-----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, NhE67+4agHKlHcTcJgyoR8xbN+WhD8PtVIlGblDfFZ33+lv1g68pnEPbSqQzuXK/ ggl9BWEV15NHpBuEkLVKCw== 0000936392-96-000265.txt : 19960525 0000936392-96-000265.hdr.sgml : 19960525 ACCESSION NUMBER: 0000936392-96-000265 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960524 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: 96572112 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 AMENDMENT NO. 1 TO FORM SB-2 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 1 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 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. COBLENZ, ESQ. ATTORNEY AT LAW MOUND, COTTON & WOLLAN 2530 SOUTH LINLEY COURT ONE BATTERY PARK PLAZA 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 - ---------------------------------------------------------------------------------------------------------- Underwriters 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 Common Shares......................... 750,000 Included Class A Bridge Warrants............... 750,000 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................... Additional Securities Being Registered 8. Plan of Distribution....................... Underwriting 9. Legal Proceedings.......................... Not Applicable 10. Directors and Executive Officers........... Management 11. Security Ownership of Certain Beneficial Owners and Management.................... Principal Shareholders 12. Description of the Securities to be Registered Prospectus Summary; Description of Securities................ Outside Front Cover Page of Prospectus; 13. Interest of Named Experts and Counsel...... Not Applicable 14. Statement as to Indemnification............ Indemnification 15. Organization with 5 Years.................. Business of the Company 16. Description of Business.................... Business of the Company 17. Management's Plan of Operation............. Business of the Company 18. Description of Property.................... Business of the Company 19. Certain Relationships and Related Transactions............................. Certain Transactions 20. Market for Common Equity and Related Stockholder Matters...................... Market for Shares 21. Executive Compensation..................... Executive Compensation 22. Financial Statements....................... Financial Statements 23. Changes in Disagreements With Accountants.............................. Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 24, 1996 PROSPECTUS [IMS 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 Warrant entitles the holder to acquire an additional common share for $5.25 per common share beginning May X, 1997 and expiring May X, 2001. (the "Shares" and "Warrants"). The Shares and the Warrants shall be separately SOLD AND tradable AS OF THE DATE OF THIS PROSPECTUS AND THE WARRANTS MAY BE EXERCISED AFTER ONE YEAR FROM THE DATE HEREOF. INVESTORS MAY PURCHASE SHARES, WARRANTS OR BOTH SECURITIES. The 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 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 Warrants have been approved for quotation on the NASDAQ System under the symbol XXXX and YYYY, 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 Warrants and the exercise price and terms of the 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 the Monitor Investment Group, Inc., the Representative of the Underwriters equal to 3% of the aggregate initial public offering price of the Shares and Underwriters Warrants to purchase up to 147,750 shares of the Company's common stock at $4.40 per share. The Underwriters Warrants carry certain registration rights with respect to the common shares underlying the Underwriters 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. MONITOR INVESTMENT GROUP, INC. MEYERS POLLOCK ROBBINS, INC. The date of this Prospectus is May , 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 consisting of one (1) $25,000 secured Promissory Note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire one (1) common share at $5.25 per share and 50,000 Class Z Bridge Warrants to acquire one (1) common share at $10 per share. The Bridge Loan Units and these Securities therein may be sold from time to time in open market transactions at prevailing price by the Bridgeholders. The Bridge Loan Units were issued in a private placement conducted by the Company in May, 1996 in which the Company accepted 1/2 units. The Underwriters are not offering any of these securities in the Offering. The common shares, Class "A" warrants and Class "Z" warrants contained in the Bridge Loan Units may be sold by the holders thereof from time to time at prevailing market prices. The Class A Warrants and the Class Z Warrants cannot be exercised for one year and two years respectively and both expire in May, 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 shares or the shares underlying the warrants. See "Description of Securities" and "Additional Securities Being Registered". The Shares and 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 May , 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 "Business of the Company".) 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 May , 1997 and expiring May , 2001. (the "Shares" and "Warrants"). The Shares and the Warrants shall be separately sold and tradeable immediately upon the opening of trading of the Company's securities on the NASDAQ System. The 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 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 to further develop its medical and pharmaceutical service products, manufacturing and 3 6 marketing. Please see "Use of Proceeds" and "Business of the Company". NASDAQ SYMBOLS............. Common Shares Warrants COMMON SHARES OUTSTANDING PRIOR TO OFFERING........ 2,578,851 Does not include 147,500 shares issueable upon exercise of the Underwriters Warrants, 1,500,000 shares issueable 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................. 3,828,851 Does not include the above Warrants, the exercise of the Representative Overallotment Option or the exercise of the Warrants offered hereby. ADDITIONAL SECURITIES BEING REGISTERED......... The Registration Statement of which this Prospectus is a part has registered the issuance of 15 Bridge Loan Units Each consisting of one (1) $25,000 secured Promissory Note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire one (1) common share at $5.25 per share and 50,000 Class Z Bridge Warrants to acquire one (1) common share at $10 per share. The Bridge Loan Units were issued in a private placement conducted by the Company in May, 1996 in which the Company accepted 1/2 units. The Underwriters are not offering any of these securities in the Offering. The common shares, Class "A" warrants and Class "Z" warrants contained in the Bridge Loan Units may be sold by the holders thereof from time to time at prevailing market prices. The Class A Warrants and the Class Z Warrants cannot be exercised for one year and two years respectively and both expire in May, 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 shares or the shares underlying the warrants. See "Description of Securities" and "Additional Securities Being Registered". RISK FACTORS............... The Offering involves a high degree of risk and immediate and substantial dilution. See "Risk Factors" and "Dilution". 4 7 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. 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. 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 30% 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. 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 5 8 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. 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. 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. 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. 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 $2.83 per share or 71%. 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. 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. 5. Potential Adverse Effect of Shares Issuable Upon Exercise Of Stock Options And Outstanding Shares Available for Resale. The Company has adopted and Incentive Stock Option Plan and a Director's 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 Director's and Officer's 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 6 9 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. 6. Determination of Offering Price. The offering price of the Shares and the Warrants as well as the 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 Warrants (if a market develops) will be at or above the Offering Price. 7. Representative's Lack of Underwriting Experience. The Representative was recently organized and has not acted as a representative of the Underwriters in any prior public offering although it has participated as a dealer in offerings underwritten by others. This lack of underwriting experience may (i) adversely affect the development or continuation of a trading market for the Shares and Warrants. (ii) limit the effectiveness of the Representative's due diligence responsibilities to review and verify the information in the Prospectus and to negotiate the offering price of the Shares and the exercise price of the Warrants, and (iii) negatively influence the market price of the Shares and Warrants following the Offering. The Representative had no material relationship with the Company or the promoters prior to this Offering. See "Underwriting." 8. Potential Adverse Effect of the Underwriter's Influence on the Market Price of the Securities. A significant amount of the Shares and 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 Warrants through or with the Underwriters. Should the Representative make a market in the Shares and 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 Warrants, and the price and liquidity of the Shares and Warrants may be significantly affected by the degree, if any, of the Underwriters' participation in such market. 9. 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. 10. 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 7 10 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. 11. Redemption of Warrants. The 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 thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption. In such event, the Warrants will only be exercisable until the close of business on the date fixed for redemption in such notice. Any 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 Redeemable Common Stock Purchase Warrants" 12. Non-Registration in Certain Jurisdictions of Shares Underlying the Warrants. The 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 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 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 Warrants, are separately tradable as of the date of this Prospectus. Subsequently, purchasers may buy Warrants in the after-market or may move to jurisdictions in which the shares underlying the Warrants are not registered or qualified during the period that the Warrants are exercisable. In this event, the Company would be unable to issue Common Stock to those persons desiring to exercise their 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, Warrant holders would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. See "Description of Securities" 13. 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. 8 11 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 Sales & Marketing........................................................ 400,000 Inventory................................................................ 100,000 Receivables Financing(1)................................................. 200,000 New Product Development(2)............................................... 300,000 Lease Financing.......................................................... 1,800,000 Facilities Expansion..................................................... 500,000 Patent/Trademark Legal Exp.(2)........................................... 250,000 Manufacturing/Computer Equip............................................. 250,000 Working Capital.......................................................... 103,750 ---------- Total Use of Net Proceeds...................................... $4,278,750 =========
- --------------- (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. 9 12 DILUTION At January 31, 1996, the net tangible book value of the Company was $193,092 or $0.075 per share. After giving effect solely to the Shares offered hereby at the $4.00 per Unit offering price and after deducting the underwriting commissions and estimated expenses of the offering, the pro forma net tangible book value as of January 31, 1996 would have been $4,471,842 or $1.17 per share. This represents an immediate dilution of $2.83 per share to new investors and an increase in net tangible book value of $1.095 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:.................... $0.075 Net Tangible Book Value Per Share after Offering...................... $1.17 Increase Per Share Attributed to the Offering......................... $1.095 Dilution of Offering Price Per Share to Investors..................... $2.83 or 71%
Does not assume the exercise of the Underwriter's Over Allotment Option or the exercise of any outstanding warrants or options. 10 13 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 SIX MONTHS OF FISCAL 1996 Revenue for the six months ending January 31, 1996 was $613,000. Of this amount, $573,000 was attributable to sales of Fillmaster(R) Purification Systems, and $40,000 to replacement filter sales. Gross profit for the period was $169,000, $139,000 (24% of sales) from Fillmaster(R) Purification Systems and $30,000 (75% of sales) from filters. Overall gross profit decreased from 37% of gross revenues in fiscal 1995 to 28%. This decrease was attributable to an isolated and concentrated purchase by the Company's first chain customer 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 $19,000 primarily due to recognition of compensation expense for the Company's CEO in the amount of $45,000 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 1.79 for the first six 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 two quarters of fiscal 1996, respectively. Debt financing has been in the amounts of $9,000, $21,000 and $0 for the 11 14 same periods. Cash flows provided (used) from operations were $(175,000) in 1994, $26,000 in 1995 and $(17,000) for the first six months of 1996. Cash flows used in investing activities were, respectively, $15,000, $8,000 and $29,000 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 intend that the proceeds of the offering will provide liquidity for: Sales and Marketing expansion: (a) expand the sales force, (b) increased trade show participation, (c) advertising in trade journals and via targeted direct response advertising, (d) increased 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) to 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 development of 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 increased 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. 12 15 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 second quarter of fiscal year 1996, the Fillmaster(R) product was installed at more than 3500 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 2400 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 2800 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 1/31/96 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 (1300 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 1996, 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%. 13 16 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; however, at the same time, they do 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 Valu-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. 14 17 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 $495,000 through the first four 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 15 18 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. 16 19 Direct and indirect costs associated specifically with bottled water are also reduced or eliminated by use of the Fillmaster(R). Storage space can be reallocated to more profitable items, and the expense of bottled water purchases of up to $1.25 for each gallon is replaced by one annual filter replacement currently costing $65. Under optimum usage, the cost of "Purified Water" is reduced to approximately $.04 per gallon. Based on the Company's surveys of Fillmaster(R) users, customer satisfaction levels are extremely high. There is virtually unanimous agreement that the Product is faster, easier to use, cleaner, and that the elimination of the aggravation and difficulties associated with all other methods of reconstitution make the Fillmaster(R) well worth the investment in its acquisition. The Product carries a suggested list price of $659, with quantity discounts available for volume purchase agreements. This price level was established to provide reasonable gross profit margins even after the negotiation of volume discounts. These margins have been calculated at actual production levels and are likely to increase through a reduction of costs associated with higher volumes. After installation, the filters require replacement approximately every 9 to 12 months in order to maintain water purity. Since filters compatible with the Fillmaster(R) system are proprietary and only available from the Company, Management feels assured that future replacement filter sales and their resultant income stream are a certainty. Revenues from the replacement filter sales will, over a five year period, equal or exceed the revenue generated by the original sale of the Product with much higher profit levels. Thus, Management views the sale of the Product as occurring in two distinct stages, immediate and deferred. The acquisition of a new customer, while generating profit during the current year, produces a deferred income stream with at least twice as much gross margin and minimal or no sales expense. The Company's business operates in a 2,200 square foot facility located in a light industrial/office park. This location houses all administrative, executive, sales, assembly, shipping and manufacturing functions for the Company. The Company employs five full time and five part time. The Product is primarily assembled from purchased components and repacked for shipment to the customer with only minor manufacturing taking place in the Company's facility. This allows the minimization of wages, equipment expense and insurance. There are no components of the Product that have permanent or unequivocally restricted availability. Most are items that are common in either design or manufacture, and a change in suppliers would result in virtually no lost production. There are no plans to alter production methods. The purification module is the major component of the Product and is purchased under an agreement with its manufacturer that is exclusive with the Company as to Pharmaceutical uses. While Management regards this particular product as the finest of its kind, suitable alternatives are available on the open market. This module and its accompanying hardware and accessories are repackaged and labeled with Fillmaster(R) graphics, the dispensing apparatus inserted, and shipped to the customer. The dispenser apparatus is assembled mostly from parts that are standard items stocked by wholesale supply houses or fabricated to Company specifications from injection-molded plastic and acrylic. The sole deviation is the Reconstitube(R), which is an integral part of the dispensing apparatus and available only from its manufacturer. This product's patent expired in 1992, and in the unlikely event of supply difficulties, the Company has a contingency plan that will allow for the fabrication of a replacement with loss of production limited to 2-4 weeks. Recently, the Company began offering lease financing through a third party lender that will open the market to customers whose capital resources are limited. This program will allow the customer to lease the Product and a five-year supply of replacement filters for less than current expenditures for bottled water. At the same time, the Company will realize the replacement filter profit in the first year rather than it being deferred. 17 20 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, 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. 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. 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 18 21 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 48,000 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 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, 19 22 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 $1.00 per share. 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. 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". 20 23 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 2,578,851 shares outstanding prior to the offering.
NAME AND ADDRESS COMMON STOCK PERCENTAGE OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS - -------------------------------------------------------------------- ------------ ---------- Norman Anderson..................................................... 51,334 2.0% 1308 N. Magnolia Av, Suite H El Cajon, CA 92020 Dennis Atchley...................................................... 22,000 0.9 1308 N. Magnolia Av, Suite H El Cajon, CA 92020 Gary Brownell....................................................... 32,334 1.3 1308 N. Magnolia Av, Suite H El Cajon, CA 92020 Michael L. Krall(2)................................................. 618,307 24.0 1308 N. Magnolia Av, Suite H El Cajon, CA 92020 Thomas E. Smith(3).................................................. 618,307 24.0 9408 Lightwood Cove Austin, TX 78748 Eugene Peiser....................................................... 6,334 0.25 1308 N. Magnolia Av, Suite H El Cajon, CA 92020 Patrick Galuska..................................................... 33,334 1.3 8137 South Downing Street Littleton, CO 80122 Dennis Brovarone.................................................... 13,334 0.5 2530 S. Linley Ct. Denver, CO 80219 Officers and Directors as a group (7 Persons)....................... 776,977 30.1
- --------------- (1) After giving effect to the two for three reverse split effective April, 1996 (2) Does not include 2,198 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. 21 24 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. As of April 30, 1996 there are 1,828,851 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 holding without the Representative consent for a two year period. There are no outstanding options or warrants to purchase or securities convertible into the common stock of the Company, except options awarded to the Company's president, see Executive Compensation, and the Bridge Loan Unit Warrants. Please see Description of Securities and Additional Securities Being Registered. (b) Approximate Number of Holders of Common Stock. The number of holders of record of the Company's no par value stock at April 30, 1996 are 40. (c) Dividends. Holders of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. No dividends have been paid with respect to the Company's Common Stock and no dividends are anticipated to be paid in the foreseeable future. (d) Reverse Split. On April 17, 1996, the Company's shareholders approved a two for three reverse split effective on that date. Fractional shares were rounded up to the next whole share. CERTAIN TRANSACTIONS On September 1, 1992, the Company issued 956,460 (pre split)shares of common stock each to Michael L. Krall and Thomas E. Smith,(Jr.) the founders of the Company for capital equipment, working capital and services rendered in the organization and initial operation of the Company. Mr. Krall is the Company's President/CEO and a director. Thomas E. Smith, (Jr.) resigned his positions with the Company in July, 1993 and remains a principal shareholder. In January, 1994, Dennis Atchley and Gary Brownell, officers and directors of the Company were issued 33,000 and 27,500 (pre-split) shares of common stock respectively for services rendered to the Company with respect to its legal and accounting affairs. Both Mr. Atchley and Mr. Brownell have also been reimbursed their expenses incurred while rendering services to the Company. In December, 1995, Dennis Brovarone was issued 20,000 (pre-split) shares of common stock in consideration of services rendered to the Company with respect to corporate financing plans and federal securities law compliance. Since inception, the Company has periodically made loans to Mr. Krall and Thomas E. Smith, (Jr.) which accrued interest at the rate of 7% per annum. These debt balances were also periodically reduced by Mr. Krall and Thomas E. Smith,(Jr.) by cash payments to the Company. These loans were made by the Company to insure Mr. Krall and Mr. Smith's availability to the Company and the proceeds were used by Mr. Krall and Mr. Smith for personal expenses unrelated to the Company. While the Company does not make loans to unrelated parties, it believes that the terms of these loans were favorable to the Company. As of July 31, 1994, Thomas E. Smith, (Jr.)'s balance was $21,449.23 and the Company received a Promissory Note in the principal amount of $21,449.23 from Thomas E. Smith, (Jr.). The Note accrued interest at the rate of 7% per annum was payable in one installment on or before September 30, 1995. In November, 1994, Thomas E. Smith, (Jr.) partially repaid his balance by contribution of $29,000 of proceeds from the sale of 29,000 of Thomas E. Smith, (Jr.)'s shares of the Company's common stock. As of July 31, 1995, Thomas E. Smith, (Jr.)'s balance owed was $9,128.199 and Thomas E. Smith, (Jr.) issued a new Promissory Note dated July 31, 1995 in the principal amount of $9,128.19 which accrues interest at the rate of 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. 22 25 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 $45,845. 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. 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 May , 1997 and expiring May , 2001. The Shares and the Warrants shall be separately tradable immediately upon the opening of trading of the Company's securities on the NASDAQ System. The 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 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 registered the issuance of 15 Bridge Loan Units Each consisting of one (1) $25,000 secured Promissory Note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire one (1) common share at $5.25 per share and 50,000 Class Z Bridge Warrants to acquire one (1) common share at $10 per share. The Bridge Loan Units were issued in a private placement conducted by the Company in May, 1996 in which the Company accepted 1/2 units. The Underwriters are not offering any of these securities in the Offering. The common shares, Class "A" warrants and Class "Z" warrants contained in the Bridge Loan Units may be sold by the holders thereof from time to time at prevailing market prices. The Bridge Loan 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 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 May, 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 shares or the shares underlying the warrants. The Class A Bridge Loan Warrants are exerciseable in May, 1996 and expire in May, 2001. The Class Z Bridge Loan Warrants are exerciseable in May, 1998 and expire in May, 2001. The 23 26 Bridge Loan 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 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. 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. UNDERWRITING The Underwriters named below, for whom Monitor Investment Group, 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 Warrants offered hereby in the amounts set forth below:
COMMON SHARES CLASS A WARRANTS ------------- ---------------- Monitor Investment Group, Inc........................... Meyers Pollock Robbins Inc.............................. Total......................................... ------------- ----------------
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, exerciseable 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 Warrants on the same terms as the Shares and 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 exerciseable 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 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 consent for a two year period. 24 27 There is currently no market for the common shares of the Company and there can be no assurance that a market will develop following the offering. The initial public offering price of the Shares was determined by negotiations between the Representative and the Company. Among the factors considered in determining the initial public offering price were the history and the prospects for the Company, the market for the Company's products, assessment of the Company's management, the number of shares offered, the price that purchasers of such securities are likely to pay, given the nature of the Company, and the general condition of the securities markets at the time of the offering. Accordingly the price set forth on the cover of the Prospectus should not be taken as an actual value of the Company or the common shares. The Company and the Underwriters have agreed to indemnify each other against certain liabilities under the Securities Act of 1933 as amended, and if such indemnification's are not available then a reciprocal indemnification and contribution arrangement will take effect. It is the position of the Securities and Exchange Commission that exculpation and indemnification for liabilities arising under the Securities and Exchange Act of 1934 as amended, and the rules and regulations thereunder is against public policy and therefore unenforceable. The Company has further agreed with the Representative that the Company will file a registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934 as amended no later than the date of this Prospectus and use its best efforts to cause the same to become effective. The Company and the Representative have also agreed that the Company will take all steps necessary, and will obtain a Notice of Listing Upon Notice of Effectiveness by NASDAQ prior to completion of the offering. Pursuant to the Underwriting Agreement, the Representative of the Underwriters is entitled to nominate a Director for election for a five years following the Offering and Mr. Krall and Mr. Thomas Smith, Jr., have agreed to vote their shares for the election of the Representative's nominee. The foregoing does not purport to be a complete statement of the terms and conditions of the Underwriting Agreement, copies of which are at the offices of the Representative, the Company and the Securities and Exchange Commission, Washington, D. C. and New York, New York. TRANSFER AGENT The Transfer Agent with respect to the Shares is American Securities Transfer, Inc., Denver, Colorado. LEGAL MATTERS The legality of the Securities of the Company offered will be passed on for the Company by Dennis Brovarone, Attorney at Law, 2530 South Linley Court, Denver, Colorado 80219. Mr. Brovarone is also a Director of the Company. EXPERTS The financial statements and schedules included in this Prospectus, to the extent and for the periods indicated in the reports, have been audited by Steven Holland, Certified Public Accountant for the periods ended July 31, 1995 and 1994 and are included herein in reliance on the authority of Mr. Holland as an expert in accounting and auditing in giving such reports. 25 28 INNOVATIVE MEDICAL SERVICES FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE YEARS ENDED JULY 31, 1995 AND JULY 31, 1994 29 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 30 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 31 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 32 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 33 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 34 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 35 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 36 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 37 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 38 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 39 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 40 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 41 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 42 INNOVATIVE MEDICAL SERVICES FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1996 (UNAUDITED) F-14 43 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 January 31, 1996, and the related statements of income, accumulated deficit, and cash flows for the six 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 April 15, 1996 F-15 44 INNOVATIVE MEDICAL SERVICES BALANCE SHEET
