As filed with the Securities and Exchange Commission on May 12, 1997
File No. 333-21243
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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AMENDMENT NO. 2
TO 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)
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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. [ ].
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAX PROPOSED MAX
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1) REGISTRATION FEE(2)
- ------------------- ------------- -------------- ------------------ -------------------
<S> <C> <C> <C> <C>
COMMON STOCK 2,000,000 $2.71 $5,420,000 $1,868.96
(NO PAR VALUE)
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(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 May 6, 1997, for 2,000,000 shares.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant files
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such dates as the Commission, acting pursuant to said
Section 8(a), may determine.
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<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
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<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 be accepted prior to the time the Registration
Statement becomes effective. This Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED MAY 12, 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) shares 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 a total of
1,327,864 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
<PAGE>
are being offered on a continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"). No underwriting
discounts, commissions or expenses are payable or applicable in connection with
the sale of such Shares by the Selling Securityholders. The Common Stock of the
Company is quoted on the National Association of Securities Dealers, Inc. (the
"NASD") OTC Bulletin Board under the symbol "IMDS". The Shares offered hereby
will be sold from time to time at the then prevailing market prices, at prices
relating to prevailing market prices or at negotiated prices. On May 9, 1997,
the last reported sale price of the Common Stock on the OTC Bulletin Board was
$2.59 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.
--------------------------------
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, N.W., 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. Based upon the known optical properties of
benign and malignant tissues
<PAGE>
(whether and to what extent light is impeded as it passes through the tissue and
the measurement of the impedance), the CTLM device is designed to provide both
the physician and patient with immediate, on-site, objective interpretation and
determination of further clinical work-up. Accordingly, the Company believes
that its proposed breast cancer diagnostic product, the Computed Tomography
Laser Mammography (CTLM/trademark/) device, will improve early diagnosis, reduce
diagnostic uncertainty and decrease the number of biopsies performed on benign
lesions.
The CTLM device will require Food and Drug Administration (FDA) approval
prior to commercial distribution in the United States. There can be no assurance
that any such approval will be received on a timely basis, or at all, or that
any products developed by the Company will be accepted commercially.
Furthermore, there can be no assurance that the Company's technology can be
adapted for breast screening or for the detection of cancer.
The CTLM device is being developed to provide physicians and patients with
immediate information concerning the probability that an identified lesion is
malignant or benign. A breast exam utilizing the CTLM device is non-invasive and
can be performed by a medical technician in less than 15 minutes. A patient lies
face down on the scanning table with a breast hanging pendulously in the
scanning chamber. Once the entire breast is scanned the other breast is placed
in the chamber for scanning. Each scan takes approximately 3-4 minutes. The
procedure is designed to provide the physician and patient with objective,
on-site, immediate diagnostic decisions, including whether or not to proceed to
surgical biopsy. Further, the device is designed to archive and compare scans
and provide the patient with a computer disc (CD) of her scan.
In order to sell the CTLM device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a Pre-Market Approval Application (PMA) with the FDA to obtain marketing
clearance.
In order to collect the clinical data for the PMA, the Company filed an
application for and was granted an investigational device exemption (IDE) to
conduct a Phase I clinical trial. An IDE allows a company to conduct human
clinical trials without filing an application for marketing clearance. The
Company is authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida. The CTLM device has been installed at Strax and patients
have been scanned. Additionally, the Company has received approval to scan an
additional 20 patients at its facility.
<PAGE>
RISK FACTORS
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has a limited history of operations. Since its
inception in December 1993, the Company has engaged principally in the
development of the CTLM/trademark/ device. The Company currently has no source
of operating revenue and has incurred net operating losses since its inception.
At December 31, 1996, the Company had an accumulated deficit of $6,785,008. Such
losses have resulted principally from costs associated with the Company's
operations. The Company expects operating losses will increase for at least the
next several years as total costs and expenses continue to increase due
principally to the anticipated commercialization of the CTLM/trademark/ device,
development of, and clinical trials for, the proposed CTLM/trademark/ device and
other research and development activities. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for its proposed products and develop the capacity to manufacture and market any
approved products either by itself or in collaboration with others. There can be
no assurance if and when the Company will receive regulatory approvals for the
development and commercial manufacturing and marketing of its proposed products,
or achieve profitability is highly uncertain. See "Management's Discussion and
Analyses of Financial Condition and Results of Operations."
GOVERNMENT REGULATION. The manufacture and sale of medical devices, including
the CTLM/trademark/ device, are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA and
corresponding state agencies, and in other countries. In the United States, the
Company's products are regulated as medical devices and are subject to the FDA's
pre-market clearance or approval requirements. Securing FDA clearances and
approvals may require the submission of extensive clinical data and supporting
information to the FDA. The Company cannot file its PMA application for the
CTLM/trademark/ device until its clinical trials are completed. There can be no
assurance, however, that the clinical trials will be successfully completed, or
if completed, will provide sufficient data to support a PMA application for the
CTLM/trademark/ device. Nor can there be any assurance that the FDA will not
require the Company to conduct additional clinical trials for the
CTLM/trademark/ device. The process for obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain and frequently requires
from one to several years from the date of FDA submission, if pre-market
approval is obtained at all. Sales of medical devices outside the United States
are subject to
<PAGE>
international regulatory requirements that vary from country to country. The
time required to gain approval for sale internationally may be longer or shorter
than that required for FDA approval and the requirements may differ. In Europe,
the Company will be required to obtain the certifications necessary to enable
the CE mark to be affixed to the Company's products by mid-1998 in order to
conduct sales in member countries of the European Union. The Company has not
obtained such certificates and there can be no assurance it will be able to do
so in a timely manner, or at all. Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which the product may be
marketed. In addition, to obtain such approvals, the FDA ands certain foreign
regulatory authorities may impose numerous other requirements with which other
medical device manufacturers must comply. FDA enforcement policy strictly
prohibits the marketing of approved medical devices for unapproved uses. Product
approvals could be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. The
third-party manufacturers upon which the Company depends to manufacture its
products are required to adhere to applicable FDA regulations regarding GMPs and
similar regulations in other countries, which include testing, control and
documentation requirements. Ongoing compliance with GMP regulations and other
applicable regulatory requirements will be monitored by periodic inspections by
the FDA and by comparable agencies in other countries. Failure to comply with
applicable regulatory requirements, including marketing and promoting products
for unapproved use, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new government
regulations or polices could prevent or delay regulatory approval of the
Company's products. Certain material changes to medical devices also are subject
to FDA review and clearance or approval. There can be no assurance that the
Company will be able to obtain FDA approval of a PMA application for the
CTLM/trademark/ device on a timely basis, or at all, and delays and delays in
receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements that would have material adverse effect on the Company's
business, financial condition and results of operations. See "Business -
Government Regulation."
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company's proposed products and future
product development efforts are at an early
<PAGE>
stage. Accordingly, there can be no assurance that any of the Company's proposed
products will be found to be safe and effective, can be developed into
commercially viable products, can be manufactured on a large scale or will be
economical to market, or will achieve or sustain market acceptance. There is,
therefore, a risk that the Company's product development efforts will not prove
to be successful.
DEPENDENCE UPON U.S. PRE-MARKET APPROVAL. Under the provisions of the Federal
Food and Cosmetic Act ("the FDC Act"), the Company must obtain pre-market
approval from the FDA prior to commercial use in the United States of the
proposed CTLM/trademark/ device. There can be no assurance if or when the
Company will receive any such clearances or approvals. Obtaining FDA pre-market
approval may impose costly requirements on the Company and may delay for a
considerable period of time, or prevent, the commercialization of the
CTLM/trademark/ device.
DEPENDENCE ON MARKET ACCEPTANCE. There can be no assurance that physicians or
the medical community in general will accept and utilize the CTLM/trademark/
device. The extent that, and rate of which, the CTLM/trademark/ device achieves
market acceptance and penetration will depend on many variables including, but
not limited to, the establishment and demonstration in the medical community of
the clinical safety, efficacy and cost-effectiveness of the CTLM/trademark/
device, the advantage of the CTLM/trademark/ device over existing technology and
cancer detection methods, third-party reimbursements practices and the Company's
manufacturing, quality control, marketing and sales efforts. Failure of the
Company's products to gain market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business - Sales and Marketing," "Business - Manufacturing" and "Business -
Reimbursement."
LIMITED MARKETING AND SALES CAPABILITY. In order to market any products it may
develop, the Company will have to develop a marketing and sales force with
technical expertise and distribution capability. There can be no assurance that
the Company will be able to establish sales and distribution capabilities or
that the Company will be successful in gaining market acceptance for any
products it may develop. The Company intends to pursue and has secured one or
more distribution arrangements in Europe and Asia with strategic marketing
partners who have established marketing capabilities. There can be no assurance
that the Company on its own, or through arrangements with others, will be able
to enter into such
<PAGE>
arrangements on acceptable terms, if at all. To the extent that the Company
arranges with third parties to market its products, the success of such products
may depend on the efforts of such third parties. There can be no assurance that
the Company will be able to enter any such strategic alliance in Europe or that
any of the Company's proposed marketing schedules or plans can or will be met.
See "Reliance on International Sales," "Business - Sales and Marketing," and See
Business Government Regulation".
LIMITATION ON THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM. In the United
States, suppliers of health care products and services are greatly affected by
Medicare, Medicaid and other government insurance programs, as well as by
private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM/trademark/ device or by refusing reimbursement. If
examinations utilizing the Company's products were not reimbursed under these
programs, the Company's ability to sell its products may be materially and/or
adversely affected. There can be no assurance that third-party payors will
provide reimbursement for use of the Company's products. Several states and the
U.S. government are investigating a variety of alternatives to reform the health
care delivery system and further reduce and control health care spending on
health care items and services, limit coverage for new technology and limit or
control the price health care providers and drug and device manufacturers may
charge for their services and products, respectively. If adopted and
implemented, such reforms could have material adverse effect on the Company's
business, financial condition and results of operations. In international
markets, reimbursement by private third-party medical insurance providers,
including governmental insurers and independent providers, varies from country
to country. In certain countries, the Company's ability to achieve significant
market penetration may depend upon the availability of third-party governmental
reimbursement. Revenues and profitability of medical device companies may be
affected by the continuing efforts of governmental and third-party payors to
contain or reduce the cost of health care through various means. See "Business -
Reimbursement."
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require substantial
additional funds for its research and development programs, preclinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
<PAGE>
marketing programs. The Company's capital requirements will depend on numerous
factors, including the progress of its research and development programs,
results of preclinical and clinical testing, the time and cost invoked in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments and changes in the Company's existing
research, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
Moreover, the Company's fixed commitments, including salaries and fee for
current employees and consultants, and other contractual agreements and are
likely to increase as additional agreements are entered into and additional
personnel are retained. See "Business - Patents," "Business - Licenses and Other
Agreements," "Management Employment Agreements," "Certain Transactions" and
"Notes to Financial Statements." The Company may need to raise additional
capital to fund its future operations and may seek such additional funding
through public or private financing or collaborative, licensing and other
arrangements with corporate partners. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result and future
investors may be granted rights superior to those of existing stockholders.
There can be no assurance, however, that additional financing will be available
when needed, or if available, will be available on acceptable terms.
Insufficient funds may prevent the company from implementing its business
strategy or may require the Company to delay, scale back, or eliminate certain
of its research and product development programs or to license to third parties
rights to commercialize products or technologies that the Company would
otherwise seek to develop itself.
DEPENDENCE ON QUALIFIED PERSONNEL. Due to the specialized scientific nature of
the Company's business, the Company is highly dependent upon its ability to
attract and retain qualified scientific, technical and managerial personnel.
Therefore the Company has entered into employment agreements with certain of its
executive officers and employees. The loss of the services of existing personnel
as well as the failure to recruit key scientific, technical and managerial
personnel in a timely manner would be detrimental to the Company's research and
development programs and to its business. The Company's anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the additional of new management personnel. Competition
for qualified personnel is intense and there can be no assurance that the
Company will be able to continue to attract and retain
<PAGE>
qualified personnel necessary for the development of its business. See "Business
- - Employees and Management."
COMPETITION. The market in which the Company intends to participate is highly
competitive. Many of the companies in the cancer diagnostic and screening
markets have substantially greater technological, financial, research and
development, manufacturing, human and marketing resources and experience than
the Company. Such companies may succeed in developing products that are more
effective or less costly than the company's products or such companies may be
successful in manufacturing and marketing their products than the Company.
Physicians using imaging equipment such as x-ray mammography equipment,
ultrasound or high frequency ultrasound systems, Magnetic Resonance Imaging
(MRI) systems, and thermography, diaphonography and transilluminational devices
may not use the company's products. Currently mammography is employed widely and
the Company's ability to demonstrate the Company's ability to sell the
CTLM/trademark/ device to medical facilities will, in part, be dependent on the
Company's ability to demonstrate the clinical utility of the CTLM/trademark/
device as an adjunct to mammography and physical examination and its advantages
over other available diagnostic tests. See "Business Competition."
TECHNICAL OBSOLESCENCE. Methods for the detection of cancer are subject to rapid
technological innovation and there can be no assurance that technical changes
will not render the Company's proposed products obsolete. There can be no
assurance that the development of new types of diagnostic medical equipment or
technology will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Competition."
RELIANCE ON INTERNATIONAL SALES. The Company intends to commence international
sales of the CTLM/trademark/ device in Europe and Asia prior to commencing
commercial sales in the United States, where sales cannot occur unless and until
the Company receives pre-market approval from the FDA. Thus, until the Company
receives pre-market approval from the FDA to market the CTLM/trademark/ device,
as to which there can be no assurance, the Company revenues, if any, will be
derived from sales to international distributors. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact
<PAGE>
on the Company's ability to deliver products on a timely basis. Future
imposition of, or significant increases in the level of, customs duties, export
quotas or other trade restrictions could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- - Sales and Marketing," the regulation of medical devices, particularly in
Europe, continue to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company.
PRODUCT LIABILITY. The Company's business exposes it to potential product
liability risks which are inherent in the testing, manufacturing and marketing
of cancer detection products. Significant litigation, not involving the Company,
has occurred in the past based on the allegations of false negative diagnoses of
cancer. While the CTLM/trademark/ device is being developed as a adjunct to
other diagnostic techniques, there can be no assurance that the Company will not
be subjected to future claims and potential liability.
GLOSSARY OF TERMS
Absorption: Process by which a portion of the x-ray beam is removed when the
x-ray strike an object.
Benign: Favorable; good prognosis; not malignant.
Biopsy: Stereotactic core needle biopsy: Sampling thru use of a "Tru-Cut" needle
of a lesion or microcalcifications guided by mammography (a sterotaxic paired
images).
Biopsy: Core needle biopsy: Can be obtained by ultrasound or mammography
guidance. Requires a special biopsy "gun" a device that works by a spring-action
mechanism to automatically project a needle through the lesion to obtain a
tissue specimen.
Calcification: Calcium salts laid down in tissue, usually complex forms of
calcium phosphates and carbonates; found in both benign and malignant breast
diseases.
Cancer: An imprecise term used to describe an estimate 200 different kinds of
malignant neoplasm marked by uncontrolled growth and spread of abnormal cells
Carcinoma in situ: Malignant cell changes in epithelial tissues still confined
to the area of origin; in the breast the cancer cells still lie within the
confines of the ducts and do not extend beyond the limiting basement membrane of
these ducts.
<PAGE>
Cyst: Encapsulated collection of fluid, semi-fluid or solid material. In the
breast, it is an abnormal structure formed by ductal obstruction.
Cyst aspiration: Cyst aspiration may be guided by palpation, ultra-sound, or
mammography. Imaging guidance may be useful for both palpable and nonpalpable
cysts because it ensures that the lesion in entered with the needle and
facilitates complete or nearly complete aspiration of the fluid.
Cytodiagnosis: Diagnosis of pathogenic conditions b the study of cells present
in fluids.
Density: The degree of opacity of a radiographically translucent medium,
depending on mass per unit volume.
Fibroglandular Tissue: Breast tissue consisting of 15-18 lobes containing the
ductal sturctures and fibrous connective and supportive tissue.
Histodiagnosis: A diagnosis made from the microscopic examination of tissues.
Lymph node: A lymph gland or rounded mass of lymphoid tissue through which the
lymph is filtered. In reference to the breast, transportation of cancer cells
that spread by flowing through the lymph channels to distant regions of the
body.
Malignant: Tending to infiltrate, metastasize, the terminate fatally.
Mammography: Non-invasive soft-tissue radiography of the breast in order to
detect abnormalities.
Mass: A quantity of cells adhering to each other usually referred to as a lump
or nodule. Dominant mass: the nodule that stands out, the mass in the breast
that is significant to surgeon, usually worthy of biopsy.
Palpation: The act of feeling (examining) with the hand.
Ultrasound: Ultrasonography of the breast images mammary structures by recording
their differing attenuations of ultrasonic waves. Sound waves; real-time
imaging. The transducer directs the high-frequency beam (more than 20,000 cycles
per second) into the breast. A computerized television video-scan converter
amplifies the resulting echoes and assembles them
<PAGE>
according to strength into a video collage displayed on an oscilloscope.
Fine needle aspiration: A sampling of palpable or non-palpable lesions guided by
mammography or ultrasound for the purpose of lesion diagnosis with cells only.
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 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. However, at a minimum, the Selling Securityholders
will be able to convert into 1,168,831 (not including dividends or warrants)
Shares of the Company, all of which will be subject to registration rights. The
formula for conversion provides for converting at the lesser of $3.85 (Fixed
Conversion Price) of 82% of the market price for the Company's Shares (Variable
Conversion Price). Accordingly, the number of Shares subject to registration
rights may increase. As an example, if the market price of the Shares at the
time of conversion was $3.50 and the Selling Securityholders were converting all
of their Preferred Shares the Securityholders would receive 1,567,944 Shares.
($3.50 x .82 = $2.87. 10,000/$2.87 = 3,484 x 450=1,567,944 ).
The Fixed Conversion Price for the Series B Preferred was determined by
reference to the market price for the Company's stock prior to the closing of
the transaction. The Variable Conversion Price was determined by reference to
various factors concerning the Company which are enumerated in the section
titled "Risk Factors". The Series B Selling Shareholders are investment
companies incorporated in the British Virgin Islands.
<PAGE>
The Series B Holders
The Selling Securityholders identified in the table below as "Series
B Holders" acquired an aggregate of 450 shares of Series B Preferred in a
private placement transaction (the "Series B Transaction") pursuant to
Subscription Agreements dated December 13, 1996 (collectively the "Subscription
Agreements"). The Series B Preferred is convertible into Common Stock at the
option of the Series B Holder as follows: may convert up to 34% of the Series B
Preferred 80 days after issuance December 17, 1996; may convert up to 67% of the
Series B Preferred 100 days after issuance December 17, 1996; and, all remaining
Series B Preferred 120 days after issuance December 17, 1996. The number of
shares of Common Stock into which shares of Series B Preferred are convertible
depends on several factors, including the date on which the shares are converted
and the market price of the Common Stock at the time of conversion. None of the
Series B Preferred have been converted. See "Description of Capital Stock -
Preferred Stock."
The 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 for Series B Preferred, each share of
Series B Preferred, in general, convertible into a number of shares determined
by dividing $10,000 by the applicable conversion price. If the variable
conversion price on the date of conversion is lower than the fixed conversion
price, then a greater number of shares will be issued. In addition, there is
dividend payable at the rate of seven percent (7%) per annum, payable quarterly
at the Company's option in cash or shares.
For the above reasons, it is not possible to set forth in the table the
maximum number of shares that could be acquired by the Series B Holders upon
conversion of shares of Series B Preferred. The number of shares set forth in
the tables are based on conversion as follows: the Series B Preferred at the
fixed conversion price, with the dividend of 7% calculated,
<PAGE>
assuming conversion of all of the Series B Preferred on the dates set forth
above. Several factors, including whether the market price of the Common Stock
is lower than the fixed conversion price of $3.85 per share, 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 identify each Selling Securityholder based upon
information provided to the Company, set forth as of May 6, 1997, with respect
to the Shares beneficially held by or acquirable by, as the case may be, each
Selling Securityholder and the shares of Common Stock beneficially owned by the
Selling Securityholder which are not covered by this Prospectus. No Selling
Securityholder has had any position, office or other material relationship with
the Company within the past three years. The percentage figures reflected in the
table assume conversion of all shares of: Series B Preferred into 1,327,864
shares of Common Stock including dividends at the rate of 7% per annum paid in
shares of Common Stock assuming conversion of the Series B Preferred in
percentages set forth above and exercise of all Warrants into 112,500 shares of
Common Stock.
<TABLE>
<CAPTION>
SERIES B HOLDERS
NUMBER OF NUMBER OF COMMON STOCK
SHARES OF COMMON STOCK SHARES OF COMMON STOCK OWNED PRIOR TO
NAME OF UNDERLYING UNDERLYING OFFERING
INVESTOR SERIES B PREFERRED WARRANTS NUMBER PERCENT
- -------- ----------------------- ---------------------- -------------- -------
<S> <C> <C> <C> <C>
Goodland International
Investment Ltd. 850,755 78,750 None 0
Weyburn Overseas
Limited 364,609 33,750 None 0
</TABLE>
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
<PAGE>
Securityholders will act independently of the Company in making decisions with
respect to the timing, manner and size of each sale. Such sale may be made on
the OTC Bulletin Board or otherwise, at prices and on terms then prevailing or
at prices related to the then market price, or in negotiated transactions. The
Shares may be sold by one or more of the following methods: (a) a block trade in
which the broker-dealer engaged by the Selling Securityholder will attempt to
sell Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by the broker-dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; and (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. To the best of the Company's knowledge, the
Selling Securityholders have not, as of the date hereof, entered into any
arrangement with a broker or dealer for the sale of shares through a block
trade, special offering, or secondary distribution of a purchase by a
broker-dealer. In effecting sales, broker-dealers engaged by the Selling
Securityholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or discounts from the Selling
Securityholders in amounts to be negotiated.
In offering the Shares, the Selling Securityholders and any broker-dealers
who execute sales for the Selling Securityholders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profits realized by the Selling Securityholders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
Rule 10b-6 under the Exchange Act prohibits participants in a distribution
from bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made
to stabilize the price of a security in connection with a distribution of the
security.
This offering will terminate as to each Selling Securityholder on the
earlier of (a) the date on which such Selling Securityholder's shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all Shares offered hereby have been sold by the Selling Securityholders. There
can be no assurance that any of the Selling Securityholders will sell any or all
of the shares of Common Stock offered hereby.
<PAGE>
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 March 31, 1997 there were
issued and outstanding 24,462,584 shares of Common Stock. As of May 6, 1997,
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.
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
<PAGE>
stock in series from time to and things as in its discretion may be necessary or
advisable in connection with such proposal.
Series B Preferred
A total of 450 shares of Series B Preferred are authorized by the
Certificate of Amendment to the Certificate of Incorporation (the "Certificate
of Determination") establishing the rights, preferences, privileges and
restrictions granted to or imposed upon the Series B Preferred. The following is
a description of some of the material terms of the Series B Preferred:
1. Designation. The designation of the series of Preferred Stock fixed
by this resolution shall be "Series B Convertible Preferred Stock"
(hereinafter referred to as the "Convertible Preferred Stock").
2. Conversion Rights.
(a) RIGHT TO CONVERT. The holder of any shares of Convertible
Preferred Stock may, (i) at any time during the period commencing on and
including eighty (80) days after issuance, convert up to thirty four
percent (34%), without the payment of any additional consideration
therefor, into that number of fully paid and nonassessable shares of
common stock, no par value, of the Corporation (ii) at any time during the
period commencing on and including one hundred (100) days after issuance,
convert up to sixty eight percent (68%) in aggregate, without the payment
of any additional consideration therefor, into that number of fully paid
and nonassessable shares of common stock, no par value, of the
Corporation, and (iii) at any time during the period commencing on and
including one hundred and twenty (120) days after issuance, convert up to
one hundred percent (100%) in aggregate, without the payment of any
additional consideration therefor, into that number of fully paid and
nonassessable shares of common stock, no par value, of the Corporation as
is determined by dividing (i) the sum of $10,000 by (ii) the Conversion
Price (determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" shall be equal to eighty two percent
(82%) of the Market Price of the Corporation's Common Stock; provided,
however, that in no event will the Conversion price be greater than the
$3.85. For purposes of this Section 2, the Market Price shall be the
average of the closing bid prices of the Common Stock over the five
consecutive trading days ending on the trading day immediately preceding
the date of the Conversion Notice (as defined in Section 2(b)hereof), as
reported by the National Association of Securities Automated Quotation
System ("NASDAQ"), or the average of the closing bid prices of the Common
Stock in the over-the-counter market over the five consecutive trading
days ending on the trading day immediately preceding the date of the
Conversion Notice, or, in the event the Common Stock is listed on a
national stock exchange, the Market Price shall be the average of the
closing prices of the Common Stock on such exchange, as reported by the
NASD OTC Bulletin Board over the five consecutive trading days immediately
preceding the date of the Conversion Notice.
(b) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Convertible Preferred Stock. If
upon conversion of shares of Convertible Preferred Stock held by a
registered holder which are being converted, such register holder would,
but for the provisions of this Section 2(b), receive a
<PAGE>
fraction of a share of Common Stock thereon, then in lieu of any such
fractional share to which such holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Convertible Preferred
Stock shall be entitled to convert the same into full shares of Common
Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer
agent for the Convertible Preferred Stock, and shall give written notice
(the "Conversion Notice") to the Corporation at such office that such
holder elects to convert the same and shall state therein such holder's
name or the name of its nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, but in any event
within three business days of the date of its receipt of the Conversion
Notice, issue and deliver or cause to be issued and delivered to such
holder of Convertible Preferred Stock, or to its nominee or nominees, a
certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled, together with cash in lieu of any
fraction of a share. Such conversion shall be deemed to have been made on
the date that the Corporation receives the Conversion Notice, and the
person or persons entitled to receive the share of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Upon the conversion
of any shares of Convertible Preferred Stock, such shares shall be
restored to the status of authorized but unissued shares and may be
reissued by the Corporation at any time.
(c) NOTICES OF RECORD DATE. In the event of (i)any declaration
by the Corporation of a record date of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution or (ii) any capital
reorganization of the Corporation, any classification or recapitalization
of the capital stock of the Corporation, any merger or consolidation of
the Corporation, and any transfer of all or substantially all of the
assets of the Corporation to any other Corporation, or any other entity or
person, or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder
of Convertible Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (A) the date on which
any such record is to be declared for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the
date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected
to become effective and (C) the time, if any, that is to be fixed, as to
when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
transfer, consolidation, merger, dissolution or winding up.
