As filed with the Securities and Exchange Commission on March 25, 1997
File No. 333-21243
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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AMENDMENT NO. 1
TO FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------------------
(Exact Name of Registrant As Specified In Its Charter)
FLORIDA 22-2671269
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(State or other jurisdiction of (IRS Employer Indet. No.)
incorporation or organization)
3845
----
(Primary Standard Industrial Classification Code Number)
6531 NW 18TH COURT, PLANTATION, FLORIDA 33313
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(Address of Principal Executive Offices and Zip code)
Issuer's telephone number: (954)581-9800
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Linda B. Grable, President
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, Florida 33313
(954) 581-9800
(Name and address of agent of service)
------------------
Copy to:
Peter S. Knezevich, Esq.
6531 NW 18th Court
Plantation, Florida 33313
(954) 581-9800
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2
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
discretion of the converting shareholders.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is registering additional securities pursuant to Rule 462(b) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. 333- [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. 333- [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ].
CALCULATION OF REGISTRATION FEE
-------------------------------
<TABLE>
PROPOSED MAX. PROPOSED MAX.
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Stock 4,275,000 $3.93 $16,800,750 $5,793.00
(no par value)
</TABLE>
(1)Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement also covers such indeterminable additional
shares of Common Stock as may be issuable as a result of any future
anti-dilution adjustments made in accordance with the terms of the Company's
Series B and Series C Convertible Preferred Stock and the warrants accompanying
such stock.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average high and low sales prices of the Registrant's Common Stock on the NASDAQ
Electronic Bulletin Board on March 21, 1997, for 4,275,000 shares.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant files
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, as amended, or until the Registration Statement shall
become effective on such dates as the Commission, acting pursuant to said
Section 8(a), may determine.
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3
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
Cross Reference Sheet
(Showing Location in Prospectus of Information
Required by Items of Form S-1)
FORM S-1 LOCATION
ITEM NO. ITEM CAPTION IN PROSPECTUS
- -------- ------------ -------------
<S> <C> <C> <C>
1 Forepart of the Registration Statement Cover Page
and Outside Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages Inside Front
of Prospectus Cover Page
3 Summary Information, Risk Factors and Ratio The Company;
of Earnings to Fixed Charges Risk Factors
4 Use of Proceeds Use of Proceeds
5 Determination of Offering Price Not Applicable
6 Dilution Not Applicable
7 Selling Security Holders Selling
Securityholders
8 Plan of Distribution Not Applicable
9 Description of Securities to Description of
be Registered Common Stock
10 Interests of Named Experts Interests of
and Counsel Named Counsel
11 Information With Respect to Business; Price Range of
the Registrant Common Stock; Selected
Financial Data;
Management's Discussion
and Analysis of Financial
Conditions and Results of
Operations; Directors and
Executive Officers;
Executive Compensation;
Security Ownership of
Certain Beneficial Owners
and Management
12 Disclosure of Commission Position Indemnification
on Indemnification for Securities
Act Liabilities
</TABLE>
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4
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.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED MARCH 25, 1997
PROSPECTUS
4,275,000 Shares
IMAGING DIAGNOSTIC SYSTEMS, INC.
Common Stock
----------------------
This prospectus ("Prospectus") covers the resale of certain shares
("Shares") of common stock, no par value per share (the "Common Stock") of
Imaging Diagnostic Systems, Inc. ("Imaging Diagnostic Systems" or the "Company")
held or acquirable by certain persons ("Selling Securityholders") named in this
Prospectus. The Company will not receive any of the proceeds from the sale of
the Shares. The Shares covered hereby include (i)share of Common Stock that are
issuable upon conversion of previously-issued shares of Series B Convertible
Preferred Stock (the "Series B Preferred") and Series C Convertible Preferred
Stock (the "Series C Preferred") held by certain Selling Securityholders (the
"Series B Holders" and "Series C Holders") and up to an additional 112,500
shares of Common Stock that are issuable upon the exercise of warrants to
Purchase Common Stock held by such Selling Securityholders (the "Series B
Warrants").
The number of shares issuable upon conversion of both the Series B
Preferred and the Series C Preferred depends on several factors, including a
fixed conversion ratio and a variable conversion ratio and the date on which
shares are converted. The variable conversion ration could result in a greater
number of Shares being issued than under the fixed conversion ratio. In order to
have sufficient number of Shares registered upon conversion of both the Series B
Preferred and the Series C Preferred, this Prospectus covers a larger number of
shares of Common Stock than the Company believes will actually be issued upon
conversion of all of the Series B Preferred and Series C Preferred. Except for
the total number of shares to which this Prospectus relates as set forth above,
references in this Prospectus to the "number of Shares covered by this
Prospectus," or similar statements, and information in this Prospectus regarding
the number of Shares issuable to or held by the Selling Securityholders and
percentage information relating to the Shares of the outstanding capital stock
of the Company, are based upon the fixed conversion ratio set forth in the
instruments establishing the rights of the Series B Preferred and Series C
Preferred and assume that a total of 2,633,989 Shares are issued upon conversion
of all shares of Series B Preferred and Series C Preferred and exercise of all
Series B Warrants. See "Selling Securityholders," "Plan of Distribution" and
"Description of Capital Stock." The Shares offered hereby represent
approximately 10.8% of the Company's currently outstanding Common Stock
(assuming conversion of all shares of Series B Preferred and Series C Preferred
and that all of the
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5
warrants held by the Selling Securityholders are exercised). The Shares are
being offered on a continuous basis pursuant to Rule 415 under the Securities
Act of 1933, as amended (the "Securities Act"). No underwriting discounts,
commissions or expenses are payable or applicable in connection with the sale of
such Shares by the Selling Securityholders. The Common Stock of the Company is
quoted on the National Association of Securities Dealers, Inc. (the "NASD") OTC
Bulletin Board under the symbol "IMDS". The Shares offered hereby will be sold
from time to time at the then prevailing market prices, at prices relating to
prevailing market prices or at negotiated prices. On March 21, 1997, the last
reported sale price of the Common Stock on the OTC bulletin Board was $3.93 per
share. This Prospectus may be used by the Selling Securityholders or any
broker-dealer who may participate in sales of the Common Stock covered hereby.
--------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE
AND INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE COMMISSION
PASSED PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------
The date of this Prospectus is _____ __, 1997.
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6
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which is Part I of the Registration Statement,
constitutes a part of the Registration Statement and does not contain all of the
information set forth therein. Any statements contained herein concerning the
provisions of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, with exhibits, may be obtained from the Commission's
office in Washington, D.C. (at the above address) upon payment of the fees
prescribed by the rules and regulations of the Commission, or examined there
without charge.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed with the Commission can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, NW., Washington, D.C. 20549. Copies of this material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, NW., Washington, D.C. 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission, such as the Company. The address of such
site is http://www.sec.gov.
THE COMPANY
Imaging Diagnostic Systems, Inc. is a medical technology company that has
developed a system for detecting breast cancer through the skin in a
non-invasive and objective procedure. Imaging's system employs a high-speed
femto-second pulsed titanium sapphire laser and proprietary scanning geometry
and reconstruction algorithms to detect and analyze masses in the breast for
indicia of malignancy or benignancy. The combination and incorporation of the
foregoing components into a device
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7
should provide for enhanced diagnostic capabilities that are superior to
standard mammography diagnostic tools such as ultra-sound and mammography.
Theoretically, the indicia of malignancy and benignancy, whether the lesion is
cystic or solid, as diagnosed by the device, is a precursor to current indicia
for malignancy or benignancy. Accordingly, the Company believes that its
proposed breast cancer diagnostic product, the Computed Tomography Laser
Mammography (CTLM/trademark/) device, will improve early diagnosis, reduce
diagnostic uncertainty and decrease the number of biopsies performed on benign
lesions.
The CTLM device will require Food and Drug Administration (FDA) approval
prior to commercial distribution in the United States. There can be no assurance
that any such approval will be received on a timely basis, or at all, or that
any products developed by the Company will be accepted commercially.
Furthermore, there can be no assurance that the Company's technology can be
adapted for breast screening or for the detection of cancer.
The CTLM device is being developed to provide physicians and patients with
immediate information concerning the probability that an identified lesion is
malignant or benign. A breast exam utilizing the CTLM device is non-invasive and
can be performed by a medical technician in less than 15 minutes. A patient lies
face down on the scanning table with a breast hanging pendulously in the
scanning chamber. Once the entire breast is scanned the other breast is placed
in the chamber for scanning. Each scan takes approximately 3-4 minutes. The
procedure is designed to provide the physician and patient with objective,
on-site, immediate diagnostic decisions, including whether or not to proceed to
surgical biopsy. Further, the device is designed to archive and compare scans
and provide the patient with a computer disc (CD) of her scan.
In order to sell the CTLM device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a Pre-Market Approval Application (PMA) with the FDA to obtain marketing
clearance.
In order to collect the clinical data for the PMA, the Company filed an
application for and was granted an investigational device exemption (IDE) to
conduct a Phase I clinical trial. An IDE allows a company to conduct human
clinical trials without filing an application for marketing clearance. The
Company is authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida. The CTLM device has been installed at Strax and patients
have been scanned.
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8
RISK FACTORS
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has a limited history of operations. Since its
inception in December 1993, the Company has engaged principally in the
development of the CTLM/trademark/ device. The Company currently has no source
of operating revenue and has incurred net operating losses since its inception.
At December 31, 1996, the Company had an accumulated deficit of $6,785,008. Such
losses have resulted principally from costs associated with the Company's
operations. The Company expects operating losses will increase for at least the
next several years as total costs and expenses continue to increase due
principally to the anticipated commercialization of the CTLM/trademark/ device,
development of, and clinical trials for, the proposed CTLM/trademark/ device and
other research and development activities. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for its proposed products and develop the capacity to manufacture and market any
approved products either by itself or in collaboration with others. There can be
no assurance if and when the Company will receive regulatory approvals for the
development and commercial manufacturing and marketing of its proposed products,
or achieve profitability is highly uncertain. See "Management's Discussion and
Analyses of Financial Condition and Results of Operations."
GOVERNMENT REGULATION. The manufacture and sale of medical devices, including
the CTLM/trademark/ device, are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA and
corresponding state agencies, and in other countries. In the United States, the
Company's products are regulated as medical devices and are subject to the FDA's
pre-market clearance or approval requirements. Securing FDA clearances and
approvals may require the submission of extensive clinical data and supporting
information to the FDA. The Company cannot file its PMA application for the
CTLM/trademark/ device until its clinical trials are completed. There can be no
assurance, however, that the clinical trials will be successfully completed, or
if completed, will provide sufficient data to support a PMA application for the
CTLM/trademark/ device. Nor can there be any assurance that the FDA will not
require the Company to conduct additional clinical trials for the
CTLM/trademark/ device. The process for obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain and frequently requires
from one top several years from the date of FDA submission, if pre-market
approval is obtained at all. Sales of medical devices outside the united states
are subject to international regulatory requirements that vary from country to
country. The time required to gain approval for sale internationally may be
longer or shorter than that required for FDA approval and the requirements may
differ. In Europe, the Company will be required to obtain the certifications
necessary to enable the CE mark to be affixed to the Company's products by
mid-1998 in order to conduct sales in member countries of the European Union.
The Company has not obtained such certificates and there can be no assurance it
will be able to do so in a timely manner, or at all. Regulatory approvals, if
granted, may include significant limitations on the indicated uses for which the
product may be marketed. In addition, to obtain such approvals, the FDA and
certain foreign regulatory authorities may impose numerous other requirements
with which other medical device manufacturers must comply. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Product approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The third-party manufacturers upon which the Company depends to
manufacture its products are required to adhere to applicable FDA regulations
regarding GMPS and similar regulations in other countries, which include
testing, control and documentation requirements. Ongoing compliance with GMP
regulations and other applicable regulatory requirements will be monitored by
periodic inspections by the FDA and by comparable agencies in other countries.
Failure to comply with applicable regulatory requirements, including marketing
and promoting products for unapproved use, could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant pre-market clearance or approval for devices, withdrawal of approvals
and criminal prosecution. Changes in existing regulations or adoption of new
government regulations or polices could prevent or delay regulatory approval of
the Company's products. Certain material changes to medical devices also are
subject to FDA review and clearance or approval. There can be no assurance that
the Company will be able to obtain FDA approval of a PMA application for the
CTLM/trademark/ device on a timely basis, or at all, and delays and delays in
receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements that would have material adverse effect on the Company's
business, financial condition and results of operations. See "Business -
Government Regulation."
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8
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company's proposed products and future
product development efforts are at an early stage. Accordingly, there can be no
assurance that any of the Company's proposed products: will be found to be safe
and effective, can be developed into commercially viable products, can be
manufactured on a large scale or will be economical to market, or will achieve
or sustain market acceptance. There is, therefore, a risk that the Company's
product development efforts will not prove to be successful.
DEPENDENCE UPON U.S. PRE-MARKET APPROVAL. Under the provisions of the Federal
Food and Cosmetic Act ("the FDC Act"), the Company must obtain pre-market
approval from the FDA prior to commercial use in the United States of the
proposed CTLM/trademark/ device. There can be no assurance if or when the
Company will receive any such clearances or approvals. Obtaining FDA pre-market
approval may impose costly requirements on the Company and may delay for a
considerable period of time, or prevent, the commercialization of the
CTLM/trademark/ device.
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DEPENDENCE ON MARKET ACCEPTANCE. There can be no assurance that physicians or
the medical community in general will accept and utilize the CTLM/trademark/
device. The extent that, and rate of which, the CTLM/trademark/ device achieves
market acceptance and penetration will depend on many variables including, but
not limited to, the establishment and demonstration in the medical community of
the clinical safety, efficacy and cost-effectiveness of the CTLM/trademark/
device, the advantage of the CTLM/trademark/ device over existing technology and
cancer detection methods, third-party reimbursements practices and the Company's
manufacturing, quality control, marketing and sales efforts. Failure of the
Company's products to gain market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business - Sales and Marketing," "Business - Manufacturing" and "Business -
Reimbursement."
LIMITED MARKETING AND SALES CAPABILITY. In order to market any products it may
develop, the Company will have to develop a marketing and sales force with
technical expertise and distribution capability. There can be no assurance that
the Company will be able to establish sales and distribution capabilities or
that the Company will be successful in gaining market acceptance for any
products it may develop. The Company intends to pursue and has secured one or
more distribution arrangements in Europe and Asia with strategic marketing
partners who have established marketing capabilities. There can be no assurance
that the Company on its own, or through arrangements with others, will be able
to enter into such arrangements on acceptable terms, if at all. To the extent
that the Company arranges with third parties to market its products, the success
of such products may depend on the efforts of such third parties. There can be
no assurance that the Company will be able to enter any such strategic alliance
in Europe or that any of the Company's proposed marketing schedules or plans can
or will be met. See "Reliance on International Sales," "Business - Sales and
Marketing," and see "Business - Government Regulation".
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LIMITATION ON THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM. In the United
States, suppliers of health care products and services are greatly affected by
Medicare, Medicaid and other government insurance programs, as well as by
private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM/trademark/ device or by refusing reimbursement. If
examinations utilizing the Company's products were not reimbursed under these
programs, the Company's ability to sell its products may be materially and/or
adversely affected. There can be no assurance that third-party payors will
provide reimbursement for use of the Company's products. Several states and the
U.S. Government are investigating a variety of alternatives to reform the health
care delivery system and further reduce and control health care spending on
health care items and services, limit coverage for new technology and limit or
control the price health care providers and drug and device manufacturers may
charge for their services and products, respectively. If adopted and
implemented, such reforms could have material adverse effect on the Company's
business, financial condition and results of operations. In international
markets, reimbursement by private third-party medical insurance providers,
including governmental insurers and independent providers, varies from country
to country. In certain countries, the Company's ability to achieve significant
market penetration may depend upon the availability of third-party governmental
reimbursement. Revenues and profitability of medical device companies may be
affected by the continuing efforts of governmental and third-party payors to
contain or reduce the cost of health care through various means. See "Business -
Reimbursement."
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require substantial
additional funds for its research and development programs, preclinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs. The Company's capital requirements will depend on numerous
factors, including the progress of its research and development programs,
results of preclinical and clinical testing, the time and cost invoked in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments and changes in the Company's existing
research, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
Moreover, the Company's fixed commitments, including salaries
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11
and fee for current employees and consultants, and other contractual agreements
and are likely to increase as additional agreements are entered into and
additional personnel are retained. See "Business - Patents," "Business -
Licenses and Other Agreements," "Management - Employment Agreements," "Certain
Transactions" and "Notes to Financial Statements." The Company may need to raise
additional capital to fund its future operations and may seek such additional
funding through public or private financing or collaborative, licensing and
other arrangements with corporate partners. If additional funds are raised by
issuing equity securities, dilution to existing stockholders will result and
future investors may be granted rights superior to those of existing
stockholders. There can be no assurance, however, that additional financing will
be available when needed, or if available, will be available on acceptable
terms. Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back, or eliminate certain
of its research and product development programs or to license to third parties
rights to commercialize products or technologies that the Company would
otherwise seek to develop itself.
DEPENDENCE ON QUALIFIED PERSONNEL. Due to the specialized scientific nature of
the Company's business, the Company is highly dependent upon its ability to
attract and retain qualified scientific, technical and managerial personnel.
Therefore the Company has entered into employment agreements with certain of its
executive officers and employees. The loss of the services of existing personnel
as well as the failure to recruit key scientific, technical and managerial
personnel in a timely manner would be detrimental to the Company's research and
development programs and to its business. The Company's anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the additional of new management personnel. Competition
for qualified personnel is intense and there can be no assurance that the
Company will be able to continue to attract and retain qualified personnel
necessary for the development of its business. See "Business - Employees and
Management."
COMPETITION. The market in which the Company intends to participate is highly
competitive. Many of the companies in the cancer diagnostic and screening
markets have substantially greater technological, financial, research and
development, manufacturing, human and marketing resources and experience than
the Company. Such companies may succeed in developing products that are more
effective or less costly than the Company's
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12
products or such companies may be successful in manufacturing and marketing
their products than the Company. Physicians using imaging equipment such as
x-ray mammography equipment, ultrasound or high frequency ultrasound systems,
Magnetic Resonance Imaging (MRI) Systems, and thermography, diaphonography and
transilluminational devices may not use the Company's products.
Currently mammography is employed widely and the Company's ability to
demonstrate the Company's ability to sell the CTLM/trademark/ device to medical
facilities will, in part, be dependent on the Company's ability to demonstrate
the clinical utility of the CTLM/trademark/ device as an adjunct to mammography
and physical examination and its advantages over other available diagnostic
tests. See "business competition."
TECHNICAL OBSOLESCENCE. Methods for the detection of cancer are subject to rapid
technological innovation and there can be no assurance that technical changes
will not render the Company's proposed products obsolete. There can be no
assurance that the development of new types of diagnostic medical equipment or
technology will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Competition."
RELIANCE ON INTERNATIONAL SALES. The Company intends to commence international
sales of the CTLM/trademark/ device in Europe and Asia prior to commencing
commercial sales in the United States, where sales cannot occur unless and until
the Company receives pre-market approval from the FDA. Thus, until the Company
receives pre-market approval from the FDA to market the CTLM/trademark/ device,
as to which there can be no assurance, the Company revenues, if any, will be
derived from sales to international distributors. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on the Company's ability to deliver products on a timely
basis. Future imposition of, or significant increases in the level of, customs
duties, export quotas or other trade restrictions could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business - Sales and Marketing," the regulation of medical devices,
particularly in Europe, continue to develop and there can be no assurance that
new laws or regulations will not have an adverse effect on the Company.
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13
PRODUCT LIABILITY. The Company's business exposes it to potential product
liability risks which are inherent in the testing, manufacturing and marketing
of cancer detection products. Significant litigation, not involving the Company,
has occurred in the past based on the allegations of false negative diagnoses of
cancer. While the CTLM/trademark/ device is being developed as a adjunct to
other diagnostic techniques, there can be no assurance that the Company will not
be subjected to future claims and potential liability.
GLOSSARY OF TERMS
Absorption: Process by which a portion of the x-ray beam is removed when the
x-ray strike an object.
Benign: Favorable; good prognosis; not malignant.
Biopsy: Sterotactic core biopsy: A sampling of a lesion or microcalcifications
guided by mammography (a sterotaxic paired images).
Biopsy: Core needle biopsy: Can be obtained by ultrasound or mammography
guidance. Requires a special biopsy "gun" a device that works by a spring-action
mechanism to automatically project the needle through the lesion to obtain a
specimen.
Calcification: Calcium salts laid down in tissue, usually complex forms of
calcium phosphates and carbonates; found in both benign and malignant breast
diseases.
Cancer: A mass of tissue cells with potentially unlimited growth; serves no
useful purpose; is parasitic; expands locally by invasion; spreads systemically
by cells transmitted through lymphatic and blood vessels; is usually fatal if
not removed or destroyed.
Carcinoma in situ: Mass of tissue cells morphologically cancerous but still
confined to the area of origin ; in the breast the cancer cells still lie within
the confines of the ducts and do not extend beyond the limiting basement
membrane of these ducts.
Cyst: Encapsulated collection of fluid that may be clear or bloody.
Cyst aspiration: Cyst aspiration may be guided by palpation, US, or Mammography.
