FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[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, 1998
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.
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(Name of small business issuer in its charter)
Florida 22-2671269
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(State of incorporation) (IRS employer Ident. No.)
6531 NW 18th Court, Plantation, FL. 33313
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(address of principal office) (Zip Code)
Issuer's telephone number: (954) 581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(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, October 12, 1998, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $9,510,380.20 with
37,989,399 shares outstanding.
The number of shares outstanding of the issuer's common stock, as of October 12,
1998 was 37,989,399. As of October 12, 1998, the number of shares outstanding of
each of the issuer's classes of preferred stock were Series B Convertible
Preferred-450, and Series H Convertible Preferred-108. A notice of conversion
for the Series B Preferred was received by the Company, however as of the date
of this Report no common shares were issued and no Series B Preferred Shares
were cancelled.
Documents Incorporated By Reference
None
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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.
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OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed and is testing a Computed Tomography Laser Mammography
("CTLM(TM)") device for detecting breast cancer through the skin in a
non-invasive 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 tissue in the breast for indicia of malignancy
or benignancy. The components of the laser system are purchased from two
unaffiliated parties and assembled and installed into the CTLM(TM) by the
Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters as
laser light pulses pass through the tissue. The CTLM(TM) device is designed to
provide the physician with objective data for interpretation and 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.
HISTORY
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. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of ten ancillary patents from 1996 to date, and intends to
file an additional 3 patent applications within the next six months. During this
period of time there were further advances in laser technology effecting the
size and stability of the laser component. The Company incorporated these
changes by purchasing a laser package manufactured by Spectra-Physics, Inc.
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLM(TM) device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and patients were scanned. Prior to the
completion of the 1996 IDE protocol, the Company was advised that greatly
improved laser technology would soon become available. The IDE protocol 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, on May 20, 1998, the Company's
termination of the IDE protocol and its final report was accepted by the FDA.
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The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. 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 upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.
On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 7 independent and 16 subordinate claims. In May 1998, the Company,
realizing that it had no formal written agreement in place with Mr. Grable,
immediately began negotiating with Mr. Grable for the exclusive use of the
patent. In June 1998, a written agreement was entered into. See Item 1.
"Description of Business-Patent
BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime. Nationwide, it is estimated that in 1998, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and an estimated 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the 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 mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommend as a routine part of preventive
healthcare for women over the age of 20 (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 a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.
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Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
Physical Examination
Physical examinations may be conducted by a physician or clinician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.
Mammography
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast which is intended to display lesions as
white spots against the black and/or white background of normal tissue. In a
screening mammogram, radiologists seek to detect suspicious lesions, while in a
diagnostic mammogram radiologist seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are often
uncomfortable for the patient. Because x-ray mammography exposes the patient to
radiation, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113), and requires the use of capital equipment
ranging in cost from approximately $75,00 to $225,000. It is expected that the
CTLM(TM) device will cost approximately $300,000 and the cost of a bilateral
exam will be $125 to $150. Due the high capital costs associated with
mammography equipment and the specialized training necessary to operate the
equipment and to interpret radiographic images, mammography is usually available
only at specialty clinics or hospitals.
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. Again, it is
expected that the CTLM(TM) device will cost approximately $350,000 and the cost
of an exam will be $125 to $150. Like mammography, ultrasound is generally
performed at specialty clinics or hospitals.
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.
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THE COMPANY
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 June 30, 1998, the Company had an
accumulated deficit of $27,055,993. 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 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. See Item 6. "Management's
Discussion and Analyses of Financial Condition and Results of Operations."
CTLM(TM)
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Since its inception in December 1993, the Company has been engaged in the
research, development and testing of its CTLM(TM) device. The CTLM(TM) is a
system for detecting breast cancer through the skin in a non-invasive procedure
that does not require compression or x-ray. The CTLM(TM) employs a high-speed
pico-second pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms that create contiguous cross sectional slice images of
the breast which are used in the detection and analysis of changes in the breast
for indicia of malignancy or benignancy. The components of the laser system are
purchase from two unaffiliated parties and assembled and installed into the
CTLM(TM) by the Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters of as
it passes through the tissue. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and 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. Further, the CTLM(TM) does not expose the patient
to ionizing radiation or painful compression, which the Company believes are
contributing factors to a portion of the patient population not obtaining a
conventional mammogram.
A breast exam utilizing the CTLM(TM) 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. A bilateral breast scan (both breasts) takes approximately 15 minutes.
Each scan takes approximately 6-8 minutes. The CTLM(TM) has been designed in
such a way as to provide the physician and patient with quick access to
information concerning the probability that an identified lesion is malignant or
benign. The procedure is designed to provide the physician and patient with an
objective, on-site, immediate diagnostic decisions, including whether or not to
proceed to surgical biopsy. Further, the CTLM(TM) is designed to archive and
compare scans and provide the patient with a computer disc (CD) with images
produced from the date of her scan.
Comparison to Existing Diagnostic Modalities
The CTLM(TM) differs from currently available breast imaging modalities employed
for the detection of breast cancer in that the CTLM(TM) will generate more
precise information for the clinician or doctor. The CTLM(TM) is designed to
generate, depending on the size of the breast, approximately 20 cross-sectional
images of a breast. A conventional screening mammography exam generates two
images of the breast. Cross-sectional imaging will allow 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.
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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. Forceful compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but is uncomfortable, and often painful. This discomfort level
poses an obstacle for many women in deciding to have their first mammogram or
deciding whether to ever return for an annual screening mammogram.
Scanning of the breast with the CTLM(TM) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. The Company believes that such images will provide the
physician with increased accuracy in lesion location, as well as determination
of the extent and involvement of breast disease. The CTLM(TM) will also be able
to produce a near three-dimensional view.
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. This is not the case with CTLM(TM) scans. Due to
the free suspension of the breast in the CTLM(TM) scanning chamber, and the
ability of the CTLM(TM) to image the breast from the chest wall to the nipple,
data can be collected from around the entire breast. The scanning capacity of
the CTLM(TM) laser light transmission through the breast is not impeded by
silicone or saline implants.
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 that 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.
GOVERNMENT REGULATION
United States Regulation
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The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(TM) device in
the United States. Because the CTLM(TM) is a medical device, it is subject to
the relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act")
and implementing its regulations. Pursuant to the FD&C Act, the Food and Drug
Administration ("FDA") regulates, among other things, the manufacture, labeling,
distribution, and promotion of the CTLM(TM) in the United States. The FD&C Act
requires that a medical device must (unless exempted by regulation) be cleared
or approved by the FDA before being commercially distributed in the United
States. The FD&C Act also requires that manufacturers of medical devices, among
other things, comply with the labeling requirements and to manufacture devices
in accordance with Good Manufacturing Practices ("GMPs"), which require that
companies manufacture their products and maintain related documentation in a
conformed manner with respect to manufacturing, testing, and quality control
activities. The FDA inspects medical device manufacturers and distributors, and
has broad authority to order recalls of medical devices, to seize non-complying
medical devices, to enjoin and/or impose civil penalties, and to criminally
prosecute violators.
Pursuant to the FD&C Act, the FDA classifies medical devices intended for human
use into three classes: Class I, Class II, and Class III. In general, Class I
devices are products the safety and effectiveness of which the FDA determines
can be reasonably assured by general controls under the FD&C Act relating to
such matters as adulteration, misbranding, registration, notification, records
and reports, and GMPs. Class II devices are products for which the FDA
determines that these general controls are insufficient to provide reasonable
assurance of safety and effectiveness, and that require special controls such as
the promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
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are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in Class III, such as the
Company's CTLM,(TM) require pre-market approval, as described below.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some devices may
qualify for clearance under a Section 510(k) procedure, which is not applicable
to the CTLM(TM) since it is a Class III device. Since the CTLM(TM) does not
qualify for the 510(k) procedure it must apply to the FDA for pre-marketing
approval ("PMA") before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results of
clinical studies, and preparing an application is a detailed and time consuming
process. Once a PMA application has been submitted, the FDA's review may be
lengthy and may include requests for additional data. By statute and regulation,
the FDA may take up to 180 days to review a PMA application, although such time
period may be extended. Furthermore, there can be no assurance that a PMA
application will be reviewed with 180 day or that a PMA application will be
approved by the FDA. The Company intends to file for expedited review of its PMA
application. See "Regulatory and Clinical Status, United States/FDA". The
inability of the Company to obtain FDA approval would have a material adverse
effect on the Company's business and financial condition and could result in
postponement of the commercialization of the CTLM.(TM) See Item 1. "Description
of Business- Regulatory and Clinical Status".
Foreign Regulation
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Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter that that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit the
Company to begin marketing the CTLM(TM) device in Europe and Asia before
marketing would be permitted in the United States. In Europe, the Company must
obtain certification necessary to enable the "CE" Mark to be affixed to the
CTLM(TM) device, which will allow the Company to market the systems throughout
Europe. The process to obtain a CE mark is lengthy and time consuming. Following
are the listed standards and steps that must be complied with in order to obtain
a CE Mark in order to distribute the CTLM(TM) device in the European Economic
Area (EEA). The listed standards are for the EEA market only and additional
document/standards exists for other markets. These standards may have direct or
indirect reference to additional standards and additional standards may apply:
Safety (Electrical/Mechanical)
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EN 60 601-1: Medical electrical equipment. Part 1: General
requirements for safety.
EN 60 601-1-1: Medical electrical equipment. Part 1: General
requirements for safety 1. Collateral standard: Safety
requirements for medical electrical systems.
EN 60 601-2-22: Medical electrical equipment. Part 2:
Particular requirements for the safety of diagnostic and
therapeutic laser equipment.
IEC 825-1: Safety of laser products. Part 1: Equipment
classification, requirements and user's guide.
EN 60 950: Safety of Information Technology Equipment
Including Business Equipment.
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Safety (EMC)
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EN 60 601-1-2: Medical electrical equipment. Part 1: General
requirements for safety 2. Collateral standard:
Electromagnetic compatibility - requirements and tests.
Programmable Electrical Systems (Software)
-----------------------------------------
EN 60 601-1-4: Medical electrical equipment. Part 1: General
requirements for safety 4. Collateral standard: Programmable
electrical medical systems.
Quality Assurance Systems
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EN 29001 : Quality Systems - Model for Quality Assurance in
design/development, production, installation and servicing.
EN 46001 : Specification for Application of EN 29001 to the
manufacture of medical devices.
Clinical Evaluations
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EN 540: Clinical investigation of medical devices for human
subjects.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
Risk Assessment
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prEN 1441: Medical devices - risk analysis.
Additional Markings/Symbols/Terminology/Documentation
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prEN 980: Terminology, symbols and information provided with
medical devices. Graphical symbols for use in the labeling of
medical devices.
prEN 1041: Terminology, symbols and information provided with
medical devices. Information supplied by the manufacturer with
medical devices.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
Although the Company has begun the process for application of regulatory
approval marks and showing compliance with the Medical Devices Directive (MDD)
which allows placement of the CE mark, there can be no assurance that such
approval will be received on a timely basis, or at all. See Item 1. "Description
of Business-Regulatory and Clinical Status".
REGULATORY AND CLINICAL STATUS
United States/FDA
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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 conduct clinical trials under the IDE 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 clinical studies at
three unaffiliated clinical sites.
In April 1998 the Company appointed seven physicians and one physicist who are
specialists in the following fields: Gynecology/Obstetrics and Mammography (4),
breast surgery (1), Neurology (1), Radiology (1), and optics and laser
engineering (1), to serve on the IRB. The IRB was appointed to review, to
approve the initiation of, and to conduct periodic review of the Company's
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research involving human subjects. The primary purpose of the IRB is to assure,
both in advance and by periodic review, that appropriate steps are taken to
protect the rights and welfare of humans participating as subjects of the
research. To accomplish this purpose, IRB's use a group process to review
research protocols and related materials (e.g., informed consent documents and
investigator brochures) to ensure that:
(i) Risks to subjects are minimized by using procedures that are
consistent with sound research design and that do not unnecessarily expose
subjects to risk, and whenever appropriate, by using procedures already
being performed on the subjects for diagnostic or treatment purposes.
(ii) Risks to subjects are reasonable in relation to anticipated benefits
(if any) to subjects, and the importance of the knowledge that may be
expected to result.
(iii) Selection of subjects is equitable.
(iv) Informed consent will be sought from each prospective subject or the
subject's legally authorized representative and will be documented in
accordance with, and to the extent required, by the FDA's informed consent
regulation.
(v) Where appropriate, the research plan makes adequate provision for
monitoring the data collected to ensure the safety of subjects.
(vi) There are adequate provisions to protect the privacy of subjects and
to maintain the confidentiality of data.
(vii) Appropriate additional safeguards have been included in the study to
protect the rights and welfare of subjects who are members of a vulnerable
group.
The IRB is not responsible for nor does it participate in obtaining data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for its services; however, if pursuant to
FDA requirements, one of the members should supervise the actual scanning of
women, they are paid a supervisory clinical honorarium of $250 per day. The
optics and laser engineer IRB member also serves and has served for the past
three years, as a consultant to the Company on an "as needed" basis. He receives
a consulting fee from the Company of $700 per month. The Neurology IRB member is
married to one of the Company's engineers.
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.
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
clinical trials. 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 its in-house facilities in Plantation, Florida. On
September 1 and September 10, 1998, the Company formally submitted the first and
second series of the 20 patient in-vivo (human) images and corresponding
interpretation data to the FDA. Upon completion and submission of the 20 patient
in-vivo studies, the Company intends to initiate, upon FDA approval, the 400
case clinical study at three prominent United States hospitals. See Item 1
"Description of Business-Government Regulation." Once the 400 case clinical
study is completed, the Company plans to file a Pre-Market Approval application
(PMA) with the FDA to obtain marketing clearance.
The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first off-site clinical site. The Company has
submitted the IDE protocol to the hospital. NCMC's IRB is scheduled to meet on
October 13, 1998 to review and approve the IDE Protocol. After approval, the
documents are sent to the FDA for their approval. Once approved by the FDA, the
Company is granted permission, assuming the 20 patient in-vivo studies have been
completed, to proceed with the clinical trials described in the IDE protocol.
9
<PAGE>
In order to sell the CTLM(TM) device commercially in the United States, the
Company must obtain marketing clearance from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:
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.
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.
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.
The availability of the device is otherwise in the best interest
of the public health.
Although the Company believes that it qualifies for expedited review, there can
be no assurance that any such review will be granted of if granted that the PMA
will be approved or that such approval will be received on a timely basis. See
Item 1. "Description of Business-Government Regulation".
Foreign
- -------
The Company has begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks and showing compliance with the MDD which allows
placement of the CE Mark. Many steps need to be taken into consideration with
the end goal of accessing the EEA market. The following is a brief explanation
of the steps the Company has taken or is currently taking to achieve this goal.
Evaluating and Securing a Notified Body ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a Competent Authority which, among other things,
is responsible for the evaluation of regulatory non-governmental agencies in
their country for designation as a NB.
An agency can be approved to be a NB for different categories (i.e. electrical
products, machinery, medical, etc.).. For instance, the NB that the Company will
choose will be one that is approved to assist manufacturers in showing
compliance with MDD. As MDD is very encompassing (product safety, quality
assurance, EMC, software, etc) some NBs are only approved to assist
manufacturers in certain areas (i.e. quality assurance evaluations) and the
manufacturer will need to look to another NB for assistance in the other areas.
The Company is in the process of evaluating applicable NBs and intends to select
a NB that can assist it in all matters of the MDD.
The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated interpretation of requirements and excellent customer
service. The Company believes that they have found a NB that will provide this
type of service and has notified them of its intent to utilize them. The
proposed NB has provided the Company with information on the necessary steps in
accessing the market of the EEA, however no contracts have been entered into at
this time.
Product Safety Evaluation - The Company believes that one of the most important
aspects of product safety is the design of the product. If safety standards are
not considered through the design of the product, the product safety evaluation
may require that the mechanical and electrical parts of the product be
re-designed. The Company has made every effort to confirm throughout the
CTLM(TM) design process that it is in compliance with all domestic and
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<PAGE>
international safety standards. In this manner, the Company is very much
involved in the product safety evaluation and, although the Company has not
entered into contract with a NB for this purpose, it is in contact with several
regulatory agencies on a regular basis for guidance. There are, however, some
considerations that cannot be anticipated, such as electrical magnetic
compatibility ("EMC"), which requires equipment that is not cost effective for
the Company to purchase in order to evaluate. There is also the consideration of
new requirements, or new interpretations of existing requirements, that may
effect the CTLM(TM).
Quality Assurance - The Company's current goal is to implement a full quality
system at the Company's corporate offices. The Company's Quality Assurance
Manager ("QAM") has begun the process of implementation in accordance with the
required standards. After implementation of the quality system, auditors are
required to review a history of the system in particular how it works and how
the normal difficulties that occur in design and manufacturing were overcome.
The Company's QAM and the NB will need to determine how much history is required
for proper proof that the system is adequate.
Software Evaluation - The preparations for software evaluation are headed by the
Company's Software Manager. Because the standards in this area are relatively
new to the industry, regulatory agencies will be very cautious in the
evaluation. Through advice from the proposed NB, the Company has begun document
preparation for evaluation submission. One of the larger steps in documentation
preparation for this evaluation is the risk analysis for the device. Although
there may be changes to the CTLM(TM) that may effect the report, the Company has
completed a risk analysis for the CTLM(TM) and is ready to proceed with the
remainder of the documentation.
Efficacy - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is
basically the same for the United States as for the EEA, however reporting
methods may differ. As the Company continues with clinical trials in the U. S.,
these efforts will also benefit it in the EEA market.
SALES AND MARKETING
The Company presently employs a Director of Sales. At present, his job consists
of locating, obtaining and coordinating with strategic marketing and
distribution companies who have established marketing capabilities, both
domestic and international. The target domestic market includes most of the over
10,000 mammography centers across the United States, which exist in both large
and small hospitals and private clinics. The international target market is
large government and private hospitals.
Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers and to the extent that, and rate of which, the
CTLM(TM) achieves market acceptance and penetration will depend on many
variables. These include, but are not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy, and
cost-effectiveness of the CTLM(TM), and the advantage of the CTLM(TM) device
over existing technology and cancer detection methods. The Company has focused
its efforts on establishing a presence at major Breast Imaging Conferences that
are held each year. 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. There can be no assurance that physicians
or the medical community in general will accept and/or utilize the CTLM(TM).
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.
Reliance on International Sales.
The laws of certain European and Asian countries may permit the Company to begin
marketing the CTLM(TM) device in Europe and Asia before marketing would be
permitted in the United States. See "Description of Business-Government
Regulation." 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
11
<PAGE>
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, continues to develop and there can be
no assurance that new laws or regulations will not have an adverse effect on the
Company.
International Distributors
In January 1998, the Company entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based in the
Republic of Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical Instruments, Telsar,
and Medlab, among many others, in the Republic of Turkey. Emtron appears to have
a strong presence in the industry, marketing to the 30 university hospitals, the
Social Security System (which has over 100 hospitals) and larger private
hospitals in Turkey.
Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of Turkey for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.
In April 1998, the Company entered into an exclusive International Distribution
Agreement 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. For the purpose of the Agreement, the first year is deemed to
begin when the Company obtains PMA acceptance from the FDA. See Item 1:
Description of Business -Government Regulation. Focus Surgical currently
distributes non-competitive laser products for companies such as Sunrise Medical
Technologies and Baltec, among many others.
The Company has already secured exclusive distributors as follows:
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<PAGE>
INTERNATIONAL DISTRIBUTORS BY COUNTRY
<TABLE>
<CAPTION>
Renewal Option
Country Term Expiration by IDSI Renewal Period
------- ---- ---------- ------- --------------
<S> <C> <C> <C> <C>
Australia 3 years 3/13/00 Yes 2 years
Austria 3 years 3/11/00 Yes 2 years
Brunei 3 years 3/13/00 Yes 2 years
China 3 years 3/13/00 Yes 2 years
Ecuador 3 years 10/12/00 Yes 3 years
France 29 months 12/31/98 Yes 2 years
Germany 3 years 3/11/00 Yes 2 years
Hong Kong 3 years 3/13/00 Yes 2 years
India 3 years 3/13/00 Yes 2 years
Indonesia 3 years 3/13/00 Yes 2 years
Ireland 3 years 3/29/01 Yes 1 year
Israel 2 years 12/31/98 Yes 2 years
Italy 29 months 11/30/98 Yes 2 years
Macau 3 years 3/13/00 Yes 2 years
Malaysia 3 years 3/13/00 Yes 2 years
New Zealand 3 years 3/13/00 Yes 2 years
Philippines 3 years 3/13/00 Yes 2 years
Russia 3 years 3/11/00 Yes 2 years
San Marino 29 months 11/30/98 Yes 2 years
Singapore 3 years 3/13/00 Yes 2 years
South Korea 2 years 2/10/99 Yes 2 years
Switzerland 3 years 3/11/00 Yes 2 years
13
<PAGE>
Renewal Option
Country Term Expiration by IDSI Renewal Period
------- ---- ---------- ------- --------------
Turkey 18 months 7/19/99 Yes 1 years
United Kingdom 3 years 3/29/01 Yes 1 year
Vatican City 29 months 11/30/98 Yes 2 years
</TABLE>
To date, the Company has not marketed, or generated revenues from the
commercialization of the CTLM(TM).
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/or adversely affected. There
can be no assurance that third-party payors will provide reimbursement for use
of the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care delivery
system and further reduce and control health care spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial
condition and results of operations. In international markets, reimbursement by
private third-party medical insurance providers, including governmental insurers
and independent providers, varies from country to country. In certain countries,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the cost of
health care through various means
PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLM(TM) device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. At present, the Company does not carry product
liability insurance. The Company intends to obtain product liability insurance
prior to testing at clinical sites and marketing the CTLM(TM) device.
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.
To a great extent, the CTLM(TM) will be competing with established imaging
equipment such as x-ray mammography equipment, ultrasound or high definition
ultrasound systems, Magnetic Resonance Imaging ("MRI") systems, and
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<PAGE>
thermography, diaphonography and transilluminational devices. Physicians
presently using these customary types of imaging equipment may not use the
Company's products. Currently, mammography is employed widely and the Company's
ability to sell the CTLM(TM) device to medical facilities will, in part, be
dependent on the Company's ability to demonstrate the clinical utility of the
CTLM(TM) 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
tommography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) 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.
