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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _________, 1998
COMMISSION FILE NO. _______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 3845 22-2671269
------- ---- ----------
(State of Incorporation) (Primary Standard Industrial (IRS Employer I.D. Number)
Classification Code Number)
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code, and telephone number, including
area code of registrant's principal executive offices)
Linda B. Grable, President
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
--------------
(Name, address and telephone number of Agent for Service)
Please send a copy of all communications to:
Rebecca J. Del Medico, Esq.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
If the registrant elects to deliver its latest annual report to Security Holders
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
Form, check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
SHARE (1) PRICE(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, NO PAR VALUE 1,971,375 $.44 $ 867,405 $ 262.85
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK, NO PAR , ISSUABLE UPON 7,200,000 $.44 $3,168,800 $ 960.00
CONVERSION OF THE SERIES H PREFERRED
STOCK (2) (3) (4)
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK, NO PAR VALUE, ISSUABLE 125,000 $.44 $ 55,000 $ 16.66
UPON EXERCISE OF WARRANTS
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TOTAL (5) 9,296,375 $.44 $4,090,405 $1,239.51
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average high and low sales prices of the Registrant's Common Stock on the NASDAQ
Electronic Bulletin Board on July 28,1998 1998.
(2) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement also covers such indeterminable additional
shares of Common Stock as may be issuable, pursuant to the terms of the
Company's Series H Convertible Preferred Stock, upon conversion.
(4) Amount being registered is 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
(5) All of the shares of common stock registered herein will be sold by the
Selling Security Holders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-2 ITEM NUMBERS AND CAPTION HEADING IN PROSPECTUS
- --------------------------------- ---------------------
<S> <C>
1. FOREPART OF THE REGISTRATION STATEMENT AND
OUTSIDE FRONT COVER OF PROSPECTUS....................................OUTSIDE FRONT COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS...........................................................INSIDE FRONT AND OUTSIDE BACK
COVER PAGES OF PROSPECTUS
3. SUMMARY INFORMATION AND RISK FACTORS...................................PROSPECTUS SUMMARY; RISK FACTORS
4. USE OF PROCEEDS........................................................NOT APPLICABLE
5. DETERMINATION OF OFFERING PRICE........................................DETERMINATION OF OFFERING PRICE
6. DILUTION...............................................................NOT APPLICABLE
7. SELLING SECURITY HOLDERS...............................................SELLING SECURITY HOLDERS
8. PLAN OF DISTRIBUTION...................................................FRONT COVER PAGE; PLAN OF
DISTRIBUTION
9. DESCRIPTION OF SECURITIES TO BE REGISTERED.............................DIVIDEND POLICY, DESCRIPTION OF
CAPITAL STOCK
10. INTEREST OF NAMED EXPERTS AND COUNSEL..................................LEGAL MATTERS AND FINANCIAL
STATEMENTS
11. INFORMATION WITH RESPECT TO THE REGISTRANT.............................DOCUMENTS INCORPORATED BY REFERENCE,
RISK FACTORS, PROSPECTUS SUMMARY,
MATERIAL CHANGES
12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................DOCUMENTS INCORPORATED BY REFERENCE
13 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES...........................................INDEMNIFICATION OF OFFICERS AND
DIRECTORS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION............................PART II
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS..............................PART II
16. EXHIBITS...............................................................PART II
17. UNDERTAKINGS...........................................................PART II
18. FINANCIAL STATEMENTS AND SCHEDULES.....................................DOCUMENTS INCORPORATED
BY REFERENCE
</TABLE>
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SUBJECT TO COMPLETION, DATED ____________, 1998.
PROSPECTUS
9,296,375 SHARES
IMAGING DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
This prospectus ("Prospectus") relates to an aggregate of 9,296,375 shares (the
"Shares") of common stock, no par value (the "Common Stock"), of Imaging
Diagnostic Systems, Inc., a Florida corporation (the "Company"). Of the
9,296,375 shares of common stock, no par value (the "Common Stock"), offered
hereby, all are being sold by the Selling Security Holders. See "Selling
Security Holders". The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Security Holders.
The Common Stock is traded on the OTC Bulletin Board under the symbol "IMDS". On
July 28,1998, the closing bid and asked price of the Common Stock as reported on
the OTC Bulletin Board was $.38 and $.49, respectively.
