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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _________, 1998
COMMISSION FILE NO. _______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 3845 22-2671269
------- ---- ----------
(State of (Primary Standard (IRS Employer
Incorporation) Industrial Classification I.D. Number)
Code Number)
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code, and telephone number, including
area code of registrant's principal executive offices)
Linda B. Grable, President
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
--------------
(Name, address and telephone number of Agent for Service)
Please send a copy of all communications to:
Rebecca J. Del Medico, Esq.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date
of this Registration Statement.
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 the registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [X]
If this Form is filed to register additional securities for an offering
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. [_]
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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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
SHARE (1) PRICE(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value (2) 500,000 $.47 $235,000 $100
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 bid and asked price of the Registrant's Common Stock on the NASDAQ
Electronic Bulletin Board on July 15,1998 1998.
(2) Of the 500,000 shares of common stock set forth in this category all of
the shares will be sold by the Selling Security Holder.
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
CROSS REFERENCE SHEET
FORM S-2 ITEM NUMBERS AND CAPTION HEADING IN PROSPECTUS
- --------------------------------- ---------------------
<S> <C>
1. FOREPART OF THE REGISTRATION STATEMENT AND
OUTSIDE FRONT COVER OF PROSPECTUS...........................OUTSIDE FRONT COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS..................................................INSIDE FRONT AND OUTSIDE BACK
COVER PAGES OF PROSPECTUS
3. SUMMARY INFORMATION AND RISK FACTORS..........................PROSPECTUS SUMMARY; RISK FACTORS
4. USE OF PROCEEDS...............................................NOT APPLICABLE
5. DETERMINATION OF OFFERING PRICE...............................DETERMINATION OF OFFERING PRICE
6. DILUTION......................................................NOT APPLICABLE
7. SELLING SECURITY HOLDERS......................................SELLING SECURITY HOLDER
8. PLAN OF DISTRIBUTION..........................................FRONT COVER PAGE; PLAN OF
DISTRIBUTION
9. DESCRIPTION OF SECURITIES TO BE REGISTERED....................DIVIDEND POLICY, DESCRIPTION OF
CAPITAL STOCK
10. INTEREST OF NAMED EXPERTS AND COUNSEL.........................LEGAL MATTERS AND FINANCIAL
STATEMENTS
11. INFORMATION WITH RESPECT TO THE REGISTRANT....................DOCUMENTS INCORPORATED BY REFERENCE,
RISK FACTORS, PROSPECTUS SUMMARY,
MATERIAL CHANGES
12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............DOCUMENTS INCORPORATED BY REFERENCE
13 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES..................................INDEMNIFICATION OF OFFICERS AND
DIRECTORS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION...................PART II
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................PART II
16. EXHIBITS......................................................PART II
17. UNDERTAKINGS..................................................PART II
18. FINANCIAL STATEMENTS AND SCHEDULES............................DOCUMENTS
INCORPORATED
BY REFERENCE
</TABLE>
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SUBJECT TO COMPLETION, DATED ____________, 1998.
PROSPECTUS
500,000 SHRES
IMAGING DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
This prospectus ("Prospectus") relates to an aggregate of 500,000 shares (the
"Shares") of common stock, no par value (the "Common Stock"), of Imaging
Diagnostic Systems, Inc., a Florida corporation (the "Company"). Of the
500,0000 shares of common stock, no par value (the "Common Stock"), offered
hereby, all are being sold by the Selling Security Holder. See "Selling
Security Holder." The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Security Holder.
The Common Stock is traded on the OTC Bulletin Board under the symbol "IMDS".
On July 15,1998, the closing bid and asked price of the Common Stock as
reported on the OTC Bulletin Board was $.45 and $.48, respectively.
The Shares are held by Alfred Ricciardi (the "Selling Security Holder"). The
Shares covered hereby were acquired by the Selling Security Holder pursuant to
a Regulation D private placement and were exempt from the registration
provisions of the Securities Act of 1933, as amended (the "1933 Act"), as
amended.
The Selling Security Holder may, from time to time, sell the Shares on the OTC
Bulletin Board, or on any other national securities exchange or automated
quotation system on which the Common Stock may be listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Shares may be sold
directly or through brokers, or dealers. See "Plan of Distribution."
The Company will receive no part of the proceeds of any sales made by the
Selling Security Holder hereunder. All expenses of registration incurred in
connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Security Holder will be borne by
the Selling Security Holder. See "Selling Security Holder."
The Selling Security Holder and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the 1933 Act, and any commissions or discounts paid or given to any
such broker-dealer may be regarded as underwriting commissions or discounts
under the 1933 Act.
The Shares have not been registered for sale by the Company or by the Selling
Security Holder under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the States in
which transactions occur or the existence of any exemption from registration.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
THE DATE OF THIS PROSPECTUS IS _______, 1998
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Selling
Security Holder," "Plan of Distribution" and "Description of Capital Stock".
The Company will not be responsible for the payment of any underwriting
discounts, commissions or expenses that may be payable or applicable in
connection with the sale of such Shares by the Selling Security Holder. 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.
This Prospectus may be used by the Selling Security Holder, 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 4 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 ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (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, DC (at
the above address) upon payment of the fees prescribed by the rules and
regulations of the Commission, or examined there without charge.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed with the Commission can
be inspected and copied at the public reference facilities of the Commission
at 450 Fifth Street, NW, Washington, DC 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, DC
20549. The Commission maintains a World Wide Web
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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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed with
the Commission pursuant to the Exchange Act:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997;
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended September 30, 1997, December 31,1997 and March
31, 1998.
3. The Company's Proxy Statement filed August 19, 1997
This Prospectus is accompanied by a copy of the Company's latest Form 10-KSB
and Form 10-QSB. The Company will provide upon request, without charge, to
each person to whom a prospectus is delivered a copy of the additional
documents listed above, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into such documents). Such
requests should be made to: General Counsel, Imaging Diagnostic Systems, Inc.,
6531 NW 18th Court, Plantation, Florida 33313. Telephone number (954)
581-9800.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED
FOR PURPOSES OF THIS PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED
HEREIN MODIFIES OR SUPERSEDES SUCH STATEMENT. ANY SUCH STATEMENT SO MODIFIED
OR SUPERSEDED SHALL NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO
CONSTITUTE A PART OF THIS PROSPECTUS.
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. THESE FORWARD
LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN
BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD
LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1)
COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2)
DELAYS, COSTS OR DIFFICULTIES RELATED TO OBTAINING THE APPROVAL OF THE FOOD
AND DRUG ADMINISTRATION ("FDA") FOR THE SALE AND MARKETING OF THE COMPANIES
COMPUTED TOMOGRAPHY LASER MAMMOGRAPHY (CTLM(TM)) DEVICE ARE GREATER THAN
EXPECTED; (3) MARKET ACCEPTANCE OF THE CTLM(TM); AND (4) GENERAL ECONOMIC
CONDITIONS ARE LESS FAVORABLE THAN EXPECTED. FURTHER INFORMATION ON OTHER
FACTORS WHICH COULD AFFECT THE FINANCIAL CONDITION OF THE COMPANY IS INCLUDED
IN THE SECTION HEREIN ENTITLED "RISK FACTORS".
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus or in the documents incorporated herein by reference. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained elsewhere in this Prospectus and in the documents
incorporated by reference herein.
THE COMPANY
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Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology
company that has developed a Computed Tomography Laser Mammography
("CTLM"(TM)") device for detecting breast cancer through the skin in a
non-invasive and objective procedure. The CTLM(TM) employs a high-speed
pico-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 (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 the CTLM(TM)will
improve early diagnosis, reduce diagnostic uncertainty, and decrease the
number of biopsies performed on benign lesions.
The CTLM(TM) device will require Food and Drug Administration ("FDA") approval
prior to commercial distribution in the United States. The Company plans to
file, within the next several months, 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 was granted, in June 1998, its second
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 20
patients at the Company's in house facilities In Plantation, Florida and an
additional 3 clinical sites. See "Risk Factors-Government Regulation".
In 1997, the Company received its first IDE, which authorized it to scan 50
patients at the Strax Breast Diagnostic Center in Lauderhill, Florida and an
additional 20 patients at its in-house facility. The CTLM(TM) device was
installed at Strax and patients were scanned. Prior to the completion of the
1997 IDE, the Company was advised that greatly improved laser technology would
soon become available to the Company. The IDE at Strax and the Company was
halted pending the receipt of the new laser. In November 1997 the CTLM(TM) was
removed from Strax and, subsequently, the Company withdrew the first IDE.
The CTLM(TM) device was 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(TM) 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.
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(TM). The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At March 31, 1998, the
Company has incurred net losses of approximately $19,904,407. 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(TM), development of, and clinical
trials for, the CTLM (TM)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 CTLM(TM), develop the capacity to
manufacture and market the CTLM(TM), either by itself or in collaboration with
others and market acceptance of the CTLM(TM). There can be no assurance if and
when the Company will receive regulatory approvals for the development and
commercial manufacturing and marketing of the CTLM(TM) or achieve
profitability.
GOVERNMENT REGULATION.
Many aspects of the medical industry in the United States, including the
Company's business, are subject to
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extensive federal and state government regulation. Although the Company
believes that its operations comply with applicable regulations, there can be
no assurance that subsequent adoption of laws or interpretations of existing
laws will not regulate, restrict, or otherwise adversely affect the Company's
business.
The manufacture and sale of medical devices, including the CTLM(TM), 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 CTLM (TM) is regulated as a medical
device and is 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. The Company cannot file
its PMA application for the CTLM(TM) 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(TM). Nor can there be any assurance
that the FDA will not require the Company to conduct additional clinical
trials for the CTLM(TM). The process for obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain and can require as
long as 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 may be subject to
international regulatory requirements that vary from country to country. The
time required to gain approval for sale internationally may be longer or
shorter than that required for FDA approval and the requirements may differ.
In Europe, the Company will be required to obtain the certifications necessary
to enable the CE mark to be affixed to the Company's products by mid-1998 in
order to conduct sales in member countries of the European Union. The Company
has not obtained such certificates and there can be no assurance it will be
able to do so in a timely manner, or at all. Regulatory approvals, if granted,
may include significant limitations on the indicated uses for which the CTLM
(TM) may be marketed. In addition, to obtain such approvals, the FDA and
certain foreign regulatory authorities may impose numerous other requirements
with which other medical device manufacturers must comply. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Product approvals could be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. The third-party manufacturers upon which the Company will
depend to manufacture its products(GMPs) 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 CTLM(TM).. 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(TM) on a timely basis, or at all, 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 would have material adverse effect on the Company's
business, financial condition and results of operations.
PRODUCT DEVELOPMENT.
The Company's proposed products and future product development efforts are at
an early stage. Accordingly, there can be no assurance that any of the
Company's proposed products will be found to be safe and effective, can be
developed into commercially viable products, can be manufactured on a large
scale or will be economical to market, or will achieve or sustain market
acceptance. There is, therefore, a risk that the Company's product development
efforts will not prove to be successful.
DEPENDENCE UPON UNITED STATES 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
of the CTLM(TM)in the United States. There can be no assurance if or when the
Company will receive any such clearances or approvals. Obtaining FDA
pre-market approval may impose
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costly requirements on the Company and may delay for a considerable period of
time, or prevent, the commercialization of the CTLM(TM).
DEPENDENCE ON MARKET ACCEPTANCE.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(TM) device. The extent that, and rate of
which, the CTLM(TM) 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(TM), the advantage of the CTLM(TM) 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.
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 has already entered into contract for the distribution of the CTLM(TM)
in the United Kingdom, Ireland, Italy, France, South Korea, the Pacific Rim
including China, Switzerland, Moscow, Germany, Austria, the Republic of Turkey
and Ecuador with strategic marketing partners who have established marketing
capabilities and will continue to develop its distribution network for
overseas. There can be no assurance that the Company will be able to further
develop this distribution network. on acceptable terms, if at all or that any
of the Company's proposed marketing schedules or plans can or will be met. 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
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(TM) 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 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.
CAPITAL NEEDS AND NEED FOR ADDITIONAL AUTHORIZED COMMON STOCK.
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical 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
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employees and consultants, and other contractual agreements and are likely to
increase as additional agreements are entered into and additional personnel
are retained. The Company has entered into a $15 Million, three year Equity
Line of Credit Funding Agreement whereby the Company, as it deems necessary,
may raise capital through the sale of its common stock to a consortium of
prominent European banking institutions. The Shares will be purchased by the
consortium at a discount from the Market Price of the Company's Common Stock.
Although no assurances can be made, the Company anticipates that it will need
approximately $8,000,000 over the next two year period to complete all
necessary stages in order to enable it to market the CTLM(TM) in the United
States and foreign countries. If the need should arise for capital in excess
of the Equity Line of Credit the Company may seek such additional funding
through public or private financing or collaborative, licensing and other
arrangements with corporate partners. If the Company utilizes the Equity Line
of Credit or additional funds are raised by issuing equity securities,
especially Convertible Preferred Stock, dilution to existing Shareholders will
result and future investors may be granted rights superior to those of
existing Shareholders. 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.
At present, due to the decline in the price of its common stock, the Company
does not have available enough authorized common stock to convert its
outstanding Preferred Stock should the Preferred Holders wish to convert. The
conversion rate of the Preferred stock ranges from 82% to 75% of the average
market price over a five-day period prior to conversion. The Company
anticipates that it will need to increase its authorized common stock from
48,000,000 shares to 100,000,000 common shares in order to meet conversion
demands, enhance the ability of the Company to attract and retain qualified
employees, consultants, officers and directors by creating stock incentives
and rewards for their contributions to the success of the Company and for
issuance in connection with any future financing activities or corporate
acquisition using the Company's Common Stock. In the event that the Company is
not able to increase the authorized common stock and the Preferred Holders
elect to convert the Preferred Stock, the Company will be in breach of it
contractual obligations to such Holders and may be subject to litigation and
the payment of damages and penalties. See "Description of Securities".
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
key employees. The loss of the services of existing personnel as well as the
failure to recruit key scientific, technical and managerial personnel in a
timely manner would be detrimental to the Company's research and development
programs and to its business. The Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as marketing,
will require the additional of new management personnel. Competition for
qualified personnel is intense and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary
for the development of its business.
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(TM) to medical
facilities will, in part, be dependent on the Company's ability to demonstrate
the clinical utility of the CTLM(TM) as an adjunct to mammography and physical
examination and its advantages over other available diagnostic tests. The
competition for developing a commercial device utilizing computed TOMOGRAPHY
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(TM)
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utilizes. 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 companies: University of Pennsylvania - Non-Invasive
Technologies; City College of New York - MediScience, Inc.
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. Although the Company believes
that The CTLM(TM) can be upgraded to maintain its state-of-the-art character,
the development of new technologies or refinements of existing ones might make
the Company's existing system technologically or economically obsolete, or
cause a reduction in the value of, or reduce the need for, the Company's
CTLM(TM). 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. Although the Company is aware of no substantial technological
changes pending, should such change occur, there can be no assurance that the
Company will be able to acquire the new or improved systems which may be
required to update the CTLM(TM).
RELIANCE ON INTERNATIONAL SALES.
The Company intends to commence international sales of the CTLM(TM) 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(TM)in the United States, as to which there can be no
assurance, the Company revenues, if any, will be derived from sales to
international distributors. A significant portion of the Company's revenues,
therefore, may be subject to the risks associated with international sales,
including economical and political instability, shipping delays, fluctuation
of foreign currency exchange rates, foreign regulatory requirements and
various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a timely basis. Future imposition
of, or significant increases in the level of customs duties, export quotas or
other trade restrictions could have a material adverse effect on the Company's
business, financial condition and results of operations. 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, marketing, and sale 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(TM) 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.
LACK OF FEASIBILITY STUDY
The Company has not performed any market or feasibility study to assess the
interest, demand, or need for the CTLM(TM). There can be no assurance that any
such study would support Management's belief that sufficient demand will
exist.
DIVIDENDS
The Company has not paid a dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future.
INFORMATION WITH RESPECT TO THE REGISTRANT
The information required to be disclosed herein is hereby incorporated by
reference. See "Documents Incorporated by Reference", "Prospectus Summary",
"Risk Factors" and "Material Changes"
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MATERIAL CHANGES;
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Stock of the
Company as of July 10, 1998, as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers
and directors of the Company as a group. calculated as required by the Act.
The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,750,040 and 3,445,800 share
respectively. Both Richard Grable and Linda Grable specifically disclaims any
beneficial interest in each others shares.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ------------------- ----------------------
Richard J. Grable 12,606,606(3) 33.6%
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 12,606,606(4) 33.6%
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 4,253,390(5) 11.7%
c/o 6351 NW 18th Court
Plantation, FL 33313
All officers and directors 16,859,996 (6) 45.3%
as a group (3 persons)
- --------------------
(1)Except as indicated 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 36,434,747 shares of Common Stock
outstanding as of July 10,1998. Shares of Common Stock subject to stock
options that are exercisable within 60 days as of July 10, 1998 are deemed
outstanding for computing the percentage of any other person or group.
(3)Includes 556,883 shares subject to options and 3,497,800 shares owned by
the wife of Richard J. Grable, Linda B. Grable, of which he disclaims
beneficial ownership.
(4)Includes 556,883 shares subject to options and 7,995,040 shares owned by
the husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership.
(5)Includes 664,410 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6)Includes 1,778,176 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
OPTION GRANTS.
In January 1998, pursuant to employment agreements dated July 4, 1994, Richard
Grable, Linda Grable, and Allan Schwartz were granted options to purchase and
aggregate of 500,000 Common Shares each. The grants for were for the July 1996
and July 1997 anniversary dates of their employment and were never issued by
prior counsel for the Company. The options are non-qualified stock options,
vesting one year from the grant date and exercisible at an exercise price of
$0.31 per share. In January 1998, Richard Grable, Linda Grable, and Allan
Schwartz were granted options to purchase 22,883 and 34,602 shares of Common
Shares each pursuant to the Company's incentive stock option plan. These
options were earned in July 1996 and July 1997 but never issued. These shares
are exercisible at any time at an exercise price of $4.37 and $2.63 per share,
respectively.
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PATENT LICENSE AGREEMENT
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of patents Patent number 5,692,511, issued on December 2, 1987 (the "Patent"),
which encompasses the technology for the CTLM(TM). The Company and Mr. Grable
has previously entered into an oral agreement for the exclusive license for
the patent that was never memorialized in written form.
Pursuant to the terms of the Agreement, the Company was granted the exclusive
right to modify, customize, maintain, incorporate, manufacture, sell, and
otherwise utilize and practice the Patent, all improvements thereto and all
technology related to the process, throughout the world. This license shall
apply to any extension or re-issue of the Patent. The term of the license is
for the life of the Patent and any renewal thereof, subject to termination,
under certain conditions. As consideration for the License, the Company issued
to Mr. Grable 3,500,000 shares of common stock and is required to issue and
additional 3,500,000 shares in June 1999. In addition, the Company has agreed
to pay to Mr., Grable a royalty based upon the net selling price (the dollar
amount earned from the sale by the Company, both international and domestic,
before taxes minus the cost of the goods sold and commissions or discounts
paid) of all products and goods in which the Patent is used, before taxes and
after deducting the direct cost of the product and commissions or discounts
paid (the "Royalty") as follows:
GROSS SALES PERCENTAGE
----------- ----------
$0 to $1,999,999 in gross sales 10%
$2,000,000 to $3,999,999 in gross sales 9%
$4,000,000 to $6,999,999 in gross sales 8%
$7,000,000 to $9,999,999 in gross sales 7%
Greater than $10,000,000 in gross sales 6%
During the second year of the Agreement there is a minimum royalty provision of
$250,000. The Company is required to have the Agreement ratified by its
Shareholders at its next special or annual meeting of Shareholders and upon
obtaining such ratification, the Royalties set forth above shall take the place
of the Development Royalties set forth in the Amendment to Grable's Employment
Agreement dated February 23, 1995, and such Amendment shall become void and have
no effect.
The Agreement also contains anti dilution protection upon the occurrence of any
stock dividend, stock split, combination or exchange of shares, reclassification
or recapitalization of the Company's common stock, reorganization of the
Company, consolidation with or merger into or sale or conveyance of all or
substantially all of the Company's assets to another corporation or any other
similar event which serves to decrease the number of Shares issued pursuant to
the Agreement.
PATENT
On June 12, 1997, Imaging Diagnostic Systems, Inc. (the "Company") was
advised by its patent counsel, Shlesinger, Arkwright & Garvey, that the
Company's patent for the Diagnostic Tomographic Laser Imaging Apparatus had
been granted, with 7 independent and 16 subordinate claims.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with NASDAQ to be listed
on the Small Cap Market. The Company's request for listing was subsequently
denied after a hearing before the Listing Qualifications Panel (the "Panel").
The denial was based upon the fact that one of the Company's outside
shareholders (the "Shareholder"), who had no influence over the Company, had a
questionable background and owned a 5% interest in the Company.
