-----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, FosPwadpN2Qm8nnbutVJiFbCA7CJtRmjVUOXP+XocNgZ/cyz76c5NCXjYA2p2pzy DXxQu5zPudp2DvzQqCw7jQ== 0000936392-96-000421.txt : 19960708 0000936392-96-000421.hdr.sgml : 19960708 ACCESSION NUMBER: 0000936392-96-000421 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19960705 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: 96591630 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. 2 DATED JULY 5, 1996 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996 REGISTRATION-333-434 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 2 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. KOBLENZ, ESQ. LARRY BARESEL, ESQ. ATTORNEY AT LAW MOUND, COTTON & WOLLAN 1080 WEST REX RD. 2530 SOUTH LINLEY COURT ONE BATTERY PARK PLAZA MEMPHIS, TN 38119 DENVER, COLORADO 80219 NEW YORK, NY 10004
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE - ---------------------------------------------------------------------------------------------------------- Common Shares......................... 1,437,500 $ 4.00 $5,750,000 $1,955.00 Class A Warrant....................... 1,437,500 0.10 125,000 42.50 Each to acquire one (1) common share - ---------------------------------------------------------------------------------------------------------- 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 JULY 5, 1996 PROSPECTUS LOGO 1,250,000 SHARES OF COMMON STOCK 1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS Innovative Medical Services (the "Company") is offering 1,250,000 shares of common stock at $4.00 per Share and 1,250,000 Class A Warrants at $0.10 per Warrant. Each Warrant entitles the holder to acquire an additional common share for $5.25 per common share beginning July X, 1997 and expiring July 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 any twenty (20) trading days within a period of thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption. See "DESCRIPTION OF SECURITIES." The Shares and Warrants have been approved for quotation on the NASDAQ System under the symbol PURE, PUREW and PUREZ, 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 Meyers Pollock Robbins, 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. MEYERS POLLOCK ROBBINS, INC. The date of this Prospectus is July , 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 offered 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 July, 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 July , 1996. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 5 PROSPECTUS SUMMARY This summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY Innovative Medical Services (the "Company") is a California corporation formed on August 24, 1992 to engage principally in the business of manufacturing and marketing the Fillmaster(R), a unique product developed by the Company. The Fillmaster(R) is a water purification system with a calibrated volumetric measuring and dispensing apparatus that provides measured amounts of "Purified Water" (as defined by the United States Pharmacopeia) for use in the reconstitution of prescription medications, generally oral antibiotics. At the present time, the Company is only marketing this single product. The current method used by Pharmacists to measure and mix water in prescription medications is typically to pour or siphon water from bottles and then manually measure and mix the water with powdered compounds. This method is time consuming and blindly relies upon the purity of the bottled water which introduces the possibility of contamination from the bottled water, any equipment used, as well as into the prescription itself. In addition, the pharmacist currently has the cost of bottled water together with overhead costs of ordering, storing and changing water bottles, all of which increase the dispensing costs to the pharmacist. The Company believes that the Fillmaster(R) is unique because it not only reduces the potential of contamination of the water source and cross-contamination of the final product but also provides the Pharmacist with cost savings over bottled water and a significantly faster and simpler means of drawing and measuring water and hence dispensing prescriptions. The Company does not believe that there is any similar product presently being marketed to the pharmacy industry. (Please see "The Company and its Business".) Customers to date for the Fillmaster(R) exceed 3,500 and include Walgreens, Wal-Mart, Eckerd Drugs, Target, SavOn, Osco, CVS, Thrifty PayLess, Thrift Drug, three divisions of Kroger, Smith's Food and Drug, and Longs Drugs as well as United States Military Clinics, the Kaiser Foundation for Medical Care, the Mayo Clinic, and Independent and Hospital Pharmacies. The Company's executive offices are located at 1308 North Magnolia Avenue, Suite H, El Cajon, California and its telephone number is (619) 441-8233. THE OFFERING SECURITIES OFFERED......... 1,250,000 Shares at $4.00 per Share and 1,250,000 Class A Warrants at $0.10 per Warrant. Each Class A Warrant entitles the holder to acquire an additional common share for $5.25 per common share beginning July , 1997 and expiring July , 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 any twenty (20) trading days within a period of thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption. See "Description of Securities" and "Underwriting". USE OF PROCEEDS............ The Company intends to use the net proceeds from this Offering and any additional funds generated from operations for Sales and Marketing, Inventory, Receivables Financing, New Product Development, Lease 3 6 Financing, Facilities Expansion, Patent, Trademark Legal Expense, Manufacturing/Computer Equipment and Bridge Loan repayment. Please see "Use of Proceeds" and "Business of the Company". NASDAQ SYMBOLS............. Common Shares PURE Class A Warrants PUREW Class Z Warrants PUREZ COMMON SHARES OUTSTANDING PRIOR TO OFFERING........ 2,583,851 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................. 3,833,851 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 offered 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 July, 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. As of April 30, 1996 the Company had an accumulated deficit of $437,418. The Company was formed in 1992 and commenced the manufacture and marketing of its Fillmaster(R) product in the final quarter of fiscal year 1993. As a result, it is subject to the risks inherent in a new enterprise, including the absence of a lengthy operating history, shortage of cash, undercapitalization and new products. (Please see "The Company and its Business.") 2. Single Product. At this time, the Company manufactures, markets and distributes a single product only. While the Company intends to develop additional products, it is not yet prepared to announce these product nor estimate when they will be ready for market. As a result, the Company's revenues will be derived from a single product for the foreseeable future. Furthermore no assurances can be given that any additional products will be developed and if developed, be profitably manufactured and marketed. (Please see "The Company and its Business"). 3. Lack of Patent Protection. None of the Company's technology is presently patented, however the Company intends to file for patent protection, and in the interim will rely upon maintaining confidentiality on its proprietary information regarding its products through confidentiality agreements with its employees and non-disclosure agreements with others. No assurance can be given that the Company will be able to maintain the confidentiality of its proprietary information or that competitors will not begin selling similar products. Furthermore, the Company believes its has independently developed its product and that its product does not infringe upon any patents or rights of others. Should a product of the Company be found to infringe, the Company could be required to modify its design, obtain a license or pay damages. No assurance can be given that the Company will be able meet such requirements in a timely manner or upon terms acceptable to the Company. A material infringement which the Company is unable to cure would have a material adverse effect upon the Company's business. 4. Competition. The Company believes that the business of providing advanced technology apparatus to the pharmaceutical industry is relatively new and that it is likely that the Company will face extensive competition as the market develops. These competitors are likely to be larger and have greater financial resources than the Company. As a result no assurances can be given that the Company will be able to obtain and maintain sufficient market share to be successful. 5. Dependence on and Control by Management. The success of the Company will be dependent largely upon the efforts of its present management who collectively own over 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. (Please see "Management.") 6. Additional Financing May be Required. If the Offering of all the Securities offered hereby are sold, the Company anticipates that the funds available to the Company will be adequate for it to fully exploit its business. However, the Company anticipates that additional funds will be required to the extent the Company desires to expand its operations from those contemplated herein. In addition the Company has agreed with the Representative that it shall not sell any of its securities for two years from the date of the prospectus without the representative's consent. There can be no assurance that additional funds will be available from any other 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. (Please see "The Company and its Business.") 8. Regulation of Pharmaceutical Products. The United States Food and Drug Administration has established a Good Manufacturing Practices protocol which requires that products be built to certain standards and specifically that an apparatus used in handling anything added to a prescription not cause any contamination of the prescription. The Company believes that all components and materials in its Product meet or exceed the current FDA standards. However no assurances can be given that FDA standards will not change in the future. In addition, the United States Pharmacopeia and the National Formulary (USP/NF) provide the standards for materials and substances and their preparations that are used in the practice of healing arts and establish standards of quality, strength and purity. The USP/NF require that only "Purified Water" be used in the reconstitution of oral prescriptions. Also, State Boards of Pharmacy uniformly defer to the standards of the USP/NF. In addition, drug manufacturers themselves require the use of "Purified Water" to ensure product stability and potency. While the Company's Fillmaster(R) meets or exceeds the USP requirements for "Purified Water", no assurance can be given that the current regulations will not be modified or that new regulations be implemented which could adversely effect the Company's business. RISK FACTORS RELATING TO THIS OFFERING 1. No Assurance of Public Market for the Company's Securities. There is no public market for Securities of the Company and no assurance such a market will develop at the conclusion of this Offering or, if developed, that it will continue. Purchasers of the Company's Securities may, therefore, have difficulty in selling such Securities should they desire to do so. (Please see "Underwriting.") 2. Public Will Bear Risk of Loss. The capital required by the Company to increase the scope of its business is being sought principally from the proceeds of this Offering. Therefore, public investors will bear most of the risk of the Company's operations. (Please see "Underwriting.") 3. Dilution. The Shares contained therein involve a substantial amount of dilution from the public offering price in that the net tangible book value of the Shares is substantially less than the offering price. As a result investors in the Shares will experience an immediate dilution of their investment of $2.85 per share or 71.25%. In addition, the Company may issue additional shares without obtaining shareholder approval which if sold for less than the offering price would cause further dilution. (Please see "Dilution.") 4. Lack of Dividends. The Company has never paid a dividend on its common stock and intends to retain all earnings for the foreseeable future in order to complete its business plan. 5. Potential Adverse Effect of Shares Issuable Upon Exercise Of Stock Options And Outstanding Shares Available for Resale. The Company has adopted an Incentive Stock Option Plan and a Directors and Officers Stock Option Plan and has reserved 1,000,000 Common shares for issuance under each plan. As of the date of this prospectus options to acquire 31,250 shares have been awarded to the Company's President pursuant to the Directors and Officers Stock Option Plan. In addition, all of the Company's presently outstanding shares of common stock are "restricted securities" as defined by Rule 144 adopted under the Securities Act of 1933, as amended. Rule 144 is a regulated method for holders of restricted securities to sell their securities into the market. Certain holders of such restricted securities have held the securities for the time period required by Rule 144 and may sell their securities. Such sales and the exercise of options and sale of underlying shares could have an adverse effect on the market for the Shares. Notwithstanding the above, all of the Company's officers, directors and holders of greater than five percent (5%) of the outstanding shares have entered into lock up agreements with the Representative not to publicly offer their Common Stock for sale for a period of 24 months from the date hereof, except with the written consent of the Representative. All other stockholders have also entered into lock up agreements with the Representative not to publicly offer 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. (Please see "Market for Company's Common Stock and Related Stockholder Matters.") 6. Determination of Offering Price. The offering price of the Shares and the 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. 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. 8. Maintenance Criteria for NASDAQ Securities. The National Association of Securities Dealers, Inc. (the "NASD"), which administers NASDAQ. recently made changes in the criteria for continued NASDAQ eligibility. In order to continue to be included in NASDAQ, a company must maintain $2 million in total assets, a $200,000 market value of its public float and $1 million in total capital and surplus. In addition, continued inclusion requires two market-makers, at least 300 holders of the Shares and a minimum bid price of $1 per share; provided, however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion in NASDAQ if the market value of the public float is at least $1 million and the Company has $2 million in capital and surplus. The Company's failure to meet these maintenance criteria in the future may result in the discontinuance of the inclusion of its securities in NASDAQ. In such event, trading, if any, in the securities may then continue to be conducted in the non-NASDAQ over-the-counter market in what are commonly referred to as the electronic bulletin board and the "pink sheets". As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of the securities. In addition. the Company would be subject to a Rule promulgated by the Securities and Exchange Commission (the "Commission") that, if the Company fails to meet criteria set forth in such rule, imposes various sales practice requirements on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the rule may have an adverse effect on the ability of broker-dealers to sell the securities, which may affect the ability of purchasers in the offering to sell the securities in the secondary market. 9. Disclosure Related to Penny Stocks. The Commission has recently adopted rules that define a "penny stock". In the event that any of the Company's securities are characterized in the future as penny stock, broker-dealers dealing in the securities will he subject to the disclosure rules for transactions involving penny stocks which require the broker-dealer among other things to (i) determine the suitability of purchasers of the securities, and obtain the written consent of purchasers to purchase such securities and (ii) disclose the best (inside) bid and offer prices for such securities and the price at which the broker-dealer last purchased or sold the securities. The additional burdens imposed upon broker-dealers may discourage them from effecting transactions in penny stocks, which could reduce the liquidity of the securities offered hereby. 10. Redemption of Warrants. The Warrants may be redeemed by the Company at any time after one year from the date of this Prospectus upon 30 days written notice to the Warrant holders at for $0.05 per Warrant commencing one year from the date of this Prospectus provided the closing bid price for the Company's common shares shall have averaged in excess of $9.00 per share for any twenty (20) trading days within a period of thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption. In such event, the Warrants will only be exercisable until the close of business on the date fixed 7 10 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.") 11. 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") 12. Limitation on Directors' Liability. The Company's Articles of Incorporation provide for certain limitations on the liability of the Company's directors to its stockholders for monetary damages. Such limitations could adversely affect an investor's ability to recover damages from such directors. 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 April 30, 1996, the net tangible book value of the Company was $123,108 or $0.07 per share. After giving effect to the 750,000 shares issued as part of the bridge financing and the Shares offered hereby at the $4.00 per Share offering price and after deducting the underwriting commissions and estimated expenses of the offering, the pro forma net tangible book value as of April 30, 1996 would have been $4,401,859 or $1.15 per share. This represents an immediate dilution of $2.85 per share to new investors and an increase in net tangible book value of $1.08 per share to existing shareholders. The following table illustrates dilution to new investors following completion of this offering: Public Offering Price............................................... $4.00 Net Tangible Book Value Per Share Before Offering................... $0.07 Net Tangible Book Value Per Share after Offering.................... $1.15 Increase Per Share Attributed to the Offering....................... $1.08 Dilution of Offering Price Per Share to Investors................... $2.85 or 71.25%
Does not assume the exercise of the Underwriter=s Over Allotment Option or the exercise of any outstanding warrants or options. 10 13 CAPITALIZATION The following table sets forth the capitalization of the Company as of April 30, 1996 and on a pro forma basis giving effect to the May, 1996 bridge financing and the sale of the Shares and Warrants offered hereby and the application of the net proceeds therefrom as described in "Use of Proceeds".
