-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RFh1VelCnsjuy1pBOp0NLx6AVdl3DjODIVrjHGdC9DlrTs23eScpGX9Ar0l99jmt e8DaFD3MEUW5ALgZ/V94Rw== 0000950150-96-000788.txt : 19960809 0000950150-96-000788.hdr.sgml : 19960809 ACCESSION NUMBER: 0000950150-96-000788 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE MEDICAL SERVICES CENTRAL INDEX KEY: 0001006028 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 330530289 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-00434 FILM NUMBER: 96605582 BUSINESS ADDRESS: STREET 1: 1308 N MAGNOLIO AVE STREET 2: STE H CITY: EL CAJON STATE: CA ZIP: 92020 BUSINESS PHONE: 6194418233 MAIL ADDRESS: STREET 1: 1308 NORTH MAGOLIA STREET 2: SUITE H CITY: EL CAJON STATE: CA ZIP: 92020 SB-2/A 1 FORM SB-2, AMENDMENT NO. 4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1996 REGISTRATION NO. 333-434 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 4 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) --------------------- CALIFORNIA 3841 33-0530289 (State of Incorporation) (Primary Standard (IRS Employer ID No.) Classification Code)
1308 NORTH MAGNOLIA AVENUE, SUITE H, EL CAJON, CALIFORNIA 92020 (619) 441-8233 --------------------- (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 --------------------- (Name, Address and Telephone Number of Agent for Service) --------------------- COPIES TO: 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
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- Representative's Warrants............. 143,750 4.40 632,500 215.05 Each to acquire one (1) common share - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INNOVATIVE MEDICAL SERVICES CROSS REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM SB-2
ITEM REGISTRATION STATEMENT HEADING LOCATION IN PROSPECTUS - ---- ------------------------------------------- ------------------------------------------- 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................... Selling Security Holders 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
3 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 8, 1997 and expiring August 8, 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.
- ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ PRICE TO UNDERWRITING PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------ Per Share.................................... $4.00 $0.40 $3.60 - ------------------------------------------------------------------------------------------------ Per Warrant.................................. $0.10 $0.01 $0.09 - ------------------------------------------------------------------------------------------------ 1,250,000 Common Shares...................... $5,000,000 $500,000 $4,500,000 - ------------------------------------------------------------------------------------------------ 1,250,000 Class A Warrants................... $125,000 $12,500 $112,500 - ------------------------------------------------------------------------------------------------ Total Offering............................... $5,125,000 $512,500 $4,612,500 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
(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 8, 1996 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", "Additional Securities Being Registered" and "Selling Security Holders". 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 13, 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. 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 8, 1997 and expiring August 8, 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 6 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", "Additional Securities Being Registered" and "Selling Security Holders". 4 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.
FISCAL YEARS NINE MONTHS PERIOD ENDED JULY 31, ENDED APRIL 30, PRO ---------------------- --------------------- FORMA INCOME STATEMENT DATA (1995) (1994) (1996) (1995) (4/30/96)(1) - ----------------------------------- -------- --------- -------- -------- -------- 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)
NINE MONTH PERIOD ENDED APRIL 30, 1996 ------------------------------------------------ FISCAL YEAR ENDED BALANCE SHEET DATA ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2) JULY 31, 1995 - --------------------------------- --------- ------------ ----------------- ----------------- 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)
- --------------- (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 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 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 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 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 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:
USE OF PROCEEDS ---------------------------------------------------------------- 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% ========= =====
- --------------- (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 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: 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%
Does not assume the exercise of the Representative's Over Allotment Option or the exercise of any outstanding warrants or options. 11 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".
APRIL 30, 1996 -------------------------------------------- HISTORICAL PRO FORMA(1) PRO FORMA(2) ---------- ------------ ------------ 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
- --------------- (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 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 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 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 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 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 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 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 employees. 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. The Company and its component manufactures carry Products Liability 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 22 MANAGEMENT The officers and directors of the Company are as follows:
NAME AGE POSITION ------------------------------------------------ --- ---------------------------------- 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
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 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.
TOTAL ANNUAL CASH COMPENSATION ------------------- YEAR ENDED $ RESTRICTED STOCK OR NAME & POSITION JULY 31, AMOUNT OPTIONS GRANTED(1) - ----------------------------------------------------------- ---------- ------ ------------------- 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
- --------------- (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 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 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.
