SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchance Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of December 31, 1997: 27,826,584 shares of Common Stock, no par value; and,
450 shares of Series B, 10 shares of Series C and 54 shares of Series D
Preferred Convertible Stock, no par value.
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Part I - Financial Information Page
<S> <C>
Condensed Balance Sheet -
December 31, 1997 and June 30, 1997.................................... 3
Condensed Statement of Operations -
Six months ended December 31,
1997 and 1996,and December 10,
1993(date of inception) to December 31, 1997........................... 4
Condensed Statement of Cash Flows -
Six months ended December 31, 1997 and 1996,
and December 10, 1993 (date of inception)
to December 31,1997.................................................... 5
Notes to Condensed Financial Statements ..................................... 6
Management's Discussion and Analysis of
Financial Condition and Results.............................................. 7
Part II - Other Information
Item 1, Legal Proceedings................................................. 8
Item 2, Changes in Securities............................................. 8
Item 3, Defaults Upon Senior Securities................................... 8
Item 4, Submission of Matters To a Vote of
Security Holders ................................................. 9
Item 5, Other Information................................................. 9
Item 6, Exhibits and Reports on Form 8-K.................................. 11
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
December 31, 1997 June 30, 1997
----------------- -------------
(Unaudited) *
<S> <C> <C>
Current Assets
Cash $ 575,084 $ 486,723
Loan receivable-other 4,573 10,073
Prepaid expenses 12,653 56,792
Other current assets 120,441 -
----------- -----------
Total Current Assets 712,751 553,588
----------- -----------
Property and Equipment, net 3,338,312 3,320,979
----------- -----------
Prototype Equipment 1,648,216 1,216,585
Other Assets 9,635 9,635
----------- -----------
1,657,851 1,226,220
----------- -----------
Total Assets $ 5,708,914 $ 5,100,787
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 913,643 $ 519,546
Current maturity of capital
lease obligation 9,314 8,928
Shareholder Loans 360,407 -
----------- -----------
Total Current Liabilities 1,283,364 528,474
----------- -----------
Long-term capital lease
obligation 29,995 35,849
----------- -----------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div. 4,500,000 4,500,000
Convertible Preferred
(Series C) 100,000 -
Convertible Preferred
(Series D) 500,000 -
Common Stock 18,472,101 14,662,966
Additional Paid-In-Capital 2,034,230 1,815,496
Deficit Accumulated during
development stage (21,135,842) (16,288,314)
----------- -----------
4,470,489 4,690,148
Less subscription receivable (35,559) (35,559)
Less deferred compensation (39,375) (118,125)
----------- -----------
Total Stockholders' Equity 4,395,555 4,536,464
----------- -----------
Total Liabilities and
Stockholders' Equity $ 5,708,914 $ 5,100,787
=========== ===========
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
Six Months Ended Three Months Ended Since Inception
December 31, December 31, (12/10/93) to
1997 1996 1997 1996 December 31, 1997
--------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Operating Expenses:
Compensation and related
benefits:
Administrative/Engineering $ 836,979 $582,238 $415,165 $375,246 $6,084,451
Research and development 163,355 297,780 69,318 191,902 1,131,866
Research/Development expenses 310,400 612,681 154,563 130,011 2,974,572
Advertising/Promotion 294,469 102,229 269,386 74,305 838,864
General/Administrative 493,696 275,472 164,293 207,149 1,399,081
Clinical expenses 4,652 11,852 4,025 10,024 355,468
Consulting expenses 484,797 37,420 479,651 29,120 2,200,705
Insurance costs 92,112 59,144 43,995 43,466 258,354
Professional fees 339,975 65,672 222,985 43,257 1,237,080
Stockholder expenses 73,487 23,373 20,654 23,373 94,389
Trade show expenses 99,003 114,796 59,273 75,587 388,279
Travel and subsistence costs 55,406 86,948 38,948 51,346 401,006
Rent expense 21,623 36,506 21,623 23,008 242,871
Interest expense - 391 - 391 27,053
Depreciation and amortization 138,747 112,265 69,374 121,591 502,961
Amortization of
deferred compensation 78,750 78,750 39,375 39,375 583,125
Interest Income (13,751) (51,417) (12,823) (14,987) (189,031)
3,473,700 2,446,100 2,059,505 1,424,164 18,531,094
--------- --------- --------- --------- ----------
Net Loss ($3,473,700) ($2,446,100) ($2,059,505) ($1,424,164) ($18,531,094)
Dividends on cumulative
preferred stock:
From discount at issuance (1,215,034) (714,155) (168,919) (705,353) (2,927,589)
Earned (158,794) (28,469) (79,397) (28,469) (391,314)
Amortization of preferred stock
discount - 60,703 - 60,703 714,155
----------- ---------- --------- ---------- ----------
Net loss applicable to common
shareholders ($4,847,528) ($3,128,021) ($2,307,821) ($2,097,283) ($21,135,842)
=========== ========== =========== ========== ============
Net loss per common share ($.19) ($.13) ($.09) ($.08) ($1.02)
=========== ========== =========== ========== ============
Weighted avg.