JANUARY 31, 1996 ----------- (UNAUDITED) ASSETS Current Assets Cash............................................................................ $ 23,237 Accounts receivable, net of allowance for doubtful accounts of $506............. 55,940 Notes receivable (Note 2)....................................................... 55,473 Due from employees.............................................................. 2,629 Due from shareholders (Note 3).................................................. 210 Inventories..................................................................... 33,240 Prepaid expenses................................................................ 11,452 ----------- Total current assets.................................................... 182,181 ----------- Property, Plant and Equipment Property, plant and equipment (Note 4).......................................... 112,505 ----------- Total property, plant and equipment..................................... 112,505 ----------- Noncurrent Assets Organizational costs, net (Note 1).............................................. 1,548 Deferred public offering costs (Note 1)......................................... 72,465 ----------- Total noncurrent assets................................................. 74,013 ----------- Total assets............................................................ $ 368,699 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable................................................................ $ 74,670 Accrued liabilities............................................................. 1,924 Note payable (Note 5)........................................................... 25,000 ----------- Total current liabilities............................................... 101,594 ----------- Stockholders' Equity Class A common stock, no par value authorized 5,000,000 shares, issued and outstanding 2,743,250 shares at January 31, 1996 (Note 7 and Note 9)......... 647,171 Accumulated deficit............................................................. (380,066) ----------- Total stockholders' equity.............................................. 267,105 ----------- Total liabilities and stockholders' equity.............................. $ 368,699 ========
See accompanying notes and accountant's report. F-16 45 INNOVATIVE MEDICAL SERVICES STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 ---------------- (UNAUDITED) Net sales..................................................................... $612,657 Cost of sales................................................................. 443,223 ---------------- Gross profit.................................................................. 169,434 ---------------- Selling expenses.............................................................. 47,159 General and administrative expenses........................................... 141,116 ---------------- Total operating costs............................................... 188,275 ---------------- Operating income (loss)....................................................... (18,841) ---------------- Other income and (expense): Miscellaneous income and (expense).......................................... 1 ---------------- Total other income and (expense).................................... 1 ---------------- Net income (loss)................................................... $(18,840) ============
See accompanying notes and accountant's report. F-17 46 INNOVATIVE MEDICAL SERVICES STATEMENT OF ACCUMULATED DEFICIT
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 ---------------- (UNAUDITED) Balance, beginning of year.................................................... $ (361,226) Net income (loss)............................................................. (18,840) ---------------- Balance, end of quarter....................................................... $ (380,066) ============
See accompanying notes and accountant's report. F-18 47 INNOVATIVE MEDICAL SERVICES STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 ---------------- (UNAUDITED) Cash flows from operating activities Net income (loss)............................................................. $(18,840) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................................. 8,251 Amortization............................................................. 516 Officers wages contributed............................................... 33,000 Changes in assets and liabilities: Decrease in accounts receivable.......................................... 118,845 (Increase) in note receivable............................................ (30,487) Decrease in due from employees........................................... 1,395 Decrease in due from shareholders........................................ 19,800 (Increase) in inventory.................................................. (10,130) (Increase) in prepaids................................................... (11,462) (Increase) in deferred public offering costs............................. (34,835) (Decrease) in accounts payable........................................... (90,268) (Decrease) in accrued liabilities........................................ (2,680) ---------------- Net cash provided by operating activities........................... (16,895) ---------------- Cash flows from investing activities Purchase of machinery and equipment......................................... (29,258) ---------------- Net cash (used) in investing activities............................. (29,258) ---------------- Cash flows from financing activities Proceeds from sale of common stock.......................................... 22,210 ---------------- Net cash provided by financing activities........................... 22,210 ---------------- Net increase (decrease) in cash..................................... (23,943) Cash, at beginning of year.................................................... 47,180 ---------------- Cash, at January 31, 1996..................................................... $ 23,237 ============
See accompanying notes and accountant's report. F-19 48 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 2500 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................................... 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 six months ended January 31, 1996 was $516. 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 $72,465 of costs as of January 31, 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. Income Taxes At January 31, 1996, the Company has financial, federal, and California tax net operating loss carryforwards of approximately $377,000, $216,000, and $87,000, respectively. The difference between the financial reporting and the federal tax loss carryforward is primarily due to the capitalization of research and F-20 49 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 $65,000 and a related valuation reserve of $65,000, as of January 31, 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. NOTE 2. NOTES RECEIVABLE At January 31, 1995, notes receivable in the amount of $45,845 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 January 31, 1996, due from shareholders represents stock sold and issued for which some payments were received after January 31, 1996. NOTE 4. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant, and equipment -- at cost, less accumulated depreciation:
JANUARY 31, 1996 ---------------- Computers and equipment............................................... $102,005 Furniture and fixtures................................................ 38,227 Leasehold improvements................................................ 18,034 -------- 158,266 Less: accumulated depreciation...................................... 45,761 -------- Total....................................................... $112,505 ========
Depreciation expense charged to general and administrative expense for the six months ended January 31, 1996 was $8,251. NOTE 5. DEBT The details relating to debt at January 31, 1996 are as follows: Note 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 Less: Current maturities of note payable included in current liabilities... 25,000 ------- Total long term debt............................................. $ 0 =======
F-21 50 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 six months ended January 31, 1996 was $14,974. 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 00 Sale of stock.................................................. 436,030 169,265 Stock issued for debt.......................................... 16,500 10,000 Contribution of officers wages................................. 0 30,000 Balance, July 31, 1994......................................... 2,568,750 482,171 Sale of stock.................................................. 114,000 59,790 Stock issued for debt.......................................... 5,000 5,000 Contribution of officers wages................................. 0 45,000 Balance, July 31, 1995......................................... 2,687,750 591,961 Sale of stock.................................................. 55,500 22,210 Contribution of officers wages................................. 0 33,000 Balance, January 31, 1996...................................... 2,743,250 $647,171
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. 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, for stock activity subsequent to January 31, 1996 not reflected in the financial statements. 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. F-22 51 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 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 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. F-23 52 SUPPLEMENTARY INFORMATION F-24 53 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 1
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 ------------------------ (UNAUDITED) Schedule of Cost of Sales Material purchases................................................... $377,347 Production labor..................................................... 39,764 Freight.............................................................. 25,793 Supplies and miscellaneous........................................... 319 -------- Total cost of sales.......................................... $443,223 ======== Schedule of Selling Expenses Advertising and promotion............................................ $ 336 Brochures and catalogs............................................... 1,634 Marketing expenses................................................... 4,106 Sales wages.......................................................... 24,122 Travel and entertainment............................................. 5,860 Trade shows.......................................................... 11,101 -------- Total selling expenses....................................... $ 47,159 ========
F-25 54 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 2 Schedule of General and Administrative Expenses
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 ---------------- (UNAUDITED) Auto expenses............................................................... $ 5,389 Amortization................................................................ 516 Bank charges................................................................ 628 Computer expenses........................................................... 3,873 Contributions............................................................... 130 Credit card fees............................................................ 50 Depreciation................................................................ 8,251 Dues and subscriptions...................................................... 2,662 Equipment rental............................................................ 3,419 Insurance................................................................... 2,846 Interest expense............................................................ 1,728 Legal and professional...................................................... 1,940 Office supplies and expense................................................. 9,324 Office wages................................................................ 23,576 Officers wages.............................................................. 45,000 Postage..................................................................... 660 Rent expense................................................................ 14,974 Repairs and maintenance..................................................... 2,650 Security.................................................................... 105 Taxes -- business........................................................... 2,490 Taxes -- payroll............................................................ 6,068 Telephone expense........................................................... 3,341 Utilities................................................................... 1,496 -------- Total general and administrative expenses........................... $141,116 ========
F-26 55 ================================================================================ NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES AND THE WARRANTS IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 9 Dilution.............................. 10 Management's Discussion and Analysis of Financial Condition.............. 11 The Company and its Business.......... 15 Management............................ 18 Security Ownership of Management and Principal Shareholders.............. 21 Market for the Company's Common Stock and Related Stockholder Matters..... 22 Certain Transactions.................. 22 Description of Securities............. 23 Underwriting.......................... 24 Transfer Agent........................ 25 Legal Matters......................... 25 Experts............................... 25 Financial Statements.................. F-1
UNTIL JUNE , 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 ------------------------- MONITOR INVESTMENT GROUP, INC. MEYERS POLLOCK ROBBINS, INC. MAY , 1996 ================================================================================ 56 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 57 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:
TOTAL NAME OF PURCHASER DATE SECURITY(1) CONSIDERATION - ------------------------------------------------------ --------- ----------- ---------------- Thomas E. Smith, R. Ph.(2)(3)......................... 9/1/92 946,460 capital & equip. Michael L. Krall(2)(3)................................ 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(4)........................................ 11/1/93 135,000 services Robert L. Shear(4).................................... 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
II-2 58
TOTAL NAME OF PURCHASER DATE SECURITY(1) CONSIDERATION - ----------------- -------- -------- ---------------- John R. Stevenson, MD.(2)............................. 11/23/94 25,000 25,000 William Strang........................................ 8/22/95 14,000 21,000 Eugene Peiser, PD..................................... 10/18/95 1,000 1,000 Dennis Brovarone...................................... 12/10/95 20,000 services
- --------------- (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. 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. 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 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
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. II-3 59 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 60 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. 1 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 May 14, 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 May 14, 1996 - --------------------------------------------- Officer and Director Michael L. Krall /s/ NORMAN L. ANDERSON Chairman of the Board of May 14, 1996 - --------------------------------------------- Directors Norman L. Anderson /s/ GARY BROWNELL Chief Financial Officer, May 14, 1996 - --------------------------------------------- Director Gary Brownell /s/ DENNIS B. ATCHLEY Secretary and General Counsel May 14, 1996 - --------------------------------------------- Dennis B. Atchley /s/ EUGENE PEISER, PD Director May 14, 1996 - --------------------------------------------- Eugene Peiser, PD /s/ PATRICK GALUSKA Director May 14, 1996 - --------------------------------------------- Patrick Galuska /s/ DENNIS BROVARONE Director May 14, 1996 - --------------------------------------------- Dennis Brovarone
II-5 EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 INNOVATIVE MEDICAL SERVICES 1,250,000 SHARES OF COMMON STOCK, $_____PAR VALUE, AND 1,250,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS UNDERWRITING AGREEMENT Monitor Investment Group, Inc. As Representative of the Underwriters 351 East Conestoga Road Wayne, PA 19087 RE: INNOVATIVE MEDICAL SERVICES Gentlemen: The undersigned, Innovative Medical Services, a California corporation (the "Company"), proposes to issue and sell an aggregate of 1,250,000 shares of Common Stock, $________ par value (the "Common Stock"), of the Company and 1,250,000 Redeemable Class A Common Stock Purchase Warrants (the "Warrants" and, together with the Common Stock, the "Securities"), to you and the other underwriters named in Schedule I to this Agreement (the "Underwriters") for whom you are acting as representative (the "Representative"). The Company also proposes to issue and sell to the Underwriters an aggregate of not more than 187,500 additional shares of Common Stock and/or 187,500 additional Warrants (the "Additional Securities") if requested by the Underwriters as provided in Section 2 hereof. As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the Underwriters, and (b) that the Underwriters are willing to purchase the numbers of Securities aggregating in total 1,250,000 shares of Common Stock and 1,250,000 Warrants set forth opposite their respective names in Schedule I, plus their pro rata portion of the Additional Securities, if the Representative elects to exercise its right to purchase Additional Securities, in whole or in part, for the purpose of covering over-allotments as provided in Section 2. 2 The shares of Common Stock initially issuable upon the exercise of the Warrants are herein called the "Warrant Shares." 1. REPRESENTATIONS AND WARRANTS OF THE COMPANY. The Company represents, warrants and agrees that: (a) A registration statement on Form SB-2 (File No. 33- 434), including a preliminary form of prospectus, with respect to the Common Stock, the Warrants and the Warrant Shares has been filed with the Securities and Exchange Commission (the "Commission"); one or more amendments to such registration statement have been or will be so filed; and the Company may file prior to the effective date of such registration statement an additional amendment to such registration statement, including a final form of prospectus. Each such preliminary prospectus is herein referred to as a "Preliminary Prospectus", and the registration statement (including all exhibits), as amended at the time it becomes effective (the "Effective Date"), and the final prospectus in the form filed with the Commission pursuant to its Rule 424(b) after the Registration Statement becomes effective are herein respectively referred to as the "Registration Statement" and the "Prospectus". (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus and has not, to the knowledge of the Company, instituted any proceedings with respect to such order. (c) At the Effective Date and at all times subsequent thereto up to the Closing Date (as hereinafter defined), the Registration Statement and the Prospectus, as amended or supplemented, will conform in all material respects to the requirements of the Securities Act of 1933 and the rules and regulations thereunder (the "Act"), and neither of such documents will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, except that the foregoing does not apply to statements or omissions in either of such documents based upon written information furnished to the -2- 3 Company by any Underwriter through the Representative expressly for use therein; provided that such information is limited to that contained in the "Underwriting" section of such documents and the information contained in the cover page of the Prospectus summarized therefrom. (d) The financial statements, together with the related notes, contained in the Registration Statement and the Prospectus fairly present the financial position of the Company and the results of its operations as of the dates, or for the periods, therein specified; such financial statements have been prepared in accordance with generally accepted accounting principles. (e) Except as reflected in or contemplated by the Registration Statement or the Prospectus, since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there has not been any material adverse change in the condition, financial or otherwise, of the Company or in its business taken as a whole, (ii) there has not been any material transaction entered into by the Company other than transactions in the ordinary course of business, (iii) the Company has not declared or paid any dividend or other distribution on the Common Stock, and (iv) there has not been any change in the Certificate of Incorporation or the By-Laws of the Company. (f) There does not exist any material breach or default under any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or any of its property is subject. Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions herein contemplated nor compliance with the terms, conditions or provisions hereof will result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or any of its property is subject, or the Certificate of Incorporation or By-laws of the Company or any law, decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over -3- 4 the Company for any of its property, except insofar as the enforceability of this Agreement may be limited by the application of the Federal securities laws, the rules and regulations promulgated thereunder and judicial and administrative decisions thereunder. (g) The Company has an authorized capital stock as set forth in the Prospectus and all the outstanding shares of such capital stock have been duly and validly authorized and issued and are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. (h) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with full corporate power and authority under such laws to own its properties and conduct its business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions, if any, in which it owns or leases substantial property or in which it maintains an office, except where the failure so to qualify would not have a material adverse effect on the business of the Company. The Company has no subsidiaries except as set forth in the Prospectus. (i) The Securities have been duly authorized and, upon issuance, delivery and payment therefor in the manner described in the Prospectus, will be duly and validly issued, fully paid and non-assessable and will conform to the description thereof contained in the Prospectus. (j) At the time of the delivery of the Securities to the Underwriters hereunder, the Company will have entered into a warrant agency agreement (the "Warrant Agreement") with Corporate Stock Transfer, Inc., substantially in the form filed as Exhibit 4.01 to the Registration Statement, and the Warrant Agreement will be a valid and binding agreement enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting the enforcement of creditors' rights. -4- 5 (k) The Warrant Shares have been duly authorized and reserved for issuance upon the exercise of the Warrants and the Warrant Shares, when issued upon such exercise, will be duly and validly issued, fully paid and non-assessable and will conform to the description thereof contained in the Prospectus. (l) There are no issued, outstanding or reserved options, warrants or rights to purchase shares of Common Stock other than as set forth in the Prospectus, and neither the shareholders of the Company nor any other persons have preemptive rights with respect to the Common Stock. (m) No consent, approval, authorization or other order of any governmental authority is required in connection with the execution and delivery by the Company of this Agreement or the issuance and sale by the Company of the Common Stock, the Warrants and the Warrant Shares, except such as may be required under the Act or state securities and Blue Sky laws. This Agreement has been duly authorized, executed and delivered by the Company. (n) There are no legal or governmental proceedings pending to which the Company is a party or of which any property of the Company is the subject, other than litigation described in the Prospectus or which individually and in the aggregate is not material to the business of the Company taken as a whole; and to the best of the knowledge of the Company, no such proceedings are threatened by governmental authorities or threatened by others. (o) Upon delivery of and payment for the Securities as provided herein, the purchasers will receive good and marketable title to the Common Stock and the Warrants, respectively, free and clear of all liens, encumbrances, equities and claims whatsoever. (p) Until the Closing Date, the Company will not issue any additional shares of Common stock or grant any rights to acquire Common Stock. (q) The Company has the authority to enter into this Agreement and sell the capital stock to the Underwriters; and, no -5- 6 additional consent or approval is required for the execution of this Agreement and/or the sale of the capital stock. (r) The Company has timely filed al tax returns and paid all taxes that have become due. 2. AGREEMENT TO SELL AND PURCHASE. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell 1,250,000 shares of Common Stock and 1,250,000 Warrants to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase from the Company at a purchase price per Common Stock and/or Warrant as hereinafter provided (the "Purchase Price") the number of shares of Common stock and Warrants set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company hereby agrees to issue and sell to the Underwriters, and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to 187,500 additional shares of Common Stock and/or 187,500 additional Warrants from the Company at the Purchase Price. Additional Securities may be purchased as provided in Section 4 solely for the purpose of covering over-allotments made in connection with the offering of the Securities. If any Additional Securities are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Securities (subject to such adjustments to eliminate fractional Securities as you may determine) which bears the same proportion to the total number of Additional Securities to be purchased which the number of Securities set forth opposite the name of the Underwriter in Schedule I hereto bears to the total number of Securities. The Purchase Price for each share of Common Stock and one Warrant (including the Additional Securities, if the over-allotment option is used) to be paid by the Underwriters will be an amount equal to the initial public offering price of $4.00 per one share of Common Stock less the amount $.40 per share and $0.10 per Warrant less the amount of $0.01 per warrant. -6- 7 The Underwriters will offer all or any part of the Securities directly to the public at such initial public offering price per Common Stock and Warrants and will offer any balance thereof to certain dealers (the "Selected Dealers") who are members of the National Association of Securities Dealers, Inc. ("NASD") or foreign brokers or dealers in accordance with Section 25(c) of the Rules of the NASD. Such Selected Dealers in offering the Securities shall do so as subagents and the Underwriters may allow to them a concession on such initial public offering price not to exceed $_______________ per Common Stock and Warrants and such Selected Dealers may reallot a discount on such initial public offering price not to exceed $______________ per Common Stock and Warrants. The Company hereby agrees not to sell or otherwise dispose of any shares of Common Stock or Preferred Stock (except pursuant to Warrants, options and convertible securities outstanding as of the Closing or issued under the Company's stock option plans described in the Prospectus) for a period of 24 months after the date of the Prospectus without the Representative's prior written consent. 3. TERMS OF PUBLIC OFFERING. The Company is advised by the Representative that the Underwriters propose initially to offer the Securities upon the terms set forth in the Prospectus. 4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment for the Securities shall be made at a closing (the "Closing") to be held at the New York offices of the Representative, 20 Exchange Place, 18th Floor, New York,New York at 10:00 A.M., New York time, on the third business day (the "Closing Date") following the Effective Date. The Closing Date and the location of the delivery of and payment for the Securities may be varied by agreement between the Representative and the Company. Delivery to the Underwriters of and payment for any Additional Securities to be purchased by the Underwriters shall be made at the New York offices of the Representative, 20 Exchange Place, 18th Floor, New York, New York, at 10:00 A.M., New York -7- 8 time, on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor later than ten business days after the giving of written notice from the Representative to the Company of the Underwriters' determination to purchase a number of Additional Securities as specified in said notice. Said notice may be given at any time within 45 days following the date of this Agreement. The Option Closing Date and the location of the delivery of and payment for the Additional Securities may be varied by agreement between the Representative and the Company. Certificates for the Securities shall be registered in such names and issued in such denominations as the Representative shall request in writing no later than two full business days prior to the Closing Date or the Option Closing Date, as the case may be. Such certificates shall be made available to the Representative for inspection not later than 9:30 A.M., New York Time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates for the Securities shall be delivered to the Representative on the Closing Date or the Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company, for the respective accounts of the Underwriters, against payment of the Purchase Price therefor by certified or official bank check or checks payable in New York Clearing House (next day) funds to the order of the Company. 