APRIL 30, 1996 -------------------------------------------- HISTORICAL PRO FORMA(1) PRO FORMA(2) ---------- ------------ ------------ Notes Payable........................................ $ 50,000 $ 425,000 $ 50,000 Stockholders Equity.................................. 658,181 2,908,181 7,090,566 20,000,000 no par common shares authorized 1,833,851 outstanding at 4/30/96 2,578,851 outstanding at 4/30/96 Pro Forma(1) 3,828,851 outstanding at 4/30/96 Pro Forma(2) Accumulated Deficit.................................. $ (437,418) $ (437,418) $ (2,687,418) Total Capitalization................................. $ 220,763 $2,470,763 $ 4,403,148
- --------------- (1) Gives effect to the issuance of 750,000 common shares in connection with the bridge financing valued at $3 per share (based upon a 25% discount from the public offering price) and recorded as a deferred financing cost asset of $2,250,000 which following completion of this public offering will be reclassified as part of the accumulated deficit. (2) Gives effect solely to the sale of 1,250,000 common shares and 1,250,000 Class A Warrants offered hereby and does not assume the exercise of the Representative's Over Allotment Option nor the exercise of any warrants or options. 11 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the audited and unaudited financial statements of the Company and related notes included therein. OVERVIEW Innovative Medical Services is engaged principally in the business of manufacturing and marketing of the Fillmaster(R), a unique water purification, measuring and dispensing apparatus used in pharmacies to reconstitute oral antibiotic suspensions. In addition, the company intends to develop and market other pharmacy-related efficiency products worldwide. RESULTS OF OPERATIONS FISCAL 1995 VS. FISCAL 1994 Revenues of $459,000 in fiscal year ending 1995 were 257% of the $179,000 in revenues reported for fiscal year 1994. This revenue increase was attributable to increased sales of Fillmaster(R) Purification Systems and the initiation of replacement filter sales. Fillmaster(R) Purification System sales in fiscal 1995 were $427,000, and replacement filter sales were $33,000. In 1994, Fillmaster(R) Purification System sales were $178,000, and replacement filter sales were $1,000. While occurring in all markets, more than 90% of the volume increase in Fillmaster(R) Purification System sales took place in the chain pharmacy marketplace. The large increase in replacement filter sales was expected due to the increased number of Fillmaster(R) Purification Systems in use. Gross profits in 1995 were $169,000 vs. $8,000 in 1994. Gross profits in 1994 were reduced because the Company offered penetration (lower) pricing to convince the first national chain purchaser of the Product to become a large-volume customer. Gross profit percentages in 1995 (37%) were higher vs. 1994 (5%) due to increased sales volume, production costs being lowered through volume purchasing, sales to new customers at higher prices and the $32,000 increase in replacement filter sales at a gross profit of 75%. Net profit for fiscal 1995 was $2,400, vs. a net loss of $171,000 for fiscal 1994. This increase in income was due to growth in sales and the increase in gross profit as outlined above. In addition, Selling Expenses and General & Administrative Expenses decreased approximately $8,000 from 1994 to 1995 on increased volume. RESULTS OF OPERATIONS FIRST NINE MONTHS OF FISCAL 1996 Revenue for the nine months ending April 30, 1996 was $701,000. Of this amount, $649,000 was attributable to sales of Fillmaster(R) Purification Systems, and $52,000 to replacement filter sales. Gross profit for the period was $193,000, $154,000 (24% of sales) from Fillmaster(R) Purification Systems and $39,000 (75% of sales) from filters. Overall gross profit decreased from 37% of gross revenues in fiscal 1995 to 27%. This decrease was attributable to an isolated and concentrated purchase by the Company's first chain customer (described previously) that more than doubled its previous total purchases at the same penetration pricing. Since this customer has now purchased the Product for 75% of its locations, this is not likely to reoccur. However, similar penetration pricing for substantial chain customers may be employed in the future resulting in temporary fluctuations in overall gross profit margins until such time as replacement filter margins are fully developed. For the period, the company incurred a net loss of $76,000 primarily due to recognition of compensation expense for the Company's CEO in the amount of $60,000 which was contributed back to the Company as additional Paid in Capital for common stock owned by the CEO. An increase in rent expense and additional clerical staff also contributed to the net loss for the period. LIQUIDITY AND CAPITAL RESOURCES With current asset to liabilities ratios of 1.2 for fiscal year end 1994, 1.73 for fiscal year end 1995 and 1.13 for the first nine months of fiscal 1996, the Company's working capital position continues to be stable. Historically, expansion has been financed by the sale of common stock. Equity financing activities have provided cash in the amounts of $172,000, $45,000 and $22,000 for fiscal years 1994, 1995 and the first three 12 15 quarters of fiscal 1996, respectively. Debt financing has been in the amounts of $9,000, $21,000 and $25,000 for the same periods. Cash flows provided (used) from operations were $(175,000) in 1994, $26,000 in 1995 and $(42,000) for the first nine months of 1996. Cash flows used in investing activities were, respectively, $15,000, $8,000 and $31,000 for the purchase of machinery and equipment. The Company has operated on a just-in-time assembly and manufacturing basis, keeping inventory to low levels. Parts and components have been, for the most part, brought into the factory for assembly and shipment only after a firm customer order has been received. As a result, the time period during which cash resources must be utilized for inventory has been compressed as much as possible. Also, aggressive receivables management combined with the quality of the customer base has resulted in a very favorable position with regards to receivables aging. Nonetheless, the extremely vigorous growth of the Company has created an ongoing dilemma related to cash. The very expansion that has made revenue projections appear so positive has at the same time hindered the Company's ability to expand sales at an even faster rate. The need to finance ever-increasing part and component inventories, even for a short period of time, has served to divert cash resources from critical sales, marketing and new product development areas that could enhance future revenues to an even greater extent. Sales and marketing decisions have often been driven by the lack of available cash resources, frequently to the exclusion of valuable opportunities. To generate capital for further expansion and to alleviate the cash issues described above, the Company has elected to issue $5,000,000 in marketable equity securities. Management intends that the proceeds of the offering will provide liquidity for: Sales and Marketing expansion: (a) expand the sales force, (b) increase trade show participation, (c) advertise in trade journals and via targeted direct response vehicles, (d) increase face-to-face sales calls with corporate customers and, (e) development of new marketing materials. Inventory Increase: (a) support the increased sales activity expected, (b) reduce the cost of goods through volume purchasing. Receivables Financing: (a) support the increased sales activity expected, (b) eliminate early-payment discounts given to customers. New Product Development: (a) further develop advanced concepts for the existing product line, (b) further develop and bring to market new products currently in various stages of development, (c) Identify new products for future development. Lease Financing: (a) provide alternative financing to its customers where few options exist (b) provide the ability to finance the purchase of the Company's products internally, (c) establish an additional source of profit and cash flow. Facilities Expansion: (a) provide adequate production facilities for the anticipated increase in Fillmaster product sales, (b) production facilities for new products (c) office and administrative space for increased staff requirements. Patent, Trademark and Legal Expense: (a) provide patent and trademark protection for existing and anticipated products. Manufacturing/Computer Equipment: (a) provide production and assembly equipment to improve production efficiency (b) provide additional computer equipment for increased productivity by administrative and executive staff. Working Capital: (a) provide liquidity for general business contingencies. Management believes that the offering of its securities will provide sufficient liquidity to meet the requirements described above for the balance of fiscal 1996 and 1997. 13 16 FUTURE OUTLOOK The key to long term profitability of the Fillmaster(R) product line and, ultimately the Company, is to establish a substantial number of Fillmaster(R) units installed and in use. Since each unit requires a replacement of its filters at least once a year, each new system installed becomes a source of steady future income far exceeding that derived from the initial sale of the Product. In addition, each pharmacy using the Fillmaster(R) will be an easily approachable candidate for any new pharmacy tools developed by the Company in the future. These multiple reasons for establishing a solid base of users have caused the Company's sales efforts to focus primarily on the chain pharmacy market. When combined with the short-term efficiencies inherent in multiple-unit sales and the expanding nature of the market, chain pharmacies were the most attractive of the options. This strategy has been successful, as the Company continues to build an ever-increasing sales revenue base with sales and marketing expenditures a fraction of those necessary to reach independent and hospital pharmacies. At the beginning of fiscal year 1994, the Company's chain pharmacy customer base consisted of scattered individual locations in three chains. By the end of the third quarter of fiscal year 1996, the Fillmaster(R) product was installed at more than 3,500 total locations representing 4% of the total domestic market, with approximately 2,800 of these locations being in more than 20 regional and national chains ranging in size from 30 to 2,400 stores. These customers include the nation's largest drug store chain, Walgreens, and Wal-Mart, the world's largest retailer. The 2,800 locations represent approximately 9% of a total chain pharmacy market that is expanding at the rate of approximately 10% per year. The Company's chain customer base continues to expand at the rate of approximately one chain per month and is expected to continue at that pace for the foreseeable future. Acquisition of a new chain customer generally results in staged product acquisition after initial testing, typically beginning with higher-volume pharmacies. Complete saturation of each customer's locations generally takes place over an extended period. Thus, gaining a new chain customer bodes well for sales of new Fillmaster(R) Purification Systems over the intermediate term and for continuing replacement filter sales over the long term. Currently, the 2,800 chain drug store locations in which the Product is installed are less than 20% of the available locations in the chains represented. The logical, ultimate and final development in the chain sales cycle is when the Product becomes specified as standard equipment for all new and remodeled pharmacies, making new orders automatic as construction occurs. As of 4/30/96 Walgreens, Eckerd, Target, Sav-On, Osco, Dillon Stores, the Mid-Atlantic Region of Kroger and City Markets have designated the Fillmaster(R) as standard equipment for their new and remodeled pharmacies. Sales revenues for new Fillmaster(R) units from these customers' new openings and remodeling programs are projected at approximately $600,000 per year (1,300 units) for each of the next five years with virtually no additional sales effort or expense. Each succeeding year, these installations will generate an equal incremental increase in the number of replacement filter sets sold. The Company expects that additional chains will make the same specification during the balance of fiscal 1996, 97 and 98, expanding the ongoing base of recurring orders. During fiscal years 1996 and 1997, the introduction of leasing is anticipated to have a positive effect on sales revenues, with more dramatic results expected in ensuing years. Through leasing, which is currently being offered through a third-party lender, new chain customers whose capital resources are limited will be able to acquire the Product with no effect on the balance sheet, and a net monthly decrease in expenses associated with water in the pharmacy. As resources allow, marketing expenditures will increase dramatically to be somewhat more focused on the costlier and more difficult-to-reach independent pharmacy market. This market, while shrinking somewhat due to inroads made by the chains, is still relatively stable in size. Representing more than 30,000 locations it has remained, in relative terms, virtually untapped. Currently, the Company's penetration is less than 3%. 14 17 Near term sales efforts in the independent pharmacy market will focus primarily on offering price concessions based upon quantity sales to the members of independent buying cooperatives and quasi-chains created by wholesale drug distributors. By accessing large numbers of pharmacies through their cooperatives and wholesalers, the Company retains the economies of scale associated with chain sales but generates higher margins through higher negotiated pricing and direct sales to the customer. Wholesale distributors have exited the durable goods markets and are not in a position to be able to stock and distribute the Product on any reasonable basis. At the same time, they offer centralized access to large numbers of independent pharmacy customers. By utilizing their customer structures but not their distribution systems, the Company will retain margins that would otherwise be paid to the distributor. Recently, the Company formed an alliance with McKesson Drug Company to promote the Fillmaster(R) Purification System to its Value-Rite quasi-chain group of independent pharmacies at a price that is discounted, but not to wholesale or chain pricing levels. McKesson is distributing product information in its regular mailings to this group, with the Product being sold and distributed directly to the customer by the Company. Longer-term marketing efforts in the independent pharmacy market will concentrate on non-affiliated independent community pharmacies. Leasing is expected to be an especially powerful tool in the independent pharmacy market once the Company has generated the capital necessary to be able to finance a leasing program internally. With limited cash resources making capital expenditures difficult for the independent community pharmacy, access to this market has been problematical. With the associated higher sales and marketing expenses, this market requires that the Company retain the full $659 list price in order to maintain profit margins. Leasing allows the customer to acquire a Fillmaster(R) unit for a monthly payment equal to or less than its existing monthly bottled water expenditures. Third-party lease financing is not currently available for fewer than four Fillmaster(R) units due to minimums imposed by the lenders. Reduction of the cash outlay necessary to acquire a Fillmaster(R) unit from $659 to an affordable monthly payment will allow the Company to penetrate this market to a much greater degree. The Company has calculated that the profits generated from internal leasing of Fillmaster(R) Filtration Systems and replacement filters will be more than double that generated by straight sales or third-party leasing for an equal number of units. In May, 1996 the Company offered 15 Bridge Financing 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 pro forma balance sheet and statement of shareholders equity attached to the financial statements in this Prospectus are given to show the effect of the Bridge Financing. Consistent with the accounting policy of the Securities and Exchange Commission, the Company has assigned a value of $2,250,000 for the 750,000 shares of common stock contained in the Bridge Financing Units and recorded this value as a Deferred Financing Costs asset and as a contribution to shareholders equity on the proforma balance sheet. Following the completion of the public offering and the repayment of the promissory notes contained in the Bridge Financing Units, the Deferred Financing Cost asset will be written off as an incurred operating expense. While the Company has not spent any cash in connection with this financing cost and the financing cost will have no effect upon the Company's liquidity from operations, recording a $2,250,000 expense is likely to delay the point in time when the Company will begin recording profits. The $2,250,000 valuation is based upon 750,000 shares at the public offering price of $4 per share with a twenty-five percent (25%) discount therefrom due to the risk taken by the Bridge Financing investors that the Company will be able to complete the public offering. 