no. of common shares 25,581,160 23,820,035 25,963,757 25,926,254 20,765,310
=========== ========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
Six Months Since inception
Ended December 31, (12/10/93) to
1997 1996 December 31, 1997
---------------------- -----------------
<S> <C> <C> <C>
Cash provided by (used for)
Operations:
Net loss ($3,473,700) ($2,446,100) ($18,531,094)
Changes in assets and liabilities 1,200,786 810,798 8,551,149
----------- ---------- ----------
Net cash provided by operations (2,272,914) (1,635,302) (9,979,945)
----------- ---------- ----------
Investments
Capital expenditures (587,711) (2,875,069) (5,349,552)
------------ ----------- ----------
Cash used for investments (587,711) (2,875,069) (5,349,552)
------------ ----------- ----------
Cash flows from financing activities:
Repayment of capital lease obligation (5,468) (641) (10,980)
Other financing activities 360,407 77,833 360,407
Proceeds from issuance of preferred stock 2,600,000 4,500,000 10,700,000
Net proceeds from issuance of common stock 97,547 - 4,855,154
----------- ---------- ----------
Net cash provided by financing activities 3,052,486 4,421,526 15,904,581
----------- ---------- ----------
Net increase(decrease) in cash 191,861 (88,845) 575,084
Cash, beginning of period 383,223 3,975,354 -
----------- ---------- ----------
Cash, end of period $575,084 $3,886,509 $575,084
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared December 31, 1997. The results of operations for the six
month period ended December 31, 1997 is not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt 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 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. Management has been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for capital requirements to date. There is no assurance that
once development of the CTLMTM prototype is completed and Drug Administration
marketing clearance is obtained, that the CTLM(TM) will achieve market
acceptance or that the Company will achieve a profitable level of operations.
Note 3 - Series D Preferred
Effective December 31, 1997, the Board of Directors amended the Articles of
Incorporation of the Company in order to designate a class of shares as Series D
Convertible Preferred. The Series D Preferred is non-voting, can be converted
into common stock of the Company and has rights and preferences that materially
limit or qualify the rights of the holders of registered common stock, including
a liquidation preference of $10,000 per share.
6
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN THE COMPANY'S FORM 10 -
KSB FOR FISCAL YEAR ENDED 1997.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses since inception through December 31, 1997 of
approximately $18,531,094. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLMtm and other research and development activities.
There can be no assurances that the CTLMtm will achieve market acceptance or
that sufficient revenues will be generated from sales of the CTLMtm to allow the
Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and six months ended
December 31, 1997, were $164,293 and $493,696, respectively, representing a
decrease of $42,856 and an increase of $218,224 for the corresponding periods
for 1997. The decrease during the three month period ending December 31, 1997,
was primarily due to certain administrative costs associated with the move to
our new building in November of 1996.
Compensation and related benefits during the three months and six months ended
December 31, 1997, were $484,483 and $1,000,334, respectively, representing a
decrease of $82,665 and an increase of $120,316 for the corresponding periods
for 1997. This increase was primarily due to additional compensation expenses as
a result of the hiring of an additional 12 employees during the calendar year
1997.
7
<PAGE>
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $575,084 as of December
31, 1997. This is an increase of $88,361 from $486,723 for the year ended June
30, 1997. On December 31, 1997, Imaging Diagnostic Systems, Inc. finalized a
private placement transaction resulting in $500,000 in equity financing. See
Item 5, Other Information.
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development and the expected costs of commercializing its initial
product, the CTLM(TM) device.
Property and Equipment was valued at $3,338,312 as of December 31, 1997. The
overall gross increase of $156,080 is due primarily to the purchase of
additional laboratory equipment.
Prototype Equipment was valued as of December 31, 1997, at $1,648,216. This
represents an increase of $431,631 from $1,216,585 for the year ended June 30,
1997. This increase is due primarily to an increase in developmental activities
leading to the commercialization of the CTLM(TM) device.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Effective December 31, 1997, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of shares
as Series D Convertible Preferred. The Series D Preferred is non-voting, can be
converted into common stock of the Company and has rights and preferences that
materially limit or qualify the rights of the holders of registered common
stock, including a liquidation preference of $10,000 per share
Item 3. Defaults Upon Senior Securities.
None.
8
<PAGE>
Item 4. Submission of Matters to a Vote of Security-
Holders.
None.
Item 5. Other Information.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with NASDAQ to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no influence over the Company, had a questionable
background and owned a 5% interest in the Company.
As a result, the Company appealed the denial decision to the NASDAQ Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with instructions to
implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th, provided
NASDAQ with copies of all things necessary to satisfy any concerns that the
Panel had regarding the Shareholder. Prior to the time NASDAQ acted on the
proposal, Barrons published an inaccurate article stating that a NASDAQ
spokesman indicated that the listing would be denied. At all times up until the
date of this article the Company's stock traded at $3.00 and above. The article
had a predictable negative impact on the Company's stock and the price dropped
below $3.00, where it has stayed ever since the Barrons article, despite a
retraction from Barrons. Based upon this decline the NASDAQ staff has refused to
approve the Company for listing on the NASDAQ Small Cap Market.
The Company appealed the denial of the listing at an oral hearing before the
Committee in Washington D.C. on January 22, 1998. The Company, as of the date
hereof, has not received a ruling in this matter. If the denial is not
overturned, the Company intends to vigorously pursue this
9
<PAGE>
matter by appeal to the NASDAQ Listing and Hearing Review Committee.
Patents
In December 1997, the Company's patent for its CTLM(TM) was issued by the United
States Department of Commerce Patent and Trademark Office under Patent Number
5692311. The Company has twelve additional patents pending with regard to
Optical Tomography.
Private Placement
On December 31,1997, the Company finalized a $500,000 private placement to
foreign investors of 50 shares of its Series D Convertible Preferred Stock ("the
"Preferred Shares") and Warrants to purchase up to 25,000 shares of the
Company's common stock. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale");
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and nonassessable shares of common stock, no par value, of the Company to
be issued upon conversion will be determined by dividing (i) the sum of $10,000
by (ii) the Conversion Price (determined as hereinafter provided) in effect at
the time of conversion. The "Conversion Price" is equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker a total of 4 shares of the Preferred Stock and $5,000 for
placement and legal fees.
Net proceeds to the Company of $495,000 will be used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
10
<PAGE>
International Distribution
In January 1998, the Company entered into an International Distribution with
Emtron, a leading medical equipment distributor based in the Republic of Turkey.
Emtron currently represents products for companies such as Summit Technology,
Sunrise Technology, Iris Medical Instruments, Telsar, and Medlab, among many
others. Based on due diligence materials received from Emtron, Emtron appears to
have a strong presence in the industry with 30 university hospitals, the Social
Security System (which has over 100 hospitals) and larger private hospitals.
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.
The Company has already secured exclusive distributors for the following
territories: Italy, France, South Korea, the Pacific Rim including China,
Switzerland, Moscow, Germany, Austria, and Ecuador.
Based on its present research and development and supplier production schedules,
the Company anticipates that the CTLM(TM) device will be ready for distribution
this Summer.
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").
11
<PAGE>
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).
Clinical Sites
In November 1997, the Company's clinical site at Strax Breast Diagnostic
Institute in Lauderhill, Florida was closed. In December 1997, the FDA granted
approval to include specific studies on augmented breast as part of the
Company's extensive in-house study of the CTLM(TM). The testing is designed to
develop diagnostic criteria for CTLM(TM) images.
In order to acquire data that will be part of the final pre-market application
the Company intends to expand the first-phase clinical trials to hospitals in
Miami, Chicago, Los Angeles, Boston and New York.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3. Amendment to Articles of Incorporation (Designation of Series D
Preferred Stock)
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
------------------------
Allan L. Schwartz
Executive Vice-President
Chief Financial Officer
Dated: February 9, 1998
12
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3 Amendment to Articles of Incorporation (Designation of Series D
Preferred Stock)
27 Financial Data Schedule
EXHIBIT 3
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS
OF THE DIRECTORS OF IMAGING DIAGNOSTIC SYSTEMS, INC.
A special meeting of the Board of Directors of Imaging Diagnostic Systems,
Inc., was held on January 7, 1998 at 11:00 a.m., in person or by telephone at
the executive offices of the Company.
The following officers and director were present constituting a quorum:
Linda B. Grable, President and Director
Allan L. Schwartz, Executive Vice President, Chief Financial
Officer and Director
The meeting was called to order by Linda B. Grable, President, who chaired the
meeting. Allan L. Schwarta served as Secretary for the meeting. A brief
discussion ensued as follows:
On December 31, 1997 the Board of Director, by Written Action, executed
the following resolution:
"RESOLVED, that pursuant to the authority vested in the Board
of Directors of the Corporation by Article III of the Corporation's
Certificate of Incorporation, the Series D Convertible Preferred Stock
(the "Preferred Stock"), consisting of 50 shares, no par value per
share, shall have the preferences and relative and other rights, and
the qualifications, limitations or restrictions thereof, as are set
forth in the Articles of Amendment, attached hereto as Exhibit A and
incorporated herein (the "Amendment").
That the Written Action contained a scrivener's error and that the number
of shares designated as Series D Convertible Preferred should have been 54.
NOW THEREFORE. It is hereby:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by Article III of the Corporation's
Certificate of Incorporation, the Series D Convertible Preferred Stock
(the "Preferred Stock"), consisting of 54 shares, no par value per
share, shall have the preferences and relative and other rights, and
the qualifications, limitations or restrictions thereof, as are set
forth in the Articles of Amendment, attached hereto as Exhibit A and
incorporated herein (the "Amendment").
<PAGE>
There being no requirement for shareholder approval for the above
Amendment,
Upon motion, duly made, seconded and passed, this resolution was
reviewed and approved
There, being no further business to come before the board, the meeting
was adjourned.
Dated, this 7th day of January 1998.
ATTEST;
/s/Allan L. Schwartz, Executive /s/Linda B. Grable, President
Vice President and Director and Director
<PAGE>
AMENDED ARTICLES OF AMENDMENT
CERTIFICATE OF DESIGNATION
IMAGING DIAGNOSTIC SYSTEMS, INC.
1. Designation. The designation of the series of Preferred Stock fixed by
this resolution shall be "Series D Convertible Preferred Stock" (hereinafter
referred to as the "Convertible Preferred Stock").
2. Conversion Rights.
(a) Right to Convert. The holder of any shares of Series D
Convertible Preferred Stock (the "Preferred Stock") may, at any time,
commencing 45 days from the date of issuance and for a period of three
years thereafter, convert all or a portion of the Preferred Stock,
without the payment of any additional consideration therefor, into that
number of fully paid and nonassessable shares of common stock, no par
value, of the Corporation of the Corporation as is determined by
dividing (i) the sum of $10,000 by (ii) the Conversion Price
(determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" shall be equal to seventy five
percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the
date of conversion provided, however, that in no event will the
Conversion Price be greater than 75% of the Average Price on the
Closing Date. For purposes of this Section 2, the Market Price shall be
the average of the closing bid prices of the Common Stock over the five
consecutive trading days ending on the trading day immediately
preceding the date of the Conversion Notice (as defined in Section 2(b)
hereof), as (i) quoted by Bloomberg, L.P. or if not quoted by
Bloomberg, L. P., then (ii) as reported by the National Association of
Securities Automated Quotation System ("NASDAQ"), or if not quoted by
NASDAQ then; (iii) the average of the closing bid prices of the Common
Stock in the over-the-counter market over the five consecutive trading
days ending on the trading day immediately preceding the date of the
Conversion Notice; or (iv) in the event the Common Stock is listed on a
national stock exchange, the Market Price shall be the average of the
closing prices of the Common Stock on such exchange, as reported in The
Wall Street Journal over the five consecutive trading days immediately
preceding the date of the Conversion Notice.
<PAGE>
(b) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of the Preferred Stock. If upon
conversion of shares of Preferred Stock held by a registered holder
which are being converted, such register holder would, but for the
provisions of this Section 2(b), receive a fraction of a share of
Common Stock thereon, then in lieu of any such fractional share to
which such holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Preferred Stock shall be
entitled to convert the same into full shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for
the Preferred Stock, and shall give written notice by facsimile or
otherwise (the "Conversion Notice") to the Corporation at such office
that such holder elects to convert the same and shall state therein
such holder's name or the name of its nominees in which such holder
wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, but
in any event within three business days of the date of its receipt of
the Conversion Notice, issue and deliver or cause to be issued and
delivered to such holder of Preferred Stock, or to its nominee or
nominees, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled, together with cash
in lieu of any fraction of a share. Such conversion shall be deemed to
have been made on the date that the Corporation receives the Conversion
Notice by facsimile or otherwise, and the person or persons entitled to
receive the share of Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such shares
of Common Stock on such date. Upon the conversion of any shares of
Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued by the Corporation
at any time.
<PAGE>
(c) Notices of Record Date. In the event of (i) any
declaration by the Corporation of a record date of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution or (ii)
any capital reorganization of the Corporation, any classification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or
substantially all of the assets of the Corporation to any other
Corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation,
the Corporation shall mail to each holder of Preferred Stock at least
twenty (20) days prior to the record date specified therein, a notice
specifying (i) the date on which any such record is to be declared for
the purpose of such dividend or distribution and a description of such
dividend or distribution; (ii) the date on which any such
reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective;
and (iii) the time, if any, that is to be fixed, as to when the holders
of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
transfer, consolidation, merger, dissolution or winding up.
(d) Stock Dividends; Stock Splits; Etc. In the event that the
Corporation shall (i) take a record of holders of shares of the Common
Stock for the purpose of determining the holders entitled to receive
dividends payable in shares of Common Stock; (ii) subdivide the
outstanding shares of Common Stock; (iii) combine the outstanding
shares of Common Stock into smaller number of shares; or (iv) issue, by
reclassification of the Common Stock, any other securities of the
Corporation, then, in each such case, the Conversion Price then in
effect shall be adjusted so that upon conversion of each share of
Convertible Preferred Stock then outstanding the number of shares of
Common Stock into which such shares of Convertible Preferred Stock are
convertible after the happening of any of the events described in
clauses (i)through(iv) above shall be the number of such shares of
Common Stock into which such shares of Preferred Stock would have been
converted if so converted immediately prior to the happening of such
event or any record date with respect thereto.
<PAGE>
(e) Common Stock Reserved. The Corporation shall issue into
escrow or reserve and keep available out of its authorized but unissued
Common Stock such numbers of shares of Common Stock as shall from time
to time be sufficient to effect conversion of all of the then
outstanding shares of Preferred Stock. In the event there are
insufficient shares to effect a conversion, the Corporation shall
increase the number of authorized shares to effect conversion. In the
event shareholder approval is required to increase the authorized
shares, the holder shall be entitled to vote with the holders of the
Common Stock, as a single class, where each share of Preferred Stock
shall be entitled to that number of votes to which it would be entitled
had all of its shares of Preferred Stock been converted into shares of
Common Stock were notice of conversion given on the date of such vote.
No sale or disposition of all or substantially all of the Corporation's
assets shall take place without the approval of the holders of the
Convertible Preferred Stock, voting as a single class.
(f) Voting Rights of Convertible Preferred Stock. Except as
otherwise required by law and as provided for in Section 2(e), the
holders of outstanding shares of Preferred Stock shall not be entitled
to vote on any matters submitted to the stockholders of the
Corporation.
3. Liquidation Rights. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time when any shares of
Preferred Stock shall be outstanding, the holders of the then outstanding shares
of Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
4. Adjustments Due to Merger or Consolidation, Etc. In the case of any
consolidation with or merger of the Corporation with or into another
corporation, or in the case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as an entirety or substantially as
an entirety, each share of Preferred Stock shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or
conveyance) upon conversion of such share of Preferred Stock would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any
such case, if necessary, the provisions set forth herein with respect to the
rights and interests thereafter of the holders of the shares of Preferred Stock
shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Convertible Preferred Stock.
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<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
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5,100,000
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