NAME AND ADDRESS COMMON STOCK PERCENTAGE OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS - -------------------------------------------------------------------- ------------ ---------- 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%
- --------------- (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 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", "Additional Securities Being Registered", and "Selling Security Holders". (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 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 8, 1997 and expiring August 8, 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 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 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:
COMMON SHARES CLASS A WARRANTS ------------- ---------------- Meyers Pollock Robbins, Inc............................. 700,000 700,000 R.D. White & Company, Inc............................... 300,000 300,000 RAF Financial Corporation............................... 250,000 250,000 ------------- ---------------- Total......................................... 1,250,000 1,250,000 ============ =============
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 27 30 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. 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. SELLING SECURITY HOLDERS The Bridge Financing Investors whose Class A and Class Z Warrants (the "Bridge Loan Unit warrants") have been registered for public resale (subject to the six month restriction on transfer of the Class A Warrants) under the registration statement which registered the Shares and Class A Warrants for the Public Offering are set forth below:
SELLING SECURITIES HOLDER SECURITIES OWNED AND OFFERED ------------------------------------------------------------- ---------------------------- Janice Mastropiero........................................... 75,000 Class A 25,000 Class Z Sheri Ann Lopa............................................... 75,000 Class A 25,000 Class Z Anthony Stropoli............................................. 150,000 Class A 50,000 Class Z Sandra A. Wood............................................... 150,000 Class A 50,000 Class Z Joseph Burtone............................................... 75,000 Class A 25,000 Class Z Natalie Sotiriou............................................. 75,000 Class A 25,000 Class Z Tom Coccio................................................... 75,000 Class A 25,000 Class Z Joerg Wiedenhoff............................................. 150,000 Class A 50,000 Class Z Manfred Rau.................................................. 150,000 Class A 50,000 Class Z Norbert Schroeder............................................ 150,000 Class A 50,000 Class Z Dagmar Deitermann-Schwark.................................... 150,000 Class A 50,000 Class Z Kenneth S. Briggs............................................ 225,000 Class A 75,000 Class Z Dennis Giordano.............................................. 75,000 Class A 25,000 Class Z Gregory Tominia.............................................. 150,000 Class A 50,000 Class Z John R. Serpico.............................................. 225,000 Class A 75,000 Class Z The Paris Group, LTD......................................... 75,000 Class A 25,000 Class Z JLE Construction, Inc........................................ 225,000 Class A 75,000 Class Z
28 31 None of the above Bridge Financing Investors have ever held any position, office, or other material relationship with the Company. The Bridge Financing Investors do not own any other securities of the Company. SELLING SECURITY HOLDERS PLAN OF DISTRIBUTION Bridge Financing Investors may, subject to a six month transfer restriction on their Class A Warrants, sell or distribute their Class A or Class Z Warrants (the "Bridge Loan Unit warrants") in transactions through underwriters, brokers, dealers or agents from time to time or through privately negotiated transactions, including in distributions to shareholders or partners or other persons affiliated with the Bridge Financing Investors. The distribution of the Bridge Loan Unit warrants may be effected from time to time in one or more transactions (which may involve crosses or block transactions) (i) in the over-the-counter market, (ii) in transactions otherwise than in the over-the-counter market or (iii) through the writing of options on the Bridge Loan Unit warrants (whether such options are listed on an options exchange or otherwise). Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices. If the Bridge Financing Investors effects such transactions by selling the Bridge Loan Unit warrants to or through underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or agents may receive compensation in the form of discounts, concessions or commissions from the Bridge Financing Investors or commissions from purchasers of Bridge Loan Unit warrants for whom they may act as agent (which discounts, concessions or commissions as to particular underwriters, brokers, dealers or agents might be in excess of those customary in the types of transactions involved). The Bridge Financing Investors and any brokers, dealers or agents that participate in the distribution of the Bridge Loan Unit warrants might be deemed to be underwriters, and any profit on the sale of the Bridge Loan Unit warrants by them and any discounts, concessions or commissions received by any such underwriters, brokers, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. Bridge Financing Investors may pledge their Bridge Loan Unit warrants from time to time in connection with such Bridge Financing Investors' financing arrangements. To the extent any such pledgees exercise their rights to foreclose on any such pledge, and sell the underlying Bridge Loan Unit warrants, such pledgees may be deemed underwriters with respect to such Bridge Loan Unit warrants and sales by them may be effected under this Prospectus. The Company will not receive any of the proceeds from the sale of any of the Bridge Unit Loan warrants by the Bridge Financing Investors. Under the Exchange Act and applicable rules and regulations promulgated thereunder, any person engaged in a distribution of any of the Bridge Loan Unit warrants may not simultaneously engage in market making activities with respect to the Bridge Loan Unit warrants for a period, depending upon certain circumstances, of either two days or nine days prior to the commencement of such distribution. In addition, and without limiting the foregoing, the Bridge Financing Investors will be subject to applicable provisions of the Exchange Act and the rules and regulations promulgated thereunder, including without limitation Rules 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of any of the Bridge Loan Unit warrants by the Bridge Financing Investors. Under the securities laws of certain states, the Bridge Loan Unit warrants may be sold in such states only through registered or licensed brokers or dealers. In addition, in certain states the Bridge Loan Unit warrants may not be sold unless the Bridge Loan Unit warrants have been registered or qualify for sale in such state or an exemption from registration or qualification is available and is complied with. TRANSFER AGENT The Transfer Agent with respect to the Shares and Class A Warrants is American Securities Transfer & Trust, Inc., Denver, Colorado. 29 32 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. 30 33 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 34 INNOVATIVE MEDICAL SERVICES BALANCE SHEETS
JULY 31, ----------------------- 1995 1994 --------- --------- 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 ========= =========
The accompanying notes are an integral part of the financial statements. F-2 35 INNOVATIVE MEDICAL SERVICES STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, ---------------------- 1995 1994 -------- --------- 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) ======= ========
The accompanying notes are an integral part of the financial statements. F-3 36 INNOVATIVE MEDICAL SERVICES STATEMENTS OF ACCUMULATED DEFICIT
FOR THE YEARS ENDED JULY 31, ----------------------- 1995 1994 --------- --------- Balance, beginning of year........................................... $(363,668) $(192,556) Net income (loss).................................................... 2,442 (171,112) --------- --------- Balance, end of year................................................. $(361,226) $(363,668) ========= =========
The accompanying notes are an integral part of the financial statements. F-4 37 INNOVATIVE MEDICAL SERVICES STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, ----------------------- 1995 1994 --------- --------- 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 ========= =========
The accompanying notes are an integral part of the financial statements. F-5 38 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: Computers and equipment............................. 7.0 years Furniture and fixtures.............................. 10.0 years Leasehold improvements.............................. 31.5 years
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 39 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:
JULY 31, 1995 JULY 31, 1994 ------------- ------------- 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 ========= =========
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 40 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. DEBT The details relating to debt are as follows:
JULY 31, 1995 JULY 31, 1994 ------------- ------------- 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 ========= =========
Following are maturities of long-term debt for each of the next 5 years: Year ended July 31, 1996................................................... $ 0 Year ended July 31, 1997................................................... 25,000 ------- $25,000 =======
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:
COMMON COMMON STOCK SHARES STOCK $ ------------ -------- 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
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 41 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 42 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 43 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 44 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED JULY 31, ------------------- 1995 1994 -------- -------- 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 ======== ========
F-12 45 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION
FOR THE YEARS ENDED JULY 31 ------------------- 1995 1994 -------- -------- 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 ======== ========
F-13 46 INNOVATIVE MEDICAL SERVICES FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE NINE MONTHS ENDED APRIL 30, 1996 (UNAUDITED) F-14 47 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 7, 1996 F-15 48 INNOVATIVE MEDICAL SERVICES BALANCE SHEET
PRO FORMA (NOTE 1) APRIL 30, APRIL 30, 1996 1996 --------- ---------- 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 ======== =========
See accompanying notes and accountant's report. F-16 49 INNOVATIVE MEDICAL SERVICES STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED APRIL 30, ------------------------------------- 1996 1995 ---------------- ---------------- (UNAUDITED) 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) ====== ======
See accompanying notes and accountant's report. F-17 50 INNOVATIVE MEDICAL SERVICES STATEMENT OF ACCUMULATED DEFICIT
FOR THE NINE MONTHS ENDED APRIL 30, 1996 ---------------- (UNAUDITED) Balance, beginning of year.................................................... $ (361,226) Net income (loss)............................................................. (76,192) ---------------- Balance, end of period........................................................ $ (437,418) ============
See accompanying notes and accountant's report. F-18 51 INNOVATIVE MEDICAL SERVICES STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, --------------------- 1996 1995 -------- -------- (UNAUDITED) 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 ======== ========