15 18 THE COMPANY AND ITS BUSINESS BUSINESS DEVELOPMENT Innovative Medical Services (the Company) was incorporated in the State of California on August 24, 1992 to pursue the immediate business of manufacturing and marketing of the Fillmaster(R) (or the Product) and subsequently a broadly based business of delivering advanced technology, equipment and supplies to the Pharmacy Industry. Over the past three years, the Company has established the production and design, entered into contracts with its parts suppliers and or manufacturers, developed its initial assembly process and initiated its marketing program for the Product. The Product is an apparatus that provides measured amounts of "Purified Water" (as defined by the United States Pharmacopoeia, ("USP") for reconstitution of liquid oral antibiotics and certain other pharmacy applications. It consists of a six-stage water purification unit, an electronic water purity testing module, an auxiliary faucet for dispensing purified water, and a calibrated volumetric measuring and dispensing apparatus for the actual reconstitution. The entire system is closed and pressurized and, according to the Company's testing, has a fill rate at least three times that of current methods. The Company also markets unique and proprietary filter replacements for the purification unit which require changing at intervals of approximately 9-12 months or whenever indicated by the purity testing module. The filter replacements represent a guaranteed source of future sales and cash flow to the Company. There are approximately 72,000 Pharmacies in the United States and Canada, with many thousands more world-wide. Water-mixed antibiotic prescriptions, for which the Fillmaster(R) is primarily used, make up approximately 12.6% of a Pharmacy's total prescriptions and approximately 25% of a pharmacy's gross profit. Approximately 3,500 units of the Product have been sold to date. Fillmasters(R) have been purchased and are now being widely used by such pharmacy chains as Walgreens, Wal-Mart, Eckerd Drugs, Target, SavOn, Osco, CVS, Thrifty PayLess, Thrift Drug, three divisions of Kroger, Smith's Food and Drug, and Longs Drugs. Also included in the customer base are United States Military Clinics, the Kaiser Foundation for Medical Care, the Mayo Clinic, and several hundred Independent and Hospital Pharmacies. The Fillmaster(R) is specified as standard equipment for all newly constructed and remodeled pharmacies at Walgreens, Target, Eckerd, SavOn/Osco and CVS. The Company believes that the Product will be installed in 100% of Walgreens pharmacies prior to the end of the current Fiscal Year. Gross Sales of the Company have been $179,000 and $459,000 for the fiscal years ended 1994 and 1995 respectively. In its current fiscal year, the Company's sales have been $701,000 through the first nine months. In 1994 it began selling the proprietary replacement filters which represent an ongoing, guaranteed and permanent market with profits far exceeding those from the original sale of the Product. PRINCIPAL PRODUCT AND ITS MARKET The Fillmaster(R) consists of a six-stage water purification unit, a pharmaceutical water dispenser with precise measuring capabilities, a purity testing module and anti-contamination qualities for use by Pharmacists in mixing liquid prescriptions. The entire system integrates with the building's tap water system, is closed and pressurized, and therefore has a fill rate 300% faster than the bottle-and-hose systems which are the only known competition. The Product utilizes proprietary filter cartridges which are changed every 9-12 months or when prompted by the Product's purity test indicator. The Product is packed and shipped by the Company and installed by the end-user following the illustrated instructions included with the Product using common household tools. The United States Pharmacopeia (USP) is a comprehensive reference work which has established the standards for pharmacy practices and supplies in the United States for over one hundred years. The USP is recognized as the official standard for pharmacy practice and supply by various federal statutes including the Food Drug and Cosmetic Act and by virtually all states. The USP requires Pharmacists to use "Purified Water" in reconstituting powdered medications such as antibiotics. "Purified Water" is defined as ". . . water 16 19 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. 17 20 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. 18 21 MANAGEMENT The officers and directors of the Company are as follows:
NAME AGE POSITION ------------------------------------------------ --- ---------------------------------- Michael L. Krall................................ 44 President, CEO, Director Norman Andersen................................. 77 Chairman of the Board, Director Gary Brownell, CPA.............................. 47 Chief Financial Officer, Director Dennis Atchley, Esq............................. 44 Secretary Eugene Peiser, PD............................... 65 Director Patrick Galuska................................. 37 Director Dennis Brovarone, Esq........................... 40 Director
The above officers and directors may be deemed the founders and organizers of the Company. The directors of the Company are elected to hold office until the next annual meeting of Shareholders and until their successors have been elected and qualified. Pursuant to the Underwriting Agreement, the Representative of the Underwriters is entitled to nominate a Director for election for a five years following the Offering and Mr. Krall and Mr. Thomas Smith, Jr., have agreed to vote their shares for the election of the Representative's nominee. No family relationship exists among the Company's officers and directors. The following summarizes the experience and qualifications of the Company's Management: DENNIS B. ATCHLEY. Mr. Atchley, 44, is a civil litigation attorney with the law firm of Epsten & Grinnell since January 1995. He was a sole practitioner from 1985 to 1995, was formerly a partner in the firm of Winters and Atchley and served as an associate attorney with several larger law firms. He became an officer of Innovative Medical Services in 1992. Mr. Atchley graduated from Loyola University of Los Angeles in 1973 with a Bachelor of Arts degree in political science. He received his Juris Doctorate in 1976 from California Western University School of Law. Mr. Atchley is a member of the American Bar Association and the American Arbitration Association. Mr. Atchley resides in San Diego with his wife and two children. GARY W. BROWNELL. Mr. Brownell, 47, has served as CFO since 1/94 and is a Certified Public Accountant in a private partnership practice. He is the partner in charge of taxes and municipal audits for his firm. Mr. Brownell graduated from San Diego State University in 1973 with a Bachelor of Science degree in accounting. He received his Certified Public Accountant designation in 1983. Mr. Brownell has been a partner in Brownell and Duffy since 1985. MICHAEL L. KRALL. Mr. Krall, 44, is the President and CEO of Innovative Medical Services, a position he has held since 1993. He is responsible for the strategic planning, product development, shareholder relations and day-to-day operations of IMS. Previously, Mr. Krall was the President and CEO of Bettis-Krall Construction, Inc. from 1983-92, a successful building-development company of custom homes and commercial property in San Diego County, California. He has also held numerous positions in general management in the hospitality industry. Mr. Krall attended Pepperdine University (economics, statistics mechanical engineering). He previously served 4 years in the United States Marine Corps and was elected, by general election, to a 4 year term on the Valle de Oro Planning Board. Mr. Krall lives in El Cajon, California with his wife, Connie and two children. NORMAN L. ANDERSEN. Mr. Andersen, 77, currently retired, was from 1974 until September of 1994, Chairman of the Board of Cord North American Moving and Storage, Inc., in Earth City, MO, a suburb of St. Louis. Prior to serving solely as Chairman of the Board from 1987 until this year, he also served as its Chief Executive Officer. Cord North American is a holding company for several moving and storage concerns in the St. Louis area. Mr. Andersen served for many years and in several capacities in the Al Bahr Shrine. He is widowed and lives in Fairview Heights, IL. 19 22 EUGENE S. PEISER, DOCTOR OF PHARMACY. Dr. Peiser, 65, has been an independent consultant to FDA regulated industries since 1974 and a Member of the Board of Innovative Medical Services since 1994. He graduated from the University of Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and has received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a wide variety of subjects, including compliance with the Prescription Drug Marketing Act and other government compliance matters, employee training and drug repackaging. Dr. Peiser furnishes expert witness services and has provides approved Pharmaceutical Continuing Education to several thousand attendees at his seminars. Dr. Peiser is a Founding Director of the Association of Drug Repackagers; is appointed as a Registered Arbitrator by the American Registry of Arbitrators; serves as a member of the Surgeon General's Speakers Bureau; and is President of the Southwest Chapter of the Association of Military Surgeons. Dr. Peiser lives and works in Palm Harbor, FL. PATRICK GALUSKA. Mr. Galuska, 37, is a Petroleum Engineer and has been with Meridian Oil Inc. since 1982. He is responsible for the financial viability of numerous properties located in the Rocky Mountains and has also been involved in many property acquisitions and contract negotiations. He is a Registered Professional Engineer and is a member of the Society of Petroleum Engineers. He was elected to the Company's Board of Directors in April, 1996. Mr. Galuska graduated from the University of Wyoming in 1982 with a Bachelor of Science degree in Petroleum engineering. He received his Masters in Business Administration, specializing in Finance, from the University of Denver in 1992. Mr. Galuska resides in Denver, Colorado with his wife. DENNIS BROVARONE, ESQ. Mr. Brovarone, 40 has been practicing corporate and securities law since 1986 and as a solo practitioner since 1990. He was elect to the Company's Board of Directors in April, 1996. Prior to 1990, Mr. Brovarone served as in-house counsel to R.B. Marich, Inc., a Denver, Colorado based brokerage firm. Mr. Brovarone also serves as President (chairman) of the Board of Directors of The Community Involved Charter School, a two year old K-12 public school located in Lakewood, Colorado, operating under an independent charter and serving approximately 350 students in an individualized, experiential learning environment. Mr. Brovarone lives and works in Denver, Colorado. SUMMARY EXECUTIVE COMPENSATION TABLE The following table sets forth the total compensation paid to the Company's Chief Executive Officer and the highest compensated executive officers for the last three completed fiscal years and as estimated for the current fiscal year.
TOTAL ANNUAL CASH COMPENSATION ------------------- YEAR ENDED $ RESTRICTED STOCK OR NAME & POSITION JULY 31, AMOUNT OPTIONS GRANTED(1) - ----------------------------------------------------------- ---------- ------ ------------------- Michael L. Krall........................................... 1992 0 637,001 shares 1993 0 0 1994 30,000 0 1995 45,000 31,250(2) 1996 96,000 Dennis Atchley............................................. 1994 0 21,978 shares 1995 0 0 Gary Brownell.............................................. 1994 0 18,315 shares 1995 0 14,000 shares Dennis Brovarone........................................... 1996 36,000 13,320 shares
- --------------- (1) After effect of a two for three reverse split effective in April, 1996. (2) Five year Options exercisable after April, 1997 at $3.20 per share. See Employment Contracts below. On April 17, 1996, the Company's shareholders approved an Incentive Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the key employees of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Options to be granted are "Incentive Stock 20 23 Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for certain key employees. The Plan is administered by the Board of Directors. The Plan became effective on April 17, 1996 after Shareholder approval and shall terminate on April 17, 2006. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Key Employees. The maximum number of shares subject to Options granted to any one Key Employee shall not exceed 100,000 shares. The exercise price for Options shall be set by the Board of Directors but shall not be for less than the fair market value of the shares on the date the Option is granted. The period in which Options can be exercised shall be set by the Board of Directors not to exceed five years from the date of Grant. The Plan may be terminated, modified or amended by the Board of Directors. The issuance of options pursuant to this Plan is not expected to be a taxable event for recipient until such time that the recipient elects to exercise the option whereon the recipient is expected to be recognize income to the extent the market price of the shares exceeds the exercise price of the option on the date of exercise. All Key Employees of the Company and its subsidiaries are eligible to participate in the Incentive Stock Options. A Key Employee is defined in the Plan as a Company employee who in the judgment of the Board of Directors has the ability to positively affect the profitability and economic well-being of the Company. Part time employees, independent contractors, consultants and advisors performing bona fide services to the Company shall be considered employees for purposes of participation in the Plan. As of the date of this Prospectus no benefits have been allocated. On April 17, 1996, the Company's Board of Directors approved a Directors and Officers Stock Option Plan. The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the Directors and Officers of the Company who are ineligible to participate in the above Incentive Stock Option Plan, the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Plan is administered by the entire Board of Directors. The Plan became effective on April 17, 1996 by the Board of Directors, was not subject to Shareholder approval and shall terminate on April 17, 2006. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Directors and Officers. The maximum number of shares subject to Options granted to any one Director or Officer shall not exceed 100,000 shares. The exercise price for Options shall be set by the Board of Directors but shall not be for less than $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. In addition, the Board of Directors granted 2,500 common shares each to Robert Abrigo and Thomas Smith, Sr. for previous service as Directors up to the Shareholders Meeting of April 17, 1996. The Company does not have a retirement, pension, profit-sharing or insurance program. The Company has not reimbursed Directors for any travel expenses incurred in attending meetings, though it may adopt such a policy as revenues permit. EMPLOYMENT CONTRACTS In April, 1996, the Board of Directors approved a five year employment agreement for Michael Krall, its President. Mr. Krall is to receive a salary of $108,000 per year, an amount equal to 3% of the Company's net income before taxes if any plus other benefits. In addition, the Board of Directors awarded Mr. Krall compensation in the amount of $30,000, $45,000 and $60,000 for the fiscal years ended July 31, 1994, 1995 and the eight month period ended March 31, 1996. Mr. Krall has contributed these amounts back to the Company as additional paid in capital for shares previously issued to Mr. Krall. Mr. Krall was also awarded five year options to acquire 31,250 common shares at $3.20 per share which are first exercisable in April, 1997. Please see "Certain Transactions". Mr. Brovarone also serves as securities counsel for the Company and receives $3,000 per month plus expenses. Please see "Certain Transactions". 21 24 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 2,583,851 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 17, 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. 22 25 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 1,833,851 shares of restricted common stock outstanding of which 1,668,343 have been held in excess of two years and therefore are eligible for sale pursuant to Rule 144, assuming all other conditions of the Rule have been met. Shares held by persons other than officers, directors and holders of greater than five percent (5%) of the outstanding shares are subject to an agreement with the Underwriters to refrain from selling more than ten percent (10%) of their individual holding without the Representative consent for a two year period. The officers, directors and holders of greater than five percent (5%) of the outstanding shares are subject to an agreement with the Underwriters to refrain from selling any their individual holdings without the Representative's consent for a two year period. There are no outstanding options or warrants to purchase or securities convertible into the common stock of the Company, except options awarded to the Company's President, see Executive Compensation, and the Bridge Loan Unit Warrants. Please see Description of Securities and Additional Securities Being Registered. (b) Approximate Number of Holders of Common Stock. The number of holders of record of the Company's no par value stock at April 30, 1996 are 40. (c) Dividends. Holders of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. No dividends have been paid with respect to the Company's Common Stock and no dividends are anticipated to be paid in the foreseeable future. (d) Reverse Split. On April 17, 1996, the Company's shareholders approved a two for three reverse split effective on that date. Fractional shares were rounded up to the next whole share. CERTAIN TRANSACTIONS On September 1, 1992, the Company issued 956,460 (pre split)shares of common stock each to Michael L. Krall and Thomas E. Smith,(Jr.) the founders of the Company for capital equipment, working capital and services rendered in the organization and initial operation of the Company. Mr. Krall is the Company's President/CEO and a director. Thomas E. Smith, (Jr.) resigned his positions with the Company in July, 1993 and remains a principal shareholder. In January, 1994, Dennis Atchley and Gary Brownell, officers and directors of the Company were issued 33,000 and 27,500 (pre-split) shares of common stock respectively for services rendered to the Company with respect to its legal and accounting affairs. Both Mr. Atchley and Mr. Brownell have also been reimbursed their expenses incurred while rendering services to the Company. In December, 1995, Dennis Brovarone was issued 20,000 (pre-split) shares of common stock in consideration of services rendered to the Company with respect to corporate financing plans and federal securities law compliance. Since inception, the Company has periodically made loans to Mr. Krall and Thomas E. Smith, (Jr.) which accrued interest at the rate of 7% per annum. These debt balances were also periodically reduced by Mr. Krall and Thomas E. Smith,(Jr.) by cash payments to the Company. These loans were made by the Company to insure Mr. Krall and Mr. Smith's availability to the Company and the proceeds were used by Mr. Krall and Mr. Smith for personal expenses unrelated to the Company. While the Company does not make loans to unrelated parties, it believes that the terms of these loans were favorable to the Company. As of July 31, 1994, Thomas E. Smith, (Jr.)'s balance was $21,449.23 and the Company received a Promissory Note in the principal amount of $21,449.23 from Thomas E. Smith, (Jr.). The Note accrued interest at the rate of 7% per annum was payable in one installment on or before September 30, 1995. In November, 1994, Thomas E. Smith, (Jr.) partially repaid his balance by contribution of $29,000 of proceeds from the sale of 29,000 of Thomas E. Smith, (Jr.)'s shares of the Company's common stock. As of July 31, 1995, Thomas E. Smith, (Jr.)'s balance owed was $9,128.199 and Thomas E. Smith, (Jr.) issued a new Promissory Note dated July 31, 1995 in the principal amount of $9,128.19 which accrues interest at the rate of 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. 