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 CTLM(TM) 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
PATENT LICENSING 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 a patent, Patent No. 5,692,511, issued on December 2, 1987 (the "Patent"),
which encompasses the technology for the CTLM(TM). The Company and Mr. Grable
had 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. In order for the Royalties set forth above to take the place of the
Development Royalties set forth in the Amendment to Grable's Employment
Agreement dated February 23, 1995, and for such Amendment to become void and
have no effect, the Company is required to have the Agreement ratified by its
Shareholders at its next special or annual meeting of Shareholders. Not
withstanding the need for shareholder ratification for the substitution of the
Royalties, the Patent Licensing Agreement does not require shareholder approval
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<PAGE>
in order to be valid. See Item 10. "Executive Compensation-Employment
Agreements".
The Agreement also contains anti-dilution protection upon the occurrence of any
stock dividend, stock split, combination or exchange of shares, reclassification
or re-capitalization 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.
OEM Agreement
- -------------
In January 1998, the Company entered into an Original Equipment Manufacturer
Agreement (OEM) with Imation Corp.("Imation"), a worldwide leader in the imaging
and information industry. Imation has a marketing presence in more than 60
countries and operates 17 manufacturing, research and distribution facilities.
Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty-free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface (the
"Dry View Technology").
The OEM Agreement also gives the Company the right to market the Dry View
Technology directly or indirectly through its Distributors. The Company believes
that the Dry View Technology will provide the Company's end uses with the most
efficient and economical and ecological product in the medical industry. In
addition, the marketing of the Dry View Technology can provide immediate
revenues to the Company as well as generate additional revenues when packaged
with the CTLM(TM). No Dry View Technology has been marketed by the Company to
date.
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 control or relationship with the Company, other
than as a minority shareholder, 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 documentation necessary to satisfy any concerns that
the Panel had regarding the Shareholder. On March 31, 1997, prior to the time
Nasdaq acted on the proposal, Barron's 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 Barron's article,
despite a retraction from Barron's on April 7, 1997. 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
Nasdaq Qualification Hearing Panel (the "Panel") in Washington D.C. on January
22, 1998. On February 10, 1998, the Panel issued its decision granting the
Company's request for initial inclusion on the Nasdaq Small Cap Market, subject
to the following conditions:
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<PAGE>
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 expired on May 11, 1998.
The Company immediately appealed this decision to the Nasdaq Listing and Hearing
Review Council (the "Council"). On May 19, 1998 the Company received the
Decision of the Council which affirmed the decision of the Panel. The Council
stated that:
"In making this decision, we find unpersuasive the Company's argument that
on remand, it was not required to satisfy the initial inclusion bid
requirement, or by implication, any of the other listing requirements. In
fact the purpose of a remand and the continuing role of the staff in the
process is to provide assurance that the Company satisfied Nasdaq listing
requirement at the time it was listed, a fact that the Company likely
understood when it went through the re-application process following
remand."
The Company contends that this determination is incorrect in that the Company
never went through a re-application process following remand. The Council went
on to state, in part, that:
"The Company could have no reasonable expectation that it received a
waiver of Nasdaq listing standard. The decision merely determines that the
ownership of the shareholder at issue would not prevent listing, given the
Company's plan to insulate itself. We believe that the Panel's exception,
which appears to be within the Company's control to achieve, was
appropriate. While the incorrect Barron's article was unfortunate, we note
that a retraction was later printed and sufficient time has passed to
allow the Company's stock to be fairly priced in the market.
On June 11, 1998, the Company filed an Application for Review before the United
States Securities and Exchange Commission to appeal the Decision of the Council.
The basis for the appeal was that the Council erred in affirming the Panel's
decision placing conditions upon the Company's initial inclusion. The Company
contends that: (i) it did satisfy all the listing requirements on a timely basis
but was initially rejected for listing by the Nasdaq Staff and Panel on grounds
that were ultimately reversed by the Council in the first appeal; (ii) that the
Company satisfied the listing requirement and this fact was so recognized in the
Council's Decision in the first appeal; (iii) that due to the four month delay
cased by the Nasdaq Staff; dilatory review process, and the irresponsible
remarks made by a Nasdaq Staff member to Barron's; the price of the Company's
stock declined below the initial listing requirement (but remained well above
the maintenance requirement). Based upon price deficiency alone, the Company was
denied listing.
On August 8, 1998, the Company filed it's Brief in Support of Application for
Review. Nasdaq's brief was due on September 10, 1998 and filed on September 15,
1998. On September 25, 1998, the Company filed its Reply Memorandum to the Brief
of the Nasdaq Stock Market. As of the date of this Report, no hearing has been
scheduled.
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 the Company's
employees (22) are employed in the areas of scientific and product research and
development. The Company's ability to provide its services is dependent upon the
Company recruiting, hiring and retaining qualified technical personnel. To date,
the Company has been able to recruit and retain sufficient qualified personnel.
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.
17
<PAGE>
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and employees. The
loss of the services of existing personnel as well as the failure to recruit key
scientific, technical and managerial personnel in a timely manner would be
detrimental to the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. See Item 9. "Directors, Executive Officers, Promoters and Control
Persons; and Compliance with Section 16(a) of the Exchange Act".
YEAR 2000
The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant.
The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and is currently reviewing the
cost of such actions. The Company expects such modifications to its CTLM(TM)
products and internal computer systems will be made on a timely basis; however
there can be no assurance there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time the Company is unable to
estimate the cost of its Year 2000 compliance.
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 the 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 Dr. 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. On November 19, 1997, after a hearing,
the Court granted Kamalov's motion to dissolve the injunction. On December 17,
1997, the Company filed a timely notice of appeal in the District Court of
Appeal of Florida, Fourth District, Appeal No. 98-58. Briefs have been filed by
both parties and the appeal is pending. Oral Argument has not been set as of the
date of this Report.
18
<PAGE>
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
---------------------------------------------------
The Company has not submitted any matters to a vote of Security Holders. As of
July 10, 1998, Austost Anstalt Schaan, Balmore Funds S.A., Dominion Capital
Funds, Ltd., Canadian Capital Fund Ltd., Avalon Capital Ltd., Richard J. Grable,
Weyburn Overseas Limited, Linda B. Grable, Goodland International Investment
Ltd. and Allan L. Schwartz, (collectively "the Majority Shareholders"),
authorized, by written action, the Company's adoption of an Amendment to the
Company's Articles of Incorporation increasing the Company's authorized shares
from 48,000,000 shares to 100,000,000 shares.
Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. The
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Due to the decrease in the
Company's stock price, the Company no longer has an adequate number of common
shares authorized to meet its contractual obligations with regard to the
conversion of the Preferred Stock. The Certificates also provide that the
holders of the Preferred Shares 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.
On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission (the "Commission") with regard to the Written
Action. On September 4, 1998, the Company received a comment letter from the
Commission and is in the process of revising the Information Statement and
providing the Commission with additional documentation. The Majority
Shareholders consent with respect to the Amendment will take effect 20 days from
the time that the Commission advises the Company that it has no further
comments.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
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
19
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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
FISCAL YEAR 1999
September 1998 $0.58 $0.50
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.
SALE OF UNREGISTERED SECURITIES
Private Placement of Preferred Stock
Series C Preferred Stock
- ------------------------
On October 6, 1997, 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"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.63 per share.
The Preferred Shares were 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" was 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 was the Conversion Price to 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 were entitled to demand registration rights
under certain conditions.
In connection with the this sale, the Company paid Settondown Capital
International, Ltd., an unaffiliated Investment Banker an aggregate of $220,500
for placement and legal fees. Net proceeds to the Company of $1,879,500 were
used for working capital and the continuous research, development and testing of
the Company's Computed Tomography Laser Mammography (CTLM (TM)) device.
The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 2,646,827
common shares.
Series D Preferred Stock
- ------------------------
On January 9, 1998, 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 at an exercise price
of $1.22 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
20
<PAGE>
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.22 per share.
The Preferred Shares were 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" was 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 entitled to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid 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.
The Series D Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,717,134
common shares.
Series E Preferred Stock
- ------------------------
On February 5, 1998, 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 at an exercise price
of $1.093 per share.. . The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.093 per share.
The Preferred Shares were 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
five-day trading period ending on the day prior to the date of conversion.
The shares underlying the Preferred Shares and Warrants are entitled to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid 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.
The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,334,455
common shares.
Series F Preferred Stock
- ------------------------
On February 20, 1998, the Company finalized a private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock (the " F
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"). At the time the placement was
concluded, the average bid and ask price of the Company's common stock was
approximately $1.31 per share.
21
<PAGE>
The F 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
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 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 entitled to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company paid, Rolcan Finance, Ltd.
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.
The 1,971,375 shares of Common Stock issued pursuant to the conversion of the
Series F Preferred are being registered on behalf of the Holders (the "Series F
Preferred Holders") pursuant to a Form S-2 Registration Statement filed with the
Securities and Exchange Commission on July 31, 1998 (the "Registration
Statement").
Series H Preferred Stock
- ------------------------
On June 2, 1998, the Company finalized a private placement to foreign investors
of 100 shares of its Series H Convertible Preferred Stock (the "Preferred
Shares") at a purchase price of $10,000 per share and 75,000A Warrant and 50,000
B Warrants. The A and B Warrants are exercisable at $1.00 and $1.50 per share,
respectively. The offering was conducted pursuant to Regulation D as promulgated
under the Securities Act of 1933, as amended (the "Regulation D Sale"). At the
time the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.56 per share. In connection with the Regulation
D Sale, the Company paid Settondown Capital International, Ltd., 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. No
shares of the Series H Convertible Preferred Stock have been converted as of the
date of this Report.
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 (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).
Pursuant to the terms of the Registration Rights Agreement between the Company
and the Series H holder, the Company is required to register 200% of the number
of shares that would be required to be issued if the Preferred Stock were
converted on the day before the filing of the Registration Statement (7,200,000
shares). The Company filed the Registration Statement on July 31, 1998. On
September 4, 1998, the Company received substantial comments from the
Commission, many of which are incorporated into this Report. The Company is in
the process of amending the Registration Statement and hopes to file an
amendment within the next few weeks. The Company is in technical default of the
Registration Rights Agreement, which required the Registration Statement to be
declared effective by October 2, 1998. Pursuant to the Registration Rights
Agreement, the Company is required to pay the Series H Holders, as liquidated
damages for failure to have the Registration Statement declared effective, and
not as a penalty, two (2%) percent of the principal amount of the Securities for
the first thirty (30) days, and three (3%) percent of the principal amount of
the Securities for each thirty (30) day period thereafter until the Company
procures registration of the Securities
22
<PAGE>
Private Placement of Common Stock
In August 1998, the Company sold 200,000 shares of restricted common stock to an
unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $60,000. At the time the placement was concluded, the average bid and
ask price of the Company's common stock was approximately $.28 per share. These
shares were subsequently registered pursuant to a Form S-2 Registration
Statement.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to an unaffiliated third
party, pursuant to Regulation D, for an aggregate purchase price of $250,000. At
the time the sale occurred the average bid and ask price of the Company's common
stock was $.595. The Note bears interest at the rate of 12% per annum. The
repayment of the Note which was originally due on October 2, 1998 has been
extended to November 2, 1998. The Note is personally guaranteed by Linda B.
Grable, the Company's President.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to an unaffiliated third party, pursuant
to Regulation D for an aggregate purchase price of $100,000. At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.50 per share. The Note bears interest at the rate of
12% per and is due and payable on November 2, 1998. The Note is personally
guaranteed by Linda B. Grable, the Company's President.
Conversion of Preferred Shares
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock for an aggregate of $4,500,000, to two investors
pursuant to Regulation D. The Company filed a Registration Statement of Form S-1
registering the share underlying the Series B Preferred. The shares were never
converted and the registration statement is no longer current. On September 4,
1998, the Company received a notice of conversion from the Series B holders. 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 the Series B and
the Series H Preferred Stock should the Series H Preferred Holders wish to
convert. The conversion rate of the Series B Preferred and the Series H
Preferred is 82% and 75% of the average market price over a five-day period
prior to conversion, respectively. Pursuant to the conversion notice, if and
when the Company converts the Series B Preferred, such share will be convertible
into 15,199,488 shares of the Company's common stock. The Company is technically
in breach of its agreement with the Series B Holders. In the event that the
Company is not able to increase the authorized common 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 Item 4. "Submission of
Matters to a Vote of Security Holders".
Financing/Equity line of credit
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 fees for current employees and consultants,
and other contractual agreements are likely to increase as additional agreements
are entered into and additional personnel are retained.
The Company has a firm commitment and is in the process of finalizing an
agreement for a $15 Million, three year Equity Line of Credit 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,
23
<PAGE>
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 utilize the Equity
Line of Credit. See Item 4. "Submission of Matters to a Vote of Security
Holders"
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 1998 and June 30, 1997.
- ---------------------------------------------------
General and administrative expenses in the aggregate during the twelve months
ended June 30, 1998, were $4,478,055 representing an increase of $1,474,313 from
$3,003,742 during the twelve months ended June 30, 1997. The increase is due
primarily to substantial increases in amortization of deferred compensation
expense and consulting expenses.
Compensation and related benefits during the twelve months ended June 30, 1998,
were $1,987,104 representing a decrease of $1,477,020 from $3,464,124 during the
twelve months ended June 30, 1997. The decrease in compensation and related
benefits is due to the additional compensation recorded in 1997 on the
compensatory stock options.
Research and development expenses during the twelve months ended June 30, 1998,
were $254,722 representing a decrease of $810,456 from $1,065,178 during the
twelve months ended June 30, 1997. This decrease is due primarily to finalizing
certain components of the CTLM(TM) device.
Net interest income during the twelve months ended June 30, 1998, was $22,137
representing a decrease of $94,835 from $116,972 during the twelve months ended
June 30, 1997. This decrease is due to a decrease of funds invested by the
Company.
Depreciation and amortization expenses during the twelve months ended June 30,
1998, were $283,966 representing an increase of $53,919 from $230,047 during the
twelve month period ended June 30, 1997. This increase is due primarily to the
purchase additional laboratory equipment and manufacturing fixtures.
Comparative fiscal year June 30, 1997 numbers have been changed to reflect
restatement as per Financial Statement, Notes to Financial Statements, (3)
Restatements, Page F15.
24
<PAGE>
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 $17,746,206 and
through loan transactions in the aggregate amount of $520,407. During Fiscal
1998, the Company received net proceeds of approximately $1,879,500 from the
private placement of its Series C Convertible Preferred Stock and Warrants,
approximately $495,000 from the private placement of its Series D Convertible
Preferred Stock and Warrants, approximately $495,000 from the private placement
of its Series E Convertible Preferred Stock and Warrants, approximately $700,000
from the private placement of its Series F Convertible Preferred Stock, all
pursuant to Regulation S of the Securities Act of 1933, as amended, and
approximately $990,000 from the private placement of its Series H 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 $310,116 at June 30,
1998, representing a decrease of $73,107 from $383,223 at June 30, 1997. The
decrease in cash and cash equivalents is due to continuing operations.
The Company's prototype equipment totaled $-0- at June 30, 1998 and $1,216,585
at June 30, 1996. All direct costs associated with the prototype equipment have
been capitalized. The Company has reclasssified the prototype equipment into
inventory as the development of the Computed Tomography Laser Mammography
(CTLM(TM)) device has been, for the most part, completed and the manufacture of
five (5) devices to be placed into clinical sites has commenced.
The Company's property and equipment, net, totaled $2,920,980 at June 30, 1998
and $3,293,297 at June 30, 1997. This decrease is due to depreciation and
retirement of certain equipment.
LIQUIDITY AND CAPITAL RESOURCES
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. 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.
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 fiscal
1998 was $3,540,001 primarily due to the Company's continued research and
development of the CTLM(TM) and preparations for FDA Clinical Trials including
the manufacture of five (5) CTLM(TM) Breast Imaging Systems and the hiring of
six additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) device and related software development
of $4,532,866 in fiscal 1997. At June 30, 1998, the Company had a working
capital of $(257,166) compared to a working capital of $(294,433) at June 30,
1997.
During fiscal 1998, the Company was able to raise a total of $5,399,599 less
expenses through Regulation S and Regulation D transactions. The Company will
continue to seek equity or debt financing in order to meet its working capital
needs. The Company does not expect to generate a positive internal cash flow for
at least the next twelve-months due to the expected increase in spending for
research and development and the expected costs of commercializing it initial
product, the CTLM(TM). The Company will require additional funds for its
research and development, 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
25
<PAGE>
end of calendar year 1998 in order to continue operations. The Company plans to
raise additional funds by either equity or debt financing, including entering
into a transaction(s) to privately place equity, either common or preferred
stock, or debt securities, or combinations of both; or by placing equity into
the public market through an underwritten secondary offering or obtaining
mortgage financing on it real property and improvements. 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. 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, working capital need and
dilution to its shareholders.
No assurances, however, can be 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. If the Company's working capital is insufficient to fund its
operations, it would have to explore additional sources of financing.
Capital expenditures for the fiscal 1998 were approximately $115,738 as compared
to approximately $2,815,923 for 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 its capital needs
for fiscal 1999 will be approximately $100,000.
ITEM 7. FINANCIAL STATEMENTS
--------------------
Index to Financial Statements
Page
----
Report of Independent Certified Public Accountants F-1-2
Financial Statements
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5-8
Statement of Cash Flows F-9-10
Notes to Financial Statement F-11-39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
-----------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- -------------------------------------------------
The following table sets forth certain information concerning directors and
executive officers of the Company:
Name Age Position
- ---- --- --------
Richard J. Grable 56 Chief Executive Officer and Director
Linda B. Grable 61 Chairman of the Board and President
Allan L. Schwartz 56 Executive Vice-President, Chief
Financial Officer and Director.
Richard Grable, Allan Schwartz and Linda Grable are founders of the Company and
as such may be deemed "promoters" and "parents" as defined in the Rules and
Regulations promulgated under the Securities Act, as those terms are defined in
the rules and regulations promulgated under the Securities Act. Directors serve
until the next meeting of shareholders Officers serve at the pleasure of the
board of directors.
Richard J. Grable has been Chief Executive Officer and a director of the
Company since 1994 and is primarily responsible for the development of the
CTLM(TM) device. From January, 1994, to February, 1994: Mr. Grable was
vice-president, research and development, for Lintronics Technologies, Inc.,
Tampa, Florida, a manufacturer of breast imaging systems. From March, 1992, to
December, 1993: Mr. Grable was a an engineering consultant for Lintronics
Technologies, Inc., Tampa, Florida, 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, Florida, a manufacturer of
surveillance devices. From May, 1990, to July, 1991: Mr. Grable was an
engineering consultant for Telmed, Inc., Ft. Lauderdale, Florida, a software and
electronic design company.
Linda B. Grable has been President and Chairman of the Board of Directors
of the Company since 1994. From September 1991, to February, 1994, Mrs. Grable
was President and Director of VCC Communications, Inc., Tampa, Florida, a
manufacturer of voltage controlled oscillators (VCO). From August, 1988, to
April, 1991: Mrs. Grable was President of Lintronics International Ltd., Inc.,
Plantation, Florida, a manufacturer of breast imaging systems.
Allan L. Schwartz has been Executive Vice-President, Chief Financial
Officer and a Director of the Company since 1994. 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. 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,
Florida, a manufacturer of prototype homes.
Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
serve at the discretion of the board.
Key Employee
Robert H. Wake is the Company's Director of Engineering and has been
employed as such since April 1995. 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.
27
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership, furnishing the Company with copies of all
Section 16(a) forms they file. To the best of the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the year ended June 30, 1998. The Company has not received
copies of amended Form 13 D from Goodland International Investments Limited and
Weyburn Overseas Limited indicating their ability to convert and/or the
conversion of the Series B Preferred Shares into an aggregate of 15,199,488
common shares. Item 5 " Market for Registrant's Common Equity and Related
Stockholder Matters-Sale of Unregistered Securities/Conversion of Preferred
Shares
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and other executive officers for services
rendered to the Company during 1998 and 1997. No other person, who, during 1997
and 1996 served as an executive officer of the Company, had a total annual
salary and bonus in excess of $100,000.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ------------------------------------------------------
Name & Principal
Position Year Salary Other Annual Restricted Securities/Underlying
Compensation Stock Awards Option/SARs(1) (2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard J. Grable, 1996 $183,333
CEO and Director 1997 $289,779 $115,000 $268,000 22,883
1998 $286,225 534,602 (3)
- ---------------------------------------------------------------------------------------------------------
Linda B Grable, 1996 $91,000
President and 1997 $97,451 $115,000 $268,000 22,883
Director 1998 $119,070 534,602(3)
- ---------------------------------------------------------------------------------------------------------
Allan L. Schwartz, 1996 $124,000
Exec. V.P., CFO and 1997 $111,534 $115,000 $268,000 130,410
Director 1998 $119,070 534,602 (3)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate dollar value of the 1997 and 1998 options, based on the
averaged high and low price on June 30, 1998 are as follows: Richard J.
Grable -$225,781.42; Linda B. Grable-$225,781; and Allan L.
Schwartz-$269,329.86.
(2) Does not include qualified options to purchase 208,333 shares a $.48 per
share (110% of fair market value on day of issuance) and non-qualified
options to purchase 250,000 shares at $.17 per share (35%) of fair market
value on day of grant) issued to each of Messrs. Grable and Schwartz and
Ms Grable on July 6, 1998.
(3) Includes 250, 000 non-qualifies options that were required, by contract to
be issued in July 1997 but were not issued until January 2, 1998.
Option Grants.
The following table sets forth certain information concerning grants of options
to purchase Common Stock to the Named Executive Officers during the fiscal year
ended June 30, 1998.
28
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
No. of Securities %of Total Options Exercise or
Underlying Options Granted to Employees Base Price Market Price Expiration
Name Granted In Fiscal Year ($/Share) On Date of Grant Date
- ---- ------- -------------- --------- ---------------- ----
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Richard J. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- --------------------------------------------------------------------------------------------------
Linda B. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- --------------------------------------------------------------------------------------------------
Allan L. 250,000 14% $.31 $.85 1/2/02
Schwartz 250,000 14% $.31 $.65 1/2/02
(1) 34,602 1.9% $2.63 $2.39 1/2/02
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 exercisable at an exercise
price of $0.31 per share (35% of the fair market value on the date of issuance).
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., however the options for the 22,883 shares
were disclosed in the Company's Proxy Statement last year. These shares are
exercisable at any time at an exercise price of $4.37 and $2.63 per share,
respectively (110% of the fair market value on the contractual date of
issuance).