The Shares are held or will be acquired by certain persons ("Selling Security
Holders") named in this Prospectus.. The Shares covered hereby include (i)
7,200,000 shares of Common Stock (200% of the number of shares that would be
required to be issued if the Series H Preferred Stock and Convertible Debentures
were converted on the day before the filing of the Registration Statement of
which this Prospectus is a part (the "Registration Statement") (ii) 1,971,375
Shares of Common Stock that were issued upon conversion of previously-issued
shares of Series F Convertible Preferred Stock (the "Series F Preferred") and
(iii) 125,000 Shares of Common Stock which may be issued in connection with the
exercise of the Warrants. See "Risk Factors" and "Selling Security Holders".
The Common Stock, Preferred Shares and Warrants, including the underlying common
stock were acquired or will be acquired by the Selling Security Holders in
various transactions, all of which were or will be exempt from the registration
provisions of the Securities Act of 1933, as amended (the "1933 Act"), including
sales by the Company in private placements and Regulation S transactions, the
exercise of warrants by certain of the Selling Security Holders and the
conversion of convertible Preferred Stock held by certain of the Selling
Security Holders.
The Selling Security Holders may, from time to time, sell the Shares on the OTC
Bulletin Board, or on any other national securities exchange or automated
quotation system on which the Common Stock may be listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Shares may be sold
directly or through brokers, or dealers. See "Plan of Distribution."
The Company will receive no part of the proceeds of any sales made by the
Selling Security Holders hereunder. All expenses of registration incurred in
connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Security Holders will be borne by the
Selling Security Holders. See "Selling Security Holders."
The Selling Security Holders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts paid or given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
The Shares have not been registered for sale by the Company or by the Selling
Security Holders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the States in
which transactions occur or the existence of any exemption from registration.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
THE DATE OF THIS PROSPECTUS IS _______, 1998
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Selling
Security Holders," "Plan of Distribution" and "Description of Capital Stock".
The Company will not be responsible for the payment of any underwriting
discounts, commissions or expenses that may be payable or applicable in
connection with the sale of such Shares by the Selling Security Holders. The
Shares offered hereby will be sold from time to time at the then prevailing
market prices, at prices relating to prevailing market prices or at negotiated
prices.
This Prospectus may be used by the Selling Security Holders, or any
broker-dealer who may participate in sales of the Common Stock covered hereby.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which is Part I of the Registration Statement,
constitutes a part of the Registration Statement and does not contain all of the
information set forth therein. Any statements contained herein concerning the
provisions of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, with exhibits, may be obtained from the Commission's
office in Washington, DC (at the above address) upon payment of the fees
prescribed by the rules and regulations of the Commission, or examined there
without charge.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed with the Commission can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, NW, Washington, DC 20549. Copies of this material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, NW. Washington, DC 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission, such as the Company. The address of such
site is http://www.sec.gov.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed with
the Commission pursuant to the Exchange Act:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997;
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended September 30, 1997, December 31,1997 and March
31, 1998.
3. The Company's Proxy Statement filed August 19, 1997
This Prospectus is accompanied by a copy of the Company's latest Form 10-KSB and
Form 10-QSB. The Company will provide upon request, without charge, to each
person to whom a prospectus is delivered a copy of the additional documents
listed above, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Such requests
should be made to: General Counsel, Imaging Diagnostic Systems, Inc., 6531 NW
18th Court, Plantation, Florida 33313. Telephone number (954) 581-9800.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE INCORPORATED
BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF
THIS PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED HEREIN MODIFIES OR
SUPERSEDES SUCH STATEMENT. ANY SUCH STATEMENT SO MODIFIED OR SUPERSEDED SHALL
NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS
PROSPECTUS.
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND BUSINESS OF THE COMPANY. THESE FORWARD LOOKING STATEMENTS
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF
SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE
COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2) DELAYS, COSTS OR DIFFICULTIES
RELATED TO OBTAINING THE APPROVAL OF THE FOOD AND DRUG ADMINISTRATION ("FDA")
FOR THE SALE AND MARKETING OF THE COMPANIES COMPUTED TOMOGRAPHY LASER
MAMMOGRAPHY (CTLM(TM)) DEVICE ARE GREATER THAN EXPECTED; (3) MARKET ACCEPTANCE
OF THE CTLM(TM); AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN
EXPECTED. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL
CONDITION OF THE COMPANY IS INCLUDED IN THE SECTION HEREIN ENTITLED "RISK
FACTORS".
