<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1996
REGISTRATION NO. 333-434
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SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 3
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SEC REGISTRATION NO. 333-434
INNOVATIVE MEDICAL SERVICES
(Exact Name of Registrant as Specified in its Charter)
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CALIFORNIA 33-0530289
(State of Incorporation) (Primary Standard (IRS Employer ID No.)
Classification Code)
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1308 NORTH MAGNOLIA AVENUE, SUITE H, EL CAJON, CALIFORNIA 92020
(619) 441-8233
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(Address and Telephone Number of Registrant's Principal
Executive Offices and Principal Place of Business)
MICHAEL L. KRALL
1308 NORTH MAGNOLIA AVENUE, SUITE H, EL CAJON, CALIFORNIA 92020
(619) 441-8233
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(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
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DENNIS BROVARONE, ESQ. MICHAEL R. KOBLENZ, ESQ. LARRY BARESEL, ESQ.
ATTORNEY AT LAW MOUND, COTTON & WOLLAN 1080 WEST REX RD.
2530 SOUTH LINLEY COURT ONE BATTERY PARK PLAZA MEMPHIS, TN 38119
DENVER, COLORADO 80219 NEW YORK, NY 10004
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE
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Common Shares......................... 1,437,500 $ 4.00 $5,750,000 $1,955.00
Class A Warrant....................... 1,437,500 0.10 125,000 42.50
Each to acquire one (1) common share
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Representative's Warrants............. 143,750 4.40 632,500 215.05
Each to acquire one (1) common share
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Bridge Loan Units..................... 15 25,000.00 375,000 127.50
Secured Promissory Notes.............. 15 Included
Class A Bridge Warrants............... 2,250,000 Included
Class Z Bridge Warrants............... 750,000 Included
Each Bridge Warrant is to acquire one (1)
common share Total $6,882,500 $2,340.05
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE EXHIBIT INDEX APPEARS ON PAGE OF THE SEQUENTIALLY NUMBERED PAGES OF
THIS REGISTRATION STATEMENT. THIS REGISTRATION STATEMENT, INCLUDING EXHIBITS,
CONTAINS PAGES.
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<PAGE> 2
INNOVATIVE MEDICAL SERVICES
CROSS REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM SB-2
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ITEM REGISTRATION STATEMENT HEADING LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Risk Factors; Description of Securities
6. Dilution................................... Dilution
7. Selling Security Holders................... Additional Securities Being Registered
8. Plan of Distribution....................... Underwriting
9. Legal Proceedings.......................... Not Applicable
10. Directors and Executive Officers........... Management
11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal Shareholders
12. Description of the Securities to be
Registered Prospectus Summary;
Description of Securities................ Outside Front Cover Page of Prospectus;
13. Interest of Named Experts and Counsel...... Not Applicable
14. Statement as to Indemnification............ Indemnification
15. Organization with 5 Years.................. Business of the Company
16. Description of Business.................... Business of the Company
17. Management's Plan of Operation............. Business of the Company
18. Description of Property.................... Business of the Company
19. Certain Relationships and Related
Transactions............................. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters...................... Market for Shares
21. Executive Compensation..................... Executive Compensation
22. Financial Statements....................... Financial Statements
23. Changes in Disagreements With
Accountants.............................. Not Applicable
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 5, 1996
PROSPECTUS
LOGO
1,250,000 SHARES OF COMMON STOCK
1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Innovative Medical Services (the "Company") is offering 1,250,000 shares of
common stock at $4.00 per Share and 1,250,000 Class A Warrants at $0.10 per
Warrant. Each Class A Warrant entitles the holder to acquire an additional
common share for $5.25 per common share beginning August X, 1997 and expiring
August X, 2001. (the "Shares" and "Class A Warrants"). THE SHARES AND THE CLASS
A WARRANTS SHALL BE SEPARATELY SOLD AND TRADABLE AS OF THE DATE OF THIS
PROSPECTUS AND THE CLASS A WARRANTS MAY BE EXERCISED AFTER ONE YEAR FROM THE
DATE HEREOF. INVESTORS MAY PURCHASE SHARES, CLASS A WARRANTS OR BOTH SECURITIES.
The Class A Warrants are redeemable by the Company for $0.05 per Class A Warrant
commencing one year from the date of this Prospectus provided the closing bid
price for the Company's common shares shall have averaged in excess of $9.00 per
share for any twenty (20) trading days within a period of thirty (30)
consecutive business days ending within five (5) days of the date of a Notice of
Redemption. See "DESCRIPTION OF SECURITIES."
The Shares and Class A Warrants have been approved for quotation on The
Nasdaq SmallCap Market under the symbols PURE and PUREW and approved for trading
on the Boston Stock Exchange, subject to official notice of issuance.
THESE ARE SPECULATIVE SECURITIES, INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
(SEE "RISK FACTORS.")
Prior to this Offering there has been no public market for the Securities
being offered, and there can be no assurance that a public market will develop
in the future. For information regarding the factors considered in determining
the initial public offering price of the Shares and the Class A Warrants and the
exercise price and terms of the Class A Warrants, see "Underwriting."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.................................... $4.00 $0.40 $3.60
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Per Warrant.................................. $0.10 $0.01 $0.09
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1,250,000 Common Shares...................... $5,000,000 $500,000 $4,500,000
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1,250,000 Class A Warrants................... $125,000 $12,500 $112,500
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Total Offering............................... $5,125,000 $512,500 $4,612,500
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(1) Does not include additional compensation to Meyers Pollock Robbins, Inc.,
the Representative of the Underwriters equal to 3% of the aggregate initial
public offering price of the Shares and Representative's Warrants to
purchase up to 147,750 shares of the Company's common stock at $4.40 per
share. The Representative's Warrants carry certain registration rights with
respect to the common shares underlying the Representative's Warrants.
(2) Before deduction of expenses of the Offering payable by the Company
estimated at $180,000.
(3) The Company has granted the Representative a 45 day option (the
Overallotment Option) to purchase up to 187,500 additional Shares and
187,500 Warrants, on the same terms as set forth above, solely for the
purpose of covering overallotments, if any. If the Overallotment Option is
exercised in full, the total Price to Public; Underwriting Commissions; and
Proceeds to the Company will be $5,893,750; $589,375; and $5,304,375.
MEYERS POLLOCK ROBBINS, INC.
The date of this Prospectus is August , 1996
<PAGE> 4
[PHOTO OP]
The Company is subject to and will comply with the periodic reporting
requirements of Section 15(d) of the Securities Exchange Act of 1934. The
Company will furnish to its Shareholders an Annual Report containing financial
information examined and reported upon by independent certified public
accountants, and it may also provide unaudited quarterly or other interim
reports as it deems appropriate. The Company's Registration Statement on Form
SB-2 with respect to the Securities offered by this Prospectus, (a part of the
Registration Statement) as well as its periodic reports may be inspected at the
public reference facilities of the U.S. Securities and Exchange Commission,
Judiciary Plaza, 450 Fifth Street, N. W., Room 1024, Washington, D. C. 20549, or
at the Commission's regional offices at Northwestern Atrium Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661 and at 7 World Trade Center,
New York, New York 10007. Copies of such materials can be obtained from the
Commission's Washington, D. C. office at prescribed rates.
The Registration Statement of which this Prospectus is a part has also
registered the issuance of 15 Bridge Loan Units each originally consisting of
one (1) $25,000 secured Promissory Note, 50,000 common shares, 50,000 Class A
Warrants to acquire one (1) common share at $5.25 per share and 50,000 Class Z
Warrants to acquire one (1) common share at $10 per share. The Bridge Loan Units
were offered in a private placement conducted by the Company in May, 1996 in
which the Company accepted 1/2 units. On August 1, 1996, the Company
renegotiated the terms of the Bridge Financing with the investors therein in
order to address concerns of The Nasdaq SmallCap Market as to the potential
return to these investors. As a result, the Bridge Financing investors have
agreed to the cancellation of the 50,000 common shares per Bridge Loan Unit
(750,000 common shares in total) and an increase of 100,000 Class A Warrants per
Bridge Loan Unit (1,500,000 additional Class A Warrants in total). As a result,
the Bridge Financing investors have been issued a total 2,250,000 Class A
Warrants and 750,000 Class Z Warrants. In addition, the Bridge Financing
investors have each agreed to an irrevocable and complete restriction on the
transfer of each investor's Class A Warrants for a six month period from the
date of this Prospectus.
The Underwriters are not offering any of the Bridge Loan Unit securities in
the Offering. Subject to the above transfer restrictions, the Class A Warrants
contained in the Bridge Loan Units may be sold by the holders thereof from time
to time at prevailing market prices. No market is expected to develop for the
Class Z Warrants. The Class A Warrants and the Class Z Warrants cannot be
exercised for one year and two years respectively and both expire in August,
2001. The Company will receive the exercise price of the Bridge Loan Unit
warrants, but will not receive any of the proceeds from any sale of the Bridge
Loan Unit warrants or the shares underlying the warrants. See "Description of
Securities" and "Additional Securities Being Registered".
The Shares and Class A Warrants are being offered by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to approval of certain legal matters by its counsel,
and subject to certain other conditions. The Representative of the Underwriters
reserves the right to withdraw, cancel or modify the Offering and to reject any
order in whole or in part. It is expected that delivery of certificates
representing the Shares and Warrants will be made against payment at the offices
of the Representative, New York, New York on or about August , 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements appearing elsewhere in this Prospectus.
THE COMPANY
Innovative Medical Services (the "Company") is a California corporation
formed on August 24, 1992 to engage principally in the business of manufacturing
and marketing the Fillmaster(R), a unique product developed by the Company. The
Fillmaster(R) is a water purification system with a calibrated volumetric
measuring and dispensing apparatus that provides measured amounts of "Purified
Water" (as defined by the United States Pharmacopeia) for use in the
reconstitution of prescription medications, generally oral antibiotics. At the
present time, the Company is only marketing this single product.
The current method used by Pharmacists to measure and mix water in
prescription medications is typically to pour or siphon water from bottles and
then manually measure and mix the water with powdered compounds. This method is
time consuming and blindly relies upon the purity of the bottled water which
introduces the possibility of contamination from the bottled water, any
equipment used, as well as into the prescription itself. In addition, the
pharmacist currently has the cost of bottled water together with overhead costs
of ordering, storing and changing water bottles, all of which increase the
dispensing costs to the pharmacist.
The Company believes that the Fillmaster(R) is unique because it not only
reduces the potential of contamination of the water source and
cross-contamination of the final product but also provides the Pharmacist with
cost savings over bottled water and a significantly faster and simpler means of
drawing and measuring water and hence dispensing prescriptions. The Company does
not believe that there is any similar product presently being marketed to the
pharmacy industry. (Please see "The Company and its Business".)
Customers to date for the Fillmaster(R) exceed 3,500 and include Walgreens,
Wal-Mart, Eckerd Drugs, Target, SavOn, Osco, CVS, Thrifty PayLess, Thrift Drug,
three divisions of Kroger, Smith's Food and Drug, and Longs Drugs as well as
United States Military Clinics, the Kaiser Foundation for Medical Care, the Mayo
Clinic, and Independent and Hospital Pharmacies.
The Company's executive offices are located at 1308 North Magnolia Avenue,
Suite H, El Cajon, California and its telephone number is (619) 441-8233.
THE OFFERING
SECURITIES OFFERED......... 1,250,000 Shares at $4.00 per Share and 1,250,000
Class A Warrants at $0.10 per Warrant. Each Class
A Warrant entitles the holder to acquire an
additional common share for $5.25 per common
share beginning August , 1997 and expiring
August , 2001. (the "Shares" and "Class A
Warrants"). The Shares and the Class A Warrants
shall be separately sold and tradeable
immediately upon the opening of trading of the
Company's securities on The Nasdaq SmallCap
Market and the Boston Stock Exchange. The Class A
Warrants are redeemable by the Company for $0.05
per Warrant commencing one year from the date of
this Prospectus provided the closing bid price
for the Company's common shares shall have
averaged in excess of $9.00 per share for any
twenty (20) trading days within a period of
thirty (30) consecutive business days ending
within five (5) days of the date of a Notice of
Redemption. See "Description of Securities" and
"Underwriting".
USE OF PROCEEDS............ The Company intends to use the net proceeds from
this Offering and any additional funds generated
from operations for Sales and Marketing,
3
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Inventory, Receivables Financing, New Product
Development, Lease Financing, Facilities
Expansion, Patent, Trademark Legal Expense,
Manufacturing/Computer Equipment and Bridge Loan
repayment. Please see "Use of Proceeds" and
"Business of the Company".
NASDAQ SYMBOLS............. Common Shares PURE
Class A Warrants PUREW
COMMON SHARES OUTSTANDING
PRIOR TO OFFERING.......... 1,833,851 Does not include 147,500 shares issuable
upon exercise of the Representative's
Warrants, 3,000,000 shares issuable upon
exercise of the Bridge Loan Unit
warrants and options to purchase 31,250
shares held by the Company's President.
COMMON SHARES TO BE
OUTSTANDING AFTER
OFFERING................. 3,083,851 Does not include the above warrants, the
exercise of the Representative's
Overallotment Option or the exercise of
any options or warrants.
ADDITIONAL SECURITIES
BEING REGISTERED......... The Registration Statement of which this Prospectus
is a part has also registered the issuance of 15
Bridge Loan Units each originally consisting of
one (1) $25,000 secured Promissory Note, 50,000
common shares, 50,000 Class A Warrants to acquire
one (1) common share at $5.25 per share and
50,000 Class Z Warrants to acquire one (1) common
share at $10 per share. The Bridge Loan Units
were offered in a private placement conducted by
the Company in May, 1996 in which the Company
accepted 1/2 units. On August 1, 1996, the
Company renegotiated the terms of the Bridge
Financing with the investors therein in order to
address concerns of The Nasdaq SmallCap Market as
to the potential return to these investors. As a
result, the Bridge Financing investors have
agreed to the cancellation of the 50,000 common
shares per Bridge Loan Unit (750,000 common
shares in total) and an increase of 100,000 Class
A Warrants per Bridge Loan Unit (1,500,000
additional Class A Warrants in total). As a
result, the Bridge Financing investors have been
issued a total 2,250,000 Class A Warrants and
750,000 Class Z Warrants. In addition, the Bridge
Financing investors have each agreed to an
irrevocable and complete restriction on the
transfer of each investor's Class A Warrants for
a six month period from the date of this
Prospectus.
The Underwriters are not offering any of the Bridge
Loan Unit securities in the Offering. Subject to
the above transfer restrictions, the Class A
Warrants contained in the Bridge Loan Units may
be sold by the holders thereof from time to time
at prevailing market prices. No market is
expected to develop for the Class Z Warrants. The
Class A Warrants and the Class Z Warrants cannot
be exercised for one year and two years
respectively and both expire in August, 2001. The
Company will receive the exercise price of the
Bridge Loan Unit warrants, but will not receive
any of the proceeds from any sale of the Bridge
Loan Unit warrants or the shares underlying the
warrants. See "Description of Securities" and
"Additional Securities Being Registered".
4
<PAGE> 7
RISK FACTORS............... The Offering involves a high degree of risk and
immediate and substantial dilution. See "Risk
Factors" and "Dilution".
SELECTED FINANCIAL DATA
The following summary financial data has been derived from the financial
statements of the Company included elsewhere in the Prospectus and should be
read in conjunction with such financial statements and the notes attached
thereto.
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FISCAL YEARS NINE MONTHS PERIOD
ENDED JULY 31, ENDED APRIL 30, PRO
---------------------- --------------------- FORMA
INCOME STATEMENT DATA (1995) (1994) (1996) (1995) (4/30/96)(1)
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Total Revenue...................... $459,330 $ 178,932 $701,088 $145,849 $701,088
Loss from Operations............... (2,305) (170,900) (75,572) (78,525) (75,572)
Loss per share..................... 0.00 (0.07) (0.02) (0.02) (0.02)
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NINE MONTH PERIOD ENDED APRIL 30, 1996
------------------------------------------------ FISCAL YEAR ENDED
BALANCE SHEET DATA ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2) JULY 31, 1995
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Total Assets..................... $ 381,095 $ 381,095 $ 4,284,845 $ 435,277
Total Liabilities................ 160,332 535,332 160,332 194,542
Total Stockholders Equity........ 220,763 220,763 4,124,513 230,735
Accumulated Deficit.............. (437,418) (437,418) (437,418) (361,226)
</TABLE>
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(1) Gives effect to the Bridge Financing of May, 1996 whereby the Company issued
$375,000 in Bridge Loan Unit promissory notes to be repaid from the
offering.
(2) As adjusted to reflect the sale of 1,250,000 common shares and 1,250,000
Class A Warrants offered hereby, net of estimated offering expenses and the
anticipated application of the estimated $4,278,750 of net proceeds
therefrom. (Please see "Use of Proceeds").
5
<PAGE> 8
RISK FACTORS
These Securities involve a high degree of risk. Prospective purchasers
should consider carefully, among other factors set forth in the Prospectus, the
following:
RISK FACTORS RELATING TO THE COMPANY
1. Limited Operating History. As of April 30, 1996 the Company had an
accumulated deficit of $437,418. The Company was formed in 1992 and commenced
the manufacture and marketing of its Fillmaster(R) product in the final quarter
of fiscal year 1993. As a result, it is subject to the risks inherent in a new
enterprise, including the absence of a lengthy operating history, shortage of
cash, undercapitalization and new products. (Please see "The Company and its
Business.")