(d) STOCK DIVIDENDS; STOCK SPLITS; ETC. In the event that the
Corporation shall (i)take a record of holders of shares of the Common
Stock for the purpose of determining the holders entitled to receive
dividends payable in shares of Common Stock, (ii)subdivide the outstanding
shares of Common Stock, (iii)combine the outstanding shares of Common
Stock into smaller number of shares or (iv)issue, by reclassification of
the Common Stock, any other securities of the Corporation, then, in each
such case, the Conversion Price then in effect shall be adjusted so that
upon conversion of each share of Convertible Preferred Stock then
outstanding the number of shares of
<PAGE>
Common Stock into which such shares of Convertible Preferred Stock are
convertible after the happening of any of the events described in clauses
(i)through(iv) above shall be the number of such shares of Common Stock
into which such shares of Convertible Preferred Stock would have been
converted if so converted immediately prior to the happening of such event
or any record date with respect thereto.
(e) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such
numbers of shares of Common Stock as shall from time to time be sufficient
to effect conversion of all of the then outstanding shares of Convertible
Preferred Stock. In the event there are insufficient shares to effect a
conversion, the Corporation shall increase the number of authorized shares
to effect conversion. In the event shareholder approval is required to
increase the authorized shares, the holder shall be entitled to vote with
the holders of the Common Stock, as a single class, where each share of
Convertible Preferred Stock shall be entitled to that number of votes to
which it would be entitled had all of its shares of Convertible Preferred
Stock been converted into shares of Common Stock were notice of conversion
given on the date of such vote. No sale or disposition of all or
substantially all of the Corporation's assets shall take place without the
approval of the holders of the Convertible Preferred Stock, voting as a
single class.
3. DIVIDEND RIGHTS. The holders of record of Convertible Preferred
Stock shall be entitled to receive cumulative dividends thereon, out of
funds legally available therefor and to the extent permitted by law, at
the rate of seven percent (7%) per share, per annum, computed on the basis
of the actual number of days elapsed in a 365-day year, commencing on the
date of issuance of such shares of Convertible Preferred Stock and payable
quarterly on the last business day of each calendar quarter commencing
with the calendar quarter next succeeding the date of issuance of the
Convertible Preferred Stock. Such dividends shall be fully cumulative and
shall accrue, whether or not declared by the Board of Directors of the
Corporation, from the date of issuance of the shares of Convertible
Preferred Stock until the date of payment thereof as set forth in the
immediately preceding sentence. No dividends or other distributions shall
be paid on or declared and set aside for payment on the Common Stock until
full cumulative dividends on all outstanding shares of Convertible
Preferred Stock shall have been paid or declared and set aside for
payment. Such dividends shall be payable in cash or in freely tradable
shares of Common Stock, with such shares of Common Stock valued at the
average closing bid price of such shares over the five consecutive trading
days immediately preceding the date of payment thereof, as such average
closing bid price is determined pursuant to Section 2 above.
4. VOTING RIGHTS OF CONVERTIBLE PREFERRED STOCK. Except as otherwise
required by law and as provided for in Section 2(e), the holders of
outstanding shares of Convertible Preferred Stock shall not be entitled to
vote on any matters submitted to the stockholders of the Corporation.
5. RANKING. The Convertible Preferred Stock shall rank senior to any
other class of capital stock of the Corporation now or hereafter issued as
to the payment of dividends and the distribution of assets on redemption,
liquidation, dissolution or winding up of the Corporation.
6. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any
shares of Convertible Preferred Stock shall be outstanding, the holders of
the then outstanding shares of Convertible Preferred Stock
<PAGE>
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.
Warrants
As of December 31, 1996, the Company had outstanding 112,500
non-redeemable warrants (the "Series B Warrants"). The Series B Warrants are
exercisable at any time for an exercise price of $5.00 and will expire five (5)
years from date of issue. The Warrants may be exercised upon surrender of the
certificate thereof on or prior to the expiration date at the offices of the
Company with the form of "Election to Purchase" and accompanied by payment of
the full exercise price for the number of Warrants being exercised. The Warrants
contain provisions that protect the holders thereof against dilution by
adjustments of the exercise price in certain events, such as stock dividends,
stock splits, mergers, combinations or recapitalizations, and for other unusual
events. The holder of a Warrant will not posses any rights as a shareholder of
the Company unless and until he or she exercises the Warrant.
INTERESTS OF NAMED EXPERTS
AND COUNSEL
Certain legal matters in connection with the securities being offered
hereby will be passed upon for the Company by Peter S. Knezevich, General
Counsel and Vice President of the Company.
<PAGE>
Mr. Knezevich currently owns approximately 251,438 shares of common stock of the
Company.
EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
included herein and elsewhere in the Registration Statement have been examined
by Margolies and Fink, independent certified public accountants, for the periods
and to the extent set forth in their respective report and are included herein
and elsewhere in the Registration Statement in reliance upon such report of said
firm given under their authority as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Shares will be passed upon for the
Company by Mr. Peter S. Knezevich, General Counsel and Vice President of the
Company.
BUSINESS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems, Inc.
(the "Company") has been engaged in research and development associated with its
cancer detection technology and developing for commercial application its
Computed Tomography Laser Mammography (CTLM/trademark/)device.
The Company has developed a system for detecting breast cancer through the
skin in a non-invasive and objective procedure. Imaging's system employs a
high-speed femto-second pulsed titanium sapphire laser and proprietary scanning
geometry and reconstruction algorithms to detect and analyze masses in the
breast for indicia of malignancy or benignancy. The combination and
incorporation of the foregoing components into a device provide for enhanced
diagnostic capabilities that are superior to standard mammography diagnostic
tools such as ultra-sound and mammography. Based upon the known optical
properties of benign and malignant tissues (whether and to what extent light is
impeded as it passes through the tissue and the measurement of the impedance),
the CTLM device is designed to provide both the physician and patient with
immediate, on-site, objective interpretation and determination of further
clinical work-up. Accordingly, the Company believes that its proposed breast
cancer diagnostic product, the Computed Tomography Laser Mammography
(CTLM/trademark/) device, will improve early diagnosis, reduce diagnostic
uncertainty and decrease the number of biopsies performed on benign lesions. See
below, Comparison to
<PAGE>
Existing Diagnostic Modalities. Further, the CTLM/trademark/ device does not
expose the patient to ionizing radiation or the breast to painful compression.
The Company believes that these factors contribute to a portion of the patient
population not obtaining a conventional mammogram.
During the first year of operations, the Company researched the
interaction between high speed, rapid pulsed (Ti-Saphire) laser technology and
various detection technologies associated with standard computed tomographic
("CT") schemes. From this research the Company developed its first prototype
which was able to create images of a breast. The Company refined various
software and hardware configurations and components of the device based on these
first images and filed a patent during June of 1995. During this period of time
there were further advances in laser technology effecting the size and stability
of the laser component. The Company incorporated these changes by purchasing a
laser package manufactured by Spectra-Physics, Inc. On December 12, 1995, the
Company had a preliminary meeting with the Food and Drug Administration to
discuss generally the approach the Company would take to obtain marketing
clearance for its CTLM/trademark/ device. The Company was advised that it would
need to submit and have approved a pre-market approval application ("PMA") in
order to obtain marketing clearance for the device. Further, the Company was
advised that it would also need to submit an investigational device exemption
("IDE") application to the FDA in order to commence human clinical trials of the
device. The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November, 1996 the Company installed its device
at the Strax Breast Diagnostic Center.
The competition for developing a commercial device utilizing computed
tommography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM/trademark/ device utilizes. A brief list of the most prestigious of these
institutions includes the University of Pennsylvania, The City College of New
York, and University College London. Two of these institutions have granted
licenses on certain patented technologies to two
<PAGE>
companies: University of Pennsylvania - Non-Invasive Technologies; City College
of New York - MediScience, Inc.
To date, the Company has not marketed, or generated revenues from the
commercialization of any products. From inception to December 31, 1996, the
Company has sustained accumulated losses of $6,785,008 and has spent
approximately $1,065,230 on research and development during this same period.
The Company's results may vary significantly from period to period depending on
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.
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 eight women in the United States will
develop breast cancer during her lifetime. Nationwide it is estimated that
approximately 43,900 women will die from this disease in 1997. In the United
States in 1997, approximately 180,200 women will be diagnosed with the disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung
cancer. In Europe in 1990, approximately 170,000 cases of cancer were
discovered, with an estimated 73,000 deaths. The annual cost of breast cancer
management in the United States alone is approximately $25 billion.
There is widespread agreement that screening for breast cancer, when
combined with appropriate follow-up, will reduce mortality from the disease.
According to the NCI, the five-year survival rate decreases from 98% 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. Extensive documentation
demonstrates that mammography misses, on average, 15%-20% of breast cancer
detected by physical exam alone.
Breast cancer screening is generally recommend as a routine part of
preventive healthcare for women over the age of 20
<PAGE>
(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 an abnormality
posing increased risk factors 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
and ultrasound. A minimally invasive procedure such as fine needle aspiration or
large core needle biopsy. 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. While the minimally invasive procedures provide
more diagnostic information, there is still present a 4% miss-rate factor.
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 up to 48 hours for their biopsy results.
<PAGE>
Screening and Diagnostic Modalities
PHYSICAL EXAMINATION
Physical examinations may be conducted by a physician or clinician 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
Mammography is a non-invasive x-ray modality commonly used for both
routine breast cancer screening and as a diagnostic tool. A mammogram produces
and image of the internal structure of the breast which is intended to display
lesions as white spots against the black and/or white background of normal
tissue. In a screening mammogram, radiologists seek to detect suspicious
lesions, while in a diagnostic mammogram radiologist seek to characterize
suspicious lesions. Mammograms require subjective interpretation by a
radiologist and are often uncomfortable for the patient. Because x-ray
mammography exposes the patient to radiation, ACS recommends mammograms be
limited to once per year. In addition, x-ray mammography is considered to be
less effective for women under the age of 50 who generally have radiographically
dense breast tissue. The average cost of a diagnostic mammogram is approximately
$55 to $200 per procedure (an average of $113), and requires the use of capital
equipment ranging in cost from approximately $75,00 to $225,000. It is expected
that the CTLM device will cost approximately $300,000 and the cost of a
bilateral exam will be $125 to $150. Due the high capital costs associated with
mammography equipment and the specialized training necessary to operate the
equipment and to interpret radiographic images, mammography is usually available
only at specialty clinics or hospitals.(The foregoing average cost figures are
based on a survey of 23 ACR and FDA certified facilities in Broward County,
Florida, conducted during the month of March, 1997).
ULTRASOUND
Ultrasound uses high frequency sound waves to create an image of soft
tissues in the body in a non-invasive manner. Like mammography, this image
requires interpretation by a physician.
<PAGE>
Ultrasound's principal role in breast cancer diagnosis has been to assist
the physician in determining whether a palpable lesion is likely to be a cyst
(usually benign) or a solid mass (potentially cancerous). The average cost for
an ultrasound of the breast is approximately $125 to $500 per procedure (an
average of $235) and requires the use of capital equipment ranging in cost from
approximately $60,000 to $200,000. Again, it is expected that the CTLM device
will cost approximately $300,000 and the cost of an exam will be $125 to $150.
Like mammography, ultrasound is generally performed at specialty clinics or
hospitals.(The foregoing average cost figures are based on a survey of 23 ACR
and FDA certified facilities in Broward County, Florida, conducted during the
month of March, 1997).
THE COMPUTED TOMOGRAPHY LASER MAMMOGRAPHY DEVICE
An approximately 15 minute bilateral breast examination utilizing the
CTLM device is performed by a Technologist with the patient resting in a
comfortable prone position. One breast at a time is pendulous in the aperture
housing the scanning device. Once the entire breast is scanned the other breast
is placed in the chamber for scanning. Each scan takes approximately 6-8
minutes. Based upon the known optical properties of benign and malignant
tissues, the procedure is designed to provide both the physician and patient
with immediate, on-site, objective interpretation and determination of further
clinical work-up. Further, the device is designed to archive and compare scans
and provide the patient with a computer disc (CD) of her scan.
BIOPSY
Other currently available minimally invasive diagnostic techniques
include fine needle aspirations or core needle biopsy employing either the
stereotactic or hand held method. In each of these procedures a physician seeks
to obtain either cellular or tissue samples of suspicious lesions for
cytodiagnosis or histodiagnosis. Inadequate sampling can render these tests
invalid. These procedures are invasive, require follow-up and range in cost from
approximately $370 to $1,000 per procedure.
COMPARISON TO EXISTING DIAGNOSTIC MODALITIES
The CTLM/trademark/ device differs from currently available breast imaging
modalities employed for the detection of breast cancer by generating more
precise imformation for the clinician or doctor. The CTLM device generates,
depending on the size of the breast, approximately 20 cross-sectional images of
a breast. A
<PAGE>
conventional screening mammography exam generates 2 images of the breast.
Cross-sectional imaging allows a doctor or clinician to isolate the location of
the abnormality within the breast. By doing so, there is greater resolution of
the area where the specific abnormality resides.
Clinical efficacy of conventional mammography diminishes proportionately
with the abundance of fibroglandular breast tissue. Based upon this fact,
limited interpretability of a mammogram increases the risk that a lesion may be
overlooked, and diagnosis and treatment may be delayed; thus threatening the
patient's survival probability. Vigorous compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but does pose an obstacle for MANY women either deciding to
have their first mammogram or deciding whether to ever return for an annual
screening mammogram.
Scanning of the breast with the CTLM device is accomplished in such a
manner that utilizes no compression of tissue. The gathering of data from
360(Degree) around the breast yields multiple cross-sectional images which are
representative of a near three-dimensional view of its internal structures. Such
an acquisition provides the physician with increased accuracy in lesion
location, as well as determination of the extent and involvement of breast
disease processes. Conventional two-dimensional imaging with mammography and
ultrasound does not provide such quick and complete information.
Breast augmentation through the use of either silicone or saline implants
renders another difficult situation when employing conventional mammography for
imaging. Although radiographic and positioning techniques have vastly improved
the ability to compress and image more breast tissue than ever before, there
still remains a certain amount of breast tissue unable to be imaged due to its
placement around the implant. With free suspension of the breast in the CTLM
scanning chamber, and the ability of the device to image the breast from the
chest wall to the nipple, data can be collected from around the entire breast.
Either silicone or saline implants do not impede light transmission through the
breast.
<PAGE>
Figure 1- Mammography
[GRAPHIC OMITTED]
Clinical efficacy of conventional mammography diminishes proportionately
with the abundance of fibroglandular breast tissue. In conventional mammography,
the 3-D breast is compressed and a 2-D image is obtained. Figure 1, below,
illustrates the mammography technique and the variable results that may be
obtained due to dense breast tissue. The overlap of tissue in a mammogram image
can obscure lesions that are present. Approximately 10 out of 100 lesions cannot
be seen with x-ray mammography because of breast tissue density. Lesions that
cannot be seen results in delayed diagnosis and delayed treatment; thus reducing
the patient's survival probability.
Figure 2, Computed Tomography Laser Mammography
[GRAPHIC OMITTED]
The CTLM breast examination DOES NOT USE X-RAY OR COMPRESSION. In the
<PAGE>
CTLM examination, the laser beam is rotated 360 degrees around the breast
to acquire data to allow an image of a cross-section of the breast to be
constructed. Figure 2, above, illustrates the scanning principal and the
slice-plane image of breast tissue. Data is acquired in a manner that allows
reconstruction of contiguous cross-sections, or "slices." The slice thickness is
set to 4 mm thus allowing a detailed examination of the interior of the breast.
This feature of the CTLM that makes it uniquely different from conventional
breast imaging techniques. These thin sections allow viewing the interior of the
breast is an almost 3-D like representation.
Figure 3, Conventional Mammography Compared to
Computed Tomography Laser Mammography
[GRAPHIC OMITTED]
The advantage of CTLM over conventional mammography is illustrated in
Figure 3, above. Multiple slice-plane images are not available from mammography.
The capability to view multiple slice-plane images instead of only two views,
the cranio-caudal and the medial lateral oblique, per breast provides more
concise location of a lesion.
<PAGE>
Figure 4, Breast Ultrasound
[GRAPHIC OMITTED]
Breast ultrasound is a breast diagnostic test, not a breast-screening
test. It is used after a lesion is located to determine if the abnormality is
cystic or solid. The field of view of the hand-held ultrasound transducer and
the lack of precise knowledge of where the image was being obtained from make
the ultrasound examination dependent on the capability of the person performing
the procedure. The patient is usually examined in the supine position. The
hand-held transducer is placed against the breast to beam high frequency sound
pulses into the tissue. The positioning of the transducer determines which
portion of the breast will be imaged. Figure4, above, illustrate the typical
ultrasound examination technique. Breast ultrasound is typically used only to
view a sector of the breast, not the entire breast.
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTICS SUMMARY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
TECHNIQUE IONIZING PATIENT COMFORT DIAGNOSTIC TEST NUMBER OF VIEWS BREAST DENSE BREASTS
RADIATION PER BREAST AUGMENTATION EFFECT
----------------------------------------------------------------------------------------------------------------------
Mammography Yes Compression Yes 2 Adverse Adverse
----------------------------------------------------------------------------------------------------------------------
Ultrasound No No discomfort Yes Unlimited Little Little
----------------------------------------------------------------------------------------------------------------------
CTLM No No discomfort Yes Unlimited None Little
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that the shortcomings of current breast cancer
management which include discomfort and exposure to radiation represent a
significant market opportunity for an objective technology which does not have
these shortcomings.
Regulatory and Clinical Status
In order to sell the CTLM device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a PMA with the FDA to obtain marketing clearance. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review which is available to
medical devices satisfying one or more of the following criteria:
/BULLET/ The device addresses a condition which is serious or
life-threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
<PAGE>
/BULLET/ The device addresses a condition which is life threatening or
irreversibly debilitating, and provides for clinically important
earlier diagnosis or significant advances in safety and/or
effectiveness over existing alternatives.
/BULLET/ The device represents a clear clinically meaningful advantage
over existing technology, defined as having major (not
incremental) increased effectiveness or reduced risk compared to
existing technology.
/BULLET/ The availability of the device is otherwise in the best interest
of the public health.
On February 9, 1996, the FDA approved the Company's Investigational Device
Exemption (IDE) application. An approved IDE application permits a device, that
would otherwise be subject to marketing clearance, to be shipped lawfully for
the purpose of conducting a clinical study. Further, the Company supplemented
the IDE to allow for the scanning of 7-10 patients in-house for calibration
purposes. On April 3, 1997, the Company was granted approval pursuant to the IDE
to scan an additional 20 patients at its facilities to conduct comparative
studies.
The IDE authorizes the Company to conduct a Phase I study at the Strax
Breast Diagnostic Institute located in Lauderhill, Florida (the "Strax Center").
The Phase I study involves scanning 50 patients with differing breast
abnormalities and comparing the results with other diagnostic modalities such as
ultra-sound and standard x-ray mammography. These 50 patients will be involved
in the study for the limited period of time for the Phase I study. In addition
to the 50 patients, the Company received authorization from the FDA on April 3,
1997, to scan an additional 20 patients at the Company's facilities. These
patient scans will be compared against mammogrpahy and MRI. As of May 2, 1997,
the Company has scanned 15 patients at is facility and 3 patients at the Strax
Center. It is anticipated the Phase I study will take 60-90 days. After the
Phase I study is completed and the results are reviewed by the FDA, the Company
will submit its Phase II application to the FDA. The Phase II study will
encompass the establishment of 4-6 clinical sites at major hospitals in the
United States and, in addition to comparing the results to existing modalities,
the results will be compared against actual biopsies. These clinical sites will
be used to accumulate the approximately 400-500 clinical studies to be submitted
with the PMA application.
The delay between the date of approval of the IDE and the installation of
the device at the Strax Center was caused by a change in the device and the
availability of a new laser package. The change was based on technological
improvements to
<PAGE>
the laser component of the device which resulted in increased scanning
capabilities. The Company was required to submit to the FDA for approval an
amendment to the Company's existing IDE application to incorporate the changes
prior to installing the device at the Strax Center. Further, in order to submit
the amendment, the Company, at the request of the FDA, had to seek its approval
to conduct a clinical test to support the amendment. The Company received
approval for the amendment on April 3, 1997.
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 May 6, 1997, the Company had 31 employees, 20 of whom devote the
majority of their time to scientific and product research and development.
Facilities
The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000 sq. ft.
building located on a 5 acre landscaped tract. The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from hardware components
that will be made by vendors to Company specifications. The software components
of the device are developed by Company.
Legal Proceedings
The Company has no legal proceedings.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the over-the-counter bulletin
board market. There has been trading in the Company's Common Stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high and low trade prices for the Common Stock, as
reported on the OTC
<PAGE>
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
March/1997 $4.12 $2.43
On May 6, 1997, the closing trade price of the Common Stock as reported on
the OTC Bulletin Board was $2.75. As of such date, there were approximately 568
holders of record of the Company's Common Stock.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends with respect
to its capital stock, and the current policy of the Board of Directors is to
retain any earnings to provide for the growth of the Company. Consequently, no
cash dividends are expected to be paid on the Company's Common Stock in the
foreseeable future.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
Statement of Operations Data
SIX MONTHS FROM FROM
INCEPTION YEARS ENDED INCEPTION INCEPTION
DECEMBER 31, JUNE 30, (12/10/93)TO (12/10/93)TO
1996 1995 1996 1995 JUNE 30, 1994 DECEMBER 31, 1996
---- ---- ---- ---- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses:
Research/Development 179,725 1,167 829,771 32,616 23,118 1,065,230
Compensation/Benefits
Admin./eng. 582,238 256,138 1,217,731 252,947 - 2,052,916
Research/Dev. 297,780 94,460 239,669 111,956 - 649,405
Advertising/Promotion 102,229 77,437 234,765 105,177 442,171
General/Adm. 275,472 55,108 297,229 59,898 19,505 652,104
Clinical expenses 11,852 170,754 182,606
Consulting expenses 37,420 72,333 303,080 88,219 10,150 438,869
Insurance Costs 59,144 11,016 34,097 10,410 448 104,099
Professional fees 65,672 22,205 181,644 48,136 295,452
Stockholder Exp. 23,373 23,373
Travel/Subsistence 86,948 45,078 99,826 50,189 236,963
Trade show expenses 114,796 27,389 85,623 48,871 249,290
Rent expense 36,506 23,850 91,123 33,853 7,650 169,132
Depreciation/Amm. 177,586 55,863 155,346 46,632 3,545 383,109
Interest expense 391 46 21,774 2,535 24,700
Amm. Def. Comp/ 78,750 173,438 232,500 114,375 425,625
Interest Income (51,417) (58,308) (109,725)
------------------------------------------------------------------------------
2,078,465 915,528 4,014,183 974,720 66,951 7,134,319
Net Loss (2,078,465)(915,528) (4,014,183)(974,720) (66,951) (7,134,319)
Dividends on cumulative
preferred stock:
From Discount at Issue 714,155 998,400 1,712,555
Earned 28,469 47,845 76,314
Net loss applicable to
common shareholders $(2,821,089)$(915,528) $(5,060,428) $(974,720) $(66,951) $(8,923,188)
Net loss per
common share $(.11) $(.049) $(.237) $(.058) $(.011) $(.458)
Weighted avg. no.
of common shares 23,820,035 18,870,569 21,354,155 16,881,230 6,288,887 19,344,642
BALANCE SHEET DATA
DECEMBER 31, JUNE 30,
1996 1996 1995 1994(1)
----------- --------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents
short term investments $3,885,509 $3,975,354 $16,059 8,898
Prototype Equipment 937,562 575,338 270,375 -
Property and equipment, net 3,868,698 1,050,194 285,976 147,386
Total Assets 8,712,457 5,669,796 623,674 154,154
Deficit accumulated during
development stage (6,785,008) (4,756,824)(927,296) (66,951)
Total stockholders
equity (deficit) 8,165,260 5,385,213 490,441 154,154
</TABLE>
(1)On April 14, 1994, Alkan Corp., the predecessor corporation, issued
51,000,000 shares of its common stock in exchange for all of the issued and
outstanding stock of all of the shareholders of Imaging Diagnostic Systems, Inc.
The transaction was accounted for as a reverse merger in accordance with
Accounting Principles Board Opinion #16, wherein the shareholders of Imaging
Diagnostic Systems, Inc. will own 51% of the outstanding stock of Alkan Corp.
after the merger. As part of the transaction, the certificate of incorporation
of Alkan Corp. was also amended to change its name to Imaging Diagnostic
Systems, Inc. Alkan Corp. had a fiscal year end of October 31. Accordingly, the
periods are reflective of that fact and the change of the fiscal year end to
June 30.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems, Inc.
(the "Company") has been engaged in research and development associated with its
cancer detection technology. As a developmental stage company, the Company has
incurred net losses since inception through December 31, 1996 of approximately
$6,785,008. The Company expects operating losses will continue for at least the
next few years as total costs and expenses increase due principally to increased
marketing and manufacturing expenses associated with the anticipated
commercialization of the Computed Tomography Laser Mammography (CTLM/trademark/)
device, development of, and clinical trials for, the proposed CTLM device and
other research and development activities.
To date, the Company has not marketed, or generated revenues from the
commercialization of, any products. The Company's results may vary significantly
from period to period depending on several factors, such as the timing of
certain expenses and the progress of the Company's research and development and
commercialization programs, all of which may be affected by the availability of
funds.
Results of Operations
Twelve Months Ended June 30, 1996, June 30, 1995, Date of Inception (December
10, 1993) to June 30, 1994, and six months ended December 31, 1996 and December
31, 1995.
General and administrative expenses during the twelve months ended June
30, 1996, were $331,326 representing an increase of $261,018 from $70,308 during
the twelve months ended June 30, 1995, and an increase of $311,373 from $19,953
during the date of inception through June 30, 1994. Further, during the six
month period ended December 31, 1996, general and administrative expenses were
$275,472, an increase of $220,364 from $55,108 during the six month period
ending December 31, 1995. These increases were primarily due to an expansion of
the general operations of the Company associated with hiring additional
personnel and an increase in the size of the facilities.
Compensation and related benefits during the twelve months ended June 30,
1996, were $1,356,733 representing an increase of $1,042,163 from $314,570
during the twelve months ended June 30, 1995, and an increase of $1,356,733 from
no compensation being paid during the date of inception through June 30, 1994.
<PAGE>
Further, during the six month period ended December 31, 1996, compensation and
related benefits were $880,018, an increase of $529,420 from $350,598 during the
six month period ending December 31, 1995. These increases were primarily due to
an increase in compensation expense as a result of the hiring of 26 employees
and the vesting of options by executives pursuant to the Company's compensatory
non-qualified stock option plan which was terminated effective July 1, 1996.
Research and development expenses during the twelve months ended June 30,
1996 were $829,771, representing an increase of $797,155 from $32,616 during the
twelve months ended June 30, 1995, and an increase of $806,653 from $23,118
during the date of inception through June 30, 1994. Further, during the six
month period ended December 31, 1996, research and development expenses were
$179,725 an increase of $178,558 from $1,167 during the six month period ending
December 31, 1995. This increase is due to an increase in the development of the
Computed Tomography Laser Mammography (CTLM/trademark/) device.
During the six months ended December 31, 1996, there was a decline in
research and development expenses, compensation/benefits, consulting services,
professional fees, and clinical expenses, and an increase in
general/administrative expenses, travel, and trade show expenses. During the
later part of the calendar year the Company focuses its energies on the
Radiological Society of North America science exhibition which is held during
the end of November and beginning of December each year. Accordingly, travel and
trade show expenses will increase and other expenses associated with development
will decrease. General and administrative expenses increased because of the
recent purchase of the facility. There has also been an increase for the year
ended June 30, 1996 for clinical expenses, consulting expenses, and professional
fees. These expenses have increased as a result of the beginning of the
Company's Phase I study, reliance on outside consults for non-software expertise
associated with the device, and legal fees associated with capital raising and
accounting.
Balance Sheet Data
Liquidity and Capital Resources
The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $12,876,000. In
March, 1996 the Company received net proceeds of approximately $3,600,000 from
the private placement of its Series A Convertible Preferred Stock offering,
approximately $1,600,000 from the private placement of its common stock pursuant
to Regulation S of the Securities Act of
<PAGE>
1933, as amended, and approximately $2,000,000 from the exercise of
options that were granted for services rendered. In December, 1996 the Company
received net proceeds of approximately $4,500,000 from the private placement of
Series B Convertible Preferred Stock and Warrants pursuant to Regulation D and
Section 4(2) of the Securities Act of 1933, as amended.
The Company's combined cash and cash equivalents totaled $3,886,509 at
December 31, 1996, representing an increase of $3,870,000 from $16,059 at June
30, 1995, and a negligible decrease of $105,354 from $3,975,354 on June 30,
1996.
The 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. The predecessor accounting
firm had issued
<PAGE>
an unqualified opinion on the financial statements through June
30, 1994, and this change is only as a result of the dissolution of the
predecessor accounting firm. The appointment of Margolies and Fink, Certified
Pubic Accountants was approved by the Board of Directors, and there were no
disagreements as to the accounting practices or principles between the Company
and the predecessor accounting firm that would need to be disclosed.
DIRECTORS AND EXECUTIVE OFFICERS
RICHARD J. GRABLE, 54
Chief Executive Officer and Director. Mr. Grable was a director of the
Company for 1994/1995, 1995/1996, and was elected for 1996/1997.
From March, 1994, to the Present: Mr. Grable is Chief Executive Officer
and a Director of Imaging Diagnostic Systems, Inc., Plantation, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily responsible
for the development of the CTLM/trademark/ device.
From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Fla., a
manufacturer of breast imaging systems.
From March, 1992, to December, 1993: Mr. Grable was a an engineering
consultant for Lintronics Technologies, Inc., Tampa, Fla., a manufacturer of
breast imaging systems.
From August, 1991 to February, 1992: Mr. Grable was an engineering
consultant for Audio Intelligence Devices, Inc., Ft. Lauderdale, Fla., a
manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant
for Telmed, Inc., Ft. Lauderdale, Fla., a software and electronic design
company.
LINDA B. GRABLE, 58
President and Chairman of the Board of Directors. Mrs. Grable was a
director of the Company for 1994/1995, 1995/1996 and was elected for 1996/1997.
From March, 1994, to Present: Mrs. Grable is President and a Director of
Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer of diagnostic
imaging systems.
From September, 1991, to February, 1994: Mrs. Grable was President and
Director of VCC Communications, Inc., Tampa, Fla., a manufacturer of voltage
controlled oscillators (VCO).
From August, 1988, to April, 1991: Mrs. Grable was President of Lintronics
International Ltd., Inc., Plantation, Fla., a manufacturer of breast imaging
systems.
<PAGE>
ALLAN L. SCHWARTZ, 55
Executive Vice-President, Chief Financial Officer and Director. Mr.
Schwartz was a director of the Company for 1994/1995, 1995/1996, and was elected
for 1996/1997.
From March, 1994, to Present: Mr. Schwartz is Executive Vice-President and
Chief Financial Officer of Imaging Diagnostic Systems, Inc., Plantation, Fla., a
manufacturer of diagnostic imaging systems.
From April, 1993, to February, 1994: Mr. Schwartz was President and
Director of DynaMed Technologies, Inc., Coral Springs, Florida, a company that
developed neural network software for use with laser imaging systems and medical
managed care software.
From August, 1991, to April, 1993: Mr. Schwartz was President and Director
of Tron Industries, Inc., North Lauderdale, Florida, a developer of low voltage
neon novelty products.
From April, 1991, to July, 1991: Mr. Schwartz worked as a manufacturing
consultant for SE Enterprises, Miami, Fla., a manufacturer of prototype homes.
PETER S. KNEZEVICH, 40
From April, 1995, to Present: Mr. Knezevich is General Counsel and Vice
President for Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer
of diagnostic imaging systems.
From May, 1994, to April 1995: Mr. Knezevich was in the private practice
of law.
From April, 1991, to May, 1994: Mr. Knezevich practiced law with the law
firm of Ferrell & Fertel located in Miami, Florida.
ROBERT H. WAKE, 48
From April, 1995, to Present: Mr. Wake is Director of Engineering for
Imaging Diagnostic Systems, Inc., Plantation, Fla., a manufacturer of diagnostic
imaging systems.
From January, 1994, to March, 1995: Mr. Wake was a consultant to various
companies in 3-D computer imaging. From October, 1986, to December, 1993: Mr.
Wake founded and was President of Reality Imaging Corporation, Solon, Ohio, a
manufacturer of 3-D computer imaging systems. Mr. Wake invented the Voxel
Flinger 3-D imaging technology.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's outstanding
stock. Both
<PAGE>
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.
<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
</TABLE>
(1) Salary includes the following amounts which had accrued as of fiscal year
end 1995 and which were paid in fiscal year 1996: $20,000, Richard J. Grable;
$20,000, Allan L. Schwartz; and, $13,000, Linda B. Grable.
The following table sets forth certain information concerning grants of
options to purchase Common Stock to the Named Executive Officers during the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
VALUE AT ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/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
</TABLE>
<PAGE>
(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.
(3)Pursuant to an employment agreement dated July 4, 1994, Mrs. Grable was
granted an option to purchase 250,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mrs. Grable was granted an option to purchase 107,527
shares of Common Stock pursuant to the Company's incentive stock option plan.
(4)Pursuant to an employment agreement dated July 4, 1994, Mr. Schwartz was
granted an option to purchase 250,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mr. Schwartz was granted an option to purchase 107,527
shares of Common Stock pursuant to the Company's incentive stock option plan.
(5)Pursuant to an option agreement dated June 8, 1994, Mr. Knezevich was granted
an option to purchase 150,000 Common Shares pursuant to the Company's
non-qualified stock option plan vesting one year from the grant date. This plan
was terminated effective July 1, 1996, for officers and directors. Additionally,
on September 1, 1996, Mr. Knezevich was granted an option to purchase 119,047
shares of Common Stock pursuant to the Company's incentive stock option plan.
The following table sets forth certain information concerning the number
and value of securities underlying exercisable and unexercisable stock options
as of the fiscal year ended June 30, 1996 by the Name Executive Officers.
<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
<PAGE>
the employment agreements, the annual salaries during the Company's development
stage are as follows: Richard J. Grable: $250,000; Linda B. Grable: $78,000;
and, Allan L. Schwartz: $104,000. During the Company's operational stage the
salaries will be: Richard J. Grable: $250,000; Linda B. Grable: $78,000, plus 3%
of gross sales; and, Allan L. Schwartz: $156,000. In addition, each employment
agreement provides for bonuses, health insurance, car allowance, and related
benefits. The bonuses are 5% of the adjusted consolidated net earnings of the
Company; no bonuses have been paid. Richard J. Grable receives a royalty bonus
based on sales of the CTLM device. The royalty bonus was granted to Mr. Grable
because he is primarily responsible for the inventing and development of the
CTLM device. For the first $1 million in sales Mr. Grable will receive a bonus
of 2.5% of the gross sales, and for each $1 million increase to $4 million will
receive an additional .5%. From $4 million to $10 million he will receive 4%;
and, 5% in excess of $10 million. The Company entered into a two year employment
agreement with Peter S. Knezevich on April 1, 1995, who was made a Vice
President of the Company on September 18, 1995. The agreement currently provides
for a salary of $85,000 per year plus the right to participate in the Company's
incentive stock option plan and non-qualified stock option plan.
Stock Option Plans
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1996, all of the executive officers are participants in this plan. The Company's
non-qualified stock option plan with respect to the officers was terminated
effective July 1, 1996.
Security Ownership of Certain Beneficial Owners and Management
The following table provides information regarding beneficial ownership of
the Company's common stock as of March 31, 1997, 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.
<PAGE>
NAME AND ADDRESS NUMBER OF SHARES OWNED % OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY (1)(2) SHARES OF COMMON STOCK
- ------------------- ---------------------- ----------------------
Richard J. Grable 9,385,713(3) 38%
Chief Executive Officer
and Director
c/o 6531 NW 18th Court
Plantation, FL 33313
Linda B. Grable 9,385,713(4) 38%
President and Director
c/o 6531 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 3,890,330(5) 16%
Chief Financial Officer
and Director
c/o 6531 NW 18th Court
Plantation, FL 33313
Peter S. Knezevich 263,657(6) 1%
Vice President and
General Counsel
c/o 6531 NW 18th Court
Plantation, FL 33313
All officers and directors 13,539,700 55%
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 24,462,584 shares of Common Stock
outstanding as of March 31, 1997. Shares of Common Stock subject to stock
options that are exercisable within 60 days as of March 31, 1996 are deemed
outstanding for computing the percentage of any other person or group.
(3)Includes 22,883 shares subject to options and 4,320,315 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 5,042,515 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership.
(5)Includes 130,350 shares subject to options and 5,000 shares owned by the wife
of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6)Includes 12,225 shares subject to options.