Imaging guidance may be useful for both palpable and impalpable cysts because of
ensures that the lesion in entered with the needle and facilitates complete
aspiration of the fluid.
Density: The degree of opacity of a radiographically translucent medium,
depending on mass per unit volume;
Lymph node: A lymph gland or rounded mass of lymphoid tissue through which the
lymph is filtered, of importance in trapping cancer cells that spread by flowing
through the lymph channels.
Malignant: Tending to infiltrate, metastasize, the terminate fatally.
Mammography: Simple soft-tissue radiography of the breast; nothing is injected
for the procedure.
Mass: A lump or nodule. Dominant mass: the nodule that stands out, the mass in
the breast that is significant to surgeon, usually worthy of biopsy.
Palpation: The act of feeling (examining) with the hand.
Ultrasound: Ultrasonography of the breast images mammary structures by recording
their differing reflections of ultrasonic waves. Sound waves; real-time imaging.
The transducer directs the high-frequency beam (more than 20,00 cycles per
second) into the breast. A computerized television video-scan converter
amplifies the resulting echoes or reflections and assembles them according to
strength into a video collage displayed on an oscilloscope.
Fine needle aspiration: A sampling of nonpalpable lesions guided by mammography
or ultrasound.
<PAGE>
13
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. All of the proceeds will be received by the Selling Securityholders.
See "Selling Securityholders".
SELLING SECURITYHOLDERS
The Selling Securityholders consist of the Series B Holders and Series C
Holders. The registration statement of which this Prospectus is a part is being
filed, and the Shares offered hereby are included herein, pursuant to
registration rights as provided for in the subscription agreement and
registration rights agreements entered into between the Company and the Selling
Securityholders (collectively, the "Registration Rights"). Due to (i) the
ability of the Selling Securityholders to determine when and whether they will
sell any Shares under this Prospectus and (ii) the uncertainty as to how many of
the Warrants will be exercised and how many shares of Common Stock will be
issued upon conversion of shares of Series B Preferred and the Series C
Preferred,
<PAGE>
14
the Company is unable to determine the exact number of Shares that will actually
Be sold pursuant to this Prospectus. However, at a minimum, the Selling
Securityholders will be able to convert into 2,467,532 (not including dividends
or warrants) shares of the Company, all of which will be subject to registration
rights. The formula for conversion provides for converting at the lesser of
$3.85 (Fixed Conversion Price) of 82% of the market price for the Company's
shares (Variable Conversion Price). Accordingly, the number of Shares subject to
registration rights may increase. As an example, if the market price of the
Shares at the time of conversion was $3.50 and the Selling Securityholders were
converting all of their Preferred Shares the Securityholders would receive
3,309,800 Shares. ($3.50 X .82= $2.87. 10,000/$2.87 = 3,484 X 950 = 3,309,800).
The Fixed Conversion Price for both the Series B Preferred and Series C
Preferred was determined by reference to the market price for the Company's
stock prior to the closing of the transaction. The Variable Conversion Price was
determined by reference to various factors concerning the Company which are
enumerated in the section titled "Risk Factors". The Series B Holders are
investment companies incorporated in the British Virgin Islands and the Series C
Holder is a company incorporated in Israel.
THE SERIES B HOLDERS
The Selling Securityholders identified in the table below as "Series
B Holders" acquired an aggregate of 450 shares of Series B Preferred in a
private placement transaction (the "Series B Transaction") pursuant to
Subscription Agreements dated December 13, 1996 (collectively the "Subscription
Agreements"). The Series B Preferred is convertible into Common Stock at the
option of the Series B Holder as follows: may convert up to 34% of the Series B
Preferred 80 days after issuance December 17, 1996; may convert up to 67% of the
Series B Preferred 100 days after issuance December 17, 1996; and, all remaining
Series B Preferred 120 days after issuance December 17, 1996. The number of
shares of Common Stock into which shares of Series B Preferred are convertible
depends on several factors, including the date on which the shares are converted
And the market price of the common stock at the time of conversion. None of the
Series B Preferred have been converted. See "Description of Capital Stock -
Preferred Stock."
THE SERIES C HOLDERS
The Selling Securityholders identified in the table below as "Series
C Holders" acquired an aggregate of 500 shares of Series C Preferred in a
private placement transaction (the
<PAGE>
15
"Series C Transaction") pursuant to Subscription Agreements dated March 6, 1997
( the "Subscription Agreement"). The Series C Preferred is convertible into
Common Stock at the option of the Series C Holder as follows: may convert up to
34% of the Series C Preferred on March 7, 1997; may convert up to 67% of the
Series C Preferred on or after March 22, 1997; and, all remaining Series C
Preferred on or after April 16, 1997. The number of shares of Common Stock into
which shares of Series C Preferred are convertible depends on several factors,
including the date on which the shares are converted and the market price of the
Common Stock at the time of conversion. None of the Series C Preferred have been
converted. See "Description of Capital Stock - Preferred Stock."
The figures in the table below representing the number of shares of Common
Stock offered by the Series B Holders and Series C Holders make a number of
assumptions concerning the applicable conversion ratio and the dates on which
shares of Series B Preferred are converted. As described in greater detail under
"Description of Capital Stock - Preferred Stock," the number of shares of Common
Stock issuable upon conversion of Series B Preferred and Series C Preferred is
calculated in part on the basis of the lower of a fixed conversion price or a
variable conversion price. The variable conversion price depends primarily on
the market price of the Common Stock on the date of conversion. The Fixed
Conversion Price is $3.85 per share. Since Series B Holders and Series C Holders
paid $10,000 per share for Series B Preferred and Series C Preferred, each share
of Series B Preferred and Series C Preferred is, in general, convertible into a
number of shares determined by dividing $10,000 by the applicable conversion
price. If the variable conversion price on the date of conversion is lower than
the Fixed Conversion Price, then a greater number of shares will be issued. In
addition, there is dividend payable at the rate of seven percent (7%) per annum,
payable quarterly at the Company's option in cash or shares.
For the above reasons, it is not possible to set forth in the table the
maximum number of shares that could be acquired by the Series B Holders and
Series C Holders upon conversion of shares of Series B Preferred and Series C
Preferred. The number of shares set forth in the tables are based on conversion
as follows: the Series B Preferred at the fixed conversion price, with the
dividend of 7% calculated, assuming conversion of all of the Series B Preferred
on the dates set forth above; and the Series C Preferred at the fixed conversion
price, with the dividend of 7% calculated, assuming conversion of all of the
Series C Preferred on the dates set forth above. Several factors, including
whether the market price of the Common Stock is lower than the fixed conversion
price of $3.85 per share,
<PAGE>
16
could result in a greater number of Shares being issued to the Series B Holders
and Series C Holders than are reflected in the table below.
The following table identify each Selling Securityholder based upon
information provided to the Company, set forth as of January 31, 1997, with
respect to the Shares beneficially held by or acquirable by, as the case may be,
each Selling Securityholder and the shares of Common Stock beneficially owned by
the Selling Securityholder which are not covered by this Prospectus. No Selling
Securityholder has had any position, office or other material relationship with
the Company within the past three years. The percentage figures reflected in the
table assume conversion of all shares of: Series B Preferred into 1,327,864
shares of Common Stock including dividends at the rate of 7% per annum paid in
shares of Common Stock assuming conversion of the Series B Preferred in
percentages set forth above and exercise of all Warrants into 112,500 shares of
Common Stock; and, Series C Preferred into 1,306,125 shares of Common Stock
including dividends at the rate of 7% per annum paid in shares of Common Stock
assuming conversion of the Series C Preferred in percentages set forth above.
<TABLE>
<CAPTION>
SERIES B HOLDERS
NUMBER OF NUMBER OF COMMON STOCK
SHARES OF COMMON STOCK SHARES OF COMMON STOCK OWNED PRIOR TO
NAME OF UNDERLYING UNDERLYING OFFERING
INVESTOR SERIES B PREFERRED WARRANTS NUMBER PERCENT
- ------ ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Goodland International
Investment Ltd. 850,755 78,750 None 0
Weyburn Overseas
Limited 364,609 33,750 None 0
</TABLE>
SERIES C HOLDERS
NUMBER OF COMMON STOCK
SHARES OF COMMON STOCK OWNED PRIOR TO
NAME OF UNDERLYING OFFERING
INVESTOR SERIES C PREFERRED NUMBER PERCENT
- -------- ---------------------- ---------------
Arcadia Importers
& Exporters, Inc. 1,306,125 0
PLAN OF DISTRIBUTION
The registration statement of which this Prospectus forms a part has been
filed pursuant to the Registration Rights. To the Company's knowledge, as of the
date hereof, no Selling Securityholder had entered into any agreement,
arrangement or understanding with any particular broker or market maker with
respect to the Shares offered hereby, nor does the Company know
<PAGE>
17
the identity of the brokers or market makers which will participate in the
offering.
The Shares covered hereby may be offered and sold from time to time by the
Selling Securityholders. The Selling Securityholders will act independently of
the Company in making decisions with respect to the timing, manner and size of
each sale. Such sale may be made on the OTC Bulletin Board or otherwise, at
prices and on terms then prevailing or at prices related to the then market
price, or in negotiated transactions. The Shares may be sold by one or more of
the following methods: (a) a block trade in which the broker-dealer engaged by
the Selling Securityholder will attempt to sell Shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by the broker-dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. To the
best of the Company's knowledge, the Selling Securityholders have not, as of the
date hereof, entered into any arrangement with a broker or dealer for the sale
of shares through a block trade, special offering, or secondary distribution of
a purchase by a broker-dealer. In effecting sales, broker-dealers engaged by the
Selling Securityholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or discounts from the Selling
Securityholders in amounts to be negotiated.
In offering the Shares, the Selling Securityholders and any broker-dealers
who execute sales for the Selling Securityholders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profits realized by the Selling Securityholders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
Rule 10b-6 under the Exchange Act prohibits participants in a distribution
from bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made
to stabilize the price of a security in connection with a distribution of the
security.
This offering will terminate as to each Selling Securityholder on the
earlier of (a) the date on which such Selling Securityholder's shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all Shares offered hereby have been sold by the Selling Securityholders. There
can be no assurance that any of the
<PAGE>
18
Selling Securityholders will sell any or all of the shares of Common Stock
offered hereby.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
capital stock of which 48,000,000 shares are common stock no par value and
2,000,000 shares are preferred, no par value. As of December 31, 1996 there were
issued and outstanding 24,273,520 shares of Common Stock. As of December 31,
1996, there were issued and outstanding 450 shares of Series B Convertible
Preferred Stock and Warrants to purchase 112,500 shares of Common Stock of the
Company ("Warrant") and 500 shares of Series C Convertible Preferred Stock.
Common Stock
The holders of the Common Stock are entitled to one vote for each share in
the election of directors and in all other matters to be voted on by the
shareholders. There is no cumulative voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available thereof and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock issued or
issuable upon the conversion of the Series B Preferred and the exercise of
Warrants will be, when issued against the consideration therefor, fully paid and
nonasseable.
Preferred Stock
Shares of preferred stock may be issued from time to time in series and
the Board of Directors of the Corporation is authorized to establish and
designate series and to fix the number of shares and the relative voting,
dividend, conversion, liquidation, redemption, and other rights, preferences,
and limitations as between series, subject to such limitations as may be
prescribed by law; that the proper officers of the corporation are by this means
authorized to make, subscribe, acknowledge, execute, and file, or cause to be
filed, such certificate or certificates as may be required under the laws of the
state of Florida and other jurisdictions to give effect to the proposal, as
presented in the proxy statement, or as may be
<PAGE>
19
required in connection with the issuance of shares of preferred stock in series
from time to and things as in its discretion may be necessary or advisable in
connection with such proposal.
Series B Preferred
A total of 450 shares of Series B Preferred are authorized by the
Certificate of Amendment to the certificate of Incorporation (the "Certificate
of Determination") establishing the rights, preferences, privileges and
restrictions granted to or imposed upon the Series B Preferred. The following is
a description of some of the material terms of the Series B Preferred:
1. Designation. The designation of the series of Preferred Stock
fixed by this resolution shall be "Series B Convertible Preferred Stock"
(hereinafter referred to as the "Convertible Preferred Stock").
2. Conversion Rights.
(a) RIGHT TO CONVERT. The holder of any shares of Convertible
Preferred Stock may, (i) at any time during the period commencing on and
including eighty (80) days after issuance, convert up to thirty four
percent (34%), without the payment of any additional consideration
therefor, into that number of fully paid and nonassessable shares of
common stock, no par value, of the Corporation (ii) at any time during the
period commencing on and including one hundred (100) days after issuance,
convert up to sixty eight percent (68%) in aggregate, without the payment
of any additional consideration therefor, into that number of fully paid
and nonassessable shares of common stock, no par value, of the
Corporation, and (iii) at any time during the period commencing on and
including one hundred and twenty (120) days after issuance, convert up to
one hundred percent (100%) in aggregate, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of common stock, no par value, of the Corporation as
is determined by dividing (i) the sum of $10,000 by (ii) the Conversion
Price (determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" shall be equal to eighty two percent
(82%) of the Market Price of the Corporation's Common Stock; provided,
however, that in no event will the Conversion price be greater than the
$3.85. For purposes of this Section 2, the Market Price shall be the
average of the closing bid prices of the Common Stock over the five
consecutive trading days ending on the trading day immediately preceding
the date of the Conversion Notice (as defined in Section 2(b)hereof), as
reported by the National Association of Securities Automated Quotation
System ("NASDAQ"), or the average of the closing bid prices of the Common
Stock in the over-the-counter market over the five consecutive trading
days ending on the trading day immediately preceding the date of the
Conversion Notice, or, in the event the Common Stock is listed on a
national stock exchange, the Market Price shall be the average of the
closing prices of the Common Stock on such exchange, as reported by the
NASD OTC Bulletin Board over the five consecutive trading days immediately
preceding the date of the Conversion Notice.
(b) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Convertible Preferred Stock. If
upon conversion of shares of Convertible Preferred Stock held by a
registered holder which are being converted, such register holder
<PAGE>
20
would, but for the provisions of this Section 2(b), receive a fraction of
a share of Common Stock thereon, then in lieu of any such fractional share
to which such holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Convertible Preferred Stock shall
be entitled to convert the same into full shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the
Convertible Preferred Stock, and shall give written notice (the
"Conversion Notice") to the Corporation at such office that such holder
elects to convert the same and shall state therein such holder's name or
the name of its nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation
shall, as soon as practicable thereafter, but in any event within three
business days of the date of its receipt of the Conversion Notice, issue
and deliver or cause to be issued and delivered to such holder of
Convertible Preferred Stock, or to its nominee or nominees, a certificate
or certificates for the number of shares of Common Stock to which such
holder shall be entitled, together with cash in lieu of any fraction of a
share. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice, and the person or persons
entitled to receive the share of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date. Upon the conversion of any shares of
Convertible Preferred Stock, such shares shall be restored to the status
of authorized but unissued shares and may be reissued by the Corporation
at any time.
(c) NOTICES OF RECORD DATE. In the event of (i)any declaration
by the Corporation of a record date of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution or (ii) any capital
reorganization of the Corporation, any classification or recapitalization
of the capital stock of the Corporation, any merger or consolidation of
the Corporation, and any transfer of all or substantially all of the
assets of the Corporation to any other Corporation, or any other entity or
person, or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder
of Convertible Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (A) the date on which
any such record is to be declared for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the
date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected
to become effective and (C) the time, if any, that is to be fixed, as to
when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
transfer, consolidation, merger, dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i)take a record of holders of shares of the Common
Stock for the purpose of determining the holders entitled to receive
dividends payable in shares of Common Stock, (ii)subdivide the outstanding
shares of Common Stock, (iii)combine the outstanding shares of Common
Stock into smaller number of shares or (iv)issue, by reclassification of
the Common Stock, any other securities of the Corporation, then, in each
such case, the Conversion Price then in effect shall be adjusted so that
upon conversion of each share of
<PAGE>
21
Convertible Preferred Stock then outstanding the number of shares of
Common Stock into which such shares of Convertible Preferred Stock are
convertible after the happening of any of the events described in clauses
(i)through(iv) above shall be the number of such shares of Common Stock
into which such shares of Convertible Preferred Stock would have been
converted if so converted immediately prior to the happening of such event
or any record date with respect thereto.
(e) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such
numbers of shares of Common Stock as shall from time to time be sufficient
to effect conversion of all of the then outstanding shares of Convertible
Preferred Stock. In the event there are insufficient shares to effect a
conversion, the Corporation shall increase the number of authorized shares
to effect conversion. In the event shareholder approval is required to
increase the authorized shares, the holder shall be entitled to vote with
the holders of the Common Stock, as a single class, where each share of
Convertible Preferred Stock shall be entitled to that number of votes to
which it would be entitled had all of its shares of Convertible Preferred
Stock been converted into shares of Common Stock were notice of conversion
given on the date of such vote. No sale or disposition of all or
substantially all of the Corporation's assets shall take place without the
approval of the holders of the Convertible Preferred Stock, voting as a
single class.
3. DIVIDEND RIGHTS. The holders of record of Convertible Preferred
Stock shall be entitled to receive cumulative dividends thereon, out of
funds legally available therefor and to the extent permitted by law, at
the rate of seven percent (7%) per share, per annum, computed on the basis
of the actual number of days elapsed in a 365-day year, commencing on the
date of issuance of such shares of Convertible Preferred Stock and payable
quarterly on the last business day of each calendar quarter commencing
with the calendar quarter next succeeding the date of issuance of the
Convertible Preferred Stock. Such dividends shall be fully cumulative and
shall accrue, whether or not declared by the Board of Directors of the
Corporation, from the date of issuance of the shares of Convertible
Preferred Stock until the date of payment thereof as set forth in the
immediately preceding sentence. No dividends or other distributions shall
be paid on or declared and set aside for payment on the Common Stock until
full cumulative dividends on all outstanding shares of Convertible
Preferred Stock shall have been paid or declared and set aside for
payment. Such dividends shall be payable in cash or in freely tradable
shares of Common Stock, with such shares of Common Stock valued at the
average closing bid price of such shares over the five consecutive trading
days immediately preceding the date of payment thereof, as such average
closing bid price is determined pursuant to Section 2 above.
4. VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise
required by law and as provided for in Section 2(e), the holders of
outstanding shares of Convertible Preferred Stock shall not be entitled to
vote on any matters submitted to the stockholders of the Corporation.
5. RANKING. The Convertible Preferred Stock shall rank senior to any
other class of capital stock of the Corporation now or hereafter issued as
to the payment of dividends and the distribution of assets on redemption,
liquidation, dissolution or winding up of the Corporation.
6. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any
shares of Convertible Preferred Stock shall be outstanding, the
<PAGE>
22
holders of the then outstanding shares of Convertible Preferred Stock
shall have a preference in distribution of the Corporation's property
available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share, together with an
amount equal to all accrued but unpaid dividends thereon, if any, to the
date of payment of such distribution, whether or not declared by the
Board.
7. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Corporation with or into another
corporation, or in the case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as an entirety or
substantially as an entirety, each share of Convertible Preferred Stock
shall after the date of such consolidation, merger, sale, lease or
conveyance be convertible into the number of shares of stock or other
securities or property (including cash) to which the Common Stock issuable
(at the time of such consolidation, merger, sale, lease or conveyance)
upon conversion of such share of Convertible Preferred Stock would have
been entitled upon such consolidation, merger, sale, lease or conveyance;
and in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the holders of the
shares of Convertible Preferred Stock shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any shares of
stock or other securities or property thereafter deliverable on the
conversion of the shares of Convertible Preferred Stock.
SERIES C PREFERRED
A total of 500 shares of Series C Preferred are authorized by the
Certificate of Amendment to the Certificate of Incorporation (the "Certificate
of Determination") establishing the rights, preferences, privileges and
restrictions granted to or imposed upon the Series B Preferred. The following is
a description of some of the material terms of the Series C Preferred:
1. DESIGNATION. The designation of the series of Preferred
Stock fixed by this resolution shall be "Series C Convertible Preferred
Stock" (hereinafter referred to as the "Convertible Preferred Stock").
2. CONVERSION RIGHTS.
(a) Right to Convert. The holder of any shares of Convertible
Preferred Stock may, (i) convert thirty four percent (34%) of the
Convertible Preferred Stock on or after March 7, 1997, without the payment
of any additional consideration therefor, into that number of fully paid
and nonassessable shares of Common Stock, no par value, of the corporation
(ii) convert an additional thirty three percent (33%) of the Convertible
Preferred Stock on or after March 22, 1997, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of Common Stock, no par value, of the Corporation,
and (iii) all shares of the Convertible Preferred Stock will become
convertible, at the option of the holder, into shares of Common Stock at
any time after April 16, 1997, without the payment of any additional
consideration therefor, into that number of fully paid and nonassessable
shares of Common Stock, no par value, of the corporation as is determined
by dividing (i) the sum of $10,000 by (ii) the Conversion Price
(determined as
<PAGE>
23
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" shall be equal to eighty two percent (82%) of the Market Price of
the Corporation's Common Stock; provided, however, that in no event will
the Conversion Price be greater than the $3.85. For purposes of this
Section 2, the Market Price shall be the average of the closing bid prices
of the Common Stock over the five consecutive trading days ending on the
trading day immediately preceding the date of the Conversion Notice (as
defined in Section 2(b)hereof), as reported by the National Association of
Securities Automated Quotation System ("NASDAQ"), or the average of the
closing bid prices of the Common Stock in the over-the-counter market over
the five consecutive trading days ending on the trading day immediately
preceding the date of the Conversion Notice, or, in the event the Common
Stock is listed on a national stock exchange, the Market Price shall be
the average of the closing prices of the Common Stock on such exchange, as
reported in The Wall Street Journal over the five consecutive trading days
immediately preceding the date of the Conversion Notice.