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus or in the documents incorporated herein by reference. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained elsewhere in this Prospectus and in the documents
incorporated by reference herein.
THE COMPANY
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed a Computed Tomography Laser Mammography ("CTLM"(TM)") device
for detecting breast cancer through the skin in a non-invasive and objective
procedure. The CTLM(TM) employs a high-speed pico-second pulsed titanium
sapphire laser and proprietary scanning geometry and reconstruction algorithms
to detect and analyze masses in the breast for
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<PAGE>
indicia of malignancy or benignancy. Based upon the known optical properties of
benign and malignant tissues (whether and to what extent light is impeded as it
passes through the tissue and the measurement of the impedance), the CTLM device
is designed to provide both the physician and patient with immediate, on-site,
objective interpretation and determination of further clinical work-up.
Accordingly, the Company believes that the CTLM(TM)will improve early diagnosis,
reduce diagnostic uncertainty, and decrease the number of biopsies performed on
benign lesions.
The CTLM(TM) device will require Food and Drug Administration ("FDA") approval
prior to commercial distribution in the United States. The Company plans to
file, within the next several months, a Pre-Market Approval Application (PMA)
with the FDA to obtain marketing clearance. In order to collect the clinical
data for the PMA, the Company was granted, in June 1998, its second
investigational device exemption ("IDE") to conduct a Phase I clinical trial. An
IDE allows a company to conduct human clinical trials without filing an
application for marketing clearance. The Company is authorized to scan 20
patients at the Company's in house facilities In Plantation, Florida and an
additional 3 clinical sites. See "Risk Factors-Government Regulation".
In 1997, the Company received its first IDE, which authorized it to scan 50
patients at the Strax Breast Diagnostic Center in Lauderhill, Florida and an
additional 20 patients at its in-house facility. The CTLM(TM) device was
installed at Strax and patients were scanned. Prior to the completion of the
1997 IDE, the Company was advised that greatly improved laser technology would
soon become available to the Company. The IDE at Strax and the Company was
halted pending the receipt of the new laser. In November 1997 the CTLM(TM) was
removed from Strax and, subsequently, the Company withdrew the first IDE.
The CTLM(TM) device was developed to provide physicians and patients with
immediate information concerning the probability that an identified lesion is
malignant or benign. A breast exam utilizing the CTLM(TM) device is non-invasive
and can be performed by a medical technician in less than 15 minutes. A patient
lies face down on the scanning table with a breast hanging pendulously in the
scanning chamber. Once the entire breast is scanned the other breast is placed
in the chamber for scanning. Each scan takes approximately 3-4 minutes. The
procedure is designed to provide the physician and patient with objective,
on-site, immediate diagnostic decisions, including whether or not to proceed to
surgical biopsy. Further, the device is designed to archive and compare scans
and provide the patient with a computer disc (CD) of her scan.
RISK FACTORS
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES; UNCERTAINTY OF
FUTURE PROFITABILITY.
The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLM(TM).
The Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At March 31, 1998, the Company has
incurred net losses of approximately $19,904,407. Such losses have resulted
principally from costs associated with the Company's operations. The Company
expects operating losses will increase for at least the next several years as
total costs and expenses continue to increase due principally to the anticipated
commercialization of the CTLM(TM), development of, and clinical trials for, the
CTLM (TM)and other research and development activities. The Company's ability to
achieve profitability will depend in part on its ability to obtain regulatory
approvals for its CTLM(TM), develop the capacity to manufacture and market the
CTLM(TM), either by itself or in collaboration with others and market acceptance
of the CTLM(TM). There can be no assurance if and when the Company will receive
regulatory approvals for the development and commercial manufacturing and
marketing of the CTLM(TM) or achieve profitability.
GOVERNMENT REGULATION.
Many aspects of the medical industry in the United States, including the
Company's business, are subject to extensive federal and state government
regulation. Although the Company believes that its operations comply with
applicable regulations, there can be no assurance that subsequent adoption of
laws or interpretations of existing laws will not regulate, restrict, or
otherwise adversely affect the Company's business.