2. Single Product. At this time, the Company manufactures, markets and
distributes a single product only. While the Company intends to develop
additional products, it is not yet prepared to announce these product nor
estimate when they will be ready for market. As a result, the Company's revenues
will be derived from a single product for the foreseeable future. Furthermore no
assurances can be given that any additional products will be developed and if
developed, be profitably manufactured and marketed. (Please see "The Company and
its Business").
3. Lack of Patent Protection. None of the Company's technology is
presently patented, however the Company intends to file for patent protection,
and in the interim will rely upon maintaining confidentiality on its proprietary
information regarding its products through confidentiality agreements with its
employees and non-disclosure agreements with others. No assurance can be given
that the Company will be able to maintain the confidentiality of its proprietary
information or that competitors will not begin selling similar products.
Furthermore, the Company believes its has independently developed its product
and that its product does not infringe upon any patents or rights of others.
Should a product of the Company be found to infringe, the Company could be
required to modify its design, obtain a license or pay damages. No assurance can
be given that the Company will be able meet such requirements in a timely manner
or upon terms acceptable to the Company. A material infringement which the
Company is unable to cure would have a material adverse effect upon the
Company's business.
4. Competition. The Company believes that the business of providing
advanced technology apparatus to the pharmaceutical industry is relatively new
and that it is likely that the Company will face extensive competition as the
market develops. These competitors are likely to be larger and have greater
financial resources than the Company. As a result no assurances can be given
that the Company will be able to obtain and maintain sufficient market share to
be successful.
5. Dependence on and Control by Management. The success of the Company
will be dependent largely upon the efforts of its present management who
collectively own over 42% of the Company's common stock eligible to vote upon
any matter submitted to a vote of shareholders. As a result, present management
can control the outcome of any vote including the determination of their
salaries and have considerable discretion in running the Company's business. To
the extent the services of management would be unavailable to the Company for
whatever reason, the Company would be required to obtain other executive
personnel to manage and operate the Company. In such event, there can be no
assurance that the Company would be able to employ qualified persons on terms
favorable to the Company. Although the Company has Key Man Life Insurance on its
President, Michael L. Krall and intends to hire additional support personnel
upon completion of the Offering to assist Management, it is anticipated that the
Company will remain primarily dependent upon the efforts of Management. (Please
see "Management.")
6. Additional Financing May be Required. If the Offering of all the
Securities offered hereby are sold, the Company anticipates that the funds
available to the Company will be adequate for it to fully exploit its business.
However, the Company anticipates that additional funds will be required to the
extent the Company desires to expand its operations from those contemplated
herein. In addition the Company has agreed with the Representative that it shall
not sell any of its securities for two years from the date of the prospectus
without the representative's consent. There can be no assurance that additional
funds will be available from any other
6
<PAGE> 9
source and it may be necessary for the Company to limit its operations to those
described herein. See "The Company and Its Business" and "Description of
Securities."
7. Reliance upon Sole Source Supplier. The Company purchases the
filtration system component of its product from a single supplier. While the
Company believes that adequate substitute components are available, an
unexpected loss or disruption in this component supply could have an adverse
effect upon the Company's ability to meet market demand. (Please see "The
Company and its Business.")
8. Regulation of Pharmaceutical Products. The United States Food and Drug
Administration has established a Good Manufacturing Practices protocol which
requires that products be built to certain standards and specifically that an
apparatus used in handling anything added to a prescription not cause any
contamination of the prescription. The Company believes that all components and
materials in its Product meet or exceed the current FDA standards. However no
assurances can be given that FDA standards will not change in the future. In
addition, the United States Pharmacopeia and the National Formulary (USP/NF)
provide the standards for materials and substances and their preparations that
are used in the practice of healing arts and establish standards of quality,
strength and purity. The USP/NF require that only "Purified Water" be used in
the reconstitution of oral prescriptions. Also, State Boards of Pharmacy
uniformly defer to the standards of the USP/NF. In addition, drug manufacturers
themselves require the use of "Purified Water" to ensure product stability and
potency. While the Company's Fillmaster(R) meets or exceeds the USP requirements
for "Purified Water", no assurance can be given that the current regulations
will not be modified or that new regulations be implemented which could
adversely effect the Company's business.
9. Contingent Liability. In connection with the sale $375,000 of Bridge
Loan Units to the Bridge Financing investors, the Company may not have
established an adequate basis to claim the private placement exemption from the
registration requirements of the Securities Act of 1933 due to the fact that the
sales of these securities were made after the initial filing of the Registration
Statement for this public offering. If the Company is unable to establish such a
basis, these sales and the public offering could be considered integrated
together, subjecting the Company to potential liability for sales of
unregistered securities. If such an assertion were made and upheld, the Company
would otherwise be required to rescind the issuance of the Bridge Financing
securities, repay the principal amount of the Bridge Notes with interest as well
as other possible damages. However, under the terms of the Bridge Notes, the
Company is obligated to repay the Bridge Notes plus accrued interest on the
closing of the public offering. Nevertheless, the Company could be liable for
any additional damages as well as the costs of litigation. No Bridge Financing
investor has asserted any claim for rescission or damages and nor is the Company
aware of any Bridge Financing investor who intends to do so. (Please see:
"Additional Securities being Registered" and "Notes to Financial
Statements -- Subsequent Events").
RISK FACTORS RELATING TO THIS OFFERING
1. No Assurance of Public Market for the Company's Securities. There is no
public market for Securities of the Company and no assurance such a market will
develop at the conclusion of this Offering or, if developed, that it will
continue. Purchasers of the Company's Securities may, therefore, have difficulty
in selling such Securities should they desire to do so. (Please see
"Underwriting.")
2. Public Will Bear Risk of Loss. The capital required by the Company to
increase the scope of its business is being sought principally from the proceeds
of this Offering. Therefore, public investors will bear most of the risk of the
Company's operations. (Please see "Underwriting.")
3. Dilution. The Shares contained therein involve a substantial amount of
dilution from the public offering price in that the net tangible book value of
the Shares is substantially less than the offering price. As a result investors
in the Shares will experience an immediate dilution of their investment of $2.57
per share or 64.25%. In addition, the Company may issue additional shares
without obtaining shareholder approval which if sold for less than the offering
price would cause further dilution. (Please see "Dilution.")
4. Lack of Dividends. The Company has never paid a dividend on its common
stock and intends to retain all earnings for the foreseeable future in order to
complete its business plan.
7
<PAGE> 10
5. Potential Adverse Effect of Shares Issuable Upon Exercise Of Stock
Options And Outstanding Shares Available for Resale. The Company has adopted an
Incentive Stock Option Plan and a Directors and Officers Stock Option Plan and
has reserved 1,000,000 Common shares for issuance under each plan. As of the
date of this Prospectus options to acquire 31,250 shares have been awarded to
the Company's President pursuant to the Directors and Officers Stock Option
Plan. In addition, all of the Company's presently outstanding shares of common
stock are "restricted securities" as defined by Rule 144 adopted under the
Securities Act of 1933, as amended. Rule 144 is a regulated method for holders
of restricted securities to sell their securities into the market. Certain
holders of such restricted securities have held the securities for the time
period required by Rule 144 and may sell their securities. Such sales and the
exercise of options and sale of underlying shares could have an adverse effect
on the market for the Shares. Notwithstanding the above, all of the Company's
officers, directors and holders of greater than five percent (5%) of the
outstanding shares have entered into lock up agreements with the Representative
not to publicly offer their Common Stock for sale for a period of 24 months from
the date hereof, except with the written consent of the Representative. All
other stockholders have also entered into lock up agreements with the
Representative not to publicly offer more than ten percent (10%) of their Common
Stock for sale for a period of 24 months from the date hereof, except with the
written consent of the Representative. (Please see "Market for Company's Common
Stock and Related Stockholder Matters.")
6. Determination of Offering Price. The offering price of the Shares and
the Class A Warrants as well as the Class A Warrant exercise price has been
arbitrarily determined by the Company and the Underwriters and does not bear any
relationship to the assets or book value of the Company or any other objective
measure of value. Accordingly no assurances can be given that the market price
for the Shares or the Class A Warrants (if a market develops) will be at or
above the Offering Price.
7. Potential Adverse Effect of the Underwriter's Influence on the Market
Price of the Securities. A significant amount of the Shares and Class A
Warrants offered hereby may be sold to customers of the Representative and the
Underwriters. Such customers subsequently may engage in transactions for the
sale or purchase of Shares or Class A Warrants through or with the Underwriters.
Should the Representative make a market in the Shares and Class A Warrants, this
market-making activity may terminate at any time. Accordingly, the
Representative may exert a dominating influence on the market, if one develops,
for the Shares and Class A Warrants, and the price and liquidity of the Shares
and Class A Warrants may be significantly affected by the degree, if any, of the
Underwriters' participation in such market.
8. Maintenance Criteria for Nasdaq Securities. The National Association of
Securities Dealers, Inc. (the "NASD"), which administers Nasdaq. recently made
changes in the criteria for continued Nasdaq eligibility. In order to continue
to be included in Nasdaq, a company must maintain $2 million in total assets, a
$200,000 market value of its public float and $1 million in total capital and
surplus. In addition, continued inclusion requires two market-makers, at least
300 holders of the Shares and a minimum bid price of $1 per share; provided,
however, that if a company falls below such minimum bid price, it will remain
eligible for continued inclusion in Nasdaq if the market value of the public
float is at least $1 million and the Company has $2 million in capital and
surplus. The Company's failure to meet these maintenance criteria in the future
may result in the discontinuance of the inclusion of its securities in Nasdaq.
In such event, trading, if any, in the securities may then continue to be
conducted in the non-Nasdaq over-the-counter market in what are commonly
referred to as the electronic bulletin board and the "pink sheets". As a result,
an investor may find it more difficult to dispose of or to obtain accurate
quotations as to the market value of the securities. In addition. the Company
would be subject to a Rule promulgated by the Securities and Exchange Commission
(the "Commission") that, if the Company fails to meet criteria set forth in such
rule, imposes various sales practice requirements on broker-dealers who sell
securities governed by the Rule to persons other than established customers and
accredited investors. For these types of transactions, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
rule may have an adverse effect on the ability of broker-dealers to sell the
securities, which may affect the ability of purchasers in the offering to sell
the securities in the secondary market.
8
<PAGE> 11
9. Disclosure Related to Penny Stocks. The Commission has recently adopted
rules that define a "penny stock". In the event that any of the Company's
securities are characterized in the future as penny stock, broker-dealers
dealing in the securities will he subject to the disclosure rules for
transactions involving penny stocks which require the broker-dealer among other
things to (i) determine the suitability of purchasers of the securities, and
obtain the written consent of purchasers to purchase such securities and (ii)
disclose the best (inside) bid and offer prices for such securities and the
price at which the broker-dealer last purchased or sold the securities. The
additional burdens imposed upon broker-dealers may discourage them from
effecting transactions in penny stocks, which could reduce the liquidity of the
securities offered hereby.
10. Redemption of Warrants. The Class A Warrants may be redeemed by the
Company at any time after one year from the date of this Prospectus upon 30 days
written notice to the Warrant holders at for $0.05 per Warrant commencing one
year from the date of this Prospectus provided the closing bid price for the
Company's common shares shall have averaged in excess of $9.00 per share for any
twenty (20) trading days within a period of thirty (30) consecutive business
days ending within five (5) days of the date of a Notice of Redemption. In such
event, the Class A Warrants will only be exercisable until the close of business
on the date fixed for redemption in such notice. Any Class A Warrants not
exercised by such time will cease to be exercisable, and the holders will be
entitled only to the redemption price. (See "Description of Securities.")
11. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants. The Class A Warrants are not convertible or exercisable unless, at
the time of exercise, the Company has a current prospectus covering the shares
of Common Stock issuable upon exercise of the Class A Warrants and such shares
have been registered, qualified or deemed to be exempt under the securities laws
of the state of residence of the holders of such Class A Warrants. There can be
no assurance that the Company will have or maintain a current prospectus or that
the securities will be qualified or registered under any state laws.
The Shares and Class A Warrants, are separately tradable as of the date of
this Prospectus. Subsequently, purchasers may buy Class A Warrants in the
after-market or may move to jurisdictions in which the shares underlying the
Class A Warrants are not registered or qualified during the period that the
Class A Warrants are exercisable. In this event, the Company would be unable to
issue Common Stock to those persons desiring to exercise their Class A Warrants
unless and until the shares could be qualified for sale in jurisdictions in
which the purchasers reside, or an exemption from this qualification exists in
such jurisdiction. Accordingly, Class A Warrant holders would have no choice but
to attempt to sell the Class A Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. (See "Description of
Securities")
12. Limitation on Directors' Liability. The Company's Articles of
Incorporation provide for certain limitations on the liability of the Company's
directors to its stockholders for monetary damages. Such limitations could
adversely affect an investor's ability to recover damages from such directors.
9
<PAGE> 12
USE OF PROCEEDS
The net proceeds of the Offering (without exercise of the Underwriters 15%
Overallotment Option) will be $4,278,750 after the payment of Underwriting
commissions (10%/$500,000), non-accountable expense allowance (3%/$150,000) and
offering expenses (estimated $180,000). The Company anticipates that the net
proceeds will be applied substantially as follows:
<TABLE>
<CAPTION>
USE OF PROCEEDS
----------------------------------------------------------------
<S> <C> <C>
Bridge Loan Repayment........................................... $ 375,000 8.8%
Sales & Marketing............................................... 400,000 9.3
Inventory....................................................... 100,000 2.3
Receivables Financing(1)........................................ 200,000 4.7
New Product Development(2)...................................... 300,000 7.0
Lease Financing................................................. 1,800,000 42.1
Facilities Expansion............................................ 500,000 11.7
Patent/Trademark Legal Exp.(2).................................. 250,000 5.8
Manufacturing/Computer Equip.................................... 250,000 5.8
Working Capital................................................. 103,750 2.4
---------- -----
Total Use of Net Proceeds............................. $4,278,750 100.0%
========= =====
</TABLE>
- ---------------
(1) Due to the Company's substantial growth in sales both historical and
projected, the Company will use these funds as an internal factoring of
receivables in order to meet product demand.
(2) These costs will be for the development and testing of new products and the
patent expense thereof if appropriate. The Company will also expend funds
for trademarks for its existing product as well as new products.
10
<PAGE> 13
DILUTION
At April 30, 1996, the net tangible book value of the Company was $123,108
or $0.07 per share. After giving effect to the Shares and Class A Warrants
offered hereby at the $4.00 per Share and $0.10 per Class A Warrant offering
prices and after deducting the underwriting commissions and estimated expenses
of the offering, the pro forma net tangible book value as of April 30, 1996
would have been $4,401,859 or $1.43 per share. This represents an immediate
dilution of $2.57 per share to new investors and an increase in net tangible
book value of $1.36 per share to existing shareholders. The following table
illustrates dilution to new investors following completion of this offering:
<TABLE>
<S> <C>
Public Offering Price............................................... $4.00
Net Tangible Book Value Per Share Before Offering................... $0.07
Net Tangible Book Value Per Share after Offering.................... $1.43
Increase Per Share Attributed to the Offering....................... $1.36
Dilution of Offering Price Per Share to Investors................... $2.57 or 64.25%
</TABLE>
Does not assume the exercise of the Representative's Over Allotment Option or
the exercise of any outstanding warrants or options.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1996 and on a pro forma basis giving effect to the May, 1996 Bridge
Financing and the sale of the Shares and Class A Warrants offered hereby and the
application of the net proceeds therefrom as described in "Use of Proceeds".
<TABLE>
<CAPTION>
APRIL 30, 1996
--------------------------------------------
HISTORICAL PRO FORMA(1) PRO FORMA(2)
---------- ------------ ------------
<S> <C> <C> <C>
Notes Payable........................................ $ 50,000 $ 425,000 $ 50,000
Stockholders Equity.................................. 658,181 658,181 4,840,566
20,000,000 no par common shares authorized
1,833,851 outstanding at 4/30/96
1,833,851 outstanding at 4/30/96 Pro Forma(1)
3,083,851 outstanding at 4/30/96 Pro Forma(2)
Accumulated Deficit.................................. $ (437,418) $ (437,418) $ (437,418)
Total Capitalization................................. $ 220,763 $ 220,763 $ 4,403,148
</TABLE>
- ---------------
(1) Gives effect to the $375,000 Bridge Financing.
(2) Gives effect solely to the sale of 1,250,000 common shares and 1,250,000
Class A Warrants offered hereby and does not assume the exercise of the
Representative's Over Allotment Option nor the exercise of any warrants or
options.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS 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 and related notes
included therein.
OVERVIEW
Innovative Medical Services is engaged principally in the business of
manufacturing and marketing of the Fillmaster(R), a unique water purification,
measuring and dispensing apparatus used in pharmacies to reconstitute oral
antibiotic suspensions. In addition, the company intends to develop and market
other pharmacy-related efficiency products worldwide.
RESULTS OF OPERATIONS FISCAL 1995 VS. FISCAL 1994
Revenues of $459,000 in fiscal year ending 1995 were 257% of the $179,000
in revenues reported for fiscal year 1994. This revenue increase was
attributable to increased sales of Fillmaster(R) Purification Systems and the
initiation of replacement filter sales. Fillmaster(R) Purification System sales
in fiscal 1995 were $427,000, and replacement filter sales were $33,000. In
1994, Fillmaster(R) Purification System sales were $178,000, and replacement
filter sales were $1,000. While occurring in all markets, more than 90% of the
volume increase in Fillmaster(R) Purification System sales took place in the
chain pharmacy marketplace. The large increase in replacement filter sales was
expected due to the increased number of Fillmaster(R) Purification Systems in
use.