(b) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Convertible Preferred Stock. If
upon conversion of shares of Convertible Preferred Stock held by a
registered holder which are being converted, such register holder would,
but for the provisions of this section 2(b), receive a fraction of a share
of Common Stock thereon, then in lieu of any such fractional share to
which such holder would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the then effective conversion
price. Before any holder of Convertible Preferred Stock shall be entitled
to convert the same into full shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the corporation or any transfer agent for the Convertible
Preferred Stock, and shall give written notice (the "Conversion Notice")
to the Corporation at such office that such holder elects to convert the
same and shall state therein such holder's name or the name of its
nominees in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, but in any event within three business days of the
date of its receipt of the Conversion Notice, issue and deliver or cause
to be issued and delivered to such holder of Convertible Preferred Stock,
or to its nominee or nominees, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share. Such conversion
shall be deemed to have been made on the date that the Corporation
receives the Conversion Notice, and the person or persons entitled to
receive the share of Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. Upon the conversion of any shares of
Convertible Preferred Stock, such shares shall be restored to the status
of authorized but unissued shares and may be reissued by the Corporation
at any time.
(c) NOTICES OF RECORD DATE. In the event of (i)any declaration
by the Corporation of a record date of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution or (ii) any capital
reorganization of the Corporation, any classification or recapitalization
of the capital stock of the Corporation, any merger or consolidation of
the Corporation, and any transfer of all or substantially all of the
assets of the Corporation to any other
<PAGE>
24
Corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of Convertible Preferred Stock at
least twenty (20) days prior to the record date specified therein, a
notice specifying (A) the date on which any such record is to be declared
for the purpose of such dividend or distribution and a description of such
dividend or distribution, (B) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective and (C) the
time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, transfer, consolidation,
merger, dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i)take a record of holders of shares of the Common
Stock for the purpose of determining the holders entitled to receive
dividends payable in shares of Common Stock, (ii)subdivide the outstanding
shares of Common Stock, (iii)combine the outstanding shares of Common
Stock into smaller number of shares or (iv)issue, by reclassification of
the Common Stock, any other securities of the Corporation, then, in each
such case, the conversion price then in effect shall be adjusted so that
upon conversion of each share of Convertible Preferred Stock then
outstanding the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible after the happening of any of
the events described in clauses (i)through(iv) above shall be the number
of such shares of Common Stock into which such shares of Convertible
Preferred Stock would have been converted if so converted immediately
prior to the happening of such event or any record date with respect
thereto.
(e) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such
numbers of shares of Common Stock as shall from time to time be sufficient
to effect conversion of all of the then outstanding shares of Convertible
Preferred Stock.
3. DIVIDEND RIGHTS. The holders of record of Convertible Preferred
Stock shall be entitled to receive cumulative dividends thereon, out of
funds legally available therefor and to the extent permitted by law, at
the rate of seven percent (7%) per share, per annum, computed on the basis
of the actual number of days elapsed in a 365-day year, commencing on the
date of issuance of such shares of Convertible Preferred Stock and payable
quarterly on the last business day of each calendar quarter commencing
with the calendar quarter next succeeding the date of issuance of the
Convertible Preferred Stock. Such dividends shall be fully cumulative and
shall accrue, whether or not declared by the Board of Directors of the
Corporation, from the date of issuance of the shares of Convertible
Preferred Stock until the date of payment thereof as set forth in the
immediately
<PAGE>
25
preceding sentence. No dividends or other distributions shall be paid on
or declared and set aside for payment on the Common Stock until full
cumulative dividends on all outstanding shares of Convertible Preferred
Stock shall have been paid or declared and set aside for payment. Such
dividends shall be payable in cash or in freely tradable shares of common
stock, at the Company's option, with such shares of Common Stock valued at
the average closing bid price of such shares over the five consecutive
trading days immediately preceding the date of payment thereof, as such
average closing bid price is determined pursuant to Section 2 above.
4. VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise
required by law, the holders of outstanding shares of Convertible
Preferred Stock shall not be entitled to vote on any matters submitted to
the stockholders of the Corporation. Notwithstanding the foregoing,
without the approval of the holders of a majority of the outstanding
shares of Convertible Preferred Stock, the Company shall not (1)
authorize, create or issue any shares of any class or series ranking
senior to the Convertible Preferred Stock as to liquidation rights, (2)
amend, alter or repeal, by any means, the certificate of incrporation if
the powers, preferences, or special rights of the Convertible Preferred
Stock would be materially adversely affected, other than restrictions
arising under the General Corporation Law of the State of Florida existing
under the Certificate of Incorporation as in effect on January 1, 1997.
5. RANKING. Except as expressly set forth herein, the
Convertible Preferred Stock shall rank senior to any other class of
capital stock of the Corporation now or hereafter issued as to the payment
of dividends and the distribution of assets on redemption, liquidation,
dissolution or winding up of the Corporation.
6. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any
shares of Convertible Preferred Stock shall be outstanding, the holders of
the then outstanding shares of Convertible Preferred Stock shall have a
preference in distribution of the Corporation's property available for the
distribution to the holders of any other class of capital stock of the
Corporation, including but not limited to, the Common Stock, equal to
$10,000.00 Consideration per share, together with an amount equal to all
accrued but unpaid dividends thereon, if any, to the date of payment of
such distribution, whether or not declared by the Board.
7. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Corporation with or into another
Corporation, or in the case of any sale, lease or conveyance to another
Corporation of the assets of the Corporation as an entirety or
substantially as an entirety, each share of Convertible Preferred Stock
shall after the date of such consolidation, merger, sale, lease or
conveyance be convertible into the number of shares of stock or other
securities or property (including cash) to which the Common Stock issuable
(at the time of such consolidation, merger, sale, lease or conveyance)
upon conversion of such share of Convertible Preferred Stock would have
been entitled upon such consolidation, merger, sale, lease or conveyance;
and in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the holders of the
shares of Convertible Preferred Stock shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any shares of
stock or other securities or property thereafter deliverable on the
conversion of the shares of Convertible Preferred Stock.
8. REDEMPTION. In the event 4,830,430 shares of Common Stock (which
amount shall not be in excess of 19.9% Of the outstanding stock of the
Company on the date of the issuance of the Convertible Preferred Stock)
the Company agrees to redeem all of the outstanding Convertible Preferred
Stock at 121.9% of the Purchase Price, plus accrued interest. At such time
as 4,830,430 shares of Common Stock have been issued, the Company shall
give notice of redemption to the
<PAGE>
26
remaining holders of the Convertible Preferred Stock at the address and
facsimile number of such Convertible Preferred Stock holder appearing on
the Company's register for the Convertible Preferred Stock. Such
redemption notice shall specify the applicable redemption price. The date
of the notice shall be the redemption date. The mandatory redemption price
shall be paid to the holder of the Convertible Preferred Stock redeemed
within seven (7) business day of the redemption date.
Warrants
As of December 31, 1996, the Company had outstanding 112,500
non-redeemable warrants (the "Series B Warrants"). The Series B Warrants are
exercisable at any time for an exercise price of $5.00 and will expire five (5)
years from date of issue. The Warrants may be exercised upon surrender of the
certificate thereof on or prior to the expiration date at the offices of the
Company with the form of "Election to Purchase" and accompanied by payment of
the full exercise price for the number of Warrants being exercised. The Warrants
contain provisions that protect the holders thereof against dilution by
adjustments of the exercise price in certain events, such as stock dividends,
stock splits, mergers, combinations or recapitalizations, and for other unusual
events. The holder of a Warrant will not posses any rights as a shareholder of
the Company unless and until he or she exercises the Warrant.
INTERESTS OF NAMED EXPERTS
AND COUNSEL
Certain legal matters in connection with the securities being offered
hereby will be passed upon for the Company by Peter S. Knezevich, General
Counsel and Vice President of the Company. Mr. Knezevich currently owns
approximately 166,400 shares of Common Stock of the Company.
EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
included herein and elsewhere in the Registration Statement have been examined
by Margolies and Fink, independent certified public accountants, for the periods
and to the extent set forth in their respective report and are included herein
and elsewhere in the Registration Statement in reliance upon such report of said
firm given under their authority as experts in accounting and auditing.
<PAGE>
27
LEGAL OPINIONS
The validity of the issuance of the Shares will be passed upon for the
Company by Mr. Peter S. Knezevich, General Counsel and Vice President of the
Company.
BUSINESS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems, Inc.
(the "Company") has been engaged in research and development associated with its
cancer detection technology and developing for commercial application its
Computed Tomography Laser Mammography (CTLM/trademark/)device. During the first
year, the Company researched the interaction between high speed, rapid pulsed
(Ti-Saphire) laser technology and various detection technologies associated with
standard computed tomographic ("CT") schemes. From this research the Company
developed its first prototype which was able to create images of a breast. The
Company refined various software and hardware configurations and components of
the device based on these first images and filed a patent during June of 1995.
During this period of time there were further advances in laser technology
effecting the size and stability of the laser component. The Company
incorporated these changes by purchasing a laser package manufactured by
Spectra-Physics, Inc. On December 12, 1995, the Company had a preliminary
meeting with the Food and Drug Administration to discuss generally the approach
the Company would take to obtain marketing clearance for its CTLM/trademark/
device. The Company was advised that it would need to submit and have approved a
pre-market approval application ("PMA") in order to obtain marketing clearance
for the device. Further, the Company was advised that it would also need to
submit an investigational device exemption ("IDE") application to the FDA in
order to commence human clinical trials of the device. The Company submitted its
IDE application on January 8, 1996, and it was approved February 9, 1996. During
calendar year 1996, among other matters, the Company further refined the
detection scheme and laser power configuration in order to obtain substantially
better image quality. In order to incorporate the changes the Company was
required to submit to the FDA an amendment to its IDE application. During the
month of November, 1996 the Company installed its device at the Strax Breast
Diagnostic Center.
To date, the Company has not marketed, or generated revenues from the
commercialization of any products. From inception to December 31, 1996, the
Company has sustained accumulated losses of $6,785,008 and has spent
approximately $1,065,230 on research and development during this same period.
The Company's results may vary significantly from period to period depending on
<PAGE>
28
several factors, such as the timing of certain expenses and the progress of the
Company's research and development and commercialization programs, all of which
may be affected by the availability of funds.
The Company is a medical technology company that has developed a system
for detecting breast cancer through the skin in a non-invasive and objective
procedure. Imaging's system employs a high-speed femto-second pulsed titanium
sapphire laser and proprietary scanning geometry and reconstruction algorithms
to detect and analyze masses in the breast for indicia of malignancy or
benignancy. The combination and incorporation of the foregoing components into a
device should provide for enhanced diagnostic capabilities that are superior to
standard mammography diagnostic tools such as ultra-sound and mammography.
Theoretically, the indicia of malignancy and benignancy, whether the lesion is
cystic or solid, as diagnosed by the device, is a precursor to current indicia
for malignancy or benignancy. Accordingly, the Company believes that its
proposed breast cancer diagnostic product, the Computed Tomography Laser
Mammography(CTLM/trademark/)device, will improve early diagnosis, reduce
diagnostic uncertainty and decrease the number of biopsies performed on benign
lesions. Further, the CTLM/trademark/ device does not expose the patient to
ionizing radiation nor the breast to painful compression. The Company believes
that these factors contribute to a portion of the patient population not
obtaining a conventional mammogram.
The competition for developing a commercial device utilizing CT and laser
technology is difficult to ascertain. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is, essentially, a shorthand description of the technology the
Company's CTLM/trademark/ device utilizes. However, in this regard, the Company
is not aware of any commercial application of this technology for diagnosing
breast cancer for which the Company would consider to be competition.
The CTLM device will require Food and Drug Administration (FDA) approval
prior to commercial distribution in the United States. There can be no assurance
that any such approval will be received on a timely basis, or at all, or that
any products developed by the Company will be accepted commercially.
Furthermore, there can be no assurance that the Company's technology can be
adapted for breast screening or for the detection of cancer.
<PAGE>
29
The Computed Tomography Laser Mammography Device
The CTLM device is being developed to provide physicians and patients with
immediate information concerning the probability that an identified lesion is
malignant or benign. A breast exam utilizing the CTLM device is non-invasive and
can be performed by a medical technician in less than 15 minutes. A patient lies
face down on the scanning table with a breast hanging pendulously in the
scanning chamber. Once the entire breast is scanned the other breast is placed
in the chamber for scanning. Each scan takes approximately 3-4 minutes. The
procedure is designed to provide the physician and patient with objective,
on-site, immediate diagnostic decisions, including whether or not to proceed to
surgical biopsy. Further, the device is designed to archive and compare scans
and provide the patient with a computer disc (CD) of her scan.
Breast Cancer
Background
Breast cancer is one of the most common cancers among women and,
notwithstanding the currently available detection modalities, is the leading
cause of death among women aged 35 to 45. According to the American Cancer
Society ("ACS"),approximately one in nine women in the United States will
develop breast cancer during her lifetime. In the United States in 1994,
approximately 180,000 women were diagnosed with, and approximately 46,000 women
died as a result of, breast cancer. In Europe in 1990, approximately 170,000
cases of cancer were discovered, with an estimated 73,000 deaths. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when
combined with appropriate follow-up, will reduce mortality from the disease.
According to the NCI, the five-year survival rate decreases from more than 90%
to 72% after the cancer has spread to the lymph nodes, and to 18% after it has
spread to other organs such as the lung, liver or brain.
Breast cancer screening is generally recommend as a routine part of
preventive healthcare for women over the age of 20 (approximately 90 million in
the United States). For these women, ACS has published guidelines for breast
cancer screening including:(i)monthly breast self-examinations for all women
over the age of 20;(ii)a baseline mammogram for women by the age of 40;(iii)a
mammogram every one to two years for women between the ages of 40 and 49;(iv)an
annual mammogram for women age 50 or older. As a result of family medical
histories and other
<PAGE>
30
factors, certain women are at "high risk" of developing breast cancer during
their lifetimes. For these women, physicians often recommend close monitoring,
particularly if a potentially pre-cancerous condition has been detected.
Each year approximately eight million women in the United States
require diagnostic testing for breast cancer because of a physical symptom, such
as a palpable lesion, pain or nipple discharge, discovered through self or
physical examination (approximately seven million) or a nonpalpable lesion
detected by screening x-ray mammography (approximately one million). Once a
physician has identified a suspicious lesion in a woman's breast, the physician
may recommend further diagnostic procedures, including diagnostic mammography,
ultrasound or fine needle aspiration. In each case, the potential benefits of
additional diagnostic testing must be balanced against the costs, risks and
discomfort to the patient associated with undergoing the additional procedures.
Each of the currently available non-surgical modalities for breast cancer
detection has various clinical limitations.
Screening and Diagnostic Modalities
Physical examinations may be conducted by a physician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.
Mammography is a non-invasive x-ray modality commonly used for both
routine breast cancer screening and as a diagnostic tool. A mammogram produces
and image of the internal structure of the breast which is intended to display
lesions as blurry white spots against normal tissue. In a screening mammogram,
radiologist seek to detect suspicious lesions, while in a diagnostic mammogram
radiologist seek to characterize suspicious lesions. Mammograms require
subjective interpretation by a radiologist and are often uncomfortable for the
patient. Because x-ray mammography exposes the patient to radiation, ACS
recommends mammograms be limited to once per year. In addition, x-ray
mammography is considered to be less effective for women under the age of 50 who
generally have radiographically dense breast tissue. The average cost of a
diagnostic mammogram is approximately $55 to $200 per procedure (an average of
$113), and requires the use of capital equipment ranging in cost from
approximately $75,00 to $225,000. It is expected that the CTLM device will cost
approximately $300,000 and the cost of an exam will be $125 to $150. Due the
high capital costs
<PAGE>
31
associated with mammography equipment and the specialized training
necessary to operate the equipment and to read x-ray images, mammography is
usually available only at specialty clinics or hospitals.(The foregoing average
cost figures are based on a survey of 23 ACR and FDA certified facilities in
Broward County, Florida, conducted during the month of March, 1997).
Ultrasound uses high frequency sound waves to create an image of soft
tissues in the body in a non-invasive manner. Like mammography, this image
requires interpretation by a physician. Ultrasound's principal role in breast
cancer diagnosis has been to assist the physician in determining whether a
palpable lesion is likely to be a cyst (usually benign) or a solid mass
(potentially cancerous). The average cost for an ultrasound of the breast is
approximately $125 to $500 per procedure (an average of $235) and requires the
use of capital equipment ranging in cost from approximately $60,000 to $200,000.
Again, it is expected that the CTLM device will cost approximately $300,000 and
the cost of an exam will be $125 to $150. Like mammography, ultrasound is
generally performed at specialty clinics or hospitals.(The foregoing average
cost figures are based on a survey of 23 ACR and FDA certified facilities in
Broward County, Florida, conducted during the month of March, 1997).
Other currently available non-surgical diagnostic techniques include
fine needle aspirations, core needle biopsy and stereotactic needle biopsy. In
each of these procedures a physician seeks to obtain cell samples from
suspicious lesions through a needle for analysis by a cytopathologist.
Inadequate sampling often renders these tests invalid. These procedures are
invasive, require follow-up and range in cost from approximately $370 to $1,000
per procedure.
Due in part to the limitations of the currently available modalities to
identify malignant lesions, a large number of patients with suspicious lesions
proceed to surgical biopsy, an invasive and expensive procedure. Approximately
800,000 surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait several days to receive their biopsy results.
The Company believes that the shortcomings of current breast cancer
management which include discomfort and exposure to radiation represent a
significant market opportunity for an
<PAGE>
32
objective technology which does not have these shortcomings. The use of the
CTLM device to detect breast cancer is believed to be especially promising for
women between the ages of 20 to 50 (over 50 million women in the United States)
for whom x-ray mammography has lower efficacy. These women often present diffuse
palpable benign breast conditions which can mask malignancies or pre-malignant
conditions.
Regulatory and Clinical Status
In order to sell the CTLM device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a PMA with the FDA to obtain marketing clearance. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review which is available to
medical devices satisfying one or more of the following criteria:
/bullet/ The device addresses a condition which is serious or
life-threatening or presents a risk of serious injury for
which no alternative legally marketed diagnostic/therapeutic
modality exists.
/bullet/ The device addresses a condition which is life-threatening or
irreversibly debilitating, and provides for clinically
important earlier diagnosis or significant advances in safety
and/or effectiveness over existing alternatives.
/bullet/ The device represents a clear clinically meaningful advantage
over existing technology, defined as having major (not
incremental) increased effectiveness or reduced risk compared
to existing technology.
/bullet/ The availability of the device is otherwise in the best
interest of the public health.
On February 9, 1996, the FDA approved the Company's Investigational Device
Exemption (IDE) application. An approved IDE application permits a device, that
would otherwise be subject to marketing clearance, to be shipped lawfully for
the purpose of conducting a clinical study. Further, the Company supplemented
the IDE to allow for the scanning of 7-10 patients in-house.
The IDE authorizes the Company to conduct a Phase I study at the Strax
Breast Diagnostic Institute located in Lauderhill,
<PAGE>
33
Florida (the "Strax Center"). The Phase I study involves scanning 50
patients with differing breast abnormalities and comparing the results with
other diagnostic modalities such as ultra-sound and standard x-ray mammography.
These 50 patients will be involved in the study for the limited period of time
for the Phase I study. As of March 15, 1997, the Company has scanned 3 patients
at the Strax Center and an addition 7 patients have been scanned at the Company.
It is anticipated the Phase I study will take 60-90 days. After the Phase I
study is completed and the results are reviewed by the FDA, the Company will
submit its Phase II application to the FDA. The Phase II study will encompass
the establishment of 4-6 clinical sites at major hospitals in the United States.
These clinical sites will be used to accumulate the approximately 400-500
clinical studies to be submitted with the PMA application.
The delay between the date of approval of the IDE and the installation of
the device at the Strax Center was caused by a change in the device and the
availability of a new laser package. The change was based on technological
improvements to the laser component of the device which resulted in increased
scanning capabilities. The Company was required to submit to the FDA for
approval an amendment to the Company's existing IDE application to incorporate
the changes prior to installing the device at the Strax Center. Further, in
order to submit the amendment, the Company, at the request of the FDA, had to
seek its approval to conduct a clinical test to support the amendment.
Sales and Marketing
The laws of certain European and Asian countries may permit the Company to
begin marketing the CTLM device in Europe and Asia before marketing would be
permitted in the United States. The Company is considering potential
distribution agreements with strategic marketing partners in Europe and Asia and
has entered into a distribution agreement with Euro Trading & Finance S.r.l. to
market and service the device in Italy.
Employees
As of January 24, 1997, the Company had 26 employees, 18 of whom devote
the majority of their time to scientific and product research and development.