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 that expire
July 6, 1999. Pursuant to the terms of the employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable: $286,224.96; Linda B. Grable: $119,069.52 and Allan L.
Schwartz $119,069.52. During the Company's operational stage the salary of Allan
L. Schwartz salary will increase to $156,000. In addition, in fiscal 1998
Messrs. Grable and Schwartz and Ms. Grable each receive a car allowance of $500
per month. Each employment agreement provides for bonuses, health insurance, car
allowance, and related benefits, and a cost of living adjustment of 7% per
annum. The bonuses are equal to 5% of the adjusted consolidated net earnings of
the Company. No bonuses have been paid to date. In addition, Richard J. Grable
will receive a royalty bonus of 2.5% to a maximum of 5%, based upon varying
levels of gross sales of the CTLM(TM) device. Upon ratification of the Patent
Licensing Agreement at the next annual meeting of shareholders, the royalties as
outlined in that agreement will take the place of those set forth in the
original employment agreement. See Item 1. "Description of Business-.Patent
Licensing Agreement".
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,
1998, all of the executive officers were participants in this plan. The plan was
approved by the Board of Directors and adopted by the shareholders at the March
29, 1995 annual meeting. The plan provides for the granting, exercising and
issuing of incentive option 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 the plan.
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.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock of the
Company as of October 9, 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 disclaim any
beneficial interest in each other's shares.
<TABLE>
<CAPTION>
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ------------------- ----------------------
<S> <C> <C>
Richard J. Grable 12,606,606(3) 32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 12,606,606(4) 32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 4,253,390 (5) 10.9%
C/o 6351 NW 18th Court
Plantation, FL 33313
Weyburn Overseas Limited 4,455,000 (6) 10.5%
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda
Goodland International 10,744,488 (6) 22.2%
Investment LTD.
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda
All officers and directors 16,859,996 (6) 43.4%
as a group (3 persons)
</TABLE>
- --------------------
(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 37,989,399 shares of Common Stock
outstanding as of October 12, 1998 plus each persons options that are
exercisable within 60 days. 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 that person and the 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. Does not include options to purchase 208,333 shares at $.48 per
share and 250,000 shares at $.44, which are not exercisable within the next
60 days.
(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. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.44, which are not exercisable within
the next 60 days.
(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. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.44, which are not exercisable within
the next 60 days.
(6) Includes an aggregate of 15,199,488 shares underlying the Series B
Preferred, for which the Company has received a notice of conversion. Does
not include Warrants to purchase 112,500 shares at $5.00 per share.
(7) 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Richard J. Grable and. 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.
30
<PAGE>
From time to time Linda Grable, the Company's President, has personally
guaranteed promissory notes issued by the Company to third parties. Ms. Grable
received no compensation for these guarantees.
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 the Patent, which encompasses the technology for the CTLM(TM) device. 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.
See Item 1. "Description of Business-Patent Licensing Agreement".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(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, 1997.
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). Incorporated by reference to the
Company's Registration Statement on Form S-2 File Number 333-59539.
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).
31
<PAGE>
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).
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).
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
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.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement
10.9 Form of Equity Line of Credit Agreement
(b) Reports on Form 8-k
None
32
<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 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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/Linda B. Grable Chairman of the Board and President October 13, 1998
- ------------------------------------
Linda B. Grable
/s/Richard J. Grable Director and Chief Executive Officer October 13, 1998
- ------------------------------------
Richard J. Grable
/s/Allan L. Schwartz Director, Executive Vice-President October 13, 1998
- ------------------------------------ (Principal Accounting and Financial
Allan L. Schwartz Officer)
</TABLE>
33
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1-2
FINANCIAL STATEMENTS:
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5-8
Statements of Cash Flows F-9-10
Notes to Financial Statements F-11-39
<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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1998 and 1997 and for the period December 10, 1993 (date of
inception) to June 30, 1998. 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, 1998 and 1997 and the results
of its operations and its cash flows for the years ended June 30, 1998 and 1997
and for the period December 10, 1993 (date of inception) to June 30, 1998 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 changes in accounting for software
development costs and recording the compensation on stock options in accordance
with Accounting Principles Board Opinion No. 25.
The Company is in the development stage as of June 30, 1998 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
Pompano Beach, Florida
August 6, 1998
F - 2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheet
June 30, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(restated)
<S> <C> <C>
Current assets:
Cash $ 310,116 $ 383,223
Restricted certificate of deposit - 103,500
Loans receivable-other - 10,073
Inventory 3,214,045 -
Prepaid expenses 33,539 56,792
--------------- --------------
Total current assets 3,557,700 553,588
--------------- --------------
Property and equipment, net 2,920,980 3,293,297
Prototype equipment - 1,216,585
Other assets 3,887,463 9,635
--------------- --------------
$ 10,366,143 $ 5,073,105
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,363,766 $ 519,546
Loan payable 285,407 -
Current maturities of capital lease obligations 9,715 8,928
Other current liabilities 2,155,978 319,547
--------------- --------------
Total current liabilities 3,814,866 848,021
--------------- --------------
Long-term capital lease obligations 26,134 35,849
--------------- --------------
Total liabilities 3,841,000 883,870
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series B), 7% cumulative annual dividend, no par value;
authorized 450 shares, issued 450 shares 4,500,000 4,500,000
Convertible preferred stock (Series D), no par value; authorized 54 shares,
issued 29 and 0 shares, respectively 290,000 -
Convertible preferred stock (Series E), no par value; authorized 54 shares,
issued 24 and 0 shares, respectively 240,000 -
Convertible preferred stock (Series H), no par value; authorized 108 shares,
issued 108 and 0 shares, respectively 1,080,000 -
Common stock, no par value; authorized 48,000,000 shares, issued 36,493,544
and 24,905,084 shares, respectively 23,986,376 15,402,655
Additional paid-in capital 4,799,881 3,379,155
Deficit accumulated during the development stage (27,055,993) (17,677,891)
--------------- --------------
7,840,264 5,603,919
Less: subscriptions receivable (14,309) (35,559)
deferred compensation (1,300,812) (1,379,125)
--------------- --------------
Total stockholders' equity 6,525,143 4,189,235
--------------- --------------
$ 10,366,143 $ 5,073,105
=============== ==============
</TABLE>
See accompanying notes to the financial statements.
F - 3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- --------------
(restated)
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 1,210,526 $ 2,847,238 $ 6,475,238
Research and development 776,578 616,886 1,745,089
Research and development expenses 254,722 1,065,178 2,918,894
Advertising and promotion expenses 329,446 166,520 873,841
Selling, general and
administrative expenses 396,752 528,753 1,302,137
Clinical expenses 9,859 33,506 360,675
Consulting expenses 1,220,676 764,364 2,936,584
Insurance costs 162,549 121,287 328,791
Professional fees 454,730 178,402 1,351,835
Stockholder expenses 75,608 20,902 96,510
Trade show expenses 216,182 154,782 505,458
Travel and subsistence costs 111,559 195,585 457,159
Rent expense 26,213 48,897 247,461
Interest expense 55,543 2,744 82,596
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Interest income ( 22,137) (116,972) (197,417)
--------------- -------------- ---------------
6,981,710 7,646,119 22,714,526
--------------- -------------- ---------------
Net loss (6,981,710) (7,646,119) (22,714,526)
Dividends on cumulative preferred stock:
From discount at issuance (2,081,392) (714,155) (3,793,947)
Earned (315,000) (184,675) (547,520)
--------------- -------------- ---------------
Net loss applicable to common shareholders $ (9,378,102) $ (8,544,949) $ (27,055,993)
=============== ============== ===============
Net loss per common share:
Basic
Net loss per common share $ (.34) $ (.35) $ (1.25)
=============== ============== ===============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
=============== ============== ===============
Diluted
Net loss per common share $ (.34) $ (.35) $ (1.25)
=============== ============== ===============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
=============== ============== ===============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
-------------------- ------------------ Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - 510,000 50,000 -
Acquisition of public shell - - 178,752 - -
Net issuance of additional shares of stock - - 15,342,520 16,451 -
Common stock sold - - 36,500 36,500 -
Net loss - - - - -
-------- --------- ------------ ---------- ---------
Balance at June 30, 1994 - - 16,067,772 102,951 -
Common stock sold - - 1,980,791 1,566,595 -
Common stock issued in exchange for services - - 115,650 102,942 -
Common stock issued with employment agreement - - 75,000 78,750 -
Common stock issued for compensation - - 377,500 151,000 -
Stock options granted - - - - 622,500
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - - - 50,333
Net loss - - - - -
-------- --------- ------------ ---------- ---------
Balance at June 30, 1995 - - 18,616,713 2,002,238 672,833
-------- --------- ------------ ---------- ---------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at December 10, 1993(date of inception) $ -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - - 50,000
Acquisition of public shell - - - -
Net issuance of additional shares of stock - - - 16,451
Common stock sold - - - 36,500
Net loss (66,951) - - (66,951)
------------ ----------- ---------- ------------
Balance at June 30, 1994 (66,951) -0- - 36,000
Common stock sold - (523,118) - 1,043,477
Common stock issued in exchange for services - - - 102,942
Common stock issued with employment agreement - - - 78,750
Common stock issued for compensation - - - 151,000
Stock options granted - - (622,500) -
Amortization of deferred compensation - - 114,375 114,375
Forgiveness of officers' compensation - - - 50,333
Net loss (1,086,436) - - (1,086,436)
------------ ----------- ---------- ------------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
------------ ----------- ---------- ------------
(Continued)
</TABLE>
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, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
-------------------- ------------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
-------- -------- ----------- -------- -------
<S> <C> <C> <C>
Balance at June 30, 1995 - - 18,616,713 2,002,23 672,833
------- ---------- ------------ ---------- ------------
Preferred stock sold, including dividends 4,000 3,600,000 - - 998,400
Common stock sold - - 700,471 1,561,110 -
Cancellation of stock subscription - - (410,500) (405,130) -
Common stock issued in exchange for services - - 2,503,789 4,257,320 -
Common stock issued with exercise of stock option - - 191,500 104,375 -
Common stock issued with exercise of options
for compensation - - 996,400 567,164 -
Conversion of preferred stock to common stock (1,600) (1,440,000 420,662 1,839,360 (399,360)
Common stock issued as payment of preferred
stock dividends - - 4,754 14,629 -
Dividends accrued on preferred
stock not yet converted - - - - -
Collection of stock subscriptions - - - - -
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - - - 100,667
Net loss - - - - -
---------- ---------- ------------ ---------- ------------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 9,941,066 1,372,540
---------- ---------- ------------ ---------- ------------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ---------- ------------ -------------
Preferred stock sold, including dividends (998,400) - - 3,600,000
Common stock sold - - - 1,561,110
Cancellation of stock subscription - 405,130 - -
Common stock issued in exchange for services - - - 4,257,320
Common stock issued with exercise of stock option - (4,375) - 100,000
Common stock issued with exercise of options
for compensation - - - 567,164
Conversion of preferred stock to common stock - - - -
Common stock issued as payment of preferred
stock dividends (14,629) - - -
Dividends accrued on preferred
stock not yet converted (33,216) - - (33,216)
Collection of stock subscriptions - 103,679 - 103,679
Amortization of deferred compensation - - 232,500 232,500
Forgiveness of officers' compensation - - - 100,667
Net loss (6,933,310) - - (6,933,310)
----------- ---------- ------------ -------------
Balance at June 30, 1996 (restated) (9,132,942) (18,684) (275,625) 4,046,355
----------- ---------- ------------ -------------
(Continued)
</TABLE>
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, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- ------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 9,941,066 1,372,540
------- ----------- ----------- ----------- ----------
Preferred stock sold, including dividends 450 4,500,000 - - 714,155
Conversion of preferred stock to common stock (2,400) (2,160,000) 1,061,202 2,759,040 (599,040)
Common stock issued in exchange for services - - 234,200 650,129 -
Common stock issued for compensation - - 353,200 918,364 -
Common stock issued with exercise of stock option - - 27,000 33,750 -
Common stock issued with exercise of stock options,
through stock appreciation rights - - 334,933 1,103,203 -
Cancellation of stock issued to employee - - (150,000) (52,500) -
Common stock issued as payment of preferred
stock dividends - - 20,760 49,603 -
Payment of accrued dividends on converted shares - - - - -
Dividends accrued on preferred
stock not yet converted - - - - -
Stock options granted - - - - 1,891,500
Collection of stock subscriptions - - - - -
Amortization of deferred compensation - - - - -
Net loss (restated) - - - - -
------- ----------- ----------- ----------- ----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,402,655 3,379,155
------- ----------- ----------- ----------- ----------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1996 (restated) (9,132,942) (18,684) ( 275,625) 4,046,355
---------- --------- ---------
Preferred stock sold, including dividends (714,155) - - 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 option - (33,750) - -
Common stock issued with exercise of stock options
through stock appreciation rights - - - 1,103,203
Cancellation of stock issued to employee - - - (52,500)
Common stock issued as payment of preferred
stock dividends (49,603) - - -
Payment of accrued dividends on converted shares 33,216 - - 33,216
Dividends accrued on preferred
stock not yet converted (168,288) - - (168,288)
Stock options granted - - (1,891,500) -
Collection of stock subscriptions - 16,875 - 16,875
Amortization of deferred compensation - - 788,000 788,000
Net loss (restated) (7,646,119) - - (7,646,119)
---------- --------- --------- ------------
Balance at June 30, 1997 (restated) (17,677,891) (35,559) (1,379,125) 4,189,235
---------- --------- --------- ------------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- -------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,402,655 3,379,155
------ ----------- ----------- ------------ --------------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 - - 1,630,892
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,984,684 (1,550,791)
Common stock sold - - 500,000 200,000 -
Common stock issued in exchange for services - - 956,000 1,419,130 -
Common stock issued for compensation - - 64,300 54,408 -
Common stock issued with exercise of stock option - - 65,712 22,999 -
Common stock issued in exchange for
licensing agrement - - 3,500,000 1,890,000 -
Dividends accrued on preferred
stock not yet converted - - - - -
Stock options granted - - - - 1,340,625
Collection of stock subscriptions - - - 12,500 -
Amortization of deferred compensation - - - - -
Net loss - - - - -
------ ----------- ----------- ------------ --------------
Balance at June 30, 1998 611 $6,110,000 36,493,544 $ 23,986,376 $ 4,799,881
====== =========== =========== ============ ==============
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1997 (restated) (17,677,891) (35,559) (1,379,125) 4,189,235
------------- ------------ ------------ -------------
Preferred stock sold, including dividends
and placement fees (2,081,392) - - 4,559,500
Conversion of preferred stock to common stock - - - 33,893
Common stock sold - - - 200,000
Common stock issued in exchange for services - - - 1,419,130
Common stock issued for compensation - - - 54,408
Common stock issued with exercise of stock option - - - 22,999
Common stock issued in exchange for
licensing agrement - - - 1,890,000
Dividends accrued on preferred
stock not yet converted (315,000) - - (315,000)
Stock options granted - - (1,340,625) -
Collection of stock subscriptions - 21,250 - 33,750
Amortization of deferred compensation - - 1,418,938 1,418,938
Net loss (6,981,710) - - (6,981,710)
------------- ------------ ------------ -------------
Balance at June 30, 1998 $ (27,055,993) $ (14,309) $ (1,300,812) $ 6,525,143
============= ============ ============ =============
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F - 8
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
-------------- -------------- ---------------
(restated)
<S> <C> <C> <C>
Net loss $ (6,981,710) $ (7,646,119) $ (22,714,526)
--------------- -------------- ---------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Noncash compensation and consulting expenses 1,379,938 2,654,821 7,388,147
(Increase) decrease in restricted certificate of deposit 103,500 (103,500) -
(Increase) decrease in loans receivable - other 10,073 (10,073) -
Increase in inventory (155,782) - (155,782)
(Increase) decrease in prepaid expenses 23,253 (40,892) (33,539)
(Increase) decrease in other assets (97,828) 43,375 (107,463)
Increase in accounts payable and accrued expenses 529,220 88,074 880,478
Increase (decrease) in other current liabilities (53,569) (536,599) 265,978
--------------- -------------- ---------------
Total adjustments 3,441,709 3,113,253 11,467,494
--------------- -------------- ---------------
Net cash used for operating activities (3,540,001) (4,532,866) (11,247,032)
--------------- -------------- ---------------
Cash flows from investing activities:
Prototype equipment (1,582,446) (641,247) (2,799,031)
Capital expenditures (115,738) (2,815,923) (3,660,994)
--------------- -------------- ---------------
Net cash used for investing activities (1,698,184) (3,457,170) (6,460,025)
--------------- -------------- ---------------
Cash flows from financing activities:
Repayment of capital lease obligation (8,928) (5,512) (14,440)
Proceeds from stockholder loans, net - (77,833) -
Proceeds from loan payable, net 285,407 - 285,407
Proceeds from issuance of preferred stock 4,559,500 4,500,000 12,659,500
Net proceeds from issuance of common stock 329,099 (18,750) 5,086,706
--------------- -------------- ---------------
Net cash provided by financing activities 5,165,078 4,397,905 18,017,173
--------------- -------------- ---------------
Net increase (decrease) in cash (73,107) (3,592,131) 310,116
Cash and cash equivalents at beginning of period 383,223 3,975,354 -0-
--------------- -------------- ---------------
Cash and cash equivalents at end of period $ 310,116 $ 383,223 $ 310,116
=============== ============== ===============
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- -------------
(restated)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,105 $ 2,744 $ 30,158
================= ============== ==============
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ 1,325,530 $ 650,129 $ 4,615,959
================= ============== ==============
Issuance of common stock in
exchange for property and equipment $ - $ - $ 89,650
================= ============== ==============
Issuance of common stock and other current liability
in exchange for patent licensing agreement $ 3,780,000 $ - $ 3,780,000
================= ============== ==============
Issuance of common stock for
compensation $ 54,408 $ 918,364 $ 1,690,936
================= ============== ==============
Issuance of common stock through
exercise of incentive stock options $ - $ 1,103,203 $ 1,103,203
================= ============== ==============
Issuance of common stock as
payment for preferred stock dividends $ - $ 49,603 $ 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 - 10
<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 Computed Tomography Laser Mammography ("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 2-6, 1996. A further refined CTLM(TM) device and clinical
images were exhibited at the "RSNA" conference held in Chicago on December 1-5,
1997.
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 Company has completed a series of calibration scans
under an approved Investigational Device Exemption ("IDE") from the Food and
Drug Administration ("FDA"). This IDE authorized 50 patient scans at the Strax
Breast Diagnostic Center and 20 additional patients at its in-house facility.
Prior to the completion of the 1996 IDE, the Company was advised that greatly
improved laser technology would soon be available. The IDE at Strax was halted,
pending receipt of the new laser system. In November 1997 the CTLM(TM) was
removed from Strax and, on May 20, 1998, the Company's termination of the IDE
and its final report was accepted by the FDA.
The Company was granted, in June 1998, its second IDE authorizing the scanning
of 20 patients at the Company's in-house facilities. On September 1 and 10,
1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending.
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) device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(Continued)
F - 11
<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) Inventory
Inventories, consisting principally of raw materials and
work-in-process, are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) 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 original
amortization period of two years was increased to five years to provide for the
estimated period of time the clinical equipment would be in service to gain FDA
approval.
During the fiscal year ended June 30, 1998, the costs associated with
the various pre-production units available for sale have been
reclassified as inventory and the remaining costs which will no longer
benefit future periods were expensed to research and development costs.
(Continued)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) 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 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.
(f) 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 CTLM(TM) device, 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)
device. 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.
(g) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per Share"),
which requires the reporting of both basic and diluted earnings per
share. Basic net loss per share is determined by dividing loss
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted into common
stock, as long as the effect of their inclusion is not anti-dilutive.
(Continued)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Patent license agreement
The patent license agreement will be amortized over the seventeen year
life of the patent, the term of the agreement.
(i) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal
1997. As permitted by SFAS 123, the Company continues to measure
compensation costs in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", but
provides pro forma disclosures of net loss and loss per share as if the
fair value method (as defined in SFAS 123) had been applied beginning
in fiscal 1997.
(j) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This statement requires companies to write
down to estimated fair value long-lived assets that are impaired. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable. In performing the review of recoverability the
Company estimates the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an
impairment loss is recognized. The Company has determined that no
impairment losses need to be recognized through the fiscal year ended
June 30, 1998.
(k) 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.
(Continued)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(3) RESTATEMENT
The June 30, 1997 and 1996 financial statements have been restated to properly
reflect the accrual of compensation and recording of deferred compensation on
the qualified and non-qualified stock options for the officers, and the
correction of an accumulated depreciation understatement of $27,682 for the year
ended June 30, 1997. The effect on net loss from the compensation restatement
was an increase of $946,796 for the year ended June 30, 1996 and a decrease of
$299,055 for the year ended June 30, 1997.
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) device currently undergoing clinical
testing. Effective December 31, 1996, the Company restated its financial
statements to expense all additional costs incurred since the acquisition of the
original software. Accordingly, the Company 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 16)
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.
(Continued)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(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. To date, 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. However, there is no assurance that
once the development of the CTLM(TM) device 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 had issued an irrevocable letter of credit, which matured on October
4, 1997, towards the purchase of laboratory equipment. The letter of credit was
secured with the certificate of deposit.