23 26 As of July 31, 1994, Mr. Krall had a debt balance of $0.00 and had contributed an additional $16,620.40 to the Company. On July 31, 1994, the Company issued Mr. Krall a Promissory Note in the principal amount of $16,620.40. The Note accrued interest at the rate of 7% per annum was payable on or before September 30, 1995. In November, 1994, Mr. Krall contributed $29,000 of proceeds from the sale of 29,000 of Mr. Krall's shares of the Company's common stock. As of July 31, 1995 and as a result of additional borrowing by Mr. Krall, Mr. Krall's balance owed was $15,857.71 and Mr. Krall issued a new Promissory Note dated July 31, 1995 in the principal amount of $15,857.71 which accrues interest at the rate of 7% per annum and is payable on or before September 30, 1996. As of April 30, 1996, the balance owed on this note is $63,683. On January 1, 1994, the Company issued a Promissory Note with a principal amount of $30,000 to Thomas E. Smith, Sr., a Director of the Company. The Note accrued interest at the rate of 9.873% per annum. The Note was repaid by the conversion of $5,000 into 5,000 shares of common stock in November, 1994 and the issuance on January 1, 1995, of another Promissory Note for the remaining principal amount of $25,000. This Note accrues interest at the rate of 11.848% per annum and is payable in monthly interest with the principal due on or before January 1, 1997. The Company is current in its payments on this Note. All ongoing and future affiliated transactions will be made or entered into on terms that are no less favorable to the Company than those that can be obtained from unaffiliated third parties and that all ongoing and future affiliated transactions and any forgiveness of loans must be approved by a majority of the independent disinterested members of the Company's Board of Directors. DESCRIPTION OF SECURITIES Common Stock: The Company is authorized to issue up to 20,000,000 shares of its no par value common stock. Each share is entitled to one vote on matters submitted to a vote of the shareholders of the Company. There is no cumulative voting of the common stock. The common stock shares have no redemption provisions nor any preemptive rights. The Company is also authorized to issue up to 5,000,000 shares of preferred stock, the rights and preferences of which may be set from time to time prior to issuance by the Board of Directors. Class A Warrants: The Class A Warrants offered hereby entitle the holder to acquire an additional common share for $5.25 per common share beginning July , 1997 and expiring July , 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 any twenty (20) trading days within a period of thirty (30) consecutive business days ending within five (5) days of the date of a Notice of Redemption. The Company has undertaken to maintain the effectiveness of the registration statement filed with the U. S. Securities and Exchange Commission covering the Class A warrants, Class Z warrants and the underlying shares thereof to allow the exercise and public resale of the warrants and the shares issueable upon exercise thereof. Additional Securities Being Registered / Bridge Loan Units: The Registration Statement of which this Prospectus is a part has 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 offered 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. 24 27 The Class A Warrants and the Class Z Warrants cannot be exercised for one year and two years respectively and both expire in July, 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 exercisable in July, 1997 and expire in July, 2001. The Class Z Bridge Loan Warrants are exercisable in July, 1998 and expire in July, 2001. The 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 a period of twenty (20) trading days within a period of thirty (30) consecutive business days ending within five days of the date of notice of redemption, averaged in excess of $9.00 per share for the Class A Warrants and $15.00 per share for the Class Z Warrants. 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 Meyers Pollock Robbins Inc., is the Representative, have agreed, severally and not jointly to the terms and conditions of an Underwriting Agreement dated the date hereof to purchase from the Company the Shares and the Warrants offered hereby in the amounts set forth below:
COMMON SHARES CLASS A WARRANTS ------------- ---------------- Meyers Pollock Robbins Inc.............................. Total......................................... 1,250,000 1,250,000 ------------- ----------------
The Underwriting Agreement provides that the Underwriters will purchase the Shares offered hereby for $3.60 per Share and the Class A Warrants for $0.09 per Warrant, representing a discount of 10% from the public offering price. The Company has granted the Representative an Overallotment Option, exercisable during the 30 day period after the date of this Prospectus, to purchase up to a maximum of an additional 187,500 Shares and 187,500 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 exercisable at $4.40 per share (one hundred ten percent (110%) of the offering price) for a period of five years from the date of the offering and carry certain rights to be included within any appropriate registration statement which the Company may file in order to permit the public resale of the underlying common stock. The Company, its directors, officers and holders of greater than five percent (5%) of the outstanding shares are subject to an agreement with the Underwriters to refrain from selling any their individual holding 25 28 without the Representative's consent for a two year period. Shareholders other than officers, directors and holders of greater than five percent (5%) of the outstanding shares are subject to an agreement with the Underwriters to refrain from selling more than ten percent (10%) of their individual holding without the Representative's consent for a two year period. There is currently no market for the common shares of the Company and there can be no assurance that a market will develop following the offering. The initial public offering price of the Shares was determined by negotiations between the Representative and the Company. Among the factors considered in determining the initial public offering price were the history and the prospects for the Company, the market for the Company's products, assessment of the Company's Management, the number of shares offered, the price that purchasers of such securities are likely to pay, given the nature of the Company, and the general condition of the securities markets at the time of the offering. Accordingly the price set forth on the cover of the Prospectus should not be taken as an actual value of the Company or the common shares. The Company and the Underwriters have agreed to indemnify each other against certain liabilities under the Securities Act of 1933 as amended, and if such indemnification's are not available then a reciprocal indemnification and contribution arrangement will take effect. It is the position of the Securities and Exchange Commission that exculpation and indemnification for liabilities arising under the Securities and Exchange Act of 1934 as amended, and the rules and regulations thereunder is against public policy and therefore unenforceable. The Company has further agreed with the Representative that the Company will file a registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934 as amended no later than the date of this Prospectus and use its best efforts to cause the same to become effective. The Company and the Representative have also agreed that the Company will take all steps necessary, and will obtain a Notice of Listing Upon Notice of Effectiveness by NASDAQ prior to completion of the offering. 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 & Trust, Inc., Denver, Colorado. LEGAL MATTERS The legality of the Securities of the Company offered will be passed on for the Company by Dennis Brovarone, Attorney at Law, Denver, Colorado. Mr. Brovarone is also a Director of the Company. INDEPENDENT PUBLIC ACCOUNTANT The balance sheets as of July 31, 1995 and 1994 and the related statements of income, accumulated deficit, and cash flows for each of the two years in the period ended July 31, 1993, incorporated by reference in this prospectus, have been included herein in reliance on the report of Steven Holland, independent public accountant, given on the authority of that firm as experts in auditing and accounting. With respect to the unaudited interim financial information for the periods ended April 30, 1996 and 1995. Incorporated by reference in this prospectus, the independent public accountant has reported he has applied limited procedures in accordance with professional standards for a compilation of such information. However, his separate report for the nine months ended April 30, 1996 and 1995 included in the Company's 26 29 Form SB-2, and incorporated by reference herein, states that he did not audit and he does not express an opinion on that interim financial information. Accordingly, the degree of reliance on his report on such information should be restricted in light of the limited nature of the procedures applied. The accountant is not subject to the liability provisions of section 11 of the Securities Act of 1933 for their report on the unaudited interim financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by the accountant within the meaning of sections 7 and 11 of the act. 27 30 INNOVATIVE MEDICAL SERVICES FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE YEARS ENDED JULY 31, 1995 AND JULY 31, 1994 31 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 32 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 33 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 34 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 35 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 36 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS SEE ACCOUNTANTS' REPORT NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Activity Innovative Medical Services was incorporated in San Diego, California on August 24, 1992. The Company was organized with the purpose of manufacturing, marketing, and sales of the Fillmaster, a unique and proprietary pharmaceutical water purification and dispensing product. The Company is fully operational, with more than 2,500 customers in all fifty states, Puerto Rico, The United Kingdom, Australia, Canada, and Europe. The Company intends to expand research and development efforts in order to further develop its product line to include an additional 11 proprietary pharmacy-related efficiency tools. Revenue Recognition The company recognizes revenues when products are delivered. Research and Development Research and development costs are charged to operations when incurred and are included in operating expenses. The total amount charged to Research and Development in years prior to July 31, 1994 was $34,697. Depreciation Method The cost of property, plant and equipment is depreciated on a straight line basis over the estimated useful lives of the related assets. The useful lives of property, plant, and equipment for purposes of computing depreciation are: 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 37 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) and $116,000, respectively. The difference between the financial reporting and the federal tax loss carryforward is primarily due to the capitalization of research and development expenses and start-up expenses for tax purposes with an amortization over five (5) years, but for financial reporting purposes these expenses are charged to operations as incurred. The difference between federal and California tax loss carryforwards is primarily due to the fifty percent limitation on California loss carryforwards. The tax loss carryforwards will begin expiring in fiscal year ended July 31, 2009 unless previously utilized. Under the Tax Reform Act of 1986, the use of the Company's net operating loss carryforwards may be limited if the public offering contemplated results in a cumulative change in ownership of more than 50%. The Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, beginning in fiscal year ended July 31, 1993. The adoption had no impact on 1993 results. In accordance with this new standard, the Company has recorded total deferred tax assets of $69,000 and $80,000 and a related valuation reserve of $69,000 and $80,000 as of July 31, 1995 and 1994, respectively. Realization of these deferred tax assets, which relate to operating loss carryforwards and timing differences from the amortization of research and development expenses and start-up expenses, is dependent on future earnings. The timing and amount of future earnings are uncertain and therefore, the valuation reserve has been established. NOTE 2. NOTES RECEIVABLE At July 31, 1995, notes receivable in the amount of $15,858 represents amounts due from officers and $9,128 represents amounts due from a shareholder, all are due and payable within one year. At July 31, 1994, notes receivable in the amount of $21,449 represent amounts due from a shareholder and previous officer. The note receivable due from the shareholder at July 31, 1994 was paid off during the fiscal year ended July 31, 1995. NOTE 3. DUE FROM SHAREHOLDERS At July 31, 1995, due from shareholders represents stock sold and issued for which some payments were received after the year end. NOTE 4. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant, and equipment -- at cost, less accumulated depreciation:
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 38 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 39 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. RELATED PARTY TRANSACTIONS On April 1, 1996, the Company entered into an employment agreement with the President and Chief Executive Officer. The term of the agreement is for five years with an automatic renewal of another five years. The following are the major provisions of the agreement: 1. Compensation -- a. Salary of $108,000 per year, and b. Additional compensation equal to 3% of the net income before taxes earned by the corporation during each full fiscal year, and c. A monthly amount of not more than $500 per month for a auto lease, and d. A five year option to purchase as many shares of the corporation's common stock as equals one hundred thousand dollars at 80% of the initial public offering price of the Company's common stock. 2. Compensation for past services -- In consideration of services which have been rendered during the fiscal years ended July 31, 1994 and July 31, 1995 and the eight months period ended March 31, 1996, the corporation granted the following compensation for past services rendered: a. $30,000 for fiscal year ended July 31, 1994, and b. $45,000 for fiscal year ended July 31, 1995, and c. $60,000 for the eight months ended March 31, 1996. The President waived the payment of compensation for past services and contributed this amount as an additional payment for the common stock he presently owns. NOTE 9. SUBSEQUENT EVENTS Stock split and change in authorized shares On April 17, 1996, the Board of Directors approved a 2 for 3 reverse stock split of the common stock of the founding shareholders of the corporation, thus reducing the outstanding shares. Also, the board authorized the issuance of 2 classes of shares, to be designated respectively as 'Common shares' and 'Preferred shares'. The total number of authorized common shares of the corporation will be increased from 5,000,000 shares to 20,000,000 shares, with no par value. The total number of authorized preferred shares of the corporation will be increased from 1,000,000 shares to 5,000,000 shares, with no par value. Stock option plans On April 17, 1996, the Board of Directors and the shareholders approved a stock option plan for the key employees of the Company and non-employee Directors of the Company. Under the plan the number of shares of stock which may be issued and sold shall not exceed 1,000,000 shares, with 900,000 shares reserved for issuance to key employees pursuant to their Incentive Stock Options and 100,000 shares reserved for issuance to non-employee Directors pursuant to their non-statutory options. The per share option shall be determined by committee, but the per share exercise price shall not be less than the fair market value of the stock on the date the option is granted. No person shall receive options, first exercisable during any single calendar year for stock, the fair market value of which exceeds $100,000. On April 17, 1996, the Board of Directors approved a stock option plan for the executive officers and Directors of the Company. Under the plan the maximum number of shares of stock which may be issued and sold shall not exceed 1,000,000 shares ,with the maximum number of shares for which an option may be F-9 40 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) granted to any one Director or officer shall be 100,000. The per share option price for the stock subject to each option shall be $1.00 per share or such other price as the Board of Directors may determine. NOTE 10. DEVELOPMENT STAGE The company was formed on August 24, 1992 and was in the development stage through July 31, 1993. The fiscal year ended July 31, 1994 is the first year during which it is considered an operating company. F-10 41 AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION Our audits of the basic financial statements were made primarily to form an opinion on such financial statements taken as a whole. The supplementary information contained in the following pages is presented for the purpose of additional analysis and, although not required for a fair presentation of financial position, results of operations, and cash flows, was subjected to the audit procedures applied in the examinations of the basic financial statements. In our opinion, the supplementary information is fairly presented in all material respects in relation to the basic financial statements taken as a whole. Steven Holland Certified Public Accountant San Diego, Ca. October 15, 1995 F-11 42 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 43 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 44 INNOVATIVE MEDICAL SERVICES FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE NINE MONTHS ENDED APRIL 30, 1996 (UNAUDITED) F-14 45 To the Board of Directors Innovative Medical Services El Cajon, California I have compiled the accompanying balance sheet of Innovative Medical Services (a corporation) as of April 30, 1996, and the related statement of income, accumulated deficit, and cash flows for the nine months then ended, and the accompanying supplementary information contained in Schedules 1 & 2, which are presented only for supplementary analysis purposes, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements and supplementary schedules information that is the representation of management. The financial statements include all adjustments which in the opinion of management are necessary to make the financial statements not misleading. I have not audited or reviewed the accompanying financial statements and supplementary schedules and, accordingly, do not express an opinion or any other form of assurance on them. Steven Holland Certified Public Accountant San Diego, California June 15, 1996 F-15 46 INNOVATIVE MEDICAL SERVICES BALANCE SHEET