Facilities
The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000 sq. ft.
building located on a 5 acre landscaped tract. The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from
<PAGE>
34
hardware components that will be made by vendors to Company specifications. The
software components of the device are developed by Company.
Legal Proceedings
The Company has no legal proceedings.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the over-the-counter bulletin
board market. There has been trading in the Company's Common Stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high and low trade prices for the Common Stock, as
reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown or commissions and may not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1995
----------------
September/1994 $1.38 $1.00
December/1994 $1.44 $ .75
March/1995 $2.19 $ .50
June/ 1995 $2.12 $1.46
FISCAL YEAR 1996
----------------
September/1995 $ .78 $ .71
December/1995 $3.15 $3.06
March/1996 $8.25 $8.00
June/ 1996 $3.90 $3.87
FISCAL YEAR 1997
----------------
September/1996 $3.93 $2.25
December/1996 $3.93 $1.43
On March 21, 1997, the closing trade price of the Common Stock as
reportd on the OTC Bulletin Board was $3.93. As of such date, there were
approximately 573 holders of record of the Company's Common Stock.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends with respect
to its capital stock, and the current policy of the Board of Directors is to
retain any earnings to provide for the growth of the Company. Consequently, no
cash dividends are expected to be paid on the Company's Common Stock in the
foreseeable future.
<PAGE>
35
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
Statement of Operations Data
FROM FROM
SIX MONTHS YEARS ENDED INCEPTION INCEPTION
DECEMBER 31, JUNE 30, (12/10/93) TO (12/10/93) TO
1996 1995 1996 1995 JUNE 30, 1994 DECEMBER 31,1996
------------------- ---------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses:
Research/Development 179,725 1,167 829,771 32,616 23,118 1,065,230
Compensation/Benefits 880,018 350,598 1,356,733 314,570 2,551,321
Advertising/Promotion 102,229 77,437 234,765 105,177 442,171
General/Adm. 275,472 55,108 297,229 59,898 19,505 652,104
Clinical expenses 11,852 - 170,754 182,606
Consulting expenses 37,420 72,333 303,080 88,219 10,150 438,869
Insurance Costs 59,144 11,016 34,097 10,410 448 104,099
Professional fees 65,672 22,205 181,644 48,136 295,452
Stockholder Exp. 23,373 - - - 23,373
Travel/Subsistence 86,948 45,078 99,826 50,189 236,963
Trade show expenses 114,796 27,389 85,623 48,871 249,290
Rent expense 36,506 23,850 91,123 33,853 7,650 169,132
Depreciation/Amm. 177,586 55,863 155,346 46,632 3,545 383,109
Interest expense 391 46 21,774 2,535 24,700
Amm. Def. Comp/ 78,750 173,438 232,500 114,375 425,625
Interest Income (51,417) (58,308) (109,725)
--------- -------- ----------- --------- --------- ----------
2,078,465 915,528 4,014,183 974,720 66,951 7,134,319
Net Loss (2,078,465) (915,528) (4,014,183) (974,720) (66,951) (7,134,319)
Dividends on cumulative
preferred stock:
From Discount at Issue 714,155 998,400 1,712,555
Earned 28,469 47,845 76,314
Net loss applicable to
common shareholders $(2,821,089) $(915,528) $(5,060,428) $(974,720) $(66,951) $(8,923,188)
Net loss per
common share $(.116) $(.049) $(.237) $(.058) $(.011) $(.458)
Weighted avg. no.
of common shares 23,820,035 18,870,569 21,354,155 16,881,230 6,288,887 19,344,642
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
DECEMBER 31, JUNE 30,
1996 1996 1995 1994(1)
----------- -----------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents
short term investments $3,885,509 $3,975,354 $ 16,059 8,898
Prototype Equipment 937,562 575,338 270,375 -
Property and equipment, net 3,868,698 1,050,194 285,976 147,386
Total Assets 8,712,457 5,669,796 623,674 154,154
Deficit accumulated during
development stage (6,785,008) (4,756,824) (927,296) (66,951)
Total stockholders
equity (deficit) 8,165,260 5,385,213 490,441 154,154
</TABLE>
(1)On April 14, 1994, Alkan Corp., the predecessor Corporation, issued
51,000,000 shares of its Common Stock in exchange for all of the issued and
outstanding stock of all of the shareholders of Imaging Diagnostic Systems, Inc.
The transaction was accounted for as a reverse merger in accordance with
Accounting Principles Board Opinion #16, wherein the shareholders of Imaging
Diagnostic Systems, Inc. will own 51% of the outstanding stock of Alkan Corp.
after the merger. As part of the transaction, the certificate of incorporation
of Alkan Corp. was also amended to change its name to Imaging Diagnostic
Systems, Inc. Alkan Corp. had a fiscal year end of October 31. Accordingly, the
periods are reflective of that fact and the change of the fiscal year end to
June 30.
<PAGE>
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems, Inc.
(the "Company") has been engaged in research and development associated with its
cancer detection technology. As a developmental stage company, the Company has
incurred net losses since inception through December 31, 1996 of approximately
$6,785,008. The Company expects operating losses will continue for at least the
next few years as total costs and expenses increase due principally to increased
marketing and manufacturing expenses associated with the anticipated
commercialization of the Computed Tomography Laser Mammography (CTLM/trademark/)
device, development of, and clinical trials for, the proposed CTLM device and
other research and development activities.
To date, the Company has not marketed, or generated revenues from the
commercialization of, any products. The Company's results may vary significantly
from period to period depending on several factors, such as the timing of
certain expenses and the progress of the Company's research and development and
commercialization programs, all of which may be affected by the availability of
funds.
Results of Operations
Twelve Months Ended June 30, 1996, June 30, 1995, Date of Inception (December
10, 1993) to June 30, 1994, and six months ended December 31, 1996 and December
31, 1995.
General and administrative expenses during the twelve months ended June
30, 1996, were $331,326 representing an increase of $261,018 from $70,308 during
the twelve months ended June 30, 1995, and an increase of $311,373 from $19,953
during the date of inception through June 30, 1994. Further, during the six
month period ended December 31, 1996, general and administrative expenses were
$275,472, an increase of $220,364 from $55,108 during the six month period
ending December 31, 1995. These increases were primarily due to an expansion of
the general operations of the Company associated with hiring additional
personnel and an increase in the size of the facilities.
Compensation and related benefits during the twelve months ended June 30,
1996, were $1,356,733 representing an increase of $1,042,163 from $314,570
during the twelve months ended June 30, 1995, and an increase of $1,356,733 from
no compensation being paid during the date of inception through June 30, 1994.
<PAGE>
37
Further, during the six month period ended December 31, 1996, compensation and
related benefits were $880,018, an increase of $529,420 from $350,598 during the
six month period ending December 31, 1995. These increases were primarily due to
an increase in compensation expense as a result of the hiring of 26 employees
and the vesting of options by executives pursuant to the Company's compensatory
non-qualified stock option plan which was terminated effective July 1, 1996.
Research and development expenses during the twelve months ended June 30,
1996 were $829,771, representing an increase of $797,155 from $32,616 during the
twelve months ended June 30, 1995, and an increase of $806,653 from $23,118
during the date of inception through June 30, 1994. Further, during the six
month period ended December 31, 1996, research and development expenses were
$179,725 an increase of $178,558 from $1,167 during the six month period ending
December 31, 1995. This increase is due to an increase in the development of the
Computed Tomography Laser Mammography (CTLM/trademark/) device.
During the six months ended December 31, 1996, there was a decline in
research and development expenses, compensation/benefits, consulting services,
professional fees, and clinical expenses, and an increase in
general/administrative expenses, travel, and trade show expenses. During the
later part of the calendar year the Company focuses its energies on the
Radiological Society of North America science exhibition which is held during
the end of November and beginning of December each year. Accordingly, travel and
trade show expenses will increase and other expenses associated with development
will decrease. General and administrative expenses increased because of the
recent purchase of the facility. There has also been an increase for the year
ended June 30, 1996 for clinical expenses, consulting expenses, and professional
fees. These expenses have increased as a result of the beginning of the
Company's Phase I study, reliance on outside consults for non-software expertise
associated with the device, and legal fees associated with capital raising and
accounting.
Balance Sheet Data
Liquidity and Capital Resources
The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $12,876,000. In
March, 1996 the Company received net proceeds of approximately $3,600,000 from
the private placement of its Series A Convertible Preferred Stock offering,
approximately $1,600,000 from the private placement of its
<PAGE>
38
Common Stock pursuant to Regulation S of the Securities Act of 1933, as amended,
and approximately $2,000,000 from the exercise of options that were granted for
services rendered. In December, 1996 the Company received net proceeds of
approximately $4,500,000 from the private placement of Series B Convertible
Preferred Stock and Warrants pursuant to Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.
The Company's combined cash and cash equivalents totaled $3,886,509 at
December 31, 1996, representing an increase of $3,870,000 from $16,059 at June
30, 1995, and a negligible decrease of $105,354 from $3,975,354 on June 30,
1996. The continuing balance of approximately $3,500,000 in cash and cash
equivalents is primarily due to receipt of approximately $11,700,000 in net
proceeds from the private placement of equity securities, Series A and Series B
Convertible Preferred Shares and Common Shares.
The Company's prototype equipment totaled $270,375 at June 30, 1995,
$575,338 at June 30, 1996, and $937,562 at December 31, 1996. All direct costs
associated with the prototype equipment have been capitalized. The increase in
prototype equipment is due to an increase in the development of the Computed
Tomography Laser Mammography (CTLM/trademark/) device.
The Company does not expect to generate a positive internal cash flow for
at least the next twelve (12) months due to the expected increase in spending
for research and development and the expected costs of commercializing it
initial product, the CTLM device. The Company will require additional funds for
its research and development, pre-clinical and clinical testing, operating
expenses, Food and Drug Administration regulatory processes, and manufacturing
and marketing programs. Accordingly, the Company will be required to raise
additional funds prior to the end of calendar year 1997 in order to continue
operations. The Company plans to raise additional funds by either: entering into
a transaction(s) to privately place equity, either common or preferred stock, or
debt securities, or combinations of both; or, placing equity into the public
market through an underwritten secondary offering. At the present time there are
no written commitments by individuals or entities for the additional funds
necessary to continue operations after December 31, 1997.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 1, 1994, the accounting firm of Chandross & Margolies,
P.A. was dissolved. Mr. Margolies formed a new accounting firm under the name of
Margolies and Fink, Certified
<PAGE>
39
Public Accountants. The predecessor accounting firm had issued an unqualified
opinion on the financial statements through June 30, 1994, and this change is
only as a result of the dissolution of the predecessor accounting firm. The
appointment of Margolies and Fink, Certified Pubic Accountants was approved by
the Board of Directors, and there were no disagreements as to the accounting
practices or principles between the Company and the predecessor accounting firm
that would need to be disclosed.
DIRECTORS AND EXECUTIVE OFFICERS
Richard J. Grable, 54
Chief Executive Officer and Director. Mr. Grable was a director of the
Company for 1994/1995, 1995/1996, and was elected for 1996/1997.
From March, 1994, to the Present: Mr. Grable is Chief Executive Officer
and a Director of Imaging Diagnostic Systems, Inc., Plantation, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily responsible
for the development of the CTLM/trademark/ device.
From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Fla., a
manufacturer of breast imaging systems.
From March, 1992, to December, 1993: Mr. Grable was a an engineering
consultant for Lintronics Technologies, Inc., Tampa, Fla., a manufacturer of
breast imaging systems.
From August, 1991 to February, 1992: Mr. Grable was an engineering
consultant for Audio Intelligence Devices, Inc., Ft. Lauderdale, Fla., a
manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant
for Telmed, Inc., Ft. Lauderdale, Fla., a software and electronic design
Company.
Linda B. Grable, 58
President and Chairman of the Board of Directors. Mrs. Grable was a
director of the Company for 1994/1995, 1995/1996 and was elected for 1996/1997.
From March, 1994, to Present: Mrs. Grable is President and a Director of
Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer of diagnostic
imaging systems.
From September, 1991, to February, 1994: Mrs. Grable was President and
Director of VCC Communications, Inc., Tampa, Fla., a manufacturer of voltage
controlled oscillators (VCO).
From August, 1988, to April, 1991: Mrs. Grable was President of Lintronics
International Ltd., Inc., Plantation, Fla., a manufacturer of breast imaging
systems.
Allan L. Schwartz, 55
<PAGE>
40
Executive Vice-President, Chief Financial Officer and Director. Mr.
Schwartz was a director of the Company for 1994/1995, 1995/1996, and was elected
for 1996/1997.
From March, 1994, to Present: Mr. Schwartz is Executive Vice-President and
Chief Financial Officer of Imaging Diagnostic Systems, Inc., Plantation, Fla., a
manufacturer of diagnostic imaging systems.
From April, 1993, to February, 1994: Mr. Schwartz was President and
Director of DynaMed Technologies, Inc., Coral Springs, Florida, a company that
developed neural network software for use with laser imaging systems and medical
managed care software.
From August, 1991, to April, 1993: Mr. Schwartz was President and Director
of Tron Industries, Inc., North Lauderdale, Florida, a developer of low voltage
neon novelty products.
From April, 1991, to July, 1991: Mr. Schwartz worked as a manufacturing
consultant for SE Enterprises, Miami, Fla., a manufacturer of prototype homes.
Peter S. Knezevich, 40
From April, 1995, to Present: Mr. Knezevich is General Counsel and Vice
President for Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer
of diagnostic imaging systems.
From May, 1994, to April 1995: Mr. Knezevich was in the private practice
of law.
From April, 1991, to May, 1994: Mr. Knezevich practiced law with the law
firm of Ferrell & Fertel located in Miami, Florida.
Robert H. Wake, 48
From April, 1995, to Present: Mr. Wake is Director of Engineering for
Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer of diagnostic
imaging systems.
From January, 1994, to March, 1995: Mr. Wake was a consultant to various
companies in 3-D computer imaging. From October, 1986, to December, 1993: Mr.
Wake founded and was President of Reality Imaging Corporation, Solon, Ohio, a
manufacturer of 3-D computer imaging systems. Mr. Wake invented the Voxel
Flinger 3-D imaging technology.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's outstanding
stock. Both parties disclaim, however, any beneficial interest or ownership in
the shares owned by the other party.
<PAGE>
41
Executive Compensation
The following table sets forth the cash compensation paid or accrued by
the Company to all of the Company's executive officers for the fiscal year ended
June 30, 1996.
<PAGE>
42
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
NAME AND UNDERLYING
PRINCIPAL OPTIONS/
POSITION YEAR SALARY($) SAR'S(#)
- -------------------------------------------------------------------------------
Richard J. Grable 1995 $100,000 357,527
CEO and Director 1996 $183,333(1)
Linda B. Grable 1995 $ 65,000 357,527
President and 1996 $ 91,000(1)
Director
Allan L. Schwartz 1995 $ 84,000 357,527
CFO and Director 1996 $124,000(1)
Peter S. Knezevich 1995 $ 12,500 315,447
General Counsel 1996 $ 56,000
Vice President
(1) Salary includes the following amounts which had accrued as of fiscal year
end 1995 and which were paid in fiscal year 1996: $20,000, Richard J. Grable;
$20,000, Allan L. Schwartz; and, $13,000, Linda B. Grable.
The following table sets forth certain information concerning grants of
options to purchase Common Stock to the Named Executive Officers during the
fiscal year ended June 30, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard J. Grable 250,000(2) 23% 35% of FMV 7/4/99 $265,000 $330,200 $399,882
107,527(2) $.93 9/1/99 - $ 4,560 $ 20,219
Linda B. Grable 250,000(3) 23% 35% of FMV 7/4/99 $265,000 $330,200 $399,882
107,527(3) $.93 9/1/99 - $ 4,560 $ 20,219
Allan L. Schwartz 250,000(4) 23% 35% of FMV 7/4/99 $265,000 $330,200 $399,882
107,527(4) $.93 9/1/99 - $ 4,560 $ 20,219
Peter S.
Knezevich 199,640(5) 21% 35% of FMV 7/4/00 $211,618 $283,209 $362,642
119,047(5) $.84 9/1/00 - $ 21,550 $ 46,409
</TABLE>
(1)Potential realizable values are based n the fair market value per share as
determined by the Company for financial statement purposes and represents
hypothetical gains that could be achieved for the respective options if
exercised at the date of the grant. The dollar amounts set forth in these
columns are the result of calculations at the zero percent, five percent and ten
percent rates set by the Securities and Exchange Commission and are not intended
to forecast possible future appreciation, if any, of the Common Stock price.
There can be no assurance that such potential realizable values will not be more
or less than indicated in the table above.
(2)Pursuant to an employment agreement dated July 4, 1994, Mr. Grable was
granted an option to purchase 250,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mr. Grable was granted an option to purchase 107,527
shares of Common Stock pursuant to the Company's incentive stock option plan.
<PAGE>
43
(3)Pursuant to an employment agreement dated July 4, 1994, Mrs. Grable was
granted an option to purchase 250,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mrs. Grable was granted an option to purchase 107,527
shares of Common Stock pursuant to the Company's incentive stock option plan.
(4)Pursuant to an employment agreement dated July 4, 1994, Mr. Schwartz was
granted an option to purchase 250,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mr. Schwartz was granted an option to purchase 107,527
shares of Common Stock pursuant to the Company's incentive stock option plan.
(5)Pursuant to an option agreement dated June 8, 1994, Mr. Knezevich was granted
an option to purchase 150,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mr. Knezevich was granted an option to purchase 119,047
shares of Common Stock pursuant to the Company's incentive stock option plan.
The following table sets forth certain information concerning the number
and value of securities underlying exercisable and unexercisable stock options
as of the fiscal year ended June 30, 1996 by the Name Executive Officers.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
NUMBER OF OPTIONS AT AT FISCAL
SECURITIES FISCAL YEAR END(#) YEAR END($)
UNDERLYING
OPTIONS/SARS VALUE
EXERCISED REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard J. Grable 250,000 $243,750 357,527/- $971,694/-
Linda B. Grable 250,000 $243,750 357,527/- $971,694/-
Allan L. Schwartz 250,000 $243,750 357,527/- $971,694/-
Peter S. Knezevich 199,600 $333,132 245,447/82,225 $698,729/$180,600
</TABLE>
Employment Agreements
The Company entered into five year employment agreements with each of
Messrs. Richard J. Grable and Allan L. Schwartz and Mrs. Linda B. Grable
beginning July 6, 1994. Pursuant to the terms of the employment agreements, the
annual salaries during the Company's development stage are as follows: Richard
J. Grable: $250,000; Linda B. Grable: $78,000; and, Allan L. Schwartz: $104,000.
During the Company's operational stage the salaries will be: Richard J. Grable:
$250,000; Linda B. Grable: $78,000, plus 3% of gross sales; and, Allan L.
Schwartz: $156,000. In addition, each employment agreement provides for bonuses,
health insurance, car allowance, and related benefits. The bonuses are 5% of the
adjusted consolidated net earnings of the Company; no bonuses have been paid.
Richard J. Grable receives a royalty bonus based on sales of the CTLM device.
The royalty bonus was
<PAGE>
44
granted to Mr. Grable because he is primarily responsible for the inventing and
development of the CTLM device. For the first $1 million in sales Mr. Grable
will receive a bonus of 2.5% of the gross sales, and for each $1 million
increase to $4 million will receive an additional .5%. From $4 million to $10
million he will receive 4%; and, 5% in excess of $10 million. The Company
entered into a two year employment agreement with Peter S. Knezevich on April 1,
1995, who was made a Vice President of the Company on September 18, 1995. The
agreement currently provides for a salary of $85,000 per year plus the right to
participate in the Company's incentive stock option plan and non-qualified stock
option plan.
Stock Option Plans
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1996, all of the executive officers are participants in this plan. The Company's
non-qualified stock option plan with respect to the officers was terminated
effective July 1, 1996.
Security Ownership of Certain Beneficial Owners and Management
The following table provides information regarding beneficial ownership of
the Company's Common Stock as of December 31, 1996, with respect to the number
of shares and respective percentage of shares of Common Stock of the Company
owned by each officer and director of the Company, each beneficial owner of more
than five percent (5%) of the Company's Common Stock and by all directors and
officers as a group. Unless otherwise indicated, such stockholders have sole
voting and investment power with respect to shares beneficially owned.
NAME AND ADDRESS NUMBER OF SHARES OWNED % OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY (1)(2) SHARES OF COMMON STOCK
- ------------------------ ---------------------- -----------------------
Richard J. Grable 9,132,752 (3) 37%
Chief Executive Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 9,132,752(4) 37%
President and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 3,790,390(5) 15%
Chief Financial Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Peter S. Knezevich 161,994(6) .6%
Vice President and
General Counsel
c/o 6351 NW 18th Court
Plantation, FL 33313
<PAGE>
45
All officers and directors 13,085,136 54%
as a group (4 persons)
(1)Except as indicate in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole voting
power and investment power with respect to all shares of Common Stock shown
beneficially owned by them.
(2) Percentage of ownership is based on 24,273,520 shares of Common Stock
outstanding as of December 31, 1996. Shares of Common Stock subject to stock
options that are exercisable within 60 days as of December 31, 1996 are deemed
outstanding for computing the percentage of any other person or group.
(3)Includes 22,883 shares subject to options and 4,177,356 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership.