Gross profits in 1995 were $169,000 vs. $8,000 in 1994. Gross profits in
1994 were reduced because the Company offered penetration (lower) pricing to
convince the first national chain purchaser of the Product to become a
large-volume customer. Gross profit percentages in 1995 (37%) were higher vs.
1994 (5%) due to increased sales volume, production costs being lowered through
volume purchasing, sales to new customers at higher prices and the $32,000
increase in replacement filter sales at a gross profit of 75%.
Net profit for fiscal 1995 was $2,400, vs. a net loss of $171,000 for
fiscal 1994. This increase in income was due to growth in sales and the increase
in gross profit as outlined above. In addition, Selling Expenses and General &
Administrative Expenses decreased approximately $8,000 from 1994 to 1995 on
increased volume.
RESULTS OF OPERATIONS FIRST NINE MONTHS OF FISCAL 1996
Revenue for the nine months ending April 30, 1996 was $701,000. Of this
amount, $649,000 was attributable to sales of Fillmaster(R) Purification
Systems, and $52,000 to replacement filter sales. Gross profit for the period
was $193,000, $154,000 (24% of sales) from Fillmaster(R) Purification Systems
and $39,000 (75% of sales) from filters. Overall gross profit decreased from 37%
of gross revenues in fiscal 1995 to 27%. This decrease was attributable to an
isolated and concentrated purchase by the Company's first chain customer
(described previously) that more than doubled its previous total purchases at
the same penetration pricing. Since this customer has now purchased the Product
for 75% of its locations, this is not likely to reoccur. However, similar
penetration pricing for substantial chain customers may be employed in the
future resulting in temporary fluctuations in overall gross profit margins until
such time as replacement filter margins are fully developed.
For the period, the company incurred a net loss of $76,000 primarily due to
recognition of compensation expense for the Company's CEO in the amount of
$60,000 which was contributed back to the Company as additional Paid in Capital
for common stock owned by the CEO. An increase in rent expense and additional
clerical staff also contributed to the net loss for the period.
LIQUIDITY AND CAPITAL RESOURCES
With current asset to liabilities ratios of 1.2 for fiscal year end 1994,
1.73 for fiscal year end 1995 and 1.13 for the first nine months of fiscal 1996,
the Company's working capital position continues to be stable. Historically,
expansion has been financed by the sale of common stock. Equity financing
activities have provided cash in the amounts of $172,000, $45,000 and $22,000
for fiscal years 1994, 1995 and the first three
13
<PAGE> 16
quarters of fiscal 1996, respectively. Debt financing has been in the amounts of
$9,000, $21,000 and $25,000 for the same periods. Cash flows provided (used)
from operations were $(175,000) in 1994, $26,000 in 1995 and $(42,000) for the
first nine months of 1996. Cash flows used in investing activities were,
respectively, $15,000, $8,000 and $31,000 for the purchase of machinery and
equipment.
The Company has operated on a just-in-time assembly and manufacturing
basis, keeping inventory to low levels. Parts and components have been, for the
most part, brought into the factory for assembly and shipment only after a firm
customer order has been received. As a result, the time period during which cash
resources must be utilized for inventory has been compressed as much as
possible. Also, aggressive receivables management combined with the quality of
the customer base has resulted in a very favorable position with regards to
receivables aging.
Nonetheless, the extremely vigorous growth of the Company has created an
ongoing dilemma related to cash. The very expansion that has made revenue
projections appear so positive has at the same time hindered the Company's
ability to expand sales at an even faster rate. The need to finance
ever-increasing part and component inventories, even for a short period of time,
has served to divert cash resources from critical sales, marketing and new
product development areas that could enhance future revenues to an even greater
extent. Sales and marketing decisions have often been driven by the lack of
available cash resources, frequently to the exclusion of valuable opportunities.
To generate capital for further expansion and to alleviate the cash issues
described above, the Company has elected to issue $5,000,000 in marketable
equity securities.
Management intends that the proceeds of the offering will provide liquidity
for:
Sales and Marketing expansion: (a) expand the sales force, (b)
increase trade show participation, (c) advertise in trade journals and via
targeted direct response vehicles, (d) increase face-to-face sales calls
with corporate customers and, (e) development of new marketing materials.
Inventory Increase: (a) support the increased sales activity expected,
(b) reduce the cost of goods through volume purchasing.
Receivables Financing: (a) support the increased sales activity
expected, (b) eliminate early-payment discounts given to customers.
New Product Development: (a) further develop advanced concepts for the
existing product line, (b) further develop and bring to market new products
currently in various stages of development, (c) Identify new products for
future development.
Lease Financing: (a) provide alternative financing to its customers
where few options exist (b) provide the ability to finance the purchase of
the Company's products internally, (c) establish an additional source of
profit and cash flow.
Facilities Expansion: (a) provide adequate production facilities for
the anticipated increase in Fillmaster product sales, (b) production
facilities for new products (c) office and administrative space for
increased staff requirements.
Patent, Trademark and Legal Expense: (a) provide patent and trademark
protection for existing and anticipated products.
Manufacturing/Computer Equipment: (a) provide production and assembly
equipment to improve production efficiency (b) provide additional computer
equipment for increased productivity by administrative and executive staff.
Working Capital: (a) provide liquidity for general business
contingencies.
Management believes that the offering of its securities will provide
sufficient liquidity to meet the requirements described above for the
balance of fiscal 1996 and 1997.
14
<PAGE> 17
FUTURE OUTLOOK
The key to long term profitability of the Fillmaster(R) product line and,
ultimately the Company, is to establish a substantial number of Fillmaster(R)
units installed and in use. Since each unit requires a replacement of its
filters at least once a year, each new system installed becomes a source of
steady future income far exceeding that derived from the initial sale of the
Product. In addition, each pharmacy using the Fillmaster(R) will be an easily
approachable candidate for any new pharmacy tools developed by the Company in
the future.
These multiple reasons for establishing a solid base of users have caused
the Company's sales efforts to focus primarily on the chain pharmacy market.
When combined with the short-term efficiencies inherent in multiple-unit sales
and the expanding nature of the market, chain pharmacies were the most
attractive of the options. This strategy has been successful, as the Company
continues to build an ever-increasing sales revenue base with sales and
marketing expenditures a fraction of those necessary to reach independent and
hospital pharmacies.
At the beginning of fiscal year 1994, the Company's chain pharmacy customer
base consisted of scattered individual locations in three chains. By the end of
the third quarter of fiscal year 1996, the Fillmaster(R) product was installed
at more than 3,500 total locations representing 4% of the total domestic market,
with approximately 2,800 of these locations being in more than 20 regional and
national chains ranging in size from 30 to 2,400 stores. These customers include
the nation's largest drug store chain, Walgreens, and Wal-Mart, the world's
largest retailer. The 2,800 locations represent approximately 9% of a total
chain pharmacy market that is expanding at the rate of approximately 10% per
year.
The Company's chain customer base continues to expand at the rate of
approximately one chain per month and is expected to continue at that pace for
the foreseeable future. Acquisition of a new chain customer generally results in
staged product acquisition after initial testing, typically beginning with
higher-volume pharmacies. Complete saturation of each customer's locations
generally takes place over an extended period. Thus, gaining a new chain
customer bodes well for sales of new Fillmaster(R) Purification Systems over the
intermediate term and for continuing replacement filter sales over the long
term. Currently, the 2,800 chain drug store locations in which the Product is
installed are less than 20% of the available locations in the chains
represented.
The logical, ultimate and final development in the chain sales cycle is
when the Product becomes specified as standard equipment for all new and
remodeled pharmacies, making new orders automatic as construction occurs. As of
4/30/96 Walgreens, Eckerd, Target, Sav-On, Osco, Dillon Stores, the Mid-Atlantic
Region of Kroger and City Markets have designated the Fillmaster(R) as standard
equipment for their new and remodeled pharmacies. Sales revenues for new
Fillmaster(R) units from these customers' new openings and remodeling programs
are projected at approximately $600,000 per year (1,300 units) for each of the
next five years with virtually no additional sales effort or expense. Each
succeeding year, these installations will generate an equal incremental increase
in the number of replacement filter sets sold.
The Company expects that additional chains will make the same specification
during the balance of fiscal 1996, 97 and 98, expanding the ongoing base of
recurring orders.
During fiscal years 1996 and 1997, the introduction of leasing is
anticipated to have a positive effect on sales revenues, with more dramatic
results expected in ensuing years. Through leasing, which is currently being
offered through a third-party lender, new chain customers whose capital
resources are limited will be able to acquire the Product with no effect on the
balance sheet, and a net monthly decrease in expenses associated with water in
the pharmacy.
As resources allow, marketing expenditures will increase dramatically to be
somewhat more focused on the costlier and more difficult-to-reach independent
pharmacy market. This market, while shrinking somewhat due to inroads made by
the chains, is still relatively stable in size. Representing more than 30,000
locations it has remained, in relative terms, virtually untapped. Currently, the
Company's penetration is less than 3%.
15
<PAGE> 18
Near term sales efforts in the independent pharmacy market will focus
primarily on offering price concessions based upon quantity sales to the members
of independent buying cooperatives and quasi-chains created by wholesale drug
distributors. By accessing large numbers of pharmacies through their
cooperatives and wholesalers, the Company retains the economies of scale
associated with chain sales but generates higher margins through higher
negotiated pricing and direct sales to the customer.
Wholesale distributors have exited the durable goods markets and are not in
a position to be able to stock and distribute the Product on any reasonable
basis. At the same time, they offer centralized access to large numbers of
independent pharmacy customers. By utilizing their customer structures but not
their distribution systems, the Company will retain margins that would otherwise
be paid to the distributor. Recently, the Company formed an alliance with
McKesson Drug Company to promote the Fillmaster(R) Purification System to its
Value-Rite quasi-chain group of independent pharmacies at a price that is
discounted, but not to wholesale or chain pricing levels. McKesson is
distributing product information in its regular mailings to this group, with the
Product being sold and distributed directly to the customer by the Company.
Longer-term marketing efforts in the independent pharmacy market will
concentrate on non-affiliated independent community pharmacies. Leasing is
expected to be an especially powerful tool in the independent pharmacy market
once the Company has generated the capital necessary to be able to finance a
leasing program internally. With limited cash resources making capital
expenditures difficult for the independent community pharmacy, access to this
market has been problematical. With the associated higher sales and marketing
expenses, this market requires that the Company retain the full $659 list price
in order to maintain profit margins. Leasing allows the customer to acquire a
Fillmaster(R) unit for a monthly payment equal to or less than its existing
monthly bottled water expenditures. Third-party lease financing is not currently
available for fewer than four Fillmaster(R) units due to minimums imposed by the
lenders.
Reduction of the cash outlay necessary to acquire a Fillmaster(R) unit from
$659 to an affordable monthly payment will allow the Company to penetrate this
market to a much greater degree. The Company has calculated that the profits
generated from internal leasing of Fillmaster(R) Filtration Systems and
replacement filters will be more than double that generated by straight sales or
third-party leasing for an equal number of units.
In May, 1996 the Company offered 15 Bridge Loan Units each originally
consisting of one (1) $25,000 secured Promissory Note, 50,000 common shares,
50,000 Class A Warrants to acquire one (1) common share at $5.25 per share and
50,000 Class Z Warrants to acquire one (1) common share at $10 per share. The
Company conducted the Bridge Financing in order to pay the expenses of preparing
for the public offering including the Representatives's non-accountable expense
allowance deposit, federal and state registration fees, market listing fees,
printing, legal and accounting fees. On August 1, 1996, the Company renegotiated
the terms of the Bridge Financing with the investors therein in order to address
concerns of The Nasdaq SmallCap Market as to the potential return to these
investors. As a result, the Bridge Financing investors have agreed to the
cancellation of the 50,000 common shares per Bridge Loan Unit (750,000 common
shares in total) and an increase of 100,000 Class A Warrants per Bridge Loan
Unit (1,500,000 additional Class A Warrants in total). As a result, the Bridge
Financing investors have been issued a total 2,250,000 Class A Warrants and
750,000 Class Z Warrants. In addition, the Bridge Financing investors have each
agreed to an irrevocable and complete restriction on the transfer of each
investor's Class A Warrants for a six month period from the date of this
Prospectus.
The private placement and this public offering may be deemed integrated
together and as a result, the private placement may have been in violation of
the registration requirements of Section 5 of the Securities Act of 1933. This
results in a contingent liability for the purchase price of the securities sold
in violation of Section 5 in the amount of $375,000 as well as other damages and
litigation cost. The Company is already contractually bound to repay the entire
consideration given for the Bridge Loan Units. No assurances can be given that
this contingent liability will not have a material adverse effect upon the
Company or its operations.
16
<PAGE> 19
THE COMPANY AND ITS BUSINESS
BUSINESS DEVELOPMENT
Innovative Medical Services (the Company) was incorporated in the State of
California on August 24, 1992 to pursue the immediate business of manufacturing
and marketing of the Fillmaster(R) (or the Product) and subsequently a broadly
based business of delivering advanced technology, equipment and supplies to the
Pharmacy Industry. Over the past three years, the Company has established the
production and design, entered into contracts with its parts suppliers and or
manufacturers, developed its initial assembly process and initiated its
marketing program for the Product.
The Product is an apparatus that provides measured amounts of "Purified
Water" (as defined by the United States Pharmacopoeia, ("USP") for
reconstitution of liquid oral antibiotics and certain other pharmacy
applications. It consists of a six-stage water purification unit, an electronic
water purity testing module, an auxiliary faucet for dispensing purified water,
and a calibrated volumetric measuring and dispensing apparatus for the actual
reconstitution. The entire system is closed and pressurized and, according to
the Company's testing, has a fill rate at least three times that of current
methods.
The Company also markets unique and proprietary filter replacements for the
purification unit which require changing at intervals of approximately 9-12
months or whenever indicated by the purity testing module. The filter
replacements represent a guaranteed source of future sales and cash flow to the
Company.
There are approximately 72,000 Pharmacies in the United States and Canada,
with many thousands more world-wide. Water-mixed antibiotic prescriptions, for
which the Fillmaster(R) is primarily used, make up approximately 12.6% of a
Pharmacy's total prescriptions and approximately 25% of a pharmacy's gross
profit.
Approximately 3,500 units of the Product have been sold to date.
Fillmasters(R) have been purchased and are now being widely used by such
pharmacy chains as Walgreens, Wal-Mart, Eckerd Drugs, Target, SavOn, Osco, CVS,
Thrifty PayLess, Thrift Drug, three divisions of Kroger, Smith's Food and Drug,
and Longs Drugs. Also included in the customer base are United States Military
Clinics, the Kaiser Foundation for Medical Care, the Mayo Clinic, and several
hundred Independent and Hospital Pharmacies.
The Fillmaster(R) is specified as standard equipment for all newly
constructed and remodeled pharmacies at Walgreens, Target, Eckerd, SavOn/Osco
and CVS. The Company believes that the Product will be installed in 100% of
Walgreens pharmacies prior to the end of the current Fiscal Year.
Gross Sales of the Company have been $179,000 and $459,000 for the fiscal
years ended 1994 and 1995 respectively. In its current fiscal year, the
Company's sales have been $701,000 through the first nine months. In 1994 it
began selling the proprietary replacement filters which represent an ongoing,
guaranteed and permanent market with profits far exceeding those from the
original sale of the Product.
PRINCIPAL PRODUCT AND ITS MARKET
The Fillmaster(R) consists of a six-stage water purification unit, a
pharmaceutical water dispenser with precise measuring capabilities, a purity
testing module and anti-contamination qualities for use by Pharmacists in mixing
liquid prescriptions. The entire system integrates with the building's tap water
system, is closed and pressurized, and therefore has a fill rate 300% faster
than the bottle-and-hose systems which are the only known competition. The
Product utilizes proprietary filter cartridges which are changed every 9-12
months or when prompted by the Product's purity test indicator. The Product is
packed and shipped by the Company and installed by the end-user following the
illustrated instructions included with the Product using common household tools.
The United States Pharmacopeia (USP) is a comprehensive reference work
which has established the standards for pharmacy practices and supplies in the
United States for over one hundred years. The USP is recognized as the official
standard for pharmacy practice and supply by various federal statutes including
the Food Drug and Cosmetic Act and by virtually all states. The USP requires
Pharmacists to use "Purified Water" in reconstituting powdered medications such
as antibiotics. "Purified Water" is defined as ". . . water
17
<PAGE> 20
obtained by distillation, ion-exchange treatment, reverse osmosis or other
suitable process" Also, ". . . Purified Water contains no added substances"
Previously, the only realistic source of "Purified Water" conforming to the USP
standard was bottled distilled water. Other forms of bottled water prepared
through purification have minerals and other substances added to them for taste
purposes.
Historically, Pharmacists have either hand poured water for reconstitution
directly from a bottle into a measuring container and then into the medicine
bottle or they used a wall-mounted measuring and gravity-flow dispensing
cylinder connected by a system of rubber siphon tubing and pinch clamps to a
water bottle. Both of these methods have significant drawbacks and possibilities
for contamination which the Fillmaster(R) minimizes. Both old methods have the
potential for inaccurate measurements, the first method because two hands are
required and the latter because the gravity-fed system can produce a variable
fill rate due to variation in siphon pressure (the siphoning rate decreases as
the bottles empties thus producing a reduced flow of water). The Fillmaster(R)
uses precision valves which exactly control the water flow.