The manufacture and sale of medical devices, including the CTLM(TM), are subject
to extensive regulation by numerous governmental authorities in the United
States, principally the FDA and corresponding state agencies, and
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in other countries. In the United States, the CTLM (TM) is regulated as a
medical device and is subject to the FDA's pre-market clearance or approval
requirements. Securing FDA clearances and approvals may require the submission
of extensive clinical data and supporting information. The Company cannot file
its PMA application for the CTLM(TM) until its clinical trials are completed.
There can be no assurance, however, that the clinical trials will be
successfully completed, or if completed, will provide sufficient data to support
a PMA application for the CTLM(TM). Nor can there be any assurance that the FDA
will not require the Company to conduct additional clinical trials for the
CTLM(TM). The process for obtaining FDA and other required regulatory approvals
is lengthy, expensive and uncertain and can require as long as one to several
years from the date of FDA submission, if pre-market approval is obtained at
all.
Sales of medical devices outside the United States may be subject to
international regulatory requirements that vary from country to country. The
time required to gain approval for sale internationally may be longer or shorter
than that required for FDA approval and the requirements may differ. In Europe,
the Company will be required to obtain the certifications necessary to enable
the CE mark to be affixed to the Company's products by mid-1998 in order to
conduct sales in member countries of the European Union. The Company has not
obtained such certificates and there can be no assurance it will be able to do
so in a timely manner, or at all. Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which the CTLM (TM) may be
marketed. In addition, to obtain such approvals, the FDA and certain foreign
regulatory authorities may impose numerous other requirements with which other
medical device manufacturers must comply. FDA enforcement policy strictly
prohibits the marketing of approved medical devices for unapproved uses. Product
approvals could be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. The
third-party manufacturers upon which the Company will depend to manufacture its
products(GMPs) are required to adhere to applicable FDA regulations regarding
GMPs and similar regulations in other countries, which include testing, control
and documentation requirements. Ongoing compliance with GMP regulations and
other applicable regulatory requirements will be monitored by periodic
inspections by the FDA and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements, including marketing and
promoting products for unapproved use, could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant pre-market clearance or approval for devices, withdrawal of approvals
and criminal prosecution. Changes in existing regulations or adoption of new
government regulations or polices could prevent or delay regulatory approval of
the CTLM(TM).. Certain material changes to medical devices also are subject to
FDA review and clearance or approval.
There can be no assurance that the Company will be able to obtain FDA approval
of a PMA application for the CTLM(TM) on a timely basis, or at all, and delays
in receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have material adverse effect on the Company's
business, financial condition and results of operations.
PRODUCT DEVELOPMENT.
The Company's proposed products and future product development efforts are at an
early stage. Accordingly, there can be no assurance that any of the Company's
proposed products will be found to be safe and effective, can be developed into
commercially viable products, can be manufactured on a large scale or will be
economical to market, or will achieve or sustain market acceptance. There is,
therefore, a risk that the Company's product development efforts will not prove
to be successful.
DEPENDENCE UPON UNITED STATES PRE-MARKET APPROVAL.
Under the provisions of the Federal Food and Cosmetic Act ("the FDC Act"), the
Company must obtain pre-market approval from the FDA prior to commercial use of
the CTLM(TM)in the United States. There can be no assurance if or when the
Company will receive any such clearances or approvals. Obtaining FDA pre-market
approval may impose costly requirements on the Company and may delay for a
considerable period of time, or prevent, the commercialization of the CTLM(TM).
DEPENDENCE ON MARKET ACCEPTANCE.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(TM) device. The extent that, and rate of which,
the CTLM(TM) achieves market acceptance and penetration will depend on many
variables including, but not limited to, the establishment and demonstration in
the medical community of the
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clinical safety, efficacy and cost-effectiveness of the CTLM(TM), the advantage
of the CTLM(TM) over existing technology and cancer detection methods,
third-party reimbursements practices and the Company's manufacturing, quality
control, marketing and sales efforts. Failure of the Company's products to gain
market acceptance would have a material adverse effect on the Company's
business, financial condition, and results of operations.
LIMITED MARKETING AND SALES CAPABILITY.