(4)Includes 22,883 shares subject to options and 4,955,396 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership.
(5)Includes 130,350 shares subject to options and 5,000 shares owned by the wife
of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6)Includes 12,225 shares subject to options.
Certain Relationships and Related Transactions
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of majority voting power of the Company's outstanding
Common Stock.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 1-2
FINANCIAL STATEMENTS:
Balance Sheet F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity F - 5-7
Statements of Cash Flows F - 8-9
Notes to Financial Statements F - 10-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of December 31, 1996, June 30, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for the six months ended December 31, 1996 and 1995, and for the years
ended June 30, 1996 and 1995, and for the period December 10, 1993 (date of
inception) to June 30, 1994, and for the period December 10, 1993 (date of
inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of December 31, 1996 and June 30, 1996
and 1995, and the results of its operations and its cash flows for the six
months ended December 31, 1996 and 1995, and for the years ended June 30, 1996
and 1995, and for the period December 10, 1993 (date of inception) to June 30,
1994, and for the period December 10, 1993 (date of inception) to December 31,
1996 in conformity with generally accepted accounting principles.
The Company is in the development stage as of December 31, 1996 and to date has
had no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F - 1
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 4. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ MARGOLIES AND FINK
-----------------------
MARGOLIES AND FINK
Pompano Beach, Florida
January 20, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash $ 3,886,509 $ 3,975,354 $ 16,059
Loans receivable - stockholders -- -- 48,600
Prepaid expenses 10,053 15,900 --
------------ ------------ ------------
Total current assets 3,896,562 3,991,254 64,659
------------ ------------ ------------
Property and equipment, net 3,868,698 1,050,194 285,976
Prototype equipment 937,562 575,338 270,375
Other assets 9,635 53,010 2,664
------------ ------------ ------------
8,712,457 $ 5,669,796 $ 623,674
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 497,549 $ 205,750 $ 84,460
Current maturities of capital lease obligations 8,499 -- --
Stockholder loans -- 77,833 48,773
------------ ------------ ------------
Total current liabilities 506,048 283,583 133,233
------------ ------------ ------------
Long-term capital lease obligations 41,149 -- --
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible Preferred Stock (Series A), 5% cumulative annual
dividend, no par value; authorized 4,000 shares, issued and
outstanding 0, 2,400 and 0 shares, respectively -- 2,160,000 --
Convertible preferred stock (Series B), 7% cumulative annual
dividend, no par value; authorized 450 shares, issued and
outstanding 450, 0 and 0 shares, respectively 4,500,00 -- --
Common stock, no par value; authorized 48,000,000 shares,
issued 24,273,520, 23,023,789 and 18,616,713, respecti 11,472,977 8,401,081 1,940,855
Additional paid-in capital 1,336,655 1,221,540 622,500
Deficit accumulated during the development stage (8,923,188) (6,102,099) (1,041,671)
------------ ------------ ------------
8,386,444 5,680,522 1,521,684
Less: subscriptions receivable (24,309) (18,684) (523,118)
deferred compensation (196,875) (275,625) (508,125)
------------ ------------ ------------
Total stockholders' equity 8,165,260 5,386,213 490,441
------------ ------------ ------------
$ 8,712,457 $ 5,669,796 $ 623,674
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED JUNE 30,
DECEMBER 31, --------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering$ $ 582,238 $ 256,138 $ 1,149,224 $ 218,454
Research and development 297,780 94,460 207,509 96,116
Research and development expenses 179,725 1,167 829,771 32,616
Advertising and promotion expenses 102,229 77,437 234,765 105,177
Selling, general and
administrative expenses 275,472 55,108 297,229 59,898
Clinical expenses 11,852 -- 170,754 --
Consulting expenses 37,420 72,333 303,080 88,219
Insurance costs 59,144 11,016 34,097 10,410
Professional fees 65,672 22,205 181,644 48,316
Stockholder expenses 23,373 -- -- --
Trade show expenses 114,796 27,389 85,623 48,871
Travel and subsistence costs 86,948 45,078 99,826 50,189
Rent expense 36,506 23,850 91,123 33,853
Interest expense 391 46 -- 21,774
Depreciation and amortization 177,586 55,863 155,346 46,632
Amortization of deferred compensation 78,750 173,438 232,500 114,375
Interest income (51,417) -- (58,308) --
------------ ------------ ------------ ------------
2,078,465 915,528 4,014,183 974,720
------------ ------------ ------------ ------------
Net loss (2,078,465) (915,528) (4,014,183) (974,720)
Dividends on cumulative
preferred stock:
From discount at issuance 714,155 -- 998,400 --
Earned 28,469 -- 47,845 --
------------ ------------ ------------ ------------
Net loss applicable to
common shareholders $ (2,821,089) $ (915,528) $ (5,060,428) $ (974,720)
============ ============ ============ ============
Net loss per common share:
Weighted average number of
common shares 23,820,035 18,870,569 21,354,155 16,881,230
============ ============ ============ ============
Net loss per common share $ (.116) $ (.049) $ (.237) $ (.058)
============ ============ ============ ============
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
FROM FROM
INCEPTION INCEPTION
(DECEMBER 10, DECEMBER 10,
1993) TO JUNE 30, 1993) TO
1994 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Compensation and related benefits:
Administrative and engineering$ $ -- $ 1,949,916
Research and development -- 601,405
Research and development expenses 23,118 1,065,230
Advertising and promotion expenses -- 442,171
Selling, general and
administrative expenses 19,505 652,104
Clinical expenses -- 182,606
Consulting expenses 10,150 438,869
Insurance costs 448 104,099
Professional fees -- 295,452
Stockholder expenses -- 23,373
Trade show expenses -- 249,290
Travel and subsistence costs -- 236,963
Rent expense 7,650 169,132
Interest expense 2,535 24,700
Depreciation and amortization 3,545 383,109
Amortization of deferred compensation -- 425,625
Interest income -- (109,725)
------------ ------------
66,951 7,134,319
------------ ------------
Net loss (66,951) (7,134,319)
Dividends on cumulative
preferred stock:
From discount at issuance -- 1,712,555
Earned -- 76,314
------------ ------------
Net loss applicable to
common shareholders $ (66,951) $ 8,923,188)
============ ============
Net loss per common share:
Weighted average number of
common shares 6,288,887 19,344,642
============ ============
Net loss per common share $ (.011) $ (.458)
============ ============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
PREFERRED STOCK (SERIES A) PREFERRED STOCK (SERIES B) COMMON STOCK
-------------------------- -------------------------- --------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) -0- $ -0- -0- $ -0- -0- $ -0-
Issuance of common stock, restated for reverse
stock split -- -- -- -- 510,000 50,000
Acquisition of public shell -- -- -- -- 178,752 --
Net issuance of additional shares of stock -- -- -- -- 15,342,520 16,451
Common stock sold -- -- -- -- 36,500 36,500
Net loss -- -- -- -- -- --
---------- ---------- ---------- --------- ----------- ----------
Balance at June 30, 1994 -- -- -- -- 16,067,772 102,951
Common stock sold -- -- -- -- 1,980,791 1,566,595
Common stock issued in exchange for services -- -- -- -- 115,650 41,559
Common stock issued with employment agreement -- -- -- -- 75,000 78,750
Common stock issued for compensation -- -- -- -- 377,500 151,000
Stock options granted -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- --------- ----------- ----------
Balance at June 30, 1995 -- -- -- -- 18,616,713 1,940,855
---------- ---------- ---------- --------- ----------- ----------
(CONTINUED)
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
---------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 10, 1993 (date of inception) $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - - - 50,000
Acquisition of public shell - - - - -
Net issuance of additional shares of stock - - - 16,451
Common stock sold - - - - 36,500
Net loss - (66,951) - - (66,951)
---------- ------------ ------------- ------------ -----------
Balance at June 30, 1994 - (66,951) - - 36,000
Common stock sold - - (523,118) - 1,043,477
Common stock issued in exchange for services - - - - 41,559
Common stock issued with employment agreement - - - - 78,750
Common stock issued for compensation - - - - 151,000
Stock options granted 622,500 - - (622,500) -
Amortization of deferred compensation - - - 114,375 114,375
Net loss - (974,720) - - (974,720)
---------- ------------ ------------- ------------ -----------
Balance at June 30, 1995 622,500 (1,041,671) (523,118) (508,125) 490,441
---------- ------------ ------------- ------------ -----------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
PREFERRED STOCK (SERIES A) PREFERRED STOCK (SERIES B) COMMON STOCK
-------------------------- ------------------------- ------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - - - - 18,616,713 1,940,855
---------- ---------- -------- -------- ----------- ----------
Preferred stock sold, including dividends 4,000 3,600,000 - - - -
Common stock sold - - - - 700,471 1,561,110
Cancellation of stock subscription - - - - (410,500) (405,130)
Common stock issued in exchange for services - - - - 2,503,789 2,778,718
Common stock issued with exercise of stock options - - - - 191,500 104,375
Common stock issued with exercise of options
for compensation - - - - 996,400 567,16
Conversion of preferred stock to common stock (1,600) (1,440,000) - - 420,662 1,839,360
Common stock issued as payment of preferred
stock dividends - - - - 4,754 14,629
Dividends accrued on preferred
stock not yet converted - - - - - -
Collection of stock subscriptions - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
---------- ---------- -------- -------- ----------- ----------
Balance at June 30, 1996 2,400 2,160,000 - - 23,023,789 8,401,081
---------- ---------- -------- -------- ----------- ----------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
--------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 622,500 (1,041,671) (523,118) (508,125) 490,441
--------- ------------ ------------- ----------- ----------
Preferred stock sold, including dividends 998,400 (998,400) - - 3,600,000
Common stock sold - - - - 1,561,110
Cancellation of stock subscription - - 405,130 -
-
Common stock issued in exchange for services - - - -
2,778,718
Common stock issued with exercise of stock options - - (4,375) -
100,000
Common stock issued with exercise of options
for compensation - - - - 567,164
Conversion of preferred stock to common (399,360) - - - -
Common stock issued as payment of preferred
stock dividends - (14,629) - - -
Dividends accrued on preferred
stock not yet converted - (33,216) - - (33,216)
Collection of stock subscriptions - - 103,679 - 103,679
Amortization of deferred compensation - - - 232,500 232,500
Net loss - (4,014,183) - - (4,014,183)
--------- ------------ ------------- ----------- -----------
Balance at June 30, 1996 1,221,540 (6,102,099) (18,684) (275,625) 5,386,213
--------- ------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F - 6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
PREFERRED STOCK (SERIES A) PREFERRED STOCK (SERIES B) COMMON STOCK
-------------------------- ------------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ---------- ---------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,400 2,160,000 - - 23,023,789 8,401,081
--------- ---------- ----- --------- ----------- ----------
Preferred stock sold, including dividends - - 450 4,500,00 - -
Conversion of preferred stock to common stock (2,400) (2,160,000) - - 1,061,202 2,759,040
Common stock issued in exchange for services - - - - 31,200 90,480
Common stock issued for compensation - - - - 3,200 10,463
Common stock issued with exercise of stock
options - - - - 5,000 6,250
Common stock issued with exercise of stock
options, through stock appreciation rights - - - - 128,369 156,060
Common stock issued as payment of preferred
stock dividends - - - - 20,760 49,603
Payment of accrued dividends on converted shares - - - - - -
Dividends accrued on preferred
stock not yet converted - - - - - -
Collection of stock subscriptions - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
--------- ---------- ----- --------- ----------- ----------
Balance at December 31, 1996 - $ - 450 $4,500,000 24,273,520 $11,472,977
========= ========== ===== ========= =========== ==========
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
--------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 1,221,540 (6,102,099) (18,684) (275,625) 5,386,213
--------- ------------ ------------- ------------ -----------
Preferred stock sold, including dividends 714,155 (714,155) - - 4,500,000
Conversion of preferred stock to common (599,040) - - - -
Common stock issued in exchange for services - - - - 90,480
Common stock issued for compensation - - - - 10,463
Common stock issued with exercise of stock - - (6,250) - -
Common stock issued with exercise of stock options,
through stock appreciation rights - - - - 156,060
Common stock issued as payment of preferred
stock dividends - (49,603) - - -
Payment of accrued dividends on converted - 33,216 - - 33,216
Dividends accrued on preferred
stock not yet converted - (12,082) - - (12,082)
Collection of stock subscriptions - - 625 - 625
Amortization of deferred compensation - - - 78,750 78,750
Net loss - (2,078,465) - - (2,078,465)
--------- ------------ ----------- ----------- -----------
Balance at December 31, 1996 1,336,655 $ (8,923,188) $ (24,309) $ (196,875) $ 8,165,260
========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements
F - 7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FROM FROM
INCEPTION INCEPTION
SIX MONTHS ENDED YEARS ENDED JUNE 30, (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, --------------------- 1993) TO JUNE 30 1993) TO
1996 1995 1996 1995 1994 DEC 31, 1996
------------------------- ------------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(2,078,465) $ (915,528) $ (4,014,183) $ (974,720) $ (66,951) $ (7,134,319)
--------- --------- ---------- -------- --------- ----------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 177,586 55,863 155,346 46,632 3,545 383,109
Amortization of deferred compensation 78,750 173,438 232,500 114,375 - 425,625
Noncash compensation and
consulting expenses 307,231 - 1,484,473 192,559 - 1,984,263
(Increase) decrease in loans
receivable - shareholders - 48,600 48,600 (48,600) - -
(Increase) decrease in prepaid 5,847 - (15,900) - - (10,053)
Increase in other assets 43,375 (16,006) (50,346) (1,249) (1,415) (9,635)
Increase in accounts payable
and accrued expenses 291,799 62,956 121,290 76,491 7,969 497,549
----------- ------------ ----------- ------------ ---------- ------------
Total adjustments 904,588 324,851 1,975,963 380,208 10,099 3,270,858
----------- ------------ ----------- ------------ ---------- ------------
Net cash used for operating activities (1,173,877) (590,677) (2,038,220) (594,512) (56,852) (3,863,461)
----------- ------------ ----------- ------------ ---------- ------------
Cash flows from investing activities:
Prototype equipment (362,224) (340,904) (304,963) (210,675) (59,700) (937,562)
Capital expenditures (2,945,801) (311,554) (908,666) (169,717) (87,686) (4,111,870)
----------- ------------ ----------- ------------ ---------- ------------
Net cash used for investing activities (3,308,025) (652,458) (1,213,629) (380,392) (147,386) (5,049,432)
----------- ------------ ----------- ------------ ---------- ------------
Cash flows from financing activities:
Repayment of capital lease obligations (641) - - - - (641)
Proceeds from stockholder loans, net (77,833) (14,000) 29,060 (61,412) 110,185 -
Proceeds from issuance of preferred stock 4,500,000 - 3,600,000 - - 8,100,000
Preferred dividends charged to
accumulated deficit (28,469) - (47,845) - - (76,314)
Proceeds from issuance of common stock - 1,398,723 3,629,929 1,043,477 102,951 4,776,357
----------- ------------ ----------- ------------ ---------- ------------
Net cash provided by financing activities 4,393,057 1,384,723 7,211,144 982,065 213,136 12,799,402
----------- ------------ ----------- ------------ ---------- ------------
Net increase (decrease) in cash (88,845) 141,588 3,959,295 7,161 8,898 3,886,509
Cash and cash equivalents at
beginning of period 3,975,354 16,059 16,059 8,898 0 0
----------- ------------ ----------- ------------ ---------- ------------
Cash and cash equivalents at
end of period $ 3,886,509 $ 157,647 $ 3,975,354 $ 16,059 $ 8,898 $ 3,886,509
=========== ============ =========== ============ ========== ============
(CONTINUED)
</TABLE>
See accompanying notes to the financial statements.
F - 8
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (CONTINUED)
FROM FROM
INCEPTION INCEPTION
SIX MONTHS ENDED YEARS ENDED JUNE 30, (DECEMBER 10, (DECEMBER 10,
DECEMBER -------------------- 1993) TO JUNE 30 1993) TO
1996 1995 1996 1995 1994 DECEMBER 31, 1996
------ ------- --------- -------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 391 $ 21,774 $ - $ 21,774 $ 2,535 $ 24,700
========= ========== ========= ========== ======== ===========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock in
exchange for services $ 90,480 $ - $ 886,780 $ 41,559 $ - $ 1,018,819
========= ========== ========= ========== ======== ===========
Issuance of common stock in
exchange for property and equipment $ - $ - $ 10,900 $ 78,750 $ - $ 89,650
========= ========== ========= ========== ======== ===========
Issuance of common stock for
compensation $ 10,463 $ - $ 567,164 $ 151,000 $ - $ 728,627
========= ========== ========= ========== ======== ===========
Issuance of common stock through
exercise of incentive stock options $156,060 $ - $ - $ - $ - $ 156,060
========= ========== ========= ========== ======== ===========
Issuance of common stock as
payment for preferred stock dividends $ 49,603 $ - $ 14,629 $ - $ - $ 64,232
========= ========== ========= ========== ======== ===========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ 50,289 $ - $ - $ - $ - $ 50,289
========= ========== ========= ========== ======== ===========
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND
The Company,("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
Corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl. was formed
on December 10, 1993.(see Note 3) Effective July 1, 1995 the Company changed its
corporate status to a Florida Corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial CTLM/trademark/ prototype has been developed with the use
of Ultrafast Laser Imaging Technology"/trademark/, and this technology was first
introduced at the "RSNA" scientific assembly and conference during late November
1994. The completed CTLM/trademark/ device was exhibited at the "RSNA"
conference November 26-30, 1995. The Company exhibited the pilot production run
CTLM/trademark/ device at the "RSNA" conference held in Chicago on December 1-6,
1996. The Company filed its initial patent application for the CTLM/trademark/
device on June 7, 1995 and has subsequently filed for foreign patent protection.
The initial CTLM/trademark/ prototype produced live images of an augmented
breast on February 23, 1995. From the experience gained with this initial
prototype, the Company continued its research and development resulting in new
hardware and software enhancements. The Food and Drug Administration (FDA)
approved calibration Investigational Device Exemption ("IDE") clinical testing
in the Company's laboratory. This phase of clinical testing was approved for a
small number of calibration scans on volunteers. At the conclusion of the
calibration studies, the Company will commence its first clinical trial at the
Strax Diagnostic Breast Institute under a Phase I - IDE application, which was
approved by the FDA on February 9, 1996. Four additional clinical sites are
planned by the end of calendar 1997.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM/trademark/ prototype is completed and finally gains Federal Drug
Administration marketing clearance, that the Company will achieve a profitable
level of operations.
(CONTINUED)
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months of less and investment in money market funds are considered to be
cash equivalents by the Company.
(c) Prototype equipment
The direct costs associated with the final CTLM prototypes have been
capitalized. On June 17, 1996 the Company's Director of Research and
Development and the Director of Engineering decided to discontinue with
the development of the then current generation proprietary scanner and
data collection system (components of the prototype CTLM device) and to
begin development of a third generation scanner and data collection
system. As a result, certain items amounting to $677,395 were
reclassified as follows: $512,453 as research and development expense
and $164,941 as computer and lab equipment. The costs associated with
the completed prototype units placed at clinical test locations will be
transferred to clinical equipment at their historical cost. The
prototype costs will be amortized over a period of two years upon
placement of the equipment at the clinical testing locations.
(d) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. CTLM software development costs incurred with outside
consultants have been capitalized at cost. Once the final CTLM is
available for sale, the software upgrades will be expensed in the period
incurred. Depreciation and amortization are computed using straight-line
methods over the estimated useful lives of the related assets.
(CONTINUED)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Research and Development
Research and development expenses consist of expenditures for equipment
which are used in testing and the development of the Company's
prototypes. These expenses include testing at outside laboratories,
parts associated with the design of initial components and tooling
costs, and other costs which do not remain with the developed CTLM
prototype. All research and development costs are expensed as incurred.
(f) Net loss per share
Net loss per share of common stock is computed by dividing the net loss
applicable to common shareholders by the weighted average number of
common shares outstanding and common stock equivalents. Stock options
and the Convertible Preferred Stock are considered common stock
equivalents unless their inclusion would be anti-dilutive.
(g) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the
year that includes the enactment date.
(h) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(3) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger.(see Note 12)
(CONTINUED)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) MERGER (CONTINUED)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represents the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(4) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. In addition, management has been able
to raise the necessary capital to reach this stage of product development and
has been able to fund any capital requirements to date. There is no assurance
that once the development of the CTLM/trademark/ prototype is completed and
finally gains Federal Drug Administration marketing clearance, that the Company
will achieve a profitable level of operations.
(5) STOCKHOLDERS' LOANS - RECEIVABLES AND PAYABLES
The loans receivable as of June 30, 1995 from certain officers represent payroll
advances. The officers repaid these loans as a payroll deductions during the
fiscal year ended June 30, 1996.
Certain of the major shareholders have advanced funds to the Company in 1995 and
1996. These loans are unsecured and non-interest bearing. These loans have been
repaid in full subsequent to June 30, 1996.
(CONTINUED)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
JUNE 30,
DECEMBER 31, ----------------------
1996 1996 1995
-------------- ----------- --------
Furniture and fixtures $ 199,777 $ 28,199 $ 13,555
Building and land 1,971,242 - -
Clinical equipment 250,000 - -
Computers and equipment 271,175 164,270 85,194
CTLM software costs 1,222,624 789,668 190,523
Trade show equipment 140,159 81,416 23,490
Laboratory equipment 158,423 153,758 -
Leasehold improvements 38,407 23,391
-------------- ---------- ---------
4,213,400 1,255,718 336,153
Less: accumulated depreciation (344,702) (205,524) (50,177)
-------------- ---------- --------
Total $ 3,868,698 $ 1,050,194 $285,976
============== ========== ========
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM software costs 5 years
Leasehold improvements Length of lease (1 year)
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM software at December 31, 1996, June 30, 1996 and 1995 are $1,004,757,
$672,416 and $171,216, respectively. Amortization expense related to the CTLM
software for each period presented in the statement of operations is as follows:
PERIOD ENDED AMOUNT
------------ ---------
12/31/96 $ 100,615
6/30/96 98,019
6/30/95 19,160
6/30/94 73
---------
Total $ 217,867
=========
(CONTINUED)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) OTHER ASSETS
Other assets consist of the following:
JUNE 30,
DECEMBER 31, ---------------------
1996 1996 1995
---------- --------- --------
Deposit on purchase of new building $ - $ 50,000 $ -
Security deposits 9,635 3,010 2,664
---------- --------- --------
Totals $ 9,635 $ 53,010 $ 2,664
========== ========= ========
The Company had paid a $50,000 deposit on the acquisition of a building, with a
purchase price of $1,250,000, as of June 30, 1996, which was finally acquired on
August 29, 1996.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
DECEMBER 31, -----------------------
1996 1996 1995
----------- ---------- ---------
Accounts payable - trade $ 399,309 $ 165,047 $ 83,743
Preferred stock dividends payable 12,082 33,216 -
Payroll taxes payable 86,158 7,487 717
----------- ---------- ---------
Totals $ 497,549 $ 205,750 $ 84,460
=========== ========== =========
(9) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 6) and the obligation has been
recorded as debt. At December 31, 1996, approximate future minimum lease
payments under capitalized lease obligations were as follows:
(CONTINUED)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) LEASES (CONTINUED)
YEAR ENDING JUNE 30
-------------------
1997 $ 7,224
1998 12,384
1999 12,384
2000 12,384
2001 12,384
2002 4,128
--------
Total minimum lease payments 60,888
Less amount representing interest (11,240)
--------
Present value of net minimum lease payments 49,648
Less current portion (8,499)
--------
Long-term portion $ 41,149
========
The Company also leases certain office equipment and office space under
operating leases expiring in various years through June 1998. The Company's
lease for its office space expired during the fiscal year ended June 30, 1997.
Minimum future lease payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1996 for each of the
next two years and in the aggregate are:
FISCAL YEAR ENDED
JUNE 30, AMOUNT
----------------- ----------
1997 $ 1,698
1998 3,396
---------
Total minimum future lease payments $ 5,094
========
(CONTINUED)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $6,659,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $2,264,000, $1,538,500 and $315,000 at December 31, 1996, June 30,
1996 and 1995, respectively. The Company has reduced the deferred tax asset
resulting from its tax loss carryforwards by a valuation allowance of an equal
amount as the realization of the deferred tax asset is uncertain. The net change
in the deferred tax asset and valuation allowance from July 1, 1996 to December
31, 1996 was an increase of approximately $725,500.
(11) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock as of December 31, 1996.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
(CONTINUED)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of the Series B Preferred Stock may convert up to 34% of the Series
B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of the Series
B Preferred Stock 100 days from issuance (March 27, 1997), and may convert their
remaining shares 120 days from issuance (April 19, 1997) without the payment of
any additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series B Preferred Stock will
receive shares determined by dividing (I) the sum of $10,000 by the (ii)
"Conversion Price" in effect at the time of conversion. The "Conversion Price"
shall be equal to eighty-two percent (82%) of the Market Price of the Company's
common stock; provided, however, that in no event will the "Conversion Price" be
greater than $3.85. The warrants are exercisable at any time for an exercise
price of $5.00 and will expire five years from the date of issue.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of December 31, 1996, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $12,082 of accrued
dividends payable.
(CONTINUED)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. The Company has
an escrow agent as custodian for these unpaid shares. During the year ended June
30, 1996, 410,500 shares of the common stock related to these receivables were
canceled and $103,679 was collected on the receivable. The unpaid balance of
$14,309 as of June 30, 1996 is reflected as a reduction to stockholder's equity
on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $41,559, approximately $.36
per share, which approximated fair market value at the date of issuance.
During the year ended June 30, 1995, the wages accrued to the officers of the
Company in the amount of $151,000, was satisfied with the issuance of 377,500
shares of restricted common stock. Compensation expenses had been charged during
the fiscal year pursuant to the employment agreements with the officers. In
addition, during the year ended June 30, 1995, 75,000 shares of restricted
common stock were issued to a company executive pursuant to the employment
agreement with this executive.
(CONTINUED)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) COMMON STOCK (CONTINUED)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($2,778,718) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $918,656
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the Company's
determination of fair market value at the various dates of the transactions.
Compensation was recorded for the full amount of the transaction when no cash
was paid for the shares, and it was recorded at the excess of the value of the
transaction over any cash received in those particular instances.
As of December 31, 1996, there were a total of 1,486,618 shares of common stock
issued as a result of the conversion of the "Series A Convertible Preferred
Stock" and the related accumulated dividends. (See Note 11)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock options and were exercised
in a "cash-less" transaction, resulting in compensation to the officers of
$567,164. Compensation cost was measured as the excess of fair market value of
the shares received over the value of the SAR shares tendered in the
transaction. The excess of fair market value at July 15, 1995 approximated $.57
per share on the 996,400 shares issued.
During the six months ended December 31, 1996, the Company issued a total of
188,529 shares ($312,856) of its common stock as a result of the following:
1. Services rendered by independent consultants in exchange for 31,200
shares. Research and development expenses of $90,480 was charged as the
fair market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees, 3,200
shares. Compensation expense of $10,463 was charged as the fair market
value at that date was $3.27 per share.
3. Exercise of incentive stock options, 133,369 shares ($162,310).
4. Payment of preferred stock dividends on the Series A Preferred Stock,
20,760 shares ($49,603).
(CONTINUED)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan, an officer may be
granted non-qualified options to purchase shares of common stock over the next
five calendar years, at a minimum of 250,000 shares per calendar year. The
exercise price shall be thirty-five percent of the fair market value at the date
of exercise. On July 5, 1995 the Board of Directors authorized an amendment to
the Plan to provide that upon exercise of the option, the payment for the shares
exercised under the option may be made in whole or in part with shares of the
same class of stock. The shares to be delivered for payment would be valued at
the fair market value of the stock on the day preceding the date of exercise.
The portion of the plan applicable to the officers of the Company was terminated
effective July 1, 1996.
The incentive stock option plan was approved by the Board of Directors and
adopted by the shareholders at the March 29, 1995 annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.
The Board of Directors also has the right to grant additional options on a
discretionary basis. Under this provision, the Board granted to a consultant,
who is now presently director of engineering of the Company, a non-qualified
option to purchase up to 150,000 shares of common stock per year, or a total of
300,000 shares, during the period March 30, 1995 and ending March 31, 1998. The
exercise price shall be $0.35 per share. The options do not "vest" until one
year from the anniversary date.
The Company records the discount from fair market value on the non-qualified
stock options as a charge to deferred compensation at the date of grant of grant
and credits additional paid-in capital. The compensation is amortized to income
over the vesting period of the options.
(CONTINUED)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
Stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
---------------------------- --------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
---------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 71,429 $ 1.40 2,250,000 (1)
Exercised - -
---------- ----------
Outstanding at June 30, 1995 71,429 $ 1.40 2,250,000
Granted 782,563 $ .81 - 8.16 -
Exercised (164,956) $ 1.25 (1,550,831) $ .35 - 1.18
---------- ---------
Outstanding at June 30, 1996 689,036 $ .81 - 8.16 699,169 (1)
Granted 168,651 $ 2.56 - 4.37 -
Exercised (339,101) (2) -
Canceled - (399,169) (3)
---------- ----------
Outstanding at December 31, 1996 518,586 $ .81 - 8.16 300,000 (1)
========== ==========
</TABLE>
At December 31, 1996, 2,723,474, net of the canceled options, under the Plan had
been granted, of which 318,616 incentive stock options were vested but not
exercised and the remaining non-qualified stock options were fully vested. The
stock options vest at various rates over periods up to five years. Shares of
authorized common stock have been reserved for the exercise of all options
outstanding.
(1) The option price of the non-qualified options for shares issued to
officers of the Company is thirty-five percent of the fair market value
at the date of exercise. The option price of the remaining shares ranged
from $.35 per share for one individual, and the greater of $.50 per
share or thirty-five percent of the fair market value at the date of
exercise for the other individual. When the non-qualified shares were
exercised, the fair market value of the common stock ranged from $.94 to
$1.18 per share.
(CONTINUED)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
(2) Of the total 339,101 options that were exercised during the six
months ended December 31, 1996, 5,000 of these option were incentive
stock options exercised by one of the employees at $1.25. (The incentive
options were granted on September 20, 1995 at fair market value, no
compensation was recorded.) The remaining 334,101 options were exercised
by officers of the Company pursuant to their Stock Appreciation Rights,
and they acquired a total of 128,369 shares of common stock. A charge to
compensation expense of $156,060, for the fair value of the common stock
issued in excess of the exercise price, was made during the period
(3) The remaining nonqualified options which were granted and not
exercised by the officers of the Company have been canceled and that
plan, with respect to the officers, was terminated effective July 1,
1996.
(14) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at December
31, 1996 was $3,869,000.
(15) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $78,000, and $104,000, respectively. Additional
provisions have been made in these agreements for salary adjustments to all of
the individuals including bonus arrangements, once the Company is operational.
During the fourth quarter (May 1, 1995) of the fiscal year ended June 30, 1995,
the officers of the Company agreed to permanently forgive any compensation
provided in their employment contracts until the Company establishes an adequate
cash flow. The Company reinstated the compensation to these officers beginning
November 1, 1995. The total amount of compensation forgiven by these officers
amounted to $151,000, or $100,667 during the fiscal year ended June 30, 1995 and
$50,333 during the fiscal year ended June 30, 1996. As a result, the officers
were paid at fifty-percent of their employment contract for a period of twelve
months. On April 1, 1995, the Company entered into a two year agreement with its
vice-president and general counsel, and provides for annual compensation of
$85,000.
(CONTINUED)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
As additional consideration for his development efforts in the CTLM/trademark/
prototype, the chief executive officer has been granted a "development royalty"
which will be paid based upon the net foreign and domestic sales, after direct
costs and commissions, of the CTLM/trademark/ device. The royalty percent ranges
from 2.5% to a maximum of 5%, based upon varying levels of gross sales.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The contract
also provided for the issuance of 75,000 restricted shares of the Company's
common stock. Compensation expense ($1.05 per share), in the amount of $78,750
was recorded on the transaction.
During the six months ended December 31, 1996 and the year ended June 30, 1996,
employment agreements were initiated with individuals in management positions
within the Company. Annual payments for compensation under these agreements
amount to $219,000 and $357,000, respectively, in the aggregate.
On July 1, 1996, the Company entered into a "Re-Seller Agreement" with an
organization located in Italy, for the sole purpose of providing the
organization with exclusive distribution rights within the three countries
defined by the agreement. The term of this agreement shall be for twenty-nine
months, and the Company and Distributor agree to renew the agreement for an
additional two years if the Distributor makes purchases of the CTLM/trademark/
device in an aggregate amount of at least four million U.S. dollars ($4,000,000)
during the Initial Term of this agreement.
F - 24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
securities being registered are as follows:
SEC Registration Fee...................................... $6,000
Miscellaneous.......................................... $3,000
Item 14. Indemnification of Directors and Officers.
Article VII of the Company's Articles of Incorporation authorizes the
Company to indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing
<PAGE>
violation of law or (iii) resulting in receipt by such person of an
improper personal benefit. No amendment to or repeal of this Article
and no amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
Item 15. Recent Sales of Unregistered Securities.
On April 25, 1994, the Company commenced the sale of its common stock to
the general public pursuant to Rule 504, Regulation D of the Securities Act of
1933, as amended ("Rule 504"). Rule 504 allows a "non-reporting" company to sell
up to $1,000,000 in freely transferable shares to the general public within a 12
month period. The Company was not a reporting company under the 1934 Act at the
time of and during the offering allowing the Company to claim the exemption from
registration. The Company raised $1,000,000 and concluded the offering on March
23, 1995. The Company paid $18,699.74 in commissions under the offering.
<PAGE>
The following sales of unregistered securities occurred pursuant to Rule
701 of the Securities Act of 1933, as amended. Pursuant to Rule 701, an issuer
that is not subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, may issue unregistered securities
to employees, advisors and consultants, under compensatory benefit plans and
written contracts relating to compensation. Further, Rule 701 permits a company
to adopt stock option and purchase programs for employees, consultants and
advisors. Bona fide services must be rendered by advisors and consultants.
However, such services must not be in connection with the offer and sale of
securities in capital raising transaction, or pursuant to written contract
relating to the compensation of such persons.
1) On October 10, 1994, the Company issued 20,000 shares of common
stock pursuant to Rule 701. The shares were issued in exchange for bona fide
insurance services actually rendered pursuant to a written agreement relating to
compensation. The services rendered were not in connection with the offer and
sale of securities in a capital raising transaction.
2) On February 25, 1995, and March 31, 1995, the Company issued a
total of 33,150 shares of common stock pursuant to Rule 701. The shares were
issued in exchange for bona fide legal services actually rendered pursuant to a
written agreement relating to compensation. The services rendered were not in
connection with the offer and sale of securities in a capital raising
transaction.
3) On March 10, 1995, the Company issued 20,000 shares of common
stock pursuant to Rule 701. The shares were issued in exchange for services
rendered by individuals at a technical trade show on behalf of the Company. The
shares were issued pursuant to written agreements that were not in connection
with the offer and sale of securities in a capital raising transaction.
4) On March 21, 1995, and March 31, 1995, the Company issued a total
of 32,000 shares of common stock pursuant to Rule 701. The shares were issued in
exchange for bona fide financial public relation services actually rendered
pursuant to a written agreement relating to compensation. The services rendered
were not in connection with the offer and sale of securities in a capital
raising transaction.
5) Effective March 31, 1995, the Company issued 377,500 shares of
common stock pursuant to Rule 701 of the Securities Act of 1933, as amended. The
shares were issued
<PAGE>
in exchange for services actually rendered by the principal officers of the
Company.
6) On April 4, 1995, the Company issued 222,222 shares of common
stock pursuant to Rule 701. The shares were issued in exchange for bona fide
consulting services actually rendered pursuant to a written agreement relating
to compensation. The services rendered were not in connection with the offer and
sale of securities in a capital raising transaction. The consulting agreement
gives the consultant an option to purchase an additional 222,222 shares at $.45
a share.
7) On April 19, 1995, the Company issued 75,000 shares of common
stock pursuant to Rule 701. The shares were issued in exchange for bona fide
engineering and software services actually rendered pursuant to a written
agreement relating to compensation. The services rendered were not in connection
with the offer and sale of securities in a capital raising transaction in
exchange for his services.
The following sales of unregistered securities occurred pursuant to
Regulation S of the Securities Act of 1933, as amended. Regulation S is a safe
harbor exemption from registration pursuant to Section 5 of the Act for shares
that are offered or sold outside of the United States. A U.S. Person, as that
term is defined in Regulation S, is not a permitted offeree or purchaser.
Additionally, at the time the buy order is originated, the buyer must be or the
issuer must reasonably believe the buyer to be outside the U.S., and there can
be no directed selling efforts by the issuer in the United States.
1) On June 15, 1995, the Company issued 25,000 shares of common stock
for $28,500 pursuant to Regulation S.
2) On February 21, 1996, the Company issued 400,471 shares of common
stock for $924,998 pursuant to Regulation S.
3) On February 26, 1996, the Company issued 300,000 shares of common
stock for $637,500 pursuant to Regulation S.
4) On March 21, 1996, the Company issued 4,000 shares of Series A
Convertible Preferred stock for $4,000,000 pursuant to Regulation S.
The following sales of unregistered securities occurred pursuant to
Regulation D and Section 4(2) of the Securities Act of 1933, as amended. Section
4(2) is an exemption from registration for shares issued in a transaction not
involving a public offering. Regulation D is a safe harbor that relates to
<PAGE>
transactions exempted from the registration requirements of Section 5 of the
Securities Act of 1933, as amended.
1) On December 22, 1996, the Company issued 450 shares of Series B
Convertible Preferred stock for $4,500,000 pursuant to Regulation D and
Section 4(2).
2) On March 6, 1997, the Company issued 500 shares of Series C
Convertible Preferred stock for $5,000,000 pursuant to Regulation D and
Section 4(2)
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
3.(i).1 Certificate and Plan of Merger - is incorporated
by reference to Exhibit 3(i) of the Form 10-SB.
3.(i).2 Certificate of Amendment - is incorporated by
reference to Exhibit 3(i) of the Form 10-SB.
3.(i).3 Articles of Incorporation and By- Laws(New
Jersey) -are incorporated by reference to
Exhibit 3 (i) of the Company's Form 10-SB, as
amended, file number 0-26028, filed on May 6,
1995 ("Form 10-SB").
3.(i).4 Certificate of Dissolution - is incorporated by
reference to Exhibit (3)(a) of the Company's
Form 10-KSB for the fiscal year ending June 30,
1995.
3.(i).5 Articles of Incorporation (Florida)-
Incorporated by reference to Exhibit 3(a) of the
Company's Form 10-KSB for the fiscal year ending
June 30, 1995.
3.(i).6 Amendment to Articles of Incorporation
(Designation of Series A Convertible Preferred
Shares) - Incorporated by reference to Exhibit
3.(i).6 of the Company's Form 10-KSB for the
fiscal year ending June 30, 1996. File number
033-04008.
<PAGE>
3.(i).7 Amendment to Articles of Incorporation
(Designation of Series B Convertible Preferred
Shares).
3.(i).8 Amendment to Articles of Incorporation
(Designation of Series C Convertible Preferred
Shares).
4.1 Instruments Defining the Rights of Security
Holders - Designation of Series A Convertible
Preferred Shares.(See Exhibit 3.(i).6, above).
4.2 Instruments Defining the Rights of Security
Holders - Designation of Series B Convertible
Preferred Shares.(See Exhibit 3.(i).7, above).
5 Legal opinion of Peter S. Knezevich dated
February 4, 1997.
10.1 Facilities Lease(s) - are incorporated by
reference to Exhibit 10(a) of the Form 10-SB.
10.2 Incentive Stock Option Plan - is incorporated by
reference to Exhibit 10(b) of the Form 10-SB.
10.3 Non-Qualified Stock Option Plan - is
incorporated by reference to Exhibit 10(b) of
the Form 10-SB.
<PAGE>
10.4 Employment Agreement(s) - are incorporated by
reference to Exhibit 10(c) of the Form 10-SB.
10.5 Lock Up Agreement By and Between The Company and
Richard J. Grable, Linda B. Grable, and Allan L.
Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for
the fiscal year ending June 30, 1996. File
number 033-04008.
10.6 Subscription Agreement by and between Imaging
Diagnostic Systems, Inc. and Goodland
International Investment Ltd. dated December 17,
1996.
10.7 Subscription Agreement by and between Imaging
Diagnostic Systems, Inc. and Weyburn Overseas
Limited dated December 17, 1996.
10.8 Stock Purchase and Registration Rights Agreement
by and between Imaging Diagnostic Systems, Inc.
and Arcadia Importers & Exporters S.A. dated
March 6, 1997.
11 Schedule of computation of net loss per share.
23.1 Consent of Peter S. Knezevich, Esq. included in
the opinion filed as Exhibit 5 hereto.
23.2 Consent of Independent Certified Public
Accountants.
B) REPORTS ON FORM 8-K
99.1 Report dated May 28, 1996, incorporated by reference to
Exhibit 99.1 of the Company's Form 10-KSB for the fiscal year
ending June 30, 1996. File number 033-04008.
99.2 Report dated January 6, 1997
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
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 thereto) 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 dislosed in the registration statement or any
material change to such information in the registration statement.
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.
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company, the Company 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
Company of expenses incurred or paid by a director, officer or controlling
person of the Company 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 Company will, unless in the
opinion of its legal counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Plantation,
State of Florida, on the 25th day of March, 1997.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /S/LINDA B. GRABLE
-----------------------------------------
Linda B. Grable
Chairman of the Board,
Director, and President.
Pursuant to 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 indicated.
By: /S/LINDA B. GRABLE
-----------------------------------------
Linda B. Grable
Chairman of the Board and President
Dated: March 25, 1997
By: /S/RICHARD J. GRABLE
-----------------------------------------
Richard J. Grable
Director and Chief Executive Officer
Dated: March 25, 1997
By: /S/ALLAN L. SCHWARTZ
-----------------------------------------
Allan L. Schwartz
Director and Executive Vice-President
Dated: March 25, 1997
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.(i).8 Amendment to Articles of Incorporation
(Designation of Series C Convertible Preferred
Shares).
10.8 Stock Purchase and Registration Rights Agreement
by and between Imaging Diagnostic Systems, Inc.
and Arcadia Importers & Exporters S.A. dated
March 6, 1997.
