to Dodo &
Company, a Korean cosmetics manufacturer and marketer. Under the contract, Dodo
& Company will purchase approximately $1.2 million dollars of product from us
over five years. In addition to the purchase price, we will receive a royalty on
sales of the Axen-containing products. We anticipate that, over the five years,
the revenues from Dodo & Company cosmetics royalties will exceed $5 Million. In
addition to sales to Dodo cosmetics, other recent sales of Axenohl have been to
companies in South Korea for testing purposes. Regulatory clearances have not
yet been issued in South Korea.
Liquidity and Capital Resources Fiscal 2001 vs. 2000
From inception through July 31, 2001, we have financed our operations primarily
through our initial public offering in August of 1996, by a subsequent private
placement in March of 2000, and by other smaller private placement stock sales.
We have operated without long-term debt and have no plans to obtain long-term
financing in the next twelve months. We believe that sales from our new product
lines will not provide sufficient capital resources to sustain operations and
fund product development until fiscal year 2001/2002. In the short term, we
expect to raise capital through equity sales as necessary to fund future growth
until we operate above the break-even point. We continually evaluate
opportunities to sell additional equity or debt securities, or obtain credit
facilities from lenders to strengthen our financial position. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders.
During the fiscal year ended July 31, 2001, our current assets to liabilities
ratio decreased from 5.02 to 3.15. Current assets decreased $883,000 from
$2,794,400 to $1,911,400. Current assets at July 31, 2001 include a decrease of
$914,200 in cash and cash equivalents and a decrease in restricted cash of
$204,900 which was pledged against a line of credit which was paid off during
the year. Accounts receivable increased $159,400 on increased sales volume.
Inventories decreased $85,100 from $796,100 in fiscal 2000 to $711,000 in fiscal
2001 which reflects a changing product mix and more efficient purchasing.
Noncurrent assets increased by $734,900 during the year mainly due to an
increase in Patents and Licenses of $713,400. Current liabilities increased
$50,600 from $556,300 to $606,900. The increase in current liabilities was the
net result of an increase in accounts payable and accrued liabilities of
$261,200 and a payoff of a line of credit of $210,600.
Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our primary
lender and disperse the funds to the dealer, less a commission charged by us,
upon completion of the contract. The primary lender disperses funds to us. We
record a liability when the funds are received and relief of liability when
funds are dispersed, and we do not retain liability on the credit extended.
Cash flows used from operations were $1,338,500 in fiscal year 2001 and
$1,311,900 in 2000. For fiscal year 2001 cash flows used in investing activities
included $40,300 for the purchase of machinery and equipment and $621,100 for
the purchase of patents and licenses. In fiscal 2000 cash flows used in
investing activities included $503,100 for the purchase of machinery and
equipment and for website development and $57,100 for the purchase of patents
and licenses. Also, we incurred $148,700 in deferred acquisition costs during
fiscal 2000. Cash flows from financing activities were $1,085,700 in fiscal 2001
and $3,120,100 in fiscal 2000. Financing activities for the current year
included a decrease of $210,600 in notes payable. Cash flows from financing
activities during the year included the following common stock transactions:
1. A $250,000 private placement in October 2000 in which we issued 94,340
shares of common stock to six investors at $2.65 per Unit.
2. A $250,002 private placement in January 2001 in which we issued 83,334
shares of common stock to six investors at $3.00 per Unit. Each Unit
contained one share of common stock and a warrant to acquire an
additional share of common stock for $4.00 per share up to January 28,
2003.
3. A $225,000 private placement in April 2001 in which we issued 150,000
shares of common stock to four investors at $1.50 per Unit. As part of
this registration we also issued $200,000 of convertible debentures at
10% interest due July 31, 2001. The holders of this debenture are
entitled to convert all or any amount over $10,000 of principal face
amount and accrued interest into Units each consisting of one share of
Common Stock and a Common Stock Purchase Warrant. The conversion price
for each Unit shall equal 80% of the average closing bid price for the
five trading days immediately preceding the receipt of Notice of
Conversion. The debentures were converted to common stock on July 31,
2001.
4. In addition, approximately $245,135 was received from exercise of
outstanding stock options.
In the prior year, cash flows from financing activities were $3,120,100, which
included $3,355,600 received through private placements of IMS and
Nutripure.com. The total decrease in cash and cash equivalents for 2001 was
$914,200 as compared to an increase of $1,099,300 during the same period in
2000.
Future Outlook
We believe that, during fiscal year 2001, we successfully transitioned from our
niche pharmacy market into other, broader markets with our expanded water
treatment division and our new bioscience division. Although our Fillmaster
products still comprised the majority of our sales in 2001, we believe that will
change in the coming fiscal year.
Looking ahead, we see a year of continued growth in the water treatment division
as the Nutripure Dealer program fully develops and sales of our retail water
filtration products continue to grow.
We also see the bioscience division growing in the coming year. We have focused
the sales efforts of our pesticide technologies on the commercial pesticide
industry to take advantage of key market opportunities. We have earned the
support of and are selling RoachX through Vopak (formerly Van, Waters & Rogers)
and members of the Speckoz group of nine regional independent wholesalers. Based
upon these distributors' representations to us and upon their own websites and
promotional materials, we believe them to be the largest distributors of
pesticide products in the United States.
Other than purchase orders, we do not have written agreements with the
distributors. We believe in the coming year RoachX will become an industry
leading technology in cockroach control.
This fall we plan to formally launch three new products from this division:
AntX(TM), our latest development in pesticide technology, CleanKill(TM), the
Axen-based hard surface disinfectant for the pest control industry, and
ProChoice(TM) caulk for pest control operators. We have submitted for and
anticipate receiving EPA approval for AntX. CleanKill is approved by the EPA as
an additional brand name of Axen. We repackage an NSF, USDA and FDA approved
food-grade silicone caulk as our ProChoice product. We believe adding sales of
these products to the already climbing RoachX revenues will have a very material
positive effect on revenues in the coming fiscal year.
Although we think that the pesticide technologies will have the most immediate
material impact on revenues in the coming year, we believe that the silver ion
technologies will ultimately become the largest revenue generator for Innovative
Medical Services. We intend not only to sell our own Axen-based products, like
CleanKill, but also to sell Axen as an additive to other manufacture's products,
like Dodo Cosmetics' acne-fighting product line. We believe that the innumerable
applications for a non-toxic, tasteless, odorless, highly effective
antimicrobial agent present an outstanding market opportunity for our Axenohl
products.
