U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the period ended April 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period from ___ to ___
Commission File number 0-21019
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INNOVATIVE MEDICAL SERVICES
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(Name of small business issuer in its charter)
California 33-0530289
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices)
619 596 8600
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Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 6,785,799 as of June 14,
2001.
EXPLANATORY NOTE ON AMENDMENT
The Registrant has filed this Amendment in response to comments received from
the staff of the U.S. Securities and Exchange Commission. The Amendment has
revised the following sections:
Notes to Financial Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Exhibits
Signatures
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2000 and April 30, 2001
Statements of Operations for the three months and nine
months ended April 30, 2000 and 2001
Statements of Cash Flows for the nine months ended
April 30, 2000 and 2001
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(Unaudited)
April 30 July 31
2001 2000
Restated Restated
ASSETS (Note 6) (Note 6)
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Current Assets
Cash and cash equivalents $ 520,086 $ 1,121,316
Restricted cash -- 204,887
Accounts receivable, net of allowance for doubtful
accounts of $ 225,000 at April 2001
and $225,000 at July 31, 2000 408,361 411,322
Due from officers and employees 292,913 226,729
Inventories 823,609 796,136
Prepaid expenses 39,805 33,975
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Total current assets 2,084,774 2,794,365
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Property, Plant and Equipment
Property, plant and equipment 934,132 1,056,252
------------ ------------
Total property, plant and equipment 934,132 1,056,252
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Noncurrent Assets
Deposits 8,127 14,083
Patents and licenses 956,927 300,910
Deferred acquisition costs -- 202,542
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Total noncurrent assets 965,055 517,535
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Total assets $ 3,983,960 $ 4,368,152
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 480,112 $ 308,812
Accrued liabilities 57,762 36,880
Notes payable 200,000 210,592
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Total current liabilities 737,874 556,284
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Minority interest payable -- 61,697
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Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
6,630,091 at April 30, 2001 and
5,942,903 at July 31, 2000 11,001,345 10,018,873
Class A warrants: issued and outstanding 3,686,000
warrants 108,750 108,750
Accumulated deficit (7,864,009) (6,377,452)
------------ ------------
Total stockholders' equity 3,246,087 3,750,171
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Total liabilities and stockholders' equity $ 3,983,960 $ 4,368,152
============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Nine Months Ended For the Three Months Ended
April 30 April 30
-------- --------
2001 2000 2001 2000
----------- ----------- --------- ---------
Net sales $ 1,462,586 $ 1,574,840 $ 701,146 $ 357,845
Cost of sales 894,457 809,301 469,941 234,249
----------- ----------- --------- ---------
Gross profit 568,129 765,539 231,205 123,596
----------- ----------- --------- ---------
Selling expenses 483,605 406,377 206,439 147,947
General and administrative expenses 1,329,340 1,154,143 389,846 582,880
Research and development 268,203 84,496 185,400 40,380
----------- ----------- --------- ---------
---------
Total operating costs 2,081,148 1,645,016 781,685 771,207
----------- ----------- --------- ---------
Operating income (loss) (1,513,019) (879,477) (550,480) (647,611)
----------- ----------- --------- ---------
Other income and (expense):
Interest income 25,932 4,218 2,770 1,714
Interest Expense (11,100) (65,286) (1,455) (29,772)
----------- ----------- --------- ---------
Total other income (expense) 14,832 (61,068) 1,315 (28,058)
----------- ----------- --------- ---------
Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (1,498,187) (940,545) (549,165) (675,669)
Federal and state income taxes 1,200 600 800 200
----------- ----------- --------- ---------
Income (loss) before minority interest in subsidiary
operations and change in accounting principle (1,499,387) (941,145) (549,965) (675,869)
Minority interest in subsidiary operations 14,972 26,718 -- 26,718
----------- ----------- --------- ----------
Net income (loss) before cumulative
change in accounting principle (1,484,415) (914,427) (549,965) (649,151)
Cumulative effect of change
in accounting principle -- 79,896 -- --
----------- ----------- --------- ---------
---------
Net income (loss) $(1,484,415) $ (834,531) $(549,965) $(649,151)
=========== =========== ========= =========
Net income (loss) per common share before change
in accounting principle (basic) $ (0.24) $ (0.17) $ (0.09) $ (0.12)
Cumulative effect of change
in accounting principle -- 0.02 -- --
----------- ----------- --------- ---------
Net income (loss) per common share (basic) $ (0.24) $ (0.15) $ (0.09) $ (0.12)
=========== =========== ========= =========
Net income (loss) per common share before change
in accounting principal (diluted) $ (0.24) $ (0.16) $ (0.09) $ (0.12)
Cumulative effect of change
in accounting principle -- 0.01 -- --
----------- ----------- --------- ---------
Net income (loss) per common share (diluted) $ (0.24) $ (0.15) $ (0.09) $ (0.12)
=========== =========== ========= =========
Nine Months
Ended Year Ended
April 30 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2001 2000
Balance, beginning of period $ (6,377,452) $ (3,840,610)
Net income (loss) (1,484,415) (1,745,431)
----------- -----------
Balance, end of period $ (7,864,009) $ (5,586,041)
============= =============
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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For the Nine Months Ended
April 30
2001 2000
----------- ------------
Cash flows from operating activities
Net income (loss) $(1,484,415) $ (834,531)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 63,579 --
Depreciation 143,602 115,324
Minority interest in subsidiary operations (61,697) 75,082
Changes in assets and liabilities:
(Increase) decrease in restricted cash 204,887 4,613
(Increase) decrease in accounts receivable 2,961 (223,938)
(Increase) decrease in due from officers and employees (66,183) 122,877
(Increase) decrease in prepaid expense (5,830) 7,758
(Increase) decrease in inventory (27,473) (22,075)
(Increase) decrease in deposits 5,956 (6,508)
(Increase) decrease in goodwill -- 6,750
(Increase) decrease in intangible assets -- (49,525)
Increase (decrease) in accounts payable 171,300 (272,987)
Increase (decrease) in accrued liabilities 20,882 12,641
----------- -----------
Net cash provided (used) by operating
activities (1,032,431) (1,064,519)
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (87,202) (316,852)
Purchase of patent and licenses (453,475) (150,465)
----------- -----------
Net cash (used) in investing activities (540,677) (467,317)
----------- -----------
Cash flows from financing activities
Proceeds from debt obligations 200,000 121,300
Payments on debt obligations (210,593) (306,956)
Proceeds from sale of common stock 982,471 3,108,655
----------- -----------
Net cash provided by financing activities 971,878 2,922,999
----------- -----------
Net increase (decrease) in cash and cash
equivalents (601,230) 1,391,163
Cash at beginning of period 1,121,316 22,056
----------- -----------
Cash at end of period $ 520,086 $ 1,413,219
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 11,100 $ 65,286
Cash paid for taxes paid $ 1,200 $ 600
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 $ --
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The financial statements included herein have been prepared by
Innovative Medical Services (the Company) without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by
such rules and regulations, and Innovative Medical Services believes
that the disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be
read in conjunction with the July 31, 2000 audited financial
statements and the accompanying notes thereto. While management
believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are in some
respects dependent upon the facts that will exist and procedures that
will be accomplished by Innovative Medical Services later in the year.
The results of operations for the interim periods are not necessarily
indicative of the results of operations for the full year.
Note 2. 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. IMS 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 4/30/2000. On October 24, 2000, the
Company issued 183,337 shares of common stock valued at $550,011
($3.00 per share) in exchange of 1,100,000 shares of Nutripure.com
stock representing the 10% minority interest outstanding shares of
Nutripure.com, which were originally purchased for $.50 cents per
share. Management of Nutripure.com did not exchange shares. Shares
held by Management were eliminated by a reverse split, effective March
16, 2001.
In January 2000, Innovative Medical Services declared a dividend in
kind of Nutripure.com common stock as the Company began the process to
spin off Nutripure.com as a separate public company. The record date
and distribution date were to be set following completion of the
registration of Nutripure.com as a reporting issuer with the
Securities and Exchange Commission. Following the announcement of the
dividend, however, adverse market conditions for solely internet-based
ventures eroded Management's confidence in the viability of a public
market for Nutripure.com common stock. Therefore, the Board amended
its declaration of a Nutripure.com dividend to a dividend of
Innovative Medical Services' common stock and the Company purchased
the minority interest in Nutripure.com through an exchange of shares.
The Company retains Nutripure.com as an operating division of
Innovative Medical Services in order to minimize the substantial
administrative expense associated with launching and operating a
public company.
On October 26, 2000, Innovative Medical Services announced that the
Board of Directors voted to declare a dividend in kind of Innovative
Medical Services' common stock. This common stock dividend was
declared and distributed in lieu of the previously announced dividend
of Nutripure.com shares. The Company distributed one share of
Innovative Medical Services' common stock for every fifty shares held
of record on November 6, 2000, with fractional shares rounded up to
the nearest whole share, for a total of 121,961 shares.
Note 3. Acquisitions
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
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Total Assets 200,988
Liabilities:
Notes Payable - IMS 60,035
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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 quarter. 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 ETIH2O with a newly formed Nevada corporation of
similar name and dissolved the Florida corporation. ETI-H2O, a
privately held technology corporation, developed Axenohl 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 will be amortized over a period of 17
years. RoachX is a safe 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.
Note 4. Common Stock
In addition to the common stock issued, described in Notes 2 and 3,
the Company completed the following private placements during the nine
months ended April 30, 2001:
1. A $250,000 private placement in October 2000 in which the
Company 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 the
Company 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 the
Company issued 150,000 shares of common stock to four
investors at $1.50 per Unit. As part of this registration
the Company 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 exercise price for the Warrant in
each unit shall equal 120% of the average closing bid price
for the five trading days immediately preceding the receipt
of Notice of Conversion.
The Company also received approximately $151,000 from the exercise of
options during the nine-month period ending April 30, 2001.
Note 5. Segment Information
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
Bio Sciences 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 can be broken down
further into Commercial Water treatment, Residential Retail products
and the Nutripure Water Dealer program. Bio Sciences include 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 April 30, 2001:
Three months Ended Nine months Ended
April 30, 2001 April 30, 2001
Revenues:
Commercial Water Treatment $415,600 $1,142,800
Residential Retail Products 111,500 145,800
Nutripure Dealership Program 140,200 140,200
Silver Ion Technology 30,300 30,300
Pest Management 3,500 3,500
Total Revenues $701,100 $1,462,600
Significant customers consisted primarily of domestic retail chain
pharmacies. Sales concentrations to major chain stores were
approximately $329,800and $754,600, respectively, for the three months
and the nine months ended April 30, 2001. No customer accounted for
more than 10% of consolidated sales. Export sales were $48,000 for the
quarter and $89,300 for the nine months ended April 30, 2001.
Note 6. Write Down of Impaired Assets
Ampromed was purchased in October of 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 the Company
has reassessed the value of the goodwill the customer list it
purchased Statement of Financial Accounting Standards No. 121
(Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of) requires an entity to review long-lived
assets and identifiable intangible assets when, among other factors,
there is a change in the extent or manner in which an asset is to be
used or when there is a significant change in the business climate
that could affect the value of an asset. Because the Company suspended
its plans to market medical and dental supplies in Brazil in May of
2000 the Company believes the Goodwill and Customer List should be
written off, and the value of the Limitada license to do business in
Brazil should be written down to what it would cost to acquire in
today's market. This is estimated to be approximately $150,000 which
will be amortized over its expected useful life of 15 years. The total
reduction of assets from this restatement was $505,400. Because the
effect of the write-down on the statements of operations presented was
only a $2,100 they have not been restated. Instead the adjustment will
be made in the fourth quarter of 2001.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services (the Company) began as a provider of pharmaceutical
water purification products. The Company has expanded from its niche pharmacy
market into other, broader markets with new products, including residential and
commercial water filtration systems, health and wellness-related retail
merchandise, e-commerce products, and silver ion bioscience technologies.
The Fillmaster(R) pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R) water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM) bar code reader. The Company also markets proprietary NSF
certified replacement filters for the Fillmaster Systems.
The Company's Nutripure(R) line of water treatment and filtration systems
includes the Nutripure 3000S-Series whole-house water softening systems, the
Nutripure Elite reverse osmosis point-of-use systems, the Nutripure 2000
countertop water filtration system and the Nutripure Sport filtered sport
bottle. The Company distributes its various Nutripure products in several ways,
including retail sales, catalogue placement, business-to-business sales,
internet promotion and in-home sales presentations.
During the first nine months of fiscal 2001, Innovative Medical Services created
and launched the Nutripure water dealer program, a comprehensive sales and
marketing program for the water treatment industry. The program offers existing
independent water treatment dealers a line of residential water softening and
other point-of-use water treatment equipment for sale to the public under IMS'
Nutripure brand. In addition, the program provides complementary,
industry-unique financing that extends credit to consumers for the purchase of
water treatment equipment. The Company has partnered with MBNA and Automated
Payment Services ("APS") 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 programs offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers. The
dealer base for the program grows steadily, and the Company expects revenues
from the Nutripure dealer program to accelerate in the second half of the year.
In the third quarter, the Company announced that it has partnered with
USFilter(R) to provide equipment to the Nutripure dealers. The Company believes
that combining the unique Nutripure marketing and financing programs with
USFilter's excellent products positions it to become a leader in the home water
treatment industry. Also in the third quarter, Innovative Medical Services
launched its first Nutripure Master Dealer.
Innovative Medical Services launched its second Nutripure Master Dealer on June
6, 2001. The June launch, like the May launch, included a 2-day training seminar
for the sales people. The conversion to Nutripure included adopting the
Nutripure logo and style on all buildings, collateral materials, vehicles and
attire. Innovative Medical Services expects to add four additional master
dealers in the coming quarter. The Company has been receiving purchase orders
and shipping products to its master dealers since April and is on schedule to
add four additional master dealers in the coming quarter.
Innovative Medical Services has obtained worldwide manufacturing and marketing
rights for advanced silver ion technologies. Axenohl(TM)/Axen(TM) is an
antimicrobial technology that uses the biocidal properties of ionic silver to
kill bacteria, viruses and fungi. Axenohl's broad effectiveness works to prevent
and treat infection, and, unlike traditional disinfectants, Axenohl is non-toxic
and environmentally friendly. Potential applications for products containing
Axenohl include municipal and point-of-use/point-of-entry water treatment, food
processing, personal disinfecting retail products, and commercial and retail
hard surface disinfecting products. In addition, this technology may provide
applications in the healthcare market for treatment of disease, including human
and animal infections and wounds, and for disinfecting applications in
hospitals, clinics, surgical centers, dental offices and other medical and
health related facilities.
The disinfection efficacy of Axenohl has been well documented by independent
testing laboratories. Axenohl eliminates the following test organism strains all
within one minute and with 99.9999% efficacy (complete kill): Pseudomonas
aeruginosa ATCC 15422, Staphylococcus aureus ATCC 6538, Salmonella cholerasuis
ATCC 10708, E. Coli ATCC 0157:H7, Listeria monocytogenes ATCC 11543, Entrococcus
facium ATCC 11543, Rhino virus (common colds), and Rotavirus (infectious
diarrhea).
In March 2001, the US Patent and Trademark Office issued US Patent Number
6,197,814 for Axenohl. Patent applications have been filed in more than 50
countries and regions, and the World Intellectual Property Organization
published the Axenohl International Patent Application on April 22, 1999 under
publication number WO 99/18790. The inventor of Axenohl is Mr. Andrew B. Arata,
President of ETIH2O Corporation, and the registered patent assignee is NVID
International, Inc. Innovative Medical Services entered into a sales, marketing,
distribution and manufacturing agreement for particular geographic areas and
particular market segments for Axenohl/Axen with NVID International on November
24, 1999. On March 26, 2000, Innovative Medical Services entered into a
superseding contract with NVID and ETI-H2O, Inc. of Florida for exclusive,
worldwide sales, marketing and distribution rights for Axenohl/Axen. The latter
contract is the subject of pending litigation with NVID. The lawsuit seeks a
judicial declaration that the Manufacturing, Licensing and Distribution
Agreement, dated March 26, 2000 between the Company, NVID, International, Inc.
and ETI-H2O does not constitute a binding contract and seeks unspecified
damages. The lawsuit does not challenge the binding effect of the Standard
Manufacturing Agreements dated November 30, 1998 and September 17, 1999 between
NVID, International, Inc. and ETI-H2O and the November 24, 1999 License
Agreement between the Company and NVID, International, Inc. The dispute does not
affect any of the Company's rights associated with the EPA registrations. Under
the registrations, ETI-H2O is the only EPA-approved producer of Axenohl and
Axen. Registration under the Federal Insecticide, Fungicide and Rodenticide Act
(FIFRA) is required before a product can be sold in the United States. Should
NVID prevail in its lawsuit, Innovative Medical Services would be limited by
both geography and market segments in its exclusive rights to sell Axenohl.
The EPA registrations for Axen and Axenohl as hard surface disinfectants were
granted in June of 2001. Axen(TM) is also approved in Costa Rica for use as a
water treatment chemical, hard surface disinfectant, and industrial disinfectant
for direct food contact. (Axen(TM) is the trade name for the use dilution
Axenohl solution.) Approval in Costa Rica for human and veterinary topical use
is expected by the end of the year.
In the third quarter, Dodo & Company began purchasing product in preparation for
the September launch of its new product line of acne-fighting cosmetics
containing Axen as its active ingredient. The Company expects to continue to
receive purchase orders from Dodo & Company. In May 2001, Innovative Medical
Services began realizing revenues from sales of Axenohl to additional
international customers.
During the quarter, the Company completed the acquisition of a new pesticide
technology. The EPA-approved RoachX(R) was the first product to launch from the
line, and the Company has submitted for and anticipates EPA approval for AntX.
RoachX is over 96% effective in three to four days with one application for
indoor and outdoor eradication of cockroaches, and can be used near children and
food preparation areas. Boric acid is a well-known and effective deterrent of
cockroaches and will kill them on contact, but cockroaches do not naturally eat
the repellent. Although many pesticide products contain boric acid as the listed
active ingredient, the Company believes RoachX to be new because of the
combination of boric acid and glycerin in a colloidal suspension to create three
unique results: 1) The formula protects the boric acid from water and humidity,
2) The cockroaches perceive formulation as food and will actually eat the
glycerin-encapsulated boric acid, and 3) The formula acts as a time-released
pesticide, allowing the cockroach to return to the nest before it dies and then
becomes a "bait station" for other roaches in the colony. The product line,
containing particular formulas for specific pests, provides excellent results
against cockroaches, ants, palmetto bugs, silverfish, waterbugs, ticks, fleas,
lice and garden pests. RoachX is available through Vopak (formerly Van, Waters &
Rogers) and members of the Speckoz group of nine regional independent
wholesalers.
Innovative Medical Services believes that with RoachX, and AntX it is well
positioned to capitalize on the recent federal restrictions on poisonous
pesticides and the subsequent industry trend of eliminating spray pesticides and
increasing the use of bait-style products like RoachX and AntX. Of all
pesticides not rated "non-toxic", boric acid, the active ingredient in RoachX,
has been found to be "least toxic" technology by the U.S. Environmental
Protection Agency and is 96-100% effective, as tested by the USDA. Many states,
including California, New York and Florida, have legislated to eliminate
pesticide spraying in public schools and move to 100% IPM (integrated pest
management) practices, such as using baits. In addition to school districts,
RoachX is currently being tested and test marketed by dozens of companies in the
US and abroad and is also being tested by the US Navy aboard ships afloat as a
safer and more effective alternative to traditional sprays and other baits that
evaporate or emit fumes.
Also during the quarter, Innovative Medical Services announced the re-launch of
its corporate website - www.IMSPURE.com(TM), and the launch of two new product
websites - www.Axenohl.com(TM) and www.RoachX.com(TM). The dynamic,
user-friendly websites link to each other and provide a complete overview of the
company, its subsidiaries, products, executive management team, company news and
stock information. The new websites also provide key technical data to
Innovative Medical Services' current and prospective customers. Visitors to the
sites may also go to www.Nutripure.com(R), the Innovative Medical Services
e-commerce health products subsidiary. Nutripure.com provides consumers a wide
variety of Bergen Brunswig vitamins, minerals, nutritional supplements,
homeopathic remedies and natural products. In addition to merchandise, the
supersite offers comprehensive health and wellness information in an
easy-to-access, intuitive reference format.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2001 VERSUS THREE
MONTHS ENDED APRIL 30, 2000
During the quarter, the Company began to realize revenues from multiple product
lines in its different divisions. In order to be more informative regarding
distribution of revenues, discussion of revenues will be in terms of the
Company's water treatment, silver ionization and pesticide divisions, rather
than in terms of individual products. Total revenues of $701,100 in the third
quarter ended April 30, 2001 were 96% higher than the $357,800 in revenues
reported for the same quarter ended April 30, 2000. Water treatment division
sales in the 2001 quarter were $667,300. The increase was due to increased
Fillmaster system sales, and increased residential water treatment sales,
including $140,200 in revenues from the new Nutripure water dealer program.
Revenues from the silver ionization division in the quarter were $30,300.
Revenues from the pesticide division were $3,500.
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 the Company currently does 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 in the most recent quarter was $231,200 versus $123,600 in the
year-earlier quarter. The gross profit of 33% in 2001 remained relatively
constant compared to the 35% gross profit in 2000. The slight decrease in gross
profit reflects the changing product mix of the Company. Although the gross
profit of products in the Nutripure line of water treatment products is slightly
less than the gross profit of the specialized Fillmaster line of pharmacy
products, the margins associated with RoachX and Axen/Axenohl are higher than
those of the water treatment products.
Net loss for the quarter ended April 30, 2001 was $550,000 versus a loss of
$649,200 for the same quarter in 2000. During the period General and
Administrative expenses decreased 35% from $582,900 to $389,900. This decrease
was mainly due to a reduction in administrative salaries and bad debt expense.
Also General and Administrative expenses in the recent quarter were reduced
$50,200 by an adjustment to inventory which allocates a portion of G & A expense
to "Work in Process". Research and Development costs increased 359% from $40,400
to $185,400. The increase was due to costs associated with research and testing
of the Axen and Axenohl products and costs associated with RoachX. Selling and
marketing expenses also increased over the prior period rising 40% from $148,000
to $206,400. The increase was due to expenses associated with the launch of the
Nutripure dealer program as well as the costs associated with the marketing of
the Company's newest product, RoachX.
In addition to the ongoing expansion of the water dealer program, distribution
of the Company's other products in the Water Treatment Division continues to
grow. Fillmaster rollouts to Shaws and Kaiser Permanente are on schedule.
Wal-Mart submits reorders on a regular basis for the Nutripure 2000 countertop
water filtration systems stocked in over 350 of its highest volume stores, and
the Company is now connected directly to Wal-Mart's ordering and inventory
system via EDI (Electronic Data Interchange). CVS continues to purchase
Fillmaster systems for its new and remodeled stores at a rate of at least 50
units per month and plans to continue the roll out through the end of the
calendar year. Fillmaster and replacement filter sales to the Company's existing
customers continues steadily. Nutripure Sport Bottle, Nutripure 2000 and
Fillmaster are being tested in Canada, with initial placement in some Pharma
Plus and Wal-Mart Canada Stores. Drug Trading, the eight largest wholesaler in
North America, is now purchasing Fillmaster, Nutripure 2000 and Nutripure Sport
Bottles for their member and associate stores, and Fillmaster, Nutripure 2000
and Nutripure Sport bottles are being sold through several other regional chains
in the US and Canada. In addition to retail sales, the Company is conducting a
successful direct mail program with Nutripure 2000 and the Nutripure Sport
Bottle.
During the quarter, the Company launched its first Nutripure Master Dealer, and,
subsequently, launched its second Master Dealer in June. Revenues from the
program began in the third quarter, and continue to ramp up, with over $61,800
in sales since April 30, 2001, the end of the third quarter, and a backlog of
orders for approximately $48,000.
In March 2001, Innovative Medical Services signed a five-year contract with Dodo
& Company, a leading Korean cosmetics manufacturer and marketer to provide
Axenohl. Dodo & Company will purchase approximately $1.2 million dollars of
product from Innovative Medical Services over five years. In addition to the
purchase price, Innovative Medical Services will receive a royalty on sales of
the Axen-containing products. The Company anticipates that, over the five years,
the revenues from Dodo & Company cosmetics royalties will exceed $5 Million. In
the third quarter, Dodo & Company began purchasing product in April 2001 in
preparation for the September launch of its new product line.
In May 2001, Innovative Medical Services began realizing revenues from sales of
Axenohl to additional international customers. Revenues from Axenohl began in
the second half of the third quarter, and continue to ramp up, with over
$230,000 in sales since April 30, 2001, the end of the third quarter. In
addition to sales to Dodo cosmetics, the recent sales of Axenohl have been to
companies in South Korea for testing purposes. Regulatory clearances have not
yet been issued in South Korea.
In January 2001, the Company announced its 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
third quarter, the Company 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 third quarter, the Company began receiving purchase
orders and shipping RoachX to customers in the western regions of the United
States. The national kickoff will take place at the National Pest Management
Association meeting in New Orleans in October. Innovative Medical Services has
taken an aggressive approach by introducing an incentive point program for
wholesalers to accumulate points used to redeem top brand merchandise based upon
purchases.
Revenues from RoachX began in the second half of the third quarter, and continue
to ramp up, with over $23,000 in sales since the end of the third quarter. The
Company expects revenues from sales of RoachX to accelerate in the coming
quarter and have a very significant short and long-term impact on revenues and
earnings.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2001 VERSUS NINE
MONTHS ENDED APRIL 30, 2000
Revenues of $1,462,600 in the nine months ended April 30, 2001 were 7% lower
than the $1,574,800 in revenues reported for the nine months ended April 30,
2000. The decrease was due to a decline in sales of Fillmaster pharmaceutical
purification systems and filter replacements in the current nine-month period.
Management believes the decline in Fillmaster revenues was due to multiple
factors, including the fact that the market for pharmacy products is maturing in
that there is a decreasing number of pharmacy chains that do not have water
filtration products, and that the Company has sold systems to most major chains.
The focus for further Fillmaster sales will be on incremental and upgrade sales
to individual pharmacies within current chain accounts, although the Company is
still actively pursuing Fillmaster sales to remaining chains. Management expects
to close such volume sales to new chains in the coming year, and, as in prior
years, those sales will result in spikes in Fillmaster revenues because of the
nature of a bulk sale of a rollout to a new customer as compared to the
continued, slower rollout of systems to new and remodeled stores of existing
customers. The Company works to retain customers with its Customer Service Plan
2000, a multi-year service and warranty contract. Fillmaster customers that
subscribe to the Company's Customer Service Plan have contracted to continue
purchasing; otherwise, customers do not have an obligation to continue historic
purchasing patterns.
Water treatment division sales in the 2001 period were $1,428,800. Revenues from
the silver ionization division in the period were $30,300. Revenues from the
pesticide division were $3,500.