PRO FORMA (NOTE 1) APRIL 30, APRIL 30, 1996 1996 --------- ---------- ASSETS Current Assets Cash............................................................... $ 21,168 $ 323,668 Accounts receivable, net of allowance for doubtful accounts of $500............................................................ 45,238 45,238 Notes receivable (Note 2).......................................... 73,311 73,311 Due from employees................................................. 1,629 1,629 Due from shareholders (Note 3)..................................... 210 210 Inventories........................................................ 32,974 32,974 Prepaid expenses................................................... 6,603 6,603 --------- ---------- Total current assets....................................... 181,133 483,633 --------- ---------- Property, Plant & Equipment Property, plant & equipment (Note 4)............................... 102,307 102,307 --------- ---------- Total property, plant & equipment.......................... 102,307 102,307 --------- ---------- Noncurrent Assets Organizational costs, net (Note 1)................................. 1,290 1,290 Deferred public offering costs (Note 1)............................ 96,365 168,865 Deferred finance costs (Note 10)................................... 0 2,250,000 --------- ---------- Total noncurrent assets.................................... 97,655 2,420,155 --------- ---------- Total assets....................................................... $ 381,095 $3,006,095 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable................................................... $ 96,092 $ 96,092 Accrued liabilities................................................ 14,240 14,240 Notes payable (Note 5)............................................. 50,000 425,000 --------- ---------- Total current liabilities.................................. 160,332 535,332 --------- ---------- Stockholders' Equity Class A common stock, no par value; authorized 20,000,000 shares, 1,833,851 and 2,583,851 shares issued and outstanding at April 30, 1996 and Pro Forma April 30, 1996 (Note 7 and Note 10)...... 658,181 2,908,181 Accumulated deficit................................................ (437,418) (437,418) --------- ---------- Total stockholders' equity................................. 220,763 2,470,763 --------- ---------- Total liabilities and stockholders' equity................. $ 381,095 $3,006,095 ======== =========
See accompanying notes and accountant's report. F-16 47 INNOVATIVE MEDICAL SERVICES STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED APRIL 30, ------------------------------------- 1996 1995 ---------------- ---------------- (UNAUDITED) Net sales..................................................... $701,088 $145,849 Cost of sales................................................. 508,489 93,775 ------ ------ Gross profit.................................................. 192,599 52,074 ------ ------ Selling expenses.............................................. 65,199 29,732 General and administrative expenses........................... 202,972 100,867 ------ ------ Total operating costs............................... 268,171 130,599 ------ ------ Operating income (loss)....................................... (75,572) (78,525) ------ ------ Other income and (expense): Miscellaneous income and (expense).......................... 180 3,042 ------ ------ Total other income and (expense).................... 180 3,042 ------ ------ Income (loss) before income taxes............................. (75,392) (75,483) Federal and state income taxes (Note 1)....................... 800 800 ------ ------ Net income (loss)............................................. $(76,192) $(76,283) ====== ====== Net (loss) per common share................................... $ (.02) $ (.02) ====== ======
See accompanying notes and accountant's report. F-17 48 INNOVATIVE MEDICAL SERVICES STATEMENT OF ACCUMULATED DEFICIT
FOR THE NINE MONTHS ENDED APRIL 30, 1996 ---------------- (UNAUDITED) Balance, beginning of year.................................................... $ (361,226) Net income (loss)............................................................. (76,192) ---------------- Balance, end of period........................................................ $ (437,418) ============
See accompanying notes and accountant's report. F-18 49 INNOVATIVE MEDICAL SERVICES STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, --------------------- 1996 1995 -------- -------- (UNAUDITED) Cash flows from operating activities Net income (loss).................................................... $(76,192) (76,283) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation...................................................... 20,029 12,297 Amortization...................................................... 774 774 Officers wages contributed........................................ 44,000 33,750 Changes in assets and liabilities: Decrease in accounts receivable................................... 129,547 13,797 Decrease (Increase) in note receivable............................ (48,325) 13,387 Decrease in due from employees.................................... 2,395 0 Decrease (Increase) in due from shareholders...................... 19,790 (30,000) (Increase) in inventory........................................... (9,863) (12,340) (Increase) in prepaids............................................ (6,604) 0 (Increase) in deferred public offering costs...................... (58,735) 0 (Decrease) in accounts payable.................................... (68,846) (10,817) Increase in accrued liabilities................................... 9,636 135 -------- -------- Net cash (used) by operating activities...................... (42,394) (55,300) -------- -------- Cash flows from investing activities Purchase of machinery and equipment.................................. (30,838) (7,521) -------- -------- Net cash (used) in investing activities...................... (30,838) (7,521) -------- -------- Cash flows from financing activities Proceeds from short-term debt........................................ 25,000 0 Payments on debt..................................................... 0 (3,596) Proceeds from sale of common stock................................... 22,220 60,000 -------- -------- Net cash provided by financing activities.................... 47,220 56,404 -------- -------- Net (decrease) in cash....................................... (26,012) (6,417) Cash, at beginning of year............................................. 47,180 6,549 -------- -------- Cash, at end of period................................................. $ 21,168 $ 132 ======== ========
See accompanying notes and accountant's report. F-19 50 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS SEE ACCOUNTANTS' REPORT NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Activity Innovative Medical Services was incorporated in San Diego, California on August 24, 1992. The Company was organized with the purpose of manufacturing, marketing, and sales of the Fillmaster , a unique and proprietary pharmaceutical water purification and dispensing product. The Company is fully operational, with more than 3,500 customers in all fifty states, Puerto Rico, The United Kingdom, Australia, Canada, and Europe. The Company intends to expand research and development efforts in order to further develop its product line to include an additional 11 proprietary pharmacy-related efficiency tools. Revenue Recognition The company recognizes revenues when products are delivered. Research and Development Research and development costs are charged to operations when incurred and are included in operating expenses. The total amount charged to Research and Development in prior years was $34,697. Depreciation Method The cost of property, plant and equipment is depreciated on a straight line basis over the estimated useful lives of the related assets. The useful lives of property, plant, and equipment for purposes of computing depreciation are: Computers and equipment.................................. 7.0 years Furniture and fixtures................................... 10.0 years
Leasehold improvements are being depreciated over the life of the lease which is equal to 29 or 89 months depending on the actual lease. Depreciation is computed on the Modified Accelerated Cost Recovery System for tax purposes. Amortization The cost of organizational expenses are being amortized on a straight line basis over their remaining lives of five (5) years. Amortization expense charged to general and administrative expense for the six months ended April 30, 1996 and April 30, 1995 was $774 and $774, respectively. Inventory Cost Method Inventories are stated at the lower of cost determined by the Average Cost method and net realizable value. Common Stock Public Offering The Board of Directors authorized the Company to sell up to 1,250,000 shares of the Company's common stock and 1,250,000 Class A warrants in a public offering pursuant to a Registration Statement on Form SB-2 under the Securities Act of 1933. The board of directors also authorized obtaining a bridge loan of up to $375,000 to facilitate the public offering (Note 10). On April 17, 1996, the Company entered into an agreement with Monitor Investment Group, Inc. of New York, whereby Monitor agreed to structure a Bridge Financing and act as the sole placement agent on a best F-20 51 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) effort basis (Note 5) and act as an underwriter on a firm-commitment basis for 1,250,000 shares of the Company's common stock and 1,250,000 Class A warrants. The Class A warrants will be exercisable commencing one year after the effective date of the offering and entitles each holder to purchase one share of common stock at $5.25 per common share during the four year period commencing one year from the effective date of the offering. The warrants are redeemable by the Company for $.05 per warrant, at the Company's option, commencing one year after the effective date of the offering provided the closing bid price for the Company's common shares shall have averaged in excess of $9.00 per share for thirty consecutive business days ending within five days of the date of a notice of redemption. The principal terms of the agreement with the Representative are as follows: a. Underwriter's discount and commission shall be ten percent of the aggregate public offering, and b. The non-accountable expense allowance will be three percent of the total amount raised, and c. The Company shall be responsible for and shall bear all expenses incurred in connection with the bridge financing and the public offering, and d. The Company will grant the underwriter an option to purchase all or part of an additional number of securities (the "Over-Allotment Option") as will be equal to not more than fifteen percent of the total number of securities initially offered for a period of thirty days from the closing date of the public offering in order to cover over-allotments, if any. Deferred Public Offering Cost The company has incurred $96,365 of costs as of April 30, 1996 related to an initial public offering. These costs have been deferred, pending completion of the offering, at which time such costs will be reclassified to shareholders' equity. Should the offering be unsuccessful, these costs will be expensed. In the Pro Forma balance sheet of April 30, 1996, additional deferred public offering costs of $72,500 are anticipated to be withheld from the bridge loan financing (Note 10). Net Loss Per Common Share Pursuant to the requirements of the Securities and Exchange Commission (SEC), common stock issued by the Company during the twelve months immediately preceding an initial public offering, plus the number of common equivalent shares which became issuable during the same period pursuant to the grant of stock options and Bridge Financing (Note 10 ) have been included in the calculation of the shares used in computing net loss per common share as if these shares were outstanding for all periods presented using the treasury stock method. Following is a reconciliation of the weighted average number of shares actually outstanding with the number of shares used in the computations of loss per common share: Weighted average number of shares actually outstanding.................... 1,817,369 Stock options issued to officer (Note 8).................................. 31,250 Bridge Financing common stock issued (Note 10)............................ 750,000 Bridge Financing warrants (Note 10)....................................... 562,500 ------- 3,161,119 =======
The number of shares that would be issued from the exercise of the warrants has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of $9.00 per share for Class A warrants and $15.00 per share for Class Z warrants, which represents the redemption prices. F-21 52 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes At April 30, 1996, the Company has financial, federal, and California tax net operating loss carryforwards of approximately $437,000, $273,000, and $116,000, respectively. The difference between the financial reporting and the federal tax loss carryforward is primarily due to the capitalization of research and development expenses and start-up expenses for tax purposes with an amortization over five (5) years, but for financial reporting purposes these expenses are charged to operations as incurred. The difference between federal and California tax loss carryforwards is primarily due to the fifty percent limitation on California loss carryforwards. The tax loss carryforwards will begin expiring in fiscal year ended July 31, 2009, unless previously utilized. Under the Tax Reform Act of 1986, the use of the Company's net operating loss carryforwards may be limited if the public offering contemplated results in a cumulative change in ownership of more than 50%. The Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, beginning in fiscal year ended July 31, 1993. The adoption had no impact on 1993 results. In accordance with this new standard, the Company has recorded total deferred tax assets of $68,000 and a related valuation reserve of $68,000, as of April 30, 1996. Realization of these deferred tax assets, which relate to operating loss carryforwards and timing differences from the amortization of research and development expenses and start-up expenses, is dependent on future earnings. The timing and amount of future earnings are uncertain and therefore, the valuation reserve has been established. Unaudited Pro Forma Balance Sheet at April 30, 1996 The pro forma balance sheet at April 30, 1996, reflects the completion of the Bridge Financing disclosed in Note 10. Interim Financial Statements The accompanying statements of income and cash flows for the nine months ended April 30, 1995 have not been audited. However, these financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. NOTE 2. NOTES RECEIVABLE At April 30, 1996, notes receivable in the amount of $63,683 represents amounts due from officers and $9,628 represents amounts due from a shareholder. All notes receivable are due and payable within one year. NOTE 3. DUE FROM SHAREHOLDERS At April 30, 1996, due from shareholders represents stock sold and issued for which some payments were received after April 30, 1996. F-22 53 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant, and equipment at cost, less accumulated depreciation:
APRIL 30, 1996 -------------- Computers and equipment................................................. $102,789 Furniture and fixtures.................................................. 39,023 Leasehold improvements.................................................. 18,034 ------ 159,846 Less: accumulated depreciation..................................... 57,539 ------ Total......................................................... $102,307 ======
Depreciation expense charged to general and administrative expense for the nine months ended April 30, 1996 and the nine months ended April 30, 1995 was $20,029 and $12,297, respectively. NOTE 5. DEBT The details relating to debt are as follows:
PRO FORMA (NOTE 1) APRIL 30, APRIL 30, 1996 1996 --------- --------- Note payable to a shareholder with interest at 12% interest payable in monthly installments of $247 and principal all due and payable on January 1, 1997................................. $ 25,000 $ 25,000 Note payable to a shareholder with interest at 12% all due and payable in 90 days..................................... 25,000 25,000 Bridge Financing (Note 10)................................... 0 375,000 ----- ------ Total notes payable................................ 50,000 425,000 Less: Current maturities of notes payable included in current liabilities................................................ 50,000 425,000 ----- ------ Total long term debt............................... $ 0 $ 0 ===== ======