The investment necessary to pursue regulatory approval for Axenohl will be
significant, but as additional US and international approvals for Axenohl uses
are received, we expect revenues to develop quickly.
Item 7. Financial Statements
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended July 31, 2001 and July 31, 2000
Independent Accountants' Report
Board of Directors
Innovative Medical Services
We have audited the accompanying consolidated balance sheets for
Innovative Medical Services and Consolidated Subsidiaries as of July 31, 2001
and 2000, and the related consolidated statements of operations, statement of
accumulated deficits and cash flows for the years ended July 31, 2001 and July
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements as of July 31, 2001 and 2000 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 and Consolidate Subsidiaries as of July 31, 2001 and
July 31, 2000, and the results of its operations and its cash flows for the
years ended July 31, 2001 and July 31, 2000, in conformity with generally
accepted accounting principles in the United States of America.
/s/ Miller and McCollom
MILLER AND MCCOLLOM
4350 Wadsworth Boulevard, Suite 300
Wheat Ridge, Colorado
October 19, 2001 except for the third paragraph above and Note 2, which is as of
June 13, 2003.
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
July 31 July 31
2001 2000
Restated Restated
(Note 2) (Note 2)
------------- -------------
Cash and cash equivalents $ 207,092 $ 1,121,316
Restricted cash -- 204,887
Accounts receivable, net of allowance for doubtful
accounts of $ 115,000 at July 2001
and $225,000 at July 31, 2000 570,733 411,323
Due from officers and employees 240,001 226,729
Inventories 711,018 796,136
Prepaid expenses 182,556 33,975
---------- ----------
Total current assets 1,911,400 2,794,366
---------- ----------
Property, plant and equipment 903,072 1,056,252
---------- ----------
Total property, plant and equipment 903,072 1,056,252
---------- ----------
Deposits 8,127 14,083
Patents and licenses 1,014,282 300,910
Deferred acquisition costs -- 202,542
---------- ----------
Total noncurrent assets 1,022,409 517,535
---------- ----------
Total assets $ 3,836,881 $ 4,368,153
========== ============
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable $ 543,992 $ 308,812
Accrued liabilities 96,691 71,400
Notes payable -- 210,592
---------- ----------
Total current liabilities 640,683 590,804
---------- ----------
Minority interest payable -- 61,697
---------- ----------
Common stock, no par value: authorized
20,000,000 shares, issued and outstanding
6,954,699 at July 31, 2001 and
5,942,902 at July 31, 2000 11,510,915 10,018,873
Class A warrants: issued and outstanding 3,686,000
warrants 108,750 108,750
Accumulated deficit (8,423,467) (6,411,971)
---------- ----------
Total stockholders' equity 3,196,198 3,715,652
---------- ----------
Total liabilities and stockholders' equity $ 3,836,881 $ 4,368,153
========== ===========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------
For Year Ended
July 31 2001
2001 2000
Restated Restated
(Note 2) (Note 2)
------------ -------------
Net sales $ 2,409,721 $ 1,661,462
Cost of sales 1,362,670 1,097,419
------------ ------------
Gross profit 1,047,051 564,043
------------ ------------
Selling expenses 781,810 595,142
General and administrative expenses 1,789,783 1,777,903
Research and development 292,964 114,756
Start-up costs 230,000 --
Impairment of long lived assets -- 505,433
------------ ------------
Total operating costs 3,094,557 2,993,234
------------ ------------
Operating income (loss) (2,047,506) (2,429,191)
------------ ------------
Other income and (expense):
Interest income 33,738 34,763
Interest Expense (11,100) (73,990)
Loss on abandoned assets -- (40,200)
------------ ------------
Total other income (expense) 22,638 (79,427)
------------ ------------
Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (2,024,868) (2,508,618)
Federal and state income taxes 1,600 800
------------ ------------
Income (loss) before minority interest in subsidiary
operations and change in accounting principle (2,026,468) (2,509,418)
Minority interest in subsidiary operations 14,972 40,103
------------ ------------
Net income (loss) before cumulative
change in accounting principle (2,011,496) (2,469,315)
Cumulative effect of change
in accounting principle -- 79,896
------------ ------------
Net income (loss) $ (2,011,496) $ (2,389,419)
============ ============
Net income (loss) per common share before change
in accounting principle (basic) $ (0.31) (0.49)
Cumulative effect of change
in accounting principle -- 0.02
------------ ------------
Net income (loss) per common share (basic) $ (0.31) $ (0.47)
============ ============
Net income (loss) per common share before change
in accounting principal (diluted) $ (0.31) (0.49)
Cumulative effect of change
in accounting principle -- 0.02
------------ ------------
Net income (loss) per common share (diluted) $ (0.31) $ (0.47)
============ ============
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
----------------------------------------------------------------
Balance, beginning of period $ (6,411,971) $ (3,993,399)
Prior period adjustment (see note 12) (29,153)
Net income (loss) (2,011,496) (2,389,419)
------------ -------------
Balance, end of period $ (8,423,467 $ (6,411,971)
============ =============
The accompanying notes are an integral part of these financal statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------
For the Year Ended
July 31
2001 2000
Restated Restated
(Note 2) (Note 2)
------------- ---------------
Cash flows from operating activities
Net income (loss) $ (2,011,496) $ (2,389,419)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 96,961 185,735
Depreciation 193,477 159,624
Minority interest in subsidiary operations (61,697) 61,697
Impairment of long lived assets - 505,433
Loss on abandoned assets - 40,200
Changes in assets and liabilities:
(Increase) decrease in restricted cash 204,887 687
(Increase) decrease in accounts receivable (159,409) 378,843
(Increase) decrease in due from officers and employees (13,272) 112,795
(Increase) decrease in prepaid expense 60,489 3,103
(Increase) decrease in inventory 85,118 (76,163)
(Increase) decrease in deposits 5,956 (7,508)
Increase (decrease) in accounts payable 235,180 (286,136)
Increase (decrease) in accrued liabilities 25,292 (822)
----------- -----------
Net cash provided (used) by operating
activities (1,338,514) (1,311,931)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (40,297) (503,100)
Purchase of patents and licenses (621,114) (57,099)
Deferred acquisition costs - (148,691)
----------- -----------
Net cash (used) in investing activities (661,411) (708,890)
----------- -----------
Cash flows from financing activities
Proceeds from debt obligations 200,000 275,436
Payments on debt obligations (210,592) (510,910)
Proceeds from sale of common stock 1,096,293 3,355,555
----------- -----------
Net cash provided by financing activities 1,085,701 3,120,081
----------- -----------
Net increase (decrease) in cash and cash
equivalents (914,224) 1,099,260
Cash at beginning of period 1,121,316 22,056
----------- -----------
Cash at end of period $ 207,092 $ 1,121,316
----------- -----------
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 11,100 $ 73,990
Cash paid for taxes paid $ 1,600 $ 800
Noncash investing and financing activities:
Value of shares issued in exchange for Nutripure.com minority interest $ 550,011 $ -
Value of shares issued in exchange for ETI H2O $ 140,953 $ -
The accompanying notes are an integral part of these financial statements.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Innovative Medical Services was incorporated in San Diego, California
on August 24, 1992. The Company was organized with the purpose of
manufacturing, marketing, and selling the Fillmaster, a unique and
proprietary pharmaceutical water purification and dispensing product.