Prior methods also present a danger of non-conforming water such as
"spring" or bottled "drinking water" being used accidentally due to label
similarities, simple mistakes in supply purchasing as well as the pharmacy
staff's being unaware of the differences in water types. Water that does not
qualify as "Purified Water" contains minerals and other impurities which will
reduce the stability and potency of the prescription medicine. The use of such
water is, in essence, an adulteration of the medication by the introduction of
foreign materials and a violation of the Federal Food Drug and Cosmetic Act.
Even when using the intended conforming water, these unsealed methods are
open to the air allowing bacteria, mold and other airborne contaminants to enter
and grow within the water supply. In addition, the dispensing tip of the
competitor can accumulate residue from the various prescriptions being mixed,
causing the potential of cross-contamination of the medications and the danger
of serious reactions by the patient.
These hazards of contamination in the Pharmacy's water source are greatly
reduced by the Fillmaster(R). The Product's filtering system consists of a
sediment filter, two multistage carbon block filters and a reverse osmosis
membrane. The system produces "Purified Water", eliminating the problem of
incorrect source. Since the Fillmaster(R) is a closed, pressurized system, the
airborne contamination problem is eliminated and the rate of filling is
increased dramatically. Finally, cross-contamination of medications is easily
prevented by the Fillmaster's cleanable and disposable dispensing tips.
Competition and the proliferation of "third party" reimbursement plans have
combined to reduce pharmacy margins nationwide to dangerously low levels,
mandating efficiency and higher volumes as the only practical means to continued
profitability. In this context, time becomes valuable in the extreme. Blocking
the road to maximum time utilization are recent federal legislation (OBRA-90)
and conforming state mandates requiring pharmacists to counsel each patient
receiving a new prescription. Filling of liquid antibiotics for which the
Fillmaster(R) is used is disproportionately time-consuming and difficult to
begin with. Since virtually all are new prescriptions, each requires an
additional expenditure of time for patient counseling.
By use of the Fillmaster(R), and based on extensive testing performed by
the Company, a pharmacy will save more than 20 seconds of actual filling time
for each liquid antibiotic prescription. When multiplied by over 6,000
antibiotics per year (on average), the resulting time savings are dramatic.
Coupled with the time savings generated by eliminating water bottle changes
(once for each 28 to 30 prescriptions approximately 5 minutes for each change),
the profitability of liquid antibiotics is substantially enhanced and pharmacist
time for patient counseling and other activities is multiplied.
The burdensome nature of these medications is compounded by their natural
instability once reconstituted. Post-reconstitution shelf life is extremely
limited and they require refrigeration. A pharmacy will generally add water to
the medication only when the patient is physically present to avoid having to
discard it if the patient is delayed or decides to go elsewhere. As a result,
the workflow related to these medications is determined not by efficiency, but
by the arrival of the patient. The efficiencies and time savings generated by
using the Fillmaster(R) have a dramatic effect on customer satisfaction by
reducing waiting times at the pickup window.
18
<PAGE> 21
Direct and indirect costs associated specifically with bottled water are
also reduced or eliminated by use of the Fillmaster(R). Storage space can be
reallocated to more profitable items, and the expense of bottled water purchases
of up to $1.25 for each gallon is replaced by one annual filter replacement
currently costing $65. Under optimum usage, the cost of "Purified Water" is
reduced to approximately $.04 per gallon.
Based on the Company's surveys of Fillmaster(R) users, customer
satisfaction levels are extremely high. There is virtually unanimous agreement
that the Product is faster, easier to use, cleaner, and that the elimination of
the aggravation and difficulties associated with all other methods of
reconstitution make the Fillmaster(R) well worth the investment in its
acquisition.
The Product carries a suggested list price of $659, with quantity discounts
available for volume purchase agreements. This price level was established to
provide reasonable gross profit margins even after the negotiation of volume
discounts. These margins have been calculated at actual production levels and
are likely to increase through a reduction of costs associated with higher
volumes.
After installation, the filters require replacement approximately every 9
to 12 months in order to maintain water purity. Since filters compatible with
the Fillmaster(R) system are proprietary and only available from the Company,
Management feels assured that future replacement filter sales and their
resultant income stream are a certainty.
Revenues from the replacement filter sales will, over a five year period,
equal or exceed the revenue generated by the original sale of the Product with
much higher profit levels. Thus, Management views the sale of the Product as
occurring in two distinct stages, immediate and deferred. The acquisition of a
new customer, while generating profit during the current year, produces a
deferred income stream with at least twice as much gross margin and minimal or
no sales expense.
The Company's business operates in a 2,200 square foot facility located in
a light industrial/office park. This location houses all administrative,
executive, sales, assembly, shipping and manufacturing functions for the
Company. The Company employs five full time and five part time.
The Product is primarily assembled from purchased components and repacked
for shipment to the customer with only minor manufacturing taking place in the
Company's facility. This allows the minimization of wages, equipment expense and
insurance. There are no components of the Product that have permanent or
unequivocally restricted availability. Most are items that are common in either
design or manufacture, and a change in suppliers would result in virtually no
lost production. There are no plans to alter production methods.
The purification module is the major component of the Product and is
purchased under an agreement with its manufacturer that is exclusive with the
Company as to pharmaceutical uses. While Management regards this particular
product as the finest of its kind, suitable alternatives are available on the
open market. This module and its accompanying hardware and accessories are
repackaged and labeled with Fillmaster(R) graphics, the dispensing apparatus
inserted, and shipped to the customer.
The dispenser apparatus is assembled mostly from parts that are standard
items stocked by wholesale supply houses or fabricated to Company specifications
from injection-molded plastic and acrylic. The sole deviation is the
Reconstitube(R), which is an integral part of the dispensing apparatus and
available only from its manufacturer. This product's patent expired in 1992, and
in the unlikely event of supply difficulties, the Company has a contingency plan
that will allow for the fabrication of a replacement with loss of production
limited to 2-4 weeks.
Recently, the Company began offering lease financing through a third party
lender that will open the market to customers whose capital resources are
limited. This program will allow the customer to lease the Product and a
five-year supply of replacement filters for less than current expenditures for
bottled water. At the same time, the Company will realize the replacement filter
profit in the first year rather than it being deferred.
19
<PAGE> 22
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------ --- ----------------------------------
<S> <C> <C>
Michael L. Krall................................ 44 President, CEO, Director
Norman Andersen................................. 77 Chairman of the Board, Director
Gary Brownell, CPA.............................. 47 Chief Financial Officer, Director
Dennis Atchley, Esq............................. 44 Secretary
Eugene Peiser, PD............................... 65 Director
Patrick Galuska................................. 37 Director
Dennis Brovarone, Esq........................... 40 Director
</TABLE>
The above officers and directors may be deemed the founders and organizers
of the Company. The directors of the Company are elected to hold office until
the next annual meeting of Shareholders and until their successors have been
elected and qualified. Pursuant to the Underwriting Agreement, the
Representative of the Underwriters is entitled to nominate a Director for
election for a five years following the Offering and Mr. Krall and Mr. Thomas
Smith, Jr., have agreed to vote their shares for the election of the
Representative's nominee.
No family relationship exists among the Company's officers and directors.
The following summarizes the experience and qualifications of the Company's
Management:
DENNIS B. ATCHLEY. Mr. Atchley, 44, is a civil litigation attorney with
the law firm of Epsten & Grinnell since January 1995. He was a sole practitioner
from 1985 to 1995, was formerly a partner in the firm of Winters and Atchley and
served as an associate attorney with several larger law firms. He became an
officer of Innovative Medical Services in 1992. Mr. Atchley graduated from
Loyola University of Los Angeles in 1973 with a Bachelor of Arts degree in
political science. He received his Juris Doctorate in 1976 from California
Western University School of Law. Mr. Atchley is a member of the American Bar
Association and the American Arbitration Association. Mr. Atchley resides in San
Diego with his wife and two children.
GARY W. BROWNELL. Mr. Brownell, 47, has served as CFO since 1/94 and is a
Certified Public Accountant in a private partnership practice. He is the partner
in charge of taxes and municipal audits for his firm. Mr. Brownell graduated
from San Diego State University in 1973 with a Bachelor of Science degree in
accounting. He received his Certified Public Accountant designation in 1983. Mr.
Brownell has been a partner in Brownell and Duffy since 1985.
MICHAEL L. KRALL. Mr. Krall, 44, is the President and CEO of Innovative
Medical Services, a position he has held since 1993. He is responsible for the
strategic planning, product development, shareholder relations and day-to-day
operations of IMS. Previously, Mr. Krall was the President and CEO of
Bettis-Krall Construction, Inc. from 1983-92, a successful building-development
company of custom homes and commercial property in San Diego County, California.
He has also held numerous positions in general management in the hospitality
industry. Mr. Krall attended Pepperdine University (economics, statistics
mechanical engineering). He previously served 4 years in the United States
Marine Corps and was elected, by general election, to a 4 year term on the Valle
de Oro Planning Board. Mr. Krall lives in El Cajon, California with his wife,
Connie and two children.
NORMAN L. ANDERSEN. Mr. Andersen, 77, currently retired, was from 1974
until September of 1994, Chairman of the Board of Cord North American Moving and
Storage, Inc., in Earth City, MO, a suburb of St. Louis. Prior to serving solely
as Chairman of the Board from 1987 until this year, he also served as its Chief
Executive Officer. Cord North American is a holding company for several moving
and storage concerns in the St. Louis area. Mr. Andersen served for many years
and in several capacities in the Al Bahr Shrine. He is widowed and lives in
Fairview Heights, IL.
20
<PAGE> 23
EUGENE S. PEISER, DOCTOR OF PHARMACY. Dr. Peiser, 65, has been an
independent consultant to FDA regulated industries since 1974 and a Member of
the Board of Innovative Medical Services since 1994. He graduated from the
University of Tennessee College of Pharmacy with a Bachelor of Science in
Pharmacy in 1951 and has received his Doctorate of Pharmacy. Dr. Peiser's
consultancy advises on a wide variety of subjects, including compliance with the
Prescription Drug Marketing Act and other government compliance matters,
employee training and drug repackaging. Dr. Peiser furnishes expert witness
services and has provides approved Pharmaceutical Continuing Education to
several thousand attendees at his seminars. Dr. Peiser is a Founding Director of
the Association of Drug Repackagers; is appointed as a Registered Arbitrator by
the American Registry of Arbitrators; serves as a member of the Surgeon
General's Speakers Bureau; and is President of the Southwest Chapter of the
Association of Military Surgeons. Dr. Peiser lives and works in Palm Harbor, FL.
PATRICK GALUSKA. Mr. Galuska, 37, is a Petroleum Engineer and has been
with Meridian Oil Inc. since 1982. He is responsible for the financial viability
of numerous properties located in the Rocky Mountains and has also been involved
in many property acquisitions and contract negotiations. He is a Registered
Professional Engineer and is a member of the Society of Petroleum Engineers. He
was elected to the Company's Board of Directors in April, 1996. Mr. Galuska
graduated from the University of Wyoming in 1982 with a Bachelor of Science
degree in Petroleum engineering. He received his Masters in Business
Administration, specializing in Finance, from the University of Denver in 1992.
Mr. Galuska resides in Denver, Colorado with his wife.
DENNIS BROVARONE, ESQ. Mr. Brovarone, 40 has been practicing corporate and
securities law since 1986 and as a solo practitioner since 1990. He was elect to
the Company's Board of Directors in April, 1996. Prior to 1990, Mr. Brovarone
served as in-house counsel to R.B. Marich, Inc., a Denver, Colorado based
brokerage firm. Mr. Brovarone also serves as President (chairman) of the Board
of Directors of The Community Involved Charter School, a two year old K-12
public school located in Lakewood, Colorado, operating under an independent
charter and serving approximately 350 students in an individualized,
experiential learning environment. Mr. Brovarone lives and works in Denver,
Colorado.
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table sets forth the total compensation paid to the Company's
Chief Executive Officer and the highest compensated executive officers for the
last three completed fiscal years and as estimated for the current fiscal year.
<TABLE>
<CAPTION>
TOTAL ANNUAL CASH
COMPENSATION
-------------------
YEAR ENDED $ RESTRICTED STOCK OR
NAME & POSITION JULY 31, AMOUNT OPTIONS GRANTED(1)
- ----------------------------------------------------------- ---------- ------ -------------------
<S> <C> <C> <C>
Michael L. Krall........................................... 1992 0 637,001 shares
1993 0 0
1994 30,000 0
1995 45,000 31,250(2)
1996 96,000
Dennis Atchley............................................. 1994 0 21,978 shares
1995 0 0
Gary Brownell.............................................. 1994 0 18,315 shares
1995 0 14,000 shares
Dennis Brovarone........................................... 1996 36,000 13,320 shares
</TABLE>
- ---------------
(1) After effect of a two for three reverse split effective in April, 1996.
(2) Five year Options exercisable after April, 1997 at $3.20 per share. See
Employment Contracts below.
On April 17, 1996, the Company's shareholders approved an Incentive Stock
Option Plan. The purpose of the Plan is to advance the business and development
of the Company and its shareholders by affording to the key employees of the
Company the opportunity to acquire a propriety interest in the Company by the
grant of Options to acquire shares of the Company's common stock. The Options to
be granted are "Incentive Stock
21
<PAGE> 24
Options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, for certain key employees. The Plan is administered by the Board of
Directors. The Plan became effective on April 17, 1996 after Shareholder
approval and shall terminate on April 17, 2006. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Key
Employees. The maximum number of shares subject to Options granted to any one
Key Employee shall not exceed 100,000 shares. The exercise price for Options
shall be set by the Board of Directors but shall not be for less than the fair
market value of the shares on the date the Option is granted. The period in
which Options can be exercised shall be set by the Board of Directors not to
exceed five years from the date of Grant. The Plan may be terminated, modified
or amended by the Board of Directors. The issuance of options pursuant to this
Plan is not expected to be a taxable event for recipient until such time that
the recipient elects to exercise the option whereon the recipient is expected to
be recognize income to the extent the market price of the shares exceeds the
exercise price of the option on the date of exercise. All Key Employees of the
Company and its subsidiaries are eligible to participate in the Incentive Stock
Options. A Key Employee is defined in the Plan as a Company employee who in the
judgment of the Board of Directors 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. As of the date of this Prospectus no benefits have been allocated.
On April 17, 1996, the Company's Board of Directors approved a Directors
and Officers Stock Option Plan. The purpose of the Plan is to advance the
business and development of the Company and its shareholders by affording to the
Directors and Officers of the Company who are ineligible to participate in the
above Incentive Stock Option Plan, the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. The Plan is administered by the entire Board of
Directors. The Plan became effective on April 17, 1996 by the Board of
Directors, was not subject to Shareholder approval and shall terminate on April
17, 2006. Subject to anti-dilution provisions, the Plan may issue Options to
acquire up to 1,000,000 shares to Directors and Officers. The maximum number of
shares subject to Options granted to any one Director or Officer shall not
exceed 100,000 shares. The exercise price for Options shall be set by the Board
of Directors but shall not be for less than 85% of fair market value per share
on the day of grant. The period in which Options can be exercised shall be set
by the Board of Directors not to exceed five years from the date of Grant. The
Plan may be terminated, modified or amended by the Board of Directors. As of the
date of this Prospectus, Michael L. Krall the Company's president has been
awarded options to purchase up to 31,250 shares at $3.20 per share. In addition,
the Board of Directors granted 2,500 common shares each to Robert Abrigo and
Thomas Smith, Sr. for previous service as Directors up to the Shareholders
Meeting of April 17, 1996.
The Company does not have a retirement, pension, profit-sharing or
insurance program.
The Company has not reimbursed Directors for any travel expenses incurred
in attending meetings, though it may adopt such a policy as revenues permit.
EMPLOYMENT CONTRACTS
In April, 1996, the Board of Directors approved a five year employment
agreement for Michael Krall, its President. Mr. Krall is to receive a salary of
$108,000 per year, an amount equal to 3% of the Company's net income before
taxes if any plus other benefits. In addition, the Board of Directors awarded
Mr. Krall compensation in the amount of $30,000, $45,000 and $60,000 for the
fiscal years ended July 31, 1994, 1995 and the eight month period ended March
31, 1996. Mr. Krall has contributed these amounts back to the Company as
additional paid in capital for shares previously issued to Mr. Krall. Mr. Krall
was also awarded five year options to acquire 31,250 common shares at $3.20 per
share which are first exercisable in April, 1997. Please see "Certain
Transactions".
Mr. Brovarone also serves as securities counsel for the Company and
receives $3,000 per month plus expenses. Please see "Certain Transactions".
22
<PAGE> 25
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the
stock ownership of each person known by the Company to be the beneficial owner
of five percent or more of the Company's Common Stock, all Directors
individually and all Directors and Officers of the Company as a group based upon
1,833,851 shares outstanding prior to the offering.
<TABLE>
<CAPTION>
NAME AND ADDRESS COMMON STOCK PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- -------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Norman Anderson..................................................... 51,334 2.8%
1308 N. Magnolia Av, Suite H
El Cajon, CA 92020
Dennis Atchley...................................................... 22,000 1.2
1308 N. Magnolia Av, Suite H
El Cajon, CA 92020
Gary Brownell....................................................... 32,334 1.8
1308 N. Magnolia Av, Suite H
El Cajon, CA 92020
Michael L. Krall(2)................................................. 618,307 33.7
1308 N. Magnolia Av, Suite H
El Cajon, CA 92020
Thomas E. Smith(3).................................................. 618,307 33.7
9408 Lightwood Cove
Austin, TX 78748
Eugene Peiser....................................................... 6,334 0.3
1308 N. Magnolia Av, Suite H
El Cajon, CA 92020
Patrick Galuska..................................................... 33,334 1.8
8137 South Downing Street
Littleton, CO 80122
Dennis Brovarone.................................................... 13,334 0.7
2530 S. Linley Ct.
Denver, CO 80219
Officers and Directors as a group (7 Persons)....................... 776,977 42.4%
</TABLE>
- ---------------
(1) After giving effect to the two for three reverse split effective April 17,
1996
(2) Does not include the 12,100 shares held by Mr. Krall's father or the 2,198
shares held by Mr. Krall's father-in-law which Mr. Krall disclaims any
beneficial ownership.
(3) Thomas E. Smith, Sr., and Thomas E. Smith, are father and son who mutually
disclaim beneficial ownership in the other's shares.
23
<PAGE> 26
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
(a) Principal Market or Markets. The Company's Common Stock is not
presently traded on any established market. Upon official notice of issuance,
the Shares and the Class A Warrants are approved for quotation on The Nasdaq
SmallCap Market and for trading upon the Boston Stock Exchange. As of April 30,
1996 there are 1,833,851 shares of restricted common stock outstanding of which
1,668,343 have been held in excess of two years and therefore are eligible for
sale pursuant to Rule 144, assuming all other conditions of the Rule have been
met. Shares held by persons other than officers, directors and holders of
greater than five percent (5%) of the outstanding shares are subject to an
agreement with the Underwriters to refrain from selling more than ten percent
(10%) of their individual holding without the Representative consent for a two
year period. The officers, directors and holders of greater than five percent
(5%) of the outstanding shares are subject to an agreement with the Underwriters
to refrain from selling any their individual holdings without the
Representative's consent for a two year period. There are no outstanding options
or warrants to purchase or securities convertible into the common stock of the
Company, except options awarded to the Company's President, see Executive
Compensation, and the Bridge Loan Unit warrants. Please see "Description of
Securities" and "Additional Securities Being Registered."
(b) Approximate Number of Holders of Common Stock. The number of holders
of record of the Company's no par value stock at April 30, 1996 are 40.
(c) Dividends. Holders of Common Stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No dividends
have been paid with respect to the Company's Common Stock and no dividends are
anticipated to be paid in the foreseeable future.
(d) Reverse Split. On April 17, 1996, the Company's shareholders approved
a two for three reverse split effective on that date. Fractional shares were
rounded up to the next whole share.
CERTAIN TRANSACTIONS
On September 1, 1992, the Company issued 956,460 (pre split)shares of
common stock each to Michael L. Krall and Thomas E. Smith,(Jr.) the founders of
the Company for capital equipment, working capital and services rendered in the
organization and initial operation of the Company. Mr. Krall is the Company's
President/CEO and a director. Thomas E. Smith, (Jr.) resigned his positions with
the Company in July, 1993 and remains a principal shareholder. In January, 1994,
Dennis Atchley and Gary Brownell, officers and directors of the Company were
issued 33,000 and 27,500 (pre-split) shares of common stock respectively for
services rendered to the Company with respect to its legal and accounting
affairs. Both Mr. Atchley and Mr. Brownell have also been reimbursed their
expenses incurred while rendering services to the Company. In December, 1995,
Dennis Brovarone was issued 20,000 (pre-split) shares of common stock in
consideration of services rendered to the Company with respect to corporate
financing plans and federal securities law compliance.
Since inception, the Company has periodically made loans to Mr. Krall and
Thomas E. Smith, (Jr.) which accrued interest at the rate of 7% per annum. These
debt balances were also periodically reduced by Mr. Krall and Thomas E.
Smith,(Jr.) by cash payments to the Company. These loans were made by the
Company to insure Mr. Krall and Mr. Smith's availability to the Company and the
proceeds were used by Mr. Krall and Mr. Smith for personal expenses unrelated to
the Company. While the Company does not make loans to unrelated parties, it
believes that the terms of these loans were favorable to the Company.
As of July 31, 1994, Thomas E. Smith, (Jr.)'s balance was $21,449.23 and
the Company received a Promissory Note in the principal amount of $21,449.23
from Thomas E. Smith, (Jr.). The Note accrued interest at the rate of 7% per
annum was payable in one installment on or before September 30, 1995. In
November, 1994, Thomas E. Smith, (Jr.) partially repaid his balance by
contribution of $29,000 of proceeds from the sale of 29,000 of Thomas E. Smith,
(Jr.)'s shares of the Company's common stock. As of July 31, 1995, Thomas E.
Smith, (Jr.)'s balance owed was $9,128.199 and Thomas E. Smith, (Jr.) issued a
new Promissory Note dated July 31, 1995 in the principal amount of $9,128.19
which accrues interest at the rate of
24
<PAGE> 27
7% per annum and is payable on or before September 30, 1996. As of April 30,
1996, the balance owed on this note is $9,628.
As of July 31, 1994, Mr. Krall had a debt balance of $0.00 and had
contributed an additional $16,620.40 to the Company. On July 31, 1994, the
Company issued Mr. Krall a Promissory Note in the principal amount of
$16,620.40. The Note accrued interest at the rate of 7% per annum was payable on
or before September 30, 1995. In November, 1994, Mr. Krall contributed $29,000
of proceeds from the sale of 29,000 of Mr. Krall's shares of the Company's
common stock. As of July 31, 1995 and as a result of additional borrowing by Mr.
Krall, Mr. Krall's balance owed was $15,857.71 and Mr. Krall issued a new
Promissory Note dated July 31, 1995 in the principal amount of $15,857.71 which
accrues interest at the rate of 7% per annum and is payable on or before
September 30, 1996. As of April 30, 1996, the balance owed on this note is
$63,683.
On January 1, 1994, the Company issued a Promissory Note with a principal
amount of $30,000 to Thomas E. Smith, Sr., a Director of the Company. The Note
accrued interest at the rate of 9.873% per annum. The Note was repaid by the
conversion of $5,000 into 5,000 shares of common stock in November, 1994 and the
issuance on January 1, 1995, of another Promissory Note for the remaining
principal amount of $25,000. This Note accrues interest at the rate of 11.848%
per annum and is payable in monthly interest with the principal due on or before
January 1, 1997. The Company is current in its payments on this Note.
All ongoing and future affiliated transactions will be made or entered into
on terms that are no less favorable to the Company than those that can be
obtained from unaffiliated third parties and that all ongoing and future
affiliated transactions and any forgiveness of loans must be approved by a
majority of the independent disinterested members of the Company's Board of
Directors.
DESCRIPTION OF SECURITIES
Common Stock: The Company is authorized to issue up to 20,000,000 shares
of its no par value common stock. Each share is entitled to one vote on matters
submitted to a vote of the shareholders of the Company. There is no cumulative
voting of the common stock. The common stock shares have no redemption
provisions nor any preemptive rights. The Company is also authorized to issue up
to 5,000,000 shares of preferred stock, the rights and preferences of which may
be set from time to time prior to issuance by the Board of Directors.
Class A Warrants: The Class A Warrants offered hereby entitle the holder
to acquire an additional common share for $5.25 per common share beginning
August , 1997 and expiring August , 2001. The Shares and the Class A
Warrants shall be separately tradable immediately upon the opening of trading of
the Company's securities on the Nasdaq SmallCap Market and the Boston Stock
Exchange. The Class A Warrants are redeemable by the Company for $0.05 per Class
A Warrant commencing one year from the date of this Prospectus provided the
closing bid price for the Company's common shares shall have averaged in excess
of $9.00 per share for any twenty (20) trading days within a period of thirty
(30) consecutive business days ending within five (5) days of the date of a
Notice of Redemption. The Company has undertaken to maintain the effectiveness
of the registration statement filed with the U. S. Securities and Exchange
Commission covering the Class A warrants, Class Z warrants and the underlying
shares thereof to allow the exercise and public resale of the warrants and the
shares issueable upon exercise thereof.
Additional Securities Being Registered / Bridge Loan Units: The
Registration Statement of which this Prospectus is a part has also registered
the issuance of 15 Bridge Loan Units Each originally consisting of one (1)
$25,000 secured Promissory Note, 50,000 common shares, 50,000 Class A Warrants
to acquire one (1) common share at $5.25 per share and 50,000 Class Z Warrants
to acquire one (1) common share at $10 per share. The Bridge Loan Units were
offered in a private placement conducted by the Company in May, 1996 in which
the Company accepted 1/2 units. On August 1, 1996, the Company renegotiated the
terms of the Bridge Financing with the investors therein in order to address
concerns of The Nasdaq SmallCap Market as to the potential return to these
investors. As a result, the Bridge Financing investors have agreed to the
cancellation of the 50,000 common shares per Bridge Loan Unit (750,000 common
shares in total) and an increase of 100,000 Class A Warrants per Bridge Loan
Unit (1,500,000 additional Class A Warrants in total). As a result,
25
<PAGE> 28
the Bridge Financing investors have been issued a total 2,250,000 Class A
Warrants and 750,000 Class Z Warrants. In addition, the Bridge Financing
investors have each agreed to an irrevocable and complete restriction on the
transfer of each investor's Class A Warrants for a six month period from the
date of this Prospectus.
The Underwriters are not offering any of the Bridge Loan Unit securities in
the Offering. Subject to the above transfer restrictions, the Class A Warrants
contained in the Bridge Loan Units may be sold by the holders thereof from time
to time at prevailing market prices. No market is expected to develop for the
Class Z Warrants. The Class A Warrants and the Class Z Warrants cannot be
exercised for one year and two years respectively and both expire in August,
2001. The Company will receive the exercise price of the Bridge Loan Unit
warrants, but will not receive any of the proceeds from any sale of the Bridge
Loan Unit warrants or the shares underlying the warrants. See "Description of
Securities" and "Additional Securities Being Registered".
The Bridge Loan Unit Promissory Notes bear interest at the rate of five
percent (5%) per annum and are due and payable on the earlier of the closing of
the Public Offering or October 26, 1996. The Bridge Loan Unit Promissory Notes
are secured by substantially all of the assets of the Company and a personal
guaranty granted by Michael Krall, the Company's President.
The Class A Warrants and the Class Z Warrants cannot be exercised for one
year and two years respectively and both expire in August, 2001. The Company
will receive the exercise price of the Bridge Loan Unit warrants, but will not
receive any of the proceeds from any sale of the Bridge Loan Unit warrants or
the shares underlying the warrants. The Bridge Loan Unit Class A Warrants are
exercisable in August, 1997 and expire in August, 2001. The Bridge Loan Unit
Class Z Warrants are exercisable in August, 1998 and expire in August, 2001. The
Bridge Loan Unit warrants have anti-dilution provisions and may be redeemed by
the Company at $0.05 and $0.10 per Class A and Class Z Warrant respectively
commencing one and two years respectively from the date of this Prospectus
provided that the prior to any call for redemption, the closing bid price for
the Company's common shares shall have for a period of twenty (20) trading days
within a period of thirty (30) consecutive business days ending within five days
of the date of notice of redemption, averaged in excess of $9.00 per share for
the Class A Warrants and $15.00 per share for the Class Z Warrants.
Pursuant to the Underwriting Agreement, the Company has agreed not to issue
any additional equity securities without the prior written consent of the
Representative for a period of twenty-four months from the date of this
Prospectus.
The holders of the Bridge Loan Units also have the one time right to
require the Company to register the securities under the Securities Act of 1933
as amended and rights to have the securities included in any appropriate
registration statement the Company may file in the future.
DIVIDEND POLICY
The Company has never paid dividends to its shareholders and intends to
retain all earnings of the Company for business development purposes for the
foreseeable future. Each outstanding share of common stock is entitled to
receive its pro rata portion of any dividends declared by the Board of Directors
from funds legally available for that purpose.
26
<PAGE> 29
UNDERWRITING
The Underwriters named below, for whom Meyers Pollock Robbins, Inc., is the
Representative, have agreed, severally and not jointly to the terms and
conditions of an Underwriting Agreement dated the date hereof to purchase from
the Company, the Shares and the Class Warrants offered hereby in the amounts set
forth below:
<TABLE>
<CAPTION>
COMMON SHARES CLASS A WARRANTS
------------- ----------------
<S> <C> <C>
Meyers Pollock Robbins, Inc.............................
Total......................................... 1,250,000 1,250,000
------------- ----------------
</TABLE>
The Underwriting Agreement provides that the Underwriters will purchase the
Shares offered hereby for $3.60 per Share and the Class A Warrants for $0.09 per
Warrant, representing a discount of 10% from the public offering price.
The Company has granted the Representative an Overallotment Option,
exercisable during the 30 day period after the date of this Prospectus, to
purchase up to a maximum of an additional 187,500 Shares and 187,500 Class A
Warrants on the same terms as the Shares and Class A Warrants being purchased by
the Underwriters from the Company. The Representative may exercise the
Overallotment Option only to cover overallotments made in connection with this
offering.
The Representative of the Underwriters will receive at closing a
non-accountable expense allowance of three percent (3%) of the public offering
price for all Shares and Warrants sold during the offering reduced by $50,000
previously paid by the Company as an advance against this allowance.
The Representative shall also receive warrants to purchase additional
shares of common stock in an amount equal to ten percent (10%) of the securities
sold during the offering. The Representative's Warrants are exercisable at $4.40
per share (one hundred ten percent (110%) of the offering price) for a period of
five years from the date of the offering and carry certain rights to be included
within any appropriate registration statement which the Company may file in
order to permit the public resale of the underlying common stock.
The Company, its directors, officers and holders of greater than five
percent (5%) of the outstanding shares are subject to an agreement with the
Underwriters to refrain from selling any their individual holding without the
Representative's consent for a two year period. Shareholders other than
officers, directors and holders of greater than five percent (5%) of the
outstanding shares are subject to an agreement with the Underwriters to refrain
from selling more than ten percent (10%) of their individual holding without the
Representative's consent for a two year period.
There is currently no market for the common shares of the Company and there
can be no assurance that a market will develop following the offering. The
initial public offering price of the Shares was determined by negotiations
between the Representative and the Company. Among the factors considered in
determining the initial public offering price were the history and the prospects
for the Company, the market for the Company's products, assessment of the
Company's Management, the number of shares offered, the price that purchasers of
such securities are likely to pay, given the nature of the Company, and the
general condition of the securities markets at the time of the offering.
Accordingly the price set forth on the cover of the Prospectus should not be
taken as an actual value of the Company or the common shares.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities under the Securities Act of 1933 as amended, and if
such indemnification's are not available then a reciprocal indemnification and
contribution arrangement will take effect. It is the position of the Securities
and Exchange Commission that exculpation and indemnification for liabilities
arising under the Securities and Exchange Act of 1934 as amended, and the rules
and regulations thereunder is against public policy and therefore unenforceable.
The Company has further agreed with the Representative that the Company will
file a registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934 as amended no later than the date of this Prospectus and
use its best efforts to cause the same to become effective. The Company and the
Representative have also agreed that the Company will take all steps necessary,
and will obtain a Notice of Listing Upon Notice of Effectiveness by NASDAQ prior
to completion of the offering.
27
<PAGE> 30
Pursuant to the Underwriting Agreement, the Representative of the
Underwriters is entitled to nominate a Director for election for a five years
following the Offering and Mr. Krall and Mr. Thomas Smith, Jr., have agreed to
vote their shares for the election of the Representative's nominee.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are at the offices of
the Representative, the Company and the Securities and Exchange Commission,
Washington, D. C. and New York, New York.
TRANSFER AGENT
The Transfer Agent with respect to the Shares and Class A Warrants is
American Securities Transfer & Trust, Inc., Denver, Colorado.
LEGAL MATTERS
The legality of the Securities of the Company offered will be passed on for
the Company by Dennis Brovarone, Attorney at Law, Denver, Colorado. Mr.
Brovarone is also a Director of the Company.
INDEPENDENT PUBLIC ACCOUNTANT
The balance sheets as of July 31, 1995 and 1994 and the related statements
of income, accumulated deficit, and cash flows for each of the two years in the
period ended July 31, 1993, incorporated by reference in this prospectus, have
been included herein in reliance on the report of Steven Holland, independent
public accountant, given on the authority of that firm as experts in auditing
and accounting.
With respect to the unaudited interim financial information for the periods
ended April 30, 1996 and 1995. Incorporated by reference in this prospectus, the
independent public accountant has reported he has applied limited procedures in
accordance with professional standards for a compilation of such information.
However, his separate report for the nine months ended April 30, 1996 and 1995
included in the Company's Form SB-2, and incorporated by reference herein,
states that he did not audit and he does not express an opinion on that interim
financial information. Accordingly, the degree of reliance on his report on such
information should be restricted in light of the limited nature of the
procedures applied. The accountant is not subject to the liability provisions of
section 11 of the Securities Act of 1933 for their report on the unaudited
interim financial information because that report is not a "report" or a "part"
of the registration statement prepared or certified by the accountant within the
meaning of sections 7 and 11 of the act.