In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop. The Company has
already entered into contract for the distribution of the CTLM(TM) in the United
Kingdom, Ireland, Italy, France, South Korea, the Pacific Rim including China,
Switzerland, Moscow, Germany, Austria, the Republic of Turkey and Ecuador with
strategic marketing partners who have established marketing capabilities and
will continue to develop its distribution network for overseas. There can be no
assurance that the Company will be able to further develop this distribution
network. on acceptable terms, if at all or that any of the Company's proposed
marketing schedules or plans can or will be met. To the extent that the Company
arranges with third parties to market its products, the success of such products
may depend on the efforts of such third parties
LIMITATION ON THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM(TM) or by refusing reimbursement. If examinations utilizing
the Company's products were not reimbursed under these programs, the Company's
ability to sell its products may be materially and adversely affected. There can
be no assurance that third-party payors will provide reimbursement for use of
the Company's products. Several states and the U.S. government are investigating
a variety of alternatives to reform the health care delivery system and further
reduce and control health care spending on health care items and services, limit
coverage for new technology and limit or control the price health care providers
and drug and device manufacturers may charge for their services and products,
respectively. If adopted and implemented, such reforms could have material
adverse effect on the Company's business, financial condition, and results of
operations. In international markets, reimbursement by private third-party
medical insurance providers, including governmental insurers and independent
providers varies from country to country. In certain countries, the Company's
ability to achieve significant market penetration may depend upon the
availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the cost of
health care through various means.
CAPITAL NEEDS AND NEED FOR ADDITIONAL AUTHORIZED COMMON STOCK.
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fee for current employees and consultants,
and other contractual agreements and are likely to increase as additional
agreements are entered into and additional personnel are retained. The Company
has a firm commitment 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,
licensing and other arrangements with corporate partners. If the
9
<PAGE>
Company utilizes the Equity Line of Credit or additional funds are raised
by issuing equity securities, especially Convertible Preferred Stock, dilution
to existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. There can be no assurance, however,
that additional financing will be available when needed, or if available, will
be available on acceptable terms. Insufficient funds may prevent the Company
from implementing its business strategy or may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license to third parties rights to commercialize products or
technologies that the Company would otherwise seek to develop itself.
At present, due to the decline in the price of its common stock, the Company
does not have available enough authorized common stock to convert its
outstanding Preferred Stock should the Preferred Holders wish to convert. The
conversion rate of the Preferred stock ranges from 82% to 75% of the average
market price over a five-day period prior to conversion. The Company anticipates
that it will need to increase its authorized common stock from 48,000,000 shares
to 100,000,000 common shares in order to meet conversion demands, enhance the
ability of the Company to attract and retain qualified employees, consultants,
officers and directors by creating stock incentives and rewards for their
contributions to the success of the Company and for issuance in connection with
any future financing activities or corporate acquisition using the Company's
Common Stock. In the event that the Company is not able to increase the
authorized common stock and the Preferred Holders elect to convert the Preferred
Stock, the Company will be in breach of it contractual obligations to such
Holders and may be subject to litigation and the payment of damages and
penalties. See "Description of Securities".
DEPENDENCE ON QUALIFIED PERSONNEL.
Due to the specialized scientific nature of the Company's business, the Company
is highly dependent upon its ability to attract and retain qualified scientific,
technical and managerial personnel. Therefore the Company has entered into
employment agreements with certain of its executive officers and key employees.
The loss of the services of existing personnel as well as the failure to recruit
key scientific, technical and managerial personnel in a timely manner would be
detrimental to the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
additional of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business.
COMPETITION.
The market in which the Company intends to participate is highly competitive.
Many of the companies in the cancer diagnostic and screening markets have
substantially greater technological, financial, research and development,
manufacturing, human and marketing resources and experience than the Company.
Such companies may succeed in developing products that are more effective or
less costly than the Company's products or such companies may be successful in
manufacturing and marketing their products than the Company. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems, and
thermography, diaphonography and transilluminational devices may not use the
Company's products. Currently mammography is employed widely and the Company's
ability to demonstrate the Company's ability to sell the CTLM(TM) to medical
facilities will, in part, be dependent on the Company's ability to demonstrate
the clinical utility of the CTLM(TM) as an adjunct to mammography and physical
examination and its advantages over other available diagnostic tests. The
competition for developing a commercial device utilizing computed TOMOGRAPHY
techniques and laser technology is difficult to ascertain given the proprietary
nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) utilizes. The most prestigious of these institutions includes the
University of Pennsylvania, The City College of New York, and University College
London. Two of these institutions have granted licenses on certain patented
technologies to two companies: University of Pennsylvania - Non-Invasive
Technