As filed with the Securities and Exchange Commission on February 6, 1997
File No. 333-_______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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IMAGING DIAGNOSTIC SYSTEMS, INC.
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(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
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(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
<PAGE>
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. [_].
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED MAX PROPOSED MAX
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1) REGISTRATION FEE(1)
<S> <C> <C> <C> <C>
Common Stock $2,000,000 $2.75 $5,500,000 $1,896.00
(no par value)
<FN>
(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 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 January 31, 1997, $2.75.
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.
</FN>
</TABLE>
<PAGE>
<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>
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>
<PAGE>
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 BY ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 6, 1997
PROSPECTUS
2,000,000 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") held by certain Selling
Securityholders (the "Series B 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 the Series B 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 the Series B 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. 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 assume that 1,322,933
Shares are issued upon conversion of all shares of Series B 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 5.4% of the Company's currently outstanding Common Stock
(assuming conversion of all shares of Series B Preferred and that all of the
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,
<PAGE>
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 February 4, 1997, the last
reported sale price of the Common Stock on the OTC bulletin Board was $3.00 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 3 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.
---------------------------
Price to Underwriting Proceeds to
Public Discount Company(1)
Per Share see text above none see text above
Total see text above none see text above
(1) The shares of common stock 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. The Company will
pay the expenses of registration estimated at $5,000.
--------------------------------
The date of this Prospectus is _____ __, 1997.
<PAGE>
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 Company believes that its proposed
breast cancer diagnostic product, the Computed Tomography Laser
Mammography(CTLM/Trademark/)device, will
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<PAGE>
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.
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors, in addition to the other information
contained in this Prospectus.
Developmental Stage Company
The Company is in the developmental stage, and its proposed operations are
subject to the risks inherent in the establishment of a new business enterprise,
including the absence of operating history. The likelihood of the success of the
Company must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the formation
of a new business, the development of new technology, and the competitive and
regulatory environment in which the Company will operate. The Company has made
no sales to date and has accumulated a net deficit from inception through
December 31, 1996. Further, it is likely that additional losses will be incurred
in the future.
3
<PAGE>
Going Concern Qualification
The report of the Company's independent auditor contains an explanatory
paragraph as to the Company's ability to continue as a going concern. Among the
factors cited by the auditors as raising substantial doubt as to the Company's
ability to continue as a going concern is that the Company has incurred losses
since inception and is expected to continue to incur losses and is in need of
substantial funds. There can be no assurance that the Company will ever achieve
significant revenues or profitable operations.
Potential Adverse Impact of FDA and Other Government Regulations
The manufacturing and marketing of the Company's product is subject to
extensive and rigorous government regulation in the United States, in various
states and in foreign countries. In the United States and certain other
countries, the process of obtaining and maintaining required regulatory
approvals is lengthy, expensive, and uncertain. In the United States, the FDA
enforces, where applicable, development, testing, labeling, manufacturing,
registration, notification, clearance or approval, marketing, distribution,
record keeping, and reporting requirements for medical devices. There can be no
assurance that the Company's product will obtain the regulatory clearance or
approval required for marketing, or that the Company will be able to comply with
any additional FDA, State or Foreign regulatory requirements.
Products in Development
The key product upon which the Company's plans depend is still in the
developmental stage. While the Company is pleased about the progress made to
date on these products, the fact remains that products in development may never
be completed or, if completed, may not be commercially salable.
Competition
Although the Company is unaware of any other company that is at a stage of
development similar to that of the Company, it is aware of other companies
involved in the development of similar technology. These companies have far
greater capital, marketing and other resources than does the Company. There can
be no assurance that these companies will not succeed in developing a similar
device and bring it to market prior to the Company.
4
<PAGE>
Financing Requirements
The Company expects that it may be required to seek additional financing
in the future. There can be no assurance that such financing will be available
or available on attractive terms, or such financing would not result in a
substantial dilution of shareholder's interest.
Market Acceptance
There can be no assurance that physicians or the medical community in
general will accept and utilize the CTLM device. The extent that, and rate at
which, the CTLM device achieves market acceptance and penetration will depend on
may 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 device. 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.
Proprietary Technology
The Company considers patent protection of its technologies to be critical
to its business prospects. There can be no assurance that the Company's pending
patent application will issue as patents, that any issued patents will provide
the Company with significant competitive advantages or that challenges will not
be instituted against the validity or enforceability of any patent owned by the
Company. The cost of litigation to uphold the validity and prevent infringement
of patents can be substantial. In addition, the Company intends to rely to a
significant extent on proprietary know how. There can be no assurance that
others will not independently develop superior know-how or obtain access to
know-how used by the Company which the Company now considers proprietary.
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. 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 entered into between the Company
and the
5
<PAGE>
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, the Company is unable
to determine the exact number of Shares that will actually be sold pursuant to
this Prospectus.
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. 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 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
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 paid $10,000 per
share of Series B Preferred, each share of Series B 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 are dividends 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 upon
conversion of shares of Series B
6
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Preferred. The number of shares set forth in the table is based on conversion of
the Series B Preferred at the fixed conversion price, with the dividend of 7%
calculated, assuming conversion of the Series B Preferred as follows: 34% of the
Series B Preferred 80 days after issuance December 17, 1996; 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. Several factors, including
whether the market price of the Common Stock is lower than the fixed conversion
price of $3.85 per share, could result in a greater number of Shares being
issued to the Series B Holders than are reflected in the table below.
The following table and accompanying footnotes 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 1,210,433 shares of Common Stock, and exercise of all
Warrants into 112,500 shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF COMMON STOCK
SHARES OF COMMON STOCK SHARES OF COMMON STOCK OWNED PRIOR TO
NAME OF UNDERLYING UNDERLYING OFFERING (1)
INVESTOR SERIES B PREFERRED WARRANTS NUMBER PERCENT
- -------- ------------------ -------- ------ -------
<S> <C> <C> <C> <C>
Goodland International
Investment Ltd. 847,303 78,750 None 0
Weyburn Overseas
Limited 363,130 33,750 None 0
</TABLE>
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 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.
7
<PAGE>
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 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").
8
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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 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:
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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 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,
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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. Knezveich, General
Counsel and Vice President of the Company. Mr. Knezevich currently owns
approximately 161,994 shares of common stock 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. 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.
The 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 Company believes that its proposed breast cancer diagnostic
product, the Computed Tomography Laser Mammography(CTLM/Trademark/)device, will
improve early diagnosis, reduce
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<PAGE>
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 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 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.
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<PAGE>
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 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 an 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
15
<PAGE>
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 $120 to $180 per procedure, and requires
the use of capital equipment ranging in cost from approximately $75,000 to
$225,000. Due the high capital costs 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.
Ultrasound uses high frequency sound waves to create an image of soft
tissues in the body. 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 $75 to $300 per procedure and
requires the use of capital equipment ranging in cost from approximately $60,000
to $200,000. Like mammography, ultrasound is generally performed at specialty
clinics or hospitals.
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 non-invasive and objective technology. 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.
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<PAGE>
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 Pre-Market Approval Application (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 Company's Phase I Investigational Device
Exemption (IDE) application was approved by the FDA. 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.
Initially, the Phase I study will be conducted at the Strax Breast
Diagnostic Institute located in Lauderhill, Florida. The study will involve 50
patients. On November 23, 1996, the device was installed at the Strax Breast
Diagnostic Institute located in Lauderhill, Florida.
After the Phase I study is completed, 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
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used to accumulate the approximately 400-500 clinical studies to be submitted
with the PMA application.
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.
Legal Proceedings
The Company has no legal proceedings.
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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 February 4, 1997, the closing trade price of the Common Stock as
reported on the OTC Bulletin Board was $3.00. 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.
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<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
YEARS ENDED 12/1/93 YEARS ENDED 6 MONTH ENDED
OCTOBER 31, THRU JUNE 30, DECEMBER 31,
1992 1993(1) 6/30/94(1) 1995 1996 1995 1996,
---- ------- ---------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data
Operating Expenses:
Research/Development - - $23,118 $32,616 $829,771 $ 1,167 $ 179,725
Compensation/Benefits - - - 314,570 1,356,733 350,598 88,018
Advertising/Promotion - - - 105,177 234,765 77,437 102,229
General/Administrative - - 19,953 70,308 331,326 66,124 334,616
Clinical expenses - - - - 170,754 - 11,852
Consulting expenses - - 10,150 88,219 303,080 72,333 37,420
Professional fees - - - 48,136 181,644 22,205 65,672
Travel/Subsistence - - - 50,189 99,826 45,078 86,948
Trade show expenses - - - 48,871 85,623 27,389 114,796
Rent expense - - 7,650 33,853 91,123 23,850 36,506
Depreciation/Amm. - - 3,545 46,632 155,346 55,863 177,586
Interest expense - - 2,535 21,774 - 46 391
Total Operating
Expenses - - 64,416 860,345 3,829,528 742,090 2,051,132
Interest Income - - - - (58,308) - (51,417)
Interest Expense - - 2,535 - -
Dividends on cumulative
preferred stock - - - - 47,845 - 28,469
Net Loss 0 0 (66,951) (860,345) (3,829,528) (742,090) (2,028,184)
Primary net loss
per common share (.011) (.051) (.176) (.039) (.079)
Weighted avg.
no. of common shares 6,288,887 16,881,230 21,781,068 18,870,569 25,676,846
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, (1) JUNE 30, DECEMBER 31,
1992 1993 1994 (1) 1995 1996 1996
---- ---- ------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance
Sheet Data
Cash, cash equivalents
short term investments - - $ 8,898 $16,059 $3,975,354 $3,886,509
Prototype Equipment - - - 270,375 575,338 937,562
Property and equipment - - 147,386 285,976 1,050,194 3,868,698
Total Assets - - 154,154 623,674 5,669,796 8,712,457
Accumulated Deficit - - (66,951) (927,296) (4,756,824) (6,785,008)
Total stockholders
equity (deficit) - - 154,154 490,441 5,386,213 8,165,260
<FN>
(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.
</FN>
</TABLE>
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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 and Date of Inception (December
10, 1993) to June 30, 1994
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. 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.
This increase was 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.
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<PAGE>
This increase is due to an increase in the development of the Computed
Tomography Laser Mammography (CTLM/Trademark/) device.
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 and
approximately $1,600,000 from the private placement of its common stock pursuant
to Regulation S of the Securities Act of 1933, as amended. 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 $9,700,000 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 Public Accountants. 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.
22
<PAGE>
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, 54
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.
23
<PAGE>
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., Sunrise, 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., Sunrise, 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.
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.
24
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
NAME AND UNDERLYING
PRINCIPAL OPTIONS/
POSITION YEAR SALARY($) SAR'S(#)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
<FN>
(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, $13,000, Linda B. Grable.
</FN>
</TABLE>
The following table sets forth certain information concerning grants of
options to purchase Common Stock to the Named Executive Officers during the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/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
<FN>
(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.
25
<PAGE>
(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.
</FN>
</TABLE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
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 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
26
<PAGE>
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 9,132,762(3) 37%
Chief Executive Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 9,132,762(4) 37%
President and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 3,780,390(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
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
27
<PAGE>
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.
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.
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.
28
<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 - 10-23
<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 9,63 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 8,49 - -
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 4,500,000 - -
Common stock, no par value; authorized 48,000,000 shares,
issued 24,273,520, 23,023,789 and 18,616,713, respectively 10,474,577 8,001,721 1,940,855
Deficit accumulated during the development stage (6,785,008) (4,756,824) (927,296)
8,189,569 5,404,897 1,013,559
Less subscriptions receivable (24,309) (18,684) (523,118)
--------- --------- ---------
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
FROM
FROM INCEPTION
INCEPTION (DECEMBER 10,
SIX MONTHS ENDED (DECEMBER 10, 1993) TO
DECEMBER 31, YEARS ENDED JUNE 30, 1993) TO JUNE 30, DECEMBER 31,
1996 1995 1996 1995 1994 1996
--------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Research and development expenses $ 179,725 $ 1,167 $ 829,771 $ 32,616 $ 23,118 $ 1,065,230
Compensation and related benefits 880,018 350,598 1,356,733 314,570 - 2,551,321
Advertising and promotion expenses 102,229 77,437 234,765 105,177 - 442,171
Selling, general and
administrative expenses 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 expenses 23,373 - - - - 23,373
Trade show expenses 114,796 27,389 85,623 48,871 - 249,290
Travel and subsistence costs 86,948 45,078 99,826 50,189 - 236,963
Rent expense 36,506 23,850 91,123 33,853 7,650 169,132
Interest expense 391 46 - 21,774 2,535 24,700
Depreciation and amortization 177,586 55,863 155,346 46,632 3,545 383,109
Interest income (51,417) (58,308) - - (109,725)
---------- -------- --------- --------- -------- ---------
1,999,715 742,090 3,781,683 860,345 66,951 6,708,694
---------- -------- --------- --------- -------- ---------
Net loss (1,999,715) (742,090) (3,781,683) (860,345) (66,951) (6,708,694)
Dividends on cumulative
preferred stock 28,469 - 47,845 - - 76,314
---------- -------- --------- --------- -------- ---------
Net loss applicable to
common shareholders $ (2,028,184) $(742,090) $(3,829,528) $ (860,345) $ (66,951) $ (6,785,008)
========== ======== ========= ========= ======= =========
Net loss per common share:
Weighted average number of
common shares 25,676,846 18,870,569 21,781,068 16,881,230 6,288,887 19,648,846
========== ========== ========== ========== ========= ==========
Primary net loss per common share $ (.079) $ (.039) $ (.176) $ (.051) $ (.011) $ (.345)
========= ========== ========== ========== ========= ==========
</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>
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 - - - - 36,50 36,500
Net loss - - - - - -
----- ------ ----- ----- ---------- ---------
Balance at June 30, 1994 - - - - 16,067,772 102,95
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 - - - - 75,00 78,750
Common stock issued for compensation - - - - 377,500 151,000
Net loss - - - - - -
----- ------ ----- ----- ---------- ---------
Balance at June 30, 1995 - - - - 18,616,713 1,940,855
----- ------ ----- ----- ---------- ---------
(RESTUBBED TABLE)
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT SUBSCRIPTIONS
STAGE RECEIVABLE TOTAL
------------ ------------- -----
<S> <C> <C> <C>
-0- $-0- $ -0-
Balance at December 10, 1993(date of inception)
Issuance of common stock, restated for reverse - - 50,000
stock split
- - -
Acquisition of public shell
- - 16,451
Net issuance of additional shares of stock
- - 36,500
Common stock sold
(66,951) - (66,951)
Net loss --------- ------- ----------
(66,951) -0- 36,000
Balance at June 30, 1994
- (523,118) 1,043,477
Common stock sold
- - 41,559
Common stock issued in exchange for services
- - 78,750
Common stock issued with employment agreement
- - 151,000
Common stock issued for compensation
(860,345) - (860,345)
Net loss ---------- ------- ----------
(927,296) (523,118) 490,441
Balance at June 30, 1995 ---------- ------- ----------
</TABLE>
<PAGE>
(CONTINUED)
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 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 1,440,000
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 - - - - - -
Net loss - - - - -
-------- ---------- --------- ------- ----------- ---------
Balance at June 30, 1996 2,400 2,160,000 - - 23,023,789 8,001,721
-------- ---------- --------- ------- ------------ ---------
(RESTUBBED TABLE)
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT SUBSCRIPTIONS
STAGE RECEIVABLE TOTAL
------------ ------------- -----
<S> <C> <C> <C>
Balance at June 30, 1995 (927,296) (523,118) 490,441
--------- -------- -------
Preferred stock sold - - 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 stock - - -
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
Net loss (3,781,683) - (3,781,683)
--------- ------- ---------
Balance at June 30, 1996 (4,756,824) (18,684) 5,386,213
--------- ------- ---------
</TABLE>
<PAGE>
(CONTINUED)
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 8,001,721
----------- ---------- -------- ---------- ----------- ----------
Preferred stock sold - - 450 4,500,000 - -
Conversion of preferred stock to common stock (2,400) (2,160,000) - - 1,061,202 2,160,000
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 option - - - - 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 - - - - - -
Net loss - - - - - -
----------- ---------- --------- ------- ------------ ----------
Balance at December 31, 1996 - $ - 450 $ 4,500,000 24,273,520 $10,474,577
=========== ========== ========= ========= ============ ==========
(RESTUBBED TABLE)
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT SUBSCRIPTIONS
STAGE RECEIVABLE TOTAL
------------ ------------- -----
<S> <C> <C> <C>
Balance at June 30, 1996 (4,756,824) (18,684) 5,386,213
------------ ----------- ---------
Preferred stock sold - - 4,500,000
Conversion of preferred stock of common stock - - -
Common stock issued in exchange for services - - 90,480
Common stock issued for compensation - - 10,463
Common stock issued with exercise of stock option - (6,250) -
Common stock issued with exercise of stock option, - - 156,060
through stock appreciation rights
Common stock issued as payment of preferred (49,603) - -
stock dividends
Payment of accrued dividends on converted shares 33,216 - 33,216
Dividends accrued on preferred (12,082) - (12,082)
stock not yet converted
Collection of stock subscriptions - 625 625
Net loss (1, 999,715) - (1,999,715)
------------ ---------- ---------
Balance at December 31, 1996 $ (6,785,008) $ (24,309) $ 8,165,260
============ ========== =========
</TABLE>
<PAGE>
(CONTINUED)
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 (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, YEARS ENDED JUNE 30, 1993) TO JUNE 30, 1993) TO
1996 1995 1996 1995 1994 DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss $(1,999,715) $(742,090) $(3,781,683) $(860,345) $(66,951) $(6,708,694)
--------- -------- --------- ------- ------ ---------
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
Noncash compensation and
consulting expenses 307,231 1,484,473 192,559 - 1,984,263
Preferred dividends charged to
accumulated deficit (28,469) - (47,845) - - (76,314)
(Increase) decrease in loans
receivable - shareholders 48,600 48,600 (48,600) - -
(Increase) decrease in prepaid expenses 5,847 (15,900) - - (10,053)
Increase in prototype equipment (362,224) (340,904) (304,963) (210,675) (59,700) (937,562)
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 435,145 (189,491) 1,390,655 55,158 (49,601) 1,831,357
--------- ------- ---------- -------- ------- ---------
Net cash used for operating activities (1,564,570) (931,581) (2,391,028) (805,187) (116,552) (4,877,337)
---------- -------- ---------- -------- ------- ---------
Cash flows from investing activities:
Capital expenditures (2,945,801) (311,554) (908,666) (169,717) (87,686) (4,111,870)
--------- -------- ------- -------- ------- ---------
Net cash used for investing activities (2,945,801) (311,554) (908,666) (169,717) (87,686) (4,111,870)
--------- ------- ------- ------- ------ ----------
Cash flows from financing activities:
Repayment of capital lease obligation (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
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 4,421,526 1,384,723 7,258,989 982,065 213,136 12,875,716
--------- --------- --------- --------- ------- ----------
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 $3,886,50 $ 157,647 $ 3,975,354$ $ 16,059 $ 8,898 $3,886,509
======== ========= ========= ========= ======= =========
</TABLE>
(CONTINUED)
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 (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, YEARS ENDED JUNE 30, 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 equipmen $ - $ - $ 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 optio $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 CTLMTM prototype has been developed with the use of
"Ultrafast Laser Imaging Technology"TM, and this technology was first introduced
at the "RSNA" scientific assembly and conference during late November 1994. The
completed CTLMTM device was exhibited at the "RSNA" conference November 26-30,
1995. The Company exhibited the pilot production run CTLMTM device at the "RSNA"
conference held in Chicago on December 1-6, 1996. The Company filed its initial
patent application for the CTLMTM device on June 7, 1995 and has subsequently
filed for foreign patent protection.
The initial CTLMTM 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
CTLMTM 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 prototypes have been
capitalized. All costs associated with the development of the original
prototype, and no longer in use, have been expensed as research and
development expenses. Those capitalized costs associated with
components for the prototypes which are no longer required, but have a
useful life as laboratory equipment, have been reclassified from
prototype equipment to laboratory equipment. The costs associated with
the completed prototype units placed at clinical test locations will be
transferred to clincal 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. Depreciation and amortization are
computed using straight-line methods over the estimated useful lives of
the related assets.
(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. All research and development costs are expensed as
incurred.
(CONTINUED)
F-11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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) As part of the transaction, the certificate
of incorporation of Alkan was amended to change its name to Imaging Diagnostic
Systems, Inc.
(CONTINUED)
F-12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 CTLMTM 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:
DECEMBER 31, JUNE 30,
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
Computer software 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 depreciatio (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
Computer software 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
computer 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
computer 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:
December 31, JUNE 30,
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:
December 31, JUNE 30,
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.
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, wages accrued to the officers of the
Company in the amount of $151,000, pursuant to employment agreements with the
officers, were satisfied with the issuance of 377,500 shares of restricted
common stock. 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.
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.
(CONTINUED)
F-19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) COMMON STOCK (CONTINUED)
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.
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 ($90,480).
2. Bonus stock issued to Company employees, 3,200 shares ($10,463).
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).
(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. 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.
(CONTINUED)
F-20
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
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. 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 Board of Directors also has the right to grant additional options on a
discretionary basis. Under this provision, the Board granted to an advisor, who
is now presently vice-president and general counsel of the Company, a
non-qualified option to purchase 150,000 shares of common stock per year, during
the period June 8, 1994 and ending December 31, 1997. The exercise price shall
be $0.50 per share or thirty-five percent of the fair market value of the common
stock at the date of exercise, whichever is greater. The options do not "vest"
until one year from the anniversary date.
The Company will accrue compensation expense, where applicable, in the
appropriate accounting periods as required by Accounting Principles Board
Opinion #25.
Stock option activity under the Plan was as follows:
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 1,050,000 (1)
Exercised - -
--------- ---------
Outstanding at June 30, 1995 71,429 $ 1.40 1,050,000
Granted 782,563 $ .81 - 8.16 1,050,000 (1)
Exercised (164,956) $ 1.25 (1,550,831) $ .35 - 1.18
--------- ---------
Outstanding at June 30, 1996 689,036 $ .81 - 8.16 549,169 (1)
Granted 168,651 $ 2.56 - 4.37 -
Exercised (339,101) (2) -
Canceled - (399,169) (3)
--------- ---------
Outstanding at December 31, 1996 518,586 $ .81 - 8.16 150,000 (1)
========= =========
</TABLE>
(CONTINUED)
F-21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
At December 31, 1996, 2,723,474, net of the cancelled 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 fuly 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.
(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 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
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.
(CONTINUED)
F-22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 of the fiscal year ended June 30, 1995, the officers
of the Company agreed to 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. 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.
As additional consideration for his development efforts in the CTLMTM 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 CTLMTM 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.
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 CTLMTM device in
an aggregate amount of at least four million U.S. dollars ($4,000,000) during
the Initial Term of this agreement.
F-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROPSECTUS
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................................... $2,000
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 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.
II-1
<PAGE>
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.
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.
II-2
<PAGE>
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 and are being held in escrow 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.
II-3
<PAGE>
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
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).
II-4
<PAGE>
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.
3.(i).7 Amendment to Articles of
Incorporation (Designation of Series B
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).
II-5
<PAGE>
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.
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 13, 1996.
10.7 Subscription Agreement by and between
Imaging Diagnostic Systems, Inc. and
Weyburn Overseas Limited dated
December 13, 1996.
23.1 Consent of Independent Certified Public
Accountants.
24.1 Consent of Peter S. Knezevich, Esq.
included in the opinion filed as Exhibit
5 hereto.
27 Financial Data Schedule
II-6
<PAGE>
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.
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.
II-7
<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 4th day of February, 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: February 4, 1997
By: /S/RICHARD J. GRABLE
------------------------------------
Richard J. Grable
Director and Chief Executive Officer
Dated: February 4, 1997
By: /S/ ALLAN L. SCHWARTZ
-------------------------------------
Allan L. Schwartz
Director and Executive Vice-President
Dated: February 4, 1997
II-8
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.(i).7 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares).
5 Legal opinion of Peter S. Knezevich dated February 4, 1997.
10.6 Subscription Agreement by and between Imaging Diagnostic Systems,
Inc. and Goodland International Investment LTD. dated December
13, 1996.
10.7 Subscription Agreement by and between Imaging Diagnostic Systems,
Inc. and Weyburn Overseas Limited dated December 13, 1996.
23.1 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule
99.2 Form 8-K dated January 6, 1997
EXHIBIT 3.i.7
ARTICLES OF AMENDMENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
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
<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.
In the event there are insufficient shares to effect a conversion, the
Corporation
3
<PAGE>
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.
4
<PAGE>
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 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.
5
EXHIBIT 5
February 4, 1997
Imaging Diagnostics Systens, Inc.
6531 N.W, 18th Court
Plantation, fL 33313
Ladies and Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities
and Exchange Commission in connection with the preparation of a Registration
Statement on Form S-1 (the "Registration Statement"), relating to the
registration under the Securities Act of 1933, as amended, of which up to
2,000,000 shares, no par value, (the "Shares") will be offered and sold by
certain shareholders of the Company (the "Sellng Shareholders").
In my capacity as general counsel to the Company, I have examined the
original, certified, conformed, or other copies of corporate documents and
records as I have deemed necessary or advisable for the purposes hereof. In all
such examinations, I have assumed the genuineness of all signatures on original
documents, and the conformity to originals or certified documents of all copies
submitted to me as conformed, photostat or other copies. In passing upon certain
corporate records and documents of the Company, I have necessarily assumed the
correctness and completeness of the statements made or included therein by the
Company, and I express no opinion thereon.
Based upon and in reliance of the foregoing, I am of the opinion that:
1. The Company is a validly existing corporation in good standing under
the laws of the State of Florida.
2. The Shares have been duly authorized, and when issued as described in
the Registration Statement, will be validly issued, fully paid and
non-assessable.
<PAGE>
IMAGING DIAGNOSIC SYSTEMS, INC.
FEBRUARY 4, 1997
PAGE 2
I hereby consent to the use of this opinion in the Registration Statement
on Form S-1 to be filed with the Commission.
Sincerely,
/s/ PETER S. KNEZEVICH
---------------------------
Peter S. Knezevich
General Counsel
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "ACT"), AND MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S
OF THE ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS
DEFINED IN REGULATION S OF THE ACT) EXCEPT PURSUANT TO REGISTRATION
UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.
IMAGING DIAGNOSTIC SYSTEMS, INC./
GOODLAND INTERNATIONAL INVESTMENT LIMITED
THIS SECURITIES SUBSCRIPTION AGREEMENT dated December 13, 1996 (this
"Agreement"), is executed in reliance upon the exemption from registration
afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "Act") and
Section 4(2) of the Act. Capitalized terms used herein and not defined shall
have the meaning given to them in Regulation D.
THIS AGREEMENT has been executed by the undersigned ("Buyer") in
connection with the private placement of 7% Convertible Preferred Stock of
Imaging Diagnostic Systems, Inc., a corporation organized under the laws of the
State of Florida, U.S.A. with its principal executive offices at 6531 NW 18th
Court, Plantation, Florida 33313 ("Seller"). Buyer and Seller hereby agree with
each other as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The undersigned Buyer hereby subscribes for and
agrees to purchase that number of the Seller's Series B Convertible Preferred
Stock, no par value (the "Preferred Shares"), and a certain number of warrants
to purchase the common stock, $0.00 par value (the "Common Stock"), of Seller
(the "Warrants") (the Common Stock, the Preferred Stock and the Warrants
together, the "Securities") set forth opposite Buyer's name on the signature
page hereof, for the purchase price (the "Purchase Price") set forth opposite
Buyer's name on the signature page hereof.
<PAGE>
(b) PAYMENT. The Purchase Price for the Preferred Shares shall be
payable at closing by delivering immediately available funds in United States
Dollars by wire transfer to Seward & Kissel, as escrow agent ("Escrow Agent")
under the Escrow Agreement of even date herewith, for closing by delivery of
securities versus payment in accordance with the terms of such Escrow Agreement.
(c) CLOSING. Subject to the satisfaction of the conditions set forth in
Sections 7 and 8 hereof, the closing of the transactions contemplated by this
Agreement shall occur on December 13, 1996, or such earlier or later date as is
mutually agreed to in writing by Buyers and Seller (the "Closing Date").
2. BUYER REPRESENTATIONS; ACCESS TO INFORMATION.
(a) PRIVATE TRANSACTION. In connection with the purchase and sale of
the Preferred Shares and the Warrants, Buyer represents and warrants to, and
covenants and agrees with, Seller as follows:
(i) Buyer is one of the following:
A. an investment company as defined in Section 3(a) of the
Investment Company Act of 1940 which is exempt from registration
pursuant to Section 3(c)(1) of such Act, and each of the equity owners
therein is an individual whose net worth as of the date hereof exceeds
$1,000,000; or
B. a partnership, corporation, or a Massachusetts or
similar business trust (i) which has a net worth as of the date hereof
in excess of $1,OOO,OOO, (ii) which is neither an investment company as
defined in Section 3(a) of the Investment Company Act of 1940 which is
required to be registered under such Act nor an investment company as
so defined which is exempt from registration pursuant to Section
3(c)(1) of such Act and was not formed for the specific purpose of
acquiring the Securities and has total assets as of the date hereof in
excess of $5,000,000.
(b) Buyer (or its Purchaser Representative, if any, who has been
designated by it) is entering into this Agreement relying solely on the facts
and terms set forth in
2
<PAGE>
this Agreement, the SEC Documents (as defined below) and any additional
documents given to it by Seller and it has received copies of all such documents
and Seller has not made any representations of any kind or nature to induce
Buyer to enter into this Agreement except as specifically set forth in such
documents;
(c) Buyer (or such Purchaser Representative) has made an investigation
of the pertinent facts relating to the operation of Seller;
(d) Buyer (or such Purchaser Representative) has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of an investment in Seller; and Buyer is able to bear the
economic risk of a complete loss of its investment in Seller;
(ii) Buyer understands the effect of the limitations on
disposition and of its representation that the Securities will not be sold,
transferred or otherwise disposed of except pursuant to an exemption from
registration under the Act; and
(f) No person is acting or authorized to act as Buyer's Purchaser
Representative in connection with Buyer's purchase of the Securities, except the
person, if any, set forth on the signature page of this Agreement as Buyer's
Purchaser Representative.
(g) This Agreement has been duly authorized, validly executed and
delivered on behalf of Buyer and is a valid and binding agreement in accordance
with its terms, subject to general principles of equity and to bankruptcy or
other laws affecting the enforcement of creditors' rights generally.
(h) The execution and delivery of this Agreement and the consummation
of the purchase of the Securities, and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Buyer of
any of the terms or provisions of, or constitute a default under, the articles
of
3
<PAGE>
incorporation or by-laws (or similar constructive documents) of Buyer or any
indenture, mortgage, deed of trust, or other material agreement or instrument to
which Buyer is a party or by which it or any of its properties or assets are
bound, or any existing applicable law, rule or regulation of the United States
or any State thereof or any applicable decree, judgment or order of any Federal
or State court, or State regulatory body, administrative agency or other United
States governmental body having jurisdiction over Buyer or any of its properties
or assets,
(i) All invitations, offers and sales of or in respect of, any of the
Securities, by Buyer and any distribution by Buyer of any documents relating to
any offer by it of any of the Securities will be in compliance with applicable
laws and regulations and will be made in such a manner that no prospectus need
be filed and no other filing need be made by Seller with any regulatory
authority or stock exchange in any country or any political sub-division of any
country:
(j) Buyer will not make any offer or sale of any of the Securities by
any means which would not comply with the laws and regulations of the territory
in which such offer or sale takes place or to which such offer or sale is
subject or which would in connection with any such offer or sale impose upon
Seller any obligation to satisfy any public filing or registration requirement
or to provide or publish any information of any kind whatsoever or otherwise
undertake or become obliged to do any act:
(k) No Government Recommendation or Approval. Buyer understands that no
Federal or State or foreign government agency has passed on or made any
recommendation or endorsement of the Securities;
(l) Buyer acknowledges that it and its advisors, if any, have been
furnished will all materials relating to the business, finances and operations
of Seller and all materials relating to the offer and sale of the Securities
which have been requested by Buyer. Buyer further acknowledges that it and its
advisors, if any, have received complete and satisfactory answers to such
inquiries; and
(m) Buyer acknowledges that the purchase of the Securities involves a
high degree of risk, including the total loss of Buyer's investment. Buyer has
such knowledge and
4
<PAGE>
experience in financial and business matters that it is capable of evaluating
the merits and risks of purchasing the Securities.
3. SELLER REPRESENTATIONS.
Seller represents and warrants to Buyer as follows:
(a) Seller has furnished Buyer with copies of the SEC Documents (as
defined below);
(b) Seller has not conducted any "directed selling efforts" with
respect to the Securities nor has Seller conducted any general solicitation in
the U.S. (as that term is used in Regulation D under the Securities Act) with
respect to any of the Securities;
(c) The Securities when issued and delivered will be duly and validly
authorized and issued, fully-paid and non-assessable and will not subject the
holders thereof to personal liability by reason of being such holders. There are
no preemptive rights of any shareholder of Seller with respect to the
Securities;
(d) This Agreement has been duly authorized, validly executed and
delivered on behalf of Seller and is a valid and binding agreement in accordance
with its terms, subject to general principles of equity and to bankruptcy or
other laws affecting the enforcement of creditors' rights generally;
(i) The execution and delivery of this Agreement and the consummation
of the issuance of the Securities and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Seller of
any of the terms or provisions of, or constitute a default under, the articles
of incorporation or by-laws (or similar constructive documents) of Seller, or
any indenture, mortgage, deed of trust or other material agreement or instrument
to which SeLler is a party or by which it or any of its properties or assets are
bound, or any existing applicable decree, judgment or order of any court,
Federal or State regulatory body, administrative agency or other governmental
body having jurisdiction over Seller or any of its properties or assets;
(j) Seller is not aware of any authorization, approval or consent of
any governmental body which is
5
<PAGE>
legally required for the issuance and sale of the Securities as contemplated by
this Agreement;
(k) Upon conversion of the Preferred Shares and/or exercise of the
Warrants, Seller will instruct its transfer agent to issue one or more
certificates representing the Common Shares in the name of Buyer, without
restrictive legend in such denominations to be specified by Buyer prior to
conversion. Seller further warrants that no such instructions other than these
instructions, and instructions for a "stop transfer" until the end of the
Restricted Period have been given to the transfer agent and also warrants that
the common stock issuable upon conversion of the Preferred Shares shall
otherwise be freely transferable on the books and records of Seller subject to
compliance with Federal and State securities laws. Seller will notify the
transfer agent of the Closing Date of the Offering and of the date of expiration
of the Restricted Period. Nothing in this section shall affect in any way
Buyer's obligations and agreement to comply with all applicable securities laws
upon resale of the Securities;
(1) Seller has taken no action that will affect in any way the running
of the Restricted Period or the ability of Buyer to freely resell the Securities
in accordance with applicable securities laws and this Agreement;
(m) Seller will comply with all applicable securities laws with respect
to the sale of the Securities, including but not limited to the filing of all
reports required to be filed in connection therewith the SEC or any stock
exchange or NASDAQ or any other regulatory authority;
(n) Since December 31, 1994, to the date hereof, Seller has filed its
annual reports on Form lO-KSB, quarterly reports on Form 10-QSB, current reports
on Form 8-K and definitive proxy statements with respect to its annual meetings
of shareholders with the SEC (the "SEC Documents"), which are all the documents
(other than preliminary material) that Seller was required to file with the SEC
since such date. As of their respective dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and no material event has occurred since the filing of Seller's
Report on Form 10-KSB dated August 20, l996, which could make any of the
6
<PAGE>
disclosures contained therein misleading. The financial statements of Seller
included in the SEC Documents have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited financial statements, as may be permitted by Form 10-QSB of the SEC)
and such statements together with the notes thereto fairly present (subject in
the ease of unaudited financial statements, only to normal recurring year-end
audit adjustments) the consolidated financial position of Seller and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and changes in financial position for the periods then
ended;
(o) Neither Seller nor Agents of the Seller have purchased any
securities of the Seller in open market transactions on the NASDAQ Bulletin
Board for the 30 days immediately preceding the date of this Agreement;
(p) This Agreement and the materials supplied by Seller to Buyer in
connection herewith do not contain an untrue statement of a material fact nor
omit to state a material fact necessary to make the statement therein not
misleading;
(q) As set forth in the Certificate of Designations for the Preferred
Shares, a copy of which is annexed as Exhibit "A" hereto, the material terms of
the Preferred Shares are as follows:
i. no par value;
ii. liquidation preference $10,000;
iii. dividend at the rate of 7.00% per annum, payable
quarterly at the Company's option in cash, or in shares
of Common Stock which have been duly registered by the
Company for resale by the holders thereof, at the
conversion rate (the "Conversion Rate") set forth below;
iv. automatically convertible into shares of Common Stock at
the Conversion Rate three years after issuance;
7
<PAGE>
v. voting rights - none except in limited circumstances
involving the authorization of additional Common Stock or
mergers or consolidations;
vi. convertible at option of holder:
(A) 34% 80 days after issuance;
(B) 67% in the aggregate l0O days after issuance; and
(C) l00% in the aggregate 120 days after issuance
with share certificates tendered within 3 business days
of notice from holder.
vii. Conversion Rate shall be based on lower of:
(A) $3.85 per Preferred Share; and
(B) 82% of average closing bid for 5 trading days
preceding notice of conversion by holder;
(r) As set forth in the form of Warrant annexed hereto as Exhibit "B",
the material terms of the Warrants are as follows:
(i) Warrants shall be for the purchase of 25,000 shares of
Common Stock of Seller for each $1 million of Preferred Shares or part
thereof purchased by Buyer (subject to standard anti-dilution
provisions);
(ii) Warrants shall expire five years from date of issue; and
(iii) Warrants are exercisable at any time for an exercise
price of $5.00.
(s) Seller will as promptly as practicable file at Seller's sole
expense, a registration statement on Form S-3 under the Securities Act (or in
the event that Seller is ineligible to use Form S-3 such other form as Seller is
eligible to use under the Securities Act) (the "Registration Statement")
covering the resale of the Common Shares issuable on conversion of the Preferred
Shares and exercise of the Warrants and shall take all action necessary to
qualify the Common Shares under all applicable State "blue
8
<PAGE>
sky" laws. Any such registration statement shall remain effective for the period
ending thirty-six (36) months after the initial issuance of the Preferred Shares
and the Warrants, or until all of the Securities are sold, whichever is earlier.
The Seller shall provide the Buyer with such numbers of copies of the prospectus
as shall be reasonably requested to facilitate the sale of the Common Shares and
exercise of the Warrants issued upon conversion of the Preferred Shares issued
to the Buyer pursuant hereto;
(t) In the event the Registration Statement is not declared effective
by the SEC within 9o days from the Closing Date, Buyer may put to Seller the
Preferred Shares and receive in return a demand promissory note of Seller in
form reasonably acceptable to Buyer in a principal amount equal to the Purchase
Price, bearing interest payable at the rate of three percent (3%) per month (the
"Note") convertible at Buyer's option into that number of Common Shares which
Buyer would have received on conversion of the Preferred Shares on the same
date. Upon declaration of effectiveness by the SEC of the Registration Statement
covering the Common Shares issuable upon conversion of the Note, the Note shall
automatically convert to that number of Preferred Shares which Buyer has
purchased hereunder, and all interest due which has not been paid, shalI be
immediately due and payable by Seller;
(u) In the event that, following the date of execution hereof and
continuing far a period of 120 days thereafter (the "Subject Period"), Seller
shall offer preferred shares, warrants or Common Stock or any similar
securities for an effective purchase price (taking into account all price
concessions made to the purchaser in connection with such sale) which is less
than the Purchase Price to any prospective purchaser, or shall offer to any such
purchaser additional registration or other rights (including, without
limitation, warrants and other options to acquire preferred shares or such other
securities which are in any respect in addition to or more favorable to the
purchaser of such securities than the rights of Buyer hereunder, the purchase
price (or at Buyer's option, conversion ratio) for the Securities hereunder
shall be automatically adjusted to such lower price (and, if the Purchase Price
shall have already been paid to Seller, Seller shall promptly refund to Buyer
the aggregate difference in the Purchase Price between that paid by Buyer and
such lower price), and Buyer without any further action shall be entitled to
such additional or more favorable
9
<PAGE>
rights as though the same were set forth herein. Seller agrees to deliver to
Buyer copies of all documentation relating to sales of preferred shares,
warrants, Common Stock or similar securities during the Subject Period, and
shall enter into such amendments to this Agreement and execute and deliver such
additional documents to the Buyer, as shall be necessary to give effect to the
foregoing agreements.
(v) The execution and delivery of this Agreement and the consummation
of the issuance of the Securities, and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Seller of
any of the terms or provisions of, or constitute a default under, the articles
of incorporation or by-laws of Seller, or any indenture, mortgage, deed of
trust, or other materia1 agreement or instrument to which Seller is a party or
by which it or any of its properties or assets are bound, or any existing
applicable law, rule, or regulation of the United States or any State thereof or
any applicable decree, judgment, or order of any Federal or State court, Federal
or State regulatory body, administrative agency or other United States
governmental body having jurisdiction over Seller or any of its properties or
assets;
(w) No authorization, approval or consent of any governmental body is
legally required for the issuance and sale of the Preferred Shares, the Warrants
and the Common Shares issuable upon conversion or exercise thereof to persons
who are non-U.S. Persons, as contemplated by this Agreement;
(x) Upon execution of this Agreement, Seller has and shall have
authorized and reserved for issuance at all times that number of shares of
Common Shares which would be issuable to the Buyer at any time upon tender of
notice of conversion of the Preferred Shares and/or the exercise of the
Warrants. In the event of a violation of this representation and warranty, the
Buyer shall immediately, and without further action on its or Seller's part, be
entitled to one vote for each share of Common Stock which they would have
received but for Seller's violation of this representation and warranty. Seller
agrees that violation of this representation and warranty shall cause
irreparable harm to Buyer, and shall entitle Buyer to an order of specific
performance.
10
<PAGE>
4. EXEMPTION; RELIANCE ON REPRESENTATIONS.
Buyer understands that the offer and sale of the Securities are not
being registered under the 1933 Act. Seller and Buyer are relying on the rules
governing offers and sales made outside the United States pursuant to Regulation
D and Section 4(2) of the Act.
5. TRANSFER AGENT INSTRUCTIONS.
(a) PREFERRED SHARES AND WARRANTS. Upon the conversion of the Preferred
Shares or the exercise of any Warrant, the holder thereof shall submit such
Preferred Shares or Warrant, as the case may be, to Seller, and Seller shall,
within three (3) business days of receipt of such Preferred Shares or Warrants,
as the case may be, instruct Seller's transfer agent to issue one or more
certificates representing the number of shares of Common Stock into which the
Preferred Shares are convertible in accordance with the provisions regarding
conversion set forth in the Certificate of Designations or the Warrants, as the
case may be. Seller shall act as Registrar for the Preferred Shares and the
Warrants and shall maintain an appropriate ledger containing the necessary
information with respect each Preferred Share and Warrant.
(b) COMMON STOCK TO BE ISSUED WITHOUT RESTRICTIVE LEGEND. Upon the
conversion of any Preferred Share or the exercise of any Warrant by a person who
is a non-U.S. Person, Seller shall instruct Seller's transfer agent to issue
stock certificates without restrictive legend in the name of Buyer (or its
nominee (being a non-U.S. Person) or such non-U.S. Persons as may be designated
by Buyer prior to the Closing) and in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon such
conversion, as applicable. Seller warrants that no instructions other than these
instructions and instructions to impose a "stop transfer" instruction with
respect to the certificates until the end of the Restricted Period have been or
will be given to the transfer agent and that the Common Shares shall otherwise
be freely transferable on the books and records of the Seller. Nothing in this
Section 5, however, shall affect in any way Buyer's or such nominee's
obligations and agreement to comply with all applicable securities laws upon
resale of the Securities.
6. CONDITIONS TO SELLER'S OBLIGATION TO SELL.
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<PAGE>
Seller's obligation to sell the Preferred Shares and the Warrants is
conditioned upon:
(a) The receipt and acceptance by Buyer of this Agreement and all
related agreements as evidenced by execution of this Agreement and such
agreements by Buyer.
(b) Delivery to the Escrow Agent of good funds by Buyer as payment in
full of the aggregate Purchase Price of the Preferred Shares and the Warrants.
7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE.
Buyer's obligation to purchase the Preferred Shares and the Warrants is
conditioned on:
(a) The receipt and acceptance by Seller of this Agreement and all
related agreements as evidenced by execution of this Agreement and such
agreements by the duly authorized officer of Seller.
(b) Seller's representations and warranties being true and accurate as
of the Closing Date.
(c) Delivery of the Preferred Shares and the Warrants as described
herein to:
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
Attn.: Gary J. Wolfe
Fax No. (212) 480-8421
Telephone No. (212) 574-1223
(d) Delivery of an opinion of counsel to Seller reasonably acceptable
to Buyer.
8. NO SHAREHOLDER APPROVAL.
Seller hereby agrees that from the Closing Date unti1 the issuance of
the Common Shares upon the conversion of the Preferred Shares or the exercise of
the Warrants, Seller will not take any action which would require Seller to seek
shareholder approva1 of such issuance. Seller shall at all times keep that
number of shares available from its authorized but unissued share capital for
the purposes of this conversion or exercise.
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<PAGE>
9. MISCELLANEOUS.
(a) Except as specifically referenced herein, this Agreement
constitutes the entire contract between the parties, and neither party shall be
liable or bound to the other in any manner by any warranties, representations or
covenants except as specifically set forth herein. Any previous agreement among
the parties related to the transactions described herein is superseded hereby.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto.
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
(b) All representations and warranties contained in this Agreement by
Seller and Buyer shall survive the closing of the transactions contemplated by
this Agreement.
(c) This Agreement shall be construed in accordance with the internal
laws of the State of New York and shall be binding upon the successors and
assigns of each party hereto. The parties agree to submit to the jurisdiction of
the state and federal courts located in the Borough of Manhattan, City and State
of New York, for the adjudication of any disputes arising out of or in
connection herewith. This Agreement may be executed in counterparts, and the
facsimile transmission of an executed counterpart to this Agreement shall be
effective as an origina1.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
Official Signatory of Seller:
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/ [ILLEGIBLE]
Title: President
Official Signatory of Buyer:
GOODLAND INTERNATIONAL INVESTMENT LIMITED
By: /s/ [ILLEGIBLE]
Title: Senior Vice President
No. of Shares
315
No. of Warrants
78,750
Purchase Price
$3,150,000
14
EXHIBIT 10.7
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "ACT"), AND MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S
OF THE ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS
DEFINED IN REGULATION S OF THE ACT) EXCEPT PURSUANT TO REGISTRATION
UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.
IMAGING DIAGNOSTIC SYSTEMS, INC./
WEYBURN OVERSEAS LIMITED
THIS SECURITIES SUBSCRIPTION AGREEMENT dated December 13, 1996 (this
"Agreement"), is executed in reliance upon the exemption from registration
afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "Act") and
Section 4(2) of the Act. Capitalized terms used herein and not defined shall
have the meaning given to them in Regulation D.
THIS AGREEMENT has been executed by the undersigned ("Buyer") in
connection with the private placement of 7% Convertible Preferred Stock of
Imaging Diagnostic Systems, Inc., a corporation organized under the laws of the
State of Florida, U.S.A. with its principal executive offices at 6531 NW 18th
Court, Plantation, Florida 33313 ("Seller"). Buyer and Seller hereby agree with
each other as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The undersigned Buyer hereby subscribes for and
agrees to purchase that number of the Seller's Series B Convertible Preferred
Stock, no par value (the "Preferred Shares"), and a certain number of warrants
to purchase the common stock, $0.00 par value (the "Common Stock"), of Seller
(the "Warrants") (the Common Stock, the Preferred Stock and the Warrants
together, the "Securities") set forth opposite Buyer's name on the signature
page hereof, for the purchase price (the "Purchase Price") set forth opposite
Buyer's name on the signature page hereof.
<PAGE>
(b) PAYMENT. The Purchase Price for the Preferred Shares shall be
payable at closing by delivering immediately available funds in United States
Dollars by wire transfer to Seward & Kissel, as escrow agent ("Escrow Agent")
under the Escrow Agreement of even date herewith, for closing by delivery of
securities versus payment in accordance with the terms of such Escrow Agreement.
(c) CLOSING. Subject to the satisfaction of the conditions set forth in
Sections 7 and 8 hereof, the closing of the transactions contemplated by this
Agreement shall occur on December 13, 1996, or such earlier or later date as is
mutually agreed to in writing by Buyers and Seller (the "Closing Date").
2. BUYER REPRESENTATIONS; ACCESS TO INFORMATION.
(a) PRIVATE TRANSACTION. In connection with the purchase and sale of
the Preferred Shares and the Warrants, Buyer represents and warrants to, and
covenants and agrees with, Seller as follows:
(i) Buyer is one of the following:
A. an investment company as defined in Section 3(a) of the
Investment Company Act of 1940 which is exempt from registration
pursuant to Section 3(c)(1) of such Act, and each of the equity owners
therein is an individual whose net worth as of the date hereof exceeds
$1,000,000; or
B. a partnership, corporation, or a Massachusetts or
similar business trust (i) which has a net worth as of the date hereof
in excess of $1,000,000, (ii) which is neither an investment company as
defined in Section 3(a) of the Investment Company Act of 1940 which is
required to be registered under such Act nor an investment company as
so defined which is exempt from registration pursuant to Section
3(c)(1) of such Act and was not formed for the specific purpose of
acquiring the Securities and has total assets as of the date hereof in
excess of $5,000,000.
(b) Buyer (or its Purchaser Representative, if any, who has been
designated by it) is entering into this Agreement relying solely on the facts
and terms set forth in
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<PAGE>
this Agreement, the SEC Documents (as defined below) and any additional
documents given to it by Seller and it has received copies of all such documents
and Seller has not made any representations of any kind or nature to induce
Buyer to enter into this Agreement except as specifically set forth in such
documents;
(c) Buyer (or such Purchaser Representative) has made an investigation
of the pertinent facts relating to the operation of Seller;
(d) Buyer (or such Purchaser Representative) has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of an investment in Seller; and Buyer is able to bear the
economic risk of a complete loss of its investment in Seller;
(ii) Buyer understands the effect of the limitations on
disposition and of its representation that the Securities will not be sold,
transferred or otherwise disposed of except pursuant to an exemption from
registration under the Act; and
(f) No person is acting or authorized to act as Buyer's Purchaser
Representative in connection with Buyer's purchase of the Securities, except the
person, if any, set forth on the signature page of this Agreement as Buyer's
Purchaser Representative.
(g) This Agreement has been duly authorized, validly executed and
delivered on behalf of Buyer and is a valid and binding agreement in accordance
with its terms, subject to general principles of equity and to bankruptcy or
other laws affecting the enforcement of creditors' rights generally.
(h) The execution and delivery of this Agreement and the consummation
of the purchase of the Securities, and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Buyer of
any of the terms or provisions of, or constitute a default under, the articles
of
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incorporation or by-laws (or similar constructive documents) of Buyer or any
indenture, mortgage, deed of trust, or other material agreement or instrument to
which Buyer is a party or by which it or any of its properties or assets are
bound, or any existing applicable law, rule or regulation of the United States
or any State thereof or any applicable decree, judgment or order of any Federal
or State court, or State regulatory body, administrative agency or other United
States governmental body having jurisdiction over Buyer or any of its properties
or assets,
(i) All invitations, offers and sales of or in respect of, any of the
Securities, by Buyer and any distribution by Buyer of any documents relating to
any offer by it of any of the Securities will be in compliance with applicable
laws and regulations and will be made in such a manner that no prospectus need
be filed and no other filing need be made by Seller with any regulatory
authority or stock exchange in any country or any political sub-division of any
country:
(j) Buyer will not make any offer or sale of any of the Securities by
any means which would not comply with the laws and regulations of the territory
in which such offer or sale takes place or to which such offer or sale is
subject or which would in connection with any such offer or sale impose upon
Seller any obligation to satisfy any public filing or registration requirement
or to provide or publish any information of any kind whatsoever or otherwise
undertake or become obliged to do any act:
(k) No Government Recommendation or Approval. Buyer understands that no
Federal or State or foreign government agency has passed on or made any
recommendation or endorsement of the Securities;
(l) Buyer acknowledges that it and its advisors, if any, have been
furnished will all materials relating to the business, finances and operations
of Seller and all materials relating to the offer and sale of the Securities
which have been requested by Buyer. Buyer further acknowledges that it and its
advisors, if any, have received complete and satisfactory answers to such
inquiries; and
(m) Buyer acknowledges that the purchase of the Securities involves a
high degree of risk, including the total loss of Buyer's investment. Buyer has
such knowledge and
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<PAGE>
experience in financial and business matters that it is capable of evaluating
the merits and risks of purchasing the Securities.
3. SELLER REPRESENTATIONS.
Seller represents and warrants to Buyer as follows:
(a) Seller has furnished Buyer with copies of the SEC Documents (as
defined below);
(b) Seller has not conducted any "directed selling efforts" with
respect to the Securities nor has Seller conducted any general solicitation in
the U.S. (as that term is used in Regulation D under the Securities Act) with
respect to any of the Securities;
(c) The Securities when issued and delivered will be duly and validly
authorized and issued, fully-paid and non-assessable and will not subject the
holders thereof to personal liability by reason of being such holders. There are
no preemptive rights of any shareholder of Seller with respect to the
Securities;
(d) This Agreement has been duly authorized, validly executed and
delivered on behalf of Seller and is a valid and binding agreement in accordance
with its terms, subject to general principles of equity and to bankruptcy or
other laws affecting the enforcement of creditors' rights generally;
(i) The execution and delivery of this Agreement and the consummation
of the issuance of the Securities and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Seller of
any of the terms or provisions of, or constitute a default under, the articles
of incorporation or by-laws (or similar constructive documents) of Seller, or
any indenture, mortgage, deed of trust or other material agreement or instrument
to which SeLler is a party or by which it or any of its properties or assets are
bound, or any existing applicable decree, judgment or order of any court,
Federal or State regulatory body, administrative agency or other governmental
body having jurisdiction over Seller or any of its properties or assets;
(j) Seller is not aware of any authorization, approval or consent of
any governmental body which is
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<PAGE>
legally required for the issuance and sale of the Securities as contemplated by
this Agreement;
(k) Upon conversion of the Preferred Shares and/or exercise of the
Warrants, Seller will instruct its transfer agent to issue one or more
certificates representing the Common Shares in the name of Buyer, without
restrictive legend in such denominations to be specified by Buyer prior to
conversion. Seller further warrants that no such instructions other than these
instructions, and instructions for a "stop transfer" until the end of the
Restricted Period have been given to the transfer agent and also warrants that
the common stock issuable upon conversion of the Preferred Shares shall
otherwise be freely transferable on the books and records of Seller subject to
compliance with Federal and State securities laws. Seller will notify the
transfer agent of the Closing Date of the Offering and of the date of expiration
of the Restricted Period. Nothing in this section shall affect in any way
Buyer's obligations and agreement to comply with all applicable securities laws
upon resale of the Securities;
(1) Seller has taken no action that will affect in any way the running
of the Restricted Period or the ability of Buyer to freely resell the Securities
in accordance with applicable securities laws and this Agreement;
(m) Seller will comply with all applicable securities laws with respect
to the sale of the Securities, including but not limited to the filing of all
reports required to be filed in connection therewith the SEC or any stock
exchange or NASDAQ or any other regulatory authority;
(n) Since December 31, 1994, to the date hereof, Seller has filed its
annual reports on Form lO-KSB, quarterly reports on Form 10-QSB, current reports
on Form 8-K and definitive proxy statements with respect to its annual meetings
of shareholders with the SEC (the "SEC Documents"), which are all the documents
(other than preliminary material) that Seller was required to file with the SEC
since such date. As of their respective dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and no material event has occurred since the filing of Seller's
Report on Form 10-KSB dated August 20, l996, which could make any of the
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<PAGE>
disclosures contained therein misleading. The financial statements of Seller
included in the SEC Documents have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited financial statements, as may be permitted by Form 10-QSB of the SEC)
and such statements together with the notes thereto fairly present (subject in
the ease of unaudited financial statements, only to normal recurring year-end
audit adjustments) the consolidated financial position of Seller and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and changes in financial position for the periods then
ended;
(o) Neither Seller nor Agents of the Seller have purchased any
securities of the Seller in open market transactions on the NASDAQ Bulletin
Board for the 30 days immediately preceding the date of this Agreement;
(p) This Agreement and the materials supplied by Seller to Buyer in
connection herewith do not contain an untrue statement of a material fact nor
omit to state a material fact necessary to make the statement therein not
misleading;
(q) As set forth in the Certificate of Designations for the Preferred
Shares, a copy of which is annexed as Exhibit "A" hereto, the material terms of
the Preferred Shares are as follows:
i. no par value;
ii. liquidation preference $10,000;
iii. dividend at the rate of 7.00% per annum, payable
quarterly at the Company's option in cash, or in shares
of Common Stock which have been duly registered by the
Company for resale by the holders thereof, at the
conversion rate (the "Conversion Rate") set forth below;
iv. automatically convertible into shares of Common Stock at
the Conversion Rate three years after issuance;
7
<PAGE>
v. voting rights - none except in limited circumstances
involving the authorization of additional Common Stock or
mergers or consolidations;
vi. convertible at option of holder:
(A) 34% 80 days after issuance;
(B) 67% in the aggregate l0O days after issuance; and
(C) l00% in the aggregate 120 days after issuance
with share certificates tendered within 3 business days
of notice from holder.
vii. Conversion Rate shall be based on lower of:
(A) $3.85 per Preferred Share; and
(B) 82% of average closing bid for 5 trading days
preceding notice of conversion by holder;
(r) As set forth in the form of Warrant annexed hereto as Exhibit "B",
the material terms of the Warrants are as follows:
(i) Warrants shall be for the purchase of 25,000 shares of
Common Stock of Seller for each $1 million of Preferred Shares or part
thereof purchased by Buyer (subject to standard anti-dilution
provisions);
(ii) Warrants shall expire five years from date of issue; and
(iii) Warrants are exercisable at any time for an exercise
price of $5.00.
(s) Seller will as promptly as practicable file at Seller's sole
expense, a registration statement on Form S-3 under the Securities Act (or in
the event that Seller is ineligible to use Form S-3 such other form as Seller is
eligible to use under the Securities Act) (the "Registration Statement")
covering the resale of the Common Shares issuable on conversion of the Preferred
Shares and exercise of the Warrants and shall take all action necessary to
qualify the Common Shares under all applicable State "blue
8
<PAGE>
sky" laws. Any such registration statement shall remain effective for the period
ending thirty-six (36) months after the initial issuance of the Preferred Shares
and the Warrants, or until all of the Securities are sold, whichever is earlier.
The Seller shall provide the Buyer with such numbers of copies of the prospectus
as shall be reasonably requested to facilitate the sale of the Common Shares and
exercise of the Warrants issued upon conversion of the Preferred Shares issued
to the Buyer pursuant hereto;
(t) In the event the Registration Statement is not declared effective
by the SEC within 9o days from the Closing Date, Buyer may put to Seller the
Preferred Shares and receive in return a demand promissory note of Seller in
form reasonably acceptable to Buyer in a principal amount equal to the Purchase
Price, bearing interest payable at the rate of three percent (3%) per month (the
"Note") convertible at Buyer's option into that number of Common Shares which
Buyer would have received on conversion of the Preferred Shares on the same
date. Upon declaration of effectiveness by the SEC of the Registration Statement
covering the Common Shares issuable upon conversion of the Note, the Note shall
automatically convert to that number of Preferred Shares which Buyer has
purchased hereunder, and all interest due which has not been paid, shalI be
immediately due and payable by Seller;
(u) In the event that, following the date of execution hereof and
continuing far a period of 120 days thereafter (the "Subject Period"), Seller
shall offer preferred shares, warrants or Common Stock or any similar
securities for an effective purchase price (taking into account all price
concessions made to the purchaser in connection with such sale) which is less
than the Purchase Price to any prospective purchaser, or shall offer to any such
purchaser additional registration or other rights (including, without
limitation, warrants and other options to acquire preferred shares or such other
securities which are in any respect in addition to or more favorable to the
purchaser of such securities than the rights of Buyer hereunder, the purchase
price (or at Buyer's option, conversion ratio) for the Securities hereunder
shall be automatically adjusted to such lower price (and, if the Purchase Price
shall have already been paid to Seller, Seller shall promptly refund to Buyer
the aggregate difference in the Purchase Price between that paid by Buyer and
such lower price), and Buyer without any further action shall be entitled to
such additional or more favorable
9
<PAGE>
rights as though the same were set forth herein. Seller agrees to deliver to
Buyer copies of all documentation relating to sales of preferred shares,
warrants, Common Stock or similar securities during the Subject Period, and
shall enter into such amendments to this Agreement and execute and deliver such
additional documents to the Buyer, as shall be necessary to give effect to the
foregoing agreements.
(v) The execution and delivery of this Agreement and the consummation
of the issuance of the Securities, and the transactions contemplated by this
Agreement do not and will not conflict with or result in a breach by Seller of
any of the terms or provisions of, or constitute a default under, the articles
of incorporation or by-laws of Seller, or any indenture, mortgage, deed of
trust, or other materia1 agreement or instrument to which Seller is a party or
by which it or any of its properties or assets are bound, or any existing
applicable law, rule, or regulation of the United States or any State thereof or
any applicable decree, judgment, or order of any Federal or State court, Federal
or State regulatory body, administrative agency or other United States
governmental body having jurisdiction over Seller or any of its properties or
assets;
(w) No authorization, approval or consent of any governmental body is
legally required for the issuance and sale of the Preferred Shares, the Warrants
and the Common Shares issuable upon conversion or exercise thereof to persons
who are non-U.S. Persons, as contemplated by this Agreement;
(x) Upon execution of this Agreement, Seller has and shall have
authorized and reserved for issuance at all times that number of shares of
Common Shares which would be issuable to the Buyer at any time upon tender of
notice of conversion of the Preferred Shares and/or the exercise of the
Warrants. In the event of a violation of this representation and warranty, the
Buyer shall immediately, and without further action on its or Seller's part, be
entitled to one vote for each share of Common Stock which they would have
received but for Seller's violation of this representation and warranty. Seller
agrees that violation of this representation and warranty shall cause
irreparable harm to Buyer, and shall entitle Buyer to an order of specific
performance.
10
<PAGE>
4. EXEMPTION; RELIANCE ON REPRESENTATIONS.
Buyer understands that the offer and sale of the Securities are not
being registered under the 1933 Act. Seller and Buyer are relying on the rules
governing offers and sales made outside the United States pursuant to Regulation
D and Section 4(2) of the Act.
5. TRANSFER AGENT INSTRUCTIONS.
(a) PREFERRED SHARES AND WARRANTS. Upon the conversion of the Preferred
Shares or the exercise of any Warrant, the holder thereof shall submit such
Preferred Shares or Warrant, as the case may be, to Seller, and Seller shall,
within three (3) business days of receipt of such Preferred Shares or Warrants,
as the case may be, instruct Seller's transfer agent to issue one or more
certificates representing the number of shares of Common Stock into which the
Preferred Shares are convertible in accordance with the provisions regarding
conversion set forth in the Certificate of Designations or the Warrants, as the
case may be. Seller shall act as Registrar for the Preferred Shares and the
Warrants and shall maintain an appropriate ledger containing the necessary
information with respect each Preferred Share and Warrant.
(b) COMMON STOCK TO BE ISSUED WITHOUT RESTRICTIVE LEGEND. Upon the
conversion of any Preferred Share or the exercise of any Warrant by a person who
is a non-U.S. Person, Seller shall instruct Seller's transfer agent to issue
stock certificates without restrictive legend in the name of Buyer (or its
nominee (being a non-U.S. Person) or such non-U.S. Persons as may be designated
by Buyer prior to the Closing) and in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon such
conversion, as applicable. Seller warrants that no instructions other than these
instructions and instructions to impose a "stop transfer" instruction with
respect to the certificates until the end of the Restricted Period have been or
will be given to the transfer agent and that the Common Shares shall otherwise
be freely transferable on the books and records of the Seller. Nothing in this
Section 5, however, shall affect in any way Buyer's or such nominee's
obligations and agreement to comply with all applicable securities laws upon
resale of the Securities.
6. CONDITIONS TO SELLER'S OBLIGATION TO SELL.
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<PAGE>
Seller's obligation to sell the Preferred Shares and the Warrants is
conditioned upon:
(a) The receipt and acceptance by Buyer of this Agreement and all
related agreements as evidenced by execution of this Agreement and such
agreements by Buyer.
(b) Delivery to the Escrow Agent of good funds by Buyer as payment in
full of the aggregate Purchase Price of the Preferred Shares and the Warrants.
7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE.
Buyer's obligation to purchase the Preferred Shares and the Warrants is
conditioned on:
(a) The receipt and acceptance by Seller of this Agreement and all
related agreements as evidenced by execution of this Agreement and such
agreements by the duly authorized officer of Seller.
(b) Seller's representations and warranties being true and accurate as
of the Closing Date.
(c) Delivery of the Preferred Shares and the Warrants as described
herein to:
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
Attn.: Gary J. Wolfe
Fax No. (212) 480-8421
Telephone No. (212) 574-1223
(d) Delivery of an opinion of counsel to Seller reasonably acceptable
to Buyer.
8. NO SHAREHOLDER APPROVAL.
Seller hereby agrees that from the Closing Date unti1 the issuance of
the Common Shares upon the conversion of the Preferred Shares or the exercise of
the Warrants, Seller will not take any action which would require Seller to seek
shareholder approva1 of such issuance. Seller shall at all times keep that
number of shares available from its authorized but unissued share capital for
the purposes of this conversion or exercise.
12
<PAGE>
9. MISCELLANEOUS.
(a) Except as specifically referenced herein, this Agreement
constitutes the entire contract between the parties, and neither party shall be
liable or bound to the other in any manner by any warranties, representations or
covenants except as specifically set forth herein. Any previous agreement among
the parties related to the transactions described herein is superseded hereby.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto.
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
(b) All representations and warranties contained in this Agreement by
Seller and Buyer shall survive the closing of the transactions contemplated by
this Agreement.
(c) This Agreement shall be construed in accordance with the internal
laws of the State of New York and shall be binding upon the successors and
assigns of each party hereto. The parties agree to submit to the jurisdiction of
the state and federal courts located in the Borough of Manhattan, City and State
of New York, for the adjudication of any disputes arising out of or in
connection herewith. This Agreement may be executed in counterparts, and the
facsimile transmission of an executed counterpart to this Agreement shall be
effective as an origina1.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
Official Signatory of Seller:
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/ [ILLEGIBLE]
-----------------------------------
Title: President
Official Signatory of Buyer:
WEYBURN OVERSEAS LIMITED
By: /s/ [ILLEGIBLE]
-----------------------------------
Title: Senior Vice President
No. of Shares
135
No. of Warrants
33,750
Purchase Price
$1,350,000
14
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
------------------
Margolies and Fink
Pompano Beach, Florida
February 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,886,509
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,896,562
<PP&E> 4,213,400
<DEPRECIATION> 334,702
<TOTAL-ASSETS> 8,712,457
<CURRENT-LIABILITIES> 506,048
<BONDS> 0
0
4,500,000
<COMMON> 10,474,577
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,712,457
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,999,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,999,715)
<EPS-PRIMARY> (.079)
<EPS-DILUTED> (.079)
</TABLE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 205449
---------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 6, 1997
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of Small Business Issuer in its charter)
FLORIDA 0-26028 22-2671269
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
6531 NW 18TH COURT, PLANTATION, FLORIDA 33313
(Address of Principal Executive Offices and Zip code)
Registrant's Telephone number: (954)581-9800
<PAGE>
Item 5. OTHER EVENTS.
On December 22, 1996, Imaging Diagnostic Systems, Inc. finalized a
private placement transaction resulting in $4,500,000 in equity financing. The
financing was secured directly with an institutional money management company.
The Company issued 450 shares of Series B Convertible Preferred Stock
("Preferred")and 112,500 Warrants ("Warrants") in reliance upon the exemption
from registration afforded by Regulation D and Section 4(2) of the Securities
Act of 1933, as amended. A registration application regarding the common stock
associated with the transaction will be made to the Securities and Exchange
Commission. The Company did not pay any investment banking fees in connection
with this transaction.
The holder of the Preferred may convert 34% of of the Preferred 80 days
after issuance; 67% of the Preferred 100 days after issuance; and, 100% in
aggregate 120 days after issuance. The Preferred are to be converted based on
the lower of 82% of the average closing bid price for the 5 trading days
preceding the notice of conversion by the holder or $3.85 per Preferred share.
The Warrants are exercisable at any time for an exercise price of $5.00 and will
expire five (5) years from date of issue.
The Company anticipates using the proceeds from the private placement
for general corporate purposes and for continued clinical trials of the Computed
Tomography Laser Mammography (CTLM/trademark/) device which includes the
establishment of an additional 4-6 clinical sites. The Company expects to
collect significant clinical data from the sites which will be incorporated into
a PMA filing with the Food and Drug Administration and hopes to receive
expedited review based on the clinical data.
Note: Forwarding-looking statements in this release are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and uncertainties,
including without limitation, the Company's ability to successfully complete and
file a PMA application; the status of competing products; and, other risks and
uncertainties detailed in the Company's Form 10-KSB filed August 20, 1996 with
the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: January 6, 1997 IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------------------
(Registrant)
/s/Peter S. Knezevich
Peter S. Knezevich
(Vice President-General Counsel)