28
<PAGE> 31
INNOVATIVE MEDICAL SERVICES
FINANCIAL STATEMENTS AND
SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED JULY 31, 1995 AND JULY 31, 1994
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California
I have audited the balance sheets of Innovative Medical Services as of July
31, 1995 and July 31, 1994 and the related statements of income, accumulated
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted the audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Medical Services
as at July 31, 1995 and July 31, 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Steven Holland
Certified Public Accountant
San Diego, California
October 15, 1995
F-1
<PAGE> 32
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash............................................................... $ 47,180 $ 6,549
Accounts receivable, net of allowance for doubtful accounts of
$500............................................................ 174,785 43,906
Notes receivable (Note 2).......................................... 24,986 21,449
Due from employees................................................. 4,024 1,390
Due from shareholders (Note 3)..................................... 20,000 0
Inventories........................................................ 23,110 5,882
--------- ---------
Total current assets....................................... 294,085 79,176
--------- ---------
Property, Plant & Equipment
Property, plant & equipment (Note 4)............................... 91,498 99,670
--------- ---------
Total property, plant & equipment.......................... 91,498 99,670
--------- ---------
Noncurrent Assets
Organizational costs, net (Note 1)................................. 2,064 3,096
Deferred public offering costs (Note 1)............................ 37,630 32,380
--------- ---------
Total noncurrent assets.................................... 39,694 35,476
--------- ---------
Total assets............................................... $ 425,277 $ 214,322
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................... $ 164,938 $ 44,417
Note payable (Note 5).............................................. 0 16,620
Accrued liabilities................................................ 4,604 4,782
--------- ---------
Total current liabilities.................................. 169,542 65,819
--------- ---------
Long-Term Debt (Note 5).............................................. 25,000 30,000
--------- ---------
Stockholders' Equity
Class A common stock, no par value; authorized 5,000,000 shares,
issued and outstanding 2,687,750 shares at July 31, 1995 and
2,568,750 shares at July 31, 1994 (Note 7 & Note 9)............. 591,961 482,171
Accumulated deficit................................................ (361,226) (363,668)
--------- ---------
Total stockholders' equity................................. 230,735 118,503
--------- ---------
Total liabilities and stockholders' equity................. $ 425,277 $ 214,322
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 33
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
----------------------
1995 1994
-------- ---------
<S> <C> <C>
Net sales............................................................. $459,330 $ 178,932
Cost of sales......................................................... 290,609 170,763
------- --------
Gross profit.......................................................... 168,721 8,169
------- --------
Selling Expenses...................................................... 33,375 40,444
General and administrative expenses................................... 137,651 138,625
------- --------
Total operating costs....................................... 171,026 179,069
------- --------
Operating income (loss)............................................... (2,305) (170,900)
------- --------
Other income and (expense):
Interest income..................................................... 3,266 170
Miscellaneous income and (expense).................................. 2,281 418
------- --------
Total other income and (expense)............................ 5,547 588
------- --------
Income (loss) before income taxes..................................... 3,242 (170,312)
Federal and state income taxes (Note 1)............................... 800 800
------- --------
Net income (loss)..................................................... $ 2,442 $(171,112)
======= ========
Earnings per common share
Net income (loss)................................................... $ 0.00 $ (0.07)
======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 34
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Balance, beginning of year........................................... $(363,668) $(192,556)
Net income (loss).................................................... 2,442 (171,112)
--------- ---------
Balance, end of year................................................. $(361,226) $(363,668)
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 35
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 2,442 $(171,112)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 16,395 13,842
Amortization.................................................... 1,032 1,032
Officers wages contributed to capital........................... 45,000 30,000
Changes in assets and liabilities:
(Increase) in accounts receivable............................... (130,879) (34,250)
(Increase) in note receivable................................... (3,537) (22,735)
(Increase) decrease in due from employees....................... (2,634) 310
(Increase) in inventory......................................... (17,228) 9,432
(Increase) in deferred public offering costs.................... (5,250) (32,380)
Increase in accounts payable.................................... 120,522 29,116
Increase (decrease) in accrued liabilities...................... (178) 1,712
--------- ---------
Net cash provided by operating activities.................. 25,685 (175,033)
--------- ---------
Cash flows from investing activities
Purchase of machinery and equipment................................ (8,224) (15,398)
--------- ---------
Net cash (used) in investing activities.................... (8,224) (15,398)
--------- ---------
Cash flows from financing activities
Increase (decrease) in notes payable............................... (21,620) 9,039
Proceeds from sale of common stock................................. 44,790 172,265
--------- ---------
Net cash provided by financing activities.................. 23,170 181,304
--------- ---------
Net increase (decrease) in cash............................ 40,631 (9,127)
Cash, at beginning of year........................................... 6,549 15,676
--------- ---------
Cash, at end of year................................................. $ 47,180 $ 6,549
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 36
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS
SEE 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 sales of the Fillmaster, a unique and proprietary pharmaceutical
water purification and dispensing product. The Company is fully operational,
with more than 2,500 customers in all fifty states, Puerto Rico, The United
Kingdom, Australia, Canada, and Europe. The Company intends to expand research
and development efforts in order to further develop its product line to include
an additional 11 proprietary pharmacy-related efficiency tools.
Revenue Recognition
The company recognizes revenues when products are delivered.
Research and Development
Research and development costs are charged to operations when incurred and
are included in operating expenses. The total amount charged to Research and
Development in years prior to July 31, 1994 was $34,697.
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:
<TABLE>
<S> <C>
Computers and equipment............................. 7.0 years
Furniture and fixtures.............................. 10.0 years
Leasehold improvements.............................. 31.5 years
</TABLE>
Depreciation is computed on the Modified Accelerated Cost Recovery System
for tax purposes.
Amortization
The cost of organizational expenses are being amortized on a straight line
basis over their remaining lives of five (5) years. Amortization expense charged
to general and administrative expense for the years ended July 31, 1995 and 1994
was $1,032 and $1,032, respectively.
Inventory Cost Method
Inventories are stated at the lower of cost determined by the Average Cost
method and net realizable value.
Deferred Public Offering Cost
The company has incurred $37,630 of costs as of July 31, 1995 related to an
initial public offering. These costs have been deferred, pending completion of
the offering, at which time such costs will be reclassified to shareholders'
equity. Should the offering be unsuccessful, these costs will be expensed.
Income Taxes
At July 31, 1995, the Company has financial, federal, and California tax
net operating loss carryforwards of approximately $361,000, $219,000, and
$102,000, respectively. At July 31, 1994, the Company had financial, federal,
and California tax net operating loss carryforwards of approximately $364,000,
$231,000,
F-6
<PAGE> 37
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and $116,000, respectively. The difference between the financial reporting and
the federal tax loss carryforward is primarily due to the capitalization of
research and development expenses and start-up expenses for tax purposes with an
amortization over five (5) years, but for financial reporting purposes these
expenses are charged to operations as incurred. The difference between federal
and California tax loss carryforwards is primarily due to the fifty percent
limitation on California loss carryforwards. The tax loss carryforwards will
begin expiring in fiscal year ended July 31, 2009 unless previously utilized.
Under the Tax Reform Act of 1986, the use of the Company's net operating loss
carryforwards may be limited if the public offering contemplated results in a
cumulative change in ownership of more than 50%.
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 $69,000 and $80,000 and a
related valuation reserve of $69,000 and $80,000 as of July 31, 1995 and 1994,
respectively. Realization of these deferred tax assets, which relate to
operating loss carryforwards and timing differences from the amortization of
research and development expenses and start-up expenses, is dependent on future
earnings. The timing and amount of future earnings are uncertain and therefore,
the valuation reserve has been established.
NOTE 2. NOTES RECEIVABLE
At July 31, 1995, notes receivable in the amount of $15,858 represents
amounts due from officers and $9,128 represents amounts due from a shareholder,
all are due and payable within one year. At July 31, 1994, notes receivable in
the amount of $21,449 represent amounts due from a shareholder and previous
officer. The note receivable due from the shareholder at July 31, 1994 was paid
off during the fiscal year ended July 31, 1995.
NOTE 3. DUE FROM SHAREHOLDERS
At July 31, 1995, due from shareholders represents stock sold and issued
for which some payments were received after the year end.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment -- at cost,
less accumulated depreciation:
<TABLE>
<CAPTION>
JULY 31, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Computers and equipment...................................... $ 91,582 $ 86,598
Furniture and fixtures....................................... 20,336 17,155
Leasehold improvements....................................... 17,090 17,031
------------- -------------
129,008 120,784
Less: accumulated depreciation............................. 37,510 21,114
------------- -------------
Total.............................................. $ 91,498 $ 99,670
========= =========
</TABLE>
Depreciation expense charged to general and administrative expense for the
years ended July 31, 1995 and 1994 was $16,395 and $13,842, respectively.
F-7
<PAGE> 38
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT
The details relating to debt are as follows:
<TABLE>
<CAPTION>
JULY 31, 1995 JULY 31, 1994
------------- -------------
<S> <C> <C>
Unsecured note payable to officer and stockholder due on July
31, 1995 at 7% interest.................................... $ 0 $16,620
Notes payable to a stockholder with interest at 12% interest
payable in monthly installments of $247 and principal all
due and payable on January 1, 1997......................... 25,000 30,000
------------- -------------
Total debt......................................... 25,000 46,620
Less: Current maturities of notes payable included in current
liabilities................................................ 0 16,620
------------- -------------
Total long term debt............................... $25,000 $30,000
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next 5 years:
<TABLE>
<S> <C>
Year ended July 31, 1996................................................... $ 0
Year ended July 31, 1997................................................... 25,000
-------
$25,000
=======
</TABLE>
During the fiscal year ended July 31, 1995, a stockholder converted $5,000
of notes payable to stock.
NOTE 6. COMMITMENTS
The company leases office and warehouse facilities under an operating lease
expiring on December 31, 1996. The rental expense recorded in general and
administrative expenses for the years ended July 31, 1995 and July 31, 1994 was
$13,631 and $14,432, respectively.
NOTE 7. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
COMMON COMMON
STOCK SHARES STOCK $
------------ --------
<S> <C> <C>
Balance, July 31, 1993......................................... 98,700 $272,906
Stock split.................................................... 2,017,520 0
Sale of stock.................................................. 436,030 169,265
Contribution of officers wages................................. 0 30,000
Stock issued for debt.......................................... 16,500 10,000
Balance, July 31, 1994......................................... 2,568,750 482,171
Sale of stock.................................................. 114,000 59,790
Contribution of officers wages................................. 0 45,000
Stock issued for debt.......................................... 5,000 5,000
Balance, July 31, 1995......................................... 2,687,750 $591,961
</TABLE>
On May 4, 1994, the shareholders voted to increase authorized common stock
from 100,000 to 5,000,000 shares. On November 22, 1993, the Board of Directors
authorized a stock split for shareholders of record of September 30, 1993,
thereby increasing the number of issued and outstanding shares to 2,117,520. All
references in the accompanying financial statements to the number of common
shares and per-share amounts have been restated to reflect the stock split. See
Note 9, Subsequent Events, which addresses a reverse stock split and additional
authorized shares as of April 17, 1996 which are not reflected in the financial
statements.
F-8
<PAGE> 39
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
On April 1, 1996, the Company entered into an employment agreement with the
President and Chief Executive Officer. The term of the agreement is for five
years with an automatic renewal of another five years. The following are the
major provisions of the agreement:
1. Compensation --
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income before
taxes earned by the corporation during each full fiscal year, and
c. A monthly amount of not more than $500 per month for a auto
lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred thousand dollars at 80%
of the initial public offering price of the Company's common stock.
2. Compensation for past services -- In consideration of services
which have been rendered during the fiscal years ended July 31, 1994 and
July 31, 1995 and the eight months period ended March 31, 1996, the
corporation granted the following compensation for past services rendered:
a. $30,000 for fiscal year ended July 31, 1994, and
b. $45,000 for fiscal year ended July 31, 1995, and
c. $60,000 for the eight months ended March 31, 1996.
The President waived the payment of compensation for past services
and contributed this amount as an additional payment for the common
stock he presently owns.
NOTE 9. SUBSEQUENT EVENTS
Stock split and change in authorized shares
On April 17, 1996, the Board of Directors approved a 2 for 3 reverse stock
split of the common stock of the founding shareholders of the corporation, thus
reducing the outstanding shares. Also, the board authorized the issuance of 2
classes of shares, to be designated respectively as 'Common shares' and
'Preferred shares'. The total number of authorized common shares of the
corporation will be increased from 5,000,000 shares to 20,000,000 shares, with
no par value. The total number of authorized preferred shares of the corporation
will be increased from 1,000,000 shares to 5,000,000 shares, with no par value.
Stock option plans
On April 17, 1996, the Board of Directors and the shareholders approved a
stock option plan for the key employees of the Company and non-employee
Directors of the Company. Under the plan the number of shares of stock which may
be issued and sold shall not exceed 1,000,000 shares, with 900,000 shares
reserved for issuance to key employees pursuant to their Incentive Stock Options
and 100,000 shares reserved for issuance to non-employee Directors pursuant to
their non-statutory options. The per share option shall be determined by
committee, but the per share exercise price shall not be less than the fair
market value of the stock on the date the option is granted. No person shall
receive options, first exercisable during any single calendar year for stock,
the fair market value of which exceeds $100,000.
On April 17, 1996, the Board of Directors approved a stock option plan for
the executive officers and Directors of the Company. Under the plan the maximum
number of shares of stock which may be issued and sold shall not exceed
1,000,000 shares ,with the maximum number of shares for which an option may be
F-9
<PAGE> 40
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted to any one Director or officer shall be 100,000. The per share option
price for the stock subject to each option shall be $1.00 per share or such
other price as the Board of Directors may determine.
NOTE 10. DEVELOPMENT STAGE
The company was formed on August 24, 1992 and was in the development stage
through July 31, 1993. The fiscal year ended July 31, 1994 is the first year
during which it is considered an operating company.
F-10
<PAGE> 41
AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION
Our audits of the basic financial statements were made primarily to form an
opinion on such financial statements taken as a whole. The supplementary
information contained in the following pages is presented for the purpose of
additional analysis and, although not required for a fair presentation of
financial position, results of operations, and cash flows, was subjected to the
audit procedures applied in the examinations of the basic financial statements.
In our opinion, the supplementary information is fairly presented in all
material respects in relation to the basic financial statements taken as a
whole.
Steven Holland
Certified Public Accountant
San Diego, Ca.
October 15, 1995
F-11
<PAGE> 42
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Schedule of Cost of Sales
Material purchases..................................................... $250,148 $124,842
Production labor....................................................... 18,783 37,310
Freight................................................................ 21,214 8,210
Supplies and miscellaneous............................................. 464 401
-------- --------
Total cost of sales............................................ $290,609 $170,763
======== ========
Schedule of Selling Expenses
Advertising and promotion.............................................. $ 15,886 $ 8,378
Brochures and catalogs................................................. 80 5,126
Demo and evaluation systems............................................ 467 3,024
Marketing expenses..................................................... 3,448 1,635
Sales wages............................................................ 10,577 16,544
Travel and entertainment............................................... 2,877 3,987
Trade shows............................................................ 40 1,750
-------- --------
Total selling expenses......................................... $ 33,375 $ 40,444
======== ========
</TABLE>
F-12
<PAGE> 43
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31
-------------------
1995 1994
-------- --------
<S> <C> <C>
Schedule of General and Administrative Expenses
Auto expenses.......................................................... $ 11,046 $ 11,384
Amortization........................................................... 1,032 1,032
Bank charges........................................................... 225 257
Computer expenses...................................................... 4,445 6,286
Contributions.......................................................... 0 120
Credit card fees....................................................... 78 342
Depreciation........................................................... 16,395 13,842
Dues and subscriptions................................................. 32 326
Equipment rental....................................................... 0 896
Insurance.............................................................. 5,334 10,060
Interest expense....................................................... 3,061 3,454
Legal and professional................................................. 2,503 6,906
License and permits.................................................... 52 337
Miscellaneous.......................................................... 556 697
Office supplies and expense............................................ 9,098 8,130
Office wages........................................................... 11,928 16,452
Officers wages......................................................... 45,000 30,000
Postage................................................................ 1,030 842
Rent expense........................................................... 13,631 14,432
Repairs and maintenance................................................ 262 1,074
Sales tax expense...................................................... 0 1,115
Security............................................................... 211 612
Telephone expense...................................................... 9,687 7,904
Utilities.............................................................. 2,045 2,125
-------- --------
Total general and administrative expenses...................... $137,651 $138,625
======== ========
</TABLE>
F-13
<PAGE> 44
INNOVATIVE MEDICAL SERVICES
FINANCIAL STATEMENTS AND
SUPPLEMENTARY INFORMATION
FOR THE NINE MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
F-14
<PAGE> 45
To the Board of Directors
Innovative Medical Services
El Cajon, California
I have compiled the accompanying balance sheet of Innovative Medical
Services (a corporation) as of April 30, 1996, and the related statement of
income, accumulated deficit, and cash flows for the nine months then ended, and
the accompanying supplementary information contained in Schedules 1 & 2, which
are presented only for supplementary analysis purposes, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
and supplementary schedules information that is the representation of
management. The financial statements include all adjustments which in the
opinion of management are necessary to make the financial statements not
misleading. I have not audited or reviewed the accompanying financial statements
and supplementary schedules and, accordingly, do not express an opinion or any
other form of assurance on them.