As a result, the Company appealed the denial decision to the NASDAQ Listing
and Hearing Review Committee (the "Committee") which on February 5, 1997,
reversed the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with
instructions to implement
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the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th, provided
NASDAQ with copies of all things necessary to satisfy any concerns that the
Panel had regarding the Shareholder. Prior to the time NASDAQ acted on the
proposal, Barrons published an inaccurate article stating that a NASDAQ
spokesman indicated that the listing would be denied. At all times up until
the date of this article the Company's stock traded at $3.00 and above. The
article had a predictable negative impact on the Company's stock and the price
dropped below $3.00, where it has stayed ever since the Barrons article,
despite a retraction from Barrons. Based upon this decline the NASDAQ staff
has refused to approve the Company for listing on the NASDAQ Small Cap Market.
The Company appealed the denial of the listing at an oral hearing before the
Committee in Washington DC on January 22, 1998. Pursuant to this meeting the
Panel determined to approve the Company for listing on the NASDAQ Small Cap
Market, subject to the following conditions:
1. On or before May 11, 1998, the Company must effect a reverse
stock split sufficient to raise its bid price to, or above $4.00 per
share for the opening of one trading day or in the alternative, on
or before May 11, 1998, the Company must have and retain for 10
consecutive trading days a $4.00 bid price through natural forces.
2. On or before May 11, 1998, the Company must make a public filing
with the SEC and NASDAQ evidencing a minimum of $5,000,000 in net
tangible assets.
The Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for
the reverse split. The conditional listing expires on May 11, 1998. To date
the Company has been unable to comply with the above conditions.
The Company immediately appealed this decision. The Company's Securities
Counsel was notified on May 19, 1998 that its appeal was denied. The Company
filed an appeal with the Securities and Exchange Commission.
PRIVATE PLACEMENTS
Series C Preferred Stock
- ------------------------
On October 6, 1997, Imaging Diagnostic Systems, Inc. (the "Company") finalized
the private placement to foreign investors of 210 shares of its Series C
Convertible Preferred Stock ("the "Preferred Shares") at a purchase price of
$10,000 per share and Warrants to purchase up to 105,000 shares of the
Company's common stock at an exercise price of $1.63 per share. The offering
was conducted pursuant to Regulation S as promulgated under the Securities Act
of 1933, as amended (the ("Regulation S Sale").
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and nonassessable shares of common stock, no par value, of the Company to
be issued upon conversion will be 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" is equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of
conversion provided, however, in no event will the Conversion Price be greater
than $1.222 per share.
Pursuant to the Regulation S Sale documents, the Company was also required to
escrow an aggregate of 3,435,583 shares of its common stock (200% of the
number of shares the Purchasers would have received if the Preferred Shares
were exercised on the closing date of the Regulation S Sale). The shares
underlying the Preferred Shares and Warrants are entitle to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $220,500 for placement and legal fees. Net
proceeds to the Company of $1,079,500 were used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
Series D Preferred Stock
- ------------------------
On January 9, 1998, Imaging Diagnostic Systems, Inc. (the "Company") finalized
the private placement to foreign investors of 50 shares of its Series D
Convertible Preferred Stock ("the "Preferred Shares"), at a purchase price of
$10,000 per share and Warrants to purchase up to 25,000 shares of the
Company's common stock. The offering
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<PAGE>
was conducted pursuant to Regulation S as promulgated under the Securities Act
of 1933, as amended (the "Regulation S Sale"). The Preferred Shares are
convertible, at any time, commencing 45 days from the date of issuance and for
a period of three years thereafter, in whole or in part, without the payment
of any additional consideration. The number of fully paid and nonassessable
shares of common stock, no par value, of the Company to be issued upon
conversion will be 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" is equal to seventy five percent (75%) of
the Average Closing Price of the Corporation's Common Stock for the five-day
trading period ending on the day prior to the date of conversion. The shares
underlying the Preferred Shares and Warrants are entitle to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred
Shares to an unaffiliated Investment Banker for placement fees and paid its
legal fees of $5,000. Net proceeds to the Company of $495,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM (TM)) device.
Series E Preferred Stock
- ------------------------
On February 5, 1998, Imaging Diagnostic Systems, Inc. (the "Company")
finalized the private placement to foreign investors of 50 shares of its
Series E Convertible Preferred Stock ("the "Preferred Shares"), at a purchase
price of $10,000 per share and Warrants to purchase up to 25,000 shares of the
Company's common stock. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). The Preferred Shares are convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in whole
or in part, without the payment of any additional consideration. The number of
fully paid and nonassessable shares of common stock, no par value, of the
Company to be issued upon conversion will be 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" is equal
to seventy five percent (75%) of the Average Closing Price of the
Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of conversion.
The shares underlying the Preferred Shares and Warrants are entitle to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred
Shares to an unaffiliated Investment Banker for placement fees and paid its
legal fees of $5,000. Net proceeds to the Company of $495,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM (TM)) device.
Series F Preferred Stock
- ------------------------
On February 20, 1998, Imaging Diagnostic Systems, Inc. (the "Company")
finalized a private placement to foreign investors of 75 shares of its Series
F Convertible Preferred Stock ("the "Preferred Shares") at a purchase price of
$10,000 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale").
The Preferred Shares pay a dividend of 6% per annum, payable in Common Stock
at the time of each conversion and are convertible, at any time, commencing
May 15, 1998 and for a period of two years thereafter, in whole or in part,
without the payment of any additional consideration. The number of fully paid
and nonassessable shares of common stock, no par value, of the Company to be
issued upon conversion will be determined by dividing (i) the sum of $10,000
plus any earned dividends by (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy percent (70%) of the Average Closing Price of the
Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of conversion. The shares underlying the Preferred Shares
are entitle to demand registration rights under certain conditions.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $50,000 for placement and legal fees. Net
proceeds to the Company of $700,000 were used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
Series H Preferred Stock
- ------------------------
On June 2, 1998, Imaging Diagnostic Systems, Inc. (the "Company") finalized a
private placement to foreign
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<PAGE>
investors of 100 shares of its Series H Convertible Preferred Stock ("the
"Preferred Shares") at a purchase price of $10,000 per share. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale").
The number of fully paid and nonassessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of seventy-five percent (75%) of the Average Price
(the lowest closing bid price of the Corporation's Common Stock for the
ten-ten-day trading period ending on the day prior to the date of conversion.
The shares underlying the Preferred Shares are in the process of being
registered on a Registration Statement on Form S-2.
In connection with the Regulation D Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $10,000 and 8 shares of the Series H
Preferred Stock for placement and legal fees. Net proceeds to the Company of
$990,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM (TM)) device.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS . There has been trading in the Company's
Common Stock since September 20, 1994. The following table sets forth, for
each of the fiscal periods indicated, the high and low trade prices for the
Common Stock, as reported on the OTC Bulletin Board. These per share
quotations reflect inter-dealer prices in the over-the-counter market without
real mark-up, markdown, or commissions and may not necessarily represent
actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1996
September 1995 $ .78 $ .71
December 1995 $3.15 $ .75
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
June 1997 $3.08 $2.62
FISCAL YEAR 1998
September 1997 $2.25 $1.87
December 1997 $1.61 $1.22
March 1998 $1.65 $1.02
June 1998 $0.78 $0.67
On June 30, 1998, the closing trade price of the Common Stock as reported on
the OTC Bulletin Board was $0.40. As of such date, there were approximately
745 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.
SELLING SECURITY HOLDER
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The Selling Security Holder is Alfred Ricciardi, 1 Evertrust Plaza, Jersey
City, NJ 07302, an accredited investor who purchased the shares offered hereby
in a private placement in accordance with and exemption from registration
under Section 4(2) of the Securities Act of 1993, as amended (the "Act") and
Rule 506 of Regulation D promulgated thereunder. 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
Security Holder. Other then the share set forth herein, the Selling Security
Holder is not the direct or beneficial owner of any of the Company's
securities, nor has he had or held any position, office or other material
relationship with the Company.
PLAN OF DISTRIBUTION
The registration statement of which this Prospectus forms a part has been
filed pursuant to the registration rights included in Subscription Agreement
between the Company and the Selling Security Holder. To the Company's
knowledge, as of the date hereof, the Selling Security Holder has not 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 Security Holder. The Selling Security Holder 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 Security Holder 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 Security
Holder 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 Security Holder may
arrange for other broker-dealers to participate. Broker-dealers may receive
commissions or discounts from the Selling Security Holder in amounts to be
negotiated.
In offering the Shares, the Selling Security Holder and any broker-dealers who
execute sales for the Selling Security Holder 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 Security Holder 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 on the earlier of (a) the date on which such
Selling Security Holder'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 Security Holder. There can be no assurance that the
Selling Security Holder will sell any or all of the shares of Common Stock
offered hereby
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
capital stock of which 48,000,000 shares are common stock no par value and
2,000,000 shares are preferred, no par value. As of July 10, 1998 there were
issued and outstanding 36,434,747 shares of Common Stock and. 450 shares of
Series B Convertible Preferred Stock, 24 shares of Series D Convertible
Preferred, 14 shares of Series E Convertible Preferred, 108 shares of Series H
Convertible Preferred, Options to purchase 2,760,409 shares and Warrants to
purchase 442,500 shares of Common Stock of the Company.
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<PAGE>
At present, due to the decline in the price of its common stock, the Company
does not have available enough authorized common stock to convert its
outstanding Preferred Stock, warrant or options, should the holders wish to
convert. The conversion rate of the Preferred stock ranges from 82% to 75% of
the average market price over a five-day period prior to conversion. The
Company anticipates that it will need to increase its authorized common stock
from 48,000,000 shares to 100,000,000 common shares in order to meet
conversion demands, enhance the ability of the Company to attract and retain
qualified employees, consultants, officers and directors by creating stock
incentives and rewards for their contributions to the success of the Company
and for issuance in connection with any future financing activities or
corporate acquisition using the Company's Common Stock. In the event that the
Company is not able to increase the authorized common stock and the Preferred
Holders elect to convert the Preferred Stock, the Company will be in breach of
it contractual obligations to such Holders and may be subject to litigation
and the payment of damages and penalties. See "Risk Factors".
COMMON STOCK
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 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 in connection with the
issuance of shares of preferred stock in series from time to and things as in
its discretion may be necessary or advisable in connection with such proposal.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE PROVISIONS SET FORTH IN THE COMPANY'S ARTICLES OF
INCORPORATION, THE COMPANY HAS BEEN INFORMED 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
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 Rebecca J. Del Medico, Esq., General
Counsel of the Company. Ms. Del Medico currently owns approximately 27,100
shares of common stock of the Company.
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EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
incorporated by referenced herein have been examined by Margolies, Fink and
Wichrowski, independent certified public accountants, for the periods and to
the extent set forth in their respective report and are incorporated herein 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 Rebecca J. Del Medico, General Counsel of the Company.
FINANCIAL INFORMATION
The information required to be disclosed herein is hereby incorporated by
reference from the Company' most recent report on form 10-KSB and its most
recent report on Form 10-QSB, both of which are being furnished with this
Prospectus.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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............................................ $100
ITEM 15. 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.
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.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE PROVISIONS SET FORTH ABOVE, THE COMPANY HAS BEEN
INFORMED 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
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT DESCRIPTION
3.1 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
3.2 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.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-1 dated July 1, 1998.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to the
Company's Form 8-K dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares).
3.9 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.
3.10 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").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 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 B Convertible Preferred Shares.(See Exhibit 3.3, above).
4.2 Instruments Defining the Rights of Security Holders - Designation of
Series C Convertible Preferred Shares.(See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders - Designation of
Series D Convertible Preferred Shares.(See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders - Designation of
Series E Convertible Preferred Shares.(See Exhibit 3.6, above).
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4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares.(See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares.(See Exhibit 3.8, above).
5 Legal opinion of Rebecca J. Del Medico, Esq. dated July 17, 1997.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi.
10.2 Patent Licensing Agreement
10.3 Incentive Stock Option Plan - is incorporated by reference to
Exhibit 10(b) of the Form 10-SB
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable 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.
24.1 Consent of Rebecca J. Del Medico, Esq. included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
B) REPORTS ON FORM 8-K
99.1 Report dated October 15, 1997.
99.2 Report dated October 16, 1998
99.3 Report dated January 12, 1998.
99.4 Report dated February 13, 1998.
99.5 Report dated February 19, 1998.
99.6 Report dated March 6, 1998.
ITEM 17. UNDERTAKINGS.
(a) 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.
(b) The undersigned registrant hereby undertakes that:
(i) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424 (b) (1) or (4) or 497 (h)
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under the Securities Act shall be deem to be part of the registration
statement as of the time it was declared effective.
(ii) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus 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.
(c) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13 (a)
or Sections 15 (d) of the Securities Exchange Act of 1934 ( and where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15 (d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
the requirement for filing on Form S-2 and 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 17th day of
July, 1998.
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.
Dated: July 17, 1998 By: /S/ LINDA B. GRABLE
----------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: July 17, 1998 By: /S/ RICHARD J. GRABLE
------------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: July 17, 1998 By: /S/ ALLAN L. SCHWARTZ
----------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[Mark One]
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to_____________
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
- ----------------------- -------------------------
State of incorporation) (IRS employer Ident. No.)
6531 NW 18th Court, Plantation, FL. 33313
- ----------------------------------- ----------
(address of principal office) (Zip Code)
Issuer's telephone number: (954)581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of class)
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2)has been subject to such filing requirements for
the past 90 days. Yes __X_ No_____ .
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. -0-
Based on the average closing bid and asked prices of the common stock on the
latest practicable date, September 24, 1997, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $22,503,933.
The number of shares outstanding of each of the issuer's classes of common
equity, as of June 30, 1997: 24,905,084. The number of shares outstanding of
the issuer's class of preferred equity (Series B Convertible Preferred), as of
June 30, 1997: 450.
Documents Incorporated By Reference
Proxy Statement dated September 7, 1997, issued in connection with the
company's annual meeting to be held on October 15, 1997. Also see Item 13.
Exhibits and Report on Form 8-k.
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH HEREIN.
PART I
Item 1. Description of Business.
BUSINESS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems,
Inc. (the "Company") has been engaged in the research and development of its
cancer detection technology and developing, for commercial application its
Computed Tomography Laser Mammography (CTLMTM)device.
The CTLM is a device for detecting breast cancer through the skin in
a non-invasive and objective procedure. The CTLM 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 which the company believes 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 the CTLM,
will improve early diagnosis, reduce diagnostic uncertainty and decrease the
number of biopsies performed on benign lesions. See Item 1. "Description of
Business- Comparison to Existing Diagnostic Modalities." In addition, the
CTLMTM device does not expose the patient to ionizing radiation or the breast
to painful compression. Which the Company believes are the contributing
factors that 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:Sapphire) laser technology
and various detection technologies associated with standard computed
tomographic ("CT") schemes. Using this research the Company developed the
first prototype of
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the CTLMTM able to create images of a breast. The Company refined various
software and hardware configurations and components of the prototype based on
these first images, and filed a patent in June 1995. During this period of
time there were further advances in laser technology effecting the size and
stability of the laser component. The Company capitalized upon these advances
by purchasing a laser package manufactured by Spectra-Physics, Inc. and
incorporating it into the CTLMTM. On December 12, 1995, the Company had a
preliminary meeting with the Food and Drug Administration to discuss the
approach the Company would need to take to obtain marketing clearance for its
CTLMTM device. The Company was advised that it would need to submit for
approval a pre-market approval application ("PMA") in order to obtain
marketing clearance for the device. Further, the Company also needed 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 otherdevelopments, 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 into
the CTLMTM the Company was required to submit an amendment to its IDE
application. In November, 1996 the Company installed its first CTLMTM device
at the Strax Breast Diagnostic Center.
On June 12, 1997, the Company was advised by patent counsel that the
patent filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus"
was granted with 7 independent and 16 subordinate claims.
The competition for developing a commercial device utilizing computed
tomography 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 CTLMTM 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 companies: University
of Pennsylvania - Non-Invasive Technologies; City College of New York -
MediScience, Inc.
The market in which the Company intends to participate is highly
competitive. Many 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
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(MRI) systems, and thermography, diaphonography and transilluminational
devices may be reluctant to the CTLMTM. Currently, mammography is the most
popular choice for the detection of breast cancer. The Company's ability to
sell the CTLMTM device to medical facilities will, in part, be dependent on
the Company's ability to demonstrate the clinical utility of the CTLMTM device
as an adjunct to mammography and physical examination as well as the CTLMTM's
advantages over other available diagnostic tests.
To date, due to the necessity of complying with all applicable United
States government regulations, the Company has not begun to market or sell the
CTLMTM and therefore has not generated revenues from the commercialization of
the CTLMTM. From inception to June 30, 1997 the Company has sustained
accumulated losses of $16,288,314. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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"), (i) approximately one in eight women in the United States
will develop breast cancer during her lifetime; (ii) Nationwide it is
estimated that approximately 43,900 women will die from this disease in 1997;
(iii) In the United States in 1997 approximately 180,200 women will be
diagnosed with breast cancer. 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; (iv) Breast cancer is the second leading
cause of death for American women following lung cancer; (vi) In Europe in
1990, approximately 170,000 cases of cancer were discovered, with an estimated
73,000 deaths; and (vii) The annual cost of breast cancer management in the
United States alone is approximately $25 billion.
There is widespread agreement within the health care industry that
screening for breast cancer, when combined with appropriate follow-up, will
reduce mortality from the disease. According to the National Cancer Institute
("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
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<PAGE>
mammography misses, on average, 15%-20% of breast cancer detected by physical
exam alone.
Breast cancer screening is generally recommended as a routine part of
preventive healthcare for women over the age of 20 (approximately 90 million
in the United States). For these women, ACS has published guidelines for
breast cancer screening including:(i)monthly breast self-examinations for all
women over the age of 20;(ii)a baseline mammogram for women by the age of
40;(iii)a mammogram every one to two years for women between the ages of 40
and 49;(iv)an annual mammogram for women age 50 or older. As a result of
family medical histories and other factors, certain women are at "high risk"
of developing breast cancer during their lifetimes. For these women,
physicians often recommend close monitoring, particularly if 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 due to the appearance of a
physical symptom, such as a palpable lesion, pain or nipple discharge, which
was 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 or 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 a 4% miss-rate factor present.
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.
According to the ACS 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 may 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 ours for
their biopsy results.
Screening and Diagnostic Modalities
5
<PAGE>
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, the ACS recommends mammograms be
limited to one 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 cost of $113)
and requires the use of capital equipment ranging in cost from approximately
$75,00 to $225,000. It is expected that the CTLMTM device will cost
approximately $300,000 and the cost of a bilateral exam will be $125 to $150.
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.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.
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. 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.
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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. 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 Computed Tomography Laser Mammography Device
A bilateral breast examination, utilizing the CTLM device is
performed by a Technologist. This procedure last approximately 15 minutes 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 CTLMTM device differs from currently available breast imaging
modalities employed for the detection of breast cancer by generating more
precise information 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 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
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<PAGE>
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.
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. The use of the CTLM device to detect breast cancer is
believed to be especially promising for women between the ages of 20 to 50
(over 50 million women in the United States) for whom x-ray mammography has
lower efficacy. These women often present diffuse palpable benign breast
conditions which can mask malignancies or pre-malignant conditions.
Regulatory and Clinical Status
In order to sell the CTLM device commercially in the United States
the Company must obtain marketing clearance from the FDA. The Company plans to
file a PMA with the FDA to obtain marketing clearance. A PMA application must
be supported by extensive data, including preclinical and clinical trial data,
as well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
8
<PAGE>
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:
o 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.
o 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.
o 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.
o 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
mammography and MRI. As of May 2, 1997, the Company has scanned 15 patients at
its 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.
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The delay between the date of approval of the IDE and the
installation of the device at the Strax Center was due to the availability of
a new laser package which was installed in the CTLMTM. These technological
improvements to the laser component of the CTLMTM 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. The FDA also
requested that the Company conduct a clinical test to support the amendment to
the IDE application. 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.
Known Uncertainties
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 CTLMTM device. The Company currently has no source of operating revenue
and has incurred net operating losses since its inception. At June 30, 1997,
the Company had an accumulated deficit of $16,288,314. 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 CTLMTM device, development of, and
clinical trials for, the proposed CTLMTM 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
10
<PAGE>
The manufacture and sale of medical devices, including the CTLMTM
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 CTLMTM 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 CTLMTM device.
Nor can there be any assurance that the FDA will not require the Company to
conduct additional clinical trials for the CTLMTM 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 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
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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 CTLMTM 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 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 CTLMTM 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 CTLMTM device.
Dependence on Market Acceptance
There can be no assurance that physicians or the medical community in
general will accept and utilize the CTLMTM device. The extent that, and rate
of which, the CTLMTM 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 CTLMTM device, the advantage of the CTLMTM 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
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results of operations. See "Business - Sales and Marketing," "Business -
Manufacturing" and "Business - Reimbursement."
Limited Marketing and Sales Capability
In order to market any products it may develop, the Company will have
to develop a marketing and sales force with technical expertise and
distribution capability. There can be no assurance that the Company will be
able to establish sales and distribution capabilities or that the Company will
be successful in gaining market acceptance for any products it may develop.
The Company intends to pursue and has secured one or more distribution
arrangements in Europe and Asia with strategic marketing partners who have
established marketing capabilities. There can be no assurance that the Company
on its own, or through arrangements with others, will be able to enter into
such arrangements on acceptable terms, if at all. To the extent that the
Company arranges with third parties to market its products, the success of
such products may depend on the efforts of such third parties. There can be no
assurance that the Company will be able to enter any such strategic alliance
in Europe or that any of the Company's proposed marketing schedules or plans
can or will be met. See "Reliance on International Sales," "Business - Sales
and Marketing," and See Business - Government Regulation".