Certain Relationships and Related Transactions
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of majority voting power of the Company's outstanding
common stock.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 1-2
FINANCIAL STATEMENTS:
Balance Sheet F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity F - 5-7
Statements of Cash Flows F - 8-9
Notes to Financial Statements F - 10-26
<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 8,499 -- --
Stockholder loans -- 77,833 48,773
------------ ------------
Total current liabilities 506,048 283,583 133,233
------------ ------------ ------------
Long-term capital lease obligations 41,149 -- --
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series A), 5% cumulative annual
dividend, no par value; authorized 4,000 shares, issued and
outstanding 0, 2,400 and 0 shares, respectively -- 2,160,000 --
Convertible preferred stock (Series B), 7% cumulative annual
dividend, no par value; authorized 450 shares, issued and
outstanding 450, 0 and 0 shares, respectively 4,500,000 -- --
Common stock, no par value; authorized 48,000,000 shares,
issued 24,273,520, 23,023,789 and 18,616,713, respectively 13,012,962 9,941,066 2,002,238
Additional paid-in capital 1,426,952 1,372,540 672,833
Deficit accumulated during the development stage (10,553,470) (7,793,084) (1,153,387)
------------ ------------ ------------
8,386,444 5,680,522 1,521,684
Less: subscriptions receivable (24,309) (18,684) (523,118)
deferred compensation (196,875) (275,625) (508,125)
------------ ------------ ------------
Total stockholders' equity 8,165,260 5,386,213 490,441
------------ ------------ ------------
$ 8,712,457 $ 5,669,796 $ 623,674
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
1996 1995 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 582,238 256,138 1,217,731 252,947
Research and development 297,780 94,460 239,669 111,956
Research and development expenses 179,725 1,167 1,106,524 32,616
Advertising and promotion expenses 102,229 77,437 272,698 105,177
Selling, general and
administrative expenses 275,472 55,108 297,229 59,898
Clinical expenses 11,852 -- 317,310 --
Consulting expenses 37,420 72,333 832,075 109,319
Insurance costs 59,144 11,016 34,097 10,410
Professional fees 65,672 22,205 630,284 88,419
Stockholder expenses 23,373 -- -- --
Trade show expenses 114,796 27,389 85,623 48,871
Travel and subsistence costs 86,948 45,078 99,826 50,189
Rent expense 36,506 23,850 130,848 33,853
Interest expense 391 46 -- 21,774
Depreciation and amortization 177,586 55,863 155,346 46,632
Amortization of deferred compensation 78,750 173,438 232,500 114,375
Interest income (51,417) -- (58,308) --
----------- ----------- ---------- ----------
2,078,465 915,528 5,593,452 1,086,436
----------- ----------- ---------- ----------
Net loss (2,078,465) (915,528) (5,593,452) (1,086,436)
Dividends on cumulative preferred stock:
From discount at issuance (714,155) -- (998,400) --
Earned (28,469) -- (47,845) --
Amortization of preferred stock
discount 60,703 -- -- --
----------- ----------- ---------- ----------
Net loss applicable to
common shareholders $ (2,760,386) $ (915,528) $ (6,639) (1,086,436)
============ ============ ========== ==========
Net loss per common share:
Weighted average number of
common shares 23,820,035 18,870,569 21,354,155 16,881,230
============ ============ ========== ==========
Net loss per common share $ (.12) $ (.05) $ (.31) $ (.06)
============ ============ ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Continued)
FROM FROM
INCEPTION INCEPTION
(DECEMBER 10, (DECEMBER 10,
1993) TO JUNE 30, 1993) TO
1994 DECEMBER 31, 1996
------------------ -----------------
Compensation and related benefits:
Administrative and engineering -- $ 2,052,916
Research and development -- 649,405
Research and development expenses 23,118 1,341,983
Advertising and promotion expenses -- 480,104
Selling, general and
administrative expenses 19,505 652,104
Clinical expenses -- 329,162
Consulting expenses 10,150 988,964
Insurance costs 448 104,099
Professional fees -- 784,375
Stockholder expenses -- 23,373
Trade show expenses -- 249,290
Travel and subsistence costs -- 236,963
Rent expense 7,650 208,857
Interest expense 2,535 24,700
Depreciation and amortization 3,545 383,109
Amortization of deferred compensation -- 425,625
Interest income -- (109,725)
----------- ------------
66,951 8,825,304
----------- ------------
Net loss (66,951) (8,825,304)
Dividends on cumulative preferred stock:
From discount at issuance -- (1,712,555)
Earned -- (76,314)
Amortization of preferred stock
discount -- 60,703
----------- ------------
Net loss applicable to
common shareholders (66,951) $(10,553,470)
=========== ============
Net loss per common share:
Weighted average number of
common shares 6,288,887 19,344,642
=========== ============
Net loss per common share (.01) $ (.55)
=========== ============
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 - - - - 36,500 36,500
Net loss - - - - - -
----------- --------- ---------- --------- ---------- ----------
Balance at June 30, 1994 - - - - 16,067,772 102,951
Common stock sold - - - - 1,980,791 1,566,595
Common stock issued in exchange for services - - - - 115,650 102,942
Common stock issued with employment agreement - - - - 75,000 78,750
Common stock issued for compensation - - - - 377,500 151,000
Stock options granted - - - - - -
Amortization of deferred compensation - - - - - -
Forgiveness of officers' compensation - - - - - -
Net loss - - - - - -
---------- ---------- ---------- -------- ---------- ---------
Balance at June 30, 1995 - - - - 18,616,713 2,002,238
---------- ---------- ---------- -------- ---------- ---------
(CONTINUED)
See accompanying notes to the financial statements.
F - 5
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
---------- ----------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - - - 50,000
Acquisition of public shell - - - - -
Net issuance of additional shares of stock - - - - 16,451
Common stock sold - - - - 36,500
Net loss - (66,951) - - (66,951)
-------- --------- ------- --------- --------
Balance at June 30, 1994 - (66,991) -0- - 36,000
Common stock sold - - (523,118) - 1,043,477
Common stock issued in exchange for services - - - - 102,942
Common stock issued with employment agreement - - - - 78,750
Common stock issued for compensation - - - - 151,000
Stock options granted 622,500 - - (622,500) -
Amortization of deferred compensation - - - 114,375 114,375
Forgiveness of officers' compensation 50,333 - - - 50,333
Net loss - (1,086,436) - - (1,086,436)
---------- ---------- ------- --------- ---------
Balance at June 30, 1995 672,833 (1,153,387) (523,118) (508,125) 490,441
---------- ---------- ------- --------- ---------
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
PREFERRED STOCK (SERIES A) PREFERRED STOCK (SERIES B) COMMON STOCK
------------------------ ------------------------- --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 - - - - 18,616,713 2,002,23
------- --------- -------- -------- ---------- ---------
Preferred stock sold, including dividends 4,000 3,600,000 - - - -
Common stock sold - - - - 700,471 1,561,110
Cancellation of stock subscription - - - - (410,500) (405,130)
Common stock issued in exchange for services - - - - 2,503,789 4,257,320
Common stock issued with exercise of stock option - - - - 191,500 104,375
Common stock issued with exercise of options
for compensation - - - - 996,400 567,164
Conversion of preferred stock to common stock (1,600) (1,440,000) - - 420,662 1,839,360
Common stock issued as payment of preferred
stock dividends - - - - 4,754 14,629
Dividends accrued on preferred
stock not yet converted - - - - - -
Collection of stock subscriptions - - - - - -
Amortization of deferred compensation - - - - - -
Forgiveness of officers' compensation - - - - - -
Net loss - - - - - -
------- --------- -------- -------- ---------- ---------
Balance at June 30, 1996 2,400 2,160,000 - - 23,023,789 9,941,066
------- --------- -------- -------- ---------- ---------
(CONTINUED)
See accompanying notes to the financial statements.
F - 6
<PAGE>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
---------- ----------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995
Preferred stock sold, including dividends 672,833 (1,153,387) (523,118) (508,125) 490,441
---------- ---------- --------- -------- ----------
Common stock sold
998,400 (998,400) - - 3,600,000
Cancellation of stock subscription
- - - - 1,561,110
Common stock issued in exchange for services
- - 405,130 - -
Common stock issued with exercise of
stock option - - - - 4,257,320
Common stock issued with exercise of options
for compensation - - (4,375) - 100,000
Conversion of preferred stock to common stock
- - - - 567,164
Common stock issued as payment of preferred
stock dividends (399,360) - - - -
Dividends accrued on preferred
stock not yet converted - (14,629) - - -
Collection of stock subscriptions
- (33,216) - - (33,216)
Amortization of deferred compensation
- - 103,679 - 103,679
Forgiveness of officers' compensation
- - - 232,500 232,500
Net loss
100,667 - - - 100,667
Balance at June 30, 1996 - (5,593,452) - - (5,593,452)
---------- ---------- --------- -------- ----------
1,372,540 (7,793,084) (18,684) (275,625) 5,386,213
---------- ---------- --------- -------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
PREFERRED STOCK (SERIES A) PREFERRED STOCK (SERIES B) COMMON STOCK
---------------------- ------------------------- --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,400 2,160,000 - - 23,023,789 9,941,066
----- --------- ------- --------- ---------- ---------
Preferred stock sold, including dividends - - 450 4,500,000 - -
Conversion of preferred stock to common stock (2,400) (2,160,000) - - 1,061,202 2,759,040
Common stock issued in exchange for services - - - - 31,200 90,480
Common stock issued for compensation - - - - 3,200 10,463
Common stock issued with exercise of stock 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 - - - - - -
Amortization of deferred compensation - - - - - -
Amortization of preferred stock dividend - - - - - -
Net loss - - - - - -
----- --------- ------- ----------- ---------- -----------
Balance at December 31, 1996 - $ - 450 $ 4,500,000 24,273,520 $13,012,962
===== ========= ======= =========== ========== ===========
(CONTINUED)
See accompanying notes to the financial statements.
F - 7
<PAGE>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT SUBSCRIPTIONS DEFERRED
CAPITAL STAGE RECEIVABLE COMPENSATION TOTAL
---------- ----------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 1,372,540 (7,793,084) (18,684) ( 275,625) 5,386,213
--------- ---------- -------- --------- ---------
Preferred stock sold, including dividends 714,155 (714,155) - - 4,500,000
Conversion of preferred stock to common stock (599,040) - - - -
Common stock issued in exchange for services - - - - 90,480
Common stock issued for compensation - - - - 10,463
Common stock issued with exercise of stock option - - (6,250) - -
Common stock issued with exercise of stock options,
through stock appreciation rights - - - - 156,060
Common stock issued as payment of preferred
stock dividends - (49,603) - - -
Payment of accrued dividends on converted shares - 33,216 - - 33,216
Dividends accrued on preferred
stock not yet converted - (12,082) - - (12,082)
Collection of stock subscriptions - - 625 - 625
Amortization of deferred compensation - - - 78,750 78,750
Amortization of preferred stock dividend (60,703) 60,703 - - -
Net loss - (2,078 465) - - (2,078,465)
---------- ------------ ----------- ---------- ------------
Balance at December 31, 1996 $1,426,952 $(10,553,470) $ (24,309) $ (196,875) $ 8,165,260
========== ============ =========== ========== ============
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
SIX MONTHS ENDED YEARS ENDED JUNE 30,
DECEMBER 31, -------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(2,078,465) $ (915,528) $(5,593,452) $(1,086,436)
----------- ---------- ----------- -----------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 177,586 55,863 155,346 46,632
Amortization of deferred compensation 78,750 173,438 232,500 114,375
Noncash compensation and
consulting expenses 307,231 -- 3,063,742 304,275
(Increase) decrease in loans
receivable - shareholders -- 48,600 48,600 (48,600)
(Increase) decrease in prepaid expens 5,847 -- (15,900) --
Increase in other assets 43,375 (16,006) (50,346) (1,249)
Increase in accounts payable
and accrued expenses 312,933 62,956 88,074 76,491
----------- ---------- ----------- -----------
Total adjustments 925,722 324,851 3,522,016 491,924
----------- ---------- ----------- -----------
Net cash used for operating activities (1,152,743) (590,677) (2,071,436) (594,512)
----------- ---------- ----------- -----------
Cash flows from investing activities:
Prototype equipment (362,224) (340,904) (304,963) (210,675)
Capital expenditures (2,945,801) (311,554) (908,666) (169,717)
----------- ---------- ----------- -----------
Net cash used for investing activiti (3,308,025) (652,458) (1,213,629) (380,392)
----------- ---------- ----------- -----------
Cash flows from financing activities:
Repayment of capital lease obligatio (64l) -- -- --
Proceeds from stockholder loans, net (77,833) (14,000) 29,060 (61,412)
Proceeds from issuance of preferred stock 4,500,000 -- 3,600,000 --
Preferred dividends charged to
accumulated deficit (49,603) -- (14,629) --
Proceeds from issuance of common stock -- 1,398,723 3,629,929 1,043,477
----------- ---------- ----------- -----------
Net cash provided by financing activitie 4,371,923 1,384,723 7,244,360 982,065
----------- ---------- ----------- -----------
Net increase (decrease) in cash (88,845) 141,588 3,959,295 7,161
Cash and cash equivalents at
beginning of period 3,975,354 16,059 16,059 8,898
----------- ---------- ----------- -----------
Cash and cash equivalents at
end of period $ 3,886,509 $ 157,647 $ 3,975,354 $ 16,059
=========== ========== =========== ===========
</TABLE>
(CONTINUED)
See accompanying notes to the financial statements.
F - 8
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FROM FROM
INCEPTION INCEPTION
(DECEMBER 10, (DECEMBER 10,
1993) TO JUNE 1993) TO
1994 DECEMBER 31, 1996
--------------- -----------------
<S> <C> <C>
Net loss $ (66,951) $ (8,825,304)
----------- ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 3,545 383,109
Amortization of deferred compensation -- 425,625
Noncash compensation and
consulting expenses -- 3,675,248
(Increase) decrease in loans
receivable - shareholders -- --
(Increase) decrease in prepaid expens -- (10,053)
Increase in other assets (1,415) (9,635)
Increase in accounts payable
and accrued expenses 7,969 485,467
----------- ------------
Total adjustments 10,099 4,949,761
----------- ------------
Net cash used for operating activities (56,852) (3,875,543)
----------- ------------
Cash flows from investing activities:
Prototype equipment (59,700) (937,562)
Capital expenditures (87,686) (4,111,870)
----------- ------------
Net cash used for investing activiti (147,386) (5,049,432)
----------- ------------
Cash flows from financing activities:
Repayment of capital lease obligatio -- (641)
Proceeds from stockholder loans, net 110,185 --
Proceeds from issuance of preferred stock -- 8,100,000
Preferred dividends charged to
accumulated deficit -- (64,232)
Proceeds from issuance of common stock 102,951 4,776,357
----------- ------------
Net cash provided by financing activitie 213,136 12,811,484
----------- ------------
Net increase (decrease) in cash 8,898 3,886,509
Cash and cash equivalents at
beginning of period 0 0
----------- ------------
Cash and cash equivalents at
end of period $ 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)
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
1996 1995 1996 1995
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 391 $ 21,774 $ - $ 21,774
========== ========== =========== ============
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ 90,480 $ - $ 2,487,025 $ 153,275
========== ========== =========== ============
Issuance of common stock in
exchange for property and equipmen $ - $ - $ 10,900 $ 78,750
========== ========== =========== ============
Issuance of common stock for
compensation $ 10,463 $ - $ 567,164 $ 151,000
========== ========== =========== ============
Issuance of common stock through
exercise of incentive stock optio $ 156,060 $ - $ - $ -
========== ========== =========== ============
Issuance of common stock as
payment for preferred stock dividends $ 49,603 $ - $ 14,629 $ -
========== ========== =========== ============
Acquisition of property and equipment
through the issuance of a capital
lease payable $ 50,289 $ - $ - $ -
========== ========== =========== ============
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS (CONTINUED)
FROM FROM
INCEPTION INCEPTION
(DECEMBER 10, (DECEMBER 10,
1993) TO JUNE 30, 1993) TO
1994 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 2,535 $ 24,700
============== ==========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ -- $2,730,780
============== ==========
Issuance of common stock in
exchange for property and equipmen $ -- $ 89,650
============== ==========
Issuance of common stock for
compensation $ -- $ 728,627
============== ==========
Issuance of common stock through
exercise of incentive stock optio $ -- $ 156,060
============== ==========
Issuance of common stock as
payment for preferred stock dividends $ -- $ 64,232
============== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ -- $ 50,289
============== ==========
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) BACKGROUND
The Company,("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl. was formed
on December 10, 1993.(see Note 3) Effective July 1, 1995 the Company changed its
corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial CTLM/trademark/ prototype has been developed with the use
of "Ultrafast Laser Imaging Technology"/trademark/, and this technology was
first introduced at the "RSNA" scientific assembly and conference during late
November 1994. The completed CTLM/trademark/ device was exhibited at the "RSNA"
conference November 26-30, 1995. The Company exhibited the pilot production run
CTLM/trademark/ device at the "RSNA" conference held in Chicago on December 1-6,
1996. The Company filed its initial patent application for the CTLM/trademark/
device on June 7, 1995 and has subsequently filed for foreign patent protection.
The initial CTLM/trademark/ prototype produced live images of an augmented
breast on February 23, 1995. From the experience gained with this initial
prototype, the Company continued its research and development resulting in new
hardware and software enhancements. The Food and Drug Administration (FDA)
approved calibration Investigational Device Exemption ("IDE") clinical testing
in the Company's laboratory. This phase of clinical testing was approved for a
small number of calibration scans on volunteers. At the conclusion of the
calibration studies, the Company will commence its first clinical trial at the
Strax Diagnostic Breast Institute under a Phase I - IDE application, which was
approved by the FDA on February 9, 1996. Four additional clinical sites are
planned by the end of calendar 1997.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM/trademark/ prototype is completed and finally gains Federal Drug
Administration marketing clearance, that the Company will achieve a profitable
level of operations.
(CONTINUED)
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months of less and investment in money market funds are considered to
be cash equivalents by the Company.
(c) Prototype equipment
The direct costs associated with the final CTLM/trademark/ prototypes
have been capitalized. On June 17, 1996 the Company's Director of
Research and Development and the Director of Engineering decided to
discontinue with the development of the then current generation
proprietary scanner and data collection system (components of the
prototype CTLM/trademark/ device) and to begin development of a third
generation scanner and data collection system. As a result, certain
items amounting to $677,395 were reclassified as follows: $512,453 as
research and development expense and $164,941 as computer and lab
equipment. The costs associated with the completed prototype units
placed at clinical test locations will be transferred to clinical
equipment at their historical cost. The prototype costs will be
amortized over a period of two years upon placement of the equipment at
the clinical testing locations.
(d) Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. CTLM/trademark/ software development
costs incurred with outside consultants have been capitalized at cost.
Once the final CTLM/trademark/ is available for sale, the software
upgrades will be expensed in the period incurred. Depreciation and
amortization are computed using straight-line methods over the
estimated useful lives of the related assets.
(CONTINUED)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Research and Development
Research and development expenses consist principally of expenditures
for equipment which are used in testing and the development of the
Company's prototypes and compensation to specific company personnel.
The non-payroll related expenses include testing at outside
laboratories, parts associated with the design of initial components
and tooling costs, and other costs which do not remain with the
developed CTLM/trademark/ prototype. All research and development costs
are expensed as incurred.
(f) Net loss per share
Net loss per share of common stock is computed by dividing the net loss
applicable to common shareholders by the weighted average number of
common shares outstanding and common stock equivalents. Stock options
and the convertible preferred stock are considered common stock
equivalents unless their inclusion would be anti-dilutive.
(g) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in
the year that includes the enactment date.
(h) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(CONTINUED)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represents the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(4) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. In addition, management has been able
to raise the necessary capital to reach this stage of product development and
has been able to fund any capital requirements to date. There is no assurance
that once the development of the CTLM/trademark/ prototype is completed and
finally gains Federal Drug Administration marketing clearance, that the Company
will achieve a profitable level of operations.
(CONTINUED)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------------------
1996 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Furniture and fixtures $ 199,777 $ 28,199 $ 13,555
Building and land 1,971,242 - -
Clinical equipment 250,000 - -
Computers and equipment 271,175 164,270 85,194
CTLM/trademark/ software costs 1,222,624 789,668 190,523
Trade show equipment 140,159 81,416 23,490
Laboratory equipment 158,423 153,758 -
Leasehold improvements - 38,407 23,391
------------- ------------- -----------
4,213,400 1,255,718 336,153
Less: accumulated depreciation (344,702) (205,524) (50,177)
------------- ------------- -----------
Total $ 3,868,698 $ 1,050,194 $ 285,976
============= ============= ===========
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM/trademark/ software costs 5 years
Leasehold improvements Length of lease (1 year)
</TABLE>
(CONTINUED)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT (CONTINUED)
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM/trademark/ software at December 31, 1996, June 30, 1996 and 1995 are
$1,004,757, $672,416 and $171,216, respectively, which represents the net
realizable value of the CTLM/trademark/ software at the end of each period
presented. Amortization expense related to the CTLM/trademark/ 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
=========
(7) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Deposit on purchase of new building $ - $ 50,000 $ -
Security deposits 9,635 3,010 2,664
------------ ----------- -----------
Totals $ 9,635 $ 53,010 $ 2,664
============ -========== ===========
</TABLE>
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.
(CONTINUED)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1995
-------------- ---------- ---------
<S> <C> <C> <C>
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
============== ========== =========
</TABLE>
(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:
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
===--=====
(CONTINUED)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) LEASES (CONTINUED)
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
========
(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 $6,609,000 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 $2,247,000, $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 $708,500.
(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.
(CONTINUED)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
The holders of the Series A Preferred Stock may convert up to 50% prior to May
28, 1996, and may convert their remaining shares subsequent to May 28, 1996
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
Preferred Stock will receive shares determined by dividing (I) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
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 Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) 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 A 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 A 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
A 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 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.
(CONTINUED)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
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 - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. The Company has
an escrow agent as custodian for these unpaid shares. During the year ended June
30, 1996, 410,500 shares of the common stock related to these receivables were
canceled and $103,679 was collected on the receivable. The unpaid balance on
these original sales of common stock 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 $102,943, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
During the year ended June 30, 1995, the wages accrued to the officers of the
Company in the amount of $151,000, was satisfied with the issuance of 377,500
shares of restricted common stock. Compensation expenses had been charged during
the fiscal year pursuant to the employment agreements with the officers. In
addition, during the year ended June 30, 1995, 75,000 shares of restricted
common stock were issued to a company executive pursuant to the employment
agreement with this executive. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(CONTINUED)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) COMMON STOCK (CONTINUED)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) 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 $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded for the at the excess of the fair market value of
the transaction over the exercise price for each of the transactions.
As of December 31, 1996, there were a total of 1,486,618 shares of common stock
issued as a result of the conversion of the Series A Convertible Preferred Stock
and the related accumulated dividends.
(See Note 11)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock options and were exercised
in a "cash-less" transaction, resulting in compensation to the officers of
$567,164. Compensation cost was measured as the excess of fair market value of
the shares received over the value of the SAR shares tendered in the
transaction. The excess of fair market value at July 15, 1995 approximated $.57
per share on the 996,400 shares issued.
During the six months ended December 31, 1996, the Company issued a total of
188,529 shares ($312,856) of its common stock as a result of the following:
1. Services rendered by independent consultants in exchange for 31,200
shares. Research and development expenses of $90,480 was charged as the
fair market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees,
3,200 shares. Compensation expense of $10,463 was charged as the fair
market value at that date was $3.27 per share.
3. Exercise of incentive stock options, 133,369 shares ($162,310).
4. Payment of preferred stock dividends on the Series A Preferred Stock,
20,760 shares ($49,603).
(CONTINUED)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan, an officer may be
granted non-qualified options to purchase shares of common stock over the next
five calendar years, at a minimum of 250,000 shares per calendar year. The
exercise price shall be thirty-five percent of the fair market value at the date
of exercise. On July 5, 1995 the Board of Directors authorized an amendment to
the Plan to provide that upon exercise of the option, the payment for the shares
exercised under the option may be made in whole or in part with shares of the
same class of stock. The shares to be delivered for payment would be valued at
the fair market value of the stock on the day preceding the date of exercise.
The portion of the plan applicable to the officers of the Company was terminated
effective July 1, 1996.
The incentive stock option plan was approved by the Board of Directors and
adopted by the shareholders at the March 29, 1995 annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.
The Company records the discount from fair market value on the non-qualified
stock options as a charge to deferred compensation at the date of grant of grant
and credits additional paid-in capital. The compensation is amortized to income
over the vesting period of the options.
(CONTINUED)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
-------------------------------- --------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
----------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 71,429 $ 1.40 2,250,000 (1)
Exercised - -
---------- ------------
Outstanding at June 30, 1995 71,429 $ 1.40 2,250,000
Granted 782,563 $ .81 - 8.16 -
Exercised (164,956) $ 1.25 (1,550,831) $ .35 - 1.18
---------- ------------
Outstanding at June 30, 1996 689,036 $ .81 - 8.16 699,169 (1)
Granted 202,434 $ 2.56 - 4.37 -
Exercised (167,964) (2) -
Canceled - (399,169) (3)
---------- ------------
Outstanding at December 31, 1996 723,506 $ .81 - 8.16 300,000 (1)
========== ============
</TABLE>
(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 167,964 options that were exercised during the six
months ended December 31, 1996, 5,000 of these option were incentive
stock options exercised by one of the employees at $1.25. (The
incentive options were granted on September 20, 1995 at fair market
value, no compensation was recorded.) The remaining 162,964 options
were exercised by officers of the Company pursuant to their Stock
Appreciation Rights, and they acquired a total of 128,369 shares of
common stock. A charge to compensation expense of $156,060, for the
fair value of the common stock issued in excess of the exercise price,
was made during the period
(3) The remaining nonqualified options which were granted and not
exercised by the officers of the Company have been canceled and that
plan, with respect to the officers, was terminated effective July 1,
1996.
(CONTINUED)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
At December 31, 1996 477,004 of the incentive stock options were vested and
exercisable and the 300,000 non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding.
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase 1,500,000 shares of common stock at 35% of the fair
market value at the date of exercise. Compensation expense of $567,164 was
recorded during the year ended June 30, 1994 as a result of the discount
from the market value at the date of exercise.
On November 7, 1994, the Company granted 300,000 non-qualified options to
its general counsel, currently a vice-president of the Company, at an
exercise price of $0.50 per share. Deferred compensation of $150,000 was
recorded on the transaction and is being amortized over the vesting period.
The options were all exercised as of December 31, 1996.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per
year, or a total of 450,000 shares, during the period March 30, 1995 and
ending March 31, 1998. The exercise price shall be $0.35 per share. The
options do not "vest" until one year from the anniversary date. Deferred
compensation of $472,500 was recorded on the transaction and is being
amortized over the vesting period. The Company also granted the individual,
incentive options to purchase 71,429 shares of common stock at an exercise
price of $1.40 per share. The options expire on March 30, 1998.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise
price of $0.93 per share (110% of the fair market value). The options expire
on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per
share. The options expire on September 1, 2000.
(CONTINUED)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 340,935 shares of
common stock at prices ranging from $0.81 to $8.18. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise
price of $4.37 per share (110% of the fair market value). The options expire
on July 4, 1998.
At various dates during the six months ended December 31, 1996, the Company
issued to various employees incentive options to purchase 133,785 shares of
common stock at prices ranging from $2.56 to $3.81. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
(14) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at December
31, 1996 was $3,869,000.
(15) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $78,000, and $104,000, respectively.
(CONTINUED)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000, or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months. On April 1, 1995, the Company entered into a two year
agreement with its vice-president and general counsel, and provides for annual
compensation of $85,000.
As additional consideration for his development efforts in the CTLM/trademark/
prototype, the chief executive officer has been granted a "development royalty"
which will be paid based upon the net foreign and domestic sales, after direct
costs and commissions, of the CTLM/trademark/ device. The royalty percent ranges
from 2.5% to a maximum of 5%, based upon varying levels of gross sales.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The contract
also provided for the issuance of 75,000 restricted shares of the Company's
common stock. Compensation expense ($1.05 per share), in the amount of $78,750
was recorded on the transaction.
During the six months ended December 31, 1996 and the year ended June 30, 1996,
employment agreements were initiated with individuals in management positions
within the Company. Annual payments for compensation under these agreements
amount to $219,000 and $357,000, respectively, in the aggregate.
On July 1, 1996, the Company entered into a "Re-Seller Agreement" with an
organization located in Italy, for the sole purpose of providing the
organization with exclusive distribution rights within the three countries
defined by the agreement. The term of this agreement shall be for twenty-nine
months, and the Company and Distributor agree to renew the agreement for an
additional two years if the Distributor makes purchases of the CTLM/trademark/
device in an aggregate amount of at least four million U.S. dollars ($4,000,000)
during the Initial Term of this agreement.
F - 26
<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............................... $6,000
Miscellaneous.................................... $3,000
Item 14. Indemnification of Directors and Officers.
Article VII of the Company's Articles of Incorporation authorizes the
Company to indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing 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 are the individuals who purchased the shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Eleanor R. Cohen John & Elpiniki White Maitland Inc.
Karl J. Hagedon, Jr. William L. Merrill, Jr. Cara E. Sherman
Harold & Carole Lovitz Leonard & Ida Vann Jack Roque
Joyce L. Sulecki Carolyn Wachtel Susan Steinfeld
Karl J. Hagedon Jr. Jeffrey & Ronda Robins William C. Martuge
Patricia A. Gandee Norma Visco David Fingerman
Eileen Abrams Steven M. Zanville Gary Scherer
Emil & Lois Mack Larry W. Kusch Trust Daniel & Peggy Sherman
Leonard S. Parker Jack Fallon John F. Maitland
Dennis Wiltshire Irwin S. Shayne Peter S. Knezevich
Alan E. & Peggy L. Carr Corrine & Charles Button Joseph Gray
Sidney & Thelma Parks DeDe Button & Carrole Koukos D & Wm Button
Marvin & Laurie Stein John M. White D Button & D Darazs
Cecile Shaheen Steven J. Orlando A.S. Quality Inc.
John P. Lennon, Jr. Debra Brandt Jay & Diana Gootee
David Kavalin John Tate Anthony Gootee
Penny S. Nurnberg Rickie & Donna Scherer Robert & Shirley Bornstein
Eric Newmark Patricia A. Gandee Stanley B. Fineberg
Stephen D. Parker Martin G. Breiter Thomas Evans
Adrienne Lipschitz George D. Kissinger Ronald & Mary Jane O'Brien
Pearl Tragash Terry A. Julie S. Zobel Timothy O'Brien
Barbara S. Arkon Paul Splane Dean & Patti Blanchette
Morris Taubman, Jr. Larry D. & Lisa Caplinger Robert E. Wiltshire
Roslyn Kovacs Steven Held George R. Dutton Jr.
Chris Jaska Jack T. Roque Shirley C. Martin
Leonard Koenigsberg Paul N. Rousseau
II-2
<PAGE>
Howard Schlessman Edward T. & Jean M. Shea EG & Barbara L. Kruse
Leandro J. Obenauer Charlie E. Coltrin Joseph Francella
Mark Schultz Jeffrey A. Johnson Trishia Grable
Ron Geraci Jorge Bravo Jr. Edith Wien
George Simon Ronald Scavron
</TABLE>
Of the foregoing individuals, Peter S. Knezevich received securities in excahnge
for non-cash consideration. As outside counsel to the Company he received
securities in exchange for legal services. The legal services did not include
documentation relative to the exempt offering. Mr. Knezevich billed the Company
at an hourly rate and received stock in lieu of cash compensation.
The following sales of unregistered securities occurred pursuant to Rule
701 of the Securities Act of 1933, as amended. Pursuant to Rule 701, an issuer
that is not subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, may issue unregistered securities
to employees, advisors and consultants, under compensatory benefit plans and
written contracts relating to compensation. Further, Rule 701 permits a company
to adopt stock option and purchase programs for employees, consultants and
advisors. Bona fide services must be rendered by advisors and consultants.
However, such services must not be in connection with the offer and sale of
securities in capital raising transaction, or pursuant to written contract
relating to the compensation of such persons.
1) On October 10, 1994, the Company issued 20,000 shares of common
stock pursuant to Rule 701. The shares were issued in exchange for bona fide
insurance services actually rendered pursuant to a written agreement relating to
compensation. The services rendered were not in connection with the offer and
sale of securities in a capital raising transaction. Dean Fulton was issued
securities in exchange for cash compensation of $5,000 and non-cash compensation
for insurance consulting services based on an hourly rate. When the services
were rendered the Company was not a reporting company and the common stock was
trading at approximately $.75 a share.
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. Peter S. Knezevich was issued securities in exchange for non-cash
consideration. As outside counsel to the
II-3
<PAGE>
Company he received securities in exchange for legal services. The legal
services did not include documentation relative to the exempt offering. Mr.
Knezevich billed the Company at an hourly rate and received stock in lieu of
cash compensation.
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. The
following four (4) individuals received 5,000 shares of common stock each:
Joseph Sardano, Donald Parker, Carolyn Schwartz, and Jerri Jones. As opposed to
cash compensation, the Company compensated the foregoing individuals with common
stock. The stock was issued in lieu of paying the individuals approximately
$500.00 a day for attending the Radiological Society of North America Science
Exhibition for 5 days. When the services were rendered the Company was not a
reporting company and the common stock was trading at approximately $.75 a
share.
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. The shares were issued to Mark Schultz. Mr. Schultz
prepared analyst reports and articles on the Company. The services were valued
at approximately $20,000. When the services were rendered the Company was not a
reporting company and the common stock was trading at approximately $.75 a
share.
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 for services actually rendered by the principal officers of the
Company pursuant to written employment agreements. These shares were issued to
Richard J. Grable, Linda B. Grable, and Allan L. Schwartz for compensation. The
total amount of consideration received by the Company was $151,000 as accrued
wages outstanding.
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 concerning the locating of clinical sites actually rendered
pursuant to a
II-4
<PAGE>
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. The shares were sold to
Steven Cohen.
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 shares were issued to Robert H. Wake who is now
the Company's Director of Engineering. Prior to being hired, Mr. Wake provided
invaluable consulting services concerning the hardware and software
configuration of the device. It is difficult to ascertain the dollar amount of
consideration considering the nature of the service rendered, but it is at least
valued at $75,000.
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. The shares were issued to Vincenza Corp.
Ltd.
2) On February 21, 1996, the Company issued 400,471 shares of common
stock for $924,998 pursuant to Regulation S. The shares were issued to Vincenza
Corp. Ltd.
3) On February 26, 1996, the Company issued 300,000 shares of common
stock for $637,500 pursuant to Regulation S. The shares were issued to Anderose
Ltd.
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. 2,000
shares were issued to Newsun Ltd. for $2,000,000; and, 2000 shares were issued
to Karle Ltd. for $2,000,000.
II-5
<PAGE>
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 and warrants to purchase
112,500 shares of common stock at $5.00 per share. Both were issued pursuant to
Regulation D and Section 4(2). 315 shares of preferred and 78,750 were issued to
Goodland International Investments Limited for $3,150,000; and, 135 shares of
preferred and 33,750 warrants were issued to Weyburn Overseas Limited for
$1,350,000
2) On March 6, 1997, the Company issued to Arcadia Importers &
Exporters, S.A. 500 shares of Series C Convertible Preferred stock for
$5,000,000 pursuant to Regulation D and Section 4(2) of which $2,500,000
was funded at the closing of the transaction. On April 17, 1997, the
Company and the Series C Holder mutually rescinded the private placement
transaction. The Company returned the proceeds to the Series C Holders and
the Series C Preferred was returned to the Company. See Exhibit 99.3,
below.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
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).
II-6
<PAGE>
3.(i).8 Amendment to Articles of
Incorporation (Designation of Series
C Convertible Preferred Shares).
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).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).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.
4.1 Instruments Defining the Rights of
Security Holders - Designation of
Series A Convertible Preferred
Shares.(See Exhibit 3.(i).6, above).
4.2 Instruments Defining the Rights of
Security Holders - Designation of
Series B Convertible Preferred
Shares.(See Exhibit 3.(i).7, above).
4.3 Instruments Defining the Rights of
Security Holders - Designation of
Series C Convertible Preferred
Shares.(See Exhibit 3.(i).8, above).
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 17, 1996.
II-7
<PAGE>
10.7 Subscription Agreement by and between
Imaging Diagnostic Systems, Inc. and
Weyburn Overseas Limited dated
December 17, 1996.
10.8 Stock Purchase and Registration
Rights Agreement by and between
Imaging Diagnostic Systems, Inc. and
Arcadia Importers & Exporters S.A.
dated March 6, 1997.
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 Exhibi
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.
11 Schedule of computation of net loss
per share
23.1 Consent of Peter S. Knezevich, Esq.
included in the opinion filed as
Exhibit 5 hereto.
23.2 Consent of Independent Certified
Public Accountants.
II-8
<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. File number 033-04008
99.3 Report dated April 17, 1997. File number 033-04008
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereto) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-9
<PAGE>
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.
[REMAINDER INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS]
II-10
<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 9th day of May, 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: May 9, 1997
By: /S/RICHARD J. GRABLE
-------------------------------------
Richard J. Grable
Director and Chief Executive Officer
Dated: May 9, 1997
By: /S/ ALLAN L. SCHWARTZ
-------------------------------------
Allan L. Schwartz
Director and Executive Vice-President
Chief Financial Officer
Dated: May 9, 1997
II-11
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Schedule of Computation of Net Loss per share
23.2 Consent of Independent Certified Public Accountants
99.3 Form 8-K dated April 17, 1997.
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
FROM FROM
INCEPTION INCEPTION
SIX MONTHS ENDED YEARS ENDED JUNE 30, (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, -------------------------- 1993) TO JUNE 30, 1993) TO
1996 1995 1996 1995 1994 DECEMBER 31, 1996
--------------------- -------------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Net loss $(2,078,465) $(915,528) $(5,593,452) $(1,086,436) $ (66,951) $ (8,825,304)
Less:
Preferred stock dividends on the
issuance of the convertible stock
with discounted conversion price 714,155 - 998,400 - 1,712,555
Preferred stock dividends earned
the preferred shareholders 28,469 - 47,845 - - 76,314
Add:
Amortization of discounted
preferred dividends pro-rata
over conversion period
conversion period 60,703 - - - - 60,703
------------- ------------ ------------- ------------ --------- ------------
Net loss applicable to common
shareholders for primary loss
per share $ (2,760,386) $(915,528) $ (6,639,697) $ (1,086,436) $(66,951) $(10,553,470)
============= =========== ============= ============ ========= ============
Weighted average number of common
shares outstanding during the 23,820,035 18,870,569 21,354,155 16,881,230 6,288,887 19,344,642
period ============== =========== ============= ============ ========= ============
Net loss per common share $ (.12) $ (.05) $ (.31) $ (.06) $ (.01) $ (.55)
============== =========== ============= ============ ========= ============
</TABLE>
NOTES -
(A) No common stock equivalents have been added in the computation of net
loss per share as their effect would be anit-dilutive.
(B) As a result of the issuance of the preferred stock below the fair
market value of the common shares at the date of issuance, a "deemed"
preferred dividend has been charged to accumulated deficit at the date
of issuance and is amortized into the conversion cost of the common
stock over the period of conversion. The calculation is made by
multiplying the total number of shares to be converted by the discount
per share to arrive at the deemed preferred dividend. The resulting
amount is then charged to accumulated deficit with a corresponding
credit to additional paid-in capital.
<PAGE>
<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
SUPPORTING SCHEDULE
FROM FROM
INCEPTION INCEPTION
SIX MONTHS ENDED YEARS ENDED JUNE 30, (DECEMBER 10, (DECEMBER 10,
DECEMBER 31, ----------------------- 1993) TO JUNE 30, 1993) TO
1996 1995 1996 1995 1994 DECEMBER 31, 1996
--------------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of common shares
outstanding during the period before the
conversion of the preferred stock 23,092,838 18,870,569 21,318,171 16,881,230 6,288,887 19,144,048
Add - weighted average of common shares
converted during the period 727,197 - 35,984 - - 200,594
--------- ---------- ---------- ---------- --------- ----------
Total weighted average of common shares
outstanding during the period 23,820,035 18,870,569 21,354,155 16,881,230 6,288,887 19,344,642
========== ========== ========== ========== ========= ==========
</TABLE>
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.
MARGOLIES AND FINK
Pompano Beach, Florida
May 1, 1997
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: April 17, 1997
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of Small Business Issuer in its charter)
FLORIDA 0-26028 22-2671269
------- ------- ---------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Indet. 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 March 6, 1997, Imaging Diagnostic Systems, Inc. (the "Company") finalized the
private placement of 250 shares of its Series C Convertible Preferred Stock
("Series C Preferred") for $2,500,000 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933, as amended. In accordance with the terms and
conditions of the private placement transaction the Company amended its then
pending S-1 registration statement, file number 333-21243, to register the
underlying common shares of the Series C Preferred.
On April 15, 1997, the Company issued the following press release:
Imaging Diagnostic Systems, Inc. (OTC Bulletin Board: IMDS) announced
today that due to the unusual trading activity of the company's common
stock, the company will withhold the conversion rights of the Series B
and C convertible preferred shares until the company can ascertain
whether such activity is related to the recent filing of an amended S-1
registration statement.
On April 17, 1997, the Company and the Series C Holder mutually agreed to
rescind the private placement transaction. The Company will return the proceeds
to the Series C Holders and the Series C Preferred will be returned to the
Company.
The return of the proceeds will not impair the Company's ability to continue
with the development and clinical trials of its Computed Tomography Laser
Mammography ("CTLM/trademark/") device.
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: April 17, 1997 IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------------------
(Registrant)
/s/Allan L. Schwartz
Executive Vice President
Chief Financial Officer