5. REPRESENTATIVE'S WARRANTS. At the Closing, the Company will sell to the Representative, at a price of $_______ Warrants (the "Representative's Warrants") to purchase up to 125,000 shares of Common Stock at a price of $4.40 per share. The Representative's Warrants are exercisable for a period of five years beginning one year from the date of the Prospectus. The Representative's Warrants are non-transferable for a period of one year following the date of the Prospectus, except to any of the Underwriters or to any individual who is either a partner or an officer of an Underwriter or by operation of law or by will or the laws of descent and distribution. -8- 9 6. EXPENSES. The Company will pay the fees and disbursements of its attorneys, all of its expenses incident to the preparation and filing of the Registration Statement under the Act and the qualification of the Securities for sale under Blue Sky and securities laws of the various states, the fees and disbursements of counsel related to Blue Sky and securities laws qualification, the charges of the NASD in connection with its review of the underwriting arrangements, the fees and expenses of any transfer or warrant agent, any Federal and/or state taxes upon the issuance of the Securities, the reasonable costs of a "tombstone" advertisement with respect to the offering of the Securities and all expenses of printing the Registration Statement, the Prospectus and all other related documents or instruments prepared in connection with the transactions contemplated hereby, including, without limitation, this Agreement, the Securities and any Blue Sky memoranda. In addition, the Company will pay to the Representative a non-accountable expense allowance in an amount equal to 3% of the gross proceeds derived from the sale of the Securities, of which $50,000 has been paid and the balance of which shall be payable at the Closing provided, however, that in the event that no Closing shall be held, the Company in lieu of such payment shall reimburse the Representative in full (up to a maximum of $100,000) for its reasonable out-of-pocket expense, including, without limitation, its legal fees and disbursements, and the Representative shall reimburse the Company if and to the extent that such expenses are less than the $__________ previously advanced amount with respect to such expenses. 7. COVENANTS OF THE COMPANY. The Company covenants and agrees with you that: (a) The Company will use its best efforts to cause the Registration Statement to become effective and will advise the Representative promptly of any proposal to amend or supplement the registration statement as presently amended, or the related form of prospectus, prior to the Effective Date, and will not effect such amendment or supplement without the consent of the Representative, which shall not be unreasonably withheld; the -9- 10 Company will also advise the Representative promptly of the effectiveness of the Registration Statement, of any amendment or supplement institution by the Commission of any suspension of qualification or stop order proceedings in respect of the Registration Statement, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (b) If at any time when a prospectus relating to the Securities is required to be delivered under the Act any event occurs as a result of which the Prospectus is then amended or supplemented would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act, the Company, at its cost, promptly will prepare and file with the Commission an amendment or supplement which will correct such statement or omission and/or which will effect such compliance and will furnish the Underwriters with copies of any such amended Prospectus or supplement to the Prospectus. (c) Not later than the first day of the eighteenth full calendar month after the date hereof, the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of at least 12 months beginning after the Effective Date which will satisfy the provisions of Section 11(a) of the Act. (d) The Company has furnished or will furnish to you copies of the Registration Statement (two of which will be signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as you shall reasonably request. The Company will forward to the Representative three complete bound volume containing the appropriate documents relating to the offering. (e) The Company will use its best efforts to qualify the Common Stock, the Warrants and the Warrant Shares for offering -10- 11 and sale, and in determining the eligibility of such securities for investment, under the Blue Sky or securities laws of such jurisdictions as the Representative shall designate and are reasonably available and will continue such qualifications in effect so long as required for the distribution of the Securities, provided, however, that in connection with such designation, the Company shall not be required to file a general consent to service of process in any jurisdiction. (f) For a period of five years after the Effective Date, the Company will furnish to the Representative, within the time permitted for filing with the Commission, a balance sheet and statements of operations, stockholders' equity (or deficit) and cash flows of the Company as at the end of and for each fiscal year in such period, all in reasonable detail and certified by independent public accountants; and the Company will furnish to the Representative (i) as soon as available a copy of each report of the Company mailed to the stockholders or filed with the Commission, and (ii) from time to time, such other information then existing concerning the Company as the Representative may reasonably request. (g) The Company will apply the net proceeds of the sale of the Securities as set forth under the caption "Use of Proceeds" in the Prospectus and will file reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (h) The Company will cause each of its executive officers, directors and 5% or greater stockholders to furnish to the Representative, on or prior to the date hereof, a letter or letters, in form and substance satisfactory to the Representative, pursuant to which each such person shall agree not to sell publicly any shares of Common Stock during the 24-month period following the Effective Date, except with the Representative's prior written consent. (i) The Company will cause each of its shareholders other than officers, directors and holders of greater than 5% of -11- 12 the outstanding shares to furnish the Representative with a letter or letters, in form and substantive satisfactory to the Representative, pursuant to which each such person shall agree not sell publicly any shares of Common Stock during the 24-month period following the Effective date of the offering, except with the Representative's prior written consent. (j) At the Closing, the Company will execute and deliver to the Representative the Representative's Warrants. (k) For a period of three years from the date hereof, the Company, at its expense, shall provide the Representative, or its designee, if so requested in writing, with copies of the Company's daily transfer sheets. (l) For a period of 90 days from the date hereof, the Company (i) will consult with the Representative prior to the distribution to third parties of any financial information, news releases, and/or other publicity regarding the Company, its business, or any terms of the offering of the Securities and (ii) will provide to the Representative for its review prior to distribution copies of all documents which the Company or its public relations advisors intend to distribute. (m) Promptly following the Closing, the Company will use its best efforts to obtain, and maintain for a period of at least five years, a listing in either Moody's Industrial Manual or Standard and Poor's Corporation Records. (n) For a period of not less than three years from the Effective Date, the Company will permit the Representative's designee to attend meetings of the Company's Board of Directors as a non-voting observer. Such designee shall receive notices of all meetings of the Board. (o) The Company will use its best efforts to obtain inclusion of the Securities, the Warrants and the Common Stock in the NASDAQ system as of the Closing Date. -12- 13 (p) The Company shall for a period of five (5) years from the Closing, engage a designee of the Underwriter as a Member (the "Member") to its Board of Directors who shall attend meetings of the board and who shall receive reimbursement for all reasonable costs incurred in attending meetings of the Board, including food, lodging, and transportation. The Company further agrees that, during said five (5) year period, it shall schedule no less than four (4) formal (in person) meetings of its Board of Directors in each such year at which meetings the Member shall be permitted to attend as set forth herein; said meetings shall be held quarterly each year and said Member shall be entitled to receive the same notice of meeting accorded to other directors of the Company. 8. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the Underwriters at the Closing hereunder will be subject to the accuracy of the representations and warranties on the part of the Company herein as of the date hereof and as of the Closing Date, to the accuracy of the statements of the Company's officers made in any certificate furnished pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Registration Statement shall have become effective not later than 5:00 P.M., New York time, on the date of this Agreement, or such later date as shall have been consented to by the Representative; and prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement will have been issued and no proceedings for that purpose shall have been instituted, or to the knowledge of the Company or the Representative, shall be contemplated by the Commission; (b) The Representative shall not have advised the Company that the Registration Statement or Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading; -13- 14 (c) The Representative shall have received a written opinion of Dennis Brovarone, Esq., counsel for the Company (or from other counsel satisfactory to the Representative), dated the Closing Date, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with full corporate power and authority under such laws to own its properties and conduct its business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions, if any, in which it owns or leases substantial property or in which it maintains an office, except where the failure so to qualify would not have a material adverse effect on the business of the Company; (ii) The Company has an authorized capital stock as set forth in the Prospectus and all the outstanding shares of capital stock have been duly and validly authorized and issued and are fully paid and non-assessable, and conform to the description thereof contained in the Prospectus; (iii) To the best of such counsel's knowledge there are no legal or governmental proceedings pending or threatened to which the Company is a party or of which any property of the Company is the subject, other than litigation described in the Prospectus or which individually and in the aggregate is not material to the business of the Company taken as a whole; (iv) This Agreement has been duly authorized, executed and delivered by the Company; (v) The Securities have been duly authorized and, upon issuance, delivery and payment therefor -14- 15 in the manner described in the Prospectus, will be duly and validly issued, fully paid and non-assessable; the Warrant Agreement has been duly authorized, executed and delivered and is a valid and binding agreement enforceable in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting the enforcement of creditors' rights, and except that no opinion need be expressed with respect to the remedy of specific performance; the Warrant Shares have been duly authorized and reserved for issuance upon such exercise will be validly issued and fully paid and non-assessable; and the Warrant Securities have been duly and validly authorized and reserved for issuance, and such Warrant Securities, when issued in accordance with the terms of the Representative's Warrants, will be duly an validly issued, fully paid and non-assessable and the Common Stock, the Warrants, the Warrant Shares, the Representative's Warrants, the Warrant Securities and the Warrant Agreement conform to the description thereof in the Prospectus; (vi) Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions herein contemplated nor compliance with the terms, conditions or provisions hereof, will result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument, known to such counsel, to which the Company is a party or any of its properties is subject, or the Certificate of Incorporation or By-laws of the Company or any law, decree, judgment, order, rule or regulation, known to such counsel, of any court or governmental agency or body having jurisdiction over the Company or any of its property, except -15- 16 insofar as the enforceability of this Agreement may be limited by the application of the Federal securities laws and decisions thereunder and except that such counsel need express no opinion as to the applicability of the Blue Sky or securities laws of the various states; and (vii) on the basis of the participation by such counsel in conferences with representatives of the Company and its accountants at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and based upon the advice of the Company, but without independent verification by such counsel of the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or any amendments or supplements thereto, and without expressing any opinion as to the financial statements and other financial data contained therein: (A) nothing has come to such counsel's attention which leads it to believe that the Registration Statement and the Prospectus, as amended or supplemented by any amendments or supplements thereto made by the Company prior to the Closing Date, do not comply as to form in all material respects with the requirements of the Act; (B) nothing has come to such counsel's attention which leads to believe that the Registration Statement or the Prospectus, as amended or supplemented by any such amendments or supplements thereto, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (C) such counsel does not know of any contract or other document required to be described in or filed as an exhibit to the Registration Statement which is not so described or filed; (D) the Registration Statement has become effective under the Act, and, to the best of the knowledge of such -16- 17 counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission. and there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statements or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. As to matters of fact in the conclusions expressed in the foregoing opinion, such counsel may rely upon certificates, copies of which shall have been furnished to the Representative, of public officials and of appropriate officers of the Company. (d) The Representative shall have received a certificate of the President and of the Treasurer of the Company, dated the Closing Date, to the effect that: (i) Since the Effective Date, there shall not have occurred any event required to be set forth in an amended or supplemented Prospectus which shall not have been so set forth, any such amendment or supplement shall not have included any untrue statement of a material fact or have omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) Subsequent to the respective dates of which information is given in the Registration Statement and Prospectus and prior to the Closing Date, and except as set forth in or contemplated -17- 18 by the Prospectus, (A) other than in the ordinary course of business, the Company has not incurred and will not have incurred any liabilities or obligations, direct or contingent, nor has it nor will it have entered into any transaction, in either case which are material to the business of the Company will not have been any change in the capital stock or long-term debt of the Company from that set forth under the heading captioned "Capitalization" in the Prospectus, or any material adverse change, financial or otherwise, in the financial position, results of operations or general affairs of the Company, considered as a whole; and (iii) To the knowledge of such persons (A) the representations and warranties contained in Section 1 hereof are, at the Closing Date, true and correct, (B) the Registration Statement has become effective, no stop order suspending the effectiveness thereof has been issued prior to the Closing Date and no proceedings for that purpose, prior to that date, have been initiated or threatened by the Commission, and (C) every reasonable request for additional information on the part of the Commission, to be included in the Registration Statement or the Prospectus or otherwise, has been complied with. (e) At the time of execution of this Agreement and also at the Closing Date, Steven Holland, Certified Public Accountant shall have furnished to the Representative a letter or letters, dated the date of delivery thereof, in form and substance satisfactory to the Representative: (i) Stating that they are independent certified public accountants within the meaning of the Act and the published rules and regulations thereunder, and the answer to -18- 19 Item 10 of the Registration Statement is correct insofar as it relates to them; and (ii) Setting forth, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of such letter), the conclusions and findings of said firm with respect to the financial information and other matters designated by you. (f) The Company shall have furnished to you such 1certificates in addition to those specifically mentioned herein, as you may have reasonably requested, as to the accuracy, on the Closing Date, of the representations and warranties of the Company; as to the performance by the Company of its obligations hereunder; and as to the other concurrent or precedent conditions to the obligations of the Underwriters hereunder. (g) All corporate and legal proceedings taken and all legal opinions rendered in connection with the Registration Statement and the issue and sale of the Securities shall be satisfactory in form and substance to Mound, Cotton & Wollan counsel to the Representative, and such counsel shall have been furnished with such papers and information as they may reasonably have requested in this connection. The several obligations of the Underwriters to purchase Additional Securities hereunder are subject to satisfaction on and as of the Option Closing Date of the conditions set forth above, except that the opinion called for in paragraph (c) shall be revised to reflect the sale of the Additional Securities. 9. CONDITIONS OF COMPANY'S OBLIGATIONS. The obligations of the Company to sell and deliver the Securities are subject to the following conditions: -19- 20 (a) The Registration Statement shall have become effective and prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been instituted or, to the knowledge of the Company or the Representative, shall be contemplated by the Commission. (b) At the Closing Date there shall be in full force and effect appropriate orders, where necessary, of such regulatory authorities as have jurisdiction over the issue and sale of the Securities, permitting the issue and sale of the Securities upon the terms and conditions herein set forth or contemplated and containing no provision unacceptable to the Company. 10. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and hold harmless each Underwriter, and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus or any amendment or supplement thereto, or any related Preliminary Prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue omission made in any of such documents in reliance upon and in conformity with written information furnished to the Company through the Representative by the Underwriters expressly for use therein; and provided, further, that the indemnity agreement contained in this Section 10(a) with respect to any -20- 21 Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person, if any, who controls such Underwriter) through whom the person asserting any such loss, claim, damage, liability or action purchased the Securities which are the subject thereof if such Underwriter or a Selected Dealer who purchased the Securities from such Underwriter failed to deliver a copy of the Prospectus to such person at or prior to the confirmation of the sale of such person or at or prior to the confirmation of the sale of such Securities to such person in any case where such delivery is required by the Act and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus. This indemnify agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related Preliminary Prospectus, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through the Representative by such Underwriter expressly for use therein; and will reimburse any legal or other expenses reasonably incurred by the Company or any such other director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have. -21- 22 (c) Promptly after receipt by an indemnified party under this Section 10 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 10, notify such indemnifying party of the commencement thereof; but the failure so to notify such indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 10. In case any such action is brought against any indemnified party, and it notifies an indemnifying party similarly notified, assume (at its own expense) and defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party under this Section 10 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the judgment of the indemnified party and its controlling persons to be represented by separate counsel, the indemnified party shall have the right to employ a single counsel to represent the indemnified party and all such controlling persons, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. No indemnifying party shall be liable for any compromise or settlement of any such action effected without its consent. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 10(a) and 10(b) hereof is for any reason held to be unavailable from the Company or any Underwriter, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contributions received by the Company from persons other than the Underwriters who may also be liable for contribution, the Company hereby agreeing to seek contribution from such persons) to which the Company and the Underwriters may be subject in such proportion so that the Underwriters are responsible for that portion represented by the percentage that the sum of the underwriting -22- 23 discount and the non-accountable expense allowance appearing on the cover page of the Prospectus bears to the public offering price appearing thereon and the Company is responsible for the balance; provided, however that: (i) in no case, other than fraudulent misrepresentation as set forth in clause (ii) below, shall an Underwriter be responsible under this Section 10(d) for any amount in excess of the sum of the underwriting discount and the non-accountable expense allowance applicable to the Securities purchased by it hereunder; and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 10(d), each person, if any, who controls an Underwriter within the meaning of the Act, shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 10(d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 10(d), notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from who contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section 10(d). 11. REGISTRATION RIGHTS. 11.1 The Company is obligated to register the Warrant Securities, on the terms, and subject to the conditions, set forth below: -23- 24 (a) If at any time during the four-year period beginning on the first anniversary of the Effective Date the Company shall file a registration statement (other than a registration statement on Form S-8 or Form S-4 or any successor form thereto) with respect to any of its securities under the Act or shall file a post-effective amendment to any registration statement (other than a registration statement on Form S-8 or Form S-4 or any successor form thereto), which post-effective amendment contains a prospectus complying with Section 10(a) if the Act, the Company will give to the holders of the Representative's Warrants and the Warrant Securities, no less than 30 days' prior written notice of its intention to file such registration statement of post-effective amendment, as the case may be, and promptly after receipt of a written request made by the holders of any portion of the Representative's Warrant or Warrant Securities, within 20 days after the giving of such notice, the Company will use its best efforts to register under the Act all Warrant Securities ("Securities to be Registered") covered by any such request and will maintain the prospectus included in any registration statement which may be so filed current for a period of 120 days subsequent to the effective date of such registration statement. (b) At any time during the four-year period beginning on the first anniversary of the Effective Date, the holders of at least 75% of the Representative's Warrants and/or Warrant Securities shall have the one time right upon the written request of such holders to cause the Company to use its best efforts to register all of such holders' Securities to be Registered covered by such request for a public offering on an appropriate form under the Act. The Company shall cause such registration statement on such form to remain effective for a period of 120 days from the initial effective date thereof. (c) All of the expenses incurred in registering the Securities to be Registered under (a) or (b) above, including reasonable fees and expenses of separate counsel for the holders of the Securities to be Registered in the case of a registration under (b) but not a registration under (a), shall be borne by the Company, except that underwriting discounts or commissions -24- 25 attributable to the Securities to be Registered shall be borne by the holders of such Securities to be Registered. (d) The holders of Securities to be Registered shall use their best efforts not to request a registration under (b) above at a time when a special audit of the financial statements of the Company would be required under the rules of the Commission. 11.2 If at time within 120 days after a post-effective amendment or a new registration statement covering the Securities to be Registered as provided in Section 11.1 hereof, shall have become effective, to the knowledge of the Company any event occurs as a result of which a prospectus included therein relating to the Securities to be Registered as then amended or supplemented would include any untrue statement of a material fact, or would not state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, the Company will promptly notify the holder or holders of Securities to be Registered covered 120 days (excluding any period during which a stop order is in effect) after the effective date of the registration statement or post-effective amendment to a registration statement of its own cost and expense amend or supplement such prospectus in order to correct such statement or omission in order that the prospectus as so amended or supplemented will comply with the requirements of Section 10(a) of the Act. In case any such holder or holders is required to deliver a prospectus after such 120-day period, the Company will, at the expense of such holder or holders, prepare promptly such prospectus or prospectuses and thereafter amend or supplement the same as may be necessary to permit compliance with Section 10(a) of the Act. 11.3 In connection with any registration statement or post- effective amendment pursuant to Section 11.1: (e) the Company will comply with all applicable rules and regulations of the Commission or any similar Federal commission and will make available to its security holders, as soon as practicable, an earning statement (which need not be -25- 26 audited) covering a period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the registration statement or post-effective amendment, as the case may be, which earning statement will satisfy the provisions of Section 11(a) of the Act; (f) each holder of the Securities to be Registered covered by such post-effective amendment or registration statement, as the case may be, will furnish in writing to the Company such information regarding such holder and its proposed plan of distribution of such Securities to be Registered as the Company shall request in order to have such post-effective amendment or registration statement declared effective; (g) the Company agrees to furnish at its own cost and expense to the holders of the Securities to be Registered a prospectus (in such reasonable quantities as such holders shall request) containing certified financial statements and other information meeting the requirements of the Act and the rules and regulations thereunder and relating to the Securities to be Registered; and (h) the Company will use its best efforts to qualify the Securities to be Registered covered by any registration statement or post-effective amendment for public offering or sale on the effectiveness thereof in such jurisdictions as the holders offering the same shall reasonably request; provided, however, that the Company shall not be required to qualify as a foreign corporation in any jurisdiction or to give a general consent to service of process in any jurisdiction except in connection with matters arising from the sale of securities in such jurisdiction. The filing frees and reasonable fees and expenses of counsel in connection with such qualification shall be paid for the Company. 11.4 In the event of any such registration of any Securities to be Registered, the Company will indemnify and hold harmless each holder of securities being offered and each person, if any, who may be deemed to control such holder within the meaning of Section 15 of the Act against any losses, claims, damages or liabilities, joint or several, to which any of them may become -26- 27 subject under the Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained on the effective date thereof, in any registration statement or post-effective amendment under which such securities were registered under the Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each of them for any legal or any other expenses reasonably incurred by them in connection with investigating, defending or settling any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to any of them to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon any untrue statement of any material fact contained, on the effective date thereof, in such registration statement or post-effective amendment, such preliminary prospectus or such final prospectus or any such amendment or supplement in reliance upon and in conformity with information furnished in writing by such persons to the Company expressly for use in the preparation thereof, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such written information required to be stated in such registration statement, such post-effective amendment, such preliminary prospectus or such final prospectus or any such amendment or supplement in light of the circumstances under which it is used, not misleading. For purposes of this Section 11.4, "information furnished in writing by such persons" shall include information contained in any portion of such registration statement, such post-effective amendment, such preliminary prospectus or such final prospectus or any such amendment or supplement which has been expressly identified and approved in writing in a letter signed by the person or persons involved. Each such person shall promptly give notice to the Company after such person has actual knowledge of any such claim as to which indemnity may be sought hereunder, or of the commencement of any legal proceedings against such person as to such claim, whichever shall first occur, and shall permit -27- 28 the Company to assume the defense of any such claim or any litigation resulting from such claim; provided, however, that: (i) counsel reasonably satisfactory to the Company and each such person involved shall act as counsel for the Company and shall conduct the defense of such claim or litigation; and (j) each such person may participate in such defense at the expense of such person, and provided, further, that the omission by any such person to given notice to the Company as provided in this sentence or the failure to permit the Company to conduct such defense shall relieve the Company of its obligations under this Section 11.4, but shall not relieve the Company of its obligations otherwise than under this Section 11.4. The Company shall notify each such person involved within 15 days after the Company shall have received such notice if the Company shall elect to defend such claim or litigation therefrom. If the Company assumes the defense of any such claim or litigation resulting therefrom, the obligation of the Company under this Section 11.4 shall be limited to taking all steps necessary in the defense or settlement of such claim or litigation resulting therefrom and to holding the person involved harmless from and against any losses, damages or liabilities caused by or arising out of any settlement approved by the Company or any judgment in connection with such claim or litigation resulting therefrom. The Company shall not, in the defense of such claim or any litigation resulting therefrom, consent to entry of any judgment except with the consent of each such person involved or enter into any settlement (except with the consent of each such person involved) which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such person of a release from all liability in respect of such claim or litigation. 11.5 In the event of any such registration of any Securities to be Registered, each holder of such securities being offered shall indemnify and hold harmless the Company, each of its directors and officers who signed the registration statement, and any person who controls the Company within the meaning of the Act from and against any loss, claim, damage or liability, joint or -28- 29 several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Act or otherwise, insofar as such loss, claim, damage, liability or action, arises out of, or is based upon, any untrue statement or alleged untrue statement of a material fact contained in any registration statement or post-effective amendment under which such securities were registered under the Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arises out of, or is based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such holder specifically for inclusion therein, and reimburse the Company for any legal and other expenses reasonably incurred by the Company or any such director, officer or controlling person in investigating or defending or preparing to defend against any such loss, claim, damage, liability or action. The foregoing indemnity agreement is in addition to any liability which any such holder may otherwise have to the Company or any of its directors, officers or controlling persons. 12. TERMINATION. This Agreement shall become effective when notification of the effectiveness of the Registration Statement has been released by the Commission. This Agreement may be terminated at any time prior to the Closing Date by the Representative by written notice to the Company if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in or affecting particularly the general condition, financial or otherwise, of the Company or the earnings, affairs, or business prospects of the Company, whether or not arising in the ordinary course of business, which would, in reasonable judgment of the Representative, materially impair the investment quality of the Securities, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in -29- 30 economic conditions if the effect of such outbreak, calamity, crisis or change on the financial markets of the United States would, in the reasonable judgment of the Representative, make the offering or delivery of the Securities impracticable, (iii) suspension of reporting of closing or bid and asked prices by the NASD Automated Quotation System or suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any Federal or state statute, regulation, rule or order of any court or other governmental authority which in the reasonable judgment of the Representative materially and adversely affects or will materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either Federal or New York State authorities or (vi) the taking of any action by any Federal, state or local government or agency in respect of its monetary or fiscal affairs which in the reasonable judgment of the Representative has a material adverse effect on the securities market in the United States. 13. SUBSTITUTION OF UNDERWRITERS. If any Underwriter shall for any reason not permitted hereunder cancel their obligations to purchase the Securities hereunder, or shall fail to take up and pay for the number of securities set forth opposite their respective names in Schedule I hereto upon tender of such securities in accordance with the terms hereof, then: (k) If the aggregate number of Securities which such Underwriter agreed but failed to purchase does not exceed 10% of the total number of Securities, the other Underwriter shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Securities which such defaulting Underwriter agreed but failed to purchase. (l) If any Underwriter so defaults and the agreed number of Securities with respect to which such default or defaults occurs is more than 10% of the total number of Securities, the remaining Underwriter shall have the right to take up and pay for the Securities, which the defaulting Underwriter agreed but failed to purchase. If such remaining Underwriter does not take up and pay for the Securities which the defaulting Underwriter -30- 31 agreed but failed to purchase, the time for delivery of the Securities shall be extended to the next business day to allow the Underwriters the privilege of substituting within twenty-four hours (including nonbusiness hours) another Underwriter or Underwriters satisfactory to the Company. If no such Underwriter or Underwriters shall have been substituted as aforesaid, within such twenty-four hour period, the time of delivery of the Securities may, at the option of the Company, be again extended to the next following business day, if necessary, to allow the Company the privilege of finding within twenty-four hours (including nonbusiness hours) another Underwriter or Underwriters to purchase the Securities which the defaulting Underwriter agreed but failed to purchase. If it shall be arranged for the remaining Underwriter to take up the Securities of the defaulting Underwriter as provided in this Section, (i) the Company or the Representative shall have the right to postpone the time of delivery for a period of none more than seven business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of Securities to be purchased by the remaining Underwriters or substituted Underwriters shall be taken at the basis of the underwriting obligation for all purposes of this Agreement. If in the event of a default by one Underwriter and the remaining Underwriter shall not take up and pay for all the Securities agreed to be purchased by the defaulting Underwriter or substitute another Underwriter or Underwriters as aforesaid, the Company shall not find or shall not elect to seek another Underwriter or Underwriters for such Securities as aforesaid, then this Agreement shall terminate. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. In the event of termination, there shall be no liability on the part -31- 32 of any nondefaulting Underwriter to the Company, provided that the provisions of this Section 9 shall not in any event affect the liability of any defaulting Underwriter to the Company arising out of such default. 14. MISCELLANEOUS. Any notice required or permitted to be given hereunder shall be given in writing by depositing the same in the United States Mail, postage prepaid, or by courier service or facsimile transmission, addressed as follows: to the Underwriters: Monitor Investment Group, Inc. 51 East Conestoga Road Wayne, PA 19087 Attention: William F. Palla, President with a copy to: Michael R. Koblenz, Esq. Mound, Cotton & Wollan One Battery Park Plaza New York, New York 10004 to the Company: Innovative Medical Services 1308 North Magnolia Avenue, Suite H El Cajon, California 92020 Attention: Michael L. Krall, President with a copy to: Dennis Brovarone Attorney-At-Law 2530 Linley Court Denver, Colorado 80219 Except as otherwise expressly provided, this Agreement has been and is made solely for the benefit of and shall be binding -32- 33 upon the Company, the Underwriters, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Securities from any of the Underwriters merely because of such purchase. The Representative represents and warrants that it has been authorized by the Underwriters to enter into this Agreement on their behalf and to act for them in the manner provided in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable in the case of agreements made and to be performed entirely within such State. This Agreement may be signed in counterparts which together shall constitute one and the same instrument. If the foregoing correctly sets forth the agreement among the Company and the Underwriters, kindly sign and return to us the enclosed duplicate of this letter, whereupon it will become a binding agreement between the Company and the Underwriters in accordance with its terms. Very truly yours, INNOVATIVE MEDICAL SERVICES By ---------------------------------- Agreed and accepted in New York, New York, as of the date hereof. MONITOR INVESTMENT GROUP, INC. Acting as Representative of the Underwriters By ------------------------------ William F. Palla, President -33- 34 Sterling Foster & Co., Inc. By ------------------------- -34- 35 SCHEDULE I
SHARES OF NUMBER OF UNDERWRITERS COMMON STOCK WARRANTS - ------------ ------------ --------- MONITOR INVESTMENT GROUP, INC..................... MEYERS POLLOCK ROBBINS, INC....................... Total............................................. 1,250,000 1,250,000
EX-1.2 3 AGREEMENT AMONG UNDERWRITERS 1 EXHIBIT 1.2 INNOVATIVE MEDICAL SERVICES 1,250,000 SHARES OF COMMON STOCK 1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS AGREEMENT AMONG UNDERWRITERS As of , 1996 Monitor Investment Group, Inc. 351 East Conestoga Road Wayne, PA 19087 Dear Sirs: We hereby agree with you as follows with respect to (i) the purchase and offering by Monitor Investment Group, Inc. (the "Representative") and Meyers Pollock Robbins, Inc. ("MPR" and collectively with the Representative, the "Underwriters") of an aggregate of 1,250,000 shares of common stock, $.01 par value (the "Common Stock") and 1,250,000 redeemable Common Stock Purchase Warrants (the "Warrants" and, together with the Common Stock, the "Securities"), of Innovative Medical Services (the "Company") and (ii) if you shall have determined that the Underwriters shall purchase any of the 187,500 additional shares of Common Stock and/or 200,000 additional Warrants (the "Additional Securities") which the Company has agreed to sell to the Underwriters pursuant to Section 2 of the Underwriting Agreement, the purchase from the Company of the Additional Securities. 1. REGISTRATION STATEMENT. We confirm that we have examined the registration statement (including the prospectus) relating to the Securities as amended to the date of this agreement and we are familiar with the terms of the Securities to be offered and the other terms of the offering which are to be reflected in the proposed pricing amendment to the registration statement. The registration statement as amended at the time it become effective, including financial statements and exhibits, is referred to in this agreement as the Registration Statement, and the prospectus in the form first filed with the Securities and Exchange Commission (the "Commission") pursuant to its Rule 424(b) is referred to as the Prospectus. 2 We further confirm that: (a) Insofar as it relates to us, the information in the Registration Statement as amended to this date and in the proposed amendment is correct and complete and is not misleading. (b) We are aware of and are willing to accept our responsibilities under the Securities Act of 1933 as an Underwriter to be named in the Registration Statement. (c) We are willing to proceed with the underwriting of the Securities in the manner contemplated in the Underwriting Agreement. (d) You are authorized, in your discretion and on our behalf, with approval of counsel for the Representative of the Underwriters, Mound, Cotton & Wollan, to approve the proposed amendment and the Prospectus and to approve of or to object to any further amendments to the Registration Statement, or amendments or supplements to the Prospectus. 2. UNDERWRITING AGREEMENT. We authorize you to execute and deliver on our behalf the Underwriting Agreement in substantially the form annexed hereto as Exhibit A. The number of Securities set forth opposite each Underwriter's name in Schedule I to the Underwriting Agreement, or such number increased as set forth in Section 12 of the Underwriting Agreement, is referred to in this agreement as the original underwriting commitment of such Underwriter, and the ratio which such original underwriting commitment bears to the total number of Securities is referred to in this agreement as the underwriting proportion of such Underwriter. 3. AUTHORIZATION UNDER UNDERWRITING AGREEMENT. The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject, among other things, to the condition that the Registration Statement shall have become effective no later than 5:00 P.M., New York time, on the date of the Underwriting Agreement. You are hereby authorized, in your discretion, to extend such time to not later than 1:00 P.M., New York time, on the date following such date and, with the consent of Underwriters, including yourselves, who have agreed to purchase -2- 3 in the aggregate at least a majority of the Securities, to agree to one or more subsequent extensions of such date and to take on our behalf any action that may be necessary for such purposes. You are also authorized in your sole discretion to take the following action with respect to the Underwriting Agreement: (a) To postpone the Effective Date or the Option Closing Date (as such terms are defined in the Underwriting Agreement) or, except as provided above, to extend any other date specified in the Underwriting Agreement. (b) To exercise any right of cancellation or termination. (c) To arrange for the purchase by other persons (including yourselves or any other Underwriters) of any of the Securities not taken up by any defaulting Underwriter or by the other Underwriters as provided in Section 13 of the Underwriting Agreement. (d) To give notice on our behalf of your determination that the Underwriters shall purchase Additional Securities from the Company. (e) To consent to such other changes in or waivers of provisions of the Underwriting Agreement as in your judgment do not materially and adversely affect our rights and obligations. 4. METHOD OF OFFERING. We agree, jointly with you, to manage the underwriting and the public offering of the Securities and to take such action in connection therewith and in connection with the purchase, carrying and resale of the Securities, including without limitation the following, as you in your sole discretion deem appropriate or desirable: (a) To determine the time of the initial public offering of the Securities, the Underwriters' gross spread and whether the Underwriters shall purchase any Additional Securities and the amount, if any, of Additional Securities to be so purchased. (b) To make any changes in the terms of the offering. -3- 4 (c) To make changes in those who are to be Underwriters and in the respective numbers of the Securities to be purchased by them, provided that our original underwriting commitment shall not be changed without our consent. (d) To determine all matters relating to advertising and communications with dealers or others. (e) To reserve for sale and to sell to institutions or other retail purchasers, for the Underwriters account, such of Securities as the Underwriters may determine; provided, however, that such reservations and sales shall be made for the respective accounts of the several Underwriters as nearly as practicable in their respective underwriting proportions, except for such sales for the account of a particular Underwriter designated by such a purchaser. (f) To reserve for sale and to sell to dealers, for the Underwriters account, such of the Underwriters Securities as the Underwriters may determine; provided, however, that such dealers shall be members in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or foreign banks or dealers not eligible for membership in the NASD who (A) agree that they will make no sales of Securities within the United States, its territories or its possessions or to persons who are citizens thereof or resident therein and (B) agree that in making sales of such Securities outside the United States, its territories or possessions they will comply with the requirements of the NASD's Interpretation with Respect to Free-Riding and Withholding and with Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair Practice as though they were such a member and will comply with Section 25 of such Article as it applies to a non-member broker or dealer in a foreign country, and (C) may include any of the Underwriters. Such sales shall be made pursuant to Dealer Agreements substantially in the form set forth as Exhibit B hereto. (g) To apportion such sales to dealers among the Underwriters as nearly as practicable in the ratio that the Securities of each Underwriter so reserved bears to the total number of Securities of all Underwriters so reserved; provided, however, that if such ratio is to be revised by reasons of the release of any of the Securities for direct sale as hereinafter -4- 5 provided, sales may be apportioned by you from day to day on the basis of the ratio existing at the end of the preceding day. (h) To fix the concession to dealers and the reallowance to dealers and, after the initial public offering of the Securities to make changes in the concession and reallowance. (i) At any time with respect to unsold Securities retained by an Underwriter: (A) to reserve any such Securities for sale by the other Underwriter for the account of the Underwriters or (B) to purchase any such Securities which in the Representatives opinion are needed to enable you to make deliveries for the accounts of the several Underwriters pursuant to this agreement. Such purchases may be made at the public offering price, or at the Underwriters option, at such price less all or any part of the concession to dealers. We understand that you will advise us when the Securities are released for public offering and of the number of Securities sold or reserved for sale for our account. We shall retain for direct sale any Securities purchased by us and not so sold or reserved. Direct sales shall be made in accordance with the terms of offering set forth in the Prospectus. With your consent, we may obtain release from you for the direct sale of the Securities held by you for sale pursuant to subparagraphs (e) and (f) above but not sold and paid for. To the extent Securities so released had been reserved for sale to dealers, the number of Securities reserved for our account for sale to dealers shall be correspondingly reduced. We will advise you from time to time, at your request, of the number of Securities retained by us which remain unsold and of the number of Securities remaining unsold which were delivered to us pursuant to the last paragraph of this Section 4. If, prior to the termination of this agreement, you shall purchase or contract to purchase any of the Securities sold directly by us, in your discretion you may (i) sell for our account the Securities so purchased and debit or credit our account for the loss or profit resulting from such sale, (ii) charge our account with an amount equal to the concession to dealers with respect thereto and credit such amount against the cost thereof or (iii) require us to purchase such Securities at a price equal to the total cost of such purchase including commissions and transfer taxes on redelivery. Certificates for -5- 6 the Securities delivered on such repurchase need not be identical to the certificates for the Securities so purchased by you. 5. TRADING AUTHORIZATIONS. We authorize you, during the term of this agreement in your discretion: (a) To make purchases and sales of the Securities, in the open market or otherwise (in addition to purchases and sales made under the authority of Section 4), either for long or short account, on such terms and at such prices as you may determine. (b) In arranging for sales of the Securities, pursuant to Section 4, to over-allot, and to make purchases for the purpose of covering any over-allotment so made. All such purchases and sales and over-allotments shall be made for the respective accounts of the several Underwriters as nearly as practicable in their respective underwriting proportions; provided, however, that at no time shall our net commitment resulting from such purchases and sales, either for long or short account, or pursuant to such over-allotments, exceed 15% of our original underwriting commitment and provided that in determining our net commitment for short account there shall be subtracted the maximum number of Additional Securities which we are entitled to purchase. We agree to take up at cost on demand any Securities so purchased for our account and to deliver on demand any Securities so sold or so over-allotted for our account. Without limiting the generality of the foregoing, you may buy or take over for the respective accounts of the several Underwriters, all in the proportion and within the limits set forth, at the price at which reserved, any of the Securities reserved for sale by you but not sold and paid for, for such purposes as you may determine, including, but not limited to, the covering of over-allotments and short sales. We agree to maintain any records required of us pursuant to Rule 17a-2 under the Securities Exchange Act of 1934. 6. LIMITATION ON TRANSACTIONS BY UNDERWRITERS. Except as permitted by you, we will not during the term of this agreement bid for, purchase, sell or attempt to induce others to purchase or sell, directly or indirectly, any shares of Common Stock or Warrants other than (i) as provided in the Underwriting Agreement and this agreement, (ii) purchases from or sales to dealers of the Securities at the public offering price less all or any part of -6- 7 the reallowance to dealers or (iii) purchases or sales by us of any securities as broker on unsolicited orders for the account of others. We represent that we have not participated in any transaction prohibited by the preceding paragraph and that we have at all times complied with the provisions of Rule 10b-6 of the Commission applicable to this offering. We may, with your prior consent, make purchases of the Securities from and sales to other Underwriters at the public offering price, less at all or any part of the concession to dealers. We agree not to sell to any account over which we exercise discretionary authority, without the prior written consent of the customer, any of the Securities which we purchase and which are subject to the terms of this agreement. 7. DELIVERY AND PAYMENT. At 9:00 A.M., New York time on the Effective Date, we will deliver to you at your office a certified or official bank check, payable in New York Clearing House funds, to the order of Monitor Investment Group, Inc. or otherwise as you may direct, for either (a) an amount equal to the public offering price less the selling concession in respect of the Securities to be purchased by us or (b) an amount equal to the public offering price less the selling concession in respect of such of the Securities to be purchased by us as shall have been retained by or released to us for direct sale, as you shall direct. At 9:00 A.M., New York time, on the Option Closing Date, if any, we will make similar payment as you may direct for any Additional Securities to be purchased by us. You shall use such funds to make payment on our behalf to the Company of the purchase price for our Securities or Additional Securities, as the case may be. Any balance shall be held by you for our account. If you have not received our funds as requested, you may in your discretion make any such payment on our behalf and we will promptly deliver funds to you in the amount so requested. Any such payment by you will not relieve us from any of our obligations under this agreement or under the Underwriting Agreement. We authorize you, in carrying out the provisions of this agreement, in your discretion, to arrange loans for our account, to advance your funds for our account, charging current interest -7- 8 rates, and to hold or pledge as security therefor all or any part of the Securities which you may be holding for our account. Any lender is hereby authorized to accept your instructions with respect to such loans, and we authorize you to execute and deliver notes or other instruments in connection therewith. You shall promptly remit to us or credit to your account (i) the proceeds of any loan taken down on our behalf and (ii) upon payment to you for any Securities sold for our account, an amount equal either to the purchase price paid by us or the price received by you therefor, as you may determine. We authorize you to take delivery of certificates for the Securities, registered as you may direct in order to facilitate deliveries, and to deliver any Securities reserved for us against sales. You will deliver to us certificates for the unreserved Securities and certificates for the reserved but unsold Securities as soon as practicable after the termination of the provisions referred to in Section 10. Certificates for all other Securities which you then hold for our account shall be delivered to us upon termination of this agreement, or prior thereto in your discretion, and certificates for any Securities may at any time be delivered to us for carrying purposes only, subject to redelivery upon demand. If, upon termination of this agreement, an aggregate of not more than 10% of the Securities remains unsold, you may, in your discretion, sell such Securities at such prices as you may determine. 8. BLUE SKY QUALIFICATION. Upon request, you will inform us as to the jurisdictions in which you have been advised by counsel that the Securities have been registered or qualified for sale under the respective securities or Blue Sky laws, but you do not assume any responsibility or obligation as to our right to sell the Securities in any jurisdiction. 9. INDEMNIFICATION AND CERTAIN CLAIMS. Each Underwriter, including yourselves, agrees to indemnify and hold harmless each of the other Underwriters, and each person, if any, who controls any other Underwriter within the meaning of Section 15 of the Securities Act of 1933 and to reimburse their expenses, all to the extent, if any, and upon the terms that we agree to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and any person controlling the Company -8- 9 to reimburse their expenses, as set forth in the Underwriting Agreement. We agree that in respect of any matters connected with or action taken by you pursuant to this agreement you shall act only as agent of the Underwriters and you shall be under no liability to us in any such respect or in respect of the form of, or the statements contained in, or the validity of, any preliminary prospectus or the Registration Statement or Prospectus, or any amendment or supplement with respect thereto, or for any report or other filing made by you for us on our behalf under this agreement, except for want of good faith and for obligations expressly assumed by you herein and no obligation on you part will be implied or inferred from confirmation or acceptance of this agreement. We will pay our proportionate share (based on our underwriting proportion) of (a) all expenses incurred by you in investigating or defending against any claim or proceeding which is asserted or instituted by any party (including any governmental or regulatory body) other than an Underwriter based upon the claim that the Underwriters constitute an association, unincorporated business or other separate entity, or relating to the Registration Statement or Prospectus (or any amendment or supplement thereto) or any preliminary prospectus and (b) any liability incurred by you in respect of any such claim or proceeding, whether such liability shall be the result of a judgment or the result of any settlement agreed to by you, other than any such liability as to which you actually receive indemnity pursuant to the first paragraph of this Section 9 or indemnity or contribution pursuant to Section 7 of the Underwriting Agreement. Upon termination of this agreement, all authorizations, rights and obligations hereunder shall cease except (i) the mutual obligations to settle accounts hereunder, (ii) our obligations to pay any transfer taxes which may be assessed and paid on account of any sales hereunder for our account, (iii) our obligation with respect to purchases which may be made by you from time to time thereafter to cover any short position incurred under this agreement, (iv) our agreements contained in the first and third paragraphs of Section 9 hereof and (v) the obligations of any defaulting Underwriter, all of which shall continue until fully discharged. If any other Underwriter defaults in its obligations under this agreement we will assume our proportionate share (determined on the basis of the respective underwriting -9- 10 proportions of the non-defaulting Underwriters) of such obligations without relieving the defaulting Underwriter from liability. The accounts arising pursuant to this agreement shall be settled and paid as soon as practicable after termination, except that you may reserve such amount as you deem advisable to cover any additional contingent expenses. You are authorized at any time: (a) To make partial distributions of credit balances or call for the payment of debit balances. (b) To determine the amounts to be paid to or by us, which determination shall be final and conclusive. (c) As compensation for your services in connection with this agreement, to charge our account and pay to yourselves, when final accounting is made, an amount per common stock or Warrant to be determined by you (not to exceed 3% of the Underwriters' gross spread per Warrant) for each common stock or Warrant which we have agreed or shall become committed to purchase from the Company. (d) To charge our account with (i) all transfer taxes on sales made for our account and (ii) our underwriting proportion of all expenses (other than transfer taxes) incurred by you, as Representative of the several Underwriters, in connection with the transactions contemplated by this agreement. (e) To maintain any of our funds at any time with your general funds without accountability for interest. 10. MISCELLANEOUS. Nothing in this agreement shall constitute us partners with you and the obligations of ourselves and you are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended. Default by any Underwriter with respect to the Underwriting Agreement shall not release us from any of our obligations thereunder or hereunder. Your authority under this agreement and under the Underwriting Agreement may be exercised solely by you. -10- 11 Any notice from you to us shall be deemed to have been given if mailed, telegraphed or hand delivered, or telephoned and subsequently confirmed in writing, to our address stated in the Underwriting Agreement which we have furnished to you for transmittal to the Company. We confirm that we are a member in good standing of the NASD and that, in making sales of the Securities, we agree to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD' Rules of Fair Practice. We also confirm that our commitment to purchase Securities pursuant to the Underwriting Agreement will not result in a violation of Rule 15c3-1 under the Securities Exchange Act of 1934 or of any similar provisions of any applicable rules of any securities exchange to which we are subject or of any restriction imposed upon us by any such exchange or any governmental authority. This agreement shall be governed by and construed in accordance with the laws of the State of New York. This agreement is being executed by us and delivered to you in duplicate. Very truly yours, MEYERS POLLOCK ROBBINS, INC. By ---------------------------------- Authorized Signatory or Attorney-In-Fact Confirmed as of the date first above mentioned. MONITOR INVESTMENT GROUP, INC. As Representative of the Co-Managing Underwriters -11- 12 named in Schedule I By --------------------------- William F. Palla, President -12- EX-1.3 4 UNDERWRITERS WARRANTS 1 EXHIBIT 1.3 REPRESENTATIVE'S WARRANT 147,750 SHARES OF COMMON STOCK INNOVATIVE MEDICAL SERVICES NO. W-1 THIS CERTIFIES that, for value received, _________________, or its registered successors and assigns, is the owner of warrants (the "Warrants") to purchase from Innovative Medical Services, a corporation organized under the laws of the State of California (the "Company"), subject to the terms and conditions hereof, at the price (the "Exercise Price") of $4.40 per each share of Common Stock (the "Common Stock") or the "Securities" (as hereinafter defined) and subject to adjustments, as hereinafter provided, after the expiration of one year from _________________________, 1996 and before 5:00 P.M., New York, New York time, on ________________________, 2001 when the Warrants expire, up to 147,750 Shares of Common Stock, subject to adjustments, as hereinafter provided. The Representative's Warrants may not at any time during the life thereof be sold, assigned, pledged, hypothecated or transferred except to officers or partners of Monitor Investment Group, Inc. (or any corporate successors thereto), or to other Underwriters (as defined in the Underwriting Agreement dated ___________________, 1996 (the "Underwriting Agreement"). For purposes of this Representative's Warrant, the term "Common Stock" shall mean that class of capital stock of the Company designated common stock, $.01 par value, as constituted on the date hereof, and any other class of capital stock of the Company resulting from successive changes or reclassifications of the Common Stock. 1. EXERCISE OF THE REPRESENTATIVE'S WARRANTS. The Warrants evidenced hereby may be exercised by the registered holder hereof (in whole or in part, as to the number of Common Stock covered hereby), by the surrender of this Representative's Warrant, duly endorsed (unless endorsement is waived by the Company), at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at such holder's last address appearing on the books of the Company) and upon payment to 2 the Company by certified or official bank check or checks payable to the order of the Company of the Exercise Price of the Securities purchased. The Company agrees that the Securities so purchased shall be deemed to be issued to the registered holder hereof on the date on which this Representative's Warrant shall have been surrendered and payment made for such Securities as aforesaid; provided, however, that no such surrender and payment on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person entitled to receive the Securities as the record holder thereof on such date, but such surrender and payment shall be effective to constitute the person entitled to receive such Securities as the record holder thereof for all purposes immediately after the opening of business on the next succeeding day on which such stock transfer books are open. The certificate(s) for such Securities shall be delivered to the registered holder hereof within a reasonable time, not exceeding five days, after the Representative's Warrants evidenced hereby shall have been so exercised and a new Representative's Warrant evidencing the number of Warrants, if any, remaining unexercised shall also be issued to the registered holder within such time unless such Warrants shall have expired. 2. ADJUSTMENTS IN EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK AND PUBLIC WARRANTS. The Exercise Price for the Warrants, the number of shares of Common Stock shall be subject to adjustment from time to time on the same basis as provided in Article __ of the warrant agreement between the Company and American Securities Transfer, Inc., as warrant agent (the "Warrant Agreement"). The Warrant Agreement shall control all adjustments to the Exercise Price, the number of Shares or Warrants issuable upon exercise of the Representative's Warrants, the number of shares of Common Stock issuable upon exercise of the Warrants and the exercise price of the Warrants as if the Warrants were issued and outstanding from the date of the Representative's Warrant Agreement. The provisions of Article __ of the Representative's Warrant Agreement shall be construed so as to give the holders of the Representative's Warrants the same protection against dilution as is enjoyed by the public holders of the Company's Public Warrants to purchase shares of Common Stock. The Warrants, when and if issued, shall in all respects be subject to, and governed by, the provisions of the Warrant Agreement, except that the Warrants are not subject to redemption by the Company. -2- 3 3. FRACTIONAL COMMON STOCK OR WARRANTS. No certificates for fractional Common Stock or Public Warrants shall be issued upon the exercise of the Warrants, but in lieu thereof the Company shall, upon exercise in full of the Warrants, purchase out of funds legally available therefor any such fractional interest for an amount in cash equal to the current market value of such fractional interest calculated to the nearest cent, which value shall be, if the Common Stock or Warrant is traded on the National Association of Securities Dealers, National Market System, the last reported sale price, or, if the Common Stock or Common Stock is not listed on such system, the closing bid price of the Common Stock or Warrant in the over-the-counter market, in each such case on the most recent day within ten days prior to the date of such exercise for which such bid or sale prices shall have been so reported, or, if the Common Stock or Warrant is listed on a stock exchange registered with the Securities and Exchange Commission, the last reported sale price on such exchange of such day; and if there shall have been no sale on said day, then the computation shall be made on the basis of the last reported sale price on such exchange within ten days prior to such date. If there have been no reported bid prices, or reported sale prices, as the case may be, within such ten days, the current market value shall be fixed in a manner determined in good faith by the Company. 4. REGISTRATION RIGHTS. The Company is obligated to register the Securities, on the terms, and subject to the conditions, set forth in Section 11 of the Underwriting Agreement. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and covenants with the registered holder hereof as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of California, is duly qualified and in good standing under the laws of any foreign jurisdiction where the failure to be so qualified would have a material adverse effect on its ability to perform its obligations under the Representative's Warrants evidenced by this Representative's Warrant and it has full corporate power and authority to issue the Representative's Warrants and to carry out the provisions of the Representative's Warrants evidenced by this Representative's Warrant. -3- 4 (b) The issuance, execution and delivery of this Representative's Warrant has been duly authorized by all necessary corporate action on the part of the Company and each of the Representative's Warrants evidenced by this Representative's Warrant constitutes the valid and legally binding obligation of the Company, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by bankruptcy, insolvency, or other laws affecting generally the enforceability of creditors' rights, by general principles of equity and by limitations on the availability of equitable remedies. (c) Neither the execution and delivery of the Warrants evidenced by this Representative's Warrant by the Company, nor compliance by the Company with the provisions hereof, violates any provision of its Certificate of Incorporation or By-Laws, as amended, or any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or will result in any breach of the terms of or constitute a default under or result in the termination of or the creation of any lien pursuant to the terms of any agreement or instrument to which the Company is a party or by which it or any of its properties is bound. 6. COMPANY TO PROVIDE STOCK. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the Warrants will be duly authorized, validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue) to the registered holder thereof. The Company further covenants and agrees that during the period within which the Warrants and the Warrants may be exercised, the Company will at all times have authorized and reserved such number of shares of Common Stock as may be sufficient to permit the exercise of the Warrants. 7. REGISTERED HOLDERS. The registered holder of this Representative's Warrant shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Representative's Warrant shall not be entitled by -4- 5 virtue of ownership of this Representative's Warrant to any rights whatsoever as a shareholder of the Company. 8. TRANSFER. This Representative's Warrant and the Warrants evidence hereby may be transferred only as set forth herein. Any transfer of this Representative's Warrant and the Warrants evidenced hereby, in whole or in part, shall be effected upon surrender of this Representative's Warrant, duly endorsed (unless endorsement is waived by the Company), at the principal office or agency of the Company referred to in Section 1. If all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issues a new Representative's Warrant registered in the name of the appropriate transferee(s). If less than all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issue new Representative's Warrants, in each case in the appropriate number of Warrants, registered in the name of the registered holder hereof and the transferee(s), as applicable. Any Warrants issued upon any exercise of the Warrants and any shares of Common Stock issued upon any exercise of the Common Stock Warrants, respectively, may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless, in the opinion of counsel reasonably satisfactory to the Company, such transfer would not result in a violation of the Securities Act. Each taker and holder of this Representative's Warrant, the Warrants evidenced hereby, and the Common Stock issued upon exercise of the Warrants and any Warrants issued upon any exercise of the Warrants, respectively, by taking or holding the same, consents to and agrees to be bound by the provisions of this Section 8. 9. COMPANY TO PROVIDE REPORTS, ETC. While this Representative's Warrant remains outstanding, the Company will mail to the person in whose name this Representative's Warrant is registered copies of all reports and correspondence which the Company mails to its stockholders. 10. LOST REPRESENTATIVE'S WARRANT. If this Representative's Warrant shall be lost, stolen, mutilated or destroyed, the Company may on such terms as to indemnity or otherwise as the Company may in its discretion reasonably impose, issue to the registered holder a new Representative's Warrant of like denomination, tenor and date as the Representative's Warrant -5- 6 so lost, stolen, mutilated or destroyed. Any such new Representative's Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Representative's Warrant shall be at any time enforceable by anyone. 11. GOVERNING LAW. These Warrants shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements to be performed entirely within such State. Dated: , 1996 ----------------------- INNOVATIVE MEDICAL SERVICES By ---------------------------------- President -6- 7 TRANSFER OF WARRANTS For value received, hereby sells, assigns and transfers unto the right to purchase Shares, of Common Stock of INNOVATIVE MEDICAL SERVICES, a California corporation, which rights are represented by the within Warrants, and does hereby irrevocably constitute and appoint attorney to transfer said rights on the books of the within named Company, with full power of substitution in the premises. ------------------------------------ Dated: , 19 ------------------- -- In the Presence of - -------------------------------- 8 ELECTION TO SUBSCRIBE Date: , 19 --------------- -- To: INNOVATIVE MEDICAL SERVICES The undersigned hereby subscribes for Shares of Common Stock covered by the within Warrants and tenders payment herewith in the amount of $ in accordance with the terms thereof: Deliver Certificate(s) against Issue Certificates(s) counter for said Unit(s) by mail receipt -- -- TO: TO: - ----------------------------- ----------------------------- (Name) (Name) - ----------------------------- ----------------------------- (Taxpayer Identification No.) (Street and Number) - ----------------------------- ----------------------------- (Street and Number) (City) (State) - ----------------------------- (City) (State) and if said number of Securities shall not be all of such securities covered by the within Warrants, then new Warrants for the balance of the Warrants remaining shall be registered in the name of, and delivered as follows: Deliver Warrants against Issue remaining counter Warrants by mail receipt -- -- TO: TO: - ----------------------------- ----------------------------- 9 (Name) (Name) - ----------------------------- ----------------------------- (Taxpayer Identification No.) (Street and Number) - ----------------------------- ----------------------------- (Street and Number) (City) (State) - ----------------------------- (City) (State) EXHIBIT 1.03 -9- 10 EXHIBIT 1.04 EX-3.1 5 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF INNOVATIVE MEDICAL SERVICES Michael L. Krall and Dennis B. Atchley hereby certify that: 1. They are the President and Secretary, respectively, of Innovative Medical Services, a California corporation. 2. Article FOUR of the Articles of Incorporation of this corporation is amended to read as follows: FOUR: The corporation is authorized to issue two (2) classes of shares, to be designated respectively as "Common Shares" and "Preferred Shares". The total number of Common Shares the corporation is authorized to issue is Twenty Million (20,000,000) with no par value. The total number of preferred Shares the corporation is authorized to issue is Five Million (5,000,000) with no par value. Said preferred stock may subsequently receive such designation as may be deemed appropriate by the Board of Directors of the corporation, and the Board of Directors shall have the right to determine or alter the rights, preferences, privileges, and restrictions granted to, or imposed upon said preferred. shares;. Additionally, the Board of Directors shall be empowered to increase or decrease (but not below the number of shares of Common or preferred Shares then outstanding) the number of shares of any class of shares subsequent to the issue of shares of that class. The foregoing amendment to the Articles of Incorporation was duly approved by the Board of Directors of the corporation on April 17, 1996. The foregoing amendment to the Articles of Incorporation was duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code on April 17, 1996. The total number of Common Shares outstanding in the corporation is 1,000,000. The number of Common Shares voting in favor of these amendments equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%). We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: May 22, 1996 /s/ MICHAEL L. KRALL ------------------------------------ Michael L. Krall President, C.E.O. and Director Dated May 22, 1996 /s/ DENNIS B. ATCHLEY ------------------------------------ Dennis Atchley, Esquire Secretary 2 [LETTERHEAD OF STATE OF CALIFORNIA SECRETARY OF STATE'S OFFICE] CORPORATION DIVISION I, TONY MILLER, Acting Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this JUN 24 1994 ------------------ [SEAL OF THE STATE OF CALIFORNIA] /s/ Tony Miller Acting Secretary of State 3 CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF INNOVATIVE MEDICAL SERVICES Michael L. Krall and Dennis B. Atchley hereby certify that: 1. They are the President and Secretary,. respectively, of Innovative Medical Services, a California corporation. 2. Article FOUR of the Articles of Incorporation of this corporation is amended to read as follows: "The corporation is authorized to issue two (2) classes of shares, to be designated respectively as 'Common Shares' and 'Preferred Shares.' The total number of Common Shares the corporation is authorized to issue is Five Million (5,000,000) with no par value. The total number of Preferred Shares the corporation is authorized to issue is One Million (1,000,000) with no par value. Said Preferred stock may subsequently receive such designation as may be deemed appropriate by the Board of Directors of the corporation, and the Board of Directors shall have the right to determine or alter the rights, preferences, privileges, and restrictions granted to, or imposed upon said Preferred Shares. Additionally, the Board of Directors shall be empowered to increase or decrease (but not below the. number of shares of. Common or Preferred Shares then outstanding) the number of shares of any class of shares subsequent to the issue of shares of that class." 3. The foregoing amendment of the Articles of. Incorporation has been duly approved by the Board of Directors of the corporation. 4. The foregoing amendment of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of Common Shares outstanding in the corporation is 100,000. The number of Common Shares voting in favor of these amendments equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%). We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge Dated: June 9, 1994 /s/ Michael L Krall ------------------------------------ President C E 0 and Director Dated: June 9, 1994 /s/ Dennis Atchley, Esquire ------------------------------------ Secretary 4 [LETTERHEAD OF STATE OF CALIFORNIA SECRETARY OF STATE'S OFFICE] CORPORATION DIVISION I, MARCH FONG EU, Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this AUG 24 1992 ------------------ [SEAL OF THE STATE OF CALIFORNIA] /s/ March Fong Eu Secretary of State 5 ARTICLES OF INCORPORATION OF INNOVATIVE MEDICAL SERVICES The undersigned Incorporator hereby executes, acknowledges, and causes to be filed the following Articles of Incorporation for the purpose of farming a corporation under the General Corporation Law of the State of California. ONE: The name of this corporation is Innovative Medical Services TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: The name and address in the State of California of this corporation's initial agent for service of process is: Dennis B. Atchley, Esq. 3033 Fifth Avenue Suite 400 San Diego, CA 92103 FOUR: This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 100,000 shares. FIVE: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SIX: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code. IN WITNESS Whereof, the Incorporator has executed the foregoing Articles of Incorporation, on August 21, 1992. /s/ THOMAS E. SMITH (Jr.) - ------------------------- Incorporator 6 BYLAWS OF INNOVATIVE MEDICAL SERVICES ARTICLE I - OFFICES. PURPOSES AND POWERS Section 1 - Principal Office The Board of Directors of Innovative Medical Services (hereinafter "IMS" or the "Corporation") shall fix the location of the principal executive office of the Corporation at any place within or outside the State of California. If the principal executive office of IMS is located outside the State of California, and the Corporation maintains one or more offices within the State of California, the Board of Directors shall fix and designate one of said offices within the State of California as its principal business office in the State of California. Section 2 - Other Offices The Board of Directors may, at any time, establish branch or subordinate offices at any place or places where the Corporation is qualified to do business. Section 3 - purposes and Powers IMS shall have such purposes, and shall exercise such powers in furtherance of its purposes, as are now or may hereafter be set forth in the Articles of Incorporation of the Corporation. ARTICLE II - MEETINGS OF SHAREHOLDERS Section 1 - Place of Meetings Meetings of the shareholders of IMS shall be held at such place within or outside the State of California as is designated from time to time by the Board of Directors. In the absence of any such designation by the Board of Directors prior to notice being given pursuant to any such meetings, meetings of the shareholders shall be held at the principal executive office of the Corporation. Section 2 - Annual Meeting The annual meeting of the shareholders of IMS shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting of the shareholders of the Corporation, Directors shall be elected, and any other proper business of the Corporation may be transacted. Section 3 - Special Meetings A special meeting of the shareholders of IMS may be called at any time by the Board of Directors or by the Chairman of the Board, or by the President of the Corporation, or by one or more shareholders holding shares in the aggregate entitled to cast not less than five percent (5%) of the votes at that meeting. Section 4 - Notice of Special Meetings If a special meeting of the shareholders of IMS is called by any person or persons other than the Board of 1 7 Directors, the request for calling such meeting shall be made in writing, specifying the date and time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or unregistered or certified mail to the Chairman of the Board, the President; any Vice President or Vice Presidents; and the Secretary of the Corporation. Any Officers of the Corporation receiving such a request shall cause notice to be normally given to the shareholders of record entitled to vote at such meeting1 in accordance with the provisions of Section 5 and Section 6 of this Article II, that a meeting will be held on the date and at the time requested by the person or persons calling the meeting, such notice to be given to said shareholders not less than ten (10) days nor more than thirty (30) days after the receipt of such request by said Officers. If notice of such meeting is not given within thirty (30) days after the receipt of the request by the Chairman of the Board, the President, any Vice President or Vice Presidents, and the Secretary of the Corporation, then the person or persons entitled to call the meeting may give the notice directly to the shareholders entitled to vote at such meeting or may petition the. superior court of the county in which the principal executive office of IMS is maintained to order the giving of such notice by the Corporation. Nothing contained in this Section 4 shall be construed as limiting, fixing or affecting the date and time when an annual or special meeting of the shareholders called by an action of the Board of Directors may be held. Section 5 - Notice of Meetings of the Shareholders All notices of meetings of the shareholders of IMS shall be sent or otherwise given in accordance with this Section 5 of Article II to each shareholder entitled to vote at any such meeting not less than ten (10) nor more than sixty (60) days before the date of any such meeting. Such notices shall contain the place, date and hour of such meetings and, in the case of the annual meeting, those matters which the Board of Directors, at the time of the giving of such notice, intends to present for action by the shareholders, and, in the case of a special meeting, the general nature of the business to be transacted. The notice of any meeting at which Directors of the Corporation are to be elected shall include the names of the nominees for election intended at the time of the notice to be presented by the Board of Directors. If action is proposed to be taken at any meeting providing for the approval of a contract or transaction in which a Director of the Corporation has a direct or indirect financial interest, an amendment of the Articles of Incorporation, a reorganization of the Corporation, a voluntary dissolution of the Corporation, or a distribution pursuant to dissolution other than in accordance with the rights of outstanding preferred shares, if any, such notice shall also state the general nature of that proposal. Section 6 - Manner of Giving Notice and Affidavit of Notice Notice of any meeting of the shareholders of the IMS shall be given either personally or by first class mail, postage prepaid, addressed to the shareholders of record entitled to vote at any such meeting at the respective addresses of the shareholders appearing in the books of the Corporation or given by the shareholders to IMS for the purpose of giving such notice. If no such address appears in the books of the Corporation for a shareholder or is given by a shareholder, notice shall be deemed to have been given if sent to that shareholder by first class mail, postage prepaid, at the Corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given when such notice, postage prepaid, is deposited with or otherwise transferred to the United States Postal Service. If any notice addressed to a shareholder of IMS at the address of that shareholder appearing in the books of the Corporation is returned as undeliverable by the United States Postal Service, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder at the principal executive office of the Corporation for a period of one year from the date of giving of such notices or reports upon the written demand of said shareholder for the availability of any such notices or reports. An affidavit of the mailing or other means of giving any such notice of any meeting of the shareholders 2 8 shall be executed by the Secretary or Assistant Secretary of IMS or any transfer agent of the Corporation giving the notice, and shall be filed and maintained in the book of minutes of the Corporation. Section 7 - Quorum The presence in person or by proxy of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares entitled to vote at any meeting of the shareholders of the Corporation shall constitute a quorum for the transaction of business at any such meeting. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken, other than adjournment, is approved by at least a majority of the shares required to constitute a quorum. Section 8 - Adjourned Meeting Any meeting of the shareholders. of IMS whether annual. or *special/ and whether? or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at any such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such a meeting. When any meeting of the shareholders, either annual or special, is adjourned to another time or place, notice of the adjourned meeting need not be given if the time and place for the continuance of such meeting are announced at any such meeting at which such adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty five (45) days from the date set for the original meeting, in which case the Board of Directors of the Corporation shall set a new record date. Notice of any such adjourned meeting which shall have a new record date fixed shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of SectionE5 and Section 6 of this Article II. At any adjourned meeting, the shareholders of the Corporation may transact any business which might have been transacted at the original meeting provided that a quorum is present at such adjourned meeting. Section 9 - Voting The shareholders of IMS entitled to vote at any meeting of the shareholders shall be determined in accordance with the provisions of Section 12 of this Article II. Any vote of the shareholders may be by voice vote or by ballot; provided, however, that any election of Directors must be by ballot if demanded. by any shareholder before the voting has begun. On any matter other than the election of Directors, any shareholder may vote part of the shareholder's shares in favor of the proposal, part of said share against the proposal, and may refrain from voting any remaining shares, but if such shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of at least a simple majority of the shares attending or represented at any such meeting and entitled to vote on any matter shall be the act of the shareholders, unless. the vote of a greater percentage of voting shares is required by the Articles of Incorporation of the Corporation or by these Bylaws. Shareholders of non-voting shares, as may be issued at the direction of the Board of Directors of the 3 9 Corporation in accordance with federal and state securities laws, shall have no right to notice of, to attend, or to vote at said meetings, and language implementing this restriction shall be placed upon the certificates for any such non-voting shares of the Corporation. At a meeting of the shareholders at which Directors are to be elected shareholders shall be entitled to cumulate votes to the extent permitted under California law. Cumulative voting shall be permitted provided that any shareholder who desires to cumulate votes shall give notice of such shareholder's intention to cumulate votes prior to the commencement of the voting. If any one shareholder has given such notice, all shareholders entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which those shareholders' shares are entitled, or may distribute the shareholders' votes on the same principle among any or all of the candidates, as the shareholders deems fit. Each candidate for the Board of Directors shall be voted upon separately, and the candidates receiving the highest number of affirmative votes of the voting shares held by the shareholders, up to the number of Directors to be elected, shall be elected as Directors of the Corporation. Section 10 - Waiver of Notice or Consent By Absent Shareholders The transactions of any meeting of the shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice with a quorum present either in person or by proxy, if, either before or after the meeting, each person entitled to vote who was not present in person or by proxy signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes of any such meeting. Any shareholder may waive notice of a meeting either before, during or after any such meeting. Such waivers, consents or approvals shall be filed with the Corporate records or made a part of the minutes of the meeting. The waiver of notice or consent need not specify either the business to be transacted, actually transacted, or the purpose of any annual or special meeting of the shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 5 of this Article IT, the waiver of notice or consent shall state the general nature of the action, proposal or proposals. Attendance of a shareholder at a meeting, either in person or by proxy, shall also constitute a waiver of notice of that. meeting and presence at such meeting; except when the shareholder objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any tight to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at such meeting. Section. 11 - Action By Written Consent Without a Meeting Any action which may be taken at any annual or special meeting of the shareholders of IMS may be taken without a meeting and without prior notice if a consent in writing setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of the election of Directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that a Director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the Directors by written consent of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares entitled to vote. All such consents shall be filed with the Secretary of IMS and shall be maintained in the Corporate records. 4 10 Any shareholder, shareholder's proxy holder, or transferee of shares, who gives a written consent may revoke the consent by notifying the Secretary of IMS in writing before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary, but may not do so thereafter. If the consents of all shareholders entitled to vote have been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary shall give prompt notice of any Corporate action approved by the shareholders without a meeting to all shareholders of record as of the date of such action. This notice shall be given in the manner specified in Section 6 of this Article II. In the case of the approval of any proposal mentioned in the second paragraph of Section 5 of this Article II, such notice shall be given at least ten (10) days before the consummation of any such action authorized by that approval. Section 12 - Record Date for Notice, Voting and Giving Consents For purposes of determining the shareholders entitled to notice of any meeting, to vote, or to give consent to Corporate action without a meeting, the Board of Directors may fix, in advance, a record date which shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice, to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as may be provided for by the laws of the State of California. If the Board of Directors does not so fix a record date, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day immediately preceding the day on which such notice is given or, if notice is waived, at the close of business on the business day immediately preceding the day on which the meeting is held. The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting when no prior action by the Board of Directors has been taken shall be the day on which the first written consent is given, or when prior action of the Board of Directors has been taken, shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 13 - Proxies Every person entitled to vote for Directors or on any other matter shall have the right to do so either in person or through one agent authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed when a shareholder's signature is manually placed on the proxy by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in force and effect unless revoked by the shareholder executing it before its next exercise by a written notice delivered to IMS stating that the proxy has been revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the shareholder who executed such proxy. Any such proxy shall be deemed terminated and void if written notice of the death or incapacity of the maker of the proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided for in any such proxy. Section 14 - Inspectors of Election Before any meeting of the-1/2shareholders of IMS, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at any such meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. 5 11 The number of inspectors shall be either one (1) or three (3).If inspectors are appointed at a meeting at the request of one or more shareholders or proxies, the holders or holders of any percentage exceeding fifty percent (50%) of the outstanding shares entitled to vote or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as an inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or shareholder's proxy shall, appoint a person to fill that vacancy. The inspectors of election shall: (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of the quorum and the authenticity, validity and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes and consents; (e) determine when the polls shall close; (f) determine the results of any votes; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III - CAPITAL STOCK. DIVIDENDS AND RIGHTS OF SHAREHOLDERS Section 1 - Common Shares and Other Classes of capital Stock The holders of shares of voting common stock of IMS are entitled to one vote per share on each matter to be decided by the shareholders. However, the Board of Directors is authorized to take, or order taken, any action required to increase the authorized issue of shares and the classes and. types of capital stock and other securities of the Corporation, including common stock and preferred stock, without first seeking the approval of the holders of shares of voting common stock or the holders of any other securities of IMS. Section 2 - Issuance of Securities Without Shareholder Approval The Board of Directors is empowered to authorize and issue corporate stock of various amounts, classes and types, and also to authorize the sale or issuance of warrants, options or other rights pursuant to such corporate stock, for valid purposes of IMS or its business or expansion without first obtaining the approval of the shareholders to the extent permitted under California law. Section 3 - Dividends and Distributions The declaration and payment of dividends or distributions, if any, by IMS on its common stock or any other securities, if any, shall be at the sole discretion of the Board of Directors. Any such declaration or payment of any cash or capital stock dividends or distributions by the Board of Directors will depend upon, among other things, the Corporation's earnings, capital requirements, the financial 6 12 position of the Corporation, general economic conditions, and other relevant factors. Holders of IMS' shares are entitled to receive any dividends or distributions which the Board of Directors may declare from time to time out of funds legally available for that purpose, if any, on a pro-rata basis. For the purposes of this provision, the term "pro-rata basis" means that the holders of shares of common stock shall be entitled to equal dividends and distributions with respect to the other holders of shares of common stock; and the holders of any other class or type of stock eligible for the payment of dividends or distributions shall be entitled to equal dividends and distributions with respect to the other holders of such any other class or type of stock eligible for the payment of dividends or distributions in accordance with the respective terms and conditions established by the Board of Directors for the payment of such dividends or distributions, as, and if declared by the Board of Directors from funds legally available for such dividends. The Board of Directors may, in its sole discretion, decide not to declare any dividends or distributions on said shares of common stock or any other class or type of stock eligible for the payment of dividends or distributions until such time as IMS is fully established and profitable and has an excess of retained earnings sufficient for anticipated corporate expansion and development activities. Section 4 - Certain Rights of Shareholders The holders of shares and other securities of IMS shall have no formal preemptive right to invest in new issues of shares or other securities, but the Corporation may offer any such new issues to shareholders of record prior to offering them to outside investors to the extent permitted by the laws of the State of California or any other applicable laws or statutes. Shares of common stock in IMS are not callable nor are they subject to redemption, and said shares will convey no special rights or privileges upon the holders thereof. ARTICLE IV - DIRECTORS Section 1 - Powers Subject to the provisions of the laws of the State of California and any limitation in the Articles of Incorporation of IMS and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed by, and all Corporate powers shall be exercised by or under the direction of, the Board of Directors of IMS. The Board of Directors may delegate the day-to-day operation of the Corporation to the Officers of IMS, to a management company, or to other persons, provided that the business of IMS shall be managed and all Corporate powers shall be exercised under the ultimate direction and discretion of the Board of Directors. The Board of Directors shall elect a Chairman of the Board of Directors, whose term as Chairman shall continue until the next election of Directors, until resignation or removal, or until a replacement Chairman is elected by the assenting vote of the majority of the Directors. Each Director shall comply with any written conflict of interest policy which is adopted by IMS pursuant to a resolution of the Board of Directors, if any. Section 2 - Number and Qualification of Directors The authorized number of Directors of IMS shall not be less than one (1) unless changed by amendment of the Articles of Incorporation or by a duly adopted Bylaw amending this Section 2 of Article IV. The exact number of Directors shall be fixed, and may from time to time be changed, by the Board of Directors without further amendment of these Bylaws. Directors need not be shareholders of IMS or residents of the State of California. Section 3 - Election and Term of Office of Directors Directors of IMS shall be elected at each annual meeting of the shareholders and shall hold office until the 7 13 next annual meeting of the shareholders. Each Director, including a Director elected to till a vacancy, shall hold office until the expiration of. the term for which elected and until a successor has been elected and qualified. Section 4 - Vacancies Vacancies in the Board of Directors may be filled by the assenting vote of a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, except that a vacancy created by the removal of a Director by the vote or written consent of the shareholders or by court order may be filled only by the vote or consent of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote at a duly held meeting at which a quorum is present. Each Director so elected shall hold office until the next annual meeting of the shareholders of IMS and until a successor has been elected. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of the death, resignation or removal of any Director, or if the Board of Directors, by resolution, declares vacant the office of a Director who has been declared unsound of mind by order of court, or if the authorized number of Directors is increased, or if the shareholders fail, at any meeting of the shareholders at which any Director or Directors are elected, to elect the number of Directors to be voted for at any such meeting. The shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, but any such election by written consent other than to fill a vacancy created by removal shall require the consent of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote. Any Director may resign effective upon the giving of written notice to the Chairman of the Board of Directors, or to the President or Secretary of the Corporation, unless such notice specifies a later date and time for such resignation to become effective. If the resignation of a Director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director's term of office expires Section 5 - Removal of Directors Any Director may be removed from office, with or without cause, at a meeting called expressly for that purpose, by the vote or written consent of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote. Section 6 - Annual Meeting Immediately following each annual meeting of the shareholders, the Board of Directors shall hold a regular meeting to provide for any election of Officers, and the transaction of any other corporate business. No notice of this meeting shall be required. Section 7 - Place of Meetings and Meetings By telephone Regular and special meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated in the notice of the meeting, or, if not stated in the notice or there is no notice, designated in these Bylaws or from time to time by resolution of the Board of Directors. In the absence of such designation, regular meetings shall be held at the principal executive office of IMS. Any meeting of the Board of Directors, either regular or special, may be held by conference telephone or similar communication equipment, so long as all Directors participating can hear one another, and all such Directors shall be deemed to be present in person at such meeting. Section 8 - Other Regular Meetings 8 14 Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice so long as the Board of Directors has fixed a time for such regular meetings. Meetings of the Board of Directors shall be held as often as necessary but not less than annually. Section 9 - Special Meetings and Notices Thereof Special meetings of the Board of Directors for any purpose of purposes may be called at any time by the Chairman of the Board of Directors, by the President, or by any Director of IMS. Notice of the date, time and place of any such meeting shall be delivered personally or sent by first class mail, postage prepaid, addressed to each Director at that Director's address as it is shown on the records of IMS. In case such notice is mailed, it shall be deposited in the United States mail at least ten (10) days prior to the date of the holding of any such meeting. In case such notice shall be delivered personally, it shall be delivered at least seventy two (72) hours prior to the date and time of the holding of any such meeting. Any such notice need not specify the purpose of the meeting nor the place of the meeting if such meeting is to be held at the principal executive office of IMS. Section 10 - Quorum and Assent of Directors A majority of the authorized number of Directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 12 of this Article IV. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors. All such acts or decisions shall be deemed to have been assented to by all of the Directors of IMS unless any Director shall state his or her dissension or disapproval of any such act or decision at and during any such meeting. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 11 Waiver of Notice The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though made at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the Corporate records or made a part of the minutes of the meeting. Notice of a meeting need not be, or have been, given to any Director who attends the meeting without protesting before or at its commencement the lack of notice to that Director. Section 12 - Adjournment A majority of the Directors present, whether or not constituting quorum, may adjourn any meeting to another time and place. Section 13 - Notice of Adjournment Notice of the date, time and place of holding an adjourned meeting of the Board of Directors need not be 9 15 given to any Director, unless the meeting is adjourned for more than twenty four (24) hours, in which case notice of the date, time and place of such adjourned meeting shall be given prior to such meeting in accordance with the provisions of Section 9 and Section 11 of this Article IV to any Directors who were not present at the time of adjournment of the adjourned meeting. Section 14 - Action Without Meeting Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if a simple majority of the Board of Directors shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a majority vote of the Board of Directors. Such written consent or consents shall be filed with the Secretary of IMS and shall be maintained in the Corporate records. Section 15 - Fees and Compensation of Directors The Directors of IMS will not receive regular salaries or wages for acting in their capacities as such, but may be compensated for time spent and expenses actually incurred in the performance of their duties as Directors. However, Directors and members of committees may receive such compensation, if any, for their services, and such reimbursements of expenses, as may be fixed or determined by an affirmative vote of a simple majority of the Board of Directors. This Section 15 shall not be construed to preclude any Director from serving the Corporation &5 an Officer, employee, agent or otherwise, and from receiving compensation of any kind, including salary or wages, for those services. ARTICLE V COMMITTEES Section 1 - Committees of Directors Committees of Directors are of two kinds, those having legal authority to act for IMS, and advisory committees. Except as otherwise specifically provided: in these Bylaws; all committees of Directors shall meet as often as necessary, but at least annually. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate one or more committees as having legal authority to act for the Corporation or as advisory committees, and all such committees shall serve at the pleasure of, and for a duration subject to, the sole discretion of the Board of Directors, and may be dissolved and terminated at any time without notice or cause by a resolution of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent member at any meeting of the committee. Any committee having legal authority to act for IMS, to the extent provided for in the resolution of the Board of Directors, shall have the full authority of the Board of Directors except with respect to: (a) the approval of any action which, by law or statute, also requires the approval of the shareholders or the approval of the outstanding shares; (b) the filling of vacancies of the Board of Directors or of any committee thereof; 10 16 (c) the fixing of compensation of the Directors for serving on the Board of Directors or of any committee thereof; (d) the amendment or repeal of Bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of Directors; (f) declaring a distribution, except as may be directed by the Board of Directors; or (g) the appointment of any other committee of the Board of Directors or the appointment of members of those committees. Section 2 - Meetings and Actions of Committees with Authority Meetings and actions of committees having legal authority to act shall be governed by, and held and taken in compliance with the provisions of Section 7, Section 8, Section 10, Section 11, Section 12, Section 13 and Section 14 of Article IV of these Bylaws. These Sections of Article IV shall be interpreted with such changes in the context of these Sections as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of the regular meetings of the committees may be determined either by a resolution of the Board of Directors or by a resolution of the committee, and that all special meetings of the committees shall be called by a resolution of the Board of Directors and notice for any such special meetings shall be given to all alternate members of such committees, who shall have the right to attend all meetings of the committees which they are respectively alternate members of. The Board of Directors may adopt rules for the governing of any committee not inconsistent with the provisions of these Bylaws. Section 3 - Advisory Committees The Board of Directors may appoint one or more advisory committees. Advisory committee membership may consist of Directors only or of both Directors and non-directors, or of non-directors only, and may include non-voting members and alternate members. The chairmen and members of advisory committees shall be appointed by and serve at the pleasure and sole discretion of the Board of Directors of IMS, and all such advisory committees may be dissolved and terminated without prior notice and without cause by a resolution of the Board of Directors. The chairmen and members of advisory committees shall receive such compensation, if any, as may be established by a resolution of the Board of Directors. ARTICLE VI - OFFICERS Section 1 - Officers The Officers of IMS shall include a President, a Treasurer, and a Secretary. The Board of Directors may also appoint a Vice President or Vice Presidents of the Corporation. The Board of Directors may also appoint Assistant Secretaries and other Officers in accordance with the provisions of Section 2 of this Article VI. To the extent provided for by the laws of the State of California, any number of offices may be held by the same person. 11 17 The salaries and other compensation of the Officers of IMS shall be fixed by the Board of Directors, and the Board of Directors may require any Officer to give security for the faithful performance of his or her duties, either by contract, agreement, bond, or other such instrument of security. Section 2 - Appointment of Officers The Officers of IMS, except such Officers as may be appointed in accordance with Section 3 or Section 5 of this Article VI, shall be appointed by the Board of Directors, and each shall serve at the pleasure of, and for a duration determined at the sole discretion of, the Board of Directors, subject to the rights, if any, of an Officer employed under an employment agreement. When authorized by the Board of Directors, any Officer may be appointed for a specified term under an employment agreement. Section 3 - Removal and Resignation of Officers Subject to the rights of an Officer pursuant to an employment agreement, if any, any Officer appointed by the Board of Directors may be removed from office at any time by the Board of Directors, with or without cause or prior notice. Any Officer not appointed by the Board of Directors may be removed at any time by the Officer who appointed that Officer or by the Board of Directors, with or without cause or prior notice. When authorized by the Board of Directors, any Officer may be appointed for a specified term under an employment agreement. Notwithstanding that an Officer is so appointed, any such Officer may be removed from office at any time pursuant to the provisions of this Section 4, and any such Officer shall have no claim against IMS on account of such removal other than for such monetary compensation as the Officer may be entitled to under the terms of an employment agreement, if any. Any Officer may resign at any time by giving written notice to either the President or Secretary of IMS. Any resignation shall take effect upon receipt or at any later date and time specified in that notice, and unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of IMS pursuant to any contract or agreement, including an employment agreement, to which the Officer is a party. Section 4 - Subordinate Officers The Board of Directors may appoint, and may empower the President of IMS to appoint, such other Officers as the business and management of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided for in these Bylaws or as the Board of Directors may from time to time determine. Section 5 - Vacancies in Offices A vacancy in any office because of death, disability, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. Section 6 - Chairman of the Board of Directors The Chairman of the Board of Directors shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be assigned to him or her from time to time by the Board of Directors or as are set forth in these Bylaws. In the absence of the Chairman of the Board of Directors, the Directors shall appoint one of themselves to preside as Acting Chairman over any such meeting from which the Chairman of the Board of Directors is absent. 12 18 Section 7 - Chief Executive Officer and President Subject to such supervisory powers as may be given by the Board of Directors of IMS to the Chairman of the Board of Directors, if any, the President shall, subject to the control of the Board of Directors, share the general supervision, direction and control of the business and of the Officers of IMS. The President, who may also be called the Chief Executive Officer, shall preside at all meetings of the shareholders of IMS and shall have the general powers and perform the duties of management usually vested in the offices of chief executive officer and president of a corporation, and shall have such other powers and perform such other duties as may be conferred by the Board of Directors or by these Bylaws. Two persons may serve as the Chief Executive Officer and President, or one person may serve in both capacities. Section 8 - Vice Presidents In the absence or disability of the President, the Vice President or Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all of the duties of the. President, and when so *acting, shall have all of the powers of, perform alt of the duties of, and be subject to all of the restrictions upon, the President. The Vice President, or Vice Presidents, shall have such other powers and perform such other duties as from time to time may be conferred by the Board of Directors, by the Chairman of the Board of Directors, by the President, and by these Bylaws. Section 9 - Treasurer The Treasurer of IMS, who may also be known as the Chief Financial Officer, shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the cash and other negotiable instruments, and of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. These books and records of accounts shall be available at all reasonable times for inspection by any Director or the President of IMS and as is further provided in Article VII of these Bylaws. The Treasurer shall deposit, or cause to be deposited, all moneys and other valuables in the name of IMS with such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of IMS as may be ordered by the Board of Directors, shall render to the Board of the Directors and the President of IMS, whenever requested, an account of all of his or her transactions as Treasurer, and shall have such other powers and perform such other duties as may be conferred by the Board of Directors or these Bylaws. Section 10 - Secretary The Secretary of IMS shall keep, or cause to be kept, at the principal executive office of IMS or at such. other place as the Board of Directors may direct, a book of minutes of all meetings and actions of the Board of Directors, of committees of Directors, and of meetings and actions of the shareholders, with the time and place of holding, whether such meetings were regular or special. In the case of special meetings, the book of minutes shall also denote how such meeting was authorized, the notice given, the names of those present at meetings of the Board of Directors or committees of Directors, the number of shares present or represented at meetings of the shareholders, and a summary of all proceedings, including actions taken by resolution, waiver, consent or approval. 13 19 The Secretary shall also keep, or cause to be kept, at the principal executive office of IMS or at the office of the Corporation's transfer agent or registrar, as determined by a resolution of the Board of Directors, a share register. If the original share register is not kept at the principal executive office of the Corporation, a duplicate share register shall be maintained by the Secretary at that location. This share register, whether original or duplicate, shall show the names and addresses of all shareholders, the number and classes of shares held by each shareholder, the number and date of certificates issues for the same, and the number and cancellation date of every certificate surrendered or otherwise canceled. The Secretary shall give, or cause to be given, notices of all meetings of the shareholders and meetings of the Board of Directors for which notice is required to be given by law or by these Bylaws, shall keep the seal of the Corporation in safe custody should one be adopted, and shall have such other powers and perform such other duties as may be conferred by the Board of Directors or these Bylaws. Section 11 - Reimbursement of IMS Any payments made to an Officer or Director of IMS which shall be made without the expressed approval of the Board of Directors and which shall be disallowed in whole or in part by the Internal Revenue Service, shall be reimbursed by such Officer to IMS to the full extent of such disallowance, to the extent required by the Board of Directors in its sole discretion. It is the duty of the Board of Directors to enforce the reimbursement of any such amount disallowed. At the sole discretion of the Board of Directors, proportionate amounts may be withheld from the Officer's or Director's future compensation payments until the amount owed has been recovered. ARTICLE VII - INDEMNIFICATION Section 1 - Agents, Proceeding and Expenses For the purposes of these Bylaws, ""agent" means any person who is or was a Director, Officer, employee or appointee of IMS, or is or was serving at the request of the Corporation as a director, officer, employee or appointee of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise. "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and '1expenses' includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(c) of Article VII. Section 2 - Actions Other Than By IMS Any indemnification as provided for in this Article VII is intended to be afforded to those persons qualified for such indemnification to the maximum extent permitted by federal law or the laws of the State of California. IMS shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding, other than an action by or on behalf of the Corporation to procure a judgment in its favor, by reason of the fact that such person is or was an agent of IMS, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, if such person had no reasonable cause to believe that his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, in itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of IMS or that the 14 20 person had reasonable cause to believe that his or her conduct was unlawful. Section 3 - Actions. By IMS IMS shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or on behalf of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of IMS. Such indemnification shall be against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner which such person believed to be in the best interests of IMS and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No; indemnification shall be made under this Section 3 in respect to any claim issue or matter as to which such person shall have been adjudged to be liable to IMS in the performance of such person's duty to the Corporation, unless and only to the extent that the court in which such proceeding is or was pending shall determine that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine. Section 4 - Successful Defense By Agent To the extent that an agent of IMS has been successful on the merits in defense of any proceeding referred to in Section 2 or Section 3 of this Article VII, or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 5 - Required Approval Except as provided in Section 4 of this Article VII, any indemnification under this Article VII shall be made by IMS only if authorized in the specific case upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Section 2 and Section 3 of this Article VII by: (a) approval by the affirmative vote of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote at a duly held meeting at which a quorum is present or by the written consent of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote ; or (b) a simple majority vote of a quorum of the Board of Directors; or (c) the court in which such proceeding is or was pending, upon application made by IMS or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the Corporation. Section 6 - Advance of Expenses Expenses incurred in defending any proceeding may be advanced by IMS prior to the final disposition of such proceeding upon receipt of an agreement by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article VII. Section 7 - Other Contractual Rights Nothing contained in this Article VII shall affect any right to indemnification to which any person may be entitled pursuant to contractual agreement with the Corporation. 