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 CTLMTM 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
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<PAGE>
market penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical device
companies may be affected by the continuing efforts of governmental and third
party payors to contain or reduce the cost of health care through various
means. See "Business - Reimbursement."
Uncertain Ability to Meet Capital Needs
The Company will require substantial additional funds for its
research and development programs, preclinical and clinical testing, operating
expenses, regulatory processes and manufacturing and marketing programs. The
Company's capital requirements will depend on numerous factors, including the
progress of its research and development programs, results of preclinical and
clinical testing, the time and cost invoked in obtaining regulatory approvals,
the cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments and changes in the Company's existing research, licensing and
other relationships and the terms of any new collaborative, licensing and
other arrangements that the Company may establish. Moreover, the Company's
fixed commitments, including salaries 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
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scientific, technical and managerial personnel. Therefore the Company has
entered into employment agreements with certain of its executive officers and
employees. The loss of the services of existing personnel as well as the
failure to recruit key scientific, technical and managerial personnel in a
timely manner would be detrimental to the Company's research and development
programs and to its business. The Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as marketing,
will require the additional of new management personnel. Competition for
qualified personnel is intense and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary
for the development of its business. See "Business - Employees and
Management."
Competition
The market in which the Company intends to participate is highly
competitive. Many of the companies in the cancer diagnostic and screening
markets have substantially greater technological, financial, research and
development, manufacturing, human and marketing resources and experience than
the Company. Such companies may succeed in developing products that are more
effective or less costly than the company's 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 CTLMTM device to medical facilities will, in part, be dependent on the
Company's ability to demonstrate the clinical utility of the CTLMTM device as
an adjunct to mammography and physical examination and its advantages over
other available diagnostic tests. The competition for developing a commercial
device utilizing computed tomography 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 CTLMTM 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 companies: University of Pennsylvania - Non-Invasive Technologies; City
College of New York - MediScience, Inc.
Technical Obsolescence
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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 CTLMTM
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 CTLMTM device, as to which there can be no
assurance, the Company revenues, if any, will be derived from sales to
international distributors. A significant portion of the Company's revenues,
therefore, may be subject to the risks associated with international sales,
including economical and political instability, shipping delays, fluctuation
of foreign currency exchange rates, foreign regulatory requirements and
various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a timely basis. Future imposition
of, or significant increases in the level of, customs duties, export quotas or
other trade restrictions could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business - Sales
and Marketing," the regulation of medical devices, particularly in Europe,
continue to develop and there can be no assurance that new laws or regulations
will not have an adverse effect on the Company.
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 CTLMTM 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.
Employees
As of September 24, 1997, the Company had 31 full-time employees,
including its three executive officers, and 2 part-time employees. A majority
of
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the Company's employees (22) are employed in the areas of scientific and
product research and development.
Item 2. Description of Property
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.
Item 3. Legal Proceedings
On July 10, 1997, the Company filed an action in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, case no. 97-10533,
against Mr. Valey Kamalov ("Kamalov"). The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Upon filing the complaint, the Company sought and was granted
injunctive relief against Kamalov during the pendency of the proceedings.
The Company is not aware of any other material legal proceedings,
pending or contemplated, to which the Company is, or would be, a party or of
which any of its property is, or would be, the subject.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the over-the-counter bulletin
board market. There has been trading in the Company's Common Stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high and low trade prices for the Common Stock, as
reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown or commissions and may not necessarily represent actual transactions.
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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 $ .75
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
June/1997 $3.06 $2.69
On June 30, 1997, the closing trade price of the Common Stock as
reported on the OTC Bulletin Board was $2.69. As of such date, there were
approximately 607 holders of record of the Company's Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Twelve Months Ended June 30, 1997 and June 30, 1996. General and
administrative expenses in the aggregate during the twelve months ended June
30, 1997, were $2,212,998 representing a decrease of $486,992 from $2,699,990
during the twelve months ended June 30, 1996. The decrease is due primarily to
a substantial decrease of professional fees as a result of hiring employees
and non-recurring expenses associated with the clinical sites and attendant
expenses. Compensation and related benefits during the twelve months ended
June 30, 1997, were $3,934,294 representing an increase of $2,484,063 from
$1,450,231 during the twelve months ended June 30, 1996. The increase in
compensation and related benefits is due to the hiring of an additional 10
employees and the exercise of incentive and non-qualified stock options by its
employees. Research and development expenses during the twelve months ended
June 30, 1997, were $1,682,064 representing an decrease of $100,865 from
$1,782,929 during the twelve months ended June 30, 1996. This decrease is due
primarily to finalizing certain components of the CTLM device.
Net interest income during the twelve months ended June 30, 1997, was
$114,228 representing an increase of $55,920 from $58,308 during the twelve
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months ended June 30, 1996. This increase is due to an increase of funds
invested by the Company.
Depreciation and amortization expenses during the twelve months ended
June 30, 1997, were $202,365 representing an increase of $90,693 from $111,672
during the twelve month period ended June 30, 1996. This increase is due
primarily to the purchase of the Company's current facility and the attendant
improvements.
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
$12,8586,000. 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 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 $383,223 at
June 30, 1997, representing a decrease of $3,592,131 from $3,975,354 at June
30, 1996. The decrease in cash and cash equivalents is due to continuing
operations.
The Company's prototype equipment totaled $1,216,585 at June 30, 1997
and $575,338 at June 30, 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
(CTLMTM) device and the manufacture of five (5) devices to be placed into
clinical sites.
The Company's property and equipment, net, totaled $3,320,979 at June
30, 1997 and $657,132 at June 30, 1996. This increase is due to the purchase
of a building and the attendant improvements.
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
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market through an underwritten secondary offering. At the present time, the
Company continues to receive indications of interest to provide this
additional funding. The Company, however, continues to review and balance
these indications of interest and funding requirements against its strategic
product development goals.
On September 24, 1997, the Corporation entered into an agreement with
a merchant banker for the sale, pursuant to Regulation S, of up to a total of
200 shares of Series C Convertible Preferred Stock ("Preferred") and Warrants
to purchase up to 100,000 shares of the Company's common stock, exercisable at
a price equal to the Closing bid price of the common stock as of the Closing
Date of the Regulation S Sale (the "Closing Date"), for a total amount of up
to $2,000,000. The Preferred is convertible at 75% of the average closing
price of the Company's common stock for the five-day trading period ending on
the day prior to the date of conversion but in no event will the conversion
price be greater than 75% of the average price on the Closing Date, as
determined by the average price over the five consecutive trading days ending
the trading day prior to the Closing Date. See Financial Statements Note (18)
Subsequent Event.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Independent Auditor's Report F-1
Financial Statements
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-8
Notes to Financial Statement F-10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective August 1, 1997, the accounting firm of Margolies and Fink,
Certified Public Accounts for the Company, changed the accounting firms name
to Margolies, Fink and Wichrowski, Certified Public Accounts.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; and
Compliance With Section 16(a) of the Exchange Act.
All Directors hold their offices until the next shareholder meeting
of the Company and until their successors are elected and qualified or until
their earlier resignation or removal. Officers are appointed by and serve at
the discretion of the Board of Directors.
Business Experience
Richard J. Grable, 55
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Mr. Grable has served as Chief Executive Officer and a Director of
the Company since 1994.
From March, 1994, to the Present: Mr. Grable is Chief Executive
Officer and a Director of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily
responsible for the development of the CTLMtm 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, 60
Mrs. Grable has served as President and Chairman of the Board of
Directors of the Company since 1994.
From March, 1994, to Present: Mrs. Grable is President and a Director
of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of
diagnostic imaging systems.
From September, 1991, to February, 1994: Mrs. Grable was President
and Director of VCC Communications, Inc., Tampa, Fla., a manufacturer of
voltage controlled oscillators (VCO).
From August, 1988, to April, 1991: Mrs. Grable was President of
Lintronics International Ltd., Inc., Plantation, Fla., a manufacturer of
breast imaging systems.
Allan L. Schwartz, 55
Mr. Schwartz has served as Executive Vice-President, Chief Financial
Officer and a Director of the Company since 1994.
From March, 1994, to Present: Mr. Schwartz is Executive
Vice-President and Chief Financial Officer of Imaging Diagnostic Systems,
Inc., Sunrise, 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.
21
<PAGE>
From August, 1991, to April, 1993: Mr. Schwartz was President and
Director of Tron Industries, Inc., North Lauderdale, Florida, a developer of
low voltage neon novelty products.
From April, 1991, to July, 1991: Mr. Schwartz worked as a
manufacturing consultant for SE Enterprises, Miami, Fla., a manufacturer of
prototype homes.
Peter S. Knezevich, 41
Mr. Knezevich served as the Company's General Counsel and Vice
President from April, 1995 until September 16, 1997, when he resigned for
personal reasons.
Robert H. Wake, 48
From April, 1995, to Present: Mr. Wake is Director of Engineering for
Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic
imaging systems.
From January, 1994, to March, 1995: Mr. Wake was a consultant to
various companies in 3-D computer imaging.
From October, 1986, to December, 1993: Mr. Wake founded and was
President of Reality Imaging Corporation, Solon, Ohio, a manufacturer of 3-D
computer imaging systems. Mr. Wake invented the Voxel Flinger 3-D imaging
technology.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's
outstanding stock. Both parties disclaim, however, any beneficial interest or
ownership in the shares owned by the other party.
Item 10. Executive Compensation
The information required by this item is hereby incorporated herein
by reference to pages 5 through 7 of the Company's Proxy Statement dated
September 7, 1997 issued, in connection with its annual meeting to be held on
October 15, 1997 ( the "Proxy Statement").
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is hereby incorporated herein
by reference to page 3 of the Company's Proxy Statement.
22
<PAGE>
Item 12. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated herein
by reference to page 4 of the Company's Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
A) Exhibits included herein:
Exhibit
No. Description
--- -----------
(3)(i).7 Amendment to Article of Incorporation -
Designation of Series B Convertible Preferred Shares.
Filed as an Exhibit to the Registration Statement on
Form S-1 declared effective on July 10,1997. File
Number 333-21243.
(3)(i).6 Amendment to Article of Incorporation -
Designation of Series A Convertible Preferred Shares.*
(3)(i).5 Articles of Incorporation (Florida)*
(3)(ii).1 By-Laws(Florida)
(3)(i).4 Certificate of Dissolution*
(3)(i).3 Articles of Incorporation and By-Laws(New Jersey)**
(3)(i).1 Certificate and Plan of Merger**
(3)(i).2 Certificate of Amendment**
(4).1 Instruments Defining the Rights of Security
Holders - Designation of Series A Convertible
Preferred Shares.(See Exhibit (3), above).
(10).1 Facilities Lease(s)**
(10).2 Incentive Stock Option Plan**
(10).3 Non-Qualified Stock Option Plan**
(10).4 Employment Agreement(s)**
(10).5 Lock Up Agreement By and Between The Company
and Richard J. Grable, Linda B. Grable, and Allan L.
Schwartz*
(11) Schedule of computation of net loss per share.
23
<PAGE>
* Filed as an Exhibit to the Company's Form 10-KSB for the year ending June 30,
1996.
** Filed as an exhibit to the Company's Form 10-SB, as amended, file number
0-26028, filed on May 6, 1995.
B) Reports on Form 8-K
99.1 Report dated June 12, 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/Linda B. Grable
-------------------
Linda B. Grable
Chairman of the Board,
Director, and President.
September 26, 1997
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
Date: September 26, 1997
By: /s/Richard J. Grable
--------------------
Richard J. Grable
Director and Chief Executive Officer
Date: September 26, 1997
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz
Director and Executive Vice-President
Dated: September 26, 1997
25
<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 June 30, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for the
years ended June 30, 1997 and 1996 and for the period December 10, 1993 (date
of inception) to June 30, 1997. 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 June 30, 1997 and 1996 and the
results of its operations and its cash flows for the years ended June 30, 1997
and 1996 and for the period December 10, 1993 (date of inception) to June 30,
1997 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated
its financial statements to reflect the change in accounting for software
development costs.
The Company is in the development stage as of June 30, 1997 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 5. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 6, 1997
F - 2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheet
June 30, 1997 and 1996
ASSETS
1997 1996
----------- ----------
Current assets:
Cash $ 383,223 $ 3,975,354
Restricted certificate of deposit 103,500 --
Loans receivable-other 10,073 --
Prepaid expenses 56,792 15,900
----------- -----------
Total current assets 553,588 3,991,254
----------- -----------
Property and equipment, net 3,320,979 657,132
Prototype equipment 1,216,585 575,338
Other assets 9,635 53,010
----------- -----------
$ 5,100,787 $ 5,276,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 519,546 $ 205,750
Current maturities of capital lease obligations 8,928 --
Stockholder loans -- 77,833
----------- -----------
Total current liabilities 528,474 283,583
----------- -----------
Long-term capital lease obligations 35,849 --
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series A),
5% cumulative annual dividend, no par
value; authorized 2,000,000 shares,
issued 0 and 2,400 shares, respectively -- 2,160,000
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par
value; authorized 450 shares, issued
450 and 0 shares, respectively 4,500,000 --
Common stock, no par value; authorized
48,000,000 shares, issued 24,905,084 and
23,023,789 shares, respectively 14,662,966 9,941,066
Additional paid-in capital 1,815,496 1,372,540
Deficit accumulated during the
development stage (16,288,314) (8,186,146)
----------- -----------
4,690,148 5,287,460
Less: subscriptions receivable (35,559) (18,684)
deferred compensation (118,125) (275,625)
----------- -----------
Total stockholders' equity 4,536,464 4,993,151
----------- -----------
$ 5,100,787 $ 5,276,734
=========== ===========
See accompanying notes to the financials.
F - 3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 3,776,794 $ 1,217,731 $ 5,247,472
Research and development 616,886 239,669 968,511
Research and development expenses 1,065,178 1,543,260 2,664,172
Advertising and promotion expenses 166,520 272,698 544,395
Selling, general and
administrative expenses 528,753 297,229 905,385
Clinical expenses 33,506 317,310 350,816
Consulting expenses 764,364 832,075 1,715,908
Insurance costs 121,287 34,097 166,242
Professional fees 178,402 630,284 897,105
Stockholder expenses 20,902 -- 20,902
Trade show expenses 154,782 85,623 289,276
Travel and subsistence costs 195,585 99,826 345,600
Rent expense 48,897 130,848 221,248
Interest expense 2,744 -- 27,053
Depreciation and amortization 202,365 111,672 364,214
Amortization of deferred compensation 157,500 232,500 504,375
Interest income (116,972) (58,308) (175,280)
----------- ----------- -----------
7,917,493 5,986,514 15,057,394
----------- ----------- -----------
Net loss (7,917,493) (5,986,514) (15,057,394)
Dividends on cumulative preferred stock:
From discount at issuance (714,155) (998,400) (1,712,555)
Earned (184,675) (47,845) (232,520)
Amortization of preferred stock discount 714,155 -- 714,155
----------- ----------- -----------
Net loss applicable to common
shareholders $(8,102,168) $(7,032,759) $(16,288,314)
=========== =========== ============
Net loss per common share:
Weighted average number of common shares 24,222,966 21,354,155 20,082,632
=========== =========== ============
Primary net loss per common share $ (.33) $ (.33) $ (.81)
=========== =========== ============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
-------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- -0- $ -0-
---------- ---------- ----------- -----------
Issuance of common stock, restated for reverse
stock split - - - -
Acquisition of public shell - - - -
Net issuance of additional shares of stock - - - -
Common stock sold - - - -
Net loss - - - -
---------- ---------- ----------- -----------
Balance at June 30, 1994 - - - -
Common stock sold - - - -
Common stock issued in exchange for services - - - -
Common stock issued with employment agreement - - - -
Common stock issued for compensation - - - -
Stock options granted - - - -
Amortization of deferred compensation - - - -
Forgiveness of officers' compensation - - - -
Net loss - - - -
---------- ---------- ----------- -----------
Balance at June 30, 1995 - - - -
---------- ---------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
----------------------- Additional During the
Number of Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
---------- ---------- ------------- -------------- ---------------
<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 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 - - - (66,951) -
---------- --------- --------- -------- --------
Balance at June 30, 1994 16,067,772 102,951 - (66,951) -0-
Common stock sold 1,980,791 1,566,595 - - (523,118)
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 - - 622,500 - -
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - 50,333 - -
Net loss - - - (1,086,436) -
---------- --------- --------- ---------- ----------
Balance at June 30, 1995 18,616,713 2,002,238 672,833 (1,153,387) (523,118)
---------- --------- --------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred
Compensation Total
------------- ------------
<S> <C> <C>
Balance at December 10, 1993(date of inception) $ -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)
------------- ------------
Balance at June 30, 1994 - 36,000
Common stock sold - 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) -
Amortization of deferred compensation 114,375 114,375
Forgiveness of officers' compensation - 50,333
Net loss - (1,086,436)
------------- ------------
Balance at June 30, 1995 (508,125) 490,441
------------- ------------
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F - 5
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
---------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 - - - -
------------- ------------- ----------- --------------
Preferred stock sold, including dividends 4,000 3,600,000 - -
Common stock sold - - - -
Cancellation of stock subscription - - - -
Common stock issued in exchange for services - - - -
Common stock issued with exercise of stock options - - - -
Common stock issued with exercise of options
for compensation - - - -
Conversion of preferred stock to common stock (1,600) (1,440,000) - -
Common stock issued as payment of preferred
stock dividends - - - -
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 - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
----------------------- Additional During the
Number of Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
----------- ---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 18,616,713 2,002,238 672,813 (1,153,387) (523,118)
---------- --------- --------- ---------- ----------
Preferred stock sold, including dividends - - 998,400 (998,400) -
Common stock sold 70,471 1,561,110 - - -
Cancellation of stock subscription (410,500) (405,130) - - 405,130
Common stock issued in exchange for services 2,503,789 4,257,320 - - -
Common stock issued with exercise of stock
options 191,500 104,375 - - (4,375)
Common stock issued with exercise of options
for compensation 916,400 367,164 - - -
Conversion of preferred stock to common stock 420,662 1,839,360 (399,360) - -
Common stock issued as payment of preferred
stock dividends 4,754 14,629 - (14,629) -
Dividends accrued on preferred
stock not yet converted - - - (33,216) -
Collection of stock subscriptions - - - - 103,679
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - 100,667 - -
Net loss - - - (5,986,514) -
---------- --------- --------- ---------- ----------
Balance at June 30, 1996 23,023,789 9,941,066 1,372,540 (8,186,146) (18,684)
---------- --------- --------- ---------- ----------
</TABLE>
<PAGE>
Deferred
Compensation Total
------------ ----------
Balance at June 30, 1995 (508,125) 490,441
--------- ----------
Preferred stock sold, including dividends - 3,600,000
Common stock sold -
1,561,110
Cancellation of stock subscription - -
Common stock issued in exchange for services - 4,257,320
Common stock issued with exercise of stock options - 100,000
Common stock issued with exercise of options
for compensation - 567,164
Conversion of preferred stock to common stock - -
Common stock issued as payment of preferred
stock dividends - -
Dividends accrued on preferred
stock not yet converted - (33,216)
Collection of stock subscriptions - 103,679
Amortization of deferred compensation 232,500 232,500
Forgiveness of officers' compensation - 100,667
Net loss - (5,986,514)
--------- ----------
Balance at June 30, 1996 (275,625) 4,993,151
--------- ----------
Continued)
See accompanying notes to the financial statements.
F - 6
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
---------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 2,400 2,160,000 - -
---------- ----------- ---------- -----------
Preferred stock sold, including dividends - - 450 4,500,000
Conversion of preferred stock to common stock (2,400) (2,160,000) - -
Common stock issued in exchange for services - - - -
Common stock issued for compensation - - - -
Common stock issued with exercise of stock options - - - -
Common stock issued with exercise of stock options
through stock appreciation rights - - - -
Cancellation of stock issued to employee - - - -
Common stock issued as payment of preferred
stock dividends - - - -
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 June 30, 1997 - $ - 450 $4,500,000
---------- ---------- --------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
---------------------------- Additional During the
Number of Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
----------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 23,023,789 9,941,066 1,372,340 (8,186,146) (8,614)
------------ ------------ ------------ ------------ ------------
Preferred stock sold, including dividends -- -- 714,144 (714,155) --
Conversion of preferred stock to common stock 1,041,202 2,759,040 599,040 -- --
Common stock issued in exchange for services 214,200 630,129 -- -- --
Common stock issued for compensation 313,200 918,364
Common stock issued with exercise of stock options 17,000 33,750 11,521 -- (33,750)
Common stock issued with exercise of stock options
through stock appreciation rights 334,933 363,514 950,473 -- --
Cancellation of stock issued to employee (150,000) (52,500) -- -- --
Common stock issued as payment of preferred
stock dividends 20,760 49,603 -- (49,603) --
Payment of accrued dividends on converted shares -- -- -- 33,216 --
Dividends accrued on preferred
stock not yet converted -- -- -- (168,288) --
Collection of stock subscriptions -- -- -- -- 16,875
Amortization of deferred compensation -- -- -- -- --
Amortization of preferred stock dividend -- -- (714,155) 714,155 --
Net loss -- -- -- (7,917,493) --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 24,905,084 $ 14,662,966 $ 1,185,496 $(16,288,314) $ (35,519)
------------ ------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferrred
Compensation Total
-------------- ---------
<S> <C> <C>
Balance at June 30, 1996 (215,625) 4,993,151
--------- ----------
Preferred stock sold, including dividends - 4,500,000
Conversion of preferred stock to common stock - -
Common stock issued in exchange for services - 650,129
Common stock issued for compensation - 918,364
Common stock issued with exercise of stock options - 91,521
Common stock issued with exercise of stock options
through stock appreciation rights - 1,313,989
Cancellation of stock issued to employee - (52,500)
Common stock issued as payment of preferred
stock dividends - -
Payment of accrued dividends on converted shares - 33,216
Dividends accrued on preferred
stock not yet converted - (168,288)
Collection of stock subscriptions - 16,875
Amortization of deferred compensation 157,500 157,500
Amortization of preferred stock dividend - (7,917,493)
Net loss - (7,917,493
--------- ----------
Balance at June 30, 1997 $(118,125) $4,536,464
--------- ----------
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
Net loss $ (7,917,493) $ (5,986,514) $(15,057,394)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 202,365 111,672 364,214
Amortization of deferred compensation 157,500 232,500 504,375
Noncash compensation and consulting expenses 2,957,128 3,049,113 6,310,516
(Increase) in restricted certificate of deposit (103,500) -- (103,500)
(Increase) decrease in loans receivable
-shareholders and others (10,073) 48,600 (10,073)
(Increase) decrease in prepaid expenses (40,892) (15,900) (56,792)
(Increase) decrease in other assets 43,375 (50,346) (9,635)
Increase in accounts payable
and accrued expenses 178,724 88,074 351,258
------------ ------------ ------------
Total adjustments 3,384,627 3,463,713 7,350,363
------------ ------------ ------------
Net cash used for operating activities (4,532,866) (2,522,801) (7,707,031)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment (641,247) (304,963) (1,216,585)
Capital expenditures (2,815,923) (471,930) (3,545,256)
------------ ------------ ------------
Net cash used for investing activities (3,457,170) (776,893) (4,761,841)
------------ ------------ ------------
Cash flows from financing activitie
Repayment of capital lease obligation (5,512) -- 5,512)
Proceeds from stockholder loans, net (77,833) 29,060 --
Proceeds from issuance of preferred stock 4,500,000 3,600,000 8,100,000
Net proceeds from issuance of common stock (18,750) 3,629,929 4,757,607
------------ ------------ ------------
Net cash provided by financing activities 4,397,905 7,258,989 12,852,095
------------ ------------ ------------
Net increase (decrease) in cash (3,592,131) 3,959,295 383,223
Cash and cash equivalents at beginning of period 3,975,354 16,059 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 383,223 $ 3,975,354 $ 383,223
============ ============ ============
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F - 8
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,744 $ -- $ 27,053
=========== =========== ==========
Supplemental disclosures of noncash investing
and financing activities:
Issuance of common stock and options
in exchange for services $ 650,129 $ 2,487,025 $3,290,429
=========== =========== ==========
Issuance of common stock in
exchange for property and equipment $ -- $ 10,900 $ 89,650
=========== =========== ==========
Issuance of common stock for compensation $ 918,364 $ 567,164 $1,636,528
=========== =========== ==========
Issuance of common stock through
exercise of incentive stock options $ 1,405,510 $ -- $1,405,510
=========== =========== ==========
Issuance of common stock as
payment for preferred stock dividends $ 49,603 $ 14,629 $ 64,232
=========== =========== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ 50,289 $ -- $ 50,289
=========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state
of New Jersey on November 8, 1985, under its original name of Alkan Corp. On
April 14, 1994, a reverse merger was effected between Alkan Corp. and the
Florida corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl.
was formed on December 10, 1993.(see Note 4) 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(TM) prototype has been developed with
the use of "Ultrafast Laser Imaging Technology"(TM), and this technology was
first introduced at the "RSNA" scientific assembly and conference during late
November 1994. The completed CTLM(TM) device was exhibited at the "RSNA"
conference November 26-30, 1995. The Company exhibited the pilot production
run CTLM(TM) device at the "RSNA" conference held in Chicago on December 1-6,
1996. The Company filed its initial patent application for the CTLM(TM) device
on June 7, 1995 and has subsequently filed for foreign patent protection.
The initial CTLM(TM) 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(TM) 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 or 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(TM) 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(TM) 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 five years upon
placement of the equipment at the clinical testing locations.
(d) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are computed using straight-line methods over the estimated
useful lives of the related assets.
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, capitalization of software development costs begins
upon the establishment of technological feasibility for the product.
The establishment of technological
(Continued)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Property, equipment and software development costs (Continued)
feasibility and the ongoing assessment of the recoverability
of these costs requires considerable judgement by management
with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware
technology. After considering the above factors, the Company
has determined that software development costs, incurred
subsequent to the initial acquisition of the basic software
technology, should be properly expensed. Such costs are
included in research and development expense in the
accompanying statements of operations.
(e) Research and Development
Research and development expenses consist principally of
expenditures for equipment and outside third-party consultants
which are used in testing and the development of the Company's
prototypes, product software 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(TM)
prototype. The software development costs are with outside
third-party consultants involved with the implementation of
final changes to the developed software. 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.
(Continued)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires an asset and liability
approach for financial accounting and reporting for income
taxes. Under SFAS 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the year that
includes the enactment date.
(h) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
(3) RESTATEMENT
The Company had been capitalizing the costs associated with the final
development of the CTLM(TM) software from its initial acquisition phase to the
software being used in the CTLM(TM) machine currently undergoing tests at
clinical locations. Effective December 31, 1996, the Company has restated its
financial statements to expense all additional costs incurred since the
acquisition of the original software. Accordingly, the Company has expensed a
total of $869,692 as additional research and development costs through
December 31, 1996, of which $436,736 was applicable to the fiscal year ended
June 30, 1996.
(4) 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 14)
(Continued)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(4) MERGER (Continued)
As reflected in the Statement of Stockholders' Equity, the Company recorded
the merger with the public shell at its cost, which was zero, since at that
time the public shell did not have any assets or equity. There was no basis
adjustment necessary for any portion of the merger transaction as the assets
of IDSI-Fl. were recorded at their net book value at the date of merger. The
178,752 shares represent 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.
(5) 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(TM) prototype is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(6) RESTRICTED CERTIFICATE OF DEPOSIT
The Company has issued an irrevocable letter of credit, due on October 4,
1997, towards the purchase of laboratory equipment. The letter of credit is
secured with the certificate of deposit.
(7) STOCKHOLDERS' LOANS - RECEIVABLES AND PAYABLES
Certain of the major shareholders have advanced funds to the Company during
1995 and 1996. These loans are unsecured and non-interest bearing. These loans
have been repaid in full during the year ended June 30, 1997.
(Continued)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
----------------------------
1997 1996
----------- ----------
Furniture and fixtures $ 240,029 $ 28,199
Building and land 2,081,399 --
Clinical equipment 250,000 --
Computers and equipment 389,373 164,270
CTLM(TM) software costs 352,932 352,932
Trade show equipment 153,193 81,416
Laboratory equipment 179,862 153,758
Leasehold improvements -- 38,407
----------- ---------
3,646,788 818,982
Less: accumulated depreciation (325,809) (161,850)
----------- ---------
Totals $ 3,320,979 $ 657,132
=========== =========
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(TM) software costs 5 years
Leasehold improvements Length of lease
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(TM) software at June 30, 1997 and 1996 are $225,007 and $279,353,
respectively, which represents the net realizable value of the CTLM(TM)
software at the end of each period presented. Amortization expense related to
the CTLM(TM) software for each period presented in the statement of operations
is as follows:
(Continued)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) PROPERTY AND EQUIPMENT (Continued)
Period ended Amount
------------ ---------
6/30/97 $ 54,345
6/30/96 54,345
6/30/95 19,160
6/30/94 73
---------
Total $ 127,923
=========
(9) OTHER ASSETS
Other assets consist of the following:
June 30,
---------------------
1997 1996
--------- --------
Deposit on purchase of new building $ -- $ 50,000
Security deposits 9,635 3,010
--------- --------
Totals $ 9,635 $ 53,010
========= ========
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.
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
----------------------
1997 1996
--------- ---------
Accounts payable - trade $ 276,096 $ 165,047
Preferred stock dividends payable 168,288 33,216
Accrued property taxes payable 14,000 --
Accrued compensated absences 56,632 --
Payroll taxes payable 4,530 7,487
--------- ---------
Totals $ 519,546 $ 205,750
========= =========
(Continued)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) 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 8) and the obligation has
been recorded as debt. At June 30, 1997, approximate future minimum lease
payments under capitalized lease obligations were as follows:
Year ending June 30,
--------------------
1998 $ 12,384
1999 12,384
2000 12,384
2001 12,384
2002 4,128
---------
Total minimum lease payments 53,664
Less amount representing interest (8,887)
---------
Present value of net minimum lease payments 44,777
Less current portion (8,928)
---------
Long-term portion $ 35,849
=========
The Company also leases certain office equipment under an operating lease
expiring in June 1998. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.
Minimum future lease payments under the non-cancelable operating lease having
a remaining term in excess of one year as of June 30, 1997 for the next year
total $3,396.
(Continued)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) 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 $11,045,000 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 $3,755,000 and $1,538,500 at June 30, 1997 and
1996, 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 June 30, 1997
was an increase of approximately $2,216,500.
(13) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to
provide for the authorization of 2,000,000 shares of no par value preferred
stock. The shares were divided out of the original 50,000,000 shares of no par
value common stock.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000
per share, with net proceeds to the Company, after commissions and issuance
costs, amounting to $3,600,000.
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.
(Continued)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) CONVERTIBLE PREFERRED STOCK (Continued)
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 during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock"
("Series B Preferred Stock") and warrants to purchase up to an additional
112,500 shares of common stock on December 17, 1996 pursuant to Regulation D
and Section 4(2) of the Securities Act of 1933. The agreement called for a
purchase price of $10,000 per share, with proceeds to the Company amounting to
$4,500,000.
(Continued)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) CONVERTIBLE PREFERRED STOCK (Continued)
The holders of the Series B Preferred Stock may convert up to 34% of the
Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (I) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to eighty-two percent (82%) of the
Market Price of the Company's common stock; provided, however, that in no
event will the "Conversion Price" be greater than $3.85. The warrants are
exercisable at any time for an exercise price of $5.00 and will expire five
years from the date of issue.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company
may issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued
common stock such number of shares of common stock as shall be available to
effect the conversion of all of the outstanding shares of Convertible
Preferred Stock. The holders of the Series B Preferred Stock are also entitled
to receive a seven percent (7%) per share, per annum dividend out of legally
available funds and to the extent permitted by law. These dividends are
payable quarterly on the last business day of each quarter commencing with the
calendar quarter next succeeding the date of issuance of the Series B
Preferred Stock. Such dividends shall be fully cumulative and shall accrue,
whether or not declared by the Board of Directors of the Company, and may be
payable in cash or in freely tradeable shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those
of the regular common stockholders, with the number of votes equal to the
number of shares of common stock that would be issued upon conversion thereof.
The Series B Preferred Stock shall rank senior to any other class of capital
stock of the Company now or hereafter issued as to the payment of dividends
and the distribution of assets on redemption, liquidation, dissolution or
winding up of the Company.
As of June 30, 1997, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $168,288 of accrued
dividends payable.
(Continued)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) 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 and other
subsequent sales of common stock, in the amount of $35,559, as of June 30,
1997, 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 $102,942,
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 - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) 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 at the
excess of the fair market value of the transaction over the exercise price for
each of the transactions.
As of June 30, 1997, there were a total of 1,507,378 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 13)
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 year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($4,721,900) of its common stock. The conversion of Series A
Convertible Preferred Stock accounted for the issuance of 1,081,962 shares
($2,808,643). The remaining 799,333 shares were issued as follows:
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. On January 3, 1997 bonus stock was issued to the officers of
the Company, 350,000 shares. Compensation expense of $907,900 was
charged, as the fair market value at that date was $2.59 per
share.
(Continued)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an
outside consultant in exchange for services performed.
Consulting services of $11,500 were recorded, representing the
fair market value ($2.88 per share) on that date.
5. Services rendered by an independent consultant during June
1997 in exchange for 199,000 shares. Consulting expenses of
$548,149 was charged, as the fair market value on the date of
the transaction was approximately $2.75 per share.
6. Exercise of incentive stock options, 361,933 shares ($397,264).
7. The Company repurchased 150,000 shares ($52,500), which had
been previously acquired by one of its employees.
(15) 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.
(Continued)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) STOCK OPTIONS (Continued)
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.
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 (1,400,831) $.35 - 1.18
-------- ----------
Outstanding at June 30, 1996 689,036 $ .81 - 8.16 849,169 (1)
Granted 363,427 $2.56 - 4.37 --
Exercised (395,384) (2) --
Canceled -- (399,169) (3)
-------- ----------
Outstanding at June 30, 1997 657,079 $ .81 - 8.16 450,000 (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. The exercise of
150,000 shares by an individual was rescinded in January 1997,
and the remaining money ($52,500) returned.
(2) Of the total 395,384 options that were exercised during
the year ended June 30, 1997, 27,500 of these options 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 367,884 options were exercised by officers and an
employee of the Company pursuant to their Stock Appreciation
Rights, and they acquired a total of 334,933 shares of common
stock. A charge to compensation expense of $1,405,510, for the
fair value of the common stock issued in excess of the
exercise price, was made during the period
(Continued)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) STOCK OPTIONS (Continued)
(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.
At June 30, 1997, 308,084 of the incentive stock options were vested and
exercisable and the 450,000 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. The following option transactions have occurred:
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 June 30, 1997.
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 - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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, 2001.
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 294,778 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.
(16) 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 June
30, 1997 was $346,000.
(17) 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), $104,000 (amended by Board of Directors
effective January 15, 1997), and $104,000, respectively.
(Continued)
F - 26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) 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. This contract was
extended on June 16, 1997, providing for annual compensation of $95,000, with
no limit as to the term.
As additional consideration for his development efforts in the CTLM(TM)
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(TM) 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 years ended June 30, 1997 and 1996, employment agreements were
initiated with individuals in various positions within the Company. Annual
payments for compensation under these agreements amount to $634,000 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(TM) device
in an aggregate amount of at least four million U.S. dollars ($4,000,000)
during the Initial Term of this agreement.
(Continued)
F - 27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) SUBSEQUENT EVENT
On September 10, 1997, the Company executed a formal "Term Sheet" with an
investor to raise additional equity capital. The Company will receive net
proceeds of approximately $1,780,000, after commissions, by issuing in a
Regulation D Private Placement shares of its common stock. The actual number
of shares of common stock to be issued will be determined at closing, and will
be based upon an average price of the common stock, five days prior to
closing. The closing of this offering is expected to take place within fifteen
days. The stock will be restricted under Rule 144 for either a one or two year
period, which will also be finalized at closing. The Company will also issue
400,000 warrants, exercisable over the next five years, at an exercise price
equal to twice the closing price of the private placement offering.
On September 11, 1997, the Company accepted a letter of intent for the
issuance of $2,500,000 of "Series C Convertible Preferred Stock". The holders
of the preferred shares shall have demand registration rights pursuant to a
registration rights agreement which shall be signed contemporaneously with the
subscription agreement. The closing of this offering is expected to take place
within fifteen days.
F - 28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Net loss $(7,917,493) $ (5,986,514) $(15,057,394)
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 by
the preferred shareholders 184,675 47,845 232,520
Add:
Amortization of discounted
preferred dividends pro-rata
over conversion period 714,155 -- 714,155
------------ ------------ ------------
Net loss applicable to common
shareholders for primary loss
per share $ (8,102,168) $ (7,032,759) $(16,288,314)
============ ============ ============
Weighted average number of common
shares outstanding during the period 24,222,966 21,354,155 20,082,632
============ ============ ============
Net loss per common share $ (.33) $ (.33) $ (.81)
============ ============ ============
</TABLE>
Notes -
(A) No common stock equivalents have been added in the computation
of net loss per share as their effect would be anti-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>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
SUPPORTING SCHEDULE
<TABLE>
<CAPTION>
From
Inception
Years Ended June 30, (December 10,
-------------------------- 1993) to June 30,
1997 1996 1997
---------- ---------- -----------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding during the period before the
conversion of the preferred stock 23,321,836 21,318,171 19,829,233
Add - weighted average of common shares
converted during the period 901,130 35,984 253,399
---------- ---------- ----------
Total weighted average of common shares
outstanding during the period 24,222,966 21,354,155 20,082,632
========== ========== ==========
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number:0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
----------------------- -------------------------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
- ------------------------------------ -------
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of
equity as of March 31, 1998: 29,639,201 shares of Common Stock, no par value;
and, 450 shares of Series B, 49 shares of Series D, 44 shares of Series E, and
75 shares of Series F Preferred Convertible Stock, no par value.
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Part I - Financial Information Page
- -------------------------------- ----
Condensed Balance Sheet -
March 31, 1998 and June 30, 1997.......................... 3
Condensed Statement of Operations Three months
and nine months ended March 31,
1998 and 1997, and December 10,
1993(date of inception) to March 31, 1998................. 4
Condensed Statement of Cash Flows Nine months
ended March 31, 1998 and 1997, and
December 10, 1993(date of inception)
to March 31, 1998......................................... 5
Notes to Condensed Financial Statements ........................ 6
Management's Discussion and Analysis of
Financial Condition and Results................................. 7
Part II - Other Information
Item 1, Legal Proceedings.................................... 9
Item 2, Changes in Securities................................ 9
Item 3, Defaults Upon Senior Securities...................... 9
Item 4, Submission of Matters to a Vote of
Security Holders .................................... 10
Item 5, Other Information.................................... 10
Item 6, Exhibits and Reports on Form 8-K..................... 14
Signature ...................................................... 14
2
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
<TABLE>
<CAPTION>
Assets
March 31, 1998 June 30, 1997
-------------- -------------
Unaudited) *
<S> <C> <C>
Current Assets
Cash $ 426,890 $ 486,723
Prepaid expenses 12,653 56,792
Loan Receivable 1,573 10,073
Other current assets 120,489 -
--------------- ---------------
Total Current Assets 561,605 553,588
--------------- ---------------
Property and Equipment, net 3,361,544 3,320,979
--------------- ---------------
Prototype Equipment 2,246,290 1,216,585
Other Assets 9,635 9,635
--------------- ---------------
2,255,925 1,226,220
--------------- ---------------
Total Assets $ 6,179,074 $ 5,100,787
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 731,295 $ 519,546
Accrued Dividends Payable 404,721 -
Current maturity of capital
lease obligation 9,572 8,928
Shareholder Loans 360,407 -
--------------- ---------------
Total Current Liabilities 1,505,995 528,474
--------------- ---------------
Long-term capital lease
obligation 28,580 35,849
--------------- ---------------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div. 4,500,000 4,500,000
Convertible Preferred (Series D) 490,000 -
Convertible Preferred (Series E) 440,000 -
Convertible Preferred (Series F) 750,000 -
Common Stock 19,172,593 14,662,966
Additional Paid-In-Capital 2,448,503 1,815,496
Deficit Accumulated during
development stage (23,121,038) (16,288,314)
--------------- ---------------
4,680,058 4,690,148
Less subscription receivable (35,559) (35,559)
Less deferred compensation - (118,125)
--------------- ---------------
Total Stockholders' Equity 4,644,499 4,536,464
--------------- ---------------
Total Liabilities and
Stockholders' Equity $ 6,179,074 $ 5,100,787
=============== ===============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
<TABLE>
<CAPTION>
9 Months Ended 3 Months Ended Since Inception
March 31, March 31, (12/10/93) to
1998 1997 1998 1997 March 31, 1998
------------------------- ----------------------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating Expenses:
Compensation and related
benefits:
Administrative/Engineering $ 1,261,163 $ 2,038,666 $ 424,184 $ 1,456,428 $ 6,508,635
Research and development 288,177 378,953 124,822 81,173 1,256,688
Research/Development expenses 367,581 866,973 57,181 254,292 3,031,753
Advertising/Promotion 319,280 128,291 24,811 26,062 863,675
General/Administrative 653,109 405,208 159,413 129,736 1,558,494
Clinical expenses 7,096 13,950 2,444 2,098 357,912
Consulting expenses 808,091 67,170 323,294 29,750 2,523,999
Insurance costs 129,790 91,483 37,678 32,339 296,032
Professional fees 423,499 114,635 83,524 48,963 1,320,604
Stockholder expenses 74,348 23,373 861 -- 95,250
Trade show expenses 134,802 149,330 35,799 34,534 422,813
Travel and subsistence costs 74,146 133,417 18,740 46,469 419,746
Rent expense 16,320 44,634 (5,303) 8,128 237,568
Interest expense 2,126 391 2,126 -- 29,175
Depreciation and amortization 208,120 163,392 69,373 51,127 554,088
Amortization of
deferred compensation 118,125 118,125 39,375 39,375 622,500
Interest Income (19,245) (95,932) (5,494) (44,515) (194,525)
------------ ------------ ------------ ------------ ------------
4,866,528 4,642,059 1,392,828 2,195,959 19,904,407
------------ ------------ ------------ ------------ ------------
Net Loss ($ 4,866,528) ($ 4,624,059) ($ 1,392,828) ($ 2,195,959) ($19,904,407)
Dividends on cumulative preferred
stock:
From discount at issuance (1,729,763) (714,155) (514,729) -- (3,461,833)
Earned (236,433) (107,218) (77,639) (78,750) (468,953)
Amortization of preferred stock
discount -- 417,780 -- 357,077 714,155
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ($ 6,832,724) ($ 5,045,652) ($ 1,985,196) ($ 1,836,703) ($23,121,038)
============ ============ ============ ============ ============
Net loss per common share ($ .26) ($ .21) ($ .07) ($ .08) ($ 1.09)
============ ============ ============ ============= =============
Weighted avg
no. of common shares 26,447,340 24,066,132 28,764,621 24,566,531 21,223,268
============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Since inception
Ended March 31, (12/10/93) to
1998 1997 March 31, 1998
----------------------------------------------- -----------------
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss $ (4,866,528) $ (4,642,059) $(19,904,407)
Changes in assets and liabilities 1,753,179 1,883,887 9,118,067
------------ ------------ ------------
Net cash provided by operations (3,112,809) (2,758,172) (10,716,340)
------------ ------------ ------------
Investments
Capital expenditures (1,278,388) (3,233,944) (5,140,200)
------------ ------------ ------------
Cash used for investments (1,278,388) (3,233,944) (5,140,200)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (6,625) (1,923) (12,137)
Other financing activities 360,407 (77,833) 360,407
Proceeds from issuance of preferred stock 3,850,000 7,000,000 11,950,000
Net proceeds from issuance of common stock 127,582 (52,500) 4,885,189
Net cash provided by financing activities 4,331,364 6,867,744 17,183,459
------------ ------------ ------------
Net increase(decrease) in cash (59,833) 875,628 426,890
Cash, beginning of period 486,723 3,975,354 --
------------ ------------ ------------
Cash, end of period $ 426,890 $ 4,850,982 $ 426,890
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared March 31, 1998. The results of operations for the
nine-month period ended March 31, 1998 is not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - 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 and/or equity financing.