11 Schedule of computation of net loss per share.
23.2 Consent of Independent Certified Public Accountants.
EXHIBIT 3.(i).8
ARTICLES OF AMENDMENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
1. DESIGNATION. The designation of the series of Preferred Stock fixed
by this resolution shall be "Series C Convertible Preferred Stock" (hereinafter
referred to as the "Convertible Preferred Stock").
2. CONVERSION RIGHTS.
(A) RIGHT TO CONVERT. The holder of any shares of Convertible
Preferred Stock may, (i) convert thirty four percent (34%) of the Convertible
Preferred Stock on or after March 7, 1997, without the payment of any additional
consideration therefor, into that number of fully paid and nonassessable shares
of Common Stock, no par value, of the Corporation (ii) convert an additional
thirty three percent (33%) of the Convertible Preferred Stock on or after March
22, 1997, without the payment of any additional consideration therefor, into
that number of fully paid and nonassessable shares of Common Stock, no par
value, of the Corporation, and (iii) all shares of the Convertible Preferred
Stock will become convertible, at the option of the holder, into shares of
Common Stock at any time after April 16, 1997, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of Common Stock, no par value, of the Corporation as is
determined by dividing (i) the sum of $10,000 by (ii) the Conversion Price
(determined as hereinafter provided) in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty two percent (82%) of the Market
Price of the Corporation's Common Stock; provided, however, that in no event
will the Conversion price be greater than the $3.85. For purposes of this
Section 2, the Market Price shall be the average of the closing bid prices of
the Common Stock over the five consecutive trading days ending on the trading
day immediately preceding the date of the Conversion Notice (as defined in
Section 2(b)hereof), as reported by the National Association of Securities
Automated Quotation System ("NASDAQ"), or the average of the closing bid prices
of the Common Stock in the over-the-counter market over the five consecutive
trading days ending on the trading day immediately preceding the date of the
Conversion Notice, or, in the event the Common Stock is listed on a national
stock exchange, the Market Price shall be the average of the closing prices of
the Common Stock on such exchange, as
<PAGE>
reported in THE WALL STREET JOURNAL over the five consecutive trading days
immediately preceding the date of the Conversion Notice.
(B) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Convertible Preferred Stock. If upon
conversion of shares of Convertible Preferred Stock held by a registered holder
which are being converted, such register holder would, but for the provisions of
this Section 2(b), receive a fraction of a share of Common Stock thereon, then
in lieu of any such fractional share to which such holder would otherwise be
entitled, the Corporation shall pay cash equal to such fraction multiplied by
the then effective Conversion Price. Before any holder of Convertible Preferred
Stock shall be entitled to convert the same into full shares of Common Stock,
such holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the
Convertible Preferred Stock, and shall give written notice (the "Conversion
Notice") to the Corporation at such office that such holder elects to convert
the same and shall state therein such holder's name or the name of its nominees
in which such holder wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation shall, as soon as practicable thereafter,
but in any event within three business days of the date of its receipt of the
Conversion Notice, issue and deliver or cause to be issued and delivered to such
holder of Convertible Preferred Stock, or to its nominee or nominees, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share. Such conversion shall be deemed to have been made on the date that the
Corporation receives the Conversion Notice, and the person or persons entitled
to receive the share of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date. Upon the conversion of any shares of Convertible Preferred Stock,
such shares shall be restored to the status of authorized but unissued shares
and may be reissued by the Corporation at any time.
(C) NOTICES OF RECORD DATE. In the event of (i)any declaration
by the Corporation of a record date of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution or (ii) any capital reorganization of the
Corporation, any classification or
2
<PAGE>
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other Corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Convertible
Preferred Stock at least twenty (20) days prior to the record date specified
therein, a notice specifying (A) the date on which any such record is to be
declared for the purpose of such dividend or distribution and a description of
such dividend or distribution, (B) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective and (C) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization, transfer,
consolidation, merger, dissolution or winding up.
(D) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i)take a record of holders of shares of the Common Stock for
the purpose of determining the holders entitled to receive dividends payable in
shares of Common Stock, (ii)subdivide the outstanding shares of Common Stock,
(iii)combine the outstanding shares of Common Stock into smaller number of
shares or (iv)issue, by reclassification of the Common Stock, any other
securities of the Corporation, then, in each such case, the Conversion Price
then in effect shall be adjusted so that upon conversion of each share of
Convertible Preferred Stock then outstanding the number of shares of Common
Stock into which such shares of Convertible Preferred Stock are convertible
after the happening of any of the events described in clauses (i)through(iv)
above shall be the number of such shares of Common Stock into which such shares
of Convertible Preferred Stock would have been converted if so converted
immediately prior to the happening of such event or any record date with respect
thereto.
(E) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such numbers of
shares of Common Stock as shall from time to time be sufficient to effect
conversion of all of the then outstanding shares of Convertible Preferred Stock.
3
<PAGE>
3. DIVIDEND RIGHTS. The holders of record of Convertible Preferred
Stock shall be entitled to receive cumulative dividends thereon, out of funds
legally available therefor and to the extent permitted by law, at the rate of
seven percent (7%) per share, per annum, computed on the basis of the actual
number of days elapsed in a 365-day year, commencing on the date of issuance of
such shares of Convertible Preferred Stock and payable quarterly on the last
business day of each calendar quarter commencing with the calendar quarter next
succeeding the date of issuance of the Convertible Preferred Stock. Such
dividends shall be fully cumulative and shall accrue, whether or not declared by
the Board of Directors of the Corporation, from the date of issuance of the
shares of Convertible Preferred Stock until the date of payment thereof as set
forth in the immediately preceding sentence. No dividends or other distributions
shall be paid on or declared and set aside for payment on the Common Stock until
full cumulative dividends on all outstanding shares of Convertible Preferred
Stock shall have been paid or declared and set aside for payment. Such dividends
shall be payable in cash or in freely tradable shares of Common Stock, at the
Company's option, with such shares of Common Stock valued at the average closing
bid price of such shares over the five consecutive trading days immediately
preceding the date of payment thereof, as such average closing bid price is
determined pursuant to Section 2 above.
4. VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise
required by law, the holders of outstanding shares of Convertible Preferred
Stock shall not be entitled to vote on any matters submitted to the stockholders
of the Corporation. Notwithstanding the foregoing, without the approval of the
holders of a majority of the outstanding shares of Convertible Preferred Stock,
the Company shall not (1) authorize, create or issue any shares of any class or
series ranking senior to the Convertible Preferred Stock as to liquidation
rights, (2) amend, alter or repeal, by any means, the Certificate of
Incorporation if the powers, preferences, or special rights of the Convertible
Preferred Stock would be materially adversely affected, other than restrictions
arising under the General Corporation Law of the State of Florida existing under
the Certificate of Incorporation as in effect on January 1, 1997.
5. RANKING. Except as expressly set forth herein, the Convertible
Preferred Stock shall rank senior to any other class of capital stock of the
Corporation now or hereafter
4
<PAGE>
issued as to the payment of dividends and the distribution of assets on
redemption, liquidation, dissolution or winding up of the Corporation.
6. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any shares of
Convertible Preferred Stock shall be outstanding, the holders of the then
outstanding shares of Convertible Preferred Stock shall have a preference in
distribution of the Corporation's property available for the distribution to the
holders of any other class of capital stock of the Corporation, including but
not limited to, the Common Stock, equal to $10,000.00 consideration per share,
together with an amount equal to all accrued but unpaid dividends thereon, if
any, to the date of payment of such distribution, whether or not declared by the
Board.
7. ADJUSTMENTS DUE TO MERGER OR CONSOLIDATION, ETC. In the case of any
consolidation with or merger of the Corporation with or into another
corporation, or in the case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as an entirety or substantially as
an entirety, each share of Convertible Preferred Stock shall after the date of
such consolidation, merger, sale, lease or conveyance be convertible into the
number of shares of stock or other securities or property (including cash) to
which the Common Stock issuable (at the time of such consolidation, merger,
sale, lease or conveyance) upon conversion of such share of Convertible
Preferred Stock would have been entitled upon such consolidation, merger, sale,
lease or conveyance; and in any such case, if necessary, the provisions set
forth herein with respect to the rights and interests thereafter of the holders
of the shares of Convertible Preferred Stock shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any shares of stock or
other securities or property thereafter deliverable on the conversion of the
shares of Convertible Preferred Stock.
8. REDEMPTION. In the event 4,830,430 shares of Common Stock (which
amount shall not be in excess of 19.9% of the outstanding stock of the Company
on the date of the issuance of the Convertible Preferred Stock) the Company
agrees to redeem all of the outstanding Convertible Preferred Stock at 121.9% of
the Purchase Price, plus accrued interest. At such time as 4,830,430 shares of
Common Stock have been issued, the Company shall give notice of redemption to
the remaining holders of the Convertible
5
<PAGE>
Preferred Stock at the address and facsimile number of such Convertible
Preferred Stock holder appearing on the Company's register for the Convertible
Preferred Stock. Such redemption notice shall specify the applicable redemption
price. The date of the notice shall be the redemption date. The mandatory
redemption price shall be paid to the holder of the Convertible Preferred Stock
redeemed within seven (7) business day of the redemption date.
6
EXHIBIT 10.8
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between Imaging Diagnostic
Systems, Inc., a Florida corporation, with headquarters located at 6531 NW 18th
Court, Plantation, Florida 33313 (the "Company"), and the undersigned (the
"Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering
this Agreement in reliance upon exemptions from securities registration afforded
under Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the " 1933 Act") and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, Series C Convertible Preferred
Stock, no par value per share (the "Preferred Stock"), of the Company which will
be convertible into shares of Common Stock, no par value per share (the "Common
Stock"), of the Company upon the terms and subject to the conditions of such
Preferred Stock (the Common Stock and Preferred Stock sometimes referred to
herein as "Securities"), and subject to acceptance of this Agreement by the
Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
A. PURCHASE. The undersigned hereby agrees to purchase from the
Company Preferred Stock of the Company, in the amount set forth on the signature
page of this Agreement, out of a total offering of $5,000,000.00 of Preferred
Stock, and having the terms and conditions set forth in the Certificate of
Designation attached hereto as Annex I. The purchase price for the Preferred
Stock shall be as set forth on the signature page hereto and shall be payable in
United States Dollars.
B. FORM OF PAYMENT. The Buyer shall pay the purchase price for
the Preferred Stock by delivering immediately available good funds in United
States Dollars to the escrow agent (the "Escrow Agent") identified in the Joint
Escrow Instructions attached hereto as Annex II (the "Joint Escrow
Instructions") as set forth below. Promptly following payment
1
<PAGE>
by the Buyer to the Escrow Agent of the purchase price of the Preferred Stock,
the Company shall deliver a Certificate for the Preferred Stock duly executed on
behalf of the Company, to the Escrow Agent. By signing this Agreement, the Buyer
and the Company, and subject to acceptance by the Escrow Agent, each agrees to
all of the terms and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by this
reference as if set forth in full.
C. METHOD OF PAYMENT. Payment into escrow of the purchase price
for the Preferred Stock shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No. 637-1600033
Not later than 1:00 p.m., New York time, on the date which is three (3) NASD
trading days after the Company shall have accepted this Agreement and returned a
signed counterpart of this Agreement to the Escrow Agent by facsimile, the Buyer
shall deposit with the Escrow Agent the aggregate purchase price for the
Preferred Stock, in currently available funds. Time is of the essence with
respect to such payment, and failure by the Buyer to make such payment, shall
allow the Company to cancel this Agreement.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
A. Without limiting the Buyer's right to convert the Preferred
Stock and to sell the Common Stock pursuant to the Registration Statement, the
Buyer is purchasing the Preferred Stock and will be acquiring the shares of
Common Stock issuable upon conversion of the Preferred Stock for its own account
for investment only and not with a view towards the resale, public sale or
distribution thereof and not with a view to or for sale in connection with any
distribution thereof;
B. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), and (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with
2
<PAGE>
the transactions described in this Agreement, and the related documents, and
(iv) able to afford the entire loss of its investment in the Preferred Stock;
C. All subsequent offers and sales of the Preferred Stock and
the shares of Common Stock issuable upon conversion of, or issued as dividends
on, the Preferred Stock (the "Shares" and, together with the Preferred Stock,
the "Securities") by the Buyer shall be made pursuant to registration of the
Shares under the 1933 Act or with respect to the Preferred Stock pursuant to an
exemption from registration;
D. The Buyer understands that the Preferred Stock is being
offered and sold, and the Shares are being offered, to it in reliance on
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying upon the truth and
accuracy of, and the Buyer's compliance with, the representations, warranties,
agreements, acknowledgements and understandings of the Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Preferred Stock and to receive an offer of the Shares;
E. The Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Preferred Stock and the
offer of the Shares which have been requested by the Buyer, including Annex V
hereto. The Buyer and its advisors, if any, have been afforded the opportunity
to ask questions of the Company and have received complete and satisfactory
answers to any such inquiries. Without limiting the generality of the foregoing,
the Buyer has also had the opportunity to obtain and to review the Company's (1)
Annual Report on Form 10 KSB for the fiscal year ended June 30, 1996, (2)
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1996,
Registration Statement on Form S-1 dated February 6, 1997, and (4) Forms 8-K
(the "Company's SEC Documents").
F. The Buyer understands that its investment in the Securities
involves a high degree of risk;
G. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities;
H. This Agreement has been duly and validly authorized, executed
and delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
I. Notwithstanding the provisions hereof, in no event (except
with respect to an Event of Mandatory Conversion) shall the holder be entitled
to convert any Preferred Stock in excess of that number of shares upon
conversion of which the sum of (1) the number of
3
<PAGE>
shares of Common Stock beneficially owned by the Buyer and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Preferred Stock), and (2) the number
of shares of Common Stock issuable upon the conversion of the Preferred Stock
with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Buyer and its affiliates of more than 4.9%
of the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
Except as disclosed in Annex V, delivered in writing to the
Buyer, the Company represents and warrants to the Buyer that:
A. CONCERNING THE SHARES. The Common Shares have been duly
authorized and, when issued upon conversion of, or as dividends on, the
Preferred Stock, will be duly and validly issued, fully paid and non-assessable
and will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive rights of any stockholder of the Company,
as such, to acquire the Common Shares.
B. REPORTING COMPANY STATUS. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and is duly qualified as a foreign corporation in all jurisdictions in
which the failure to so qualify would have a material adverse effect on the
Company and its subsidiaries taken as a whole. The Company has registered its
Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Common Stock is listed and traded on the
NASDAQ/OTC Bulletin Board. The Company has timely filed all material required to
be filed pursuant to all reporting obligations under either Section 13(a) or
15(d) of the Exchange Act for a period of at least twelve (12) months
immediately preceding the offer or sale of the Preferred Stock, and has received
no notice, either oral or written, with respect to the continued eligibility of
the Common Stock for such listing.
C. AUTHORIZED SHARES. The Company has legally available
sufficient authorized and unissued Shares as may be reasonably necessary to
effect the conversion of the Preferred Stock, if the Preferred Stock were
converted on the date hereof.
D. STOCK PURCHASE AGREEMENT; Registration Rights Agreement and
Stock. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as Annex IV (the "Registration Rights Agreement"), have been
duly and validly authorized by the Company, this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, when executed and delivered by the Company, will
be, valid and binding agreements of the Company enforceable in accordance with
their respective terms, subject as to enforceability to general principles of
equity, the
4
<PAGE>
indemnification provisions of the Registration Rights Agreement, and to
bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Securities will be duly and
validly issued, fully paid and non-assessable when delivered on behalf of the
Company upon payment therefor in accordance with this Agreement, subject to
general principles of equity and to bankruptcy, insolvency, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally.
E. NON-CONTRAVENTION. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Preferred Stock do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
articles of incorporation or by-laws of the Company, or any indenture, mortgage,
deed of trust, or other material agreement or instrument to which the Company is
a party or by which it or any of its properties or assets are bound, or any
material existing applicable law, rule, or regulation or any applicable decree,
judgment, or order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
F. APPROVALS. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the Stockholders of the Company is required to be
obtained by the Company for the issuance and sale of the Securities to the Buyer
as contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
G. SEC FILINGS. None of the SEC Filings with the Securities and
Exchange Commission since January 1, 1996 contained, at the time they were
filed, 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 made
therein in light of the circumstances under which they were made, not
misleading. The Company has since January 1, 1996 timely filed all requisite
forms, reports and exhibits thereto with the Securities and Exchange Commission.
H. ABSENCE OF CERTAIN CHANGES. Since September 30, 1996, there
has been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, outstanding securities,
or results of operations of the Company, except as disclosed in the documents
referred to in Section 2(g) hereof.
I. FULL DISCLOSURE. There is no fact known to the Company (other
than general economic conditions known to the public generally) that has not
been disclosed in writing to the Buyer (including through the publicly filed
documents of the Company) that (i) could reasonably be expected to have a
material adverse effect on the condition (financial or otherwise) or in the
earnings, business affairs, properties or assets of the Company or (ii) could
reasonably be expected to materially and adversely affect the ability of the
Company to perform
5
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its obligations pursuant to this Agreement.
J. ABSENCE OF LITIGATION. Except as set forth in ANNEX V hereto,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), or results of operations of the Company and its subsidiaries taken as a
whole or the transactions contemplated by this Agreement or any of the documents
contemplated hereby or which would adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
K. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in ANNEX V
hereto, no Event of Default, as defined in any agreement to which the Company is
a party, and no event which, with the giving of notice or the passage of time or
both, would become an Event of Default (as so defined), has occurred and is
continuing, which would have a material adverse effect on the Company's
financial condition or results of operations.
L. NO DEFAULT. The Company is not in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property may be bound,
and neither the execution, nor the delivery by the Company, nor the performance
by the Company of its obligations under this Agreement or the Preferred Stock,
other than the conversion provision thereof, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, any material indenture, mortgage,
deed of trust or other material agreement or instrument to which the Company is
a party or by which it is bound or any statute or the Certificate of
Incorporation or By-Laws of the Company, or any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or its listing agreement with respect to any
securities exchange or trading market on which the Common Stock is listed.
M. PRIOR ISSUES. During the twelve (12) months preceding the
date hereof, the Company has not issued any securities pursuant to Regulation S
or Regulation D under the Act, except as set forth on Exhibit 3(m). The
presently outstanding unconverted principal amount of each such issuance as at
____________, 19__ are set forth in Exhibit 3(m).
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered
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thereunder or (B) the Buyer shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company, to
the effect that the Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration; (2) any sale of the
Securities made in reliance on Rule 144 promulgated under the 1933 Act may be
made only in accordance with the terms of said Rule and further, if said Rule is
not applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
B. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that
the Preferred Stock, and, until such time as the Common Stock have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement and sold in accordance with such Registration Statement, the shares of
Common Stock, shall bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the Preferred
Stock and the shares of Common Stock):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE AND ARE
BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND SUCH LAWS. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL
OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED.
C. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to
enter into the Registration Rights Agreement, in the form attached hereto as
ANNEX IV, on or before the Closing Date.
D. FILINGS. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Preferred Stock to the
Buyer as required by United States laws and regulations, or by any domestic
securities exchange or trading market, and to provide a copy thereof to the
Buyer promptly after such filing.
E. REPORTING STATUS. So long as the Buyer beneficially owns any
of the
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Preferred Stock or Common Stock issued on conversion thereof, the Company shall
file all reports required to be filed with the SEC pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination.
F. USE OF PROCEEDS. The Company will use the proceeds from the
sale of the Preferred Stock (excluding amounts paid by the Company for legal
fees and finder's fees in connection with the sale of the Preferred Stock) for
the repayment of the Company's debt and internal working capital purposes and
shall not, directly or indirectly (except in any situation where the Company is
acquired by merger or otherwise by a third party) use such proceeds for any loan
to or investment in any other corporation, partnership enterprise or other
person.
G. CERTAIN AGREEMENTS. The Company covenants and agrees that it
will not (i) enter into any subsequent or further offer or sale of common stock
or securities convertible into common stock with any third party until the
expiration of ninety (90) days after the effective date of the Registration
Statement required to be filed under the Registration Rights Agreement, and (ii)
enter into any subsequent or further offer or sale of common stock or securities
convertible into common stock with any third party within a period of thirty
(30) days following the period set forth in clause (i) above, without first
offering the Buyer the opportunity (which shall remain open for a period of five
business days from the date the Buyer receives notice thereof) to purchase all
of such additional securities (in the discretion of the Buyer) on the terms and
provisions on which the Company proposes to offer such additional securities to
such third party. In the event that the Buyer declines to participate in any
such investment, the Company shall provide the Buyer with prompt written notice
of the consummation of any such transaction with a third party, specifying the
material terms thereof. However, clauses 4(g)(i) and 4(g)(ii) will not apply to
(x) the issuance of securities (other than for cash) in connection with a
merger, consolidation, sale of assets, disposition of a business, product or
license by the Company, strategic alliance, bank loan or agreement, public
offering, securities issued at the then current market price (as determined in
good faith by the Board of Directors), or the exercise of options, or (y) the
exchange of the capital stock of the Company for assets, stock or other joint
venture interests.
H. OPTION. Notwithstanding Section 4(g), the Buyer shall be
obligated to purchase up to an additional $2,500,000 principal amount of
Preferred Stock (the "Additional Preferred Stock"), upon the same terms and
conditions as those applicable to the Preferred Stock issued pursuant to this
Agreement, thirty (30) days after the effective date of the Registration
Statement (the "Additional Closing Date"). Buyer shall be obligated to purchase
the Additional Preferred Stock on the Additional Closing Date upon the
satisfaction by the Company of the following conditions: On the Additional
Closing Date (i) the Registration Statement required to be filed under the
Registration Rights Agreement is effective, and (ii) the representations and
warranties of the Company contained in Section 3 are true and correct in all
material respects.
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5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate
purchase price for the Preferred Stock in accordance with Section 1(c) hereof,
the Company will irrevocably instruct its transfer agent to issue Common Stock
from time to time upon conversion of the Preferred Stock in such amounts as
specified from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the Shares under the 1933 Act, registered in the name of the
Buyer or its nominee and in such denominations to be specified by the Buyer in
connection with each conversion of the Preferred Stock. The Company warrants
that no instruction other than such instructions referred to in this Section 5,
the Registration Rights Agreement, and stop transfer instructions to give effect
to Section 4(a) hereof prior to registration and sale of the Shares under the
1933 Act will be given by the Company to the transfer agent and that the Shares
shall otherwise be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement, the Registration Rights
Agreement, and applicable law. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Securities. If the Buyer provides the Company with an
opinion of counsel reasonably satisfactory to the Company that registration of a
resale by the Buyer of any of the Securities in accordance with clause (1)(B) of
Section 4(a) of this Agreement is not required under the 1933 Act, the Company
shall (except as provided in clause (2) of Section 4(a) of this Agreement)
permit the transfer of the Securities and, in the case of the Shares, promptly
instruct the Company's transfer agent to issue one or more certificates for
Common Stock in such name and in such denominations as specified by the Buyer.
b. The Company will permit the Buyer to exercises its right to
convert the Preferred Stock by telecopying an executed and completed Notice of
Conversion to the Company and delivering within three business days thereafter,
the original Notice of Conversion and the certificate for the Preferred Stock
representing the Shares to the Company by express courier. Each date on which a
Notice of Conversion is telecopied to and received by the Company (and confirmed
via telephonic notice) in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company will transmit the certificates representing the
Shares of Common Stock issuable upon conversion of any Preferred Stock (together
with the Preferred Stock representing the Shares not so converted) to the Buyer
via express courier, by electronic transfer or otherwise, within five business
days after receipt by the Company of the original Notice of Conversion and the
certificate for the Preferred Stock representing the Shares to be converted (the
"Delivery Date").
c. The Company understands that a delay in the issuance of the
Shares of Common Stock beyond the Delivery Date could result in economic loss to
the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments, not exceeding $500,000 in the aggregate, to the Buyer for late
issuance of Shares upon Conversion in accordance with the following schedule
(where "No. Business Days Late" is defined as the number of business days beyond
three (3) business days from Delivery Date:
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LATE PAYMENT FOR EACH
$10,000 OF PREFERRED STOCK
NO. BUSINESS DAYS LATE PRINCIPAL AMOUNT BEING CONVERTED
---------------------- --------------------------------
1 $50
2 $100
3 $150
4 $200
5 $250
6 $300
7 $350
8 $400
9 $450
10 $500
10+ $500 + $100 for each Business
Day Late beyond 10 days
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit a Buyer's right to
pursue actual damages for the Company's failure to issue and delivery Common
Stock to the Buyer. Furthermore, in addition to any other remedies which may be
available to the Buyer, in the event that the Company fails for any reason to
effect delivery of such shares of Common Stock within five business days after
the Delivery Date, the Buyer will be entitled to revoke the relevant Notice of
Conversion by delivering a notice to such effect to the Company whereupon the
Company and the Buyer shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion (and in such event,
the late payments described above shall not be due and payable).
6. DELIVERY INSTRUCTIONS.
The Preferred Stock shall be delivered by the Company to the
Escrow Agent pursuant to Section l(b) hereof on a delivery against payment basis
at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Preferred
Stock (the "Closing Date") shall be the later of 12:00 Noon, New York time on
March 4, 1997, or such other mutually agreed to time, but not later than
________________________ unless waived by the Company. The closing shall occur
on the Closing Date at the offices of the Escrow Agent. Notwithstanding anything
to the contrary contained herein, the Escrow Agent will be authorized to release
the funds representing the Purchase Price for the Preferred Stock, and the
certificates representing the shares of the Preferred Stock only upon
satisfaction of the conditions set forth in Section 8(d) hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
Preferred Stock on the Closing Date and Additional Closing Date to the Buyer
pursuant to this Agreement is conditioned upon:
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A. The receipt and acceptance by the Company of such Agreement
as evidenced by execution of this Agreement by the Company for at least Two
Million Five Hundred Thousand ($2,500,000.00) Dollars in Preferred Stock (or
such lesser amount as the Company, in its sole discretion, shall determine);
B. Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Preferred Stock
in accordance with Section l(c) hereof;
C. The accuracy on the Closing Date and Additional Closing Date
of the representations and warranties of the Buyer contained in this Agreement
as if made on the Closing Date and the performance by the Buyer on or before the
Closing Date and Additional Closing Date of all covenants and agreements of the
Buyer required to be performed on or before the Closing Date and Additional
Closing Date;
D. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase
the Preferred Stock on the Closing Date and Additional Closing Date is
conditioned upon:
A. Acceptance by Buyer of an Agreement for the sale of Preferred
Stock, as indicated by execution of this Agreement;
B. Filing of the Certificate of Designation in form acceptable
to counsel for Buyer.
C. Delivery by the Company to the Escrow Agent of the Preferred
Stock in accordance with this Agreement;
D. The accuracy in all material respects on the Closing Date and
Additional Closing Date of the representations and warranties of the Company
contained in this Agreement as if made on the Closing Date and Additional
Closing Date and the performance by the Company on or before the Closing Date
and Additional Closing Date of all covenants and agreements of the Company
required to be performed on or before the Closing Date and Additional Closing
Date; and
E. On the Closing Date and Additional Closing Date, the Buyer
having received an opinion of counsel for the Company, dated the Closing Date
and Additional Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX III attached hereto,
and the Registration Rights Agreement annexed hereto as ANNEX IV.
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<PAGE>
10. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on FORUM NON COVENIENS, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given upon personal delivery or seven business days after deposit in
the United States Postal Service, by (a) advance copy by fax, and (b) mailing by
express courier or registered or certified mail with postage and fees prepaid,
addressed to each of the other parties "hereunto entitled at the following
addresses, or at such other addresses as a party may designate by ten days
advance written notice to each of the other parties hereto.
COMPANY: Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, Florida 33313
Telecopier No. (954) 581-0555
with a copy to:
Peter S. Knezevich, Esq.
6531 N.W. 18th Court
Plantation, Florida 33313
PURCHASER: At the address set forth on the signature page of this
Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Purchaser's
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Preferred Stock.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
for one of its officers thereunto duly authorized as of the date set forth
below:
NUMBER OF SHARES OF PREFERRED STOCK TO BE PURCHASED:
AGGREGATE PURCHASE PRICE OF SUCH PREFERRED STOCK: $2,500,000
TRANCHE I
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Stock Purchase
Agreement to be duly executed on its behalf this 27th day of February, 1997.
111 Arlosov Street ARCADIA IMPORTERS & EXPORTERS, S.A.
Tel Aviv, Israel Printed Name of Subscriber
By: /s/ JOHN CAINSFORD
Telecopier No ________________ -------------------------------
(Signature of Authorized Person)
John Cainsford - Director
-------------------------------
- ------------------------------ Printed Name and Title
Jurisdiction of Incorporation
or Organization
This Agreement has been accepted as of the date set forth below.
IMAGING DIAGNOSTICS SYSTEMS, INC.
By: /s/ LINDA B. GRABLE
--------------------------
Linda B. Grable
Title: President
-------------------------
Date: March 6, 1997
-------------------------
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<PAGE>
ANNEX
IV TO
STOCK
PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of ______________,
1997 (this "Agreement"), is made by and between Imaging Diagnostic Systems,
Inc., a Florida corporation (the "Company"), and the person named on the
signature page hereto (the "Initial Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Stock Purchase Agreement of even date herewith, between the Initial Investor and
the Company (the "Stock Purchase Agreement"), the Company has agreed to issue
and sell to the Initial Investor 7% Series C Convertible Redeemable Preferred
Stock of the Company (the "Preferred Stock") which will be convertible into
shares of the common stock, no par value (the "Common Stock"), of the Company
(the "Conversion Shares") upon the terms and subject to the conditions of such
Preferred Stock; and
WHEREAS, to induce the Initial Investor to execute and deliver
the Stock Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agrees as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have
the following meanings:
(i) "Investor" means the Initial Investor and any permitted
transferee or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "Register, "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities
1
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Act and pursuant to Rule 415 under the Securities Act or any successor rule
providing for offering securities on a continuous basis ("Rule 415"), and the
declaration or ordering of effectiveness of such Registration Statement by the
United States Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares.
(iv) ""Registration Statement" means a registration statement of
the Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Stock Purchase
Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall prepare, and
within ten (10) days after the Closing Date (as that term is defined in Section
7 of the Stock Purchase Agreement) file with the SEC, an amendment to the
Registration Statement on Form S-1 (File No. 333-_________) covering at least an
aggregate of _____ shares of Common Stock for the Initial Investors (or such
lesser number as may be required by the SEC, but in no event less than 175% of
the number of shares into which the Preferred Stock would be convertible at the
time of filing of the Form S-1), and such Registration Statement or amended
Registration Statement shall state that, in accordance with Rule 416 under the
Securities Act it also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Preferred Stock
resulting from adjustment in the Conversion Price, or to prevent dilution
resulting from stock splits, stock dividends or similar event). If at any time
the number of shares of Common Stock into which the Preferred Stock may be
converted exceeds the number of shares of Common Stock covered by the
Registration Statement on Form S-1, referred to in the preceding sentence, the
Company shall, within ten (10) business days after receipt of a written notice
from any Investor, either (i) amend such Registration Statement, if such
Registration Statement has not been declared effective by the SEC at that time,
to register all shares of Common Stock into which the Preferred Stock may be
converted, or (ii) if such Registration Statement has been declared effective by
the SEC at that time, file with the SEC an additional Registration Statement on
Form S-1 to register the shares of Common Stock into which the Preferred Stock
may be converted that exceed such number of shares of Common Stock already
registered. The Initial Investor acknowledges that such Registration Statement
will also cover additional shares required to be registered pursuant to the
Certificate of Designation of the Series B Preferred Stock.
(b) UNDERWRITTEN OFFERING. If (at the Company's discretion) any
offering pursuant to a Registration Statement pursuant to Section 2(a) hereof
involves an underwritten offering, the Investors who hold a majority in interest
of the Registrable Securities subject to such underwritten offering shall have
the right to select one legal counsel to represent their
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<PAGE>
interests, and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company. The Investors who hold
the Registrable Securities to be included in such underwriting shall pay all
underwriting discounts and commissions and other fees and expenses of such
investment banker or bankers and manager or managers so selected in accordance
with this Section 2(b) (other than fees and expenses relating to registration of
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) PAYMENTS BY THE COMPANY. If the Registration Statement
covering the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) hereof is not effective within ninety (90) days after the
Closing Date (the "Initial Date"), or if the Investors have not otherwise
received cash or marketable securities in exchange for the Registrable
Securities by the Initial Date, then the Company will make payments to the
Initial Investor in such amounts and at such times as shall be determined
pursuant to this Section 2(c). The amount to be paid by the Company to the
Initial Investor shall be determined as of each Computation Date, and such
amount shall be equal 3 ~ of the Purchase Price paid by the Initial Investor for
the Preferred Stock pursuant to the Stock Purchase Agreement from the Initial
Date to the first Computation Date, and three (3 %) percent of the purchase
price for each Computation Date thereafter, pro rata to the date the
Registration Statement is declared effective by the SEC (the "Periodic Amount").
For example, if the Registration Statement is declared effective on the 100th
day, a payment of $1.00 (30/100 x 3% = 1%) is required for $100 of Preferred
Stock. The full Periodic Amount shall be paid by the Company in immediately
available funds within three business days after each Computation Date.
As used in this Section 2(c), the following terms shall have the
following meanings:
"Computation Date" means the date which is one hundred twenty
(120) days after the Closing Date and, if the Registration Statement required to
be filed by the Company pursuant to Section 2(a) has not theretofore been
declared effective by the SEC, each date which is thirty (30) days after the
previous Computation Date until such Registration Statement is so declared
effective.
3. OBLIGATIONS OF THE COMPANY. In connection with the
registration of the Registrable Securities, the Company shall do each of the
following.
(a) Prepare promptly, and file with the SEC as soon as possible
after the Closing Date, an amendment to the Registration Statement with respect
to not less than the number of Registrable Securities provided in Section 2(a),
above, and thereafter use its best efforts to cause each Registration Statement
relating to Registrable Securities to become effective not later than the
earlier of (a) ninety (90) days of the Closing Date, or (b) five (5) days after
notification by the SEC to the Company that the Company may request acceleration
of the effectiveness of the Registration Statement, and keep the Registration
Statement effective pursuant to Rule 415 at all times until the earliest (the
"Registration Period") of (i) the date that is six (6) months after the Closing
Date (ii) the date when the Investors may sell all Registrable
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<PAGE>
Securities under Rule 144 or (iii) the date the Investors no longer own any of
the Registrable Securities, which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) Furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to the
Company, (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one (1) copy of the Registration
Statement, each preliminary prospectus and prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) Use reasonable efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investors who hold a
majority in interest of the Registrable Securities being offered reasonably
request and in which significant volumes of shares of Common Stock are traded,
(ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times during the Registration Period, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times during the Registration Period, and (iv) take all other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions; PROVIDED, HOWEVER, that the Company shall not be required in
connection therewith or as a condition thereto to (A) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (B) subject itself to general taxation in any such
jurisdiction, (C) file a general consent to service of process in any such
jurisdiction, (D) provide any undertakings that cause more than nominal expense
or burden to the Company or (E) make any change in its certificate of
incorporation or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
stockholders;
(e) As promptly as practicable after becoming aware of such
event, notify each Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
4
<PAGE>
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of any stop order or other suspension of the effectiveness
of the Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, either
to (i) cause all the Registrable Securities covered by the Registration
Statement to be listed on a national securities exchange and on each additional
national securities exchange on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation of all the Registrable Securities covered by the
Registration Statement as a National Association of Securities Dealers Automated
Quotations System ("NASDAQ") "national market system security" within the
meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the quotation of the Registrable
Securities on the NASDAQ National Market; or if, despite the Company's
commercially reasonable efforts to satisfy the preceding clause (i) or (ii), the
Company is unsuccessful in doing so, to secure NASDAQ authorization and
quotation for such Registrable Securities and, without limiting the generality
of the foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Securities;
(h) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities
being offered to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legends) representing Registrable Securities to be
sold under the Registration Statement and enable such certificates to be in such
denominations or amounts as the case may be, as the Investors may reasonably
request and registered in such names as the Investors may request.
(j) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration
5
<PAGE>
as the Company may reasonably request. At least five (5) days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor of the information the Company requires from each such Investor
(the "Requested Information") if such Investor elects to have any of such
Investor's Registrable Securities included in the Registration Statement. If at
least two (2) business days prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(e)
or 3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. EXPENSES OF REGISTRATION. Except as provided in Section 2(b),
all reasonable expenses, other than underwriting discounts and commissions and
other fees and expenses of investment bankers and other than brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printers and accounting fees,
fees and disbursements of one counsel for the Investors not to exceed $3,500,
and the fees and disbursements of counsel for the Company, shall be borne by the
Company.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement of a
material fact contained in the Registration Statement or any post-effective
amendment thereof or the
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<PAGE>
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation under the Securities Act, the
Exchange Act or any state securities law (the matters in the foregoing clauses
(i) through (iii) being, collectively, "Violations"). Notwithstanding anything
to the contrary contained herein, the indemnification agreement contained in
this Section 6(a) shall not (I) apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon information furnished in writing to the
Company by or on behalf of any Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto; (II) with respect to any preliminary
prospectus, inure to the benefit of any such person from whom the person
asserting any such Claim purchased the Registrable Securities that are the
subject thereof (or to the benefit of any person controlling such person) if the
untrue statement or omission of material fact contained in the preliminary
prospectus was corrected in the prospectus, as then amended or supplemented, if
such prospectus was timely made available by the Company pursuant to Section
3(b) hereof; (III) be available to the extent such Claim is based on a failure
of the Investor to deliver or cause to be delivered the prospectus made
available by the Company; or (IV) apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Each Investor will
indemnify the Company and its officers, directors and agents against any claims
arising out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company, by or on behalf
of such Investor, expressly for use in connection with the preparation of the
Registration Statement, subject to such limitations and conditions as are
applicable to the Indemnification provided by the Company to this Section 6.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
(b) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; PROVIDED, HOWEVER, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel
7
<PAGE>
in such proceeding. In such event, the Company shall pay for only one separate
legal counsel for the Investors; such legal counsel shall be selected by the
Investors holding a majority in interest of the Registrable Securities included
in the Registration Statement to which the Claim relates. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; PROVIDED, HOWEVER, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6; (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
1 l(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available
to the Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time permit
the Investors to sell securities of the Company to the public without
registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144' the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of all or any portion
of such securities (or all or any portion of any Preferred Stock of the Company
which is convertible into such securities) of Registrable Securities only if:
(a) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time
8
<PAGE>
after such assignment, (b) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name and
address of such transferee or assignee and (ii) the securities with respect to
which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein. In the event of any delay in filing the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities not resold to the
public. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile transmission,
receipt confirmed, or other means) or sent by certified mail, return receipt
requested, properly addressed and with proper postage pre-paid (i) if to the
Company, at Imaging Diagnostic Systems, Inc., with a copy to Peter S. Knezevich,
Esq., 6531 NW 18th Court, Plantation, Florida 33313; (ii) if to the Initial
Investor, at the address set forth under its name in the Stock Purchase
Agreement, with a copy to Samuel Krieger, Esq., Krieger & Prager, 319 Fifth
Avenue, Third Floor, New York, NY 10016 and (iii) if to any other Investor, at
such address as such Investor shall have provided in writing to the Company, or
at such other address as each such party furnishes by notice given in accordance
with this Section ll(b), and shall be effective, when personally delivered, upon
receipt and, when so sent by certified mail, four (4) calendar days after
deposit with the United states Postal Service.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall
9
<PAGE>
be deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law. Any provision
hereof which may prove invalid or unenforceable under any law shall not effect
the validity or enforceability of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning thereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3(a), or any delay in such performance
could result in direct damages to the Investors and the Company agrees that, in
addition to any other liability the Company may have by reason of any such
failure or delay, the Company shall be liable for all direct damages caused by
any such failure or delay, unless same is the result of force majeure. Neither
party shall be liable for consequential damages.
(j) This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by telephone line facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed by their respective officers thereunto duly authorized as
of the day and year first above written.
IMAGING DIAGNOSTIC SYSTEMS, INC
By: /s/ LINDA B. GRABLE
-------------------------------
Name: Linda B. Grable
Title: President
ARCADIA IMPORTERS & EXPORTERS, S.A.
By: /s/ ILLEGIBLE
-------------------------------
Name: /s/ ILLEGIBLE
Title: Director
11
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
FROM FROM
INCEPTION INCEPTION
SIX MONTHS ENDED YEARS ENDED JUNE 30, (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, --------------------- 1993) TO JUNE 30 1993) TO
1996 1995 1996 1995 1994 DECEMBER 31, 1996
---- ---- ---- ---- ---------------- -----------------
PRIMARY AND FULLY DILUTED
<S> <C> <C> <C> <C> <C> <C>
Net loss $(2,078,465) $ (915,528) $ (4,014,183) $ (974,720) $ (66,951) $(7,134,319)
Less:
Preferred stock dividends on the
issuance of the convertible stock
with discounted conversion price 714,155 - 998,400 - - 1,712,555
Preferred stock dividends earned
the preferred shareholders 28,469 - 47,845 - - 76,314
Add:
Amortization of discounted
preferred dividends pro-rata
over conversion period
conversion period 60,703 - - - - 60,703
---------- ---------- ---------- ---------- ---------- -------------
Net loss applicable to common
shareholders for primary loss
per share $(2,760,386) $ (915,528) $(5,060,428) $ (974,720) $ (66,951) $ (8,862,485)
========== ========== ========== ========== ========== =============
Weighted average number of common
shares outstanding during the 23,820,035 18,870,569 21,354,155 16,881,230 6,288,887 19,344,642
period =========== ========== ========== ========== ========== ============
Net loss per common share $ (.116) $ (.049) $ (.237) $ (.058) $ (.011) $ (.458)
=========== =========== ========== ========== ========== ============
</TABLE>
Note - No common stock equivalents have been added in the computation of net
loss per share as their effect would be anti-dilutive.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated January 20, 1997, which appears on page F-2 of the Imaging
Diagnostic Systems, Inc. financial statements and to the reference to our firm
under the caption "Experts" in the Prospectus.
/s/ MARGOLIES AND FINK
Pompano Beach, Florida
March 18, 1997