(7) INVENTORIES
Inventories consisted of the following:
June 30,
--------------------------------
1998 1997
--------------- ---------------
Raw materials $ 1,296,864 $ -
Work-in process 1,917,181 -
------------- -------------
$ 3,214,045 $ -
============= =============
(Continued)
F - 16
<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,
--------------------------------
1998 1997
-------------- --------------
Furniture and fixtures $ 245,219 $ 240,029
Building and land 2,084,085 2,081,399
Clinical equipment - 250,000
Computers and equipment 487,143 389,373
CTLM(TM) software costs 352,932 352,932
Trade show equipment 153,193 153,193
Laboratory equipment 190,031 179,862
--------------- --------------
3,512,603 3,646,788
Less: accumulated depreciation (591,623) (353,491)
--------------- --------------
Totals $ 2,920,980 $ 3,293,297
=============== ==============
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(TM) software costs 5 years
</TABLE>
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, 1998 and 1997 are $138,180 and $225,007,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
(Continued)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) PROPERTY AND EQUIPMENT (Continued)
Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:
Period ended Amount
------------ --------
6/30/98 $ 70,587
6/30/97 70,587
6/30/96 54,345
6/30/95 19,160
6/30/94 73
-----------
Total $ 214,752
===========
(9) OTHER ASSETS
Other assets consist of the following:
June 30,
-----------------------------
1998 1997
--------------- -----------
Patent license agreement $ 3,780,000 $ -
Court bond 100,000 -
Security deposits 6,080 9,635
Other 1,383 -
--------------- -----------
Totals $ 3,887,463 $ 9,635
=============== ===========
During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the CTLM(TM) . 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. The license shall apply to any
extension or re-issue of the Patent. The term of 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 the officer
3,500,000 shares of common stock and is required to issue an additional
3,500,000 shares in June 1999. The License agreement has been recorded at the
fair market value of the total 7,000,000 shares on the date of the agreement
($.54 per share), in accordance with the guidelines of Accounting Principles
Board Opinion No. 29 ("Accounting for Nonmonetary Transactions"). A liability
has been recorded for the remaining shares to be issued in June 1999. (see Note
11)
(Continued)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -------------
(restated)
<S> <C> <C>
Accounts payable - trade $ 774,952 $ 276,096
Preferred stock dividends payable 483,288 168,288
Accrued property taxes payable 15,585 14,000
Insurance financing payable 10,233 -
Accrued compensated absences 38,530 56,632
Accrued interest 18,546
Payroll taxes payable 4,250 4,530
Other 18,382 -
------------- -------------
Totals $ 1,363,766 $ 519,546
============= =============
</TABLE>
(11) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Patent licensing agreement payable (see Note 9) $ 1,890,000 $ -
Accrued compensation-stock options 265,978 319,547
------------ -----------
$ 2,155,978 $ 319,547
============ ===========
</TABLE>
The Company anticipates that the items included in other current liabilities
will be liquidated through the issuance of common stock within the next fiscal
year.
(12) LOAN PAYABLE
During the year ended June 30, 1998, the Company borrowed $460,407, from an
unrelated third-party on an unsecured basis. The loan accrues interest at a rate
of 6% per annum and is payable on demand. The Company has repaid $175,000 as of
June 30, 1998. Accrued interest of $18,546 is reflected in accrued expenses on
the balance sheet.
(Continued)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) 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, 1998, approximate future minimum lease payments
under capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
Year ending June 30,
-------------------
<S> <C> <C>
1999 $ 12,384
2000 12,384
2001 12,384
2002 4,128
-----------
Total minimum lease payments 41,280
Less amount representing interest (5,431)
-----------
Present value of net minimum lease payments 35,849
Less current portion (9,715)
-----------
Long-term portion $ 26,134
===========
</TABLE>
The Company also leases certain office equipment under an operating lease
expiring in June 2002. 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, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal year ended
June 30, Amount
----------------- ----------
<S> <C> <C>
1999 $ 3,370
2000 3,676
2001 3,676
2002 3,676
----------
Total minimum future lease payments $ 14,398
==========
</TABLE>
(Continued)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) 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 $16,691,000 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 $5,675,000 and $3,755,000 at June 30, 1998 and 1997, 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, 1997 to June 30, 1998 was an increase of
approximately $1,920,000.
(15) 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 could have converted 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 - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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.
The holders of the Series B Preferred Stock could have converted 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.
(Continued)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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 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, 1998, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $483,288 of accrued
dividends payable.
During the year ended June 30, 1998 the Company issued five Private Placements
of convertible preferred stock (see schedule incorporated into Note 15). The
Private Placements are summarized as follows:
Series C Preferred Stock
------------------------
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock 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 agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series C Preferred Stock is 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, 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 C 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.
(Continued)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event
will the "Conversion Price" be greater than $1.222. Pursuant to the
Regulation S 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
investor would have received had the shares been converted on the closing
date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment
banker $220,500 for placement and legal fees, providing net proceeds to the
Company of $1,879,500.
Series D Preferred Stock
------------------------
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.22 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series D Preferred Stock is 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, 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 D 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 seventy-five percent (75%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series E Preferred Stock
------------------------
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.093 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series E Preferred Stock is 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
(Continued)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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 E 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 seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series F Preferred Stock
------------------------
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F 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, 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 F 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 seventy percent (70%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company paid an unaffiliated investment
banker $50,000 for placement and legal fees, providing net proceeds to the
Company of $700,000. The shares underlying the preferred shares and warrant
are entitled to demand registration rights under certain conditions.
Series H Preferred Stock
------------------------
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 126,500
shares of the Company's common stock at an exercise price of $1.00 per
share. The agreement was executed pursuant to Regulation D as promulgated by
the Securities Act of 1933, as amended.
(Continued)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The Series H Preferred Stock is convertible, at any time, for a period of
two years thereafter, in whole or in part, 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 H 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 the lesser of $.53 or seventy-five percent (75%) of
the Average Closing Price of the Company's common stock for the ten-day
trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and
paid $10,000 to an unaffiliated investment banker for placement and legal
fees, providing net proceeds to the Company of $990,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
The Company is currently in technical default of the Registration Rights
Agreement ("RRA"), which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company is required
to pay the Series H holders, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, 2% of the
principal amount of the Securities for the first thirty days, and 3% of the
principal amount of the Securities for each thirty day period thereafter
until the Company procures registration of the Securities.
The agreements provide 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
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 1998:
(Continued)
F - 26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
<TABLE>
<CAPTION>
(15) Convertible Preferred Stock (Continued)
Series A Series B Series C Series D
-------- -------- -------- --------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000
Conversion of preferred
stock (210) (2,100,000) (25) (250,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1998 - $ - 450 $4,500,000 - $ - 29 $290,000
========= =========== ==== =========== ===== =========== ===== =========
(RESTUBBED TABLE CONTINUED)
Series E Series F Series H Totals
-------- -------- -------- ------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 54 540,000 75 750,000 108 1,080,000 501 5,010,000
Conversion of preferred
stock (30) (300,000) (75) (750,000) (340) (3,400,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1998 24 $240,000 - $ - 108 $ 1,080,000 611 $6,110,000
======= ========= ===== ========== ===== =========== ======= ============
(Continued)
</TABLE>
F - 27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) 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. 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.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expenses has been
recorded 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 was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(Continued)
F - 28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) 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, 1996, there were a total of 425,416 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 15)
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 option plan 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 stock appreciation
rights ("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 ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends, 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 - 29
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) 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 ($1,136,953).
7. The Company repurchased 150,000 shares ($52,500), which had been
previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 100,000
shares. Consulting expenses of $221,900 was charged as the fair market
value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange for 200,000
shares. Consulting expenses of $400,000 was charged as the fair market
value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange for 40,000
shares. Consulting expenses of $67,480 was charged as the fair market
value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange for 166,000
shares. Public relations expenses of $269,750 was charged as the fair
market value at October 24, 1997 was $1.63 per share.
5. On December 15, 1997, bonus stock was issued to Company employees, for
39,300 shares. Compensation expense of $41,658 was charged as the fair
market value at that date was $1.06 per share.
(Continued)
F - 30
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
6. Services rendered by an independent consultant in exchange for
250,000 shares. Consulting expenses of $320,000 was charged as the fair
market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May 1998 in
exchange for 200,000 shares. Consulting expenses of $140,000 was
charged, as the fair market value on that date was $.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a Regulation D
offering at $.40 per share, and received cash proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive officer
3,500,000 shares ($1,890,000) as consideration for an exclusive Patent
License Agreement (see Note 8). The market value of the stock on this
date was $.54 per share.
10. On June 11, 1998, the Company issued 25,000 shares to its corporate
counsel as additional bonus compensation. Legal expenses of $12,750
were recorded as the market value of the stock on that date was $.51
per share.
11. A total of 65,712 non-qualified stock options were exercised and
proceeds of $22,999 ($.35 per share) was received by the Company.
(17) 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 and pursuant to
their employment contracts, 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 grant. 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 plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
(Continued)
F - 31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the 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.
In accordance with the provisions of APB No. 25, 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 and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Options
------------------------------ ------------------------------
Shares Wtd. Avg. Price Shares Wtd. Avg. Price
------------ ---------------- ------------- ----------------
<S> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $ 1.40 1,500,000 $ 1.12
Exercised - -
------------- -------------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
------------- ------------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 -
------------- ------------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised - (65,712) .35
Canceled (175,205) 4.25 -
------------- ------------
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
============= ============
(Continued)
</TABLE>
F - 32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At June 30, 1998 and 1997, 451,513 and 270,526, respectively, of the incentive
stock options were vested and exercisable and 1,884,288 and 1,200,000,
respectively, of the 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 summarizes the option transactions that
have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense of
$567,164 was recorded during the year ended June 30, 1996 as a result of the
discount from the market value.
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 75,000 shares of common stock at an exercise
price of $1.40 per share. The options originally expired on March 30, 1998,
but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense was
recorded during the year ended June 30, 1996 as a result of the discount
from the market value.
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 - 33
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 328,681 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.
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Deferred compensation of
$1,891,500 was recorded on the transaction and is being amortized over the
remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 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.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise
price of $2.94 per share (110% of the fair market value). The options expire
on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $1,340,625 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (two years).
(Continued)
F - 34
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common
stock at prices ranging from $.55 to $2.60. 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.
The following table summarizes information about all of the stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Outstanding options Exercisable options
----------------------------------------------- --------------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
--------------- ------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .35 - 1.25 1,374,720 8.61 $ .83 1,252,490 $ .78
1.36 - 2.94 975,115 7.85 1.59 936,552 1.55
3.10 - 5.08 236,349 7.67 3.93 146,759 4.34
----------------------------------------------------------------------------------------------------
$ .35 - 5.08 2,586,184 8.24 $ 1.40 2,335,801 $ 1.31
====================================================================================================
</TABLE>
At June 30, 1998, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing stock appreciation rights to exercise their
incentive stock options. The compensation cost that has been charged against
income for the officers was $(53,570) and $475,955 for 1998 and 1997,
respectively. The weighted average Black-Scholes value of options granted during
1998 and 1997 was $1.44 and $2.03 per option, respectively. Had compensation
cost for the Company's fixed stock-based compensation plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of SFAS 123, the Company's pro forma net loss and pro forma net loss
per share would have been as indicated below:
(Continued)
F - 35
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $ (9,378,102) $ (8,544,949) $ (27,055,993)
============= ============ =============
Pro forma $ (9,638,158) $ (8,758,447) $ (27,615,569)
============= ============ =============
Basic loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
Diluted loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: no dividend yield;
volatility of 7.1% and .2%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.
(18) 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,
1998 was $350,698.
(Continued)
F - 36
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) 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.
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. The officer resigned
during the fiscal year ended June 30, 1998.
As additional consideration for his development efforts in the CTLM(TM) device,
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. Upon ratification of
the patent licensing agreement, entered into on June 2, 1998, at the Company's
next annual shareholder meeting, the royalties as outlined in that agreement
will take the place of those set forth in the original employment contract. The
royalty percentages in the new agreement start at 10% and decrease to 6% as
gross sales volumes increase.
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 agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. 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, 1998, 1997 and 1996, employment agreements were
initiated with individuals in various positions currently within the Company.
Annual payments for compensation under these agreements amount to $170,000,
$536,500 and $206,500, respectively, in the aggregate.
(Continued)
F - 37
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the CTLM(TM) device. The
terms of these agreements range from eighteen months to three years. The Company
has the right to renew the agreements, with renewal periods ranging from one to
three years.
During the year ended June 30, 1998, the Company entered into an agreement for a
fifteen million dollar, three year equity line of credit, 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 fair market value of the
Company's common stock.
(20) SUBSEQUENT EVENTS
The Company has selected Nassau County Medical Center of East Meadow, Long
Island, New York, to be its first external clinical site. The Company has
submitted its Investigational Device Exemption ("IDE") protocol to the
hospital's Institutional Review Board, which is scheduled to meet on October 14,
1998 to review the IDE protocol. Upon approval, documents will be forwarded to
the Food and Drug Administration ("FDA") for their approval. The Company will be
contacted by the FDA granting permission to proceed with the clinical trials
described in the IDE protocol.
The Company has applied for a conventional first mortgage, of up to $2,000,000,
on its office and manufacturing facility located in Plantation, Florida. At
present, a commitment letter with respect to this mortgage is still pending.
During the period subsequent to the end of the fiscal year, the Company has
borrowed approximately $410,000 in three separate transactions. The Company
issued 480,000 shares of common stock in conjunction with the borrowings.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Company is in the process of completing the revisions to the Information
Statement. The Majority Shareholders consent with respect to the Amendment will
take effect twenty days from the notification that the SEC has no further
comments with respect to the Information Statement.
(Continued)
F - 38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) SUBSEQUENT EVENTS (Continued)
On September 4, 1998, the Company received a notice of conversion from the
Series B Preferred Stockholders. At present, due to the decline in the price of
its common stock, the Company does not have enough authorized common stock to
convert the Series B and the Series H Preferred Stockholders, should the Series
H holders wish to convert. The Company is in technical breach of its agreement
with the Series B holders. In the event that the Company is not able to increase
the authorized common stock, the Company will continue to be in breach of its
contractual obligations to the Series B holders and may be subject to litigation
and the payment of damages and penalties.
F - 39
EXHIBIT 10.8
OEM PURCHASE AGREEMENT FOR
PRODUCTS, ACCESSORIES, SPARE PARTS,
AND SERVICE AGREEMENTS
This OEM Purchase Agreement is between IMATION ENTERPRISES CORP, a Delaware
corporation, located at 1 Imation Place, Apollo BuUding-1W-30. Oakdale, MN 55128
("Imation"), and IMAGING DIAGNOSTICS SYSTEMS, INC., a Florida corporation
located at 6531 NW 16th Court. Plantation, FL 33313 ("IDS").
BACKGROUND
IDS desires to purchase from Imation and Imation desires to sell to IDS certain
Imation medical diagnostic imaging equipment and products, and related
accessories, spare parts, and service agreements destined for non-exclusive
resale, all in combination with IDS's established medical imaging business,
Imation will grant a non'exclusive license (the "License") permitting IDS to use
any software (the "Imation Software") furnished by Imation to IDS pursuant to
this Agreement. IDS agrees to actively promote sales of the Products in
conjunction with each safe of its own products. Specifically, IDS will train its
sales and marketing force regarding the features, advantages and benefits of the
Products, list the Products in its price pages, and distribute Product sales
literature throughout its sales organization and to its customers.
AGREEMENT
1. PRODUCTS. ACCESSORIES. SPARE PARTS AND SERVICE AGREEMENTS.
1.1 Sale and Purchase. Imation agrees to sell to IDS and IDS agrees to purchase
and pay for such of the Imation products specified in Exhibit A (the
"Products"), related accessories specified in Exhibit B (the "Accessories"),
spare parts specified in Exhibit C (the "Spare Parts") and service agreements
specified In Exhibit D (the "Service Agreements") as IDS may order during the
term of this Agreement.
1.2 Changes. Imation may make any change which does not affect form, fit or
function of the Products, Accessories, Spare Parts and/or Service, Imation may
make any change which affects form. fit or function, but does not affect any
interface hardware or software, by giving IDS sixty (60) days advance written
notice of each change, and one hundred twenty (120) days advance written notice
where IDS must reconfigure its product Any change will apply only to purchase
orders placed by IDS pursuant to Section 3.2 after the effective date of
Imation's notice.
1.3 Discontinuation. Imation may discontinue its production or sale of any
Products, Accessories or Service Agreements at any time during the term of this
Agreement, with at least sixty (60) days advance notice, provided, however, that
Spare Parts and service tools and Service Agreements shall be made available for
at least seven (7) years after the last shipping date of each Product or for
such longer period as may be required by applicable law.
1.4 Compliance. IDS acknowledges that Products, Accessories and Spare Parts
packaging, labeling. Material Safety Data Sheets and product literature have
been produced and prepared in compliance with the laws of the United States.
Canada and Mexico and product standards designed for the North American market.
If Products, Accessories or Spare Parts are sold elsewhere, IDS is responsible
for compliance with all applicable laws, regulations and standards.
1.5 Non-Exclusive, IDS shall not be obligated to purchase all or any set amount
of its requirements from Imation.
<PAGE>
PRICES AND DISCOUNTS.
2.1 Product Prices. The suggested list price applicable to each Product is set
forth in Exhibit A imation may increase the prices for Products at any time but
not more frequently than once In each calendar year following sixty (60) day
written notice. Any change will apply only to purchase orders placed by IDS
pursuant to Section 3,2 after the effective date of imation's notice.
2.2 Discounts. The price for each Product (but not any related installation
charges) shall be discounted by a percentage tied to the aggregate number of
laser imagers ordered by IDS from Imation in the prior calendar year Such number
shall be determined by mutual agreement of the parties each December for
implementation on the following January 1. For orders placed prior to the dose
of business on December 31, 1998, the discounts are agreed to be thirty percent
(30%) for each Product Thereafter, the discount percentages shall be determined
as follows:
NUMBER ORDERED IN PRIOR CALENDAR YEAR DISCOUNT PERCENTAGE
1-10 30
11+ 32
2.3 Other Prices. List prices for Accessories are listed In Exhibit B and shall
be discounted by thirty percent (30%) for purchases made hereunder Prices for
Spare Parts are listed in Exhibit C and prices for Service Agreements in Exhibit
D. Imation may change the prices in Exhibits B, C or D at any time on written
notice at feast (i) sixty (60) days for changes to Exhibits B or C and (ii)
thirty (30) days for changes to D. Any change wiH apply only to purchase orders
placed by IDS pursuant to Section 3.2 after the effective date of Imation's
notice.
2.4 Purchases. Outside the United States. The prices set forth In Exhibits A, B
and C apply only to orders placed in the United States or through Imation Export
at 1 Imation Place, Endeavor-1 W-30, Oakdale, MN 55126. Purchases from Imation
subsidiaries are as established by the selling subsidiary.
FORECASTS. ORDERS AND PAYMENT
3.1 Forecasts. During the term of this Agreement, IDS will provide to Imation in
writing and on a quarterly basis, a one (1) year rolling non-binding Itemized
forecast by month of the orders it anticipates placing for Products hereunder.
IDS's initial forecast for Product purchases is attached as Exhibit E.
3.2 Purchase Orders. IDS will order Products, Accessories, Spare Parts and
Service Agreements only by purchase orders submitted to Imation. The parties
will cooperate in developing, at Imation's expense, a site plan to accompany
each Product purchase order IDS may use IDS's standard purchase order or other
purchasing/acknowledgment form. Acceptance of orders placed on IDS's purchasing
forms does not constitute acceptance by Imation of any of the terms and
conditions appearing thereon, except as to identification and quantity of
Products, Accessories, Spare Parts or Service Agreements Involved. All orders
are governed by the provisions of this Agreements
3.3 Delivery. Title and risK of loss will transfer to IDS at F,0,B. Imation's
point of shipment. Imation will plan to ship the forecasted number of Products
and will make reasonable commercial efforts to ship Products, Accessories and
Spare Parts within four (4) weeks from receipt of an order In the event Products
are being allocated, Imation will notify IDS in writing of the allocation status
and provide a fair allocation of Products to IDS. All Products, Accessories and
Spare Parts will be packaged for international shipment Imation will select the
earner unless otherwise specified by IDS. Shipping expenses will be prepaid by
imation and charged to IDS.
3.4 Invoices and Payment. Imation will Invoice IDS for Products, Accessories and
Spare Parts when shipped and for Service Agreements when ordered. IDS will pay
imation within thirty (30) days from the date of Imation's invoice. All payments
will be made in US Dollars, unless otherwise agreed to in writing by Imation.
<PAGE>
3.5 Credit Balance. Imation, at its sole discretion, may change or limit the
amount or duration of credit to be allowed IDS. Imation may cancel any orders it
previously had accepted or delay the shipment of an order if IDS fails to meet
the payment schedule or other credit or financial requirements established by
Imation.
4. WARRANTY. LIMITATION OF REMEDIES AND INDEMNIFICATION.
4.1 Seller's Warranty. Imation warrants to IDS that each Product and the Imation
Software will be free from defects In material and manufacture for a period of
one (1) year from the date of installation or fifteen (15) months from the date
of delivery pursuant to Section 3.3. Imation warrants to IDS that Accessories
and Spare Parts will be free from defects in material and manufacture for a
period of ninety (90) days from the date of delivery pursuant to Section 3.3.
Imation will provide IDS with free replacement parts and labor (during normal
business hours) to replace warranty covered items.
4.2 Limitation. THIS WARRANTY IS MADE IN LIEU OP ALL OTHER PRODUCT WARRANTIES,
EXPRESSED AND IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS,
AND THOSE ARISING FROM A COURSE OF DEALING OR USAGE OF TRADE. The express
warranty does not apply to the following: expendable parts, defects or damage
Incurred in transportation to the end user, defects or damage due to accidents,
neglect, misuse, operator error, improper installation or alterations of the
Products, Imation Software, Accessories and Spare Parts, or operation of the
Products. Imation Software Accessories and Spare Parts out of specification.
4.3 Indemnification. Imation shall be responsible for and shall defend,
indemnify and hold harmless IDS from and against any direct losses, expenses and
liabilities to third parties for any and ail claims of personal injuries, death
and/or property damages arising out of the use of Products, imation Software,
Accessories and Spare Parts to the extent caused by the negligence or strict
liability of Imation in the manufacture or design of the Products, Imation
Software, Accessories or Spare Parts delivered hereunder under normal intended
usage and maintenance procedures, recommended In writing by Imation. In
connection with this obligation, it shall be IDS's responsibility that imatton
is promptly notified of any and all claims against it or any of its customers
for any such Injuries and/or property damages alleged to be the result of
defective Products, Imation Software. Accessories, Spare Parts or Service
Support delivered by Imation as well as to investigate jointly whether such
personal injuries and/or property damages are attributable to any part of the
items supplied to IDS under normal intended usage and IDS will use its best
efforts to mitigate such damages.
5. LICENSE GRANT AND PATENT INDEMNITY
5.1 License. Imation hereby grants to IDS a limited, worldwide, non-exclusive,
non-transferable (except as provided in Section 5.1.1). royalty-free license to
use the Imation Software only in conjunction with its use of Products,
Accessories and Spare Parts purchased hereunder.
5.1.1 IDS shall not copy, reproduce, sublicenee, transfer, assign or disclose
the Imation Software to any third party, imation agrees that resale of a
Product, Accessory or Spare Part containing any imatlon Software will not
constitute a violation of the prohibitions contained in the foregoing sentence
and in such case IDS's customer shall have the same license as IDS to use the
Imation Software in conjunction with the use of the Product, Accessory or Spare
Part sold to the customer.
5.1.2 Title to any imation Software shall remain vested in Imation, or in
Imation's licensor from whom imation has obtained marketing rights, at all times
before, during and after the term of the License.
<PAGE>
5.1.3 IDS will Itself not attempt to, nor will it allow any third party over
which it has any influence to attempt to, debug, reverse engineer, decompile,
disassemble, decrypt or analyze the Imation Software.
5.2 Patents. imation agrees to indemnify, defend, and hold harmless IDS against
all claims, damages, liabilities and suits, including responsible attorney's
fees, alleging that any Products, imation Software Accessories and Spare Parts
Infringe any United States patent, copyright or other intellectual property,
provided that IDS gives Imation prompt notice and imation is given full control
over the defense and settlement of such claims and disputes and provided further
that the alleged infringement Is not due to modifications or special designs
required by IDS or due to IDS's trade dress or trade name.
6. LIMITATION OF LIABILITY
Except for Imation's warranty obligations stated In Section 4. NEITHER PARTY
WILL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND. INCLUDING WITHOUT
LIMITATION, DIRECT. INDIRECT. INCIDENTAL. SPECIAL OR CONSEQUENTIAL DAMAGES
(INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, REVENUE OR BUSINESS) RESULTING
FROM OR IN ANY WAY RELATED TO PRODUCTS. IMATION SOFTWARE, ACCESSORIES, SPARE
PARTS, SERVICE AGREEMENTS. ANY OF IDS'S PURCHASE ORDERS, OR THIS AGREEMENT This
limitation Includes, but is not limited to, loss of and damage to equipment,
software or stored data. This limitation applies regardless of whether the
damages or other relief are sought based on breach of warranty, breach of
contract, negligence, strict liability in tort or any other legal or equitable
theory.
7. APPROVALS AND REGISTRATIONS
7.1 Products, Accessories and Spare Parts supplied under this Agreement will
have the agency listings and approvals stated in applicable imation product
literature.
7.2 Imation will. at its expense, maintain any required PDA registration, and
assure that the Products, Imation Software, Accessories and Spare Parts meet all
applicable requirements for marketing distribution and use as medical devices in
the United States, Canada and Mexico.
8. TRAINING FOR APPLICATION SPECIALISTS
During the term of this Agreement, Imation will provide, at mutually convenient
times at one of Imation's established training centers, free training for IDS's
application specialists. IDS shall be responsible for all expenses incurred by
its employees other than tuition.
9. CONFIDENTIAL INFORMATION
9.1 Each party may, during the course of this Agreement, have access to or will
have disclosed to it information of the other party which is identified as
confidential including, specifically IDS's forecast as described in Section 3.1,
Each party agrees not to use such information for its own benefit except to
perform this Agreement, to keep such information confidential and not to
disclose to third parties without the other party's prior written consent. Each
party will protect the disclosed information by using the same degree of care,
but no less than a reasonable degree of care, to prevent the unauthorized
disclosure of the Information, as that party uses to protect its own
confidential information of a like nature.
9.2 The foregoing obligations will not apply to Information which:
is or becomes generally known to the general public or is
Independently developed by each other; or
either party can show was known at the time of disclosure; or
either party can show it rightfully learned from a third party
without an obligation of confidence: or
is required to be disclosed by law or pursuant to a court order
following prompt notice to the other party and reasonable
opportunity to participate In the decision to disclose and/or
proceeding leading to the order to disclose.
9.3 Each party agrees to maintain the other party's confidential information as
confidential for a period of three (3) years after the termination or expiration
of this Agreement.
10. TERM AND TERMINATION
10.1 The Initial term of this Agreement will be from the date of execution by
Imation and continue through December 31. 1998. Thereafter, this Agreement will
automatically renew for successive periods of one (1) year. subject to
termination by either party at any time upon thirty (30) days advance written
notice to the other party.
10.2 imation may terminate this Agreement on thirty (30) days written notice to
IDS should IDS acquire any interest in a medical imaging competitor of Imation
or should a medical imaging competitor of imation's acquire any Interest in IDS.
10.3 Either party may terminate this Agreement if the other materially breaches
this Agreement by giving at least thirty (30) days prior written notice and
opportunity to cure.
10.4 Even after termination or expiration, the terms of this Agreement
continue to apply to charges incurred, payments made, events occurring and
obligations arising before the date of termination or expiration.
11. DISPUTE RESOLUTION
11.1 The parties agree to attempt in good faith to resolve any dispute arising
out of or relating to this Agreement promptly by negotiations.
11.1.1 Either party may give the other party written notice of any dispute not
resolved in the normal course of business. Executives of both parties at levels
one step above the project personnel who have previously been involved in the
dispute will meet at a mutually acceptable time and place within ten (10) days
after delivery of the notice, and thereafter as often as they reasonably deem
necessary to exchange relevant information and to attempt to resolve the
dispute.
11.1.2 If the matter has not been resolved by the executives within thirty (30)
days of the notice, or If the parties fail to meet within the ten (10) day
period, the dispute will be referred to the CFO or other senior financial
executive of each party who shall have authority to settle.
11.1.3 If the matter has not been resolved within thirty (30) days from the
referral to the senior financial executives, or if no meeting has taken place
within fifteen (15) days after such referral, either party may initiate
mediation (or, if mutually agreed, arbitration) pursuant to the applicable
procedures established by the National Arbitration Forum, PO Box 50191.
Minneapolis, MN 65405, telephone (600) 474-2371.
11.1.4 If the dispute has not been resolved for whatever reason within ninety
(90) days of the initial notice of dispute, either party may pursue such
judicial relief as it deems appropriate,
11.2 The procedures stated in Section 11.1 are the sole and exclusive procedure
for the resolution of disputes between the parties arising out of or relating to
this Agreement, A party, however, may seek a preliminary injunction or other
provisional judicial relief if in its judgment such action is necessary to avoid
irreparable damage or to preserve the status quo. Despite such action the
parties will continue to participate in good faith in the procedures specified
in this Section 11.
<PAGE>
11.3 Each party irrevocably waives any right to a jury trial with respect to any
claims or disputes arising out of or relating to this Agreement or the
negotiation of this Agreement.
11.4 Any questions, claims, disputes or litigation arising from or related to
this Agreement are governed by the law of the state of Minnesota, without regard
to conflicts of law.
12. GENERAL TERMS
12.1 Neither party is liable to the other for damages caused by delays in
delivery or performance due to acts of God or other causes beyond its control.
12.2 The relationship of the parties under this Agreement is that of independent
contractors. Nothing In this Agreement authorizes either party to act for the
other as an agent.
12.3 Neither party may assign any of its rights or delegate or subcontract any
of its duties under this Agreement without first getting the other party's
permission in writing.
12.4 Nothing in this Agreement shall be construed as granting to either party
any rights in any trademarks, wordmarks, service marks or similar intellectual
property of the other. Any use by a party of the other's name, trade or wordmark
for the purposes of this Agreement or any other purpose shall be subject to the
other party's prior, written consent.
12.5 If Imation accepts a purchase order under this Agreement for Products,
Accessories, Spare Parts or Service Agreements to be provided to any state or
federal agency in the United States and if any provisions, representations,
agreements or contract clauses are required, either expressly or by reference or
by operation of law, to be Incorporated in subcontracts for those goods or
services which are issued under IDS's contract with such agency, Imation shall
also comply with such of those provisions, representations, agreements or
contract clauses related to Equal Employment Opportunity, Employment of
Veterans, Employment of the Handicapped, Employment Discrimination because of
Age and Utilization of Oisadvantaged Business Enterprises. Other clauses
required by such agency must be presented to Imation for acceptance In writing
prior to imation being bound thereby.
12.6 This Agreement states the complete Agreement between Imation and IDS on
this subject and replaces any previous understandings, representations or
communications, whether oral or written, regarding the subject matter of this
Agreement. THIS AGREEMENT IS INTENDED BY THE PARTIES TO BE THE FINAL, COMPLETE
AND EXCLUSIVE STATEMENT OF ALL TERMS AND CONDITIONS OF THE AGREEMENT. This
Agreement can be amended only by a writing signed by both parties. No oral
modification is possible. A party's failure to exercise a right in one or many
instances does not waive that right as to any later instance. A course of
dealing or performance does not effect a modification or a waiver unless
ratified in writing by the party to be bound.
12.7 Any notice required to be given under this Agreement shall be hand
delivered or sent by overnight delivery service or by facsimile followed by mail
to the address indicated on the front page of this Agreement and shall be deemed
to be effective on the date first received.
12.6 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.
12.9 In the event that there is any controversy or claim arising out of or
relating to this Agreement, or to the Interpretation, breach or enforcement
thereof, and any action or proceeding is commenced to enforce the provisions of
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees, costs and expenses,
<PAGE>
ACCEPTED AND AGREED:
IMATION ENTERPRISES CORP. ("Imation") IMAGING
By: _________________________________ By: __________________
J. Michael McQuade Richard J. Grable
General Manager Chief Executive Officer
Date: _______________________________ Date:______________________
Exhibit A - Products and Prices
Exhibit B - Accessories and Prices
Exhibit C - Spare Parts and Prices
Exhibit D - Service Agreements and Prices
Exhibit E - IDS's Initial Forecast
EXHIBIT 10.9
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
PRIVATE EQUITY LINE OF CREDIT AGREEMENT dated as of October , 1998 (the
"Agreement"), between the entities listed on Schedule A attached hereto
(collectively referred to as the "Investors"), SETTONDOWN CAPITAL INTERNATIONAL
LTD. (the "Placement Agent") located at Charlotte House, Charlotte Street, P.O.
Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas,
and IMAGING DIAGNOSTIC SYSTEMS, INC., a corporation organized and existing under
the laws of the State of Florida (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
from time to time as provided herein, and the Investors shall purchase (a) an
aggregate of Warrant A's to purchase 25,000 Warrant Shares, (b) an aggregate of
Warrant B's to purchase 25,000 Warrant Shares, and (c) pursuant to the equity
line of credit established herein whereby the Company has the option of
exercising its "Put" rights upon the Investors for the purchase and sale of up
to an additional $15,000,000 of the Common Stock (the "Aggregate Purchase
Price"); and
WHEREAS, the Company shall issue to the Placement Agent, in return for
services rendered, from time to time as provided herein the fees set forth in
Section 12.7 below; and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended, and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Bid Price" shall mean the closing bid price (as reported
by Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.2 "Capital Shares" shall mean the Common Stock and any shares
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of the
Company.
Section 1.3 "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into, exchangeable for, or have any
right to subscribe for any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any
security convertible into, or exchangeable for Capital Shares.
Section 1.4 "Closing" shall mean one of the closings of a purchase and
sale of the Common Stock pursuant to Section 2.1.
Section 1.5 "Closing Date" shall mean with respect to a Closing for the
Put Shares shall be the fifth Trading Day following the Put Date related to such
Closing; provided all conditions to such Closing have been satisfied on or
before such Trading Day.
Section 1.6 "Commitment Amount" shall mean the $15,000,000 up to which
the Investors have agreed to provide to the Company in order to purchase the
Warrants, and Put Shares pursuant to the terms and conditions of this Agreement.
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Section 1.7 "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and the Investors may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investors shall have purchased
Put Shares pursuant to this Agreement for an aggregate Purchase Price of
$15,000,000, (y) the date this Agreement is terminated pursuant to Section 2.4,
or (z) the date occurring three years from the date of commencement of the
Commitment Period.
Section 1.8 "Common Stock" shall mean the Company's common stock, no
par value per share.
Section 1.9 "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2.
Section 1.10 "Damages" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.11 "Effective Date" shall mean the date on which the SEC
first declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.12 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.13 "Floor Price" shall mean a Bid Price of Fifty Cents
($0.50) per share of Common Stock.
Section 1.14 "Investment Amount" shall mean the dollar amount to be
invested by the Investors to purchase Put Shares with respect to any Put Date as
notified by the Company to the Investors, all in accordance with Section 2.2
hereof.
Section 1.15 "Market Price" on any given date shall mean the average of
the two lowest Bid Prices of the Common Stock during the Valuation Period.
Section 1.16 "Material Adverse Effect" shall mean any effect on the
business, Bid Price, trading volume of the Common Stock, operations, properties,
prospects, results of operations, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates,
individually, or taken as a whole, and/or any condition, circumstance, or
situation that would prohibit or otherwise interfere with the ability of the
Company to enter into and perform any of its obligations under this Agreement,
the Registration Rights Agreement, the Escrow Agreement, or the Warrants in any
material respect.
Section 1.17 "Maximum Put Amount" on any Put Date shall mean the amount
indicated opposite the range in which the Closing Price is on such Put Date and
below the 30 Day Average Daily trading Volume on such Put Date, as set forth in
the Table below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily
Trading Volume Trading Volume Trading Volume Trading Volume Trading Volume Trading Volume
Closing Price 25,000-50,000 50,001-75,000 75,001-100,000 100,001-125,000 125,001-150,000 150,001 and Above
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.50-$1.00 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
- ------------------------------------------------------------------------------------------------------------------------------------
$1.01 - $1.50 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
- ------------------------------------------------------------------------------------------------------------------------------------
$1.51 - $2.00 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
- ------------------------------------------------------------------------------------------------------------------------------------
$2.01 - $2.50 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
- ------------------------------------------------------------------------------------------------------------------------------------
$2.51 - $3.00 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
- ------------------------------------------------------------------------------------------------------------------------------------
$3.01 - $3.50 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
- ------------------------------------------------------------------------------------------------------------------------------------
$3.51 - $4.00 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
- ------------------------------------------------------------------------------------------------------------------------------------
$4.01 - Above $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Section 1.18 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.19 "Outstanding" when used with reference to shares of Common
Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as
of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that "Outstanding" shall not mean any such Shares
then directly or indirectly owned or held by or for the account of the Company.
Section 1.20 "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.21 "Principal Market" shall mean the OTC Bulletin Board, the
Nasdaq Small-Cap Market, or the American Stock Exchange, whichever is at the
time the principal trading exchange or market for the Common Stock.
Section 1.22 "Purchase Price" shall mean (a) with respect to Put
Shares, eighty (80%) percent (the "Purchase Price Percentage") of the Market
Price upon a Put Date (or such other date on which the Purchase Price is
calculated in accordance with the terms and conditions of this Agreement) if the
Common Stock is then traded on the OTC Bulletin Board, or eighty five (85%)
percent (also referred to as the "Purchase Price Percentage") of the Market
Price upon a Put Date (or such other date on which the Purchase Price is
calculated in accordance with the terms and conditions of this Agreement) if the
Common Stock is then traded on the Nasdaq Small Cap Stock Market or American
Stock Exchange.
Section 1.23 "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investors to purchase
shares of the Company's Common Stock, subject to the terms of this Agreement.
Section 1.24 "Put Date" shall mean the Trading Day during the
Commitment Period that a Put Notice to sell Common Stock to the Investors is
deemed delivered pursuant to Section 2.2(b) hereof.
Section 1.25 "Put Notice" shall mean a written notice to the Investors
setting forth the Investment Amount that the Company intends to sell to the
Investors and Compliance Certification from the Company as attached hereto as
Exhibit C.
Section 1.26 "Put Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to a Put that has occurred or may
occur in accordance with the terms and conditions of this Agreement.
Section 1.27 "Registrable Securities" shall mean any of the Put Shares,
and the Warrant Shares (i) in respect of which a Registration Statement has not
been declared effective by the SEC, (ii) which have not been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) which have not been otherwise transferred to holders who may trade such
shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such securities
not bearing a restrictive legend or (iv) the sales of which, in the opinion of
counsel to the Company, are subject to any time, volume or manner limitations
pursuant to Rule 144(k) (or any similar provision then in effect) under the
Securities Act.
3
<PAGE>
Section 1.28 "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company, the Placement Agent,
and the Investors on the Subscription Date annexed hereto as Exhibit D.
Section 1.29 "Registration Statement" shall mean a registration
statement on Form SB-2 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which the Company then qualifies and which counsel for the Company
shall deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement, and the
Warrants and in accordance with the intended method of distribution of such
securities), for the registration of the resale by the Investors of the
Registrable Securities under the Securities Act.
Section 1.30 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.31 "SEC" shall mean the Securities and Exchange Commission.
Section 1.32 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.33 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.34 "SEC Documents" shall mean the Form10-KSB, Form 10-QSB's,
Form 8-K's, (including all amendments thereto) or Proxy Statements, filed by the
Company for a period of at twelve (12) months immediately preceding the date
hereof until such time the Company no longer has an obligation to maintain the
effectiveness of a Registration Statement as set forth in the Registration
Rights Agreement.
Section 1.35 "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.
Section 1.36 "Trading Cushion" shall mean the mandatory fifteen (15)
Trading Days between Put Dates.
Section 1.37 "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.
Section 1.38 "Valuation Event" shall mean an event in which the Company
at any time during a Valuation Period takes any of the following actions:
4
<PAGE>
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares ("Additional Capital Shares"),
otherwise than as provided in the foregoing Subsections (a) and (b) above, at a
price per share less, or for other consideration lower, than the Bid Price in
effect immediately prior to such issuance, or without consideration;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Bid Price in
effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable for Capital
Shares and the consideration per share for which Additional Capital Shares may
at any time thereafter be issuable pursuant to the terms of such convertible or
exchangeable securities shall be less than the Bid Price in effect immediately
prior to such issuance;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for dividends under applicable law or any distribution to such
holders made in respect of the sale of all or substantially all of the Company's
assets (other than under the circumstances provided for in the foregoing
subsections (a) through (e); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Subsections (a)
through (f) hereof, inclusive, which in the opinion of the Company's Board of
Directors, determined in good faith, would have a material adverse effect upon
the rights of the Investors at the time of a Put or exercise of the Warrant.
Section 1.39 "Valuation Period" shall mean with respect to the Purchase
Price on any Put Date, the six day period commencing three (3) Trading Days
immediately preceding, and the two (2) Trading Days immediately following, the
Trading Day on which an Put Notice is deemed to be delivered, as well as the
Trading Day on which such notice is deemed to be delivered; provided, however,
that if a Valuation Event occurs during a Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately after the occurrence of such
Valuation Event and end on the sixth Trading Day thereafter.
Section 1.40 "Warrants" shall mean collectively the Warrant A's and
Warrant B's being issued pursuant to the terms herein.
Section 1.41 "Warrant A" shall have the meaning set forth in Section
2.5(a), and be subject to the terms and conditions substantially as set forth in
the form of Exhibit E.
Section 1.42 "Warrant B" shall have the meaning set forth in Section
2.5(b) and be subject to the terms and conditions substantially in the form of
Exhibit F.
Section 1.43 "Warrant Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to exercise of the Warrants.
5
<PAGE>
ARTICLE II
Purchase and Sale of Warrants, and Put Shares
Section 2.1 Investments in Put Shares.
(a) Puts. Upon the terms and conditions set forth herein (including,
without limitation, the provisions of Article VII hereof), on any Put Date the
Company may make a Put by the delivery of a Put Notice in the form attached
hereto as Exhibit C. The number of Put Shares that the Investors shall receive
pursuant to such Put shall be determined by dividing the Investment Amount
specified in the Put Notice by the Purchase Price on such Put Date. The
Investment Amount for each Put as designated by the Company in the applicable
Put Notice shall not be less than $100,000 nor more than the Maximum Put Amount
on the Put Date.
(b) Maximum Aggregate Purchase of Common Stock. In the event the
Common Stock is listed on the Nasdaq Small Cap Stock Market or American Stock
Exchange, or if the rules of the exchange or market where the Common Stock is
then quoted require, unless the Company obtains Shareholder approval pursuant to
the applicable corporate governance rules of the Nasdaq Stock Market, the
Investors may not be compelled to make a purchase which results in the issuance
to the Investors of more than 19.99% of the shares of Common Stock (measured at
the time of such purchase) as a result of the transactions contemplated by this
Agreement
Section 2.2 Mechanics.
(a) Put Notice. At any time during the Commitment Period, provided all
of the conditions set forth in Article VII are satisfied, the Company may
deliver a Put Notice to the Investors (pro rata), subject to the conditions set
forth in Section 2.4.
(b) Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or otherwise by the
Investors if such notice is received prior to 12:00 noon Eastern Time, or (ii)
the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Put Notice may be deemed delivered, on a day that
is not a Trading Day.
Section 2.3 Put Closings. On each Closing Date for a Put (i) the
Company shall deliver to the Escrow Agent one or more certificates, at the
Investor's option, representing the Put Shares to be purchased by the Investors
pursuant to Section 2.1 herein, registered in the name of the Investors or, at
the Investor's option, and (ii) the Investors shall deliver to escrow the
Investment Amount specified in the Put Notice by wire transfer of immediately
available funds to the Escrow Agent on or before the Closing Date for each Put.
In addition, on or prior to the Closing Date for each Put, each of the Company
and the Investors shall deliver to the Escrow Agent all documents, instruments
and writings required to be delivered or reasonably requested by either of them
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein. Payment of funds to the Company and delivery of the
certificates to the Investors shall occur out of escrow in accordance with the
conditions set forth above and those contained in the Escrow Agreement referred
to in Section 7.2(n).
6
<PAGE>
Section 2.4 Termination of Investment Obligation. The obligation of the
Investors to purchase Put Shares shall terminate permanently (including with
respect to a Closing Date that has not yet occurred) in the event that (i) there
shall occur any stop order or suspension of the effectiveness of the
Registration Statement for an aggregate of twenty (20) Trading Days during the
Commitment Period, for any reason other than deferrals or suspensions in
accordance with the Registration Rights Agreement as a result of corporate
developments subsequent to the Subscription Date that would require such
Registration Statement to be amended to reflect such event in order to maintain
its compliance with the disclosure requirements of the Securities Act, or (ii)
the Company shall at any time fail to comply with the requirements of Article VI
below.
Section 2.5 Warrants. On the Subscription Date, the Company will issue
to the Investors: (i) Warrant A's exercisable beginning six months after the
Subscription Date and then exercisable any time over the five-year period
thereafter, to purchase an aggregate of 25,000 Warrant Shares at the Exercise
Price and subject to the provisions contained in the Warrant A; and (ii) Warrant
B's exercisable beginning six months after the Subscription Date and then
exercisable any time over the five-year period thereafter, to purchase an
aggregate of 25,000 Warrant Shares at the Exercise Price and subject to the
provisions contained in the Warrant B. The Warrants shall be delivered by the
Company to the Escrow Agent, and delivered to the Investors pursuant to the
terms of this Agreement and the Escrow Agreement. The Warrant Shares shall be
registered for resale pursuant to the Registration Rights Agreement.