15 21 Section 8 - Limitations No indemnification or advance shall be made under this Article VII, except as provided in Section 4 or Section 5(c), in any circumstances where it appears that it would be inconsistent with a provision of the Articles of Incorporation, a resolution of the shareholders, or an agreement which prohibits or otherwise limits indemnification and which was in effect at the time of the occurrence of the alleged cause of action asserted in the proceeding with respect to which the expenses were incurred or other amounts were paid; or with any condition expressly imposed by a court in approving a settlement. Section 9 - Insurance The Board of Directors of IMS may require the Corporation to purchase and maintain liability insurance on behalf of any agent of IMS who the Board of Directors may designate. If so required by the Board of Directors, said insurance shall insure any such agent of IMS against any liability asserted against or incurred by the agent in his or her capacity as an agent or arising out of the agent's status as such, whether or not the Corporation would have the power to indemnify the agent against such liability under the provisions of this Article VII. Section 10 - Fiduciaries of Corporate Employee Benefit Plan This Article VII does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person also may be an agent of IMS as defined in Section 1 of this Article VII. Nothing contained in this Article VII shall limit any right to indemnification to which such a trustee, investment manager or other fiduciary may be entitled by contract or otherwise to the extent permitted by applicable law. ARTICLE VIII - RECORDS AND REPORTS Section 1 - Maintenance and Inspection of Share Register IMS shall keep at its principal executive office, *or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the Corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the Corporation or, should IMS become a public corporation as that term is defined in the Securities Act of 1933, as amended, by a shareholder or shareholders who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission, shall have the absolute right to do either or both of the following: (a) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours upon five (5) days prior written demand delivered to, and received by, the Corporation; and (b) obtain from the transfer agent of IMS, upon written demand, receipt thereof, and upon tendering such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of Directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of an available record date specified by the shareholder subsequent to the date of such demand. This list shall be made available to any such shareholder by the Secretary of IMS, its registrar, or its 16 22 transfer agent on or before the later of five (5) business days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. Any inspection and copying under this Section 1 must be made in person by the shareholder or proxy holder. Pursuant to this Section 1, and for any other valid purpose either set forth in these Bylaws or not so set forth, no such list of shareholders shall be provided to any such shareholder, nor shall any such shareholder or proxy inspect any record of shareholders, unless any such shareholder shall duly execute an acceptable confidentiality and non-disclosure agreement pursuant to the possession and use of any such list of shareholders and shall further attest to the validity of purpose and intent for which any such shareholder shall demand any such list of shareholders, and further shall indemnify IMS against any claims arising from any such shareholder's possession or use of any such list of shareholders. Section 2 - Maintenance and Inspection of the Bylaws IMS shall keep at its principal executive office, or if its principal. executive officeEis not in the State of California,. at its principal business office within the State of California, if any, the original or a copy of these Bylaws as amended to date, which shall be available for inspection by the shareholders at all reasonable times during office hours upon prior written notice by any such shareholders to IMS of at least one (1) day. If the principal executive office of IMS is outside the State of California, and the Corporation has no principal business office in the State of California, the Secretary shall, upon written request of any shareholder, furnish to that shareholder a copy of these Bylaws as amended to date. Shareholders shall be entitled to receive one such copy of these Bylaws free of charge, and shall pay reasonable copying, shipping and handling costs associated with any additional copies of these Bylaws which they may request. Section 3 - Maintenance and Inspection of Other Records The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places as may be designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of IMS. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be available for inspection upon the written demand of any shareholder or proxy holder, at any reasonable time during usual business hours, for a purpose reasonably related to the shareholder's interests as a shareholder or as the holder of a proxy. The inspection must be made in person by the shareholder or proxy holder, and shall include the right to copy and make extracts. However, no shareholder's or proxy holder's right to inspect, make extracts, and copy shall extend to any material, whether written or in any other form, which has been designated by any Officer or Director of IMS as proprietary or confidential with respect to the business of the Corporation. IMS may charge any such shareholder or proxy holder reasonable fees associated with such copying. Section 4 - Inspection By Directors Every Director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of IMS. This inspection by a Director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents with the exception of documents which have been designated by the Board of Directors as confidential or proprietary with respect to the business of IMS. 17 23 Section 5 - Annual Report to Shareholders The Board of Directors may resolve to provide shareholders with annual reports concerning the operations and performance of IMS in the previous fiscal year, or such annual reports shall be automatically provided to shareholders if required by law or pursuant to the effective registration of any securities offering of IMS as provided for by the Securities Act of 1933, or any regulations promulgated thereunder, or the securities laws of any state in which IMS offers and sells securities. Such annual reports shall include financial statements including a balance sheet, an income statement, a cash flow statement and a statement of shareholders' equity, and said financial statements shall be audited by an independent certified public accountant if so required by applicable law or regulation or if IMS shall have more than two hundred (200) shareholders, and said annual report shall also include a summary description of any major business or other events, activities, occurrences or results affecting the condition of IMS during such previous fiscal year. Section 6 - Other Reports to Shareholders The Board of Directors may resolve to provide shareholders with quarterly reports concerning the operations and performance of IMS, or such quarterly reports shall be automatically provided to shareholders if required by law or pursuant to the effective registration of any securities offering of IMS as provided for by the Securities Act of 1933, as amended, or any regulations promulgated thereunder, or the securities laws of any state in which the Corporation shall offer and sell its securities. Such quarterly reports shall include unaudited financial statements including a balance sheet, an income statement, a cash flaw statement and a statement of shareholders' equity, and said quarterly reports may also include a summary description of any major business or other events, activities, occurrences or results affecting the condition of IMS during the fiscal quarter to which such report pertains. Section 7 - Financial Statements Any financial statements of IMS may include a balance sheet, an income statement, a cash flow statement and a statement of shareholders' equity, including any accompanying notes thereto, and such. financial statements may reflect the Corporation's. financial performance on a quarterly basis for the fiscal year or may reflect the Corporations performance on an annual basis for the fiscal year. At the discretion of the Board of Directors, and pursuant to any applicable laws of the State of California or pursuant to the effective registration of any securities offering of IMS as provided for by the Securities Act of 1933, as amended, or any regulations promulgated thereunder, or the securities laws of any state in which the Corporation shall offer and sell its securities, such financial statements may be prepared by personnel of the Corporation or may be prepared by an independent certified public accountant. A copy of any such financial statement of IMS shall be kept on file in the principal executive office of the Corporation for twelve (12) months after the publication of such statement. Each such statement shall be available for inspection by any shareholder of record during normal business hours for the duration of such twelve (12) month period or, alternately, at the discretion of the Treasurer of IMS, a copy of any such statement may be mailed, postage prepaid, to any such shareholder. Any shareholder holding at least five percent (S%) of the Outstanding shares of any class of stock in IMS may request and receive a copy of the most recent financial statement of the Corporation. Any such request must be made in writing, signed by the shareholder, and delivered to the Treasurer of the Corporation. Such request may be for the most recent annual financial statement of the Corporation or may be for the 18 24 financial statement reflecting most recently concluded fiscal quarter of any current fiscal year, if such quarterly financial statement was prepared. Upon the receipt of any such request, and if the requested financial statement has been prepared, the Treasurer shall mail a copy of the applicable statement, postage prepaid, to the person making the request within thirty (30) days after the receipt of any such request. Should the requested financial statement not have been prepared, the Treasurer shall mail a notice to that effect to the shareholder making such request. Any such shareholder shall be entitled to one copy of any such financial statement free of charge. IMS may charge any such shareholder reasonable fees associated with the copying, postage and handling of any additional copies requested. If IMS has not yet sent the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or shareholders making such written request within thirty (30) days after the request or within ten (10) days after its publication, whichever is later. Any financial statements referred to in this Section 6 which are mailed or otherwise given to any shareholder pursuant to a written request for such information, and any such statements which are maintained at the principal executive office of the Corporation or at any other office of the Corporation for the purpose of inspection and copying by the shareholders of IMS, shall be accompanied by the report, if any, of any independent accountants engaged by IMS or a letter from an authorized Officer of IMS that the financial statements were prepared without an audit from the books and records of the Corporation. Section 8 - Reports. Forms and Documents IMS shall file any required annual or other reports with the Secretary of State, Division of Corporations of the State of California, on any forms, and to include any required fees, prescribed therefor, and shall include in any such reports any information required pursuant to the correct and complete filing of any such reports. IMS shall also file any reports, forms or other documents which may be required for the continuation of the Corporation and its business, including any such reports, forms or documents which may be required to be filed with the Securities and Exchange Commission or any state securities commission or other state or federal agency. ARTICLE IX - GENERAL CORPORATE MATTERS Section 1 - Amendment of the Articles of Incorporation The Articles of Incorporation of IMS may be amended by any of the means set forth in this Section 1 so long as .such. amendment is not contrary to California law. Any amendment of the Articles of Incorporation, including increasing the number or classes of shares of stock or other securities of the corporation authorized therein, may be proposed to the Board of Directors by the holders of any percentage exceeding five percent (5%) of the outstanding shares of IMS entitled to vote, and must then be approved by the Directors of the corporation, and must then be approved by the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote. Alternately, any such amendment, including increasing the number or classes of shares of stock or other securities of the corporation authorized therein, may be made through the written consent of a simple majority of the Directors and the written consent of the holders of any percentage exceeding fifty percent (50%) of the outstanding shares of IMS entitled to vote, without any meetings of the Directors and shareholders or notices thereof. Upon such written consent by the Directors and shareholders, any such amendment to the Articles of Incorporation shall become effective upon the filing thereof. 19 25 Section 2 - Record Date for Purposes Other Than Notices and Voting For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of rights, or entitled to exercise any rights in respect of any other lawful action, other than action by the shareholders of IMS by written consent without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case, only shareholders of record on the date so fixed are entitled to receive the dividends, distribution or allotment of rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date so fixed, except as otherwise provided for by the laws of the State of California. If the Board of Directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts an applicable resolution pursuant to such purpose or the sixtieth (60th) day before the date of that action, whichever is later. Section 3 - Check. Drafts and Evidences of Indebtedness All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness, issued in the name of or payable by IMS, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 4 - Execution of Corporate Contracts and Instruments The Board of Directors, except as otherwise provided in these Bylaws, may authorize any Director or Directors, any Officer or Officers, or any agent or agents, to enter into any contract or to execute any instrument in the name of, and on behalf of, IMS, and this authority may be general or may be confined to specific instances. Unless so authorized or ratified by the Board of Directors, no agent or employee of the Corporation shall have any power or authority to bind IMS by any contract or agreement, to pledge the Corporation's credit, or to render it liable for any purpose or for any amount. Section 5 - Certificates for Shares A certificate representing the ownership of the appropriate number of shares of the capital stock in IMS shall be issued to each shareholder whose shares are fully paid, and the Board of Directors may authorize the issuance of certificates for shares as partly paid, provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. Certificates issued for non-voting shares shall include language setting forth this restriction pursuant to the issuance and holding of such shares. Additionally, certificates for shares shall also include language setting forth any restrictions which apply to the reoffering, resale, transfer, pledging, hypothecation, assignment or other disposition of such shares. All certificates shall be signed on behalf of IMS by the Chairman of the Board of Directors or by the President or a Vice President of IMS, and shall also be signed by the Treasurer or the Secretary of the Corporation. Any or all of the signatures on the certificate may be facsimile. In case any Director or Officer of the Corporation who has signed, or whose facsimile signature has been placed on, a certificate for shares shall have ceased to be a Director or Officer of IMS before such certificate is issued, such certificate may be issued by IMS with the same effect as if that person were a Director or Officer on the date of issue. Section 6 - Transfer of Shares The reoffering, resale, transfer, assignment, hypothecation, pledging, or other disposition of the shares of capital stock in IMS may be restricted pursuant to the terms and conditions of a duly executed shareholders' agreement or pursuant to federal or state securities laws. 20 26 In the event that any and all applicable regulations and terms and conditions restricting the reoffering, resale, transfer, assignment, hypothecation, pledging, or other disposition of certain shares of capital stock in IMS are met, then IMS or its duly authorized transfer agent or registrar shall register a certificate for shares presented to it for transfer if the certificate is properly endorsed by the shareholder of record of such shares or by his or her duly authorized attorney-in-fact. Subject to. such restrictions, upon the surrender of a certificate for shares duly endorsed or accompanied by proper evidence of succession or authority to transfer to IMS, its transfer agent or its registrar, it shall be the duty of IMS, its transfer agent or its registrar to issue a new certificate for shares to the person entitled thereto, and to cancel the old certificate, which shall be maintained with the corporate records. Subject to the aforementioned restrictions, every such transfer shall be entered into the stock transfer book of IMS, which shall be kept and maintained at the principal executive office of the Corporation or at the office of the transfer agent or registrar of IMS. No transfer shall be made within ten (10) days immediately preceding an annual meeting of shareholders. Transfers made during the closing of books pursuant to the determination of shareholders of record in accordance with a resolution of the Board of Directors or these Bylaws may be made at the discretion of the Board of Directors, but the transferee of such shares shall have no right to vote such shares should such transfer be completed during any period in which the transfer book of IMS is closed pursuant to the determination of shareholders of record of the Corporation. Section 7 - Lost Certificates Except as provided for in this Section 7, no new certificate for shares shall be issued to replace an old certificate unless the latter is surrendered to IMS and canceled. In case any certificate for shares or certificate for any other securities of IMS is lost, stolen or destroyed, the Board of Directors may authorize the issuance of a replacement certificate under such terms and conditions as the Directors may require, including any provisions for the indemnification of IMS, secured by bond or other adequate security, sufficient to protect IMS against any claim that may be made, including any expense or liability, resulting from the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. Section 8 - Representation of Shares of Other Corporations The Chairman of the Board of Directors, the President, any Vice President, or any other person authorized by a resolution of the Board of Directors, is authorized to vote on behalf of IMS any and all shares of any other corporation or corporations, foreign or domestic, owned in the name of IMS. Section 9 - Issuance of Additional Capital Stock Except to the extent permitted by the laws of the State of California, the provisions of this Section 9 cannot be amended, altered, repealed, or replaced without a majority vote of the Board of Directors of IMS. The Board of Directors of IMS is authorized to take any actions necessary to issue additional classes and amounts of shares and other securities of IMS for proper purposes, including, but not limited to, engaging in mergers or acquisitions, deterring takeover bids, and providing for the further capitalization of the corporation, without obtaining shareholder approval either by vote or consent. Section 10 - Reorganization and Exchange of Capital Stock In the event that it shall, at any time, be deemed advisable to reorganize by transferring the assets and business of IMS as a going concern to a corporation organized under the laws any state, and the successor corporation shall take over all the property, assets, goodwill, and business of IMS, without any decrease in assets and without any increase or change in the character of liabilities, except in the ordinary course of business, except 21 27 that the common stock may be increased, the holders of any securities of IMS shall become obligated to take the equivalent capital stock of such successor corporation in exchange for their securities to the extent permitted by the laws of the State of California. Section 11 - Business Combinations The Directors and Officers of IMS shall observe certain restrictions regarding certain mergers, consolidations, asset sales, tender offers and other "business combinations" involving IMS. Business combinations are defined as: (a) any merger or consolidation of IMS with an interested shareholder, for the purposes of this Section 11, the term '1interested shareholder" being defined as a holder of at least five percent (5%) of IMS' voting stock; (b) any sale, lease or similar disposition to an interested shareholder of any asset of the Corporation constituting at least five percent (5%) of the total assets of IMS; (c) the issuance or transfer by IMS of any securities of IMS to an interested shareholder in return for cash or other property, being at least five percent (5%) of the total assets of the Corporation; (d) adoption of any plan to dissolve or liquidate the Corporation proposed by an interested shareholder; or (e) any reclassification of securities or recapitalization of IMS or merger whereby the percentage of shares of any interested shareholder is. increased. Business combinations with an interested shareholder must be approved by the holders of at least sixty percent (60%) of the shares entitled to vote, unless the business combination is approved in advance by those persons then on the Board of Directors who were Directors immediately prior to the time the interested shareholder first became an interested shareholder and who would have constituted a majority of the Board of Directors at that time, known as "a majority of the Continuing Directors", or certain minimum "fair price" requirements are met. Section 12 - Construction and Definitions These Bylaws shall be governed by the general provisions, rules of construction, and definitions of the laws of the State of California. Section 1 - Amendment by the Shareholders Except as provided for in Section 2 of Article X, new bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of the holders of any percentage exceeding fifty percent (50%) of the shares of IMS entitled to vote. Neither these Bylaws, nor any Article hereof, shall be repealed unless new bylaws, or a new article, also generally providing for the governing and management of IMS as these Bylaws do in the various Articles and Sections hereof, are made effective pursuant to the provisions of this Article x. Should shareholders repeal these Bylaws or any Article hereof without replacing these Bylaws or said Article by new bylaws or a new article in accordance with this Section 1, then these Bylaws and all of the Articles hereof shall remain in effect until such time as the shareholders do replace these Bylaws or such Article in accordance with the provisions of this Article X. At no time shall IMS operate without effective Bylaws. Section 2 - Amendment By Directors These Bylaws and any Article, Section, or part hereof, may be amended or repealed by the assenting vote 22 28 or written consent of a simple majority of the Board of Directors. ARTICLE XI - SEVERABILITY Section 1 - Severability The Articles and Sections of these Bylaws are severable, and any Article, Section, or part thereof, which shall be deemed by a court or authority of competent jurisdiction to be contrary to, or in conflict with, applicable federal law or California law or statute, shall not alter or affect the validity of any other Article, Section, or part thereof except to the extent of any such conflict. I, the undersigned, do hereby certify that I am the duly elected Secretary of Innovative Medical Services, a corporation duly organized and existing under the laws of the State of California, and that these Bylaws, consisting of thirty five (35) pages, constitute the Bylaws of said Corporation as duly adopted through the unanimous written consent of both the shareholders and the Directors of IMS, copies of said written consents being duly executed by said shareholders and said Directors and attached hereto IN WITNESS WHEREOE, I have placed my signature and seal upon this Certificate on this 4th day of May, 1994. INNOVATIVE MEDICAL SERVICES /s/ Dennis B. Atchley ------------------------------------ Dennis B. Atchley Secretary 23 EX-4.1 6 FORM OF CLASS A WARRANT 1 EXHIBIT 4.1 CLASS A WARRANT TO PURCHASE __________ SHARES OF COMMON STOCK INNOVATIVE MEDICAL SERVICES (A CALIFORNIA CORPORATION) NOT EXERCISEABLE UNTIL MAY , 1997 VOID AFTER 5:00 O' CLOCK P.M., PACIFIC STANDARD TIME, ON MAY __, 2001 INNOVATIVE MEDICAL SERVICES, a California corporation (the "Company") hereby certifies that the holder of this Class A Warrant (the "Holder"), for value received, is entitled to purchase from the Company the number of fully paid and non-assessable shares of Common Stock of the Company (the "Shares"), stated above at the purchase price of $5.25 per Share (the "Exercise Price") (the number of Shares and Exercise Price being subject to adjustment as hereinafter provided) upon the terms and conditions herein provided. 1. Exercise of Warrants. (a) Subject to subsection (b) of this Section 1, upon presentation and surrender of this Warrant Certificate, with the attached Purchase Form duly executed, at the principal office of the Company or at such other place as the Company may designate by notice to the Holder hereof, together with a certified or bank cashier's check payable to the order of the Company in the amount of the Exercise Price times the number of Shares being purchased, the Company shall deliver to the Holder hereof, as promptly as practicable, certificates representing the Shares being purchased. This Warrant may be exercised in whole or in part; and, in case of exercise hereof in part only, the Company, upon surrender hereof, will deliver to the Holder a new Warrant Certificate or Warrant Certificates of like tenor entitling the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) This Warrant may be exercised in whole or in part at any time after May , 1997 and prior to 5:00 o'clock P.M., Pacific Standard Time, on May __, 2001. 2. Exchange and Transfer of Warrant. This Warrant (a) at any time prior to the exercise hereof, upon presentation and surrender to the Company, may be exchanged, alone or with other Warrants of like tenor registered in the name of the Holder, for another Warrant or other Warrants of like tenor in the name of such Holder exercisable for the same aggregate number of Shares as the Warrant or Warrants surrendered, (b) may not be sold, transferred, hypothecated, or assigned, in whole or in part, before May _, 2001. 3. Rights and Obligations of Warrant Holder. (a) The Holder of this Warrant Certificate shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or in equity; provided, however, in the event that any certificate representing the Shares is issued to the Holder hereof upon exercise of this Warrant, such Holder shall, for all purposes, be deemed to have become the holder of record of such Shares on the date on which this Warrant Certificate, 2 together with a duly executed Purchase Form, was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such Share certificate. The rights of the Holder of this Warrant are limited to those expressed herein and the Holder of this Warrant, by its acceptance hereof, consents to and agrees to be bound by and to comply with all the provisions of this Warrant Certificate, including, without limitation, all the obligations imposed upon the Holder hereof by Sections 2 and 5 hereof. In addition, the Holder of this Warrant Certificate, by accepting the same, agrees that the Company may deem and treat the person in whose name this Warrant Certificate is registered on the books of the Company maintained for such purpose as the absolute, true and lawful owner for all purposes whatsoever, notwithstanding any notation of ownership or other writing thereon, and the Company shall not be affected by any notice to the contrary. (b) No Holder of this Warrant Certificate, as such, shall be entitled to vote or receive distributions or to be deemed the holder of Shares for any purpose, nor shall anything contained in this Warrant Certificate be construed to confer upon any Holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any action by the Company, whether upon any recapitalization, issue of stock, reclassification of stock, merger, conveyance or otherwise, receive notice of meetings or other action affecting stockholders (except for notices provided for herein), receive distributions, subscription rights, or otherwise, until this Warrant shall have been exercised and the Shares purchasable upon the exercise thereof shall have become deliverable as provided herein; provided, however, that any such exercise on any date when the stock transfer books of the Company shall be closed shall constitute the person or persons in whose name or names the certificate or certificates for those Shares are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open, and the Warrant surrendered shall not be deemed to have been exercised, in whole or in part as the case may be, until the next succeeding day on which stock transfer books are open for the purpose of determining entitlement to distributions on the Company's common stock. 4. Shares Underlying Warrants. The Company covenants and agrees that all Shares delivered upon exercise of this Warrant shall, upon delivery and payment therefor, be duly and validly authorized and issued, fully-paid and non-assessable, and free from all stamp taxes, liens, and charges with respect to the purchase thereof In addition, the Company agrees at all times to reserve and keep available an authorized number of Shares sufficient to permit the exercise in full of this Warrant. 5. Registration of Warrants and Underlying Shares. The Company represents and warrants to the Holder of this Warrant Certificate and any transferee hereof or of the Shares issuable upon the exercise of the Warrant Certificate, that the Warrants and Shares Underlying the Warrants have been registered under the Securities Act of 1933 (the "Act") thereby permitting the unrestricted transferability thereof by non-affiliates of the Company. The foregoing notwithstanding, the Company makes no representations to the Holder as to registration of the Warrant and the Underlying Shares under applicable the state securities law of the state of residence of the Holder. Such state securities laws may prohibit the transfer or exercise of the Warrant. The 3 Company intends to file periodic reports with the Securities and Exchange Commission ("SEC") pursuant to the provisions of the Securities Exchange Act of 1934, as amended and to maintain the effectiveness of the registration statement which included the original offering of the Warrant. 