NOTE 6. COMMITMENTS The Company leases office and warehouse facilities under an operating lease expiring on December 31, 1996. The total rental expense in general and administrative expenses for the nine months ended April 30, 1996 and April 30, 1995 was $18,441 and $8,987, respectively. On May 14, 1996, the Company entered into a new operating lease agreement for sixty-five months commencing on July 1, 1996. The rent payment portion of the lease will be for sixty-three months which allows for an initial building improvement period of two months. The monthly rental for the 7000 square foot facility will be $.61 per square foot plus $.08 per square foot for maintenance of common areas. There also is a fixed yearly increase of 4%. F-23 54 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. CAPITAL STOCK The following schedule summarizes the change in capital stock:
COMMON COMMON STOCK SHARES STOCK $ ------------ -------- Balance, July 31, 1994......................................... 2,568,750 $482,171 Reverse stock split............................................ (856,233) 0 Sale of stock.................................................. 76,000 59,790 Stock issued for debt.......................................... 3,334 5,000 Contribution of officers wages................................. 0 45,000 Balance, July 31, 1995......................................... 1,791,851 591,961 Sale of stock.................................................. 37,000 22,210 Contribution of officers wages................................. 0 44,000 Balance, April 30, 1996........................................ 1,833,851 $658,171
On May 4, 1994, the shareholders voted to increase authorized common stock from 100,000 to 5,000,000 shares. On November 22, 1993, the Board of Directors authorized a stock split for shareholders of record of September 30, 1993, thereby increasing the number of issued and outstanding shares to 2,117,520. On April 17, 1996, the Board of Directors approved a 2 for 3 reverse stock split of the common stock of the founding shareholders of the corporation , thus reducing the outstanding shares. Also, the board authorized the issuance of 2 classes of shares, to be designated respectively as 'Common shares' and 'Preferred shares'. The total number of authorized common shares of the corporation was increased from 5,000,000 shares to 20,000,000 shares, with no par value. The total number of authorized preferred shares of the corporation was increased from 1,000,000 shares to 5,000,000 shares, with no par value. All references in the accompanying financial statements to the number of common shares and per-share amounts have been restated to reflect the stock splits. NOTE 8. RELATED PARTY TRANSACTIONS On April 1, 1996, the Company entered into an employment agreement with the President and Chief Executive Officer. The term of the agreement is for five years with an automatic renewal of another five years. The following are the major provisions of the agreement: 1. Compensation -- a. Salary of $108,000 per year, and b. Additional compensation equal to 3% of the net income before taxes earned by the corporation during each full fiscal year, and c. A monthly amount of not more than $500 per month for a auto lease, and d. A five year option to purchase as many shares of the corporation's common stock as equals one hundred thousand dollars at 80% of the initial public offering price of the Company's common stock, approximately 31,250 shares at $3.20 per share, which are exercisable in April, 1997. F-24 55 INNOVATIVE MEDICAL SERVICES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. Compensation for past services -- In consideration of services which have been rendered during the fiscal years ended July 31, 1994 and July 31, 1995 and the eight months period ended March 31, 1996, the corporation granted the following compensation for past services rendered: a. $30,000 for fiscal year ended July 31, 1994, and b. $45,000 for fiscal year ended July 31, 1995, and c. $60,000 for the eight months ended March 31, 1996. The President waived the payment of $119,000 of the compensation for past services and contributed this amount as an additional payment for the common stock he presently owns. NOTE 9. STOCK OPTION PLANS On April 17, 1996, the Board of Directors and the shareholders approved a stock option plan for the key employees of the Company and non-employee Directors of the Company. Under the plan the number of shares of stock which may be issued and sold shall not exceed 1,000,000 shares, with 900,000 shares reserved for issuance to key employees pursuant to their Incentive Stock Options and 100,000 shares reserved for issuance to non-employee Directors pursuant to their non-statutory options. The per share option shall be determined by committee, but the per share exercise price shall not be less than the fair market value of the stock on the date the option is granted. No person shall receive options, first exerciseable during any single calendar year for stock, the fair market value of which exceeds $100,000. On April 17, 1996, the Board of Directors approved a stock option plan for the executive officers and Directors of the Company. Under the plan the maximum number of shares of stock which may be issued and sold shall not exceed 1,000,000 shares ,with the maximum number of shares for which an option may be granted to any one Director or officer shall be 100,000. The per share option price for the stock subject to each option shall be $1.00 per share or such other price as the Board of Directors may determine. NOTE 10. SUBSEQUENT EVENTS Bridge Financing In May 1996, the Company offered in a private placement 15 Bridge Loan Units each consisting of one $25,000 secured promissory note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire one common share at $5.25 and 50,000 Class Z Warrants to acquire one common share at $10.00 per share. The promissory notes bear interest at the rate of (5%) five percent and are due and payable on the earlier of the closing of the public offering or October 26, 1996. The Bridge Loan promissory notes are secured by substantially all of the assets of the Company and a personal guaranty granted by Michael Krall, the Company's president. The Class A and Class Z Warrants cannot be exercised for one year and two years, respectively, and both expire in May 2001. The Company will receive the exercise price of the Bridge Loan Unit warrants, but will not receive any proceeds from any sale of the Bridge Loan Unit shares or the shares underlying the warrants. If the proposed public offering has not been consummated within one (1) year of the Bridge Financing, the shares of common stock that have been issued as part of the Bridge Loan Units (750,000 shares) shall be redeemable, upon 30 days notice by either party, at a redemption price of $1.00 per share. The value of the 750,000 shares ( at $3.00 per share) has been recorded as Deferred Finance Costs and Common Stock on the Pro Forma Balance sheet dated April 30, 1996. The Deferred Finance Costs of $2,250,000 will be written off to finance expenses over the life of the promissory notes. The net proceeds to the Company from the issuance of the promissory notes was $302,500, after payment of $72,500 for public offering costs. F-25 56 SUPPLEMENTARY INFORMATION F-26 57 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 1
FOR THE NINE MONTHS ENDED APRIL 30, ---------------------- 1996 1995 -------- ------- (UNAUDITED) Schedule of Cost of Sales Material purchases.................................................. $420,643 $76,456 Production labor.................................................... 55,710 9,614 Freight............................................................. 31,553 7,628 Supplies and miscellaneous.......................................... 583 77 -------- ------- Total cost of sales......................................... $508,489 $93,775 ======== ======= Schedule of Selling Expenses Advertising and promotion........................................... $ 810 $16,138 Brochures and catalogs.............................................. 2,711 0 Marketing expenses.................................................. 8,927 981 Sales wages......................................................... 33,262 9,825 Travel and entertainment............................................ 8,388 2,748 Trade shows......................................................... 11,101 40 -------- ------- Total selling expenses...................................... $ 65,199 $29,732 ======== =======
See accompanying notes and accountants report. F-27 58 INNOVATIVE MEDICAL SERVICES SUPPLEMENTARY INFORMATION -- SCHEDULE 2
FOR THE NINE MONTHS ENDED APRIL 30, ----------------------- 1996 1995 -------- -------- (UNAUDITED) Schedule of General and Administrative Expenses Auto expenses...................................................... $ 10,539 $ 8,469 Amortization....................................................... 774 774 Bank charges....................................................... 1,065 142 Computer expenses.................................................. 5,740 3,853 Contributions...................................................... 205 0 Credit card fees................................................... 48 78 Depreciation....................................................... 20,029 12,297 Dues and subscriptions............................................. 2,662 33 Equipment rental................................................... 4,616 4,079 Insurance.......................................................... 4,525 4,494 Interest expense................................................... 2,221 1,481 Legal and professional............................................. 2,940 2,513 Office supplies and expense........................................ 11,193 3,152 Office wages....................................................... 25,239 4,156 Officers wages..................................................... 69,000 33,750 Postage............................................................ 873 773 Rent expense....................................................... 18,441 8,987 Repairs and maintenance............................................ 3,177 285 Security........................................................... 160 158 Taxes -- business.................................................. 2,719 1,957 Taxes -- payroll................................................... 7,606 1,232 Telephone expense.................................................. 6,679 6,655 Utilities.......................................................... 2,521 1,549 -------- -------- Total general and administrative expenses.................. $202,972 $100,867 ======== ========
See accompanying notes and accountants report. F-28 59 =============================================================================== 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 Capitalization........................ 11 Management's Discussion and Analysis of Financial Condition.............. 12 The Company and its Business.......... 16 Management............................ 19 Security Ownership of Management and Principal Shareholders.............. 22 Market for the Company's Common Stock and Related Stockholder Matters..... 23 Certain Transactions.................. 23 Description of Securities............. 24 Underwriting.......................... 25 Transfer Agent........................ 26 Legal Matters......................... 26 Independent Public Accountant......... 26 Financial Statements.................. F-1
UNTIL AUGUST , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDER-WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================================================== =============================================================================== INNOVATIVE MEDICAL SERVICES LOGO ------------------------- PROSPECTUS ------------------------- MEYERS POLLOCK ROBBINS, INC. JULY , 1996 =============================================================================== 60 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 61 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.(1)(2)......................... 9/1/92 946,460 capital & equip. Michael L. Krall(1)(2)................................ 9/1/92 946,460 capital & equip. Norman Anderson....................................... 10/14/92 55,000 25,000 Leonard M. Krall...................................... 10/14/92 12,100 6,000 Charles Lewis, MD..................................... 10/14/92 11,000 10,000 Thomas E. Smith, Sr................................... 10/16/92 16,500 10,000 Joel B. Richey, PT.................................... 11/25/92 16,500 15,000 Stephan Gillespie, R.Ph............................... 1/22/93 55,000 50,000 Spencer Dowell, R.Ph.................................. 1/28/93 7,700 7,000 Christine Givant, R.Ph................................ 1/28/93 5,500 5,000 Patrick S. Galuska.................................... 4/26/93 11,000 10,000 Thomas Balaskas, R.Ph................................. 9/22/93 11,000 10,000 Daniel F. Smith....................................... 9/22/93 3,300 3,000 David Reitz(3)........................................ 11/1/93 135,000 services Robert L. Shear(3).................................... 11/1/93 75,000 services Thomas Balaskas, R.Ph................................. 12/17/93 5,500 5,000 David Duea............................................ 1/1/94 3,630 services Patrick S. Galuska.................................... 1/1/94 33,000 20,000 Dennis Atchley, Esq................................... 1/3/94 33,000 services Gary Brownell, CPA.................................... 1/3/94 27,500 services Eugene Peiser, PD..................................... 1/24/94 5,500 5,000 Norman Anderson....................................... 2/1/94 22,000 10,000 William Ross.......................................... 2/5/94 11,000 10,000 Steven Nelson, R.Ph................................... 2/14/94 22,000 20,000 Robert Abrigo......................................... 3/4/94 30,800 40,000 Janet V. Gammell...................................... 3/14/94 2,750 5,000 Frank Short........................................... 3/14/94 5,500 5,000 John R. Stevenson, MD................................. 3/16/94 27,500 25,000 Gary Pernicano........................................ 3/25/94 1,650 3,000 Steven Dryden, R.Ph................................... 4/12/94 1,650 3,000 Linus Lee............................................. 7/12/94 2,750 5,000 Howard Hervey......................................... 7/22/94 2,750 5,000 William G. Metze...................................... 7/22/94 2,750 5,000 Thomas Vollmer........................................ 8/8/94 5,500 5,000 William H. Newkirk, Esq............................... 8/13/94 5,500 5,000 Carolyn Konecki....................................... 8/18/94 1,000 services Steven Nelson, R.Ph................................... 9/16/94 102,000 50,000 William G. Metze(2)................................... 11/21/94 2,000 2,000 Robert Abrigo(2)...................................... 11/22/94 9,000 9,000 Steven Dryden, R.Ph.(2)............................... 11/22/94 5,000 5,000 Patrick S. Galuska(2)................................. 11/22/94 6,000 6,000 Eugene Peiser, PD.(2)................................. 11/22/94 3,000 3,000 Frank Short(2)........................................ 11/22/94 2,500 2,500 Thomas Balaskas, R.Ph.(2)............................. 11/22/94 5,000 5,000 Thomas E. Smith, Sr.(2)............................... 11/22/94 5,000 5,000
John R. Stevenson, MD.(2)............................. 11/23/94 25,000 25,000 William Strang........................................ 8/22/95 14,000 21,000
II-2 62
TOTAL NAME OF PURCHASER DATE SECURITY(1) CONSIDERATION - ------------------------------------------------------ -------- -------- ---------------- Eugene Peiser, PD..................................... 10/18/95 1,000 1,000 Dennis Brovarone...................................... 12/10/95 20,000 services Robert Abrigo......................................... 4/17/96 2,500 services Thomas Smith, Sr...................................... 4/17/96 2,500 services
- --------------- (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 4.2 -- Form of Class Z Warrant 4.3 -- Form of Common Stock Certificate 4.4 -- Warrant Agreement *5.1 -- Opinion of Dennis Brovarone, Attorney at Law, *10.1 -- Confidentiality and Non-Competition Agreement *10.2 -- Employment Contract/Michael L. Krall 23.1 -- Consent of Dennis Brovarone, Attorney at Law 23.2 -- Consent of Steven Holland, Certified Public Accountant
- --------------- * Previously Filed ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled II-3 63 by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 64 SIGNATURES In accordance with the requirements of the Securities Act of 1933 as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form SB-2 and authorized this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of El Cajon, State of California on July 5, 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 July 5, 1996 - --------------------------------------------- Officer and Director Michael L. Krall /s/ NORMAN L. ANDERSON Chairman of the Board of July 5, 1996 - --------------------------------------------- Directors Norman L. Anderson /s/ GARY BROWNELL Chief Financial Officer, July 5, 1996 - --------------------------------------------- Director Gary Brownell /s/ DENNIS B. ATCHLEY Secretary and General Counsel July 5, 1996 - --------------------------------------------- Dennis B. Atchley /s/ EUGENE PEISER, PD Director July 5, 1996 - --------------------------------------------- Eugene Peiser, PD /s/ PATRICK GALUSKA Director July 5, 1996 - --------------------------------------------- Patrick Galuska /s/ DENNIS BROVARONE Director July 5, 1996 - --------------------------------------------- Dennis Brovarone
II-5 65 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 1.1 -- Underwriting Agreement............................................... 1.2 -- Agreement Among Underwriters......................................... *1.3 -- Underwriters Warrants................................................ 3.1 -- Articles of Incorporation, Articles of Amendment and Bylaws.......... 4.1 -- Form of Class A Warrant.............................................. 4.2 -- Form of Class Z Warrant.............................................. 4.3 -- Form of Common Stock Certificate..................................... 4.4 -- Warrant Agreement.................................................... *5.1 -- Opinion of Dennis Brovarone, Attorney at Law,........................ *10.1 -- Confidentiality and Non-Competition Agreement........................ *10.2 -- Employment Contract/Michael L. Krall................................. 23.1 -- Consent of Dennis Brovarone, Attorney at Law......................... 23.2 -- Consent of Steven Holland, Certified Public Accountant...............