ARTICLE III
Representations and Warranties of Investors
Each of the Investors represents and warrants to the Company that:
Section 3.1 Organization and Authorization. Each of the Investors is
duly incorporated or organized and validly existing in the country of its
incorporation or organization and have all requisite power and authority to
purchase and hold the securities issuable hereunder. The decision to invest and
the execution and delivery of this Agreement by each of the Investors, the
performance by each of the Investors of its obligations hereunder and the
consummation by each of the Investors of the transactions contemplated hereby
have been duly authorized and requires no other proceedings on the part of any
of the Investors. The undersigned has all right, power and authority to execute
and deliver this Agreement on behalf of the Investors. This Agreement has been
duly executed and delivered by the Investors and, assuming the execution and
delivery hereof and acceptance thereof by the Company, will constitute the
legal, valid and binding obligations of each of the Investors, enforceable
against each of the Investors in accordance with its terms.
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Section 3.2 Evaluation of Risks. Each of the Investors has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of, and bearing the economic risks entailed by,
an investment in the Company and of protecting its interests in connection with
this transaction.
It recognizes that its investment in the Company involves a high degree of risk.
Section 3.3 Independent Counsel. Investors acknowledge that they have
been advised to consult with their own attorney regarding legal matters
concerning the Company and to consult with its tax advisor regarding the tax
consequences of acquiring the securities issuable hereunder.
Section 3.4 No Registration. The Investors understand that the
securities issuable hereunder have not been registered under the Act or any
other securities laws but are being offered and sold to it in reliance upon
specific exemptions from the registration requirements of Federal and State
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of Investors set forth herein in order to determine the applicability of such
exemptions and the suitability of Investors to acquire the securities hereunder.
Section 3.5 Investment Intent. The Investors are entering into this
Agreement solely for their own account and the Investors have no present
arrangement (whether or not legally binding) at any time to sell the Put Shares
to or through any person or entity. Investors understand and agree that they may
bear the economic risk of its investment in the securities issuable hereunder
for an indefinite period of time.
Section 3.6 Registration Rights. The parties have entered into a
Registration Rights Agreement (Exhibit D).
Section 3.7 No Advertisements. The Investors are not entering into this
Agreement as a result of or subsequent 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.
Section 3.8 Sophisticated Investor. The Investors are each a
sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
accredited investors (as defined in Rule 501 of Regulation D), and each of the
Investors have such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in Common Stock. The
Investors acknowledge that an investment in the Common Stock is speculative and
involves a high degree of risk.
Section 3.9 Not an Affiliate. None of the Investors are either an
officer, director or "affiliate" (as that term is defined in Rule 405 of the
Securities Act) of the Company.
ARTICLE IV
Representations and Warranties of the Company
The Company hereby represents and warrants to, and covenants with, the
Investors that the following are true and correct as of the date hereof and as
of the Subscription Date:
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Section 4.1 Organization; Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Florida and
is in good standing under such laws. The Company has all requisite corporate
power and authority to own, lease and operate its properties and assets, and to
carry on its business as presently conducted. The Company is qualified to do
business as a foreign corporation in each jurisdiction in which the ownership of
its property or the nature of its business requires such qualification, except
where failure to so qualify would not have a Material Adverse Effect.
Section 4.2 Capitalization. The authorized capital stock of the Company
consists of 48,000,000 shares of Common Stock, no par value per share, of which
37,704,399 are outstanding, 2,000,000 shares of non-voting Preferred Stock, no
par value, of which 450 shares of non-voting Preferred Stock, no par value, have
been designated Series B Convertible Preferred Stock (all of which are
outstanding), and 108 shares of non-voting Preferred Stock which are designated
as Series H Convertible Preferred Stock, all of which are outstanding. All
issued and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable.
Section 4.3 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the securities
issuable hereunder and the performance of the Company's obligations hereunder
have been taken. This Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies,
and to limitations of public policy as they may apply to the indemnification
provisions set forth in of this Agreement. Upon their issuance and delivery
pursuant to this Agreement, the securities will be validly issued, fully paid
and nonassessable and will be free of any liens or encumbrances other than those
created hereunder or by the actions of the Investors; provided, however, that
the securities are subject to restrictions on transfer under state and/or
federal securities laws. The issuance and sale of the securities hereunder will
not give rise to any preemptive right or right of first refusal or right of
participation on behalf of any person.
Section 4.4 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a Material Adverse
Effect.
Section 4.5 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Form 10-KSB, Form
10-QSBs, Form 8-K, Proxy Statement and S-1 Registration Statement filed by the
Company for a period of at least twelve (12) months immediately preceding this
offer (the "Reports"), this Agreement or those incurred in the ordinary course
of the Company's business since January 1, 1997, and which individually or in
the aggregate, do not or would not have a Material Adverse Effect.
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Section 4.6 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement or any of the
Exhibits or attachments hereto, including the exercise provision of the
Warrants, will conflict with or result in the breach or violation of any of the
terms or provisions of, or constitute a default or result in the creation or
imposition of any lien or charge on any assets or properties of the Company
under, any material indenture, mortgage, deed of trust or other material
agreement applicable to the Company or instrument to which the Company is a
party or by which it is bound or any statute or the Memorandum or Articles of
the Company, or any decree, judgment, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or its
properties, or the Company's listing agreement for its Common Stock, in each
case which default, lien or charge is likely to cause a Material Adverse Effect.
Section 4.7 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a Material Adverse
Effect.
Section 4.8 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
securities hereunder, or the consummation of any other transaction contemplated
hereby.
Section 4.9 Intellectual Property Rights. Except as disclosed in the
Reports, the Company, to the best of its knowledge, has sufficient trademarks,
trade names, patent rights, copyrights and licenses to conduct its business as
presently conducted in the Reports, except where failure to have any such
intellectual property would not cause a Material Adverse Effect. To the best of
its knowledge, neither the Company, nor its products is infringing or will
infringe any trademark, trade name, patent right, copyright, license, trade
secret or other similar right of others currently in existence; and there is no
claim being made against the Company regarding any trademark, trade name,
patent, copyright, license, trade secret or other intellectual property right
which could have a Material Adverse Effect.
Section 4.10 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect the Company is not in material breach
or material default under any of such agreements, except where such breach or
default would not cause a Material Adverse Effect.
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Section 4.11 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
financial conditions or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
Section 4.12 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
Section 4.13 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
Section 4.14 Required Governmental Permits. Except as set forth in the
Reports, the Company is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect.
Section 4.15 Listing. The Company will maintain the listing of its
Common Stock on the OTC Bulletin Board or other organized United States market
or Quotation system. The Company has not received any notice, oral or written,
regarding continued listing and, as long as the Common Stock issuable hereunder,
the Warrant Shares or Put Shares are outstanding, the Company will take no
action, which would impact their continued listing or eligibility of the Company
for such listing.
Section 4.16 Other Outstanding Securities/Financing Restrictions. Other
than warrants and options to acquire shares of Common Stock as disclosed in the
Reports, there are no other outstanding securities, debt or equity presently
convertible into Common Stock. Except as disclosed in the Reports, the Company
has no outstanding restricted shares, or shares of Common Stock sold under
Regulation S, Regulation D or outstanding under any other exemption from
registration, which are available for sale as unrestricted ("free trading")
stock.
Section 4.17 Use of Proceeds. The Company represents that the net
proceeds from this offering will be used for working capital purposes and/or
general corporate purposes.
Section 4.18 Further Representations and Warranties of the Company. For
so long as any securities issuable hereunder held by the Investors remain
outstanding, the Company acknowledges, represents, warrants and agrees that it
will use its best efforts to maintain the listing of its Common Stock on the OTC
Bulletin Board or other organized United States market or quotron systems.
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Section 4.19 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and sale, none of the
Company's filings with the SEC (as they may have been amended or supplemented as
provided in the Reports) contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein in light of the circumstances under which they were made,
not misleading as of the date of such filing (or in such amendment or
supplement, as the case may be). The Company has timely, subject to permitted
extensions, filed all requisite forms, reports and exhibits thereto with the
SEC.
Section 4.20 Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Investors that could reasonably be expected
to have a Material Adverse Effect.
Section 4.21 Opinion of Counsel. Each of the Investors shall receive an
opinion letter from counsel to the Company prior to each Closing for the Put
Shares by the Company to the effect that:
(i) The Company is incorporated and validly existing
in the jurisdiction of its incorporation. The Company and/or its
subsidiaries are duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions where the Company and/or
its subsidiaries owns or leases properties, maintains employees or
conducts business, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company, and
has all requisite corporate power and authority to own its properties
and conducts its business.
(ii) There is no action, proceeding or investigation
pending, or to such counsel's knowledge, threatened against the
Company, which might result, either individually or in the aggregate,
in any material adverse change in the business or financial condition
of the Company.
(iii) To counsel's knowledge, the Company is not a
party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or
instrumentality.
(iv) To counsel's knowledge, there is no action,
suit, proceeding or investigation by the Company currently pending.
(v) The Common Stock and Warrants which shall be
issued at each Put Closing, will be duly authorized and validly issued
under the laws of the Company's State of Incorporation.
(vi) This Subscription Agreement, the issuance of the
Warrants, Common Stock issuable upon exercise of the Warrants, and the
Put Shares have been duly approved by all required corporate action and
that all such securities, upon delivery, shall be validly issued and
outstanding, fully paid and nonassessable
(vii) The issuance of the Warrants, Common Stock
issuable upon exercise of the Warrants, and the Put Shares will not
violate the applicable listing agreement between the Company and any
securities exchange or market on which the Company's securities are
listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Investors set forth in this
Private Equity Line of Credit Agreement, the offer, issuance and sale
of the Warrants, Common Stock issuable upon exercise of the Warrants,
and the Put Shares, to be issued upon exercise to the Investors
pursuant to this Agreement are exempt from the registration
requirements of the Securities Act.
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(ix) The authorized capital stock of the Company
consists of 48,000,000 shares of Common Stock, no par value per share,
of which 37,704,399 are outstanding, 2,000,000 shares of non-voting
Preferred Stock, no par value, of which 450 shares of non-voting
Preferred Stock, no par value, have been designated Series B
Convertible Preferred Stock (all of which are outstanding), and 108
shares of non-voting Preferred Stock which are designated as Series H
Convertible Preferred Stock, all of which are outstanding. All issued
and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934,
as amended, and the Company has timely filed all the material required
to be filed pursuant to Sections 13(a) or 15(d) of such Act for a
period of at least twelve months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Warrants, Common Stock issuable upon exercise of the Warrants, and the
Put Shares as described in the Agreements; each of the Agreements has
been duly and validly authorized by all necessary corporate action by
the Company and to our knowledge, no approval of any governmental or
other body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; each of the Agreements has been duly and validly
executed and delivered by and on behalf of the Company, and is a valid
and binding agreement of the Company, enforceable in accordance with
its terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge, after due
inquiry, the execution, delivery and performance of the Agreements by
the Company and the performance of its obligations thereunder do not
and will not constitute a breach or violation of any of the terms and
provisions of, or constitute a default under or conflict with or
violate any provision of (i) the Company's Certificate of Incorporation
or By-Laws, (ii) any indenture, mortgage, deed of trust, agreement or
other instrument to which the Company is a party or by which it or any
of its property is bound, (iii) any applicable statute or regulation,
(iv) or any judgment, decree or other of any court or governmental body
having jurisdiction over the Company or any of its property.
Section 4.22 Opinion of Counsel. The Company will obtain for each of
the Investors, at the Company's expense, any and all opinions of counsel which
may be required in order to exercise or sell the securities issuable
hereunder.Such draft of opinion of counsel shall be received by the Investors on
or before the Subscription Date.
Section 4.23 Dilution. The Company is aware and acknowledges that the
issuance of Common Stock hereunder, and the exercise of the Warrants could cause
dilution to existing shareholders and could significantly increase the
outstanding number of shares of Common Stock.
Section 4.24 Employee Relations. The Company is not involved in any
labor dispute, nor, to the knowledge of the Company, is any such dispute
threatened. None of the Company's employees is a member of a union and the
Company believes that its relations with its employees are good.
Section 4.25 Environmental Laws. To the best of the Company's
knowledge, the Company is (i) in compliance with any and all foreign, federal,
state and local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants and which the Company know is applicable to them
("Environmental Laws"), (ii) has received all permits, licenses or other
approvals required under applicable Environmental Laws to conduct its business,
and (iii) is in compliance with all terms and conditions of any such permit,
license or approval.
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Section 4.26 Insurance. The Company is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company is engaged. The Company has no reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires, or obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
ARTICLE V
Representations and Warranties of the Company and the Investors
Each of the Investors, and the Company represent to the other the
following with respect to itself:
Section 5.1 Authorization/Execution. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and each of
the Investors 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.
Section 5.2 Non-contravention. The execution and delivery of this
Agreement along with all Exhibits, and the consummation of the issuance of the
securities and the transactions contemplated by this Agreement do not and will
not conflict with or result in a breach by the Company or the Investors 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 of the Investors, or any
indenture, mortgage, deed of trust of other material agreement or instrument to
which the Company or any Investor is a party or by which it or any of its
properties or assets are bound, or any existing applicable law, rule or
regulation or any applicable decree, judgment or order of any court, Federal or
State regulatory body, administrative agency or other governmental body having
jurisdiction over the Company or Investors or any of its properties or assets.
Section 5.3 Approvals. Neither the Company, nor any Investor, is aware
of any authorization, approval or consent of any governmental body which is
legally required for the issuance and sale of the securities.
Section 5.4 Indemnification. Each of the Company and the Investors
agree to indemnify the other and to hold the other harmless from and against any
and all losses, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) which the other may sustain or incur in connection with the
breach by the indemnifying party of any representation, warranty or covenant
made by it in this Agreement.
ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all material respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has authorized and reserved and the Company shall continue to reserve
and keep available at all times, free of preemptive rights, shares of Common
Stock for the purpose of enabling the Company to satisfy any obligation to issue
shares of Common Stock upon exercise of the Warrants , and the Put Shares; such
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amount of shares of Common Stock to be reserved shall be calculated based upon
the minimum Purchase Price and exercise price therefor under the terms of this
Agreement, the, and the Warrants respectively. The number of shares of Common
Stock so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder and the number of shares so reserved shall be increased or decreased
to reflect potential increases or decreases in the Common Stock that the Company
may thereafter be so obligated to issue by reason of adjustments to the
Warrants.
Section 6.3 Listing of Common Stock. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as soon as
practicable (but in any event prior to the commencement of the Commitment
Period) to list the Put Shares and the Warrant Shares. The Company further
agrees, if the Company applies to have the Common Stock traded on any other
Principal Market, it will include in such application the Put Shares and the
Warrant Shares, and will take such other action as is necessary or desirable in
the opinion of any Investor to cause the Common Stock to be listed on such other
Principal Market as promptly as possible. The Company will take all action to
continue the listing and trading of its Common Stock on the Principal Market
(including, without limitation, maintaining sufficient net tangible assets) and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market.
Section 6.4 Exchange Act Registration. The Company will cause its
Common Stock to continue to be registered under Section 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by Exchange Act or the rules thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under said Act.
Section 6.5 No Legend. The certificates evidencing the Put Shares to be
sold by the Investors shall be free of legends.
Section 6.6 Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Additional SEC Documents. The Company will deliver to each
of the Investors, as and when the originals thereof are submitted to the SEC for
filing, copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8 Notice of Certain Events Affecting Registration; Suspension
of Right to Make a Put. The Company will immediately notify each of the
Investors upon the occurrence of any of the following events in respect of a
registration statement or related prospectus relating to an offering of
Registrable Securities; (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate; and the Company will promptly make available to
the Investors any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investors any Put Notice during the
continuation of any of the foregoing events.
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Section 6.9 Expectations Regarding Put Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company must notify the Investors, in
writing, as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Put Notices.
Such notification shall constitute only the Company's good faith estimate and
shall in no way obligate the Company to raise such amount, or any amount, or
otherwise limit its ability to deliver Put Notices.
Section 6.10 Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investors such shares of stock and/or securities as
the Investors are entitled to receive pursuant to this Agreement.
Section 6.11 Issuance of Put Shares and Warrant Shares. The sale of the
Put Shares and the issuance of the Warrant Shares pursuant to exercise of the
Warrant shall be made in accordance with the provisions and requirements of
Section 4(2) of the Securities Act, or Regulation D and any applicable state
securities law. Issuance of the Warrant Shares pursuant to exercise of the
Warrant shall be made in accordance with the provisions and requirements under
the Securities Act and any applicable state securities law.
ARTICLE VII
Conditions to Delivery of Puts and Conditions to Closing
Section 7.1 Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the Investors (pro rata) incident to each Put Closing
is subject to the satisfaction, at or before each such Closing, of each of the
conditions set forth below.
(a) Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investors shall be true and correct in all
material respects as of the date of this Agreement and as of the date of each
such Closing as though made at each such time.
(b) Performance by the Investors. The Investors shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Investors at or prior to such Closing.
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Section 7.2 Conditions Precedent to the Right of the Company to Deliver
a Put Notice and the Obligation of the Investors to Purchase Put Shares. The
right of the Company to deliver a Put Notice and the obligation of the Investors
hereunder to acquire and pay for the Put Shares incident to a Closing is subject
to the satisfaction, on (i) the date of delivery of such Put Notice and (ii) the
applicable Closing Date (each a "Condition Satisfaction Date"), of each of the
following conditions:
(a) Registration of the Common Stock with the SEC. The Company shall have
filed with the SEC a Registration Statement with respect to the resale of at
least that amount of Registrable Securities contained in the Put Notice in
accordance with the terms of the Registration Rights Agreement. As set forth in
the Registration Rights Agreement, the Registration Statement shall have
previously become effective and shall remain effective on each Condition
Satisfaction Date and (i) neither the Company nor the Investors shall have
received notice that the SEC has issued or intends to issue a stop order with
respect to the Registration Statement or that the SEC otherwise has suspended or
withdrawn the effectiveness of the Registration Statement, either temporarily or
permanently, or intends or has threatened to do so (unless the SEC's concerns
have been addressed and the Investors are reasonably satisfied that the SEC no
longer is considering or intends to take such action), and (ii) no other
suspension of the use or withdrawal of the effectiveness of the Registration
Statement or related prospectus shall exist. The Registration Statement must
have been declared effective by the SEC prior to the first and each subsequent
Put Date.
(b) Authority. The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the Put Shares,
or shall have the availability of exemptions therefrom. The sale and issuance of
the Put Shares shall be legally permitted by all laws and regulations to which
the Company is subject.
(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in all
material respects as of each Condition Satisfaction Date as though made at each
such time (except for representations and warranties specifically made as of a
particular date) with respect to all periods, and as to all events and
circumstances occurring or existing to and including each Condition Satisfaction
Date, except for any conditions which have temporarily caused any
representations or warranties herein to be incorrect and which have been
corrected with no continuing impairment to the Company or the Investors.
(d) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement, the Registration Rights Agreement and
the Warrant to be performed, satisfied or complied with by the Company at or
prior to each Condition Satisfaction Date.
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(e) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
or directly and adversely affects any of the transactions contemplated by this
Agreement, and no proceeding shall have been commenced that may have the effect
of prohibiting or adversely affecting any of the transactions contemplated by
this Agreement.
(f) Adverse Changes. Since the Subscription Date, no event that had or is
reasonably likely to have a Material Adverse Effect has occurred.
(g) No Suspension of Trading In or Delisting of Common Stock. The trading
of the Common Stock (including, without limitation, the Put Shares) is not
suspended by the SEC or the Principal Market, and the Common Stock (including,
without limitation, the Put Shares) shall have been approved for listing or
quotation on and shall not have been delisted from the Principal Market. The
issuance of shares of Common Stock with respect to the applicable Closing, if
any, shall not violate the shareholder approval requirements of the Principal
Market. The Company shall not have received any notice threatening the listing
of the Common Stock on the Principal Market.
(h) 4.99% Percent Limitation. On each Closing Date, the number of Put
Shares then to be purchased by each Investor will not exceed the number of such
shares which, when aggregated with all other shares of Common Stock then owned
by such Investor beneficially or deemed beneficially owned by such Investor,
would result in any Investor owning more than 4.99% of all of such Common Stock
as would be outstanding on such Closing Date, as determined in accordance with
Rule 13d-3 of the Exchange Act and the regulations promulgated thereunder. For
purposes of this Section 7.2(j), in the event that the amount of Common Stock
outstanding as determined in accordance with Rule 13d-3 of the Exchange Act and
the regulations promulgated thereunder is greater on a Closing Date than on the
date upon which the Put Notice associated with such Closing Date is given, the
amount of Common Stock outstanding on such Closing Date shall govern for
purposes of determining whether any Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement and, if any, Warrant Shares, would
own more than 4.99% of the Common Stock following such Closing. Then, in such
event, the Company would reduce that number of Put Shares so issuable so that it
would not exceed the aforementioned 4.99% limitation. Such Investor shall notify
the Company as soon as possible, but in any event within three (3) business days
of receiving a Put Notice, if such Investor believes Investor's purchase of the
Put Shares specified in the Put Notice would result in any Investor exceeding
the 4.99% limitation described above.
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(i) Minimum Bid Price. The Bid Price equals or exceeds the Floor Price
during the applicable Valuation Period (as adjusted for stock splits, stock
dividends, reverse stock splits, and similar events).
(j) Minimum Average Trading Volume. The average trading volume for the
Common Stock over the previous thirty (30) Trading Days exceeds 25,000 shares
per Trading Day.
(k) No Knowledge. The Company has no knowledge of any event more likely
than not to have the effect of causing such Registration Statement to be
suspended or otherwise ineffective (which event is more likely than not to occur
within the fifteen Trading Days following the Trading Day on which such Notice
is deemed delivered).
(l) Trading Cushion. The Trading Cushion shall have elapsed since the next
preceding Put Date.
(m)Escrow Agreement. The parties hereto shall have entered into a
mutually acceptable escrow agreement for the Purchase Prices due hereunder.