See accompanying notes and accountant's report. F-19 52 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: Computers and equipment.................................. 7.0 years Furniture and fixtures................................... 10.0 years
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 53 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: 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 =======
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 54 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 55 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:
APRIL 30, 1996 -------------- Computers and equipment................................................. $102,789 Furniture and fixtures.................................................. 39,023 Leasehold improvements.................................................. 18,034 ------ 159,846 Less: accumulated depreciation..................................... 57,539 ------ Total......................................................... $102,307 ======
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:
PRO FORMA (NOTE 1) APRIL 30, APRIL 30, 1996 1996 --------- --------- 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 ===== ======
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 56 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. CAPITAL STOCK The following schedule summarizes the change in capital stock:
COMMON COMMON STOCK SHARES STOCK $ ------------ -------- 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
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 57 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 net F-25 58 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 59 SUPPLEMENTARY INFORMATION F-27 60 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 1
FOR THE NINE MONTHS ENDED APRIL 30, ---------------------- 1996 1995 -------- ------- (UNAUDITED) 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 ======== =======
See accompanying notes and accountants report. F-28 61 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 2
FOR THE NINE MONTHS ENDED APRIL 30, ----------------------- 1996 1995 -------- -------- (UNAUDITED) 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 ======== ========
See accompanying notes and accountants report. F-29 62 ================================================================================ 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 AND THE CLASS A WARRANTS OFFERED BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES AND THE CLASS A WARRANTS IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 6 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 Selling Security Holders.............. 28 Transfer Agent........................ 29 Legal Matters......................... 30 Independent Public Accountant......... 30 Financial Statements.................. F-1
UNTIL SEPTEMBER 2, 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 8, 1996 ================================================================================ 63 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: 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* ==========
- --------------- * Estimated. II-1 64 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:
COMMON TOTAL NAME OF PURCHASER DATE STOCK(1) CONSIDERATION - ------------------------------------------------------ --------- ----------- ---------------- 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
II-2 65
COMMON TOTAL NAME OF PURCHASER DATE STOCK(1) CONSIDERATION - ------------------------------------------------------ -------- -------- ---------------- 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
BRIDGE FINANCING INVESTORS
NAME OF PURCHASER DATE BRIDGE FINANCING UNITS(4) CONSIDERATION - ------------------------------------------ ------- ------------------------- ------------- 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
- --------------- (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 66 ITEM 27. EXHIBITS. The following Exhibits are filed as part of this Registration Statement pursuant to Item 601 of Regulation S-B:
EXHIBIT NO. TITLE - ----------- ------------------------------------------------------------------------------ *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
- --------------- * 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 67 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. 4 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 7, 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.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- -------------- /s/ MICHAEL L. KRALL President, Chief Executive August 7, 1996 - --------------------------------------------- Officer and Director Michael L. Krall /s/ NORMAN L. ANDERSON Chairman of the Board of August 7, 1996 - --------------------------------------------- Directors Norman L. Anderson /s/ GARY BROWNELL Chief Financial Officer, August 7, 1996 - --------------------------------------------- Director Gary Brownell /s/ DENNIS B. ATCHLEY Secretary and General Counsel August 7, 1996 - --------------------------------------------- Dennis B. Atchley /s/ EUGENE PEISER, PD Director August 7, 1996 - --------------------------------------------- Eugene Peiser, PD /s/ PATRICK GALUSKA Director August 7, 1996 - --------------------------------------------- Patrick Galuska /s/ DENNIS BROVARONE Director August 7, 1996 - --------------------------------------------- Dennis Brovarone
II-5 68 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ *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...............
- --------------- * Previously Filed EX-23.1 2 EXHIBIT 23.1 1 EXHIBIT 23.1 DENNIS BROVARONE 2530 SOUTH LINLEY COURT DENVER, COLORADO 80219 PH: 303 742 0966 / FX-MDM: 303 742 0117 August 7, 1996 CONSENT OF ATTORNEY Reference is made to Amendment No. 4 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 EX-23.2 3 EXHIBIT 23.2 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 7, 1996 -----END PRIVACY-ENHANCED MESSAGE-----