The Company has yet to generate an internal cash flow, and until the sales of
its product begins, the Company is totally dependent upon debt and equity
funding. See Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
In the event that the Company is unable to obtain debt or equity financing or
is unable to obtain such financing on terms and conditions acceptable to the
Company, the Company may have to cease or severely curtail its operations.
This would materially impact 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. Management has been able to raise the capital necessary
to reach this stage of product development and has been able to obtain funding
for capital requirements to date. There is no assurance that once development
of the CTLMTM prototype is completed and if and when Federal Drug
Administration marketing clearance is obtained, that the CTLM(TM) will achieve
market acceptance or that the Company will achieve a profitable level of
operations.
Note 3 - Series E & F Preferred
Effective February 3, 1998 and February 26, 1998, the Board of Directors
amended the Articles of Incorporation of the Company in order to designate
classes of shares as Series E and F Convertible Preferred. The Series E and F
Preferred are non-voting, can be converted into common stock of the Company
and have rights and preferences that materially limit or qualify the rights of
the holders of registered common stock, including a liquidation preference of
$10,000 per share.
6
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN THE
COMPANY'S FORM 10-KSB FOR FISCAL YEAR ENDED 1997.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development
of its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology
and proprietary computer algorithms to produce three dimensional cross section
slice images of the breast. Due to the fact that the Company is in the last
stages of the development of its cancer detection technology and its CTLM(TM),
it has not yet engaged in any marketing or distribution of it products and
therefore has had no revenue from its operations.
The Company has incurred net losses since inception through March 31, 1998 of
approximately $19,904,407. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLMtm , the costs associated with the clinical
trials and other research and development activities. There can be no
assurances that the CTLMtm will achieve market acceptance or that sufficient
revenues will be generated from sales of the CTLMtm to allow the Company to
operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and nine months
ended March 31, 1998, were $159,413 And $653,109, respectively, representing
an increase of $29,677 and an increase of $247,901 for the corresponding
periods for 1997. The increase during the three-month period ending March 31,
1998 was primarily due to certain administrative costs associated with the
further development of the CTLM(TM) breast-imaging device.
Compensation and related benefits during the three months and nine months
ended March 31, 1998, were $549,006 and $1,549,340 respectively, representing
a decrease of $988,595 and a decrease of $868,279 for the corresponding
periods for 1997. This decrease was primarily due to the elimination of
additional compensation expenses.
7
<PAGE>
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $426,890 as of March
31, 1998. This is a decrease of $$59,833 from $486,723 for the year ended June
30, 1997. On February 4, 1998 and February 20, 1998, Imaging Diagnostic
Systems, Inc. finalized private placement transactions resulting in $500,000
and $750,000 in equity financing respectively. See Item 5, Other Information.
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, the costs associated with the clinical trials and
the expected costs of commercializing its initial product, the CTLM(TM)
device.
Property and Equipment was valued at $3,361,544 as of March 31, 1998. The
overall gross increase of $40,565 is due primarily to the purchase of
additional laboratory equipment.
Prototype Equipment was valued as of March 31, 1998, at $2,246,290. This
represents an increase of $1,029,705 from $1,216,585 for the year ended June
30, 1997. This increase is due primarily to an increase in developmental
activities leading to the commercialization of the CTLM(TM) device.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during the
third quarter of 1998 was $1,072,828 primarily due to the Company's continued
research and development of the CTLM(TM) device and preparations for FDA
Clinical Trials including the manufacture of five (5) CTLM(TM) Breast Imaging
Systems, compared to net cash used by operating activities of research and
development of the CTLM(TM) device and related software development of
$2,195,959 in the same quarter of 1997. At March 31, 1998, the Company had a
working capital of $1,301,900 compared to a working capital of $3,016,343 at
March 31, 1997.
During the third quarter of 1998, the Company was able to raise a total of
$1,690,000 less expenses through Regulation S transactions. The Company may
continue to receive working capital from the exercise of stock options,
private placements and long term debt and operations. If the Company's working
capital is insufficient to fund its operations, it would have to explore
additional sources of financing. No assurances, however, can be
8
<PAGE>
given that future financing would be available or if available, that it could
be obtained at terms satisfactory to the Company. The Company's ability to
effectuate its plan of and continue operations is dependent on its ability to
raise capital, structure a profitable business, and generate revenues.
Capital expenditures for the third quarter of 1998 were approximately $92,615
as compared to approximately $191,137 for the third quarter of fiscal 1997.
These expenditures were a direct result of purchases of computer and other
equipment, office, warehouse and manufacturing fixtures, tradeshow equipment,
computer software, laboratory equipment and other fixed assets. The Company
anticipates that the balance of its capital needs for fiscal 1998 will be
approximately $53,000. The Company will continue to seek equity or debt
financing in order to meet its working capital needs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Effective February 3, 1998, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of
shares as Series E Convertible Preferred. The Series E Preferred is
non-voting, can be converted into common stock of the Company and has rights
and preferences that materially limit or qualify the rights of the holders of
registered common stock, including a liquidation preference of $10,000 per
share. See Item 5 "Other Information - Private Placements".
Effective February 26, 1998, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of
shares as Series F Convertible Preferred. The Series F Preferred is
non-voting, can be converted into common stock of the Company and has rights
and preferences that materially limit or qualify the rights of the holders of
registered common stock, including a liquidation preference of $10,000 per
share. See Item 5 "Other Information - Private Placements".
Item 3. Defaults Upon Senior Securities.
None.
9
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Item 4. Submission of Matters to a Vote of Security-
Holders.
None.
Item 5. Other Information.
NASDAQ LISTING
--------------
On March 24, 1996, the Company filed its application with NASDAQ to be listed
on the Small Cap Market. The Company's request for listing was subsequently
denied after a hearing before the Listing Qualifications Panel (the "Panel").
The denial was based upon the fact that one of the Company's outside
shareholders (the "Shareholder"), who had no influence over the Company, had a
questionable background and owned a 5% interest in the Company.
As a result, the Company appealed the denial decision to the NASDAQ Listing
and Hearing Review Committee (the "Committee") which on February 5, 1997,
reversed the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying
initial inclusion be reversed and the case be remanded to the Staff with
instructions to implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th, provided
NASDAQ with copies of all things necessary to satisfy any concerns that the
Panel had regarding the Shareholder. Prior to the time NASDAQ acted on the
proposal, Barrons published an inaccurate article stating that a NASDAQ
spokesman indicated that the listing would be denied. At all times up until
the date of this article the Company's stock traded at $3.00 and above. The
article had a predictable negative impact on the Company's stock and the price
dropped below $3.00, where it has stayed ever since the Barrons article,
despite a retraction from Barrons. Based upon this decline the NASDAQ staff
has refused to approve the Company for listing on the NASDAQ Small Cap Market.
The Company appealed the denial of the listing at an oral hearing before the
Committee in Washington D.C. on January 22, 1998. Pursuant to this meeting the
Panel determined to approve the Company for listing on the NASDAQ Small Cap
Market, subject to the following conditions:
1. On or before May 11, 1998, the Company must effect a reverse stock
split sufficient to raise its bid price to, or above $4.00 per share for the
opening of one trading day or in
10
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the alternative, on or before May 11, 1998, the Company must have and retain
for 10 consecutive trading days a $4.00 bid price through natural forces.
2. On or before May 11, 1998, the Company must make a public filing with
the SEC and NASDAQ evidencing a minimum of $5,000,000 in net tangible assets.
The Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for
the reverse split. The conditional listing expires on May 11, 1998. To date
the Company has been unable to comply with the above conditions.
The Company immediately appealed this decision. The Company's Securities
Counsel was notified on May 19, 1998 that its appeal was denied. The Company
has thirty (30) days to file an appeal with the Securities and Exchange
Commission. The Company intends to file an appeal in this matter.
PATENTS
-------
In December 1997, the patent for the CTLM(TM) was issued by the United States
Department of Commerce Patent and Trademark Office under Patent Number
5692311. The Company has twelve patents pending with regard to Optical
Tomography.
PRIVATE PLACEMENTS
------------------
On February 4, 1998, the Company finalized a $500,000 private placement to
foreign investors of 50 shares of its Series E Convertible Preferred Stock
("the "Preferred Shares") and Warrants to purchase up to 25,000 shares of the
Company's common stock. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale");
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
to be issued upon conversion will be 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" is equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the
11
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five-day trading period ending on the day prior to the date of conversion but
in no event greater than $.82 per share.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker a total of 4 shares of the Preferred Stock and $5,000 for
placement and legal fees.
Net proceeds to the Company of $495,000 will be used for working capital and
the continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
On February 20, 1998, the Company finalized a $750,000 private placement to
foreign investors of 75 shares of its Series F Convertible Preferred Stock
("the "Preferred Shares"). The Preferred Stock pays a dividend of 6% per
annum. The offering was conducted pursuant to Regulation S as promulgated
under the Securities Act of 1933, as amended (the "Regulation S Sale");
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company
to be issued upon conversion will be 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" is equal to seventy
percent (70%) of the Average Closing Price of the Corporation's Common Stock
for the five-day trading period ending on the day prior to the date of
conversion.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker a total of $50,000 for expenses and legal fees.
Net proceeds to the Company of $700,000 will be used for working capital and
the continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
The Company is currently negotiating with investors for additional funding
through private placement. The proceeds from
12
<PAGE>
this funding will be used to continue the development of and the continuation
of clinical trials for the Company's Computed Tomography Laser Mammography
(CTLM (TM)) device.
INTERNATIONAL DISTRIBUTION
--------------------------
In April 1998, the Company entered into an exclusive International
Distribution with Focus Surgical LTD, to distribute the CTLM(TM) device to
hospitals and clinics throughout the United Kingdom and Ireland. The term of
the Agreement is three years, with a minimum purchase requirement of 10, 12
and 15 CTLM(TM) devices in the first, second and third year(s) of the
Agreement, respectively.
Focus Surgical currently distributes noncompetitive laser products for
companies such as Sunrise Medical Technologies and Baltec, among many others.
The Company has already secured exclusive distributors for the following
territories: Italy, France, South Korea, the Pacific Rim including China,
Switzerland, Moscow, Germany, Austria, the Republic of Turkey and Ecuador.
Based on its present research and development and supplier production
schedules, the Company anticipates that the CTLM(TM) device will be ready for
distribution this Summer.
FDA UPDATE
----------
On March 19, 1998 the Company submitted the final Report for the Company's
IDE. Also on March 19, 1998 the Company met with representatives of the FDA.
The purpose of the meeting was to describe several options to the Company's
IDE and to get the FDA's perspective on these approaches. It was decided that
the Company will complete the first phase with 20 patient studies performed
in-house and monitored by an Institutional Review Board ("IRB") established by
the Company. The information obtained from the study will be submitted to the
FDA to enable the Company to commence the second phase at three unaffiliated
clinical sites.
In April 1998 the Company appointed eight specialists in the fields of
Gynecology and Obstetrics, Mammography, breast surgery, Neurology and optics
and laser engineering to serve on the IRB.
13
<PAGE>
On May 15, 1998 the Company submitted a supplemental safety report to the FDA
which encompasses all of the modifications and upgrades since the initial
safety report was filed.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3. Amendment to Articles of Incorporation (Designation of
Series E Preferred Stock)
3.1 Amendment to Articles of Incorporation (Designation of
Series F Preferred Stock)
(b) Reports on Form 8-K
Form 8-K dated February 19, 1998.
Form 8-K dated March 16, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
------------------------
Allan L. Schwartz
Executive Vice-President
Chief Financial Officer
Dated: May 20, 1998
14
<PAGE>
EXHIBIT 3
ARTICLES OF AMENDMENT
CERTIFICATE OF DESIGNATION
IMAGING DIAGNOSTIC SYSTEMS, INC.
1. Designation. The designation of the series of Preferred Stock fixed by
this resolution shall be "Series E Convertible Preferred Stock" (hereinafter
referred to as the "Convertible Preferred Stock").
2. Conversion Rights.
(a) Right to Convert. The holder of any shares of Series D
Convertible Preferred Stock (the "Preferred Stock") may, at any time,
commencing 45 days from the date of issuance and for a period of three
years thereafter, convert all or a portion of the Preferred Stock,
without the payment of any additional consideration therefor, into that
number of fully paid and non-assessable 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 seventy five percent (75%) of the Average Closing Price of the
Corporation's Common Stock for the five-day trading period ending on the
day prior to the date of conversion provided, however, that in no event
will the Conversion Price be greater than 75% of the Average Price on the
Closing Date. 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
(i) quoted by Bloomberg, L.P. or if not quoted by Bloomberg, L. P., then
(ii) as reported by the National Association of Securities Automated
Quotation System ("NASDAQ"), or if not quoted by NASDAQ then; (iii) 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 (iv) in the event the Common Stock is listed on a national stock
exchange, the Market Price shall be the average of the closing prices of
the Common Stock on such exchange, as reported in The Wall Street Journal
over the five consecutive trading days immediately preceding the date of
the Conversion Notice.
1
<PAGE>
(b) Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of the Preferred Stock. If upon
conversion of shares of Preferred Stock held by a registered holder which
are being converted, such register holder would, but for the provisions
of this Section 2(b), receive a fraction of a share of Common Stock
thereon, then in lieu of any such fractional share to which such holder
would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then effective Conversion Price. Before any
holder of 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 Preferred Stock, and shall give written notice
by facsimile or otherwise (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 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 by facsimile or otherwise, 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
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,
2
<PAGE>
liquidation or winding up of the Corporation, the Corporation shall mail
to each holder of Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (i) 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; (ii) the
date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected
to become effective; and (iii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall
be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, transfer, consolidation, merger, dissolution or winding
up.
(d) Stock Dividends; Stock Splits; Etc. In the event that the
Corporation shall (i) take a record of holders of shares of the Common
Stock for the purpose of determining the holders entitled to receive
dividends payable in shares of Common Stock; (ii) subdivide the
outstanding shares of Common Stock; (iii) combine the outstanding shares
of Common Stock into smaller number of shares; or (iv) issue, by
reclassification of the Common Stock, any other securities of the
Corporation, then, in each such case, the Conversion Price then in effect
shall be adjusted so that upon conversion of each share of Convertible
Preferred Stock then outstanding the number of shares of Common Stock
into which such shares of Convertible Preferred Stock are convertible
after the happening of any of the events described in clauses
(i)through(iv) above shall be the number of such shares of Common Stock
into which such shares of 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 issue into escrow
or 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 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 Preferred Stock shall be entitled to that number of votes
to which it would be entitled had all of its
3
<PAGE>
shares of 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.
(f) 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 Preferred Stock shall not be entitled to
vote on any matters submitted to the stockholders of the Corporation.
3. Liquidation Rights. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any shares
of Preferred Stock shall be outstanding, the holders of the then outstanding
shares of Preferred Stock shall have a preference in distribution of the
Corporation's property available for the distribution to the holders of any
other class of capital stock of the Corporation, including but not limited to,
the Common Stock, equal to $10,000.00 consideration per share.
4. 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 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 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 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.
4
<PAGE>
EXHIBIT 3.1
AMENDED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF IMAGING DIAGNOSTIC SYSTEMS, INC.
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to the written consent dated February 19, 1998, duly executed by all
of the members of the Corporation's Board of Directors, adopting the
resolutions providing for the issuance of up to 75 shares of the Corporation's
authorized but unissued preferred stock, no par value, to be designated the
Series F Convertible Preferred Stock (the "Preferred Stock"), and the
Amendment of the Corporation's Articles of Incorporation to provide for the
Preferred Stock, and there being no shareholder action required, the
Corporation Articles of Incorporation are hereby Amended as follows:
ARTICLE III CAPITAL STOCK
- - -------------------------
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES F
CONVERTIBLE PREFERRED STOCK
1. Designation and Rank. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 75 Shares of "Series F Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred
Stock"), all of which shall rank equally and be identical in all respects.
2. Conversion Rights. (a) Right to Convert. The holder of any shares of Series
F Convertible Preferred Stock (the "Preferred Stock") may, at any time,
commencing May 15, 1998 and for a period of two years thereafter, convert all
or a portion of the Preferred Stock, without the payment of any additional
consideration therefor, into that number of fully paid and non-assessable
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 seventy percent (70%) of the Average Closing Price of
the Corporation's Common Stock for the five-day trading period ending on the
day prior to the date of the conversion. 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 (i) quoted by Bloomberg, L.P. or if not quoted by Bloomberg,
L.P., then (ii) as
1
<PAGE>
reported by the National Association of Securities Automated Quotation System
("NASDAQ"), or if not quoted by NASDAQ then; (iii) 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 (iv) in the event the Common Stock is listed
on a national stock exchange, the Market Price shall be the average of the
closing prices of the Common Stock on such exchange, as reported in The Wall
Street Journal over the five consecutive trading days immediately preceding
the date of the Conversion Notice.
(b) Mechanics of Conversion. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. If upon conversion of shares of
Preferred Stock held by a registered holder which are being converted, such
register holder would, but for the provisions of this Section 2(b), receive a
fraction of a share of Common Stock thereon, then in lieu of any such
fractional share to which such holder would otherwise be entitled, the
Corporation shall round up or down, as the case may be, to the nearest share.
Before any holder of the 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 Preferred Stock, and shall give written notice by
facsimile or otherwise (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
five business days of the date of its receipt of the Conversion Notice and
original Preferred Stock Certificate, issue and deliver or cause to be issued
and delivered to such holder of 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. Such conversion shall be deemed
to have been made on the date that the Corporation receives the Conversion
Notice by facsimile or otherwise, 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 Preferred Stock, such
shares shall be restored to the status of authorized but unissued shares and
may be reissued as a new series 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 Preferred Stock at least twenty (20)
days prior to the record date specified therein, a notice specifying (i) 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;
(ii) the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective; and (iii) 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
2
<PAGE>
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, transfer, consolidation,
merger, dissolution or winding up.
(d) Stock Dividends; Stock Splits; Etc. In the event that the Corporation
shall (i) take a record of holders of shares of the Common Stock for the
purpose of determining the holders entitled to receive dividends payable in
shares of Common Stock; (ii) subdivide the outstanding shares of Common Stock;
(iii) combine the outstanding shares of Common Stock into smaller number of
shares; or (iv) issue, by reclassification of the Common Stock, any other
securities of the Corporation, then, in each such case, the Conversion Price
then in effect shall be adjusted so that upon conversion of each share of
Convertible Preferred Stock then outstanding the number of shares of Common
Stock into which such shares of Convertible Preferred Stock are convertible
after the happening of any of the events described in clauses (i)through(iv)
above shall be the number of such shares of Common Stock into which such
shares of 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 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 , the holder shall be
entitled to vote with the holders of the Common Stock, as a single class,
where each share of Preferred Stock shall be entitled to that number of votes
to which it would be entitled had all of its shares of 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 approval of the holders of the
Convertible Preferred Stock, voting as a single class.
(f) 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 Preferred Stock shall not be entitled to vote on any matters submitted to
the stockholders of the Corporation.
3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Preferred
Stock shall be outstanding, the holders of the then outstanding shares of
Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
4. 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 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
3
<PAGE>
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 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 Preferred Stock shall be
appropriately adjusted so as to be applicable, as nearly as may reasonable be,
to any shares of stock or other securities or property thereafter deliverable
on the conversion of the shares of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of the 25th day of February 1998.
- -------------------------------------------
/s/ Linda B. Grable, President and Director
- ------------------------------------------------------------
/s/ Allan L. Schwartz, Executive Vice President and Director
- ----------------------------------------------------------
/s/Richard J. Grable, Chief Executive Officer and Director
4
<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES ACT OF 1934
(AMENDMENT No.__)
Filed by the Registrant[ X ]
Filed by a party other than the Registrant[ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ X ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting materials pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
Imaging Diagnostic Systems, Inc.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the Appropriate Box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which
transaction applies:______________________
(2) Aggregate number of securities to which
transaction applies:______________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 __/
(4) Proposed maximum aggregate value of
transaction:_______________________
(5) Total fee paid:____________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:___________________
(2) Form, Schedule or Registration Statement No.:_____________
(3) Filing Party:________________
(4) Date Filed:__________________
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18th Court
Plantation, Florida 33313
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To
Be Held on October 15, 1997
TO THE STOCKHOLDERS OF IMAGING DIAGNOSTIC SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Imaging Diagnostic Systems, Inc., a Florida Corporation (the "Company"), will
be held on Wednesday, October 15, 1997, at 9:00 a.m. at the Sheraton Suites,
located at 311 N. University Dr., Plantation, Florida, for the following
purposes:
1. To elect three (3) directors to serve a one year term expiring upon the
1998 Annual Meeting of Stockholders or until his/her successor is duly
elected and qualified.
2. To ratify the selection of Margolies, Fink and Wichrowski, CPA as
independent auditors for the Company for the fiscal year ending June 30,
1998.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on Friday,
August 15, 1997, as the record date for the determination of stockholders
entitled to notice of and to vote at this Annual Meeting and at any
adjournment or postponement thereof.
By Order of the Board of Directors
/s/ Allan L. Schwartz
------------------------
Allan L. Schwartz
Secretary
Plantation, Florida
September 7, 1997
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE
POSTAGE PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE RETURNED A PROXY. PLEASE
NOTE, HOWEVER, THAT IF A BROKER HOLDS YOUR SHARES OF RECORD, OR BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18th Court
Plantation, Florida 33313
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Imaging Diagnostic Systems,
Inc. (the "Company") to be held on Wednesday, October 15, 1997, at 9:00 a.m.
at the Sheraton Suites, located at 311 N. University Dr., Plantation, Florida,
or any adjournment or adjournments thereof, for the purposes set forth herein
and in the accompanying Notice of Annual Meeting. The Company intends to mail
this Proxy Statement and the accompanying proxy card on or about September 7,
1997 to all shareholders entitled to vote at the Annual Meeting.
RECORD DATE; OUTSTANDING SHARES
Only stockholders of record at the close of business on Friday, August
15, 1997 (the "Record Date"), are entitled to receive notice of and to vote at
the meeting. On the Record Date, there were outstanding 24,782,584 shares of
Common Stock.
REVOCABILITY OF PROXIES
If a person who has executed and returned a proxy is present at the
meeting and wishes to vote in person, he or she may elect to do so and thereby
suspend the power of the proxy holders to vote his or her proxy. A proxy also
may be revoked before it is exercised by filing with the Secretary of the
Company a duly signed revocation of proxy bearing a later date.
VOTING AND SOLICITATION
Each share of Common Stock issued and outstanding on the record date
shall have one vote on the matters presented herein, except that with respect
to the election of directors, each share of Common Stock is entitled to one
vote for a nominee for each director position. Stockholders do not have the
right to cumulate votes in the election of directors.
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies
including preparation, assembly, printing and mailing of this proxy statement,
the proxy and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of Common Stock
beneficially owned by others to forward such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, facsimile,
telegram or personal solicitation by directors, officers, or other regular
employees of the Company. No additional compensation will be paid to
directors, officers or other regular employees for such services, but Jersey
Transfer & Trust Co. will be paid a fee, estimated to be about $2,000 if it
renders solicitation services.
<PAGE>
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's Annual Meeting of Stockholders
to held in 1998 must be received by the Company no later than March 31, 1998
in order that they may be included in the proxy statement and form of proxy
relating to the meeting.
SHARE OWNERSHIP BY PRINICPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock
of the Company as of June 30, 1997, as to (a) each person known to the Company
who beneficially owns more than 5% of the outstanding shares of its Common
Stock; (b) each current director, nominee for director and named executive
officer; and (c) all executive officers and directors of the Company as a
group.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ------------------- ----------------------
Richard J. Grable 9,419,496(3) 38%
Chief Executive Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 9,419,496(4) 38%
President and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 3,928,113(5) 16%
Executive Vice President,
Chief Financial Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Peter S. Knezevich 263,657(6) 1%
Vice President and
General Counsel
c/o 6351 NW 18th Court
Plantation, FL 33313
All officers and directors 13,539,700 55%
as a group (4 persons)
(1) Except as indicated 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 24,685,084 shares of Common Stock
outstanding as of June 30, 1997. Shares of Common Stock subject to stock
options that are exercisable within 60 days as of June 30, 1997 are deemed
outstanding for computing the percentage of any other person or group.
(3) Includes 56,666 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 56,666 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 164,133 shares subject to options and 9,000 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.
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires that the Company's directors and executive officers,
and persons who own more than 10% of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, directors and greater than 10% beneficial owners are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended June 30, 1997, its
officers, directors and greater than 10% beneficial owners complied with all
applicable Section 16(a) filing requirements.
PROPOSAL 1
ELECTION OF DIRECTORS
Three directors are to be elected at the meeting. All three directors
are to be elected for the term expiring in 1998. Information on the nominees
follows.
Richard J. Grable: Mr. Grable is Chief Executive Officer of the Company
and is the inventor of the CTLMtm device. He has been in the medical imaging
field since 1973. Mr. Grable has been a Director and Officer of the Company
since its inception.
Linda B. Grable: Mrs. Grable is President of the Company and Chairman of
the Board of Directors. She has 15 years experience in the marketing and sales
of imaging equipment. Mrs. Grable has been a Director and Officer of the
Company since its inception.
Allan L. Schwartz: Mr. Schwartz is Executive Vice-President of the
Company and is responsible for its financial affairs. He is an operationally
oriented executive with a wide range of management, marketing, field
engineering, construction, investment banking, and business development
experience. Mr. Schwartz has been a Director and Officer of the Company since
its inception.
Compensation of Directors
Each director who is not an employee of the Company receives an annual
retainer of $500 plus a fee of $100 for each Board meeting attended. Under a
deferred compensation plan, directors may elect to defer with interest all or
part of such compensation for varying periods of time.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's
outstanding stock. Both parties disclaim, however, any beneficial interest or
ownership in the shares owned by the other party.
Board Meetings and Committees
The Board of Directors met 9 times during the fiscal year ended June
30, 1997. The Company has no standing Committees.
<PAGE>
Required Vote
Each nominee receiving a majority of the number of affirmative votes of
the shares of the Company's Common Stock present and entitled to vote at the
Annual Meeting on this matter shall be elected as the Directors.
The Board of Directors of the Company recommends a vote FOR the election
of the nominees named above. Proxies solicited by the Board of Directors
will be voted FOR the named nominee unless instructions are given to the
contrary.
Management
Directors and Executive Officers
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Name and Other Long Term
Principal Annual Compensation Annual Restricted
Position Age Year Salary ($) Compensation Stock Awards ($)(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard J. Grable 55 1995 $100,000
CEO and Director 1996 $183,333(1)
1997 $289,779 $115,000 $268,000
Linda B. Grable 60 1995 $ 65,000
President and 1996 $ 91,000(1)
Director 1997 $ 97,451 $115,000 $268,000
Allan L. Schwartz 55 1995 $ 84,000
Exec. V.P., CFO and 1996 $124,000(1)
Director 1997 $111,534 $115,000 $268,000
Peter S. Knezevich 41 1995 $ 12,500
General Counsel 1996 $ 56,000
Vice President 1997 $ 87,500 $134,000
</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.
(2) Mr. Grable and Mr. Schwartz and Mrs. Grable were granted a restricted stock
bonus of 100,000 shares; Mr. Knezevich was granted a restricted stock bonus
of 50,000 shares. On the date of grant the bid price was $2.68 a shares.
Option Grants. The following table sets forth certain information
concerning grants of options to purchase Common Stock to the Named Executive
Officers during the fiscal year ended June 30, 1997.
Option/SAR Grants in Last Fiscal Year
Individual Grants
Potential Realizable
<TABLE>
<CAPTION>
Potential Realizable
Value at Annual Rates
Number of Percent of of Stock Price
Securities Total Options
Appreciation for Option
Underlying Granted to Exercise or Term(1)
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Grable (2)22,883 4% $4.37 7/4/01 $34,009 $76,999
Linda B. Grable (3)22,883 4% $4.37 7/4/01 $34,009 $76,999
Allan L. Schwartz (4)22,883 4% $4.37 7/4/01 $34,009 $76,999
</TABLE>
(1) Potential realizable values are based on the fair market value per
share as determined by the Company for financial statement purposes and
represents hypothetical gains that could be achieved for the respective
options if exercised at the date of the grant. The dollar amounts set
forth in these columns are the result of calculations at the zero
percent, five percent and ten percent rates set by the Securities and
Exchange Commission and are not intended to forecast possible future
appreciation, if any, of the Common Stock price. There can be no
assurance that such potential realizable values will not be more or less
than indicated in the table above.
(2) On July 4, 1996, Mr. Grable was granted an option to purchase 22,883
shares of common stock pursuant to the Company's incentive stock option
plan.
(3) On July 4, 1996, Mrs. Grable was granted an option to purchase 22,883
shares of common stock pursuant to the Company's incentive stock option
plan.
(4) On July 4, 1996, Mr. Schwartz was granted an option to purchase
22,883 shares of common stock pursuant to the Company's incentive stock
option plan.
Fiscal Year-End Option Values. The following table sets forth certain
information concerning the number and value of securities underlying
exercisable and unexercisable stock options as of the fiscal year ended June
30, 1997 by the Name Executive Officers.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of
In-The-Money
Options
Number of at Fiscal
Underlying Year End($) Number of Value of
Securities Exercised/ Options at Underlying
Options/SARs Unexercised Fiscal Year End(#) Securities
Unexercised Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard J. Grable 82,515 $216,549 22,883/0 0
Linda B. Grable 82,515 $216,549 22,883/0 0
Allan L. Schwartz 0 0 130,410/0 $189,032
Peter S. Knezevich 95,669 $257,810 12,225/0 0
</TABLE>
Employment Agreements
The Company entered into five-year employment agreements with each of
Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable
beginning July 6, 1994. Pursuant to the terms of the employment agreements,
the annual salaries during the Company's development stage are as follows:
Richard J. Grable: $250,000; Linda B. Grable: $78,000; on January 15, 1997,
Ms. Grable's salary was increased to $104,000; and, Allan L. Schwartz:
$104,000. During the Company's operational stage the salary of Allan L.
Schwartz will increase to $156,000. In addition, each employment agreement
provides for bonuses, health insurance, car allowance,
<PAGE>
and related benefits, and a cost of living adjustment of 7% per year. The
bonuses are 5% of the adjusted consolidated net earnings of the Company; no
bonuses have been paid. Richard J. Grable receives a royalty bonus based on
sales of the CTLM device. The Company entered into an employment agreement
with Peter S. Knezevich on June 16, 1997, for a salary of $95,000 per year.
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, 1997, all of the executive officers were participants in this plan, except
for Mr. Knezevich.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Margolies, Fink and Wichrowski CPA
as independent public accountants of the Company with respect to its
operations for the fiscal year 1998, subject to ratification by the holders of
Common Stock of the Company. The firm has audited the Company's financial
statements since 1994. Representatives of the firm are expected to be present
at the Annual Meeting, will have an opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
There will be presented at the Annual Meeting a proposal for the
ratification of this appointment, which the Board of Directors believes is
advisable and in the best interests of the stockholders. If the appointment of
Margolies, Fink and Wichrowski, CPA is not ratified, the matter of appointment
of independent public accountants will be considered by the Board of
Directors.
The Board of Directors of the Company recommends a vote FOR the
appointment of Margolies, Fink and Wichrowski, CPA as the Company's
independent accountants for the fiscal year ending June 30, 1998.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/ Allan L. Schwartz
---------------------------
Allan L. Schwartz
Secretary
<PAGE>
APPENDIX A
IMAGING DIAGNOSTIC SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 15, 1997
The undersigned hereby appoints Richard J. Grable and Allan L. Schwartz
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of Imaging Diagnostic
Systems, Inc. which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of Imaging Diagnostic Systems, Inc. to be held at
Sheraton Suites, located at 311 N. University Dr., Plantation, Florida, on
October 15, 1997, at 9:00 a.m., local time, ant at any and all continuations
and adjournments thereof, with all powers that the undersigned would possess
if personally sent, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
(Continued, and to be signed on the other side)
Please mark your votes as this [X]
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2 AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS
PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
FOR WITHOLDER FOR
PROPOSAL 1: To elect three (3) directors [ ] [ ]
to hold office until the 1998 Annual
Meeting of Stockholders.
Nominees: Richard J. Grable, Linda B. Grable, and Allan L. Schwartz
Instruction: To withhold authority to vote for any nominee, write
the nominee's name in the space provided below.
- ----------------------------------------------------
PROPOSAL 2: To ratify selection of FOR AGAINST ABSTAIN
Margolies, Fink and Wichrowski CPA, [ ] [ ] [ ]
as independent public accountants
of the Company for its fiscal
year ending June 30, 1998.
I PLAN TO ATTEND THE MEETING [ ]
Please sign exactly as your name appears hereon. If the stock is
registered in the names of two or more persons, each should sign.
Executors, administrators, trustees, guardians and attorney-in-fact
should add their titles. If signer is a corporation, please give full
corporate name and have a duly authorized officer, stating title. If
signer is a partnership, please sign in partnership name by authorized
person.
Signature____________________________________ Date________________
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION SEQUENTIAL
PAGE NUMBER
3.1 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.
3.2 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.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference from
Registration statement on Form S-1 Dated July 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference from Form
8-k dated October 15, 1997,
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference from Form
8-k dated January 12, 1998.
3.6 `Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference from Form
8-k dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference from Form
8-k dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares).
3.9 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.
3.10 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").
3.11 Certificate and Plan of Merger - is incorporated by reference to
Exhibit 3(i) of the Form 10-SB.
3.12 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 B Convertible Preferred Shares. See Exhibit 3.3, above.
4.2 Instruments Defining the Rights of Security Holders Designation of
Series C Convertible Preferred Shares. See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders Designation of
Series D Convertible Preferred Shares. See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders Designation of
Series E Convertible Preferred Shares. See Exhibit 3.6, above).
24
<PAGE>
EXHIBIT DESCRIPTION SEQUENTIAL
PAGE NUMBER
4.5 Instruments Defining the Rights of Security Holders Designation of
Series F Convertible Preferred Shares. ( See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders Designation of
Series H . See Exhibit 3.8, above 5 Legal opinion of Rebecca J. Del
Medico, Esq.
5 Legal opinion of Rebecca J. Del Medico, Esq. dated July 17, 1997.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc.and Alfred Ricciardi.
10.2 Patent Licensing Agreement
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable 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.
24.1 Consent of Rebecca J. Del Medico, Esq. included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
Accountants.
25
EXHIBIT 3.8
AMENDMENT TO ARTICLES OF INCORPORATION
SERIES H DESIGNATION
AMENDED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
IMAGING DIAGNOSTIC SYSTEMS, INC.
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to the written consent dated February 19, 1998, duly executed by all of
the members of the Corporation's Board of Directors, adopting the resolutions
providing for the issuance of up to 75 shares of the Corporation's authorized
but unissued preferred stock, no par value, to be designated the Series F
Convertible Preferred Stock (the "Preferred Stock"), and the Amendment of the
Corporation's Articles of Incorporation to provide for the Preferred Stock, and
there being no shareholder action required, the Corporation Articles of
Incorporation are hereby Amended as follows:
ARTICLE III CAPITAL STOCK
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES F
CONVERTIBLE PREFERRED STOCK
1. Designation and Rank. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 75 Shares of "Series F Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred Stock"),
all of which shall rank equally and be identical in all respects.
2. Conversion Rights.
(a) Right to Convert. The holder of any shares of Series F Convertible Preferred
Stock (the "Preferred Stock") may, at any time, commencing May 15, 1998 and for
a period of two years thereafter, convert all or a portion of the Preferred
Stock, 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 seventy percent (70%) of
the Average Closing Price of the Corporation's Common Stock for the five-day
trading period ending on the day prior to the date of the conversion. 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 (i) quoted by Bloomberg, L.P. or if not
quoted by Bloomberg, L.P., then (ii) as reported by the National Association of
Securities Automated Quotation System ("NASDAQ"), or if not quoted by NASDAQ
1
<PAGE>
then; (iii) 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 (iv) in
the event the Common Stock is listed on a national stock exchange, the Market
Price shall be the average of the closing prices of the Common Stock on such
exchange, as reported in The Wall Street Journal over the five consecutive
trading days immediately preceding the date of the Conversion Notice.
(b) Mechanics of Conversion. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. If upon conversion of shares of
Preferred Stock held by a registered holder which are being converted, such
register holder would, but for the provisions of this Section 2(b), receive a
fraction of a share of Common Stock thereon, then in lieu of any such fractional
share to which such holder would otherwise be entitled, the Corporation shall
round up or down, as the case may be, to the nearest share. Before any holder of
the 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 Preferred Stock, and shall give written notice by facsimile or otherwise
(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 five business days of the date
of its receipt of the Conversion Notice and original Preferred Stock
Certificate, issue and deliver or cause to be issued and delivered to such
holder of 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. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice by facsimile or otherwise, 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 Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued as a new series 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 Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (i) 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; (ii) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective; and
(iii) 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,
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consolidation, merger, dissolution or winding up.
(d) Stock Dividends; Stock Splits; Etc. In the event that the Corporation shall
(i) take a record of holders of shares of the Common Stock for the purpose of
determining the holders entitled to receive dividends payable in shares of
Common Stock; (ii) subdivide the outstanding shares of Common Stock; (iii)
combine the outstanding shares of Common Stock into smaller number of shares; or
(iv) issue, by reclassification of the Common Stock, any other securities of the
Corporation, then, in each such case, the Conversion Price then in effect shall
be adjusted so that upon conversion of each share of Convertible Preferred Stock
then outstanding the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible after the happening of any of the
events described in clauses (i)through(iv) above shall be the number of such
shares of Common Stock into which such shares of 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 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 , the holder shall be entitled
to vote with the holders of the Common Stock, as a single class, where each
share of Preferred Stock shall be entitled to that number of votes to which it
would be entitled had all of its shares of 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 approval of the holders of the Convertible Preferred
Stock, voting as a single class.
(f) 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
Preferred Stock shall not be entitled to vote on any matters submitted to the
stockholders of the Corporation.
3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Preferred
Stock shall be outstanding, the holders of the then outstanding shares of
Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
4. 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 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 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
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the shares of Preferred Stock shall be appropriately adjusted so as to be
applicable, as nearly as may reasonable be, to any shares of stock or other
securities or property thereafter deliverable on the conversion of the shares
of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of the 19th day of February 1998.
/s/ Linda B. Grable, President and Director
/s/ Allan L. Schwartz, Executive Vice President
and Director
/s/ Richard J. Grable, Chief Executive Officer
and Director
4
EXHIBIT 5
EXHIBIT 5IMAGING DIAGNOSTIC SYSTEMS, INC.
[Letterhead of Registrant]
July 17, 1998
Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, FL 33313
Re: Registration Statement on Form S-2
Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities and
Exchange Commission with respect to the registration by Imaging Diagnostic
Systems, Inc. (the "Company") of an aggregate of 500,000 shares of Common Stock,
no par value (the "Common Stock") pursuant to a Registration Statement on Form
S-2.
In my capacity as general counsel to the Company, I have examined the original,
certified, conformed, or other copies of the Company's Certificate of
Incorporation, Bylaws and corporate minutes provided to me by the Company. In
all such examinations, I have assumed the genuineness of all signatures on
original documents, and the conformity to originals or certified documents of
all copies submitted to me as conformed, photostat or other copies. .In passing
upon certain corporate records and documents of the Company, I have necessarily
assumed the correctness and completeness of the statements made or included
therein by the Company, and I express no opinion thereon. Based upon and in
reliance of the foregoing, I am of the opinion that the Common Stock has been be
validly issued, fully paid and non-assessable. I hereby consent to the use of
this opinion in the Registration Statement on Form S-2 to be filed with the
Commission.
/s/Rebecca J. Del Medico
- ------------------------
Rebecca J. Del Medico
General Counsel
EXHIBIT 10.1
FORM OF SUBSCRIPTION AGREEMENT BETWEEN IMAGING
DIAGNOSTIC SYSTEMS, INC AND ALFRED RICCIARDI
--------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------
Maximum Offering: $200,000
This offering consists of 500,000 shares of the Company's Common Stock.
--------------------
SUBSCRIPTION AGREEMENT
-------------------
SUBSCRIPTION PROCEDURES
The Common Stock, no par value, of Imaging Diagnostic Systems, Inc.
(the "Company" or "Seller") is being offered for $.40 per share (the "Shares").
The Shares will be transferable to the extent that any such transfer is
permitted by law. This offering is being made in accordance with the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended
(the "Act") and Rule 506 of Regulation D promulgated under the Act (the
"Regulation D Offering").
The Investor Questionnaire is designed to enable the Investor
to demonstrate the minimum legal requirements under federal and state securities
laws to purchase the Shares. The Signature Page for the Investor Questionnaire
and the Subscription Agreement contain representations relating to the
subscription.
Also included is an Internal Revenue Service Form W-9: "Request for Taxpayer
Identification Number and Certification" for U.S. citizens or residents of the
U.S. for U.S. federal income tax purposes only. (Foreign investors should
consult their tax advisors regarding the need to complete Internal Revenue
Service Form W-9 and any other forms that may be required).
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If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any dividends paid by the Company. In order to
eliminate or reduce such withholding tax you may submit a properly executed
I.R.S. Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or
I.R.S. Form 1001 (Ownership Exemption or Reduced Trade Certificate), claiming
exemption from withholding or eligibility for treaty benefits in the form of a
lower rate of withholding tax on interest or dividends.
Payment must be made by wire transfer as provided below:
Immediately available funds should be sent via wire transfer to:
First Union National Bank of Florida-Jacksonville Florida
1502 Sun City Center Plaza
Sun City Center, Florida 33579
ABA #: 0630-00021
Account #: 2090000431548
Acct.Name: Imaging Diagnostic Systems, Inc.
SUBSCRIPTION AGREEMENT
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
This Subscription Agreement is made between IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida corporation, (the "Company" or "Seller"), and the undersigned
prospective purchaser ("Purchaser") who is subscribing hereby for the Company's
Common Stock, no par value, (the "Shares"), at $.40 per share. The Shares being
offered will be separately transferable to the extent that any such transfer is
permitted by law. This subscription is submitted to Purchaser in accordance with
and subject to the terms and conditions described in this Subscription Agreement
dated May 11, 1998, together with any Exhibits thereto, relating to an offering
(the "Offering") of 500,000 Shares. The Offering comprises (i) an offering of
the Shares to accredited investors (the "Regulation D Offering") in accordance
with the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D promulgated under the
Act ("Regulation D").
1. SUBSCRIPTION.
(a) The undersigned hereby irrevocably subscribes for and agrees to
purchase 500,000 Shares at a purchase price of $.40 per Share.
2. REPRESENTATIONS AND WARRANTIES.
The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The undersigned has been furnished with, and understands the terms
of the Offering. With respect to tax and other economic considerations involved
in his investment, the undersigned is not relying on the Company. The
undersigned has carefully considered and has, to the extent the undersigned
believes such discussion necessary, discussed with the undersigned's
professional legal, tax, accounting and financial advisors the
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<PAGE>
suitability of an investment in the Company, by purchasing the Shares, for the
undersigned's particular tax and financial situation and has determined that
the investment being made by the undersigned is a suitable investment for the
undersigned.
(b) The undersigned acknowledges that all documents, records, and
books pertaining to this investment which the undersigned has requested have
been made available for inspection by the undersigned.
(c) The undersigned has had a reasonable opportunity to ask questions
of and receive answers from a person or persons acting on behalf of the
Company concerning the Offering and all such questions have been answered to
the full satisfaction of the undersigned.
(d) The undersigned will not sell or otherwise transfer the Shares
without registration under the Act or applicable state securities laws or an
exemption therefrom. The Shares have not been registered under the Act or
under the securities laws of certain states.
Upon written notice at any time, beginning July 8, 1998 and ending
May 13, 1998 , from the Holder that it contemplates the transfer of all or any
of its Shares under such circumstances that a public offering, within the
meaning of the Act, of the Shares will be involved, the Company, as promptly
as possible after the receipt of such notice, shall file, not more than once
at the sole cost of the Company, a registration statement or, if available, a
Notification under Regulation A under the Act, with respect to the offering
and sale or other disposition of the Shares with respect to which it shall
have received such notice. Within 10 days after receiving any such notice, the
Company shall give notice to the Holder that the Company is proceeding with
such registration statement or Notification.
The Holder shall promptly supply the Company with all information
necessary to effectuate such registration. The Company shall furnish to
Purchaser such number of prospectuses and other documents incidental to the
registration of the Shares of Common Stock, including any amendment of or
supplements thereto.
The undersigned represents that the undersigned is purchasing the Shares for the
undersigned's own account, for investment and not with a view to resale or
distribution except in compliance with the Act. The undersigned has not offered
or sold any portion of the Shares being acquired nor does the undersigned have
any present intention of dividing the Shares with others or of selling,
distributing or otherwise disposing of any portion of the Shares either
currently or after the passage of a fixed or determinable period of time or upon
the occurrence or non-occurrence of any predetermined event or circumstance in
violation of the Act. Except as provided herein, the Company has no obligation
to register the Shares.
(e) The undersigned recognizes that an investment in the Shares
involves substantial risks, including loss of the entire amount of such
investment.
(f) Legends (i) The undersigned acknowledges that each certificate
representing the Shares unless registered , shall be stamped or otherwise
imprinted with a legend substantially in the following form:
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<PAGE>
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR
(iii) IF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
NOTWITHSTANDING THE FOREGOING, THE COMMON STOCK ARE ALSO SUBJECT TO THE
REGISTRATION RIGHTS SET FORTH IN THAT CERTAIN SUBSCRIPTION AGREEMENT BY AND
BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF EACH IS ON FILE AT THE
COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
(g) The undersigned acknowledges and agrees that it shall not be
entitled to seek any remedies with respect to the Offering from any party
other than the Company.
(h) This Subscription Agreement is executed and delivered on behalf
of a corporation, and: (i) such corporation has the full legal right and power
and all authority and approval required (a) to execute and deliver, or
authorize execution and delivery of, this Subscription Agreement and all other
instruments (including, without limitation, the Registration Rights Agreement)
executed and delivered by or on behalf of such corporation in connection with
the purchase of the Shares and (b) to purchase and hold the Shares: (ii) the
signature of the party signing on behalf of such corporation is binding upon
such corporation; and (iii) such corporation has not been formed for the
specific purpose of acquiring the Shares, unless each beneficial owner of such
entity is qualified as an accredited investor within the meaning of Rule
501(a) of Regulation D and has submitted information substantiating such
individual qualification.
(i) The undersigned shall indemnify and hold harmless the Company and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Company, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of or arising from any actual or
alleged misrepresentation or misstatement of facts or omission to represent or
state facts made or alleged to have been made by the undersigned to the
Company or omitted or alleged to have been omitted by the undersigned,
concerning the undersigned or the undersigned's subscription for and purchase
of the Shares or the undersigned's authority to invest or financial position
in connection with the Offering, including, without limitation, any such
misrepresentation, misstatement or omission contained in this Subscription
Agreement, the Questionnaire or any other document submitted by the
undersigned, against losses, liabilities and expenses for which the Company,
or any stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Company has not otherwise been reimbursed
(including attorneys' fees and disbursements, judgments, fines and amounts
paid in settlement) actually and reasonably incurred by the Company, or such
officer, director stockholder, executive, employee, representative, affiliate
or control person in connection with such action, suit or proceeding.
(j) The undersigned is not subscribing for the Shares as a result of,
or pursuant to, any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or meeting.
(k) The undersigned or the undersigned's representatives, as the case
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<PAGE>
may be, has such knowledge and experience in financial, tax and business
matters so as to enable the undersigned to utilize the information made
available to the undersigned in connection with the Offering to evaluate the
merits and risks of an investment in the Shares and to make an informed
investment decision with respect thereto.
(l) The Purchaser is purchasing the Shares for its own account for investment,
and not with a view toward the resale or distribution thereof. Purchaser is
neither an underwriter of, nor a dealer in, the Shares and is not
participating in the distribution or resale of the Shares.
3. SELLER REPRESENTATIONS.
(a) Concerning the Securities.The issuance, sale and delivery of the
Shares have been duly authorized by all required corporate action on the part
of the Company, and when issued, sold and delivered in accordance with the
terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their
terms, subject to the laws of bankruptcy and creditors' rights generally.
(b) Authority to Enter Agreement. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
(c) Non-contravention. The execution and delivery of this Agreement
and the consummation of the issuance of the Shares, and the transactions
contemplated by this Agreement do not and will not conflict with or result in
a breach by the Company of any of the terms or provisions of, or constitute a
default under, the articles of incorporation or by-laws of The Company, or any
indenture, mortgage, deed of trust, or other material agreement or instrument
to which the Company is a party or by which it or any of its properties or
assets are bound, or any existing applicable law, rule, or regulation of the
United States or any State thereof or any applicable decree, judgment, or
order of any Federal or State court, Federal or State regulatory body,
administrative agency or other United States governmental body having
jurisdiction over the Company or any of its properties or assets.
(d) Company Compliance. The Company represents and warrants that the
Company and its subsidiaries are: (i) in full compliance, to the extent
applicable, with all reporting obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; (ii) not in violation of
any term or provision of its article of incorporation or by-laws; (iii) not in
default in the performance or observance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any mortgage, deed of trust, indenture or other instrument
or agreement to which they are a party, either singly or jointly, by which it
or any of their property is bound or subject. Furthermore, the Company is not
aware of any other facts which it has not disclosed which could have a
material adverse effect on the business, condition (financial or otherwise),
operations, earnings, performance, properties or prospects of the Company and
its subsidiaries taken as a whole.
(e) Pending Litigation. There is (i) no action, suit or proceeding
before or by any court, arbitrator or governmental body now
5
<PAGE>
pending or, to the knowledge of the Company, threatened or contemplated to
which the Company or any of its subsidiaries is or may be a party or to which
the business or property of the Company or any of its subsidiaries is or may
be bound or subject, (ii) no law, statute, rule, regulation, order or
ordinance that has been enacted, adopted or issued by any governmental body or
that, to the knowledge of the Company, has been proposed by any governmental
body materially adversely affecting the Company or any of its subsidiaries,
(iii) no injunction, restraining order or order of any nature by a federal,
state or foreign court or governmental body of competent jurisdiction to which
the Company or any of its subsidiaries is subject issued that, in the case of
clauses (i), (ii) and (iii) above, (x) is reasonably likely to, singly or in
the aggregate, result in a material adverse effect on the business, condition
(financial or otherwise), operations, earnings, performance, properties or
prospects of the Company effect, and its subsidiaries taken as a whole or (y)
would interfere with or adversely affect the issuance of the Shares reasonably
likely to render this Subscription Agreement or the Shares, or any portion
thereof, invalid or unenforceable.
(f) Issuance of the Shares. No action has been taken and no law,
statute, rule, regulation, order or ordinance has been enacted, adopted or
issued by any governmental body that prevents the issuance of the Shares no
injunction, restraining order or order of any nature by a federal or state
court of competent jurisdiction has been issued that prevents the issuance of
the Shares or suspends the sale of the Shares in any jurisdiction; and no
action, suit or proceeding is pending against or, to the best knowledge of the
Company, threatened against or affecting, the Company, any of its subsidiaries
or, to the best knowledge of the Company, before any court or arbitrator or
any Governmental Body that, if adversely determined, would prohibit, interfere
with or adversely affect the issuance or marketability of the Shares or render
the Subscription Agreement or the Shares , or any portion thereof, invalid or
unenforceable.
(g) The Company shall indemnify and hold harmless the Purchaser and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Purchaser, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of or arising from any actual or
alleged misrepresentation or misstatement of facts or omission to represent or
state facts made or alleged to have been made by the Company to the Purchaser
or omitted or alleged to have been omitted by the Company, concerning the
Purchaser or the Purchaser's subscription for and purchase of the Shares or
the Purchaser 's authority to invest or financial position in connection with
the Offering, including, without limitation, any such misrepresentation,
misstatement or omission contained in this Subscription Agreement, the
Questionnaire or any other document submitted by the Company, against losses,
liabilities and expenses for which the Purchaser, or any stockholder,
executive, employee, representative, affiliate, officer, director or control
person of the Purchaser has not otherwise been reimbursed (including
attorneys' fees and disbursements, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by the Purchaser, or such
officer, director stockholder, executive, employee, representative, affiliate
or control person in connection with such action, suit or proceeding.
(h) No Change. Other than filings required by the Blue Sky or federal
securities law, no consent, approval or authorization of or
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<PAGE>
designation, declaration or filing with any governmental or other regulatory
authority on the part of the Company is required in connection with the valid
execution, delivery and performance of this Agreement. Any required
qualification or notification under applicable federal securities laws and
state Blue Sky laws of the offer, sale and issuance of the Shares, has been
obtained on or before the date hereof or will have been obtained within the
allowable period thereafter.
(i) True Statements. Neither this Agreement nor any of the
"Disclosure Documents", as hereinafter defined, contains any untrue statement
of a material fact or omits to state any material fact necessary in order to
make the statements contained herein or therein not misleading in the light of
the circumstances under which such statements are made. There exists no fact
or circumstances which, to the knowledge of the Company, materially and
adversely affects the business, properties or assets, or conditions, financial
or otherwise, of the Company, which has not been set forth in this
Subscription Agreement or disclosed in such documents.
(j) The Purchaser has been advised that the Company has not retained
any independent professionals to review or comment on this Offering or
otherwise protect the interests of the Purchaser. Although the Company has
retained its own counsel, neither such counsel nor any other firm, has acted
on behalf of the Purchaser, and the Purchaser should not rely on the Company's
legal counsel with respect to any matters herein described.
(k) There has never been represented, guaranteed, or warranted to the
undersigned by any broker, the Company, its officers, directors or agents, or
employees or any other person, expressly or by implication (i) the percentage
of profits and/or amount of or type of consideration, profit or loss to be
realized, if any, as a result of the Company's operations; and (ii) that the
past performance or experience on the part of the management of the Company,
or of any other person, will in any way result in the overall profitable
operations of the Company.
(l) Prior Shares Issued Under Regulation S or Regulation D. In the
past twelve months the Company raised $3,850,000 in Regulation S offerings of
which $1,640,000 remains unconverted. The Company has raised $4,500,000 in
Regulation D offerings in the past eighteen months of which the principal
amount of $4,500,000 remains unconverted.
(m) Current Authorized Shares. As of April 20, 1998, there were
48,000,000 authorized shares of Common Stock of which approximately 35,425,620
shares of Common Stock were issued and outstanding on a fully diluted basis
(n) Disclosure Documents. The Disclosure Documents are all the
documents (other than preliminary materials) that the Company has been
required to file with the Securities and Exchange Commission from December 31,
1996 to the date hereof. As of their respective dates, none of the Disclosure
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading, and no material event has occurred since the
Company's filing on Form 10-KSBA for the year ended December 31, 1996 which
could make any of the disclosures contained therein misleading. The financial
statements of the Company included in the Disclosure Documents have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis during the periods involved (except as may be indicated
in the notes thereto or, in the case of unaudited
7
<PAGE>
financial statements, subject only to normal recurring year-end audit
adjustments) and present fairly the consolidated financial position of the
Company and its consolidated subsidiaries as at the dates thereof and the
consolidated results of their operations and changes in financial position for
the periods then ended.
(o) Information Supplied. The information supplied by the Company to
Purchaser in connection with the offering of the Shares does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in the light of the circumstances in which they were
made, not misleading. There exists no fact or circumstances which, to the
knowledge of the Company, materially and adversely affects the business,
properties, assets, or conditions, financial or otherwise, of the Company
which has not been set forth in this Agreement or disclosed in such documents.
(p) Non-contravention. The execution and delivery of this Agreement
by the Company, the issuance of the Shares, and the consummation by the
Company of the other transactions contemplated by this Agreement, do not and
will not conflict with or result in a breach by the Company of any of the
terms or provisions of, or constitute a default under, the (i) certificate of
incorporation or by-laws of the Company, (ii) any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a
party or by which it or any of its properties or assets are bound, (iii) any
material existing applicable law, rule, or regulation or any applicable
decree, judgment, or (iv) order of any court, United States federal or state
regulatory body, administrative agency, or other governmental body having
jurisdiction over the Company or any of its properties or assets, except such
conflict, breach or default which would not have a material adverse effect on
the transactions contemplated herein.
(q) No Default. Except as set forth in the Company's Disclosure
Documents, the Company is not in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement
to which it is a party or by which it or its property is bound, and neither
the execution of, nor the delivery by the Company of, nor the performance by
the Company of its obligations under, this Agreement, will conflict with or
result in the breach or violation of any of the terms or provisions of, or
constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under, (i) any material
indenture, mortgage, deed of trust or other material agreement applicable to
the Company or instrument to which the Company is a party or by which it is
bound, (ii) any statute applicable to the Company or its property, (iii) the
Certificate of Incorporation or By-Laws of the Company, (iv) any decree ,
judgment, order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company regulation of any court or
governmental agency or body having jurisdiction over the Company or its
properties, or (v) the Company's listing agreement for its Common Stock.
(r) Registration Rights Upon written notice at any time, beginning
July 8, 1998 and ending May 13, 1998, from the Holder that it contemplates the
transfer of all or any of its Shares under such circumstances that a public
offering, within the meaning of the Act, of the Shares will be involved, the
Company, as promptly as possible after the receipt of such notice, shall file,
not more than once at the sole cost of the Company, a registration statement
or, if available, a Notification under Regulation A under the Act, with
respect to the offering and sale or other
8
<PAGE>
disposition of the Shares with respect to which it shall have received such
notice. Within 10 days after receiving any such notice, the Company shall give
notice to the Holder that the Company is proceeding with such registration
statement or Notification.
The Holder shall promptly supply the Company with all information necessary to
effectuate such registration. The Company shall furnish to Purchaser such number
of prospectuses and other documents incidental to the registration of the Shares
of Common Stock, including any amendment of or supplements thereto.
(s) Use of Proceeds. The Company represents that the net proceeds of
this offering will be used for working capital.
4. UNDERSTANDINGS.
The undersigned understands, acknowledges and agrees with the Company
as follows:
FOR ALL SUBSCRIBERS:
(a) This Subscription may be rejected, in whole or in part, by the
Company in its sole and absolute discretion at any time before the date set
for closing unless the Company has given notice of acceptance of the
undersigned's subscription by signing this Subscription Agreement.
(b) No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Shares.
(c) The representations, warranties and agreements of the undersigned
and the Company contained herein and in any other writing delivered in
connection with the transactions contemplated hereby shall be true and correct
in all material respects on and as of the date of the sale of the Shares and
shall survive the execution and delivery of this Subscription Agreement and
the purchase of the Shares.
(d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR
OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THE SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THE MEMORANDUM OR THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
(e) The Regulation D Offering is intended to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements made by
the undersigned herein and in the Questionnaire.
(f) It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the Securities Act and Regulation D, any
transferee may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
9
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(g) THE SHARES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED
OF EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS
SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
(h) NASAA UNIFORM LEGEND
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF
THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE
NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933 AND
THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
(i) The undersigned acknowledges and is aware that except for the
three day rescission rights provided under Florida law, the undersigned is
entitled to cancel, terminate or revoke this subscription, and any agreements
made in connection herewith shall survive my death or disability.
(j) The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
(k) The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required
by Section 517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a)
thereunder, the undersigned understands that he may have, at the offices of
the Company, at any reasonable hour, after reasonable prior notice, access to
the materials set forth in the Rule which the Company can obtain without
unreasonable effort or expense.
(l) The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
5. SUBMISSION TO JURISDICTION
(a) Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or
any course of conduct, course of dealing, statements (whether oral or written)
or actions of the Company or Purchaser shall be brought and maintained
exclusively in the courts of the State of Florida. The Company and Purchaser
hereby expressly and irrevocably submits to the jurisdiction of the state and
federal Courts of the State of Florida for the purpose of any such litigation
as set forth above and irrevocably agrees to be bound by any final judgment
rendered thereby in connection with such litigation. The
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Company and Purchaser further irrevocably consents to the service of process
by registered mail, postage prepaid, or by personal service within or without
the State of Florida. The Company and Purchaser hereby expressly and
irrevocably waives, to the fullest extent permitted by law, any objection
which it may have or hereafter may have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that any
such litigation has been brought in any inconvenient forum. To the extent that
the Company or Purchaser have or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service
or notice, attachment prior to judgment, attachment in aid of execution or
otherwise) with respect to itself or its property the Company and Purchaser
hereby irrevocably waive such immunity in respect of their obligations under
this Agreement and the other loan documents.
(b) Waiver of Jury Trial. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Purchaser or
the Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(c) Submission To Jurisdiction. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought in the
state and federal courts located in Florida, and the parties hereby irrevocably
submit to the exclusive jurisdiction of such courts for the purpose of any such
action or proceeding.
6. MISCELLANEOUS.
(a) All pronouns and any variations thereof used herein shall be
deemed to refer to the masculine, feminine, impersonal, singular or plural, as
the identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof
shall be waived, modified, changed, discharged, terminated, revoked or
canceled, except by an instrument in writing signed by the party effecting the
same against whom any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed: (i) if to the
Company, at its executive offices or (ii) if to the undersigned, at the
address for correspondence set forth in the Questionnaire, or at such other
address as may be specified by written notice given in accordance with this
paragraph.
(d) This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida, and shall be binding
upon the undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company, its
successors and assigns. If any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statue or rule of law, then such
provisions shall be deemed inoperative to
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the extent that it may conflict therewith and shall be deemed modified to
conform with such statute or rule of law. Any provision hereof that may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(e) This Subscription Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by both parties hereto.
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
7. SIGNATURE.
The signature of this Subscription Agreement is contained as part of
the applicable Subscription Package, entitled "Signature Page."
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION QUESTIONNAIRE
Investor Name:
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned CORPORATION'S Subscription to
purchase the Shares described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned CORPORATION understands, however, that the
Company may present this Questionnaire to such parties as it deems appropriate
if called upon to establish that the proposed offer and sale of the Shares is
exempt from registration under the Securities Act of 1933, as amended. Further,
the undersigned CORPORATION understands that the offering is required to be
reported to the Securities and Exchange Commission and to various state
securities and "blue sky" regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED CORPORATION
MUST COMPLETE FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE CORPORATION.
o FORMCHECKBOX o
1. The undersigned CORPORATION: (a) has total assets in excess of
$5,000,000; (b) was not formed for the specific purpose of acquiring the
Shares and (c) has its principal place of business in __________________.
o FORMCHECKBOX o
2. Each of the shareholders of the undersigned CORPORATION is able to
certify that such shareholder meets at least one of the following three
conditions:
(a) the shareholder is a natural person whose individual net worth*
or joint net worth with his or her spouse exceeds $10,000,000; or
(b) the shareholder is a natural person who had an individual income*
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in excess of $200,000 in each of 1996 and 1997 and who reasonably expects an
individual income in excess of $200,000 in 1998; or (c) Each of the
shareholders of the undersigned CORPORATION is able to certify that such
shareholder is a natural person who, together with his or her spouse, has had
a joint income in excess of $300,000 in each of 1996 and 1997 and who
reasonably expects a joint income in excess of $300,000 during 1998; and the
undersigned CORPORATION has its principal place of business in _______________.
* For purposes of this Questionnaire, the term "net worth" means the excess of
total assets over total liabilities. In determining income, an investor should
add to his or her adjusted gross income any amounts attributable to tax-exempt
income received, losses claimed as a limited partner in any limited partnership,
deductions claimed for depletion, contributions to IRA or Keogh retirement plan,
alimony payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.
o FORMCHECKBOX o
3. The undersigned CORPORATION is:
(a) a bank as defined in Section 3(a)(2) of the Securities Act; or
(b) a savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity; or
(c) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; or
(d) an insurance company as defined in Section 2(13) of the
Securities Act; or
(e) An investment company registered under the Investment Company Act
of 1940 or a business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940; or
(f) a small business investment company licensed by the U.S. Small
Business Administration under Section 301 (c) or (d) of the Small Business
Investment Act of 1958; or
(g) a private business development company as defined in Section
202(a) (22) of the Investment Advisors Act of 1940.
II. OTHER CERTIFICATIONS.
By signing the Signature Page, the undersigned certifies the following:
(a) That the CORPORATION'S purchase of the Shares will be solely for
the CORPORATION'S own account and not for the account of any other person or
entity; and
(b) that the CORPORATION'S name, address of principal place of
business, place of incorporation and taxpayer identification number as set
forth in this Questionnaire are true, correct and complete.
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III. GENERAL INFORMATION
(a) PROSPECTIVE PURCHASER (THE CORPORATION)
Name:
-------------------------------------------------------------------------
Principal Place of Business:
--------------------------------------------------
Address for Correspondence (if different):
- ------------------------------------------------------------------------------
(Number and Street)
- ------------------------------------------------------------------------------
(City) (State) (Zip Code)
Telephone Number:
-------------------------------------------------------------
(Area Code) (Number)
Jurisdiction of Incorporation:
------------------------------------------------
Date of Formation:
-----------------------------------------------------------
Taypayer Identification Number:
-----------------------------------------------
Number of Shareholders:
-------------------------------------------------------
(b) INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.
Name:
------------------------------------------------------------------------
Position or Title:
-----------------------------------------------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION SIGNATURE PAGE
Your signature on this Corporation Signature Page evidences the
agreement by the Purchaser to be bound by the Questionnaire and the
Subscription Agreement.
1. The undersigned hereby represents that (a) the information
contained in the Questionnaire is complete and accurate and (b) the Purchaser
will notify Imaging Diagnostic Systems, Inc.. immediately if any material
change in any of the information occurs prior to the acceptance of the
undersigned Purchaser's subscription and will promptly send Imaging Diagnostic
Systems, Inc. written confirmation of such change.
2. The undersigned officer of the Purchaser hereby certifies that he
has read and understands this Subscription Agreement.
3. The undersigned officer of the Purchaser hereby represents and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Shares and sign this Subscription Agreement on
behalf of _______________ and, further, that ____________________ has all
requisite authority to purchase the Shares and enter into this Subscription
Agreement.
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<PAGE>
4. The undersigned acknowledges and is aware that except for the
three day rescission rights provided under Florida law, the undersigned is
entitled to cancel, terminate or revoke this subscription, and any agreements
made in connection herewith shall survive my death or disability.
5. The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
6. The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required
by Section 517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a)
thereunder, the undersigned understands that he may have, at the offices of
the Company, at any reasonable hour, after reasonable prior notice, access to
the materials set forth in the Rule which the Company can obtain without
unreasonable effort or expense.
7. The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
- -------------------------------- --------------------------------
Number of Shares subscribed for Date
(Purchaser)
By:
------------------------------
(Signature)
Name: Title:
--------------------------- ---------------------------
(Please Type or Print) (Please Type or Print)
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT.
COMPANY ACCEPTANCE PAGE
This Subscription Agreement accepted and agreed
to this ____ day of May, 1998
IMAGING DIAGNOSTIC SYSTEMS, INC.
By__________________________________
15
EXHIBIT 10.2
PATENT LICENSING AGREEMENT
EXCLUSIVE PATENT LICENSE
THIS LICENSE AGREEMENT made and entered into this 2nd day of June 1998
by and between Imaging Diagnostic Systems, Inc., a Florida Corporation
("LICENSEE") and Richard Grable, an Individual ("GRABLE").
WHEREAS, GRABLE, is the owner of the following described patents:
Patent number 5,692,511, issued on December 2, 1987, as more fully described on
Exhibit A hereto and incorporated herein (the "Patent").
WHEREAS, LICENSEE is a medical technology company that has developed
a Computed Tomography Laser Mammography( system for detecting breast cancer
through the skin in a non-invasive and objective procedure, which incorporates
the use of the Patent (the "CTLM").
WHEREAS, GRABLE and LICENSEE had previously entered into an oral
agreement, which was to be set forth in, written form by LICENSEE's former
general counsel, whereby LICENSEE was to receive an exclusive License for the
use of the Patent.
WHEREAS, LICENSEE's former general counsel did not provide the
required License Agreement.
WHEREAS, LICENSEE has expended substantial funds, time and effort in
developing the CTLM(.
WHEREAS, GRABLE has expended substantial funds, time and effort in
developing the Patent.
WHEREAS, GRABLE and LICENSEE wish to enter into a formal, written
licensing agreement granting LICENSEE the exclusive License to use the patent,
upon the terms and conditions contained herein.
NOW THEREFORE, the parties hereto in consideration of $10.00 and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and the promises and covenants contained herein, agree as
follows:
1. GRANT. GRABLE grants to LICENSEE the exclusive right to modify, customize,
maintain, incorporate, manufacture, sell, and otherwise utilize and practice
the above stated Patent, all improvements thereto and all technology related
to the process, throughout the world. This license shall apply to any
extension or re-issue of the Patent.
2. TERM. This License shall be for the life of the Patent and any renewal
thereof, subject to termination as provided for herein.
3. CONSIDERATION.
(a) Common Stock As consideration for the License granted
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hereunder LICENSEE shall issue to GRABLE, 7,000,000 shares of the LICENSEE's
Common Stock (the "Shares") as follows:
1. 3,500,000 shares upon execution of this Agreement;
2. 3,500,000 shares one year from the date of this Agreement.
The Shares shall be valued at fair market value as of the date of this
Agreement,
(b) Protection Against Dilution. Upon the occurrence of any stock
dividend, stock split, combination or exchange of shares, reclassification or
recapitalization of the Company's common stock, reorganization of the Company,
consolidation with or merger into or sale or conveyance of all or
substantially all of the Company's assets to another corporation or any other
similar event which serves to decrease the number of Shares issued pursuant to
this Agreement (the "Event"), Grable shall receive, as additional
consideration, that number of shares equal to the difference between the
7,000,000 Shares issued hereunder and the number of Shares Grable has
remaining subsequent to the event.
(c) In addition, the LICENSEE shall pay to Grable a royalty based
upon the net selling price of all products and goods in which the Patent is
used, before taxes and after deducting the direct cost of the product and
commissions or discounts paid (the "Royalty"). The Royalty shall be as
follows:
GROSS SALES PERCENTAGE
$0 to $1,999,999 in gross sales 10%
$2,000,000 to $3,999,999 in gross sales 9%
$4,000,000 to $6,999,999 in gross sales 8%
$7,000,000 to $9,999,999 in gross sales 7%
Greater than $10,000,000 in gross sales 6%
For purposes of this paragraph Net Sales shall mean the dollar amount earned
from the sale by the Company, both international and domestic, before taxes
minus the cost of the goods sold and commissions or discounts paid.
(1) In the event that such products are used by the LICENSEE
directly, or are disposed of in another manner than sale, the royalty shall be
calculated on the customary price for similar goods. In the event that any
products made under the license are sold to a corporation, which is controlled
by or is a subsidiary of LICENSEE, the royalty shall be determined by the
re-sale price.
(2) Beginning the second year of this Agreement the minimum annual
Royalty shall be $250,000. In the event that the minimum is not paid in the
first three quarterly payments in each year, sufficient funds shall be paid in
the final quarter's payment. Sums shall not carry over from year to year.
(3) Royalties shall be paid on a quarterly basis, with a report of
sales and payment due no later than 15 days after the end of the quarter.
LICENSEE shall permit GRABLE, and GRABLE's agents reasonable access to any
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<PAGE>
and all of the records of LICENSEE related to the use of the patent and to
Royalties. Such accountings shall be deemed to be final if no objection or
request for audit is received by LICENSEE within 1 year following receipt of
such accounting. In the event of a dispute, the parties shall appoint a
disinterested certified public accountant to conduct an audit. Each party may
present argument or materials to the certified public accountant. The decision
of the certified public accountant shall be final and may be entered as a
judgment in any court with jurisdiction. The prevailing party shall pay the
cost of the audit. In the event that the parties cannot agree on a
disinterested certified public accountant, each party shall appoint a
certified public accountant and the two shall appoint a third certified public
accountant, and the majority of those persons shall appoint the single
disinterested Certified Public Accountant. The expense of the panel of
appointment shall be borne by each party equally. Interest at the highest
legal rate shall accrue on any unpaid royalties.
(4) LICENSEE shall have this Agreement ratified by its Shareholders at its
next special or annual meeting of Shareholders. Upon obtaining such
ratification, the Royalties set forth above shall take the place of the
Development Royalties set forth in the Amendment to Grable's Employment
Agreement dated February 23, 1995, and such Amendment shall become void and
have no effect.
5. IMPROVEMENTS. In the event of any improvement of the Patent, these
improvements shall be disclosed to the LICENSEE by GRABLE, and the LICENSEE
shall have the right to use and practice the improvements.
6. ASSISTANCE. GRABLE shall provide reasonable cooperation and assistance to
LICENSEE as to the practice and use of the patent.
7. ACKNOWLEDGEMENTS
(a) LICENSEE acknowledges and agrees that GRABLE is the sole owner of
the Patent and all proprietary information in connection with the Patent and
that such information constitutes trade secrets of GRABLE's, which are
revealed to the LICENSEE in confidence and that no right is given to or
acquired by the LICENSEE to disclose, duplicate, license, sell or reveal any
portion thereof, except as contemplated by this Agreement.
(b) GRABLE acknowledges and agrees that, except for the Patent and
the proprietary information set forth in 7(a) above, the LICENSEE is the sole
owner of all present and future patents and proprietary information in
connection with the CTLM( and that such proprietary information constitutes
trade secrets of the LICENSEE which are revealed to GRABLE in confidence and
that no right is given to or acquired by GRABLE to disclose, duplicate,
license, sell or reveal any portion thereof, except as contemplated in this
Agreement.
8. BOOKS AND RECORDS. LICENSEE shall maintain full and accurate books and
records showing production and sales of the CTLM( and shall furnish weekly
reports with respect thereto in a form that may be reasonably specified from
time to time by GRABLE, LICENSEE shall afford GRABLE or its representatives a
reasonable opportunity once every week, during business hours and on at least
24 hours' prior notice, to conduct an examination of LICENSEE's books and
records relating to this Agreement in order to ensure that LICENSEE is meeting
its obligations to GRABLE as provided in this Agreement. In the event that any
review of the books and records of LICENSEE indicates that it has failed to
properly account to GRABLE and the amount due GRABLE is in
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<PAGE>
excess of 5% of the total amount due, LICENSEE shall promptly pay to GRABLE
the sum due together with 18% per annum interest calculated on a 360 day year
and any costs including professional fees incurred by GRABLE in reviewing the
books and records of LICENSEE.
9. CONFIDENTIALITY. It is understood and agreed that any of GRABLE trade
secrets or Proprietary Information that may from time to time be made
available to become known to LICENSEE are to be treated as confidential, are
to be used solely in connection with LICENSEE's performance under the terms of
this Agreement and are not to be disclosed to any persons other than employees
of LICENSEE who have a reasonable need for access thereto in connection with
LICENSEE's performance of its duties hereunder. Reasonable measures shall be
taken to protect the confidentiality of GRABLE's trade secrets, Proprietary
Information and any memoranda or papers containing trade secrets or
Proprietary Information of GRABLE that LICENSEE may receive in connection
herewith are to be returned to GRABLE upon request. LICENSEE's obligations and
duties under this section shall survive any termination of this Agreement. If
this LICENSEE is a corporation or other legal entity, LICENSEE shall have all
officers, directors, partners and beneficial owners of any equity interest to
execute such agreement as may be prepared by GRABLE agreeing to be bound by
paragraphs 10, 11 and 12 of this Agreement.
10. INDEMNIFICATION OF GRABLE LICENSEE shall indemnify and save harmless
GRABLE and his employees and agents from and against any loss, claim or damage
including reasonable attorney's fees, resulting from any negligence or breach
of warranty by LICENSEE in connection with the preparation, packaging, sale or
distribution of the CTLM( or other product of LICENSEE. With respect to the
risks thus assumed, LICENSEE shall maintain a policy of contractual liability
insurance in the minimum amount of $1,000,000 single unit coverage with an
insurer satisfactory to GRABLE, and shall cause this insurer to provide GRABLE
within 15 days after the date of this Agreement with an appropriate
certificate of insurance evidencing this contractual liability insurance
coverage, which may not be materially modified or canceled on less than 30
days prior written notice to GRABLE. At the request of GRABLE, LICENSEE will
defend GRABLE and his employees and agents in connection with any claim, suit,
action or proceeding covered by this indemnification.
11. TRADE SECRETS AND PROPRIETARY INFORMATION. Subject to the foregoing,
LICENSEE acknowledges the validity of and ownership by GRABLE of the trade
secrets and Proprietary Information in connection with the sale of the CTLM(
and agrees to take no action that would prejudice or interfere with the
validity or ownership. All use of the trade secrets and Proprietary
Information by LICENSEE under this Agreement shall inure to the exclusive
benefit of GRABLE.
12. INJUNCTIVE RELIEF. GRABLE shall have the right to injunctive relief to
enforce the covenants of paragraphs 10 and 11 of this Agreement, without
having to plead or prove irreparable harm or lack of adequate remedy at law in
addition to any other relief to which it may be entitled at law or in equity.
13. ABSOLUTE RESTRICTION ON TRANSFER WITHOUT GRABLE'S CONSENT. The grant of
the license hereunder is unique to LICENSEE and may not be transferred, or in
effect transferred in whole or in part, whether by independent agreement,
acquisition by another party of LICENSEE's capital stock or assets, mortgage
pledge, lease or other assignment as security, merger, consolidation or other
reorganization, the succession by another party to LICENSEE's business by
4
<PAGE>
operation of law, as a consequence of any transaction that results in a change
in the ownership or right of control of LICENSEE or otherwise unless GRABLE
has expressly consented in writing thereto.
In the event that there is an acquisition by another party of LICENSEE's
capital stock or assets, mortgage pledge, lease or other assignment as
security, merger, consolidation or other reorganization, the succession by
another party to LICENSEE's business by operation of law, as a consequence of
any transaction that results in a change in the ownership or right of control
of LICENSEE or otherwise, without Grable's specific written consent as to that
event or occurrence, Grable, at his sole option may immediately terminate this
Agreement.
This Agreement shall immediately terminate, without further action on the part
of any party, in the event that insolvency proceedings of any character,
including, without limitation, bankruptcy, receivership, reorganization,
composition or arrangement with creditors, voluntary or involuntary,
designating LICENSEE as the bankrupt or insolvent, are instituted, pending or
threatened or if LICENSEE makes an assignment for the benefit of creditors or
takes any action with a view to, or that would constitute the basis for, the
institution of any such insolvency proceedings.
14. TERMINATION BY GRABLE UPON NOTICE. This Agreement may be terminated at any
time by GRABLE in the event that LICENSEE shall fail to perform any of the
covenants and obligations herein. Upon written notice of termination delivered
to LICENSEE by GRABLE, stating the nature and character of the breach and
allowing LICENSEE an opportunity to cure such failure within 15 days after
giving notice, if the failure has not been corrected by LICENSEE within the 15
day period GRABLE may terminate this Agreement forthwith without the
requirement of any additional notice to LICENSEE to that effect.
Notwithstanding the above, GRABLE is not required to give LICENSEE the
opportunity to correct a default that is a repetition within any 12 month
period of a prior default for the same cause and may terminate this Agreement
forthwith by written notice.
15. WAIVER. The failure of either party to give notice of nonperformance or
termination shall not constitute a waiver of the covenants, terms or
conditions herein or of the rights of either party thereafter to enforce those
covenants, terms or conditions or to terminate this Agreement upon any
subsequent occurrence or date.
16. ACTIONS TO BE TAKEN UPON TERMINATION OF LICENSE. Upon the termination of
this Agreement, except as may otherwise be provided herein, the license and
all rights and privileges granted to LICENSEE under this Agreement shall
immediately cease and terminate and LICENSEE in the absence of a renewal
agreement shall thereupon immediately discontinue forever (i) the production
and sale of the CTLM( and (ii) the use of the Patent trade secrets and
Proprietary Information in connection with LICENSEE's business.
17. ASSIGNMENT AND TRANSFER. This License may not be assigned or transferred
by LICENSEE except with the prior approval of GRABLE, which shall be at his
sole discretion.
18. FURTHER ASSURANCES. The parties agree to execute and deliver from time to
time at the request of any of the other parties to this Agreement and without
further consideration, such additional documents and to take such other action
necessary to consummate the transactions contemplated herein.
5
<PAGE>
19. NOTICES. All notices, offers, acceptance and any other acts under this
Agreement (except payment) shall be in writing, and shall be sufficiently
given if delivered to the addressees in person, by Federal Express or similar
receipted delivery, by facsimile delivery or, if mailed, postage prepaid, by
certified mail, return receipt requested, as follows:
LICENSEE Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation Florida 33313
GRABLE Richard J. Grable
12000 NW 11th Court
Plantation Florida 33323
or to such other address as either of them, by written notice to the other may
designate from time to time. The transmission confirmation receipt from the
sender's facsimile machine shall be conclusive evidence of successful
facsimile delivery. Time shall be counted to, or from, as the case may be, the
delivery in person or by mailing.
20. GOVERNING LAW. This Agreement and any dispute, disagreement, or issue of
construction or interpretation arising hereunder whether relating to its
execution, its validity, the obligations provided herein or performance shall
be brought in a court of competent jurisdiction in Broward County, Florida and
governed or interpreted according to the internal laws of the State of
Florida.
21. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between
the parties and supersedes all prior oral or written agreements regarding the
same subject matter.
22. SEVERABILITY CLAUSE. In the event any parts of this Agreement are found to
be void, the remaining provisions of this Agreement shall nevertheless be
binding with the same effect as though the void parts were deleted.
23. SUCCESSORS. Subject to the provisions of this Agreement, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
24. SECTION AND PARAGRAPH HEADINGS. The section and paragraph headings in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
25. AMENDMENT. This Agreement may be amended only by an instrument in writing
executed by all parties hereto.
26. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument. The execution of this Agreement may be
by actual or facsimile signature, provided however that original signatures
must be provided within five business days from the date of signing.
IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement
as of the date and year first above written.
6
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/s/ Richard J. Grable
Individually
Imaging Diagnostic Systems, Inc
By: /s/ Allan L. Schwartz
Executive Vice President
7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-2 n this Registration Statement on Form S-2 of our report
dated August 6, 1997, which appears on page F1 of our financial statements
included in the Imaging Diagnostic Systems, Inc. Form 10-KSB, dated September
26, 1997 and to the reference to our firm under the caption "Experts" in the
Prospectus.
/s/ MARGOLIES, FINK AND WICHROWSKI
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Margolies, Fink and Wichrowski
Pompano Beach, Florida
July 17, 1998