6. Adjustments. The number of Shares purchasable upon the exercise of each Warrant is subject to adjustment from time to time upon the occurrence of any of the events enumerated below. (a) In case the Company shall: (i) pay a dividend in Shares, (ii) subdivide its outstanding Shares into a greater number of Shares, (iii) combine its outstanding Shares into a smaller number of Shares, or (iv) issue, by reclassification of its Shares, any shares of its capital stock, the amount of Shares purchasable upon the exercise of each Warrant immediately prior thereto shall I)e adjusted so that the Holder shall be entitled to receive upon exercise of the Warrant that number of Shares which such Holder would have owned or would have been entitled to receive after the happening of such event had such Holder exercised the Warrant immediately prior to the record date, in the case of such dividend, or the effective date, in the case of any such subdivision, combination or reclassification. An adjustment made pursuant to this subsection (a) shall be made whenever any of such events shall occur, but shall become effective retroactively after such record date or such effective date, as the case may be, as to Warrants exercised between such record date or effective date and the date of happening of any such event. (b) In case the Company shall issue rights or warrants to all holders of its Shares entitling them to subscribe for or to purchase Shares at a price per Share which, when added to the amount of consideration received or receivable by the Company for such rights or warrants, is less than the Current Market Price (as hereinafter defined) per Share at the record date, the number of Shares purchasable upon the exercise of this Warrant shall be adjusted so that thereafter, until further adjusted, each Warrant shall entitle the Holder to purchase that number of Shares determined by multiplying the number of Shares purchasable hereunder by a fraction, the numerator of which shall be the number of additional Shares issuable upon the exercise of such rights or warrants, and the denominator of which shall be the number of Shares which an amount equal to the sum of (i) the aggregate exercise price of the total number of Shares issuable upon the exercise of such rights or warrants, and (ii) the aggregate amount of consideration, if any, received, or receivable by the Company for such rights or warrants, would purchase at such Current Market Price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to Warrants exercised between the record date for the determination of stockholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (c) For the purpose of any computation under subsection (b) above, the Current Market Price per Share at any date shall be: (i) if the Shares are listed on any national securities exchange, the average of the daily closing prices for the 15 consecutive business days commencing 20 business days before the day in question (the "Trading Period"); (ii) if the Shares are not listed on any national securities exchange but are quoted on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), the average of the high and low bids as reported by NASDAQ for the Trading Period; and 4 (iii) if the Shares are neither listed on any national securities exchange nor quoted on NASDAQ, the higher of (x) the exercise price then in effect, or (y) the tangible book value per Share as of the end of the Company's immediately preceding fiscal year. (d) No adjustment shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of Shares purchasable hereunder; provided, however, that any adjustments which by reason of this subsection (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6 shall be made to the nearest one-hundredth of a Share. (e) No adjustment shall be made in any of the following cases: (i) Upon the grant or exercise of stock options now or hereafter granted, or under any employee stock option or stock purchase plan now or hereafter authorized, to the extent that the aggregate of the number of Shares which may be purchased under such options and the number of Shares issued under such employee stock purchase plan is less than or equal to 10% of the number of Shares outstanding on January 1 of the year of the grant or exercise; (ii) Shares issued upon the conversion of any of the Company's convertible or exchangeable securities; (iii) Shares issued in connection with the acquisition by the Company or by any subsidiary of the Company of 80% or more of the assets of another corporation or entity, and Shares issued in connection with the acquisition by the Company or by any subsidiary of the Company of 80% or more of the voting shares of another corporation (including Shares issued in connection with such acquisition of voting shares of such other corporation subsequent to the acquisition of an aggregate of 80% of such voting shares), Shares issued in a merger of the Company or a subsidiary of the Company with another corporation in which the Company or the Company's subsidiary is the surviving corporation, and Shares issued upon the conversion of other securities issued in connection with any such acquisition or in any such merger; and (iv) Shares issued pursuant to this Warrant and pursuant to all stock options and warrants outstanding on the date hereof. (f) Notice to Warrant Holders of Adjustment. Whenever the number of Shares purchasable hereunder is adjusted as herein provided, the Company shall cause to be mailed to the Holder in accordance with the provisions of this Section 6 a notice (i) stating that the number of Shares purchasable upon exercise of this Warrant have been adjusted, (ii) setting forth the adjusted number of Shares purchasable upon the exercise of a Warrant, and (iii) showing in reasonable detail the computations and the facts, including the amount of consideration received or deemed to have been received by the Company, upon which such adjustments are based. 7. Fractional Shares. The Company shall not be required to issue any fraction of a Share upon the exercise of Warrants. If more than one Warrant shall be surrendered for exercise at one time by the same Holder, the number 5 of full Shares which shall be issuable upon exercise thereof shall be computed on the basis of the aggregate number of Shares with respect to which this Warrant is exercised. If any fractional interest in a Share shall be deliverable upon the exercise of this Warrant, the Company shall make an adjustment therefor in cash equal to such fraction multiplied by the Current Market Price of the Shares on the business day next preceding the day of exercise. 8. Redemption by the Company. At any time after May , 1997, and provided that the closing bid price for the Company's common shares shall have averaged in excess of $9.00 per share for thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption, the Warrants are redeemable by the Company for $0.05 per Warrant. the Company shall have the right (but not the obligation) to purchase this Warrant from the Holder (the "Redemption Right"), and, upon due exercise of the Redemption Right, the Holder shall be required to sell this Warrant to the Company. 8. Loss or Destruction. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant Certificate and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement or bond satisfactory in form, substance and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of this Warrant Certificate, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant Certificate of like tenor. 9. Survival. The various rights and obligations of the Holder hereof as set forth herein shall survive the exercise of the Warrants represented hereby and the surrender of this Warrant Certificate. 10. Notices. Whenever any notice, payment of any purchase price, or other communication is required to be given or delivered under the terms of this Warrant, it shall be in writing and delivered by hand delivery or United States registered or certified mail, return receipt requested, postage prepaid, and will be deemed to have been given or delivered on the date such notice, purchase price or other communication is so delivered or posted, as the case may be; and, if to the Company, it will be addressed to the address specified in Section 1 hereof, and if to the Holder, it will be addressed to the registered Holder at its, his or her address as it appears on the books of the Company. INNOVATIVE MEDICAL SERVICES By: ___________________________ Michael L. Krall, President ATTEST: By: _________________________ Dennis Atchley, Secretary 6 PURCHASE FORM Date: TO: INNOVATIVE MEDICAL SERVICES The undersigned hereby irrevocably elects to exercise the attached Warrant Certificate to the extent of __________ shares of the Common Stock, of INNOVATIVE MEDICAL SERVICES and hereby makes payment of $_________ ($5.25 per Share) in accordance with the provisions of Section 1 of the Warrant Certificate in payment of the purchase price thereof. INSTRUCTIONS FOR REGISTRATION OF STOCK Name: ___________________________________________________________ (Please typewrite or print in block letters) Address: ________________________________________________________ ________________________________________________________ __________________________ By: ______________________ EX-5.1 7 OPINION OF DENNIS BROVARONE 1 EXHIBIT 5.1 [LETTERHEAD OF DENNIS BROVARONE] 2530 SOUTH LINLEY COURT DENVER, COLORADO 80219 PH: 303 742 0966 / FX-MDM: 303 742 0117 May 14, 1996 Board of Directors Innovative Medical Services 1308 N. Magnolia Avenue, Suite H El Cajon, CA 92020 Re: Registration Statement on Form SB-2 Gentlemen: As counsel for Innovative Medical Services, a California corporation (the "Company") you have requested my opinion as to the legality of the securities covered by the proposed Registration Statement of the Company filed with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Commission@ and the "Act"). The proposed offering is up to 1,250,000 Units, each consisting of one share of the Company's common stock and one Class A Warrant to acquire an additional share of common stock at $4.00 per Unit. This opinion is to be filed as an Exhibit to the Form SB-2 Registration Statement filed with the Commission. In connection with rendering my opinion as set forth below, I have reviewed and examined originals or copies identified to my satisfaction of the following: (1) Articles of Incorporation of the Company as amended and as filed with the Secretary of State of the State of Cailfornia. (2) Minute book containing the written deliberations and resolutions of the Board of Directors and Shareholders of the Company. (3) Stock book of the Company evidencing issuances of shares of the common stock of the Company prior to the date hereof. (4) The Registration Statement and the Prospectus contained within the Registration Statement. (5) The other exhibits to the Registration Statement as filed with the Commission. 2 Board of Directors Innovative Medical Services May 14, 1996 Page 2 I have examined such other documents and records, instruments and certificates of public officials, officers and representatives of the Company, and have made such other investigations as we have deemed necessary or appropriate under the circumstances. Based upon the foregoing and in reliance thereon, it is my opinion that the securities proposed to be sold pursuant to the public offering, will, upon the purchase, receipt of full payment, issuance and delivery in accordance with the terms of the offering described in such Registration Statement and Prospectus, be duly and validly authorized, legally issued, fully paid and non-assessable. Very truly yours, /s/DENNIS BROVARONE ------------------- Dennis Brovarone EX-10.1 8 CONFIDENTIALITY AND NON-COMPETITION AGREEMENT 1 EXHIBIT 10.1 AGREEMENT This AGREEMENT (the "Agreement") is made and entered into as of this g day of Nay, 1996 by and between Innovative Medical services ("13(5"), and Hydrotechnology, Inc. ("Hydrotech") (collectively, the "Parties"). WHEREAS, the parties have a mutually valuable, ongoing business relationship whereby IMS purchases Water Filtration Systems and Replacement Filters from Hydrotech as a component of the IMS "Fillmaster" product marketed and sold to, and used by, pharmacies; and WHEREAS the Parties desire to enter into this Agreement for the purpose of stating their respective rights and responsibilities with respect to the future growth of their business relationship; NOW, THEREFOR, in consideration of the mutual promises contained herein, the Parties agree as follows; 1. GRANT OF EXCLUSIVITY. IMS grants to Hydrotech during the term of this Agreement, the right to be the exclusive supplier of Water Filtration Systems and Replacement Filters to IMS as components of the IMS "Fillmaster" product marketed and sold to, and used by, pharmacies. Hydrotech grants to IMS during the term of this Agreement, and subject to the terms contained herein, the exclusive right to purchase Hydrotech Water Filtration Systems and Replacement Filters as components at any water filtration and dispensing equipment that have the same capabilities as the IMS "Fillmaster" product and that are marketed or sold directly to, and used by, pharmacies, to the extent that Hydrotech is legally able to do so and to the extent Hydrotech is aware of and/or can otherwise control the ultimate distribution of such products. 2. NON-COMPETITION. While this Agreement is in effect, Hydrotech shall not, within the United States, directly or indirectly, own, manage, operate or participate in the ownership, management, operation or control or, or be a consultant to, any business, firm, corporation or entity which is conducting any business which competes with the IMS "Fillmaster" product. Hydrotech further agrees that it shall not, while this Agreement is in effect, solicit, directly or indirectly, for its account or for the account of others, orders for merchandise, products or services of any kind and nature like or similar to the IMS "Fillmaster" product from any pharmacy which was a customer of IMS or which pharmacy IMS was actively soliciting to be a customer of the IMS "Fillmaster" product during the twelve (12) month 1 2 period immediately preceding the date upon which this Agreement is terminated; nor shall Hydrotech at any time, directly or indirectly, urge any customer or potential customer of IMS to discontinue, in whole or in part, business, or not to do business with IMS. Hydrotech further agrees that while this Agreement is in effect Hydrotech shall not knowingly sell Replacement Filters to any business, firm, corporation or entity which has been previously identified in writing based upon the good faith belief of IMS to be selling or attempting to sell Replacement Filters directly to and for use by pharmacies. IMS shall be solely responsible for such identification and shall indemnity and hold Hydroteob harmless from any and all liabilities for damages due to the willful or negligent misidentification of such person. nothing contained in this Agreement shall preclude the sale by Hydrotech to customers other than pharmacies of Water nitration Systems, Replacement Filters, Reverse osmosis Systems, and all other products presently sold by Hydrotech. 3. RIGHT TO INJUNCTIVE RELIEF. It is understood and recognized by Hydrotech that in the event of any violation by Hydrotech of the provisions of this Agreement, IMS' remedy at law may be inadequate and IMS may suffer irreparable injury. Accordingly, IMS shall have the right to seek injunctive and other appropriate equitable relief upon the institution of legal proceedings therefor in order to protect IMS' interest. such relief shall be in addition to any other relief to which IMS may be entitled at law or in equity. 4. MODIFICATION. The parties hereto covenant and agree that to the extant any provisions. or portion at this agreement shall be held, found or deemed to be unreasonable, unlawful or unenforceable. then the parties hereto expressly covenant and agree that any such provision or portion thereof shall be modified to the extent necessary in order that any such provision or portion thereof shall be legally enforceable to the fullest extent permitted by applicable law and that any court of competent jurisdiction shall, and the Parties, hereto do hereby expressly authorize any court of competent jurisdiction to, enforce any such provision or portion thereof or to modify any such provision or portion thereof in order that any such provision or portion thereof shall be enforced by such court to the fullest extent permitted by applicable law. 5. BINDING EFFECT. The terms of this Agreement shall inure to the benefit of and be binding upon the Parties hereto, their successors and assigns. 6. TERM OF AGREEMENT. This Agreement shall begin on the date hereof 2 3 and shall continue in effect for each successive fiscal quarter in which IMS maintains its account with Hydrotech in a current status and has purchased and paid Hydrotech in full within thirty (30) days for not less than four hundred (400) Water Filtration Systems. 7. COUNTERPARTS/FACSIMILE SIGNATURES. This Agreement may be executed in counterpart signatures and the Parties agree that a facsimile signature transmitted from a known telephone number of either Party shall be deemed to he an original signature. 8. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the United States and the State of California without regard to conflicts of law. 9. ALTERNATIVE DISPUTE RESOLUTION. The Parties agree that any dispute arising from this Agreement shall be submitted to arbitration or other means of alternative dispute resolution mutually satisfactory to all parties before seeking redress through civil litigation. In the event a party must file a legal action to compel arbitration or alternative dispute resolution, said Party shall be entitled to an award of costs and attorneys' fees for compelling arbitration. 10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended or modified, except by a written agreement signed by the Parties hereto. HYDROTECHNOLOGY, INC. INNOVATIVE MEDICAL SERVICES By /s/ BRUCE BURROWS By /s/ MICHAEL L. KRALL ------------------------ --------------------------- BRUCE BURROWS, President MICHAEL L. KRALL, President 3 EX-10.2 9 EMPLOYMENT CONTRACT/MICHAEL L. KRALL 1 EXHIBIT 10.2 [LOGO] EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement") is made this 17th day of April, 1996, in El Cajon, California, by and between INNOVATIVE MEDICAL SERVICES. (hereinafter referred to as the "Corporation"), a California Corporation, and Michael L. Krall (hereinafter referred to as the "Employee"). 1. EMPLOYMENT. The Corporation hereby employs the Employee and the Employee hereby accepts employment with the Corporation upon the terms and conditions hereinafter set forth. 2. TERM. Subject to the provisions set forth in Sections 8 and 9 of this Agreement, the term of this Agreement shall be for a period of five (5) years commencing on the 1st day of April, 1996, and thereafter and except as otherwise modified by mutual agreement, the term of this Agreement shall be automatically renewed for successive five (5) year periods unless prior written notice to the contrary is given by the Corporation or the Employee to the other on or before ninety (90) days prior to the expiration of the original five (5) year term hereof or each such successive five year period. 3. DUTIES. The Employee is engaged as President and Chief Executive Officer of the Corporation, and the Employee agrees to perform such other executive services as shall from time to time be reasonably assigned to him by the Board of Directors of the Corporation. 4. COMPENSATION. The Corporation shall pay to the Employee as his exclusive compensation for services rendered under this Agreement as follows: a) An amount at the rate of one hundred and eight thousand dollars ($108,000) per year in accordance with the Corporation's normal payroll policies; b) An amount, determined in accordance with generally accepted accounting principles, equal to three percent (3%) of the net income before income taxes earned by the Corporation during any full fiscal year which amount shall be payable within thirty (30) days after the date on which the Corporation receives financial statements from its Certified Public Accountants showing such net income before income taxes, if any; and c) A monthly amount of not more than five hundred ($500.00) per month for the purpose of an automobile lease. Employee is responsible for keeping adequate 1 2 d) records to document both business and personal use of the leased automobile in order to properly qualify for the business use exception of the Internal Revenue Service. e) Such other fringe benefits as may be separately awarded by the Corporation's Board of Directors for executive employees of the Corporation either individually or as a group, including but not limited to stock options or the participation in a Stock Option or Incentive Plan as adopted by the Corporation. The Board further agrees to re-evaluate each year both employee's performance and any additional compensation to which he may be entitled based upon the gross sales performance of the Corporation for the first 5 year term of this contract. 5. EXTENT OF SERVICE. The Employee shall diligently and competently devote his full business time, attention and energies to the performance of his duties under this Agreement and shall exert his best efforts in furtherance of the business of the Corporation. 6. EXPENSES. a) Ordinary Expenses: The Employee is authorized to incur reasonable expenses in the conduct of the business of the Corporation, including expenses for meals, travel, and other similar items. The Corporation shall prepay or reimburse the Employee for all such expenses upon the presentation by the Employee, from time to time, of an itemized accounting for such expenditures. b) Entertainment and Goodwill Expenses: In addition, the Corporation, for and on behalf of the Employee, shall prepay or reimburse Employee for entertainment, goodwill or other promotional expense deemed necessary or beneficial to the Corporation by the Employee. In the Entertainment and Goodwill Expenses, the Employee is authorized to incur not more than Twelve Thousand ($12,000.00) Dollars per year without Board approval. The Corporation shall prepay or reimburse the Employee for all such expenses upon the presentation by the Employee, from time to time, of an itemized accounting for such expenditures. c) 7. EMPLOYEE TO RETAIN GOODWILL. The Employee agrees to exert his best efforts to preserve for the benefit of the Corporation the good will of the Corporation's clients and those who may have business relations with it. 8. TERMINATION. a) Anything contained herein to the contrary notwithstanding, upon one hundred-twenty (120) days prior written notice to the Employee, the Corporation, at any time subsequent to the adoption of a resolution by the Board of Directors of the Corporation to the substantial effect that the Board of Directors deems it advisable that the business of the Corporation be terminated and its assets liquidated, may terminate this Agreement and all of the rights, obligations and duties of the parties hereunder. 2 3 b) In the event that during the term of this Agreement, the Employee shall become disabled by accident or by illness so as to be unable to perform the duties required of him under this Agreement for a period of sixty (60) consecutive days, then the Corporation may, at the expiration of such sixty (60) day period, suspend the Employee's services and the Corporation's obligation and duties under this Agreement for the continuing period of his disability by notice to him in writing and, if the Employee does not resume the duties required of him within sixty (60) days of the date he first became so disabled, this Agreement and all of the rights, duties, and obligations hereunder shall terminate except that the restrictions imposed on the Employee as set forth in paragraphs 10 and 11 of this Agreement and the remedies available to the Corporation as set forth in such Sections shall remain in effect. 9. DISCHARGE FOR CAUSE. Anything contained in this Agreement to the contrary notwithstanding, the Corporation may discharge the Employee for cause at any time upon thirty (30) days prior written notice, and upon the occurrence of such discharge for cause, this Agreement and all of the rights, duties and obligations hereunder shall terminate except that the restrictions and provisions imposed on the Employee as set forth in paragraphs 10 and 11 hereof shall remain in effect. 10. COVENANT NOT TO COMPETE. For a period of one (1) year commencing on that date upon which the Employee shall leave the employ of the Corporation for any reason whatsoever, the Employee shall not, within the United States of America, directly or indirectly, enter into or carry on as owner, employee or otherwise a business or businesses that compete with the Corporation. The Employee further agrees that he shall not for a period of one (1) years following that date upon which he/she shall leave the employ of the Corporation for any reason whatsoever, solicit, directly or indirectly, for his own account or for the account of others, orders for services of a kind and nature like or similar to services performed by the Corporation during the Employee's employment with the Corporation from any party which was a client or customer of the Corporation or which the Corporation was actively soliciting to be a customer or client during the six (6) month period preceding that date upon which the Employee shall leave the employ of the Corporation, nor shall the Employee at any time, directly or indirectly, urge any customer or client or potential customer or client of the Corporation to discontinue, in whole or in part, business, or not to do business with the Corporation. As a violation by the Employee of the provisions of this Section could cause irreparable injury to the Corporation and there is no adequate remedy at law for such violation, the Corporation shall have the right, in addition to any other remedies available to it, at law or in equity, to enjoin the Employee in a court of equity for violating such provisions. 11. REIMBURSEMENT OF DISALLOWED EXPENSES. In the event that any expenses paid by the Corporation for the Employee or any reimbursement of expenses by the Corporation to the Employee shall, upon audit or other examination of the income tax returns of the Corporation, be determined not to be allowable deductions from the gross income of the Corporation and such determination shall be acceded to by the Corporation, or such determination shall be made final by the appropriate state or federal taxing 3 4 authority or a final judgment of a court of competent jurisdiction, and no appeal shall be taken therefrom, or the applicable period for filing a notice of appeal shall have expired, then in such event, the Employee shall rebate to the Corporation the dollar amount of such disallowed expenses. Such repayment may not be waived by the Corporation. 12. VACATION. The Employee shall be entitled annually to Two (2) weeks of paid vacation; provided, however, that the Employee shall not take more than Two (2) consecutive weeks of vacation in any single instance. 13. LINE OF CREDIT. Provided that the Employee shall not be in breach of or default under this Agreement and if, in the judgment of the Directors such loan may reasonably be expected to benefit the Corporation, the Corporation shall, at any time or times during the term hereof and at the request of the Employee, loan to the Employee a dollar amount or amounts designated by the Employee, the sum of which dollar amount or amounts shall not exceed in the aggregate the sum of Sixty-Eight Thousand Dollars ($68,000). Each such loan shall be evidenced by the promissory note of the Employee in the form. 14. COMPENSATION FOR PAST SERVICES. In consideration of the services of the Employee which have been rendered by the Employee as President and Chief Executive Officer during the fiscal years ended July 31, 1994, 1995 and the eight month period ended March 31, 1996, the Corporation hereby grants and the Employee agrees to the following compensation for services rendered prior to the date of this Agreement: $30,000 for fiscal year ended July 31, 1994; $45,000 for fiscal year ended July 31, 1995; and $60,000 for the eight months ended March 31, 1996. 15. STOCK OPTION. A Five (5) year Option to purchase as many shares of the Corporation's common stock as equals One Hundred Thousand ($100,000) dollars at 80% of initial public offering price of the Company's common stock. Said Option shall be exerciseable in whole or in part one year from the date of closing of the initial public Offering. The underlying common stock of the Option shall be registered by the Corporation under the Securities Act of 1933, as amended on or before becoming exerciseable. 16. The Employee hereby waives the payment of the above cash compensation for the fiscal years ending July 31, 1994 and 1995 and the eight month period ended March 31, 1996 and contributes the same back to the Corporation as $135,000 of additional paid-in capital for the 618,307 (post 4/17/96 split) shares of common stock presently owned by the Employee. 17. AGREEMENT INCLUSIVE. This Agreement supersedes any and all employment or other agreements, whether written or oral by and between the Employee and the Corporation and any and al such prior Agreements are hereby canceled effective as at the date of this Agreement. 18. BENEFIT. This Agreement shall inure to the benefit of and be binding upon the Corporation, its successors and assigns, including, but not limited to, (i) any corporation 4 5 which may acquire all or substantially all of the Corporation's assets and business, (ii) any corporation with or into which the Corporation may be consolidated or merged; (iii) any corporation that is the successor corporation in a share exchange, and the Employee, his/her heirs, guardians and personal and legal representatives. 19. GOVERNING LAW. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of California. 20. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties, and may be amended, waived, changed, modified, extended or rescinded only by a writing signed by the party against whom any such amendment,/ waiver, change, modification, extension or rescission is sought. 21. NOTICES. All notices and communications hereunder shall be in writing and shall be deemed given when sent postage prepaid by registered or certified mail, return receipt requested, and, if intended for the Corporation, shall be addressed to it, to the attention of its Chief Financial Officer at 1308 North Magnolia Av., Suite H, El Cajon, California 92020, with a copy to Michael L. Krall at 1308 North Magnolia Av., Suite H, El Cajon, California 92020, or at such other address of which the Corporation shall have given notice to the Employee in the manner herein provided, and if intended for the Employee, shall be addressed to him at or at such other address of which the Employee shall have given notice to the Corporation in the manner herein provided. IN WITNESS WHEREOF, the parties hereto have set their hands as of the date first above written. ATTEST: Date: 4/23/96 By: /s/ MICHAEL L. KRALL ------- -------------------------------------- Michael L. Krall INNOVATIVE MEDICAL SERVICES Date: 4/25/96 By: /s/ GARY BROWNELL ------- -------------------------------------- Gary Brownell, Chief Financial Officer WITNESS: INNOVATIVE MEDICAL SERVICES Date: 4/26/96 By: /s/ DENNIS B. ATCHLEY ------- -------------------------------------- Dennis Atchley, Secretary 5 EX-23.1 10 CONSENT OF DENNIS BROVARONE 1 EXHIBIT 23.1 DENNIS BROVARONE 2530 SOUTH LINLEY COURT DENVER, COLORADO 80219 PH: 303 742 0966 / FX-MDM: 303 742 0117 May 21, 1996 CONSENT OF ATTORNEY Reference is made to Amendment No. 1 to the Registration Statement on Form SB-2 pursuant to which Innovative Medical Services, proposes to register for sale to the public 1,250,000 Units, each consisting of one share of common stock and a Class A Warrant to acquire an additional share of common stock at $4.00 per Unit. 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 11 CONSENT OF STEVEN HOLLAND, CPA 1 EXHIBIT 23.2 STEVEN HOLLAND, CPA 3914 MURPHY CANYON RD., 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 six months ended January 31, 1996. I hereby consent to their inclusion with the company's intended registration statement on form SB-2. Steven Holland, CPA May 22, 1996 -----END PRIVACY-ENHANCED MESSAGE-----