The Company is fully operational, with more than 15,000 customers in
all fifty states, Puerto Rico, the United Kingdom, Australia, Canada,
and Europe. The Company has expanded research and development efforts
in order to further develop its product line to include an additional 8
proprietary pharmacy-related efficiency tools.
In October of 1998, the Company purchased the assets of Export Company
of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary
supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary
supplies and water filtration products to practitioners, retail outlets
and government agencies. The Company acquired the remaining 55%
interest in AMPROMED from a private individual. To facilitate this
transaction the Company has formed EXCOA Nevada, a 100% owned
subsidiary of Innovative Medical Services. This company was
incorporated in Nevada. A 99% interest in AMPROMED is held by EXCOA
Nevada, with the remaining 1% of AMPROMED being owned by Innovative
Medical Services. These business combinations were accounted for using
the purchase method. The Company incurred $1,091,393 of acquisition
costs for these two entities all of which was paid in cash. The
majority of the purchase price was advanced to the previous owners in
fiscal year 1998 and recorded as deferred acquisition costs until the
purchase was concluded. The assets acquired and liabilities assumed are
as follows:
Assets:
Accounts Receivable $ 32,500
Inventory 58,217
Fixed Assets 49,083
Customer List 360,000
Licenses 354,961
Goodwill 261,322
-------
Total Assets 1,116,083
Liabilities
Accounts Payable 24,690
------
Equity $ 1,091,393
===========
The above listed goodwill of $261,322 and customer list of $360,000
were being amortized over a period of forty (40) years. The licenses
are being amortized over fifteen (15) years. The value of these assets
and the amortization periods were reassessed at July 31, 2000 and
adjusted as described in Note 16.
In December 1999, the Company formed NUTRIPURE.COM as a wholly owned
subsidiary, incorporated in the state of Nevada. NUTRIPURE.COM is an
e-commerce web supersite providing consumers a wide variety of
vitamins, minerals, nutritional supplements, homeopathic remedies and
natural products. In addition to products, the website offers
comprehensive health and wellness information in an easy-to-access,
intuitive reference format. The website will also present the Nutripure
line of water filtration systems.
In November 2000, Innovative Medical Services acquired 100% of the
stock of ETIH2O, Inc., a Florida corporation, for 56,381 shares of IMS
stock valued at $140,953 ($2.50 per share). The transaction was
recorded using the purchase method of accounting. The assets acquired
and liabilities assumed are as follows:
Assets:
Notes Receivable $ 33,655
Inventories 32,077
Equipment 16,932
Licensing & Distribution Rights 118,324
----------
Total Assets 200,988
Liabilities:
Notes Payable - IMS 60,035
----------
Equity $ 140,953
=========
Assets and liabilities were valued at historical cost and no goodwill
was recorded in the transaction. Results of operations of ETIH2O Inc.
are included in the current period. The acquired entity was a startup
company, if results of operations were included in prior periods and
shown as though the companies had been combined at the beginning of the
period, it would not have a material affect on the consolidated
financial statements of Innovative Medical Services.
The Company merged ETI-H2O with a newly formed Nevada corporation of
similar name and dissolved the Florida corporation. ETI-H2O, a
privately held technology corporation, developed Axenohl and is
responsible for processing, and production of Axenohl and Axen. ETI-H2O
is also responsible for all supervision of all research, studies, data
and quality control of the Axenohl/Axen product line.
In April 2001, the Company completed the purchase of the entire right,
title and interest in and to specific patent-pending boric acid
pesticide technologies and all rights, title and interest in and to all
patents for RoachX from a private individual, for approximately
$160,000 in cash. The owner/inventor accepted a position with the
Company to serve as Senior Scientist and to head the Company's new Pest
Management Division. The employment agreement included bonuses at
certain revenue thresholds of RoachX sales. The owner/inventor of
RoachX died unexpectedly in June of 2001. Because the initial payment
was primarily for the patents and for the EPA licenses, it is included
in Patents and Licenses and is amortized over a period of 17 years.
RoachX is a pesticide technology containing a familiar active
ingredient, boric acid, bound to a masking agent and combined with an
attractant fragrance and proteins in a colloidal suspension. The
patent-pending time-released formulation protects the boric acid from
dissolving in water and maintains the integrity of the pesticide to
obtain maximum killing effect.
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts
of Innovative Medical Services and its subsidiaries. All inter-company
balances and transactions have been eliminated.
Previously published financial statements have been restated to write
down certain intangible assets by $505,433. The net loss for the year
ended July 31, 2000 increased to $2,384,052 from $1,745,430 that was
previously reported. An explanation of the detail of the adjustment is
included in Note 16.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Revenue Recognition
Generally, the company recognizes income based upon concluded
arrangements with customers and all events have occurred by delivery or
performance. Certain income is recognized upon shipment where the sale
is made f.o.b. shipping point. Customer acceptance provisions and
installation procedures accompanying delivery are minor in nature, and
the Company has not experienced any material expense in satisfying
customer satisfaction. Revenue is recognized on sales to dealers and to
pharmacists as shipped, since the Company does not sell to third party
customers of the dealers and pharmacies. Software upgrades are provided
free to customers resulting from implants included in products which
they purchase. In a minor amount of e-commerce business conducted to
date, sales are recorded on a gross basis resulting from credit card
sales, the Company does not charge the customer until the product is
shipped and the Company has been billed.
The Company began its program of providing financing to independent
dealers in fiscal year ending July 31, 2001. Currently the financing is
for equipment of other manufacturers and not the Company's products.
The Company receives funds from its primary lender and disperses the
funds to the dealer, less a commission charged by the Company, upon
completion of the contract. The Company records a liability when the
funds are received and relief of liability when funds are dispersed.
The Company is recording only the commissions earned as revenues.
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain assets in accordance with Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Certain costs of computer software developed or obtained
for internal use are capitalized and amortized on a straight-line basis
over the estimated useful life of the software. Costs for general and
administrative, overhead, maintenance and training, are expensed as
incurred. To date $207,707 of costs related to the Nutripure.com
website have been capitalized under SOP 98-1 and are being amortized
over a period of 3 years.
Stock-Based Compensation
The Company follows FASB Statement No. 123, 'Accounting for Stock-Based
Compensation' ('FAS 123'). The provisions of FAS 123 allow companies to
either expense the estimated fair value of stock options or to continue
to follow the intrinsic value method set forth in APB Opinion 25,
'Accounting for Stock Issued to Employees' ('APB 25') but disclose the
pro forma effects on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB
25 in accounting for its stock option plans (Note 10). For awards that
generate compensation expense as defined under APB 25, the Company
calculates the amount of expenses and recognizes the expense over the
vesting period of the award.
In March 2000, the FASB issued FASB Interpretation No. 44, 'Accounting
for Certain Transactions involving Stock Compensation' ('FIN 44'),
which contains rules designed to clarify the application of APB 25. FIN
44 became effective on July 1, 2000 at which time the Company adopted
it. The impact of the adoption of FIN 44 was not material to the
earnings or financial position of the Company.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Research and Development
Research and development costs that have no alternative future uses are
charged to operations when incurred and are included in operating
expenses. The total amount charged to Research and Development expense
was $292,964 and $114,756 in the fiscal years ended July 31, 2001 and
2000, respectively.
Depreciation Method
The cost of property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the related
assets. The useful lives of property, plant, and equipment for purposes
of computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Website 3.0 years
Vehicle 5.0 years to 7.0 years
Leasehold improvements are being depreciated over the life of the
lease, which is equal to 120 months.
Depreciation is computed on the Modified Accelerated Cost Recovery
System for tax purposes.
Amortization
The cost of patents acquired is being amortized on a straight-line
basis over the remaining lives of 17 years. Licenses which include the
Ampromed Limitada, the right of Nutripure to distribute and disseminate
certain information through its website, and costs to acquire EPA
approval on Axen and Axenohl, are being amortized on a straight line
basis over periods ranging from 15 to 20 years. Website development
costs are being amortized on the straight-line basis over 3 years.
Amortization expense for the years ended July 31, 2001 and July 31,
2000 was $97,000 and $185,700, respectively.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the carrying value of intangible assets and
other long-lived assets will be reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally,
that may suggest impairment. The Company has recognized impairment of
the assets purchased with the Ampromed acquisition and has reassessed
the value of certain assets as described in Note 16. Should there be
additional impairment in the future, the Company will measure the
amount of the impairment based on undiscounted expected future cash
flows from the impaired assets. The cash flow estimates that will be
used will contain management's best estimates, using appropriate and
customary assumptions and projections at the time.
Inventory Cost Method
Inventories are stated at the lower of cost or market determined by the
Average Cost method and net realizable value. Inventories at July 31
consisted of:
2001 2000
------------ -------------
Finished Goods $ 246,374 $ 108,528
Work in Progress 150,815 180,770
Raw Materials 313,829 507,410
------------ -------------
$ 711,018 $ 796,708
------------ -------------
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The fair value of financial instruments, consisting primarily of the
line of credit, is based on interest rates available to the Company and
comparison to quoted prices. The fair value of these financial
instruments approximates carrying value.
Advertising and Promotional Costs
Cost of advertising and promotion are expensed as incurred or at the
first-time advertising and promotion takes place. Such costs were
$276,492 and $197,908 for the years ended July 31, 2001 and July 31,
2000, respectively.
Deferred Acquisition Costs
During the process of evaluating certain companies for acquisition, the
Company expended $230,000 and $202,542 in fiscal years ended July 31,
2001 and July 31, 2000, respectively. These costs were capitalized and
will be reclassified if the acquisitions are successful as a cost of
the investment or expensed in the future if the acquisitions are not
successful.
Net Income (Loss) Per Common Share
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997.
Entities that have only common stock outstanding are required to
present basic earnings per share amounts. All other entities are
required to present basic and diluted per share amounts. Diluted per
share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing
operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Following is a reconciliation of the weighted average number of shares
actually outstanding with the number of shares used in the computations
of loss per common share:
For the Years Ended
July 31, 2001 July 31, 2000
------------- --------------
Shares outstanding 6,954,699 5,942,903
Weighted average number of shares actually outstanding
6,420,926 5,056,141
Stock Options 1,815,625 1,214,309
Warrants 1,797,500 1,798,125
----------- -----------
Total weighted average shares 10,034,051 8,068,575
----------- -----------
Net income (loss) before cumulative
Change in accounting principle $ (2,011,496) $(2,469,315)
Cumulative change in accounting principle -- 79,896
----------- -----------
Net income (loss) $ (2,011,496) $(2,389,419)
=========== ===========
Basic net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.31) $ (0.49)
Cumulative effect of change in
accounting principle -- 0.02
----------- -----------
Net income (loss) per common share $ (0.31) $ (0.47)
=========== ===========
Diluted net earnings (loss) per share
Net income (loss) per common share
before change in accounting principle $ (0.31) $ (0.49)
Cumulative effect of change in
accounting principle -- 0.02
----------- -----------
Net income (loss) per common share $ (0.31) $ (0.47)
=========== ===========
Potential common stock instruments at July 31, 2001, which include
1,815,625 stock options and 1,797,500 warrants, are included in the
loss per share calculation for fiscal year ended July 31, 2001.
Potential common stock instruments at July 31, 2000, which include
1,214,309 stock options and 1,798,125 warrants, are included in the
loss per share calculation for fiscal year ended July 31, 2000.
On August 8, 2001, the warrants expired without exercise.
Recent Accounting Pronouncements
In June of 1998, the FASB issued Statement of Accounting Standards No.
133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their value. This statement, as
amended by SFAS 137, is effective for financial statements for all
fiscal quarters to all fiscal years beginning after June 15, 2000. The
Company does not expect the adoption of this standard to have a
material impact on its results of operation, financial position, or
cash flows as the Company currently does not engage in any derivative
or hedging activities.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations to be accounted for using the purchase method of
accounting and is effective for all business combinations initiated
after June 30, 2001. SFAS 142 requires goodwill to be tested for
impairment under certain circumstances, and written off when impaired,
rather than being amortized as previous standards required. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. Early
application is permitted for entities with fiscal years beginning after
March 15, 2001 provided that the first interim period financial
statements have not been previously issued. The adoption of SFAS 141
did not have a material effect on the Company's operating results or
financial condition. The Company is currently assessing the impact of
SFAS 142 on its operating results and financial condition.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Income Taxes
The current provisions for income taxes of $1,600 for fiscal year ended
July 31, 2001 and $800 for July 31, 2000 is the minimum franchise tax
paid to the State of California regardless of income or loss.
At July 31, 2001, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $7,146,000, and
$6,523,000, and $3,073,000, respectively. At July 31, 2000, the Company
has financial, federal, and California tax net operating loss
carryforwards of approximately $5,594,000. $5,076,000, and $2,377,000,
respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to accrued expenses and
valuation allowances reported in the financials but not deductible for
tax purposes. The difference between federal and California tax loss
carryforwards is primarily due to the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforwards will
begin expiring in the fiscal year ended July 31, 2011, unless
previously utilized and will completely expire in fiscal year ended
July 31, 2020. The California tax loss carryforwards will begin
expiring in fiscal year ended July 31, 2001, unless previously utilized
and will completely expire in fiscal year ended July 31. 2010.
The Company adopted Financial Accounting Standards Board Statement No.
109, Accounting for Income Taxes, beginning in fiscal year ended July
31, 1993. The adoption had no impact on 1993 results. In accordance
with this new standard, the Company has recorded total deferred tax
assets of $ 1,304,000 and $ 1,181,000 for the fiscal years ended July
31, 2001 and 2000, respectively. Realization of these deferred tax
assets, which relate to operating loss carryforwards and timing
differences, is dependant on future earnings. The timing and amount of
future earnings are uncertain and therefore, the valuation allowance
had been established. The increase in the valuation allowance on the
deferred tax asset during the fiscal year ended July 31, 2001 was
$123,000.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
are as follows:
July 31 July 31
2001 2000
---- ----
Net operating loss carryforward $ 1,263,000 $ 1,108,000
Depreciation and amortization 0 0
Accrued expenses and calculation allowances 36,000 71,000
Other 5,000 2000
----- ----
Total deferred tax assets 1,304,000 1,181,000
Valuation allowance for deferred tax assets (1,304,000) (1,181,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=============== ==========
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 2. Restatement of Financial Statements
Year Ended July 31, 2001 - 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
income statement 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. The balance sheet effect is to show a decrease in
Deferred Acquisition Costs in 2001 of $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 $29,153
at July 31, 1999 and is shown as a prior period adjustment on the
Consolidated Statements of Accumulated Deficits. A liability of $33,791
at July 31, 2001 and $34,520 at July 31, 2000 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, 2000 of $5,367.
Year Ended July 31, 2000 - Write Down of Impaired Assets And Change in
Asset Lives
Ampromed was purchased in October 1998 to enable the Company to take
advantage of the lucrative markets for medical and dental supplies in
Brazil and other South American countries and to later introduce and
distribute its water purification products to these markets. Since the
acquisition the economic conditions in the region have declined and
implementation of the project has been delayed. The Company no longer
has immediate plans to import medical and dental supplies into Brazil
but believes, however, that Ampromed is a vital part of its plan to
market and sell "Axenohl", RoachX and the Nutripure line of water
treatment products. The Company believes there is considerable value in
owning a Brazilian Limitada but has reassessed the value of the
goodwill and the customer list it purchased. Statement of Financial
Accounting Standards No. 121 (Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) requires
an entity to review long-lived assets and identifiable intangible
assets when, among other factors, there is a change in the extent or
manner in which an asset is to be used or when there is a significant
change in the business climate that could affect the value of an asset.
Because the Company suspended its plans to market medical and dental
supplies in Brazil in May of 2000 it believes the Goodwill and Customer
List assets should be written off, and the value of the Limitada
license to do business in Brazil should be written down to what it
would cost to acquire in today's market. This is estimated to be
approximately $150,000 and is being amortized over its expected useful
life of 15 years.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
At the date of acquisition of Ampromed the Company established
amortization periods for the assets purchased at the maximum allowable
life of 40 years. We now believe these estimated lives were too long
and the life of the goodwill should have been set at 5 years to reflect
a more reasonable amortization expense under the circumstances and the
uncertainty involved in commitments from a foreign government. Also, an
analysis of the customer list based on original estimates indicates
that a 6 year life is a more appropriate amortization period for this
intangible asset. In addition, instead of the straight-line method, the
Company has computed an accelerated method of amortization for the
customer list based on an analysis of expected future cash flows at
July 31, 1999 and July 31, 2000. The effect of this restatement is to
increase General and Administrative Expense by an increase to
amortization cost of $152,800 in the year ended July 31,1999. The
effect of the restatement in the year ended July 31, 2000 is a write
down of impaired asset charge of $505,400 and an increase in General
and Administrative Expense by an increase to amortization cost of
$133,20
Note 3. Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair
value because of the short maturity of these instruments. The Company
maintains cash balances at several financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
At July 31, 2001 and July 31, 2000, the Company's cash and cash
equivalents is represented by $207,092 and $1,121,316, respectively, in
cash or checking accounts.
Note 4. Restricted Cash
At July 31, 2001, the Company had no restricted cash. At July 31, 2000,
the Company's restricted cash consisted of a certificate of deposit of
$205,574. These certificates of deposit were held by a bank, as
security for a line of credit with the same bank (Note 6).
Note 5. Due from Officers and Employees
At July 31, 2001, notes receivable of $66,561 represents amounts due
from officers and $173,440 represents amounts due from employees. At
July 31, 2000, notes receivable of $162,793 represents amounts due from
officers and $63,936 represent amounts due from employees. Due from
officers at July 31, 2001 consisted of a loan to the president of
$18,379 and a loan to the chief financial officer of $48,182 due and
payable at July 31, 2002. These were renewals and changes of prior year
notes to $117,339 and $45,454, respectively, that were due at July 31,
2001. All notes receivable are due and payable within one year. The
carrying value of the notes, based on the terms at which those same
loans would be made currently, approximate their fair value. All notes
in excess of $10,000 have interest accrued at 6%
Note 6. Property, Plant and Equipment
The following is a summary of property, plant, and equipment - at cost,
less accumulated depreciation:
July 31, 2001 July 31, 2000
--------------------- ----------------------
Computers and equipment $ 1,061,197 $ 927,257
Furniture and fixtures 103,855 100,630
Website 207,916 207,916
Vehicle 50,985 50,985
Leasehold improvements 307,606 304,623
--------------------- ----------------------
1,731,559 1,591,411
Less: accumulated depreciation
and amortization 828,487 535,159
--------------------- ----------------------
Total $ 903,072 $ 1,056,252
--------------------- ----------------------
Depreciation expense charged to general and administrative expense for
the years ended July 31, 2001 and July 31, 2000 was $193,477and
$159,624, respectively.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 7. Debt
The details relating to debt are as follows:
July 31, 2001 July 31, 2000
------------- ------------
Line of Credit Community 1st Bank $200,000 line of credit,
interest at 8.35% Due and payable February 25, 2001
Secured by certificate of deposit of $205,574 $ - $ 196,009
Line of Credit Flagship Capital, Inc. for financing
of accounts payable, interest at 9% payable at $15,823
monthly beginning March 17, 2000.
- 14,583
----------- -----------
Total notes payable - 210,592
Current maturities of notes payable included in
current liabilities - 210,592
------------ -----------
Total long term debt $ - $ -
------------ ------------
Note 8. Commitments
The company leased office and warehouse facilities under an operating
lease that expired on December 31, 1996. On May 14, 1996, the Company
entered into a new operating lease agreement for sixty-five months
commencing on July 1, 1996. The rent payment portion of the lease is
for sixty-three months, which allows for an initial building
improvement period of two months. The monthly rental for the 11,255
square foot facility is $0.69 per square foot plus $0.14 per square
foot for maintenance of common areas. There is also a fixed yearly
increase of 4%. The company has also signed an amendment to the lease
to allow for an option to lease the building for an additional five
years. The company made improvements to the new building in the amount
of approximately $307,000.
The rental expense recorded in general and administrative expenses for
the years ended July 31, 2001 and July 31, 2000 was $133,968 and
$98,835, respectively. Future minimum rental payments required for each
of the 5 succeeding years assuming exercise of the option are as
follows:
Year Ended July 31 Amount
2002 $139,327
2003 $144,900
2004 $150,696
2005 $156,724
2006 $162,993
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 9. Capital Stock
The following schedule summarizes the change in capital stock:
Common Common
Stock Stock A Warrants A Warrants Z Warrants
Shares $ Issued $ Issued
------------- --------------- ------------- ------------ -------------
Balance, July 31, 1999 4,392,242 6,663,318 3,687,500 108,750 785,000
Sale of stock 783,250 759,055 - - -
Private placement 767,411 2,596,500 - - -
------- --------- ---------- --------- ----------
Balance, July 31, 2000 5,942,903 10,018,873 3,687,500 108,750 785,000
Sale of stock 245,467 640,884
Private placement 421,314 851,158
Stock Dividends 121,961 -
Acquisitions 223,054 -
-------
Balance, July 31, 2001 6,954,699 $11,510,915 3,687,500 $108,750 785,000
========= =========== ========= ======== =======
Each Class A warrant entitles the holder to acquire an additional
common share for $5.25 per common share beginning August 8, 1997 and
expiring August 8, 2001. The Class A Warrants are redeemable by the
Company for $0.05 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$9.00 per share for thirty consecutive business days ending within five
days of the date of notice of redemption.
Each Class Z warrant entitles the holder to acquire an additional
common share for $10.00 per common share beginning August 8, 1998 and
expiring August 8, 2001. The Class Z Warrants are redeemable by the
Company for $0.10 per warrant, at the Company's option, commencing one
year after the effective date of the offering provided the closing bid
price for the Company's common shares shall have averaged in excess of
$15.00 per share for thirty consecutive business days ending within
five days of the date of notice of redemption.
On August 8, 2001 the total 3,687,500 Class A warrants and the total
785,000 Class Z warrants expired without exercise.
Note 10. Related Party Transactions
See Note 4 and Note 10.
Note 11. Stock Option Plans
The Company has the following stock option plans (the Plans) pursuant
to which options to acquire common stock have been granted.
1996 Incentive Stock Option Plan: Approved by Shareholders in April,
1996 with 1,000,000 shares authorized under this Plan. The maximum
number of shares subject to options granted under this Plan to any one
Key Employee is 100,000 shares. The Options granted are "Incentive
Stock Options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, for certain key employees. All Key
Employees of the Company and its subsidiaries are eligible to
participate in the 1996 Incentive Plan. A Key Employee is defined in
the Plan as a Company employee who in the judgment of the
Administrative Committee has the ability to positively affect the
profitability and economic well-being of the Company. Part time
employees, independent contractors, consultants and advisors performing
bona fide services to the Company shall be considered employees for
purposes of participation in the Plan. No Executive Officer or Director
of the Company has received options pursuant to this Plan. Options to
acquire 350,125 shares under the 1996 Incentive Plan were outstanding
as of July 31, 2001 with 356,125 shares remaining under this Incentive
Plan for which options may be granted.
1996 Directors and Officers Stock Option Plan: Adopted by the Board in
April, 1996 with 1,000,000 shares authorized under this Plan. The
maximum number of shares subject to options granted under this Plan to
any one Director or Officer shall not exceed 200,000 shares in any
12-month period. Options to acquire 549,625 shares under the 1996 D&O
Plan were outstanding as of July 31, 2001 and there are no shares
remaining under this Plan for which options may be granted.
Amended 1998 Directors and Officers Stock Option Plan: Approved by
Shareholders in December, 1998 with 2,000,000 shares authorized under
this Plan. The maximum number of shares subject to options granted
under this Plan to any one Director or Officer shall not exceed 200,000
shares in any 12-month period. Upon the election of a continuing
director or the further appointment of a continuing executive officer,
the continuing director or officer will receive an additional option
for 50,000 shares. A newly elected director or newly appointed
executive officer is entitled to receive an option for 100,000 shares.
Options to acquire 1,281,250 shares under this Plan were outstanding as
of July 31, 2001 and there are no shares remaining under this Plan for
which options may be granted.
2001 Directors and Officers Stock Option Plan: Approved by Shareholders
in January 2001 with 1,000,000 shares authorized under this Plan. The
maximum number of shares subject to options granted under this Plan to
any one Director or Officer shall not exceed 200,000 shares in any
12-month period. Upon the election of a continuing director or the
further appointment of a continuing executive officer, the continuing
director or officer will receive an additional option for 50,000
shares. A newly elected director or newly appointed executive officer
is entitled to receive an option for 100,000 shares. Options to acquire
44,790 shares under this Plan were outstanding as of July 31, 2001 and
there are 955,210 shares remaining under this Plan for which options
may be granted.
2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001
with 1,000,000 shares authorized under this Plan. Options to acquire
550,000 shares under this Plan were outstanding as of July 31, 2001 and
there are 450,000 shares remaining under this Plan for which options
may be granted.
2001 Consultants and Advisors Stock Option Plan: Adopted by the Board
in January 2001 with 500,000 shares authorized under this Plan. The
maximum number of shares subject to options granted under this Plan to
any one participant shall not exceed 50,000 shares in any 12-month
period. No options to acquire shares under this Plan were outstanding
as of July 31, 2001 and there are 500,000 shares remaining under this
Plan for which options may be granted.
The Plans are administered by a Committee of the Board of Directors or
the entire Board. The exercise price of options granted under any of
the Plans must be at or above the fair market value for the common
stock at the date of grant.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
The Company estimates a fair value method of accounting for stock-based
compensation in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). In accordance with SFAS 123, the Company has chosen to continue
to account for employee stock-based compensation utilizing the
intrinsic value method. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market price of
the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost
of stock-based employee compensation is measured at the grant date
based on the value of the award and is recognized over the service
period. The value of the stock based award is determined using a
pricing model whereby compensation cost is the excess of the fair value
of the stock as determined by the model at grant date or other
measurement date over the amount an employee must pay to acquire the
stock.
The Company accounts for non-employee stock based compensation by
establishing a fair value for stock options granted. Compensation cost
is measured as the excess, if any, of the fair value of the Company's
stock over the amount the non-employee must pay to acquire the stock
and is recognized over the anticipated service period.
The effect of applying FAS 123 on the years ended July 31, 2001 and
2000 pro forma net loss as stated below is not necessarily
representative of the effects on reported net loss for future years due
to, among other things, the vesting period of the stock options and the
fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under FAS 123, the Company's
net loss in the years ended July 31, 2001 and 2000 would have been
approximately $2,420,628 and $3,292,510 or $(0.38) per share and
$(0.66) per share, respectively, on a diluted basis. The fair value of
the options granted during the years ended July 31, 2001 and 2000 are
estimated at $1.22 per share and $1.84 per share, respectively, on the
date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for grants in 2001 and 2000; no
dividend yield, volatility of 98.79% and 124%, respectively; a
risk-free interest rate of 5.50% and 5.50%, respectively and an
expected life of 3.51 year from date of vesting. A summary of stock
option activity is as follows:
Weighted-Average
Number of Shares Exercise Price ($)
------------------------- -----------------------
Balance at July 31, 1999 1,615,000 1.17
Granted 1,246,540 1.81
Exercised (781,750) 1.78
Forfeited (44,250) 1.34
--------
Balance at July 31, 2000 2,035,540 1.55
Granted 997,000 2.21
Exercised (203,824) 1.78
Forfeited (93,750) 1.50
--------
Balance at July 31, 2001 2,734,966 1.72
==========
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Outstanding Exercisable
Weighted Weighted
Range of Number Average Average Weighted
Exercise Shares Life Exercise Number Average
Prices Outstanding (in years) Price Exercisable Price
-------------------- --------------- --------------- ---------------- ------------------ ------------
$0.56 285,000 2.0 $ 0.56 235,000 $ 0.56
$1.00 553,750 1.9 $ 1.00 352,500 $ 1.00
$1.31 to $1.50 274,966 3.7 $ 1.45 176,875 $ 1.48
$1.63 to $1.90 315,000 3.6 $ 1.71 165,000 $ 1.79
$2.00 to $2.50 900,000 3.0 $ 3.01 480,000 $ 2.01
$2.93 to $3.20 406,250 3.3 $ 3.01 406,250 $ 3.01
-------- --------
2,734,966 2.9 $ 1.72 1,815,625 $ 1.78
========= =========
Note 12. Pension Plan
The Company participates in a Small SEP program under which the
employer makes contributions to a SEP, which includes a salary
reduction arrangement (SARSEP). Employees who participate in the SARSEP
may elect to have the employer: (a) make contributions to the SEP on
their behalf, or (b) pay them cash. A salary reduction arrangement may
be used only in years in which the SEP meets requirements that the IRS
may impose to ensure distribution of excess contributions. Annual
contributions of an employer under a SEP are excluded from the
participant's gross income. No employer contributions were made during
the fiscal years ending July 31, 2000 and July 31, 2001.
Note 13. Credit Risk and Fair Value of Financial Instruments
The Company markets its products to numerous customers in various
geographic regions, thereby spreading its credit risk related to
receivables. See Note 2 Cash and Cash Equivalents as to the discussion
of credit risks concerning cash equivalents.
The carrying amounts for cash and cash equivalents, receivables, and
payables approximate fair value because of the short maturity,
generally less than three months, of these instruments. The carrying
value of the Company's long-term debt approximates fair value since the
current borrowing rates available for financing are similar in terms.