- --------------- * Previously Filed EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 INNOVATIVE MEDICAL SERVICES 1,250,000 SHARES OF COMMON STOCK, NO PAR VALUE, AND 1,250,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS UNDERWRITING AGREEMENT Meyers Pollock Robbins, Inc. As Representative of the Underwriters One World Trade Center 91st Floor, Suite 9151 New York, NY 10048 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, no 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. 333- 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 American Securities Transfer & Trust, Inc., substantially in the form filed as Exhibit 4.4 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, One World Trade Center, 91st 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, One World Trade Center, 91st 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 of counsel up to $20,000 and disbursements 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 $50,000 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. In addition, the letter or letters of Michael L. Krall and Thomas E. Smith (Jr.) shall contain a convenant to vote their shares in favor of the election of the designee of the Representative as a Member of the Company's Board of Directors pursuant to paragraph (o) below. (i) The Company will cause each of its shareholders other than 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 more than 10% of their individual holdings of shares of Common Stock during the 24-month period following the Effective Date, except with the Representative's prior written consent. -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) 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 (o) The Company shall for a period of five (5) years from the Closing, engage a designee of the Representative 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, 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: Meyers Pollock Robbins, Inc. One World Trade Center 91st Floor, Suite 9151 New York, NY 10048 Attention: Michael Ploshnick, President with a copy to: Michael R. Koblenz, Esq. Mound, Cotton & Wollan One Battery Park Plaza New York, New York 10004 AND Larry Baresel, Esq. 1080 West Rex Rd. Memphis, TN 38119 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. MEYERS POLLACK ROBBINS, INC. Acting as Representative of the Underwriters By ------------------------------ Michael Ploshnick, President -33- 34 SCHEDULE I
SHARES OF NUMBER OF UNDERWRITERS COMMON STOCK WARRANTS - ------------ ------------ --------- 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 July __, 1996 Meyers Pollock Robbins, Inc. One World Trade Center 91st Floor, Suite 9151 New York, NY 10048 Dear Sirs: We hereby agree with you as follows with respect to (i) the purchase and offering by Meyers Pollock Robbins, Inc. (the "Representative"), the "Underwriters") of an aggregate of 1,250,000 shares of common stock, no 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 -11- EX-3.1 4 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 A477457 STATE OF CALIFORNIA SECRETARY OF STATE CORPORATION DIVISION I, BILL JONES, 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 1 8 1996 [Seal State of California] Bill Jones Secretary of State 2 A477457 Certificate OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF INNOVATIVE MEDICAL SERVICES ENDORSED FILED In the office of tile Secretary of State of the State of California JUN 18,1996 Bill Jones Secretary of State 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 be divided into series 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 series of 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 series of preferred shares subsequent to the issue of shares of that class." 3. The foregoing amendment to the Articles of incorporation was duly approved by the Board of Directors of the corporation on April 17, 1996. 4. 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 2,743,250. 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 14, 1996 Michael L. Krall --------------------------- Michael L. Krall 3 President, C.E.O and Director Dated: June 14, 1996 Dennis Atchley Esquire --------------------------- Dennis Atchley Esquire Secretary EX-4.1 5 FORM OF CLASS A WARRANTS 1 EXHIBIT 4.1 NOT EXERCISABLE UNTIL AFTER 9:00 A.M., NEW YORK, NEW YORK TIME ON_________, 1997 AND VOID (UNLESS EXTENDED) AFTER 5:00 P.M., NEW YORK, NEW YORK TIME, ON_________ , 2001 NUMBER CLASS A WARRANTS - ------------ ---------------- W - ------------ ---------------- CERTIFICATE FOR CLASS A COMMON STOCK PURCHASE WARRANTS INNOVATIVE MEDICAL SERVICES CUSIP 45766R 11 7 Incorporated Under the Laws of the State of California THIS WARRANT CERTIFICATE CERTIFIES that, for value received or registered assigns ("Holder"), is the registered holder of the number of Warrants ("Warrants") set forth above. Each Warrant entitles the Holder thereof to purchase, from Innovative Medical Service, a corporation incorporated under the laws of the State of California ("Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agency Agreement hereinafter referred to, one (1) fully paid and nonassessable share of common stock, no par value, of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate with the exercise form hereon duly completed and executed, at any time during the period commencing at 9:00 a.m. and continuing until 5:00 p.m. ("Exercise Period"), at the stock transfer office of American Securities Transfer & Trust, Inc. ("Warrant Agent") or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of $5.25 per share of Common Stock ("Purchase Price") and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. The Holder may exercise all or any number of Warrants evidenced hereby. The Purchase Price and the number and kind of securities or other property into which the Warrants are exercisable are subject to further adjustment in certain events, such as mergers, splits, stock dividends, recapitalizations and the like. Upon 30 days prior written notice, the Company may at any time during the Exercise Period redeem all or any portion of the unexercised Warrants for $.05 per Warrant provided that the average closing price or bid price of the Common Stock as reported by the principal exchange on which the Common Stock is traded equals or exceeds $9.00 per share for any 20 trading days within a period of 30 consecutive trading days and ending not more that 5 days prior to the mailing of the notice of redemption and provided further than an effective registration statement covering the Warrants and the underlying Common Stock is on file with the Securities and Exchange Commission and is current. All Warrants not theretofore exercised or redeemed will expire at 5:00 p.m. New York, New York time on July , 2001, and any Warrant not exercised by such time shall become void unless extended by the Company. This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agency Agreement, dated as of , 199 ("Warrant Agreement"), between the Company and the Warrant Agent, to all of which terms, provisions and conditions the Holder of the Warrant Certificate consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof, and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the Holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Warrant Agent at its stock transfer office. This Warrant Certificate, with or without other Certificates, upon presentation and surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate office of the Company, may be exchanged for another Warrant Certificate or Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Certificates so surrendered, subject to such terms and conditions set forth in the Warrant Agreement. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the Holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be payable in respect thereof by the Holder pursuant to the Warrant Agreement shall have been paid. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. The stock certificates of the Company that will evidence the shares of Common Stock, into which the Warrants represented by the Warrant Certificates may be exercisable may be imprinted with any legend deemed necessary or appropriate by the Company. IN WITNESS THEREOF, the Company has caused this Warrant Certificate to be signed by its President and by its Secretary, each by a facsimile of his signature, and has caused a facsimile of its corporate seal to be imprinted hereon. Dated: INNOVATIVE MEDICAL SERVICES By: Secretary President COUNTERSIGNED: American Securities Transfer and Trust, Inc. P.O. Box 1596 Denver, Colorado 80201 By ---------------------------------------------- Warrant Agent & Registrar Authorized Signature 2 INNOVATIVE MEDICAL SERVICES TRANSFER FEE: $15.00 PER CERTIFICATE ISSUED The following abbreviations when used in the inscription on the face of this instrument, shall be construed as though they were written and in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-_______Custodian________ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act _______________________________ in common (State) Additional abbreviations may also be used though not in the above list. FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if He Desires to Exercise Warrants Evidenced by the Within Warrant Certificate) To: INNOVATIVE MEDICAL SERVICES The undersigned hereby elects to exercise _________ Warrants evidenced by the within Warrant Certificate for and to purchase thereunder _________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $ _________ and any applicable taxes. The undersigned requests that certificates for such shares be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER - --------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Please print or type name and address If said number of Warrants shall not be all the Warrants evidenced by the within Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: Dated: ____________________ X _________________________________________ X _________________________________________ Address: _________________________________________ _________________________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement of any change whatsoever, of it signed by any other person the Form of Assignment hereon must be duly executed and if the certificate representing the shares of any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which the within Warrant Certificate is registered, the signature of the holder hereto just be guaranteed. Signature Guaranteed:__________________________________________________________ FORM OF ASSIGNMENT (To Be Executed by the Registered Holder if He Desires to Assign Warrants Evidenced by the Within Warrant Certificate) FOR VALUE RECEIVED, _______________________________________________(Name) hereby sells, assigns and transfers unto _____________________________________________ (Number of Warrants) Warrants, evidenced by the within Warrant Certificate, and does hereby irrevocable constitute and appoint Attorney to transfer the said Warrants evidenced by the within Warrant Certificate on the books of the Company, with full power of substitution. 3 Dated:__________________ Signature X__________________________________________ X__________________________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signature(s) Guaranteed: ______________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. 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-4.2 6 FORM OF CLASS Z WARRANT 1 EXHIBIT 4.2 NOT EXERCISABLE UNTIL AFTER 9:00 A.M., NEW YORK, NEW YORK TIME ON_________, 1998 AND VOID (UNLESS EXTENDED) AFTER 5:00 P.M., NEW YORK, NEW YORK TIME, ON_________ , 2001 NUMBER CLASS Z WARRANTS - ------------ ---------------- W - ------------ ---------------- CERTIFICATE FOR CLASS Z COMMON STOCK PURCHASE WARRANTS INNOVATIVE MEDICAL SERVICES CUSIP 45766R 11 7 Incorporated Under the Laws of the State of California THIS WARRANT CERTIFICATE CERTIFIES THAT, for value received or registered assigns ("Holder"), is the registered holder of the number of Warrants ("Warrants") set forth above. Each Warrant entitles the Holder thereof to purchase, from Innovative Medical Service, a corporation incorporated under the laws of the State of California ("Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agency Agreement hereinafter referred to, one (1) fully paid and nonassessable share of common stock, no par value, of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate with the exercise form hereon duly completed and executed, at any time during the period commencing at 9:00 a.m. and continuing until 5:00 p.m. ("Exercise Period"), at the stock transfer office of American Securities Transfer & Trust, Inc. ("Warrant Agent") or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of $10.00 per share of Common Stock ("Purchase Price") and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. The Holder may exercise all or any number of Warrants evidenced hereby. The Purchase Price and the number and kind of securities or other property into which the Warrants are exercisable are subject to further adjustment in certain events, such as mergers, splits, stock dividends, recapitalizations and the like. Upon 30 days prior written notice, the Company may at any time during the Exercise Period redeem all or any portion of the unexercised Warrants for $.10 per Warrant provided that the average closing price or bid price of the Common Stock as reported by the principal exchange on which the Common Stock is traded equals or exceeds $15.00 per share for any 20 trading days within a period of 30 consecutive trading days and ending not more that 5 days prior to the mailing of the notice of redemption and provided further than an effective registration statement covering the Warrants and the underlying Common Stock is on file with the Securities and Exchange Commission and is current. All Warrants not theretofore exercised or redeemed will expire at 5:00 p.m. New York, New York time on July , 2001, and any Warrant not exercised by such time shall become void unless extended by the Company. This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agency Agreement, dated as of , 199 ("Warrant Agreement"), between the Company and the Warrant Agent, to all of which terms, provisions and conditions the Holder of the Warrant Certificate consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof, and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the Holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Warrant Agent at its stock transfer office. This Warrant Certificate, with or without other Certificates, upon presentation and surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate office of the Company, may be exchanged for another Warrant Certificate or Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Certificates so surrendered, subject to such terms and conditions set forth in the Warrant Agreement. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the Holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be payable in respect thereof by the Holder pursuant to the Warrant Agreement shall have been paid. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. The stock certificates of the Company that will evidence the shares of Common Stock, into which the Warrants represented by the Warrant Certificates may be exercisable may be imprinted with any legend deemed necessary or appropriate by the Company. IN WITNESS THEREOF, the Company has caused this Warrant Certificate to be signed by its President and by its Secretary, each by a facsimile of his signature, and has caused a facsimile of its corporate seal to be imprinted hereon. Dated: INNOVATIVE MEDICAL SERVICES By: Secretary President COUNTERSIGNED: American Securities Transfer and Trust, Inc. P.O. Box 1596 Denver, Colorado 80201 By__________________________________________________ WARRANT AGENT & REGISTRAR AUTHORIZED SIGNATURE 2 INNOVATIVE MEDICAL SERVICES TRANSFER FEE: $15.00 PER CERTIFICATE ISSUED The following abbreviations when used in the inscription on the face of this instrument, shall be construed as though they were written and in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-_______Custodian______ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act _______________________ in common (State) Additional abbreviations may also be used though not in the above list. FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if He Desires to Exercise Warrants Evidenced by the Within Warrant Certificate) To: INNOVATIVE MEDICAL SERVICES The undersigned hereby elects to exercise _____________ Warrants evidenced by the within Warrant Certificate for and to purchase thereunder__________________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $ _____________ and any applicable taxes. The undersigned requests that certificates for such shares be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _______________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Please print or type name and address If said number of Warrants shall not be all the Warrants evidenced by the within Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: Dated: ______________ X _____________________________________________ X _____________________________________________ Address: _____________________________________________ _____________________________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement of any change whatsoever, of it signed by any other person the Form of Assignment hereon must be duly executed and if the certificate representing the shares of any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which the within Warrant Certificate is registered, the signature of the holder hereto just be guaranteed. Signature Guaranteed:__________________________________________________________ FORM OF ASSIGNMENT (To Be Executed by the Registered Holder if He Desires to Assign Warrants Evidenced by the Within Warrant Certificate) FOR VALUE RECEIVED,______________________________________(Name) hereby sells, assigns and transfers unto_________________________________ (Number of Warrants) Warrants, evidenced by the within Warrant Certificate, and does hereby irrevocable consititute and appoint________________ Attorney to transfer the said Warrants evidenced by the within Warrant Certificate on the books of the Company, with full power of substitution. ______________________ ____________________________________________________ Dated:________________ Signature X_________________________________________ X__________________________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signature(s) Guaranteed: 3 - --------------------------------------- The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-4.3 7 FORM OF COMMON STOCK CERTIFICATE 1 EXHIBIT 4.3 INNOVATIVE MEDICAL SERVICES INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AUTHORIZED SHARES 20,000,000 THIS CERTIFIES THAT Is The Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF INNOVATIVE MEDICAL SERVICES transferable on the books of the Corporation by the holder hereof, in person or by duly authorized Attorney, upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and to be sealed with the seal of the Corporation. Dated: SECRETARY PRESIDENT 2 INNOVATIVE MEDICAL SERVICES TRANSFER FEE: $15.00 PER NEW CERTIFICATE ISSUED The following abbreviations, when used in the inscription on the face of this , shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-_______Custodian_______ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ____________________________ in common (State) Additional abbreviations may also be used though not in the above list. ________________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________ _________________________ For Value Received, ______________________hereby sell, assign and transfer unto _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________ Shares of the Common Stock represented by the within , and do hereby irrevocably constitute and appoint ______________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated _______________________________________ _______________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: ______________________________________________________ The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-4.4 8 WARRANT AGREEMENT 1 Exhibit 4.4 WARRANT AGREEMENT INNOVATIVE MEDICAL SERVICES, a California corporation (Company), and AMERICAN SECURITIES TRANSFER & TRUST, INC. (AST), 1825 Lawrence Street, Suite 444, Denver, Colorado 80202, a Colorado corporation (Warrant Agent), agree as follows: 1. Purpose. The Company proposes to publicly offer and issue up to 1, 437,500 shares of the Company's no par value common stock (Shares) and 1,437,500 Class A Warrants, each permitting the purchase of an additional Share (Class A Warrants). In addition, the Company has sold 750,000 Class Z Warrants, each permitting the purchase of an additional Share (Class Z Warrants). 