Gross profits for the nine months ended April 30, 2001 were $568,100 versus
$765,500 in 2000. The gross profit of 39% in 2001 was lower versus the 49% gross
profit in 2000. The decrease in gross profit percentage was due to fixed
production and labor costs being applied to the lower sales volume for the
period and to additional costs associated with the launch of the Company's new
product lines.
Net loss for first nine months ended April 30, 2001 was $1,484,400 versus
$834,500 for the same period last year. The decreased income was due to
decreased sales and to an increase in Research and Development costs and General
and Administrative expenses as the Company positions for anticipated rapid
growth activity related to new ventures, including expanded distribution of the
Nutripure line of water systems, RoachX, and the new silver ion technologies.
Research and Development costs increased $183,700 (217%) from $84,500 in the
prior period to $268,200 in the current period. Selling and marketing expenses
rose $77,200 (19%) from $406,400 to $483,600. General and Administrative
expenses increased $121,000 (9%) from $1,219,400 in fiscal 2000 to $1,340,400 in
fiscal 2001. $178,200 of these expenses were related to Nutripure.com, a wholly
owned subsidiary. The Company believes it has created and maintains a robust
website at a fraction of the cost of other stand alone e-commerce engines.
Although sales to date from Nutripure.com are non-material, the Company has
minimized costs related to the operation and promotion of Nutripure.com and has
plans for strategic partnership and future promotion. The Company does not
anticipate significant revenues from Nutripure.com until the coming fiscal year.
In November 2000, Innovative Medical Services acquired 100% of the stock of
ETIH2O, Inc., a Florida corporation, for approximately 56,400 shares of IMS
stock valued at approximately $141,000. The transaction was recorded using the
purchase method of accounting. The Company merged ETIH2O with a newly formed
Nevada corporation of similar name and dissolved the Florida corporation.
ETI-H2O, a privately held technology corporation, developed Axenohl and
previously manufactured the product in cooperation with NVID. ETI-H2O
specializes in research and development of varied water treatment applications,
including electronic RF scale control, copper/silver ionization and filtration
technologies.
During the second quarter, the Company 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 programs offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers.
Revenues from the Nutripure water treatment dealer program continue to ramp up.
The dealer base grows steadily, and Management believes that the program will
accelerate through the second half of the year.
Throughout the nine-month period, Innovative Medical Services focused its
resources on expanding the current and future scope of business and related
growth potential. The Company's increased selling expenses and general and
administrative expenses reflect the Company's transition from a niche market
company that provides water purification equipment to pharmacies to an
international company containing several divisions to manage new products and
programs in consumer and commercial water treatment, direct-to-consumer
e-commerce and retail distribution of multiple product lines.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended April 30, 2001, the Company's current assets to
liabilities ratio decreased from 5.02 to 2.83. Current assets decreased $709,300
from $2,794,400 to $2,084,800. The change in current assets during the nine
months ended April 30, 2001 include a decrease of $601,200 in cash on hand and a
decrease of $204,900 in restricted cash which was pledged against a line of
credit that was paid off during the period. Accounts and notes receivable,
inventories and prepaid expenses increased slightly during the recent nine
months. Current liabilities rose $181,600 which was mainly a result of an
increase in accounts payable. Notes payable decreased $210,600 as the Company
paid off its line of credit but increased $200,000 by the sale of convertible
debentures described below.
The Company's liquidity is unaffected by the financing program offered to
participating dealers in the Nutripure water dealer program. 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
primary lender disperses funds to the Company. The Company records a liability
when the funds are received and relief of liability when funds are dispersed,
and the Company does not retain liability on the credit exended.
Cash flows used from operations were $1,032,400 in the first nine months of
fiscal year 2001. Cash flows used from operations were $1,064,500 for the same
period in 2000. For those periods, cash flows used in investing activities
included, respectively, $87,200 and $316,900 for the purchase of fixed assets
and $453,500 and $150,500 for the purchase of patents and licenses. Cash flows
from financing activities were $971,800 during the current period which included
the following common stock transactions:
1. A $250,000 private placement in October 2000 in which the Company
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 the Company
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 the Company issued
150,000 shares of common stock to four investors at $1.50 per Unit. As
part of this registration the Company 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.
4. In November 2000, Innovative Medical Services acquired 100% of the
stock of ETIH2O, Inc., a Florida corporation, for approximately 56,400
shares of IMS stock valued at approximately $141,000. The transaction
was recorded using the purchase method of accounting. 5. In addition,
approximately $151,000 was received from exercise of outstanding stock
options.