Steven Holland
Certified Public Accountant
San Diego, California
August 1, 1996
F-15
<PAGE> 46
INNOVATIVE MEDICAL SERVICES
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 1)
APRIL 30, APRIL 30,
1996 1996
--------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash............................................................... $ 21,168 $ 323,668
Accounts receivable, net of allowance for doubtful accounts of
$500............................................................ 45,238 45,238
Notes receivable (Note 2).......................................... 73,311 73,311
Due from employees................................................. 1,629 1,629
Due from shareholders (Note 3)..................................... 210 210
Inventories........................................................ 32,974 32,974
Prepaid expenses................................................... 6,603 6,603
--------- ----------
Total current assets....................................... 181,133 483,633
--------- ----------
Property, Plant & Equipment
Property, plant & equipment (Note 4)............................... 102,307 102,307
--------- ----------
Total property, plant & equipment.......................... 102,307 102,307
--------- ----------
Noncurrent Assets
Organizational costs, net (Note 1)................................. 1,290 1,290
Deferred public offering costs (Note 1)............................ 96,365 168,865
--------- ----------
Total noncurrent assets.................................... 97,655 170,155
--------- ----------
Total assets....................................................... $ 381,095 $ 756,095
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................... $ 96,092 $ 96,092
Accrued liabilities................................................ 14,240 14,240
Notes payable (Note 5)............................................. 50,000 425,000
--------- ----------
Total current liabilities.................................. 160,332 535,332
--------- ----------
Stockholders' Equity
Class A common stock, no par value; authorized 20,000,000 shares,
1,833,851 and shares issued and outstanding at April 30,
1996 and Pro Forma April 30, 1996 (Note 7 and Note 10).......... 658,181 658,181
Accumulated deficit................................................ (437,418) (437,418)
--------- ----------
Total stockholders' equity................................. 220,763 220,763
--------- ----------
Total liabilities and stockholders' equity................. $ 381,095 $ 756,095
======== =========
</TABLE>
See accompanying notes and accountant's report.
F-16
<PAGE> 47
INNOVATIVE MEDICAL SERVICES
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED APRIL 30,
-------------------------------------
1996 1995
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Net sales..................................................... $701,088 $145,849
Cost of sales................................................. 508,489 93,775
------ ------
Gross profit.................................................. 192,599 52,074
------ ------
Selling expenses.............................................. 65,199 29,732
General and administrative expenses........................... 202,972 100,867
------ ------
Total operating costs............................... 268,171 130,599
------ ------
Operating income (loss)....................................... (75,572) (78,525)
------ ------
Other income and (expense):
Miscellaneous income and (expense).......................... 180 3,042
------ ------
Total other income and (expense).................... 180 3,042
------ ------
Income (loss) before income taxes............................. (75,392) (75,483)
Federal and state income taxes (Note 1)....................... 800 800
------ ------
Net income (loss)............................................. $(76,192) $(76,283)
====== ======
Net (loss) per common share................................... $ (.02) $ (.02)
====== ======
</TABLE>
See accompanying notes and accountant's report.
F-17
<PAGE> 48
INNOVATIVE MEDICAL SERVICES
STATEMENT OF ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
APRIL 30, 1996
----------------
(UNAUDITED)
<S> <C>
Balance, beginning of year.................................................... $ (361,226)
Net income (loss)............................................................. (76,192)
----------------
Balance, end of period........................................................ $ (437,418)
============
</TABLE>
See accompanying notes and accountant's report.
F-18
<PAGE> 49
INNOVATIVE MEDICAL SERVICES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED APRIL 30,
---------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................... $(76,192) (76,283)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation...................................................... 20,029 12,297
Amortization...................................................... 774 774
Officers wages contributed........................................ 44,000 33,750
Changes in assets and liabilities:
Decrease in accounts receivable................................... 129,547 13,797
Decrease (Increase) in note receivable............................ (48,325) 13,387
Decrease in due from employees.................................... 2,395 0
Decrease (Increase) in due from shareholders...................... 19,790 (30,000)
(Increase) in inventory........................................... (9,863) (12,340)
(Increase) in prepaids............................................ (6,604) 0
(Increase) in deferred public offering costs...................... (58,735) 0
(Decrease) in accounts payable.................................... (68,846) (10,817)
Increase in accrued liabilities................................... 9,636 135
-------- --------
Net cash (used) by operating activities...................... (42,394) (55,300)
-------- --------
Cash flows from investing activities
Purchase of machinery and equipment.................................. (30,838) (7,521)
-------- --------
Net cash (used) in investing activities...................... (30,838) (7,521)
-------- --------
Cash flows from financing activities
Proceeds from short-term debt........................................ 25,000 0
Payments on debt..................................................... 0 (3,596)
Proceeds from sale of common stock................................... 22,220 60,000
-------- --------
Net cash provided by financing activities.................... 47,220 56,404
-------- --------
Net (decrease) in cash....................................... (26,012) (6,417)
Cash, at beginning of year............................................. 47,180 6,549
-------- --------
Cash, at end of period................................................. $ 21,168 $ 132
======== ========
</TABLE>
See accompanying notes and accountant's report.
F-19
<PAGE> 50
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS
SEE 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 sales of the Fillmaster , a unique and proprietary pharmaceutical
water purification and dispensing product. The Company is fully operational,
with more than 3,500 customers in all fifty states, Puerto Rico, The United
Kingdom, Australia, Canada, and Europe. The Company intends to expand research
and development efforts in order to further develop its product line to include
an additional 11 proprietary pharmacy-related efficiency tools.
Revenue Recognition
The company recognizes revenues when products are delivered.
Research and Development
Research and development costs are charged to operations when incurred and
are included in operating expenses. The total amount charged to Research and
Development in prior years was $34,697.
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:
<TABLE>
<S> <C>
Computers and equipment.................................. 7.0 years
Furniture and fixtures................................... 10.0 years
</TABLE>
Leasehold improvements are being depreciated over the life of the lease
which is equal to 29 or 89 months depending on the actual lease.
Depreciation is computed on the Modified Accelerated Cost Recovery System
for tax purposes.
Amortization
The cost of organizational expenses are being amortized on a straight line
basis over their remaining lives of five (5) years. Amortization expense charged
to general and administrative expense for the six months ended April 30, 1996
and April 30, 1995 was $774 and $774, respectively.
Inventory Cost Method
Inventories are stated at the lower of cost determined by the Average Cost
method and net realizable value.
Common Stock Public Offering
The Board of Directors authorized the Company to sell up to 1,250,000
shares of the Company's common stock and 1,250,000 Class A warrants in a public
offering pursuant to a Registration Statement on Form SB-2 under the Securities
Act of 1933. The board of directors also authorized obtaining a bridge loan of
up to $375,000 to facilitate the public offering (Note 10).
On April 17, 1996, the Company entered into an agreement with Monitor
Investment Group, Inc. of New York, whereby Monitor agreed to structure a Bridge
Financing and act as the sole placement agent on a best
F-20
<PAGE> 51
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
effort basis (Note 5) and act as an underwriter on a firm-commitment basis for
1,250,000 shares of the Company's common stock and 1,250,000 Class A Warrants.
The Class A Warrants will be exercisable commencing one year after the effective
date of the offering and entitles each holder to purchase one share of common
stock at $5.25 per common share during the four year period commencing one year
from the effective date of the offering. The Class A Warrants are redeemable by
the Company for $.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 a notice
of redemption.
The principal terms of the agreement with the Representative are as
follows:
a. Underwriter's discount and commission shall be ten percent of the
aggregate public offering, and
b. The non-accountable expense allowance will be three percent of the
total amount raised, and
c. The Company shall be responsible for and shall bear all expenses
incurred in connection with the bridge financing and the public offering,
and
d. The Company will grant the Representative an option to purchase all
or part of an additional number of securities (the "Over-Allotment Option")
as will be equal to not more than fifteen percent of the total number of
securities initially offered for a period of thirty days from the closing
date of the public offering in order to cover over-allotments, if any.
Deferred Public Offering Cost
The company has incurred $96,365 of costs as of April 30, 1996 related to
an initial public offering. These costs have been deferred, pending completion
of the offering, at which time such costs will be reclassified to shareholders'
equity. Should the offering be unsuccessful, these costs will be expensed. In
the Pro Forma balance sheet of April 30, 1996, additional deferred public
offering costs of $72,500 are anticipated to be withheld from the bridge loan
financing (Note 10).
Net Loss Per Common Share
Pursuant to the requirements of the Securities and Exchange Commission
(SEC), common stock issued by the Company during the twelve months immediately
preceding an initial public offering, plus the number of common equivalent
shares which became issuable during the same period pursuant to the grant of
stock options and Bridge Financing (Note 10 ) have been included in the
calculation of the shares used in computing net loss per common share as if
these shares were outstanding for all periods presented using the treasury stock
method.
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:
<TABLE>
<S> <C>
Weighted average number of shares actually outstanding.................... 1,817,369
Stock options issued to officer (Note 8).................................. 31,250
Bridge Loan Unit warrants (Note 10)....................................... 1,187,500
-------
3,036,118
=======
</TABLE>
The number of shares that would be issued from the exercise of the warrants
has been reduced by the number of shares that could have been purchased from the
proceeds at the average market price of $9.00 per share for Class A Warrants and
$15.00 per share for Class Z warrants, which represents the redemption prices.
F-21
<PAGE> 52
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
At April 30, 1996, the Company has financial, federal, and California tax
net operating loss carryforwards of approximately $437,000, $273,000, and
$116,000, respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to the capitalization of research
and development expenses and start-up expenses for tax purposes with an
amortization over five (5) years, but for financial reporting purposes these
expenses are charged to operations as incurred. The difference between federal
and California tax loss carryforwards is primarily due to the fifty percent
limitation on California loss carryforwards. The tax loss carryforwards will
begin expiring in fiscal year ended July 31, 2009, unless previously utilized.
Under the Tax Reform Act of 1986, the use of the Company's net operating loss
carryforwards may be limited if the public offering contemplated results in a
cumulative change in ownership of more than 50%.
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 $68,000 and a related
valuation reserve of $68,000, as of April 30, 1996. Realization of these
deferred tax assets, which relate to operating loss carryforwards and timing
differences from the amortization of research and development expenses and
start-up expenses, is dependent on future earnings. The timing and amount of
future earnings are uncertain and therefore, the valuation reserve has been
established.
Unaudited Pro Forma Balance Sheet at April 30, 1996
The pro forma balance sheet at April 30, 1996, reflects the completion of
the Bridge Financing disclosed in Note 10.
Interim Financial Statements
The accompanying statements of income and cash flows for the nine months
ended April 30, 1995 have not been audited. However, these financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
NOTE 2. NOTES RECEIVABLE
At April 30, 1996, notes receivable in the amount of $63,683 represents
amounts due from officers and $9,628 represents amounts due from a shareholder.
All notes receivable are due and payable within one year.
NOTE 3. DUE FROM SHAREHOLDERS
At April 30, 1996, due from shareholders represents stock sold and issued
for which some payments were received after April 30, 1996.
F-22
<PAGE> 53
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment at cost, less
accumulated depreciation:
<TABLE>
<CAPTION>
APRIL 30, 1996
--------------
<S> <C>
Computers and equipment................................................. $102,789
Furniture and fixtures.................................................. 39,023
Leasehold improvements.................................................. 18,034
------
159,846
Less: accumulated depreciation..................................... 57,539
------
Total......................................................... $102,307
======
</TABLE>
Depreciation expense charged to general and administrative expense for the
nine months ended April 30, 1996 and the nine months ended April 30, 1995 was
$20,029 and $12,297, respectively.
NOTE 5. DEBT
The details relating to debt are as follows:
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 1)
APRIL 30, APRIL 30,
1996 1996
--------- ---------
<S> <C> <C>
Note payable to a shareholder with interest at 12% interest
payable
in monthly installments of $247 and principal all due and
payable on January 1, 1997................................. $ 25,000 $ 25,000
Note payable to a shareholder with interest at 12% all due
and payable in 90 days..................................... 25,000 25,000
Bridge Financing (Note 10)................................... 0 375,000
----- ------
Total notes payable................................ 50,000 425,000
Less: Current maturities of notes payable included in current
liabilities................................................ 50,000 425,000
----- ------
Total long term debt............................... $ 0 $ 0
===== ======
</TABLE>
NOTE 6. COMMITMENTS
The Company leases office and warehouse facilities under an operating lease
expiring on December 31, 1996. The total rental expense in general and
administrative expenses for the nine months ended April 30, 1996 and April 30,
1995 was $18,441 and $8,987, respectively.
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 will be for sixty-three months which allows for an initial building
improvement period of two months. The monthly rental for the 7000 square foot
facility will be $.61 per square foot plus $.08 per square foot for maintenance
of common areas. There also is a fixed yearly increase of 4%.
F-23
<PAGE> 54
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
COMMON COMMON
STOCK SHARES STOCK $
------------ --------
<S> <C> <C>
Balance, July 31, 1994......................................... 2,568,750 $482,171
Reverse stock split............................................ (856,233) 0
Sale of stock.................................................. 76,000 59,790
Stock issued for debt.......................................... 3,334 5,000
Contribution of officers wages................................. 0 45,000
Balance, July 31, 1995......................................... 1,791,851 591,961
Sale of stock.................................................. 42,000 22,210
Contribution of officers wages................................. 0 44,000
Balance, April 30, 1996........................................ 1,833,851 $658,171
</TABLE>
On May 4, 1994, the shareholders voted to increase authorized common stock
from 100,000 to 5,000,000 shares. On November 22, 1993, the Board of Directors
authorized a stock split for shareholders of record of September 30, 1993,
thereby increasing the number of issued and outstanding shares to 2,117,520.
On April 17, 1996, the Board of Directors approved a 2 for 3 reverse stock
split of the common stock of the founding shareholders of the corporation , thus
reducing the outstanding shares. Also, the board authorized the issuance of 2
classes of shares, to be designated respectively as 'Common shares' and
'Preferred shares'. The total number of authorized common shares of the
corporation was increased from 5,000,000 shares to 20,000,000 shares, with no
par value. The total number of authorized preferred shares of the corporation
was increased from 1,000,000 shares to 5,000,000 shares, with no par value. All
references in the accompanying financial statements to the number of common
shares and per-share amounts have been restated to reflect the stock splits.
NOTE 8. RELATED PARTY TRANSACTIONS
On April 1, 1996, the Company entered into an employment agreement with the
President and Chief Executive Officer. The term of the agreement is for five
years with an automatic renewal of another five years. The following are the
major provisions of the agreement:
1. Compensation --
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income before
taxes earned by the corporation during each full fiscal year, and
c. A monthly amount of not more than $500 per month for a auto
lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred thousand dollars at 80%
of the initial public offering price of the Company's common stock,
approximately 31,250 shares at $3.20 per share, which are exercisable in
April, 1997.
F-24
<PAGE> 55
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. Compensation for past services --
In consideration of services which have been rendered during the
fiscal years ended July 31, 1994 and July 31, 1995 and the eight months
period ended March 31, 1996, the corporation granted the following
compensation for past services rendered:
a. $30,000 for fiscal year ended July 31, 1994, and
b. $45,000 for fiscal year ended July 31, 1995, and
c. $60,000 for the eight months ended March 31, 1996. The
President waived the payment of $119,000 of the compensation for past
services and contributed this amount as an additional payment for the
common stock he presently owns.
NOTE 9. STOCK OPTION PLANS
On April 17, 1996, the Board of Directors and the shareholders approved a
stock option plan for the key employees of the Company and non-employee
Directors of the Company. Under the plan the number of shares of stock which may
be issued and sold shall not exceed 1,000,000 shares, with 900,000 shares
reserved for issuance to key employees pursuant to their Incentive Stock Options
and 100,000 shares reserved for issuance to non-employee Directors pursuant to
their non-statutory options. The per share option shall be determined by
committee, but the per share exercise price shall not be less than the fair
market value of the stock on the date the option is granted. No person shall
receive options, first exerciseable during any single calendar year for stock,
the fair market value of which exceeds $100,000.
On April 17, 1996, the Board of Directors approved a stock option plan for
the executive officers and Directors of the Company. Under the plan the maximum
number of shares of stock which may be issued and sold shall not exceed
1,000,000 shares ,with the maximum number of shares for which an option may be
granted to any one Director or officer shall be 100,000. The per share option
price for the stock subject to each option shall be $1.00 per share or such
other price as the Board of Directors may determine.
NOTE 10. SUBSEQUENT EVENTS
Bridge Financing
In May 1996, the Company offered in a private placement 15 Bridge Loan
Units each originally consisting of one $25,000 secured promissory note, 50,000
common shares, 50,000 Class A Warrants to acquire one common shares at $5.25 and
50,000 Class Z Warrants to acquire one common share at $10.00 per share. On
August 1, 1996, the Company renegotiated the terms of the Bridge Financing with
the investors therein in order to address concerns of The Nasdaq SmallCap Market
as to the potential return to these investors. As a result, the Bridge Financing
investors have agreed to the cancellation of the 50,000 common shares per Bridge
Loan Unit (750,000 common shares in total) and an increase of 100,000 Class A
Warrants per Bridge Loan Unit (1,500,000 additional Class A Warrants in total).
As a result, the Bridge Financing investors have been issued a total 2,250,000
Class A Warrants and 750,000 Class Z Warrants. In addition, the Bridge Financing
investors have each agreed to an irrevocable and complete restriction on the
transfer of each investor's Class A Warrants for a six month period from the
date of this Prospectus. The promissory notes bear interest at the rate of (5%)
five percent and are due and payable on the earlier of the closing of the public
offering or October 26, 1996. The Bridge Loan promissory notes are secured by
substantially all of the assets of the Company and a personal guaranty granted
by Michael Krall, the Company's president. The Class A and Class Z Warrants
cannot be exercised for one year and two years, respectively, and both expire in
August 2001. The Company will receive the exercise price of the Bridge Loan Unit
warrants, but will not receive any proceeds from any sale of the Bridge Loan
Unit warrants or the shares underlying the warrants. The
F-25
<PAGE> 56
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
net proceeds to the Company from the issuance of the promissory notes was
$302,500, after payment of $72,500 for public offering costs.