2. Warrants. Each Class A and Each Class Z Warrant will entitle the registered holder of a Class A or Class Z Warrant (Warrant Holder) to purchase from the Company one (1) Share at $5.25 per Share (Class A Warrant Exercise Price) and $10.00 per Share (Class Z Warrant Exercise Price). A Warrant Holder may exercise all or any number of Warrants resulting in the purchase of a whole number of Shares. 3. Exercise Period. The Class A Warrants may be exercised at any time during the period commencing July __,. 1997 and the Class Z Warrants may be exercised at any time during the period commencing July __, 1998 and (for both the Class A and Class Z Warrants) ending at 3:00 p.m., Denver, Colorado time on July __, 2001 (Expiration Date) except as changed by Section 12 of this Agreement. After the Expiration Date, any unexercised warrants will be void and all rights of Warrant Holders shall cease. 4. Redemption. The Warrants may be redeemed by the Company upon thirty days written notice to the holders at any time after July __, 1997 for $0.05 per Warrant provided that the averaged closing bid price for the Shares as reported by the NASDAQ system has been greater than $9.00 per Share for the Class A Warrants and $15.00 per Share for the Class Z Warrants for any twenty (20) trading days within a period of thirty (30) consecutive business days ending five (5) days of the Date of Notice of Redemption. The Company shall notify the Warrant Agent of an election to redeem the Warrants not less than ten days prior to the anticipated mailing of the Notice of Redemption and provided the Warrant Agent with sufficient funds for the redemption of all outstanding Warrants and expenses of the Warrant Agent therefor. 5. Certificates. The Warrant Certificates shall be in registered form only and shall be substantially in the form set forth in Exhibit A and B attached to this Agreement. Warrant Certificates shall be signed by, or shall bear the facsimile signature of, the President or a Vice President of the Company and the Secretary or an Assistant Secretary of the Company and shall bear a facsimile of the Company's corporate seal. If any person whose facsimile signature has been placed upon any Warrant Certificate as the signature of an officer of the Company, shall have ceased to be such officer before such Warrant Certificate is countersigned, issued and delivered, such Warrant Certificate shall be countersigned, issued and delivered with the same effect as if such Person had not ceased to be such officer. Any Warrant Certificate may be signed by, or made to bear the facsimile signature of, any person who at the actual date of the preparation of such Warrant Certificate shall be a proper officer of the Company to sign such Warrant Certificate even though such person was not such an officer upon the date of this Agreement. 6. Countersigning. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent hereby is authorized to countersign and deliver to, or in accordance with the instructions of, any Warrant Holder any Warrant Certificate which is properly issued. 7. Registration of Transfers and Exchanges. The Warrant Agent shall from time to time register the transfer of any outstanding Warrant Certificate upon records maintained by the Warrant Agent for such purpose upon surrender of such Warrant Certificate to the Warrant Agent for transfer, accompanied by appropriate Instruments of transfer in form satisfactory to the Company and the Warrant Agent and duly executed by the Warrant Holder or a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued In the name of and to the transferee and the surrendered Warrant Certificate shall be 2 cancelled. 8. Exercise of Warrants. a. Any one Warrant or any multiple of one Warrant evidenced by any Warrant Certificate may be exercised upon any single occasion on or after the Exercise Date, and on or before the Expiration Date. A Warrant shall be exercised by the Warrant Holder by surrendering to the Warrant Agent the Warrant Certificate evidencing such Warrant with the exercise form on the reverse of such Warrant Certificate duly completed and executed and delivering to the Warrant Agent, by good check or bank draft payable to the order of the Company, the Exercise Price for each Share to be purchased. b. Upon receipt of a Warrant Certificate with the exercise form thereon duly executed together with payment in full of the Exercise Price for the Shares for which Warrants are then being exercised, the Warrant Agent shall requisition from any transfer agent for the Shares, and upon receipt shall make delivery of, certificates evidencing the total number of whole Shares for which Warrants are then being exercised in such names and denominations as are required for delivery to, or in accordance with the instructions of, the Warrant Holder. Such certificates for the Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a holder of record of such Shares, as of the date of the surrender of such Warrant Certificate and payment of the Exercise Price, whichever shall last occur, provided that if the books of the Company with respect to the Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a record holder of such Shares, as of the date on which such books shall next be open (whether before, on or after the Expiration Date) but at the Exercise Price, whichever shall have last occurred, to the Warrant Agent. c. If less than all the Warrants evidenced by a Warrant Certificate are exercised upon a single occasion, a new Warrant Certificate for the balance of the Warrants not so exercised shall be Issued and delivered to, or in accordance with, transfer instructions properly given by the Warrant Holder until the Expiration Date. d. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled. e. Upon the exercise, or conversion of any warrant, the Warrant Agent shall promptly deposit the payment into an escrow account established by mutual agreement of the Company and the Warrant Agent at a federally insured commercial bank. All funds deposited In the escrow account will be disbursed on a weekly basis to the Company once they have been determined by the Warrant Agent to be collected funds. Once the funds are determined to be collected, the Warrant Agent shall cause the share certificate(s) representing the exercised warrants to be issued. f. Expenses incurred by American SECURITIES TRANSFER & TRUST, Inc. while acting in the capacity as Warrant Agent will be paid by the Company. These expenses, including delivery of exercised share certificate to the shareholder, will be deducted from the exercise fee submitted prior to distribution of funds to the Company. A detailed accounting statement relating to the number of shares exercised, names of registered Warrant Holder and the net amount of exercised funds remitted will be given to the Company with the payment of each exercise amount. g. At the time of exercise of the Warrant(s), the transfer fee is to be paid by the Company. In the event the shareholder must pay the fee and fails to remit same, the fee will be deducted from the proceeds prior to distribution to the Company. 9. Taxes. The Company will pay all taxes attributable to the initial issuance of Shares upon exercise of Warrants. The Company shall not, however, be required to pay any tax which may be payable in respect to any 3 transfer involved In any Issue of Warrant Certificates or in the issue of any certificates of Shares in the name other than that of the Warrant Holder upon the exercise of any Warrant 10. Mutilated or Missing Warrant Certificates. If any Warrant Certificate Is mutilated, lost, stolen or destroyed, the Company and the Warrant Agent may, on such terms as to indemnify or otherwise as they may in their discretion impose (which shall, In the case of a mutilated Warrant Certificate, include the surrender thereof), and upon receipt of evidence satisfactory to the company and the Warrant Agent of such mutilation, loss. theft or destruction, issue a substitute Warrant Certificate of like denomination and tenor as the Warrant Certificate so mutilated, lost, stolen or destroyed. Applicants for substitute Warrant Certificates shall comply with such other reasonable regulations and pay any reasonable charges as the Company or the Warrant Agent may prescribe. 11. Reservation of Shares. For the purpose of enabling the Company to satisfy all obligation to issue Shares upon exercise of Warrants, the Company will at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares, the full number of Shares which may be issued upon the exercise of Warrants will upon issue be fully paid and nonassessable by the Company and free from all taxes, liens, charges and security interests with respect to the issue thereof. 12. Governmental Restrictions. If any Shares issuable upon the exercise of Warrants require registration or approval of any governmental authority, the Company will endeavor to secure such registration or approval; provided that in no event shall such Shares be issued, and the Company shall have the authority to suspend the exercise of all Warrants, until such registration or approval shall have been obtained; but all Warrants, the exercise of which is requested during any such suspension, shall be exercisable at the Exercise Price. If any such period of suspension continues past the axpiration Date, all Warrants, the exercise of which have been requested on or prior to the Expiration Date, shall be exercisable upon the removal of such suspension until the close of business on the business day immediately following the expiration of such suspension. 13. Adjustments. If prior to the exercise of any Warrants the Company shall have effected one or more stock split-ups, stock dividends or other increases or reductions of the number of shares of its no par value common stock outstanding without receiving compensation therefore in money, services or property, the number of shares of common stock subject to the Warrant granted shall, (i) if a net increase shall have been effected in the number of outstanding shares of the Company's common stock, be proportionately increased, and the cash consideration payable per share shall be proportionately reduced. and, (ii) if a net reduction shall have been effected in the number of outstanding shares of the Company's common stock, be proportionately reduced and the cash consideration payable per share be proportionately increased. 14. Notice to Warrant Holders. Upon any adjustment as described in Section 13, the Company within 20 days thereafter shall (i) cause to be filed with the Warrant Agent a certificate signed by a Company officer setting forth the details of such adjustment, the method of calculation and the facts upon which such calculation is based, which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) cause written notice of such adjustments to be given to each Warrrant Holder as of the record date applicable to such adjustment. Also, if the Company proposes to enter into any reorganization, reclassification, sale of substantially all of its assets, consolidation, merger, dissolution, liquidation or winding up, the Company shall give notice of such fact at least 20 days prior to such action to all Warrant Holders which notice shall set forth such facts as indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Exercise Price and the kind and amount of the shares or other securities and property deliverable upon exercise of the Warrants. Without limiting the obligation of the Company hereunder to provide notice to each Warrant Holder, failure of the Company to give notice shall not invalidate corporate action taken by the Company. 15. No Fractional Warrants or Shares. The Company shall not be required to issue fractions of Warrants upon the reissue of Warrants, any adjustments as described in Section 13 or otherwise; but the Company in lieu of issuing any such fractional interest, shall round up or down to the nearest full Warrant. If the total Warrants 3 4 surrendered by exercise would result in the issuance of a fractional share, the Company shall not be required to issue a fractional share but rather the aggregate number of shares issuable will be rounded up or down to the nearest full share. 16. Rights of Warrant Holders. No Warrant Holder, as such, shall have any rights of a shareholder of the Company, either at law or equity, and the rights of the Warrant Holders, as such, are limited to those rights expressly provided in this Agreement or in the Warrant Certificates. The Company and the Warrant Agent may treat the registered Warrant Holder in respect of any Warrant Certificate as the absolute owner thereof for all purposes notwithstanding any notice to the contrary. 17. Warrant Agent. The Company hereby appoints the Warrant Agent to act as the agent of the Company and the Warrant Agent hereby accepts such appointment upon the following terms and conditions by all of which the Company and every Warrant Holder, by acceptance of his Warrants, shall be bound: a. Statements contained in this Agreement and in the Warrant Certificates shall be taken as statements of the Company. The Warrant Agent assumes no responsibility for the correctness of any of the same except such as describes the Warrant Agent or for action taken or to be taken by the Warrant Agent. b. The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the Company's covenants contained In this Agreement or in the Warrant Certificates. c. The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder in respect cf any action taken, suffered or omitted by it hereunder in good faith and in accordance with. the opinion or the advice of such counsel, provided the Warrant Agent shall have exercised reasonable care in the selection and continued employment of such counsel. d. The Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder for any action taken in reliance upon any notice, resolution, waiver, consent, order, certificate or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. e. The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and all other charges of any kind in nature incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for this Agreement except as a result of the Warrant Agent's negligence or bad faith. f. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more Warrant Holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred In connection with such action, suit or legal proceeding, but this provision shall not effect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of Judgment shall be for the ratable benefit of the Warrant Holders as their respective rights or interests may appear. 4 5 g. The Warrant Agent and any shareholder, director, officer or employee of the Warrant Agent may buy, sell or deal In any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agerit under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 18. Successor Warrant Agent. Any corporation into which the Warrant Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act of a party or the parties hereto. In any such event or if the name of the Warrant Agent is changed, the Warrant Agent or such successor may adopt the countersignature of the original Warrant Agent and may countersign such Warrant Certificates either In the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent. 19. Change of Warrant Agent. The Warrant Agent may resign or be discharged by the Company from its duties under this Agreement by the Warrant Agent or the Company, as the case may be, giving notice in writing to the other, and by giving a date when such resignation or discharge shall take effect, which notice shall be sent at least 30 days prior to the date so specified. If the Warrant Agent shall resign, be discharged or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any Warrant Holder or after discharging the Warrant Agent, then any Warrant Holder may apply to the District Court for Denver County, Colorado, for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such Court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent, whether appointed by the Company or by such Court, shall be a bank or a trust company, in good standing, organized under the laws of the State of Colorado or of the United States of America, having its principal office in Denver, Colorado and having at the time of its appointment as Warrant Agent, a combined capital and surplus of at least four million dollars, After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it thereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for effecting the delivery or transfer. Failure to give any notice provided for in this section, however, or any defect therein. shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. 20. Notices. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Warrant Holder to or on the Company shall be sufficiently given or made If sent by mail, first class, certified or registered, postage prepaid, addressed (until another address is filed in writing by the Company. with the Warrant Agent), as follows: Innovative Medical Services 1308 N. Magnolia Avenue, Suite H El Cajon, California 92020 Any notice or demand authorized by this Agreement to be given or made by any Warrant Holder or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by mail. first class, certified or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company), as follows: 5 6 American SECURITIES TRANSFER & TRUST, Inc. 1825 Lawrence Street, #444 Denver, CO80202 Any distribution, notice or demand required or authorized by this Agreement to be given or made by the Company or the Warrant Agent to or on the Warrant Holders shall be sufficiently given or made if sent by mail, first class, certified or registered, postage prepaid, addressed to the Warrant Holders at their last known addresses as they shall appear on the registration books for the Warrant Certificates maintained by the Warrant Agent. 21. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Warrant Holders in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable. 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 23. Termination. This Agreement shall terminate at the close of business on the Expiration Date or such earlier date upon which all Warrants have been exercised; provided, however, that if exercise of the Warrants is suspended pursuant to Section 12 and such suspension continues past the Expiration Date, this Agreement shall terminate at the close of business on the business day immediately following the expiration of such suspension. The provisions of Section 17 shall survive such termination. 24. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Colorado and for all purposes shall be construed in accordance with the laws of said State. 25. Benefits of this Agreement. Nothing in this Agreement shall be construed to give any person or corporation other. than the Company, the Warrant Agent and the Warrant Holders any legal or equitable right, remedy or claim under this Agreement, but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the Warrant Holders. 26. Counterparts. This Agreement may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument. Date: July __, 1996 INNOVATIVE MEDICAL SERVICES a California corporation By: _______________________________ Michael L. Krall, President SEAL ATTEST: _____________________________ Dennis Atchley, Secretary AMERICAN SECURITIES TRANSFER & TRUST, INC. a Colorado Corporation . 6 7 BY: ______________________________________ Gregory D. Tubbs, Senior Vice President SEAL ATTEST: ________________________ Bruce E. Hall, Secretary 7 EX-23.1 9 CONSENT OF DENNIS BROVARONE, ATTORNEY AT LAW 1 EXHIBIT 23.1 DENNIS BROVARONE 2530 SOUTH LINLEY COURT DENVER, COLORADO 80219 PH: 303 742 0966 / FX-MDM: 303 742 0117 July 2, 1996 CONSENT OF ATTORNEY Reference is made to Amendment No. 2 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 shares of common stock at $4.00 per share and 1,250,000 Class A Warrants to acquire an additional share of common stock at $0.10 per Warrant. I hereby consent to being named in the Registration Statement as having advised Innovative Medical Services, as to the legality of its securities proposed to be sold. DENNIS BROVARONE ATTORNEY AT LAW /s/DENNIS BROVARONE ------------------- Dennis Brovarone EX-23.2 10 CONSENT OF STEVEN HOLLAND, CERTIFIED PUBLIC ACCT 1 EXHIBIT 23.2 STEVEN HOLLAND, CPA 3914 MURPHY CANYONRD., STE. A126 SAN DIEGO, CA. 92123 (619) 279-1640 I have prepared the attached audited financial statements for Innovative Medical Services for the fiscal years ended July 31, 1995 and 1994 and the compiled financial statements for the nine months ended April 30, 1996.1 hereby consent to their inclusion with the company's intended registration statement on Form SB-2 and to the reference to me as an expert in accounting and auditing in those filings. Steven Holland, CPA June 27, 1996 -----END PRIVACY-ENHANCED MESSAGE-----