Note 14. Cumulative Change in Accounting Principle
During fiscal years 1999 and 2000, the Company incurred approximately
$208,000 in development costs related to construction of the
Nutripure.com website. These costs were originally expensed as
incurred. In the accompanying financial statements, these costs have
been retroactively capitalized and included in fixed assets at July 31,
2000 in compliance with SOP 98-1 (Statement of Position issued by the
Accounting Standards Executive Committee). Of these costs, $79,900 were
incurred in prior years and are shown as a change in accounting
principle consistent with EITF Issue No. 00-2 - Emerging Issues Task
Force Issue titled: Accounting for Web Site Development Costs dated
March 16, 2000.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 15. Business Segment and Sales Concentrations
In accordance with the provisions of SFAS No. 131, certain information
is disclosed based on the way management organizes financial
information for making operating decisions and assessing performance.
In determining operating segments, the Company reviewed the current
management structure reporting to the chief operating decision-maker
('CODM') and analyzed the reporting the CODM receives to allocate
resources and measure performance.
The Company's business activities are divided, managed and conducted in
two basic business segments, the Water Treatment segment and the
Bioscience segment. These two segments were determined by management
based upon the inherent differences in the end use of the products, the
inherent differences in the value added processes made by the Company,
the differences in the regulatory requirements and the inherent
differences in the strategies required to successfully market finished
products. The Water Treatment segment includes Commercial Water
treatment, Residential Retail products and the Nutripure Water Dealer
program. Bioscience includes two new products, Axenohl (Silver Ion
Technology) and RoachX (Pest Management).
The Company plans to utilize multiple forms of analysis and control to
evaluate the performance of the segments and to evaluate investment
decisions. In general, gross margin and Earnings Before Interest
Depreciation and Amortization (EBITDA) are deemed to be the most
significant measurements of performance, although collection volumes
and certain controllable costs also provide useful "early warning
signs" of future performance. Because the Company has just recently
changed to multiple segments, historical data on gross profit and
income from operations is not available. However, the following is a
summary of segment revenues at July 31, 2001:
% % Total
Fiscal Year End Total Fiscal Year Sales
2001 Sales End 2000
Water Treatment Division
Commercial Water Treatment $1,698,900 71% $1,597,500 96%
Residential Retail Water Treatment $190,800 8% $29,800 2%
Nutripure Dealer Program $167,400 7% $34,200 2%
Bioscience Division
Silver Ion Technology $320,300 13% - -
Pest Management Technology $32,300 1% - -
---------- -----------
Total Revenues $2,409,700 $1,661,500
Significant customers primarily consisted of domestic retail chain
pharmacies. Sales concentrations to major chain stores were
approximately $1,294,600 and export sales were $390,100 for the year
ended July 31, 2001. No customer accounted for more than 10% of
consolidated sales.
Note 16. Stock Dividend and Share Exchange
In December 1999, Innovative Medical Services formed a wholly owned
subsidiary, Nutripure.com, to capitalize on internet commerce
opportunities focusing on health and wellness. Total authorized
capitalization of the corporation was 50,000,000 shares of common stock
at $.001 par value. The Company purchased 8,000,000 shares and the
newly formed board of directors of the subsidiary purchased 900,000
shares all at par value. In February of 2000 the corporation raised
$550,000 in a private placement of 1,100,000 at $0.50 per share. At
this point the minority interest represented 20% of the outstanding
common stock of the corporation. Minority interest payable and income
from operations were first recognized in the consolidated financial
statements in the quarter ended April 30, 2000. On October 24, 2000,
the Company issued 183,337 shares of common stock valued at $550,011
($3.00 per share) in exchange of 1,100,000 shares of Nutripure.com
stock representing the 10% minority interest outstanding shares of
Nutripure.com, which were originally purchased for $.50 cents per
share. Management of Nutripure.com did not exchange shares. Shares held
by Management were eliminated by a reverse split, effective March 16,
2001.
Innovative Medical Services
Notes to Consolidated Financial Statements
See Independent Accountants' Report
In January 2000, Innovative Medical Services declared a dividend in
kind of Nutripure.com common stock as the Company began the process to
spin off Nutripure.com as a separate public company. The record date
and distribution date were to be set following completion of the
registration of Nutripure.com as a reporting issuer with the Securities
and Exchange Commission. Following the announcement of the dividend,
however, adverse market conditions for solely internet-based ventures
eroded Management's confidence in the viability of a public market for
Nutripure.com common stock. Therefore, the Board amended its
declaration of a Nutripure.com dividend to a dividend of Innovative
Medical Services' common stock and the Company purchased the minority
interest in Nutripure.com through an exchange of shares. The Company
retains Nutripure.com as an operating division of Innovative Medical
Services in order to minimize the substantial administrative expense
associated with launching and operating a public company.
On October 26, 2000, Innovative Medical Services announced that the
Board of Directors voted to declare a dividend in kind of Innovative
Medical Services' common stock. This common stock dividend was declared
and distributed in lieu of the previously announced dividend of
Nutripure.com shares. The Company distributed one share of Innovative
Medical Services' common stock for every fifty shares held of record on
November 6, 2000, with fractional shares rounded up to the nearest
whole share, for a total of 121,961 shares.
Note 17. Subsequent Events
On August 14, 2001, 20,000 options were exercised bringing the total
outstanding shares of common stock to 6,974,699 as of October 29, 2001,
the date of the Form 10KSB filing.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
31. -- Sarbanes Oxley Section 302 Certification
32. -- Sarbanes Oxley Section 906 Certification
B. Reports on Form 8-K:
A Current Report on Form 8-K was filed on May 24, 2001 and amended on
October 19, 2001
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES DATE
/s/ MICHAEL L. KRALL August 19, 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/ DENNIS BROVARONE Director August 19, 2003
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Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer and Director August 19, 2003
------------------------------------------- --------------
Gary Brownell
/s/ PATRICK GALUSKA Director August 19, 2003
------------------------------------------- --------------
Patrick Galuska
/s/ MICHAEL L. KRALL President/CEO and Director August 19, 2003
------------------------------------------- --------------
Michael L. Krall
/s/ EUGENE PEISER Director August 19, 2003
------------------------------------------- --------------
Eugene Peiser
/s/ GREGORY BARNHILL Director August 19, 2003
------------------------------------------- --------------
Gregory Barhill