(n) Other. On each Condition Satisfaction Date, the Investors shall have
received and been reasonably satisfied with such other certificates and
documents as shall have been reasonably requested by any Investor in order for
such Investor to confirm the Company's satisfaction of the conditions set forth
in this Section 7.2, including, without limitation, a certificate in
substantially the form and substance of Exhibit C hereto, executed in either
case by an executive officer of the Company and to the effect that all the
conditions to such Closing shall have been satisfied as at the date of each such
certificate.
ARTICLE VII
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 8.1 Due Diligence Review. The Company shall make available for
inspection and review by the Investors, advisors to and representatives of the
Investors (who may or may not be affiliated with the Investors and who are
reasonably acceptable to the Company), any underwriter participating in any
disposition of the Registrable Securities on behalf of the Investors pursuant to
the Registration Statement, any such registration statement or amendment or
supplement thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investors
or any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investors and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
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Section 8.2 Non-Disclosure of Non-Public Information
(a) The Company shall not disclose non-public information to the
Investors, advisors to or representatives of the Investors (including, without
limitation, in connection with the giving of the Adjustment Period Notice
pursuant to Section 2.4) unless prior to disclosure of such information the
Company identifies such information as being non-public information and provides
the Investors, such advisors and representatives with the opportunity to accept
or refuse to accept such non-public information for review. The Company may, as
a condition to disclosing any non-public information hereunder, require the
Investor's advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Investors.
(b) Nothing herein shall require the Company to disclose non-public
information to the Investors or their advisors or representatives, and the
Company represents that it does not disseminate non-public information to any
investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investors and, if
any, underwriters, of any event or the existence of any circumstance (without
any obligation to disclose the specific event or circumstance) of which it
becomes aware, constituting non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section 8.2 shall be
construed to mean that such persons or entities other than the Investors
(without the written consent of the Investors prior to disclosure of such
information) may not obtain non-public information in the course of conducting
due diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE IX
Choice of Law/Jurisdiction
Section 9.1 Choice of Law; Venue; Jurisdiction. This Agreement
will be construed and enforced in accordance with and governed by the laws of
the State of Florida, except for matters arising under the Act, without
reference to principles of conflicts of law. The party who initiates legal
action shall choose the jurisdiction of the federal courts in connection with
any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party waives its right to a trial by jury. Each party hereby agrees that if
another party to this Agreement obtains a judgment against it in such a
proceeding, the party which obtained such judgment may enforce same by summary
judgment in the courts of any country having jurisdiction over the party against
whom such judgment was obtained, and each party hereby waives any defenses
available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law.
ARTICLE X
Assignment; Termination
Section 10.1 Assignment. Neither this Agreement nor any rights of the
Investors or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased or acquired by the Investors hereunder with respect
to the Common Stock held by such person, and (b) upon the prior written consent
of the Company, which consent shall not unreasonably be withheld, the Investors
interest in this Agreement may be assigned at any time, in whole or in part, to
any other person or entity (including any affiliate of the Investors) who agrees
to make the representations and warranties contained in Article III and who
agrees to be bound by the covenants of Article V.
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Section 10.2 Termination. This Agreement shall terminate five and
one-half (5-1/2) years after the Subscription Date; provided, however, that the
provisions of Articles I, III, IV, V, VI, VII, VIII, IX, X, XI, and XII shall
survive the termination of this Agreement.
ARTICLE XI
Notices
Section 11.1 Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b)on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be:
If to the Company:
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, FL 33313
Attention: Linda Grable
Facsimile: (954) 581-0555
Telephone: (800) 992-9008
If to the Investors, at the address listed on Schedule A.
Either party hereto may from time to time change its address or
facsimile number for notices under this Section 11.1 by giving at least ten (10)
days' prior written notice of such changed address or facsimile number to the
other party hereto.
ARTICLE XII
Miscellaneous
Section 12.1 Counterparts/Facsimile/Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 12.2 Entire Agreement. This Agreement, the Exhibits or
Attachments hereto, which include, but are not limited to the Warrants, the
Escrow Agreement, and the Registration Rights Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Attachments
to this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
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Section 12.3 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.4 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.5 Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of
the Investors and the Company shall be required to employ any other reporting
entity.
Section 12.6 Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Warrants, Warrant Shares, or Put
Shares, and (ii) in the case of any such loss, theft or destruction of such
certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or (iii) in the case of any such
mutilation, on surrender and cancellation of such certificate, the Company at
its expense will execute and deliver, in lieu thereof, a new certificate of like
tenor.
Section 12.7 Fees and Expenses. Each of the parties shall pay its own
fees and expenses (including the fees of any attorneys, accountants, appraisers
or others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company shall pay (a) on the
Subscription Date, to Goldstein, Goldstein & Reis, LLP fifty thousand (50,000)
shares of Common Stock that will be registered at the same time as the Put
Shares, and (b) on the Closing Date of each Put (i) one (1%) percent of the
proceeds in cash to Goldstein, Goldstein & Reis, LLP for legal, administrative,
and escrow agent fees, and (ii) six (6%) percent of the gross proceeds of each
Put in cash to the Placement Agent, payable in the form of Common Stock that
will be registered at the same time as the Put Shares. In addition, the
Placement Agent shall receive, on a pro rata basis as the Equity Line of Credit
is drawn upon, (a) a Warrant A to purchase up to fifty thousand (50,000) shares
of Common Stock upon the same terms as the Warrant A issued to the Investors
pursuant to this Agreement (which Warrant Shares will be registered at the same
time as the Put Shares), and (b) eighty thousand (80,000) shares of Common Stock
that will be registered at the same time as the Put Shares.
Section 12.8 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
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IN WITNESS WHEREOF, the parties hereto have caused this Private Equity
Line of Credit Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.
Agreed to and Accepted as of the
day of October, 1998
IMAGING DIAGNOSTIC SYSTEMS, INC.
By____________________________
Linda B. Grable, President
AUSTOST ANSTALT SCHAAN,
Investor
By___________________________
Name:
Title:
BALMORE FUNDS S.A.,
Investor
By___________________________
Name:
Title:
SETTONDOWN CAPITAL INTER-
NATIONAL, LTD.
Placement Agent
By___________________________
Anthony L.M. Inder Riden
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SCHEDULE A
List of Investors
-----------------
1. AUSTOST ANSTALT SCHAAN
733 Fuerstentum
Lichenstein Landstrasse 163
Telephone: 011 431.53.453.2951
Facsimile: 011 431.53.453.2895
Attention: Thomas Hackl
Percentage of Put Amount: %
No. of shares of Common Stock
underlying Warrant A:
No. of shares of Common Stock
underlying Warrant B:
2. BALMORE FUNDS S.A.
Trident Chambers
P.O. Box 146
Roadstown, Tortola, BVI
Telephone: 011-411-71-201-6262
Facsimile: 011-441-71-201-4800
Attention: Francois Morax
Percentage of Put Amount: %
No. of shares of Common Stock
underlying Warrant A:
No. of shares of Common Stock
underlying Warrant B:
<PAGE>
EXHIBIT C
PUT NOTICE/COMPLIANCE CERTIFICATE
Imaging Diagnostic Systems, Inc.
The undersigned, Linda Grable, hereby certifies, with respect to shares of
common stock of Imaging Diagnostic Systems, Inc. (the "Company") issuable in
connection with this Put Notice and Compliance Certificate dated _____________
(the "Notice"), delivered pursuant to Article II of the Equity Private Line Of
Credit Agreement (the "Agreement"), as follows:
1. The undersigned is the duly elected President of the Company.
2. The representations and warranties of the Company set forth in the Agreement
dated as of ________, are true and correct in all material respects as though
made on and as of the date hereof.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.
4. The Investment Amount is $____________.
The undersigned has executed this Certificate this ____ day of ________, 199_.
Imaging Diagnostic Systems, Inc.
By_____________________________
Linda Grable, President
<PAGE>
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the __ day of
October, 1998, between the entities listed on Schedule A attached hereto
(referred to as a "Purchaser" or "Purchasers"), SETTONDOWN CAPITAL INTERNATIONAL
LTD. (the "Placement Agent" together with the Purchasers is also hereinafter
referred to as the "Holder") located at Charlotte House, Charlotte Street, P.O.
Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas,
GOLDSTEIN, GOLDSTEIN & REIS, LLP ("GGR" and together with the Purchasers and the
Placement Agent also referred to as a "Holder") and IMAGING DIAGNOSTIC SYSTEMS,
INC., a corporation incorporated under the laws of the state of Florida, and
having its principle place of business at 6531 NW 18th Court, Plantation,
Florida 33313, (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchasers are purchasing from the Company, pursuant to a
Private Equity Line of Credit Agreement dated the date hereof (the "Equity Line
Agreement"), (i) an aggregate of up to Fifteen Million ($15,000,000) Dollars
principal amount of shares of Common Stock, (ii) a Warrant A to purchase twenty
five thousand (25,000) shares of the Company's Common Stock, and (iii) a Warrant
B to purchase twenty five thousand (25,000) shares of the Company's Common
Stock. All capitalized terms not hereinafter defined shall have that meaning
assigned to them in the Equity Line Agreement; and
WHEREAS, the Company has agreed to pay to the Placement Agent
for services rendered, 6% of the gross proceeds of each Put, payable in the form
of Common Stock that will be registered at the same time as the Put Shares. In
addition, the Placement Agent shall receive, on a pro rata basis as the Equity
Line of Credit is drawn upon, (a) a Warrant A to purchase up to fifty thousand
(50,000)) shares of Common Stock upon the same terms as the Warrant A issued to
the Purchasers pursuant to the Equity Line Of Credit Agreement (whose Warrant
Shares will be registered at the same time as the Put Shares), and (b) eighty
thousand (80,000) shares of Common Stock which be registered at the same time as
the Put Shares; and
WHEREAS, the Company has agreed to pay to GGR for services
rendered, fifty thousand (50,000) shares of Common Stock ("GGR Shares") to be
registered at the same time as the Put Shares; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein with respect to the Put Shares, the Common
Stock and Warrant Shares to be issued to the Placement Agent, and the shares of
Common Stock underlying Warrants (hereinafter referred to as the "Stock" or
"Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
"Registrable Security" means the Securities; provided, however, that with
respect to any particular Registrable Security, such security shall cease to be
a Registrable Security when, as of the date of determination, (i) it has been
effectively registered under the Securities Act of 1933, as amended (the "1933
Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is
no longer required for the immediate public distribution of such security as a
result of the provisions of Rule 144 promulgated under the 1933 Act, or (iii) it
has ceased to be outstanding. The term "Registrable Securities" means any and/or
all of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable Security"
as is appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holders acknowledge and
understand that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Act. The Holders understand that no disposition or transfer of the
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Securities may be made by Holders in the absence of (i) an opinion of counsel to
the Holders that such transfer may be made without registration under the 1933
Act or (ii) such registration.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file and cause
to become effective with the Securities and Exchange Commission ("Commission")
an amendment (the "Amendment") to the Form S-2 registration statement (which was
filed by the Company on _____) at the sole expense of the Company (except as
provided in Section 3(c) hereof), registering the GGR Shares and the shares of
Common Stock underlying the Warrants issued to the Purchasers on the
Subscription Date, in respect of GGR and the Purchasers. The Company also agrees
that, prior to each Put Closing it will prepare and file and cause to become
effective with the Commission , a registration statement (on Form S-2, or other
appropriate registration statement) under the 1933 Act (the "Registration
Statement"), at the sole expense of the Company (except as provided in Section
3(c) hereof), registering that amount of Common Stock, and the Common Stock
underlying the Warrants, associated with that Put Closing, in respect of all
holders of Registrable Securities, so as to permit a public offering and sale of
the Registrable Securities associated with the Put Closings, under the Act.
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3 hereof current under the
1933 Act until the earlier of (i) the date that all of the Registrable
Securities have been sold pursuant to the Registration Statement, (ii) the date
the holders thereof receive an opinion of counsel that the Registrable
Securities may be sold under the provisions of Rule 144 or (iii) five and one
half years after the date the applicable Registration Statement is filed. The
Company will maintain the Amendment or post-effective amendment filed under this
Section 3 hereof current under the 1933 Act until the earlier of (i) the date
that all of the GGR Shares and the shares of Common Stock underlying the
Warrants issued to the Purchasers on the Subscription Date have been sold by
such people pursuant to the Amendment, (ii) the date the holders thereof receive
an opinion of counsel that the GGR Shares and the shares of Common Stock
underlying the Warrants issued to the Purchasers on the Subscription Date may be
sold under the provisions of Rule 144 or (iii) five and one half years after the
Subscription Date.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Amendment and the Registration Statement under subparagraph 3(a) and in
complying with applicable securities and Blue Sky laws (including, without
limitation, all attorneys' fees) shall be borne by the Company. The Holders
shall bear the cost of underwriting discounts and commissions, if any,
applicable to the Registrable Securities being registered and the fees and
expenses of its counsel. The Company shall qualify any of the securities for
sale in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 6 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holders with copies of the Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holders.
(d) The Company shall not be required by this Section 3 to
include a Holder's Registrable Securities or GGR Shares and the shares of Common
Stock underlying the Warrants issued to the Purchasers on the Subscription Date
in any Amendment or Registration Statement which is to be filed if, in the
opinion of counsel for both the Holders and the Company (or, should they not
agree, in the opinion of another counsel experienced in securities law matters
acceptable to counsel for the Holders and the Company) the proposed offering or
other transfer as to which such registration is requested is exempt from
applicable federal and state securities laws and would result in all purchasers
or transferees obtaining securities which are not "restricted securities", as
defined in Rule 144 under the 1933 Act.
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(e) No provision contained herein shall preclude the Company
from selling securities pursuant to any Registration Statement in which it is
required to include Registrable Securities pursuant to this Section 3.
(f) The Company agrees that it will declare the Amendment and/or
the Registration Statement effective within five business days after being
notified by the Commission that it may do so.
(e) In the event the Amendment to be filed by the Company
pursuant to Section 3(a) above is not filed with the Commission within fifteen
(15) days from the Subscription Date and/or the Amendment is not declared
effective by the Commission within forty five (45) days from the Subscription
Date, then the Company will pay GGR and the Purchasers (pro rated on a daily
basis), as liquidated damages for such failure and not as a penalty, two (2%)
percent of the purchase price of the then outstanding Securities for every
thirty (30) day period until the Amendment has been filed and/or declared
effective. Such payment of the liquidated damages shall be made to the GGR and
the Purchasers in cash, immediately upon demand, provided, however, that the
payment of such liquidated damages shall not relieve the Company from its
obligations to register the Securities pursuant to this Section.
If the Company does not remit the damages as set forth above,
the Company will pay the reasonable costs of collection, including attorneys
fees, in addition to the liquidated damages. The registration of the Securities
pursuant to this provision shall not affect or limit other rights or remedies of
GGR and the Purchasers as set forth in this Agreement.
Section 4. Cooperation with Company. The Holders will cooperate with
the Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities, the GGR Shares and the shares of Common
Stock underlying the Warrants issued to the Purchasers on the Subscription Date.
Section 5. Registration Procedures. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities or the GGR Shares and the shares of Common
Stock underlying the Warrants issued to the Purchasers on the Subscription Date
under the Act, the Company shall (except as otherwise provided in this
Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to the Amendment and/or Registration Statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with respect to
the sale or other disposition of all securities covered by such registration
statement whenever the holder of such securities shall desire to sell or
otherwise dispose of the same (including prospectus supplements with respect to
the sales of securities from time to time in connection with a registration
statement pursuant to Rule 415 promulgated under the Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Act, and such other documents, as such Holder may reasonably request in
order to facilitate the public sale or other disposition of the securities owned
by such Holder;
(c) use its best effort to register and qualify the securities
covered by the Amendment and Registration Statement under such other securities
or blue sky laws of such jurisdictions as the Holders shall reasonably request,
and do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
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(d) list such securities on the NASDAQ Small Cap Stock Market or
other national securities exchange on which any securities of the Company are
then listed, if the listing of such securities is then permitted under the rules
of such exchange or NASDAQ;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(f) notify each holder of Registrable Securities covered by the
Registration Statement and GGR and the holder of the shares of Common Stock
underlying the Warrants issued to the Purchasers on the Subscription Date, at
any time when a prospectus relating thereto covered by the Amendment or the
Registration Statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in the Amendment or Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Information by Holder. Each holder of Registrable
Securities, GGR Shares and the shares of Common Stock underlying the Warrants
issued to the Purchasers on the Subscription Date, included in any registration
shall furnish to the Company such information regarding such holder and the
distribution proposed by such holder as the Company may request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to in this Section 6.
Section 7. Assignment. The rights granted the Holders under this
Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unreasonably withheld. This Agreement is binding upon
and inures to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
Section 8. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferee under Section 7 above) upon the occurrence of any of the following:
(a) all such Holder's securities subject to this Agreement
have been registered;
(b) all of such Holder's securities subject to this Agreement
may be sold without such registration pursuant to Rule 144 promulgated by the
SEC pursuant to the Securities Act;
(c) all of such Holder's securities subject to this Agreement
can be sold pursuant to Rule 144(k); or
(d) five and one half years from the issuance of the
Registrable Securities, GGR Shares, and the shares of Common Stock underlying
the Warrants issued to the Purchasers on the Subscription Date.
Section 9. Indemnification.
(a) In the event of the filing of any Registration Statement
with respect to Registrable Securities, or any Amendment with respect to the GGR
Shares and the shares of Common Stock underlying the Warrants issued to the
Purchasers on the Subscription Date pursuant to Section 3 hereof, the Company
agrees to indemnify and hold harmless the Holders and each officer, director of
the Holders, and each person, if any, who controls the Holders within the
meaning of the Securities Act ("Distributing Holders") against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Distributing Holders may
become subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
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are based upon any untrue statement or alleged untrue statement of any material
fact contained in any such Registration Statement, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company by the
Distributing Holders, specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof; arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in a Registration
Statement requested by such Distributing Holder, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement contained in this Section 9(b) shall not inure to the
benefit of the Company with respect to any person asserting such loss, claim,
damage or liability who purchased the Registrable Securities which are the
subject thereof if the Company failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Company was obligated to do so under the Securities Act or
the rules and regulations promulgated thereunder. This indemnity agreement will
be in addition to any liability which the Distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
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<PAGE>
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 10. Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the Distributing
Holder makes a claim for indemnification pursuant to Section 9 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 9 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the applicable
Distributing Holder, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Distributing Holder agree that it
would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 11. Notices. Any notice pursuant to this Agreement by the
Company or by the Holders shall be in writing and shall be deemed to have been
duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holders, to its, his or her address set forth on
the signature page of this Agreement, with a copy to the person designated in
the Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 13. Headings. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 14. Jurisdiction. This Agreement will be construed and
enforced in accordance with and governed by the laws of the State of Florida,
except for matters arising under the Act, without reference to principles of
conflicts of law. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the State of Florida in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
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jurisdictions. Each party hereby agrees that if another party to this Agreement
obtains a judgment against it in such a proceeding, the party which obtained
such judgment may enforce same by summary judgment in the courts of any country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 15. Severability. If any provision of this Agreement shall
for any reason be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed, on the day and year first above written.
Attest: IMAGING DIAGNOSTIC SYSTEMS, INC.
By:_________________________ By:____________________________
Name: Name:
Title: Title:
SETTONDOWN CAPITAL INTER-
NATIONAL LTD.
By_____________________________
GOLDSTEIN, GOLDSTEIN & REIS, LLP
By_____________________________
By______________________________
By______________________________
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<PAGE>
EXHIBIT E
THIS WARRANT HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER
TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE
"RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE
ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT A
To Purchase ______ Shares of Common Stock of
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS CERTIFIES that, for value received, _________ (the "Investor"),
is entitled, upon the terms and subject to the conditions hereinafter set forth,
at any time on or after October , 1999 (the "Exercise Commencement Date"), and
on or prior to October , 2004 (the "Termination Date") but not thereafter, to
subscribe for and purchase from IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida
corporation (the "Company"), _________ (______) shares of Common Stock (the
"Warrant Shares"). The purchase price of one share of Common Stock (the
"Exercise Price") under this Warrant shall be equal to $1.00. The Exercise Price
and the number of shares for which the Warrant is exercisable shall be subject
to adjustment as provided herein. This Warrant is being issued in connection
with the Private Equity Line of Credit Agreement dated as of October , 1998, in
the aggregate amount of Fifteen Million ($15,000,000) Dollars (the "Agreement")
between the Company and Investor and is subject to its terms. In the event of
any conflict between the terms of this Warrant and the Agreement, the Agreement
shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented
by this Warrant may be made at any time or times, in whole or in part, after the
Exercise Commencement Date and before the close of business on the Termination
Date, or such earlier date on which this Warrant may terminate as provided in
paragraph 11 below, by the surrender of this Warrant and the Subscription Form
annexed hereto duly executed, at the office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the
registered holder hereof at the address of such holder appearing on the books of
the Company) and upon payment of the Exercise Price of the shares thereby
purchased; whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
five business days after the date on which this Warrant shall have been
exercised as aforesaid. Payment of the Exercise Price of the shares may be by
certified check or cashier's check or by wire transfer to an account designated
by the Company in an amount equal to the Exercise Price multiplied by the number
of shares being purchased.
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4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
7. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
8. Assignment and Transfer of Warrant. This Warrant may be assigned
by the surrender of this Warrant and the Assignment Form annexed hereto duly
executed at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except (i)
in a transaction registered under the Securities Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or otherwise
convey all or substantially all of its assets or (ii) to effect a transaction
(by merger or otherwise) in which more than 50% of the voting power of the
Company is disposed of (collectively, a "Sale or Merger Transaction"), in which
the consideration to be received by the Company or its shareholders consists
solely of cash, the Company shall give the holder of this Warrant thirty (30)
days' notice of the proposed effective date of the transaction specifying that
the Warrant shall terminate if the Warrant has not been exercised by the
effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or Merger
Transaction in which the consideration to be received by the Company or its
shareholders consists in part of consideration other than cash, the holder of
this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
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to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) Registration. The Company agrees to register the shares of Common
Stock underlying this Warrant pursuant to the terms of the Agreement and the
Registration Rights Agreement dated October _____, 1998. In addition to the
foregoing, the Holder of this Warrant shall have the right to include all of the
shares of Common Stock underlying this Warrant (the "Registrable Securities") as
part of any registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8) and must be notified in writing of such filing.
Holder shall have five (5) business days to notify the Company in writing as to
whether the Company is to include Holder or not include Holder as part of the
registration; provided, however, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering.
12. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, the number of Warrant Shares purchasable
upon exercise of this Warrant immediately prior thereto shall be adjusted so
that the holder of this Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or have been entitled to receive had such Warrant been exercised in advance
thereof. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at its
warrant, at any time during the term of this Warrant, reduce the then current
Exchange Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
15. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
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Stock upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
16. Call. The Company has the right to "call" any portion of this
Warrant for exercise, for any portion of this Warrant which has not been then
exercised, by sending written notice to the holder, upon the satisfaction of the
following conditions: (i) closing bid price of the Common Stock (as reported by
Bloomberg, L.P.) is at least $1.50 per share for twenty (20) consecutive trading
days, and (ii) the registration statement filed by the Company covering the
shares of Common Stock underlying this Warrant has been declared effective by
the Securities and Exchange Commission, and must remain in effect at the time of
the call by the Company.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall be
construed and shall be given effect in all respects as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws of Florida and for all purposes shall be construed in
accordance with and governed by the laws of said state without regard to its
conflict of law, principles or rules. The party who initiates legal action shall
choose the jurisdiction of the federal courts in connection with any dispute
arising under this Warrant and hereby waives, to the maximum permitted by law,
any objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury.
(b) Restrictions. The holder hereof acknowledges that the Common
Stock acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the Company has caused this Warrant A to be
executed by its officers thereunto duly authorized.
Dated: October __, 1998
. IMAGING DIAGNOSTIC SYSTEMS, INC.
By______________________________
Linda B. Grable, President
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NOTICE OF EXERCISE
------------------
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock of IMAGING DIAGNOSTIC SYSTEMS, INC. pursuant to the terms of the
attached Warrant A, and tenders herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
Dated:________________________
------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
---------------
(To assign the foregoing Warrant A, execute
this form and supply required information.
Do not use this form to purchase
shares of Common Stock.)
FOR VALUE RECEIVED, the foregoing Warrant A and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ________________________
Holder's Signature: _______________________________
Holder's Address: _______________________________
_______________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant A, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant A.
<PAGE>
EXHIBIT F
THIS WARRANT HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER
TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE
"RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE
ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT B
To Purchase ______ Shares of Common Stock of
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS CERTIFIES that, for value received, _________ (the "Investor"),
is entitled, upon the terms and subject to the conditions hereinafter set forth,
at any time on or after April , 1999 (the "Exercise Commencement Date"), and on
or prior to April , 2004 (the "Termination Date") but not thereafter, to
subscribe for and purchase from IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida
corporation (the "Company"), _________ (______) shares of Common Stock (the
"Warrant Shares"). The purchase price of one share of Common Stock (the
"Exercise Price") under this Warrant shall be equal to $1.50. The Exercise Price
and the number of shares for which the Warrant is exercisable shall be subject
to adjustment as provided herein. This Warrant is being issued in connection
with the Private Equity Line Of Credit Agreement dated as of October ___, 1998,
in the aggregate amount of Fifteen Million ($15,000,000) Dollars (the
"Agreement") between the Company and Investor and is subject to its terms. In
the event of any conflict between the terms of this Warrant and the Agreement,
the Agreement shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented
by this Warrant may be made at any time or times, in whole or in part, after the
Exercise Commencement Date and before the close of business on the Termination
Date, or such earlier date on which this Warrant may terminate as provided in
paragraph 11 below, by the surrender of this Warrant and the Subscription Form
annexed hereto duly executed, at the office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the
registered holder hereof at the address of such holder appearing on the books of
the Company) and upon payment of the Exercise Price of the shares thereby
purchased; whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
five business days after the date on which this Warrant shall have been
exercised as aforesaid. Payment of the Exercise Price of the shares may be by
certified check or cashier's check or by wire transfer to an account designated
by the Company in an amount equal to the Exercise Price multiplied by the number
of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
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holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
7. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
8. Assignment and Transfer of Warrant. This Warrant may be assigned
by the surrender of this Warrant and the Assignment Form annexed hereto duly
executed at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except (i)
in a transaction registered under the Securities Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or otherwise
convey all or substantially all of its assets or (ii) to effect a transaction
(by merger or otherwise) in which more than 50% of the voting power of the
Company is disposed of (collectively, a "Sale or Merger Transaction"), in which
the consideration to be received by the Company or its shareholders consists
solely of cash, the Company shall give the holder of this Warrant thirty (30)
days' notice of the proposed effective date of the transaction specifying that
the Warrant shall terminate if the Warrant has not been exercised by the
effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or Merger
Transaction in which the consideration to be received by the Company or its
shareholders consists in part of consideration other than cash, the holder of
this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) Registration. The Company agrees to register the shares of Common
Stock underlying this Warrant pursuant to the terms of the Agreement and the
Registration Rights Agreement dated October ____, 1998. In addition to the
foregoing, the Holder of this Warrant shall have the right to include all of the
shares of Common Stock underlying this Warrant (the "Registrable Securities") as
part of any registration of securities filed by the Company (other than in
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<PAGE>
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8) and must be notified in writing of such filing.
Holder shall have five (5) business days to notify the Company in writing as to
whether the Company is to include Holder or not include Holder as part of the
registration; provided, however, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering.
12. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, the number of Warrant Shares purchasable
upon exercise of this Warrant immediately prior thereto shall be adjusted so
that the holder of this Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or have been entitled to receive had such Warrant been exercised in advance
thereof. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
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<PAGE>
13. Voluntary Adjustment by the Company. The Company may at its
warrant, at any time during the term of this Warrant, reduce the then current
Exchange Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
15. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
16. Call. The Company has the right to "call" any portion of this
Warrant for exercise, for any portion of this Warrant which has not been then
exercised, by sending written notice to the holder, upon the satisfaction of the
following conditions: (i) closing bid price of the Common Stock (as reported by
Bloomberg, L.P.) is at least $2.25 per share for twenty (20) consecutive trading
days, and (ii) the registration statement filed by the Company covering the
shares of Common Stock underlying this Warrant has been declared effective by
the Securities and Exchange Commission, and must remain in effect at the time of
the call by the Company.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall be
construed and shall be given effect in all respects as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws of Florida and for all purposes shall be construed in
accordance with and governed by the laws of said state without regard to its
conflict of law, principles or rules. The party who initiates legal action shall
choose the jurisdiction of the federal courts in connection with any dispute
arising under this Warrant and hereby waives, to the maximum permitted by law,
any objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury.
(b) Restrictions. The holder hereof acknowledges that the Common
Stock acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
[Remainder of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant B to be
executed by its officers thereunto duly authorized.
Dated October __, 1998
IMAGING DIAGNOSTIC SYSTEMS, INC.
By_______________________________
Linda B. Grable, President
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<PAGE>
NOTICE OF EXERCISE
------------------
To: IMAGING DIAGNOSTIC SYSTEMS, INC.
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock of IMAGING DIAGNOSTIC SYSTEMS, INC. pursuant to the terms of the
attached Warrant B, and tenders herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
Dated:________________________
------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant B, execute
this form and supply required information.
Do not use this form to purchase
shares of Common Stock.)
FOR VALUE RECEIVED, the foregoing Warrant B and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ________________________
Holder's Signature: _______________________________
Holder's Address: _______________________________
_______________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant B, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant B.
<PAGE>
EXHIBIT G
ESCROW AGREEMENT
THIS AGREEMENT is made as of the ____ day of October, 1998 by and among IMAGING
DIAGNOSTIC SYSTEMS, INC., with its principal office at 6531 NW 18th Court,
Plantation, Florida 33313, (hereinafter the "Company"), SETTONDOWN CAPITAL
INTERNATIONAL LTD. (the "Placement Agent") located at Charlotte House, Charlotte
Street, P.O. Box N. 9204, Nassau, Bahamas, the "Purchasers" specified on
Schedule A attached hereto, with their respective principal offices at the
addresses set forth in Schedule A (hereinafter together with the Placement Agent
referred to as the "Investors"), and GOLDSTEIN, GOLDSTEIN & REIS, LLP, 65
Broadway, 10th Fl., New York, NY 10006 (hereinafter the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Purchasers will be purchasing, Common Stock and
Warrants from the Company at a purchase price as set forth in a Private Equity
Line Of Credit Agreement (the "Equity Line Agreement") dated October ____, 1998,
which will be issued as per the terms contained herein and in the Equity Line
Agreement executed by the Company and the Purchasers; all capitalized terms not
defined herein shall have the definition as set forth in the Agreement; and
WHEREAS, the Company shall issue to the Placement Agent, in
return for services rendered, from time to time as provided in the Agreement, 6%
of the gross proceeds of each Put, payable in the form of Common Stock that will
be registered at the same time as the Put Shares. In addition, the Placement
Agent shall receive, on a pro rata basis as the Equity Line of Credit is drawn
upon, a Warrant A to purchase up to fifty thousand (50,000) shares of Common
Stock upon the same terms as the Warrant A issued to the Investors pursuant to
the Equity Line Agreement and eighty thousand (80,000) shares of Common Stock;
and
WHEREAS, the Company has agreed to pay to GGR for services
rendered, fifty thousand (50,000) shares of Common Stock to be registered at the
same time as the Put Shares; and
WHEREAS, the Company shall have a Put for the Commitment
Amount, in accordance with the terms and conditions in the Equity Line
Agreement; and
WHEREAS, it is intended that the purchase of Securities be
consummated in accordance with the requirements set forth by Regulation D
promulgated under the Securities Act of 1933, as amended; and
WHEREAS, the parties hereby agree to establish an escrow
account with the Escrow Agent whereby the Escrow Agent shall hold the funds for
the purchase of Put Shares and the Warrants (the "Securities"); and
WHEREAS, the Company has requested that the Escrow Agent (i)
hold the Commitment Amount in escrow until the Escrow Agent has received the Put
Shares, as applicable, and (ii) hold the shares of Common Stock and Warrants
issuable upon the Subscription Date until the execution of the Equity Line
Agreement. The Escrow Agent will then immediately (i) wire transfer or otherwise
deliver at the Company's discretion immediately available funds to the Company's
account and arrange for delivery of the Put Shares to Investors as per the terms
and conditions in the Agreement, and (ii) arrange for delivery of the shares of
Common Stock and Warrants.
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties agree as follows:
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<PAGE>
ARTICLE 1
TERMS OF THE ESCROW FOR THE PUT SHARES
AND PLACEMENT AGENT SHARES
1.1 Upon Escrow Agent's receipt of confirmation in writing
that the Company has properly served a Put Notice in accordance with the
Agreement, and once it has received the Purchase Price for the Put Shares into
its attorney trustee account, it shall notify the Company, or the Company's
designated attorney or agent, of the amount of funds it has received into its
account.
1.2 The Company, upon receipt of said notice and acceptance by
the Investors, as evidenced by written notice by the Investors, shall deliver to
the Escrow Agent the Put Shares being purchased and the Warrants and shares of
Common Stock being issued to the Placement Agent. The Escrow Agent shall then
communicate with the Company to confirm the validity of their issuance.
1.3 Once the Escrow Agent confirms the validity of the
issuance of the Put Shares, Warrants and Common Stock, he shall immediately wire
that amount of funds necessary to purchase of the Put Shares per the written
instructions of the Company. The Company will furnish Escrow Agent with a "Net
Letter" directing payment of (i) legal, administrative, and escrow costs as per
the terms of the Equity Line Agreement to Goldstein, Goldstein & Reis, LLP. Such
fees are to be remitted in accordance with wire instructions that will be sent
to Escrow Agent from the Company, with the net balance payable to the Company.
Once the funds have been received per the Company's instructions, the Escrow
Agent shall then arrange to have the Securities delivered as per instructions
from the Investors and the Placement Agent.
ARTICLE 2
TERMS OF THE ESCROW FOR THE WARRANTS AND SHARES
OF COMMON STOCK ISSUED TO THE ESCROW AGENT
2.1 Upon Escrow Agent's receipt of the executed Equity Line
Agreement by the Investors, it shall notify the Company, or the Company's
designated attorney or agent, of such event.
2.2 The Company, upon receipt of said notice and acceptance by
the Investors of the Equity Line Agreement, shall deliver to the Escrow Agent
the shares of Common Stock being issued to the Escrow Agent and the Warrants
being issued to the Investors per the terms of the Equity Line Agreement. The
Escrow Agent shall then communicate with the Company to confirm the validity of
their issuance.
2.3 Once the Escrow Agent confirms the validity of the
issuance of the shares of Common Stock and Warrants as referred to in Section
2.2 above, the Escrow Agent shall then arrange to have these Securities
delivered as per instructions from the Investors.
ARTICLE 3
MISCELLANEOUS
3.1 No waiver or any breach of any covenant or provision
herein contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed any extension of
the time for performance of any other obligation or act.
3.2 All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by fax, overnight courier,
registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed received upon receipt thereof, as follows:
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<PAGE>
(a) Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, FL 33313
Attention: Rebecca J. Del Medico, Esq.
Telephone: (954) 581-0555
Facsimile: (954) 581-0555
(b) Goldstein, Goldstein & Reis, LLP
65 Broadway
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
(c) To the Purchasers at their respective addresses
listed on Schedule A.
(d) Settondown Capital International Ltd.
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Attention: Anthony L. M. Inder Riden
Telephone: (242) 325-1033
Facsimile: (242) 323-7918
or to such other person at such other place as shall
designated in writing;
3.3 This Agreement shall be binding upon and shall inure to
the benefit of the permitted successors and assigns of the parties hereto.
3.4 This Agreement is the final expression of, and contains
the entire Agreement between, the parties with respect to the subject matter
hereof and supersedes all prior understandings with respect thereto. This
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
parties to be charged or by its agent duly authorized in writing or as otherwise
expressly permitted herein.
3.5 Whenever required by the context of this Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Agreement.
3.6 The Company acknowledges and confirms that it is not being
represented in a legal capacity by Goldstein, Goldstein & Reis, LLP and it has
had the opportunity to consult with its own legal advisors prior to the signing
of this Agreement.
3.7 This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Florida, except for
matters arising under the Act, without reference to principles of conflicts of
law. The party who initiates legal action shall choose the jurisdiction of the
federal courts in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. Each party waives its right to a trial by
jury. Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
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<PAGE>
3.8 This Agreement may be altered or amended only with the
written consent of all of the parties hereto. Should the Company, the Placement
Agent, or any Investor, attempt to change this Agreement in a manner which, in
the Escrow Agent's discretion, shall be undesirable, the Escrow Agent may resign
as Escrow Agent by notifying the Company and the Investors in writing. In the
case of the Escrow Agent's resignation or removal pursuant to the foregoing, its
only duty, until receipt of notice from the Company and the Investors or its
agent that a successor escrow agent shall have been appointed, shall be to hold
and preserve the funds. Upon receipt by the Escrow Agent of said notice from the
Company and the Investors of the appointment of a successor escrow agent, the
name of a successor escrow account and a direction to transfer the funds, the
Escrow Agent shall promptly thereafter transfer all of the funds held in escrow
to said successor escrow agent. Immediately after said transfer, the Escrow
Agent shall furnish the Company, the Placement Agent, and the Investors with
proof of such transfer. The Escrow Agent is authorized to disregard any notices,
requests, instructions or demands received by it from the Company, the Placement
Agent, or the Investors after notice of resignation or removal shall have been
given, unless the same shall be the aforementioned notice from the Company and
the Investors to transfer the funds to a successor escrow agent or to return
same to the respective parties.
3.9 The Escrow Agent shall be reimbursed by the Company and
the Investors for any reasonable expenses incurred in the event there is a
conflict between the parties and the Escrow Agent shall deem it necessary to
retain counsel.
3.10 The Escrow Agent shall not be liable for any action taken
or omitted by it in good faith in accordance with the advice of the Escrow
Agent's counsel; and in no event shall the Escrow Agent be liable or responsible
except for the Escrow Agent's own gross negligence or willful misconduct.
3.11 The Company and the Investors warrant to and agree with
the Escrow Agent that, unless otherwise expressly set forth in this Agreement:
(i) there is no security interest in the Securities
or any part thereof;
(ii) no financing statement under the Uniform
Commercial Code is on file in any jurisdiction
claiming a security interest or in describing
(whether specifically or generally) the Securities or
any part thereof; and
(iii) the Escrow Agent shall have no responsibility
at any time to ascertain whether or not any security
interest exists in the Securities or any part thereof
or to file any financing statement under the Uniform
Commercial Code with respect to the Securities or any
part thereof.
3.12 The Escrow Agent in its capacity as such has no liability
hereunder to either party other than to hold the funds and the Securities and to
deliver them under the terms hereof. Each party hereto agrees to indemnify and
hold harmless the Escrow Agent in its capacity as such from and with respect to
any suits, claims, actions or liabilities arising in any way out of this
transaction including the obligation to defend any legal action brought which in
any way arises out of or is related to this Escrow.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this
Escrow Agreement as of the date first written above.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By______________________________
Linda Grable, President
AUSTOST ANSTALT SCHAAN, Purchaser
By_____________________________
Thomas Hackl
BALMORE FUNDS S.A., Purchaser
By___________________________
Name:
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Placement Agent
By______________________________
Anthony L. M. Inder Riden
GOLDSTEIN, GOLDSTEIN & REIS, LLP,
Escrow Agent
By______________________________
Scott H. Goldstein
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<PAGE>
EXHIBIT J
INSTRUCTIONS TO TRANSFER AGENT
Imaging Diagnostic Systems, Inc.
_______________, 1998
[Name and address of Transfer Agent]
Dear Sirs:
Reference is made to the Private Equity Line of Credit Agreement and
all Exhibits and Attachments thereto (the "Agreement") dated as of October ___
1998, between entities listed on Schedule A (the "Investors") and Imaging
Diagnostic Systems, Inc. (the "Company"). Pursuant to the Agreement, subject to
the terms and conditions set forth in the Agreement the Investors have agreed to
purchase from the Company and the Company has agreed to sell to the Investors
from time to time during the term of the Agreement, and the Company has agreed
to issue to Settondown Capital International, Ltd. ("Settondown"), and
Goldstein, Goldstein & Reis, LLP ("GGR"), shares of common stock of the Company,
(the "Common Stock") and (ii) the Company has agreed to issue to the Investors
and the Settondown warrants to purchase Common Stock (the "Warrants"). As a
condition to the effectiveness of the Agreement, the Company has agreed to issue
to you, as the transfer agent for the Common Stock (the "Transfer Agent"), these
instructions relating to the Common Stock to be issued to the Investors,
Settondown and GGR (or their permitted assigns) pursuant to the Agreement or
upon exercise of the Warrants. All terms used herein and not otherwise defined
shall have the meaning set forth in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to prepare and file
with the Commission, and maintain the effectiveness of, a registration statement
or registration statements registering the resale of the Common Stock to be
acquired by the Investors, Settondown and GGR, (i) under the Agreement and (ii)
upon exercise of the Warrants. The Company will advise the Transfer Agent in
writing of the effectiveness of any such registration statement promptly upon
its being declared effective. The Transfer Agent shall be entitled to rely on
such advice and shall assume that the effectiveness of such registration
statement remains in effect unless the Transfer Agent is otherwise advised in
writing by the Company and shall not be required to independently confirm the
continued effectiveness of such registration statement. In the circumstances set
forth in the following two paragraphs, the Transfer Agent shall deliver to the
Investors, Settondown and/or GGR, certificates representing Common Stock not
bearing the Legend without requiring further advice or instruction or additional
documentation from the Company or its counsel or the Investors, Settondown,
and/or GGR, or its their counsel or any other party (other than as described in
such paragraphs).
At any time after the effective date of the applicable registration
statement (provided that the Company has not informed the Transfer Agent in
writing that such registration statement is not effective) upon any surrender of
one or more certificates evidencing Common Stock which bear the Legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of the Legend to replace those surrendered, the Transfer Agent shall deliver to
the Investors, Settondown and/or GGR, the certificates representing the Common
Stock not bearing the Legend, in such names and denominations as the Investors
shall request.
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In the event the Company files a Form S-3 registration statement and such
registration statement is declared effective by the Securities and Exchange
Commission in connection with any such event, the Investors, Settondown and/or
GGR, (or their permitted assigns) shall confirm in writing to the Transfer Agent
that (i) the Investors, Settondown and/or GGR, has sold, pledged or otherwise
transferred or agreed to sell, pledge or otherwise transfer such Common Stock in
a bona fide transaction to a third party that is not an affiliate of the
Company; and (ii) the Investors, Settondown and/or GGR, confirms to the transfer
agent that the Investors, Settondown and/or GGR, has complied with the
prospectus delivery requirement.
In the event the Company files a registration statement other than on Form
S-3, which is subsequently declared effective by the Securities and Exchange
Commission, the Investors, Settondown and/or GGR, need not confirm the above in
writing to the Transfer Agent.
In the event a registration statement is not filed by the Company, or for
any reason the registration statement which is filed by the Company is not
declared effective by the Securities and Exchange Commission the Investors,
Settondown and/or GGR, or their permitted assigns, or either of their brokers
confirms to the Transfer Agent that (i) the Investors, Settondown and/or GGR,
has held the shares of Common Stock for at least one year, (ii) counting the
shares surrendered as being sold upon the date the unlegended Certificates would
be delivered to the Investors, Settondown and/or GGR, (or the Trading Day
immediately following if such date is not a Trading Day), the Investors,
Settondown and/or GGR, will not have sold more than the greater of (a) one
percent (1%) of the total number of outstanding shares of Common Stock or (b)
the average weekly trading volume of the Common Stock for the preceding four
weeks during the three months ending upon such delivery date (or the Trading Day
immediately following if such date is not a Trading Day), and (iii) the
Investors, Settondown and/or GGR, has complied with the manner of sale and
notice requirements of Rule 144 under the Securities Act.
Any advice, notice, or instructions to the Transfer Agent required or
permitted to be given hereunder may be transmitted via facsimile to the Transfer
Agent's facsimile number of (973) 239-2361.
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2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK
In connection with any Closing pursuant to which the Investors,
Settondown and/or GGR, acquires Common Stock under the Agreement, the Transfer
Agent shall deliver to the Transfer Agent as defined in the Agreement
certificates representing Common Stock (with or without the Legend, as
appropriate) immediately.
3. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these Irrevocable Instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
4. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree that the
Investors, Settondown and/or GGR, is an express third party beneficiary of these
Irrevocable Instructions and shall be entitled to rely upon, and enforce, the
provisions thereof.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By:__________________________
Chief Executive Officer
AGREED:
[NAME OF TRANSFER AGENT]
By:__________________________
Name:
Title:
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