The Bridge Financing and this public offering may be deemed integrated
together and as a result, the Bridge Financing may have been in violation of the
registration requirements of Section 5 of the Securities Act of 1933. This
results in a contingent liability for the purchase price of the securities sold
in violation of Section 5 in the amount of $375,000 as well as other damages and
litigation loan cost. The Company is already contractually bound to repay the
entire consideration given for the Bridge Financing Units. No assurances can be
given that this contingent liability will not have a material adverse effect
upon the Company or its operations.
F-26
<PAGE> 57
SUPPLEMENTARY INFORMATION
F-27
<PAGE> 58
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION -- SCHEDULE 1
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED APRIL 30,
----------------------
1996 1995
-------- -------
(UNAUDITED)
<S> <C> <C>
Schedule of Cost of Sales
Material purchases.................................................. $420,643 $76,456
Production labor.................................................... 55,710 9,614
Freight............................................................. 31,553 7,628
Supplies and miscellaneous.......................................... 583 77
-------- -------
Total cost of sales......................................... $508,489 $93,775
======== =======
Schedule of Selling Expenses
Advertising and promotion........................................... $ 810 $16,138
Brochures and catalogs.............................................. 2,711 0
Marketing expenses.................................................. 8,927 981
Sales wages......................................................... 33,262 9,825
Travel and entertainment............................................ 8,388 2,748
Trade shows......................................................... 11,101 40
-------- -------
Total selling expenses...................................... $ 65,199 $29,732
======== =======
</TABLE>
See accompanying notes and accountants report.
F-28
<PAGE> 59
INNOVATIVE MEDICAL SERVICES
SUPPLEMENTARY INFORMATION -- SCHEDULE 2
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED APRIL 30,
-----------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Schedule of General and Administrative Expenses
Auto expenses...................................................... $ 10,539 $ 8,469
Amortization....................................................... 774 774
Bank charges....................................................... 1,065 142
Computer expenses.................................................. 5,740 3,853
Contributions...................................................... 205 0
Credit card fees................................................... 48 78
Depreciation....................................................... 20,029 12,297
Dues and subscriptions............................................. 2,662 33
Equipment rental................................................... 4,616 4,079
Insurance.......................................................... 4,525 4,494
Interest expense................................................... 2,221 1,481
Legal and professional............................................. 2,940 2,513
Office supplies and expense........................................ 11,193 3,152
Office wages....................................................... 25,239 4,156
Officers wages..................................................... 69,000 33,750
Postage............................................................ 873 773
Rent expense....................................................... 18,441 8,987
Repairs and maintenance............................................ 3,177 285
Security........................................................... 160 158
Taxes -- business.................................................. 2,719 1,957
Taxes -- payroll................................................... 7,606 1,232
Telephone expense.................................................. 6,679 6,655
Utilities.......................................................... 2,521 1,549
-------- --------
Total general and administrative expenses.................. $202,972 $100,867
======== ========
</TABLE>
See accompanying notes and accountants report.
F-29
<PAGE> 60
------------------------------------------------------
------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS OR
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES AND THE
WARRANTS IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 10
Dilution.............................. 11
Capitalization........................ 12
Management's Discussion and Analysis
of Financial Condition.............. 13
The Company and its Business.......... 17
Management............................ 20
Security Ownership of Management and
Principal Shareholders.............. 23
Market for the Company's Common Stock
and Related Stockholder Matters..... 24
Certain Transactions.................. 24
Description of Securities............. 25
Underwriting.......................... 27
Transfer Agent........................ 28
Legal Matters......................... 28
Independent Public Accountant......... 28
Financial Statements.................. F-1
</TABLE>
UNTIL AUGUST , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDER-WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
INNOVATIVE MEDICAL SERVICES
LOGO
-------------------------
PROSPECTUS
-------------------------
MEYERS POLLOCK
ROBBINS, INC.
AUGUST , 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other arrangement
under which any controlling persons, director or officer of the Registrant is
insured or indemnified in any manner against any liability which he may incur in
his capacity as such, is as follows:
(a) The Company's Certificate of Incorporation provides the Company's
Officers and Directors the full extent of the protection offered by the
General Corporation Law of the State of California.
(b) The General Corporation Law of the State of California provides
that a corporation may include a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that
such provision shall not eliminate or limit the liability of a director (i)
for any breach of the directors' duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under the
Corporation Law dealing with the liability of directors for unlawful
payment of dividend or unlawful stock purchase or redemption, or (iv) for
any transaction from which the director derived an improper personal
benefit. No such provision shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such
provision becomes effective.
(c) The Company's Bylaws provide that the Company may indemnify its
Officers and Directors to the full extent permitted by the General
Corporation Law of the State of California.
(d) The General Corporation Law of the State of California provides
that a corporation may indemnify its directors and officers against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and incurred by them in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the rights
of the corporation), by reason of being or having been directors or
officers, if such directors or officers acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, they
had no reasonable cause to believe their conduct was unlawful. The
indemnification provided the General Corporation Law of the State of
California is not exclusive of any other rights arising under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by the
Registrant, are as follows:
<TABLE>
<S> <C>
SEC Filing Fee.......................................................... $ 2,300.00
NASD Filing Fee......................................................... 1,150.00
Printing and Advertising Expenses....................................... 50,000.00*
Accounting Fees and Expenses............................................ 30,000.00*
Legal Fees and Expenses................................................. 90,000.00*
Blue Sky Fees and Expenses.............................................. 10,000.00*
Miscellaneous........................................................... 1,650.00*
-----------
Total......................................................... $180,000.00*
==========
</TABLE>
- ---------------
* Estimated.
II-1
<PAGE> 62
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant sold securities which were not
registered under the Securities Act of 1933, as amended, as follows:
<TABLE>
<CAPTION>
COMMON TOTAL
NAME OF PURCHASER DATE STOCK(1) CONSIDERATION
- ------------------------------------------------------ --------- ----------- ----------------
<S> <C> <C> <C>
Thomas E. Smith, R. Ph.(1)(2)......................... 9/1/92 946,460 capital & equip.
Michael L. Krall(1)(2)................................ 9/1/92 946,460 capital & equip.
Norman Anderson....................................... 10/14/92 55,000 25,000
Leonard M. Krall...................................... 10/14/92 12,100 6,000
Charles Lewis, MD..................................... 10/14/92 11,000 10,000
Thomas E. Smith, Sr................................... 10/16/92 16,500 10,000
Joel B. Richey, PT.................................... 11/25/92 16,500 15,000
Stephan Gillespie, R.Ph............................... 1/22/93 55,000 50,000
Spencer Dowell, R.Ph.................................. 1/28/93 7,700 7,000
Christine Givant, R.Ph................................ 1/28/93 5,500 5,000
Patrick S. Galuska.................................... 4/26/93 11,000 10,000
Thomas Balaskas, R.Ph................................. 9/22/93 11,000 10,000
Daniel F. Smith....................................... 9/22/93 3,300 3,000
David Reitz(3)........................................ 11/1/93 135,000 services
Robert L. Shear(3).................................... 11/1/93 75,000 services
Thomas Balaskas, R.Ph................................. 12/17/93 5,500 5,000
David Duea............................................ 1/1/94 3,630 services
Patrick S. Galuska.................................... 1/1/94 33,000 20,000
Dennis Atchley, Esq................................... 1/3/94 33,000 services
Gary Brownell, CPA.................................... 1/3/94 27,500 services
Eugene Peiser, PD..................................... 1/24/94 5,500 5,000
Norman Anderson....................................... 2/1/94 22,000 10,000
William Ross.......................................... 2/5/94 11,000 10,000
Steven Nelson, R.Ph................................... 2/14/94 22,000 20,000
Robert Abrigo......................................... 3/4/94 30,800 40,000
Janet V. Gammell...................................... 3/14/94 2,750 5,000
Frank Short........................................... 3/14/94 5,500 5,000
John R. Stevenson, MD................................. 3/16/94 27,500 25,000
Gary Pernicano........................................ 3/25/94 1,650 3,000
Steven Dryden, R.Ph................................... 4/12/94 1,650 3,000
Linus Lee............................................. 7/12/94 2,750 5,000
Howard Hervey......................................... 7/22/94 2,750 5,000
William G. Metze...................................... 7/22/94 2,750 5,000
Thomas Vollmer........................................ 8/8/94 5,500 5,000
William H. Newkirk, Esq............................... 8/13/94 5,500 5,000
Carolyn Konecki....................................... 8/18/94 1,000 services
Steven Nelson, R.Ph................................... 9/16/94 102,000 50,000
William G. Metze(2)................................... 11/21/94 2,000 2,000
Robert Abrigo(2)...................................... 11/22/94 9,000 9,000
Steven Dryden, R.Ph.(2)............................... 11/22/94 5,000 5,000
Patrick S. Galuska(2)................................. 11/22/94 6,000 6,000
Eugene Peiser, PD.(2)................................. 11/22/94 3,000 3,000
Frank Short(2)........................................ 11/22/94 2,500 2,500
Thomas Balaskas, R.Ph.(2)............................. 11/22/94 5,000 5,000
Thomas E. Smith, Sr.(2)............................... 11/22/94 5,000 5,000
John R. Stevenson, MD.(2)............................. 11/23/94 25,000 25,000
William Strang........................................ 8/22/95 14,000 21,000
</TABLE>
II-2
<PAGE> 63
<TABLE>
<CAPTION>
COMMON TOTAL
NAME OF PURCHASER DATE STOCK(1) CONSIDERATION
- ------------------------------------------------------ -------- -------- ----------------
<S> <C> <C> <C>
Eugene Peiser, PD..................................... 10/18/95 1,000 1,000
Dennis Brovarone...................................... 12/10/95 20,000 services
Robert Abrigo......................................... 4/17/96 2,500 services
Thomas Smith, Sr...................................... 4/17/96 2,500 services
</TABLE>
BRIDGE FINANCING INVESTORS
<TABLE>
<CAPTION>
NAME OF PURCHASER DATE BRIDGE FINANCING UNITS(4) CONSIDERATION
- ------------------------------------------ ------- ------------------------- -------------
<S> <C> <C> <C>
Janice Mastropiero........................ 4/25/96 0.5 $12,500
Sheri Ann Lopa............................ 4/25/96 0.5 $12,500
Anthony Stropoli.......................... 5/4/96 1.0 $25,000
Sandra A. Wood............................ 4/24/96 1.0 $25,000
Joseph Burtone............................ 5/15/96 0.5 $12,500
Natalie Sotiriou.......................... 4/25/96 0.5 $12,500
Tom Coccio................................ 5/2/96 0.5 $12,500
Joerg Wiedenhoff.......................... 4/26/96 1.0 $25,000
Manfred Rau............................... 4/25/96 1.0 $25,000
Norbert Schroeder......................... 4/26/96.. 1.0 $25,000
Dagmar Deitermann-Schwark................. 4/24/96 1.0 $25,000
Kenneth S. Briggs......................... 5/15/96 1.5 $25,000
Dennis Giordano........................... 5/22/96 0.5 $12,500
Gregory Tominia........................... 5/23/96 1.0 $25,000
John R. Serpico........................... 4/24/96 1.5 $37,500
The Paris Group, Ltd...................... 5/15/96 0.5 $12,500
JLE Construction, Inc..................... 5/15/96 1.5 $37,500
</TABLE>
- ---------------
(1) All securities are common stock and do not reflect the 2 for 3 reverse split
effective in April, 1996.
(2) 29,000 shares were each sold by Mr. Krall and Thomas E. Smith, (Jr.) to the
indicated shareholders with proceeds of the sale being contributed to the
Company in partial repayment of debt. Please see Certain Transactions.
(3) Shares were previously issued for cash and services which were never
received by the Company. On April 17, 1996, the Board of Directors resolved
to cancel these certificates and notice thereof has been provided to the
holders.
(4) In May 1996, the Company offered in a private placement 15 Bridge Loan Units
each originally consisting of one $25,000 secured promissory note, 50,000
common shares, 50,000 Class A Warrants to acquire one common share at $5.25
and 50,000 Class Z Warrants to acquire one common share at $10.00 per
share. On August 1, 1996, the Company renegotiated the terms of the Bridge
Financing with the investors therein in order to address concerns of The
Nasdaq SmallCap Market as to the potential return to these investors. As a
result, the Bridge Financing investors have agreed to the cancellation of
the 50,000 common shares per Bridge Loan Unit (750,000 common shares in
total) and an increase of 100,000 Class A Warrants per Bridge Loan Unit
(1,500,000 additional Class A Warrants in total).
With respect to the sales made, the Company or its affiliates 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 to officers and directors who had access to information by virtue
of their relationship as officers and directors of the Company or to persons
with a prior business or family relationship with officers and directors of the
Company. The securities were offered for investment only and not for the purpose
of resale or distribution, and the transfer thereof was appropriately restricted
by the Company.
II-3
<PAGE> 64
ITEM 27. EXHIBITS.
The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ------------------------------------------------------------------------------
<C> <C> <S>
*1.1 -- Underwriting Agreement
*1.2 -- Agreement Among Underwriters
*1.3 -- Underwriters Warrants
*3.1 -- Articles of Incorporation, Articles of Amendment and Bylaws
*4.1 -- Form of Class A Warrant
*4.2 -- Form of Class Z Warrant
*4.3 -- Form of Common Stock Certificate
*4.4 -- Warrant Agreement
*5.1 -- Opinion of Dennis Brovarone, Attorney at Law,
*10.1 -- Confidentiality and Non-Competition Agreement
*10.2 -- Employment Contract/Michael L. Krall
23.1 -- Consent of Dennis Brovarone, Attorney at Law
23.2 -- Consent of Steven Holland, Certified Public Accountant
</TABLE>
- ---------------
* Previously Filed
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 65
SIGNATURES
In accordance with the requirements of the Securities Act of 1933 as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2 and authorized this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of El Cajon, State of
California on August 1, 1996.
INNOVATIVE MEDICAL SERVICES
By: /s/ MICHAEL L. KRALL
------------------------------------
Michael L. Krall
Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- --------------
<C> <S> <C>
/s/ MICHAEL L. KRALL President, Chief Executive August 1, 1996
- --------------------------------------------- Officer and Director
Michael L. Krall
/s/ NORMAN L. ANDERSON Chairman of the Board of August 1, 1996
- --------------------------------------------- Directors
Norman L. Anderson
/s/ GARY BROWNELL Chief Financial Officer, August 1, 1996
- --------------------------------------------- Director
Gary Brownell
/s/ DENNIS B. ATCHLEY Secretary and General Counsel August 1, 1996
- ---------------------------------------------
Dennis B. Atchley
/s/ EUGENE PEISER, PD Director August 1, 1996
- ---------------------------------------------
Eugene Peiser, PD
/s/ PATRICK GALUSKA Director August 1, 1996
- ---------------------------------------------
Patrick Galuska
/s/ DENNIS BROVARONE Director August 1, 1996
- ---------------------------------------------
Dennis Brovarone
</TABLE>
II-5
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------- ------------
<C> <S> <C> <C>
*1.1 -- Underwriting Agreement...............................................
*1.2 -- Agreement Among Underwriters.........................................
*1.3 -- Underwriters Warrants................................................
*3.1 -- Articles of Incorporation, Articles of Amendment and Bylaws..........
*4.1 -- Form of Class A Warrant..............................................
*4.2 -- Form of Class Z Warrant..............................................
*4.3 -- Form of Common Stock Certificate.....................................
*4.4 -- Warrant Agreement....................................................
*5.1 -- Opinion of Dennis Brovarone, Attorney at Law,........................
*10.1 -- Confidentiality and Non-Competition Agreement........................
*10.2 -- Employment Contract/Michael L. Krall.................................
23.1 -- Consent of Dennis Brovarone, Attorney at Law.........................
23.2 -- Consent of Steven Holland, Certified Public Accountant...............
</TABLE>
- ---------------
* Previously Filed
<PAGE> 1
EXHIBIT 23.1
DENNIS BROVARONE
2530 SOUTH LINLEY COURT
DENVER, COLORADO 80219
PH: 303 742 0966 / FX-MDM: 303 742 0117
August 2, 1996
CONSENT OF ATTORNEY
Reference is made to Amendment No. 3 to the Registration Statement on
Form SB-2 pursuant to which Innovative Medical Services, proposes to register
for sale to the public 1,437,500 shares of common stock at $4.00 per share and
1,437,500 Class A Warrants to acquire an additional share of common stock at
$0.10 per Warrant.
I hereby consent to being named in the Registration Statement as having
advised Innovative Medical Services, as to the legality of its securities
proposed to be sold.
DENNIS BROVARONE
ATTORNEY AT LAW
/s/DENNIS BROVARONE
-------------------
Dennis Brovarone
<PAGE> 1
EXHIBIT 23.2
STEVEN HOLLAND, CPA
3914 MURPHY CANYONRD., STE. A126
SAN DIEGO, CA. 92123
(619) 279-1640
I have prepared the attached audited financial statements for Innovative Medical
Services for the fiscal years ended July 31, 1995 and 1994 and the compiled
financial statements for the nine months ended April 30, 1996.1 hereby consent
to their inclusion with the company's intended registration statement on Form
SB-2 and to the reference to me as an expert in accounting and auditing in those
filings.
Steven Holland, CPA
August 2, 1996