In the prior nine month period, cash flows from financing activities were
$2,923,000 which included $2,596,500 received through private placements of IMS
and Nutripure.com. The total decrease in cash and cash equivalents for the 2001
period was $601,200 as compared to an increase of $1,391,200 during the same
period in 2000.
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
There have been no developments in the case involving the Company and Zedburn
Corporation et al in Circuit Court of Pinellas County, Florida as previously
discussed. Rulings on motions are on appeal, and as of June 14, 2001, no rulings
have been received.
The Company has filed an action against John Woodard, former Vice President of
Sales, in Superior Court in the State of California in April 2000. The Company
has alleged Mr. Woodard violated his non-competition/non-disclosure agreement.
The Company is seeking monetary damages and injunctive relief.
The Company has also filed an action against Fresh Water Systems, Inc., Steven
Norvell, Brian Folk and Eric Norvell in Superior Court in the State of
California. The action was filed in August 2000. The Company alleges Fresh Water
Systems and its officers and directors misappropriated trade secrets of the
Company obtained from former employees of the Company, engaged in unfair
competition in violation of the California Unfair Practices Act, tortious
interference with contractual relations, tortious interference with prospective
business advantage, fraud, trade libel and conspiracy. The Company is seeking
monetary damages and injunctive relief.
The Company filed an action against Eckerd Corporation in Superior Court in the
State of California in August 2000. The Company alleges Eckerd Corporation has
not paid for Fillmaster products ordered by and shipped to Eckerd pharmacies.
The Company seeks monetary damages not less than $170,000 plus interest and
attorney's fees. In September 2000, the action was removed to the Federal Court
for the Southern District of California. On March 5, 2001 Defendant's motion to
"Dismiss for Lack of Personal Jurisdiction" was granted.. The Company filed an
appeal on April 5, 2001. This matter is now before the United States Court of
Appeals for the Ninth Circuit.
On April 12, 2001, NVID, International, Inc. filed a declaratory judgment action
in the Circuit Court of Pinellas County, Florida against the Company and
ETI-H2O, Inc. The lawsuit seeks a judicial declaration that the Manufacturing,
Licensing and Distribution Agreement, dated March 26, 2000 between the Company,
NVID, International, Inc. and ETI-H2O does not constitute a binding contract and
seeks unspecified damages. The lawsuit does not challenge the binding effect of
the Standard Manufacturing Agreements dated November 30, 1998 and September 17,
1999 between NVID, International, Inc. and ETI-H2O and the November 24, 1999
License Agreement between the Company and NVID, International, Inc.
On May 17, 2001, the Company and ETI-H2O removed NVID'S declaratory judgment
action from Pinellas County Circuit Court to the United States District Court
for the Middle District of Florida. The Company and ETI-H2O has filed a Motion
To Dismiss, which is currently pending.
On May 7, 2001, the Company and EIT-H2O filed a separate action, a Petition to
Compel Arbitration, in the United States District Court for the Southern
District of California based on arbitration clauses contained in the March 26,
2000 and November 24, 1999 agreements. Contemporaneously with filing the
Petition, the Company and ETI-H2O filed a demand for arbitration against NVID,
International, Inc. with the American Arbitration Association ("AAA") in San
Diego, California. NVID, International, Inc. has notified AAA that it objects to
the arbitration demand. The Company's Petition to compel Arbitration is
scheduled to be heard in July 2001.
ITEM 2.
CHANGES IN SECURITIES
In February 2001, the Company issued 20,000 shares of common stock to a single
investor in settlement of a debt of ETI H2O, Inc.
With respect to these shares, the Company relied on Section 3(a)(10) of the
Securities Act of 1933, as amended as the shares were a security issued in
exchange for a bona fide outstanding claim where the terms and conditions of
such issuance and exchange have been approved, after a hearing by a court of the
United States.
In April 2001, the Company issued 150,000 shares of common stock in a private
placement to four investors at $1.50 per Unit. In April, the Company 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
exercise price of the Warrants shall equal 120% of the average closing bid price
for the five trading days immediately preceding the receipt of Notice of
Conversion.
With respect to the sales made, the Company 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 the Company.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.5 -- Dodo Agreement dated March 5, 2001
[CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN OMITTED
INFORMATION FILED SEPARATLEY]
10.8 -- Nutripure Dealer Agreement
10.9 -- Sales Finance Agreements
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
(B) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K on May 24, 2001
regarding the current IMS/ETI-H2O Manufacturing, Licensing and
Distribution Agreement with NVID. The entire contract was
filed as an exhibit.
SIGNATURES
Pursuant to the requirement 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
(Registrant)
By: /s/ Michael L. Krall
-------------------------------
Michael L. Krall, President/CEO
October 8, 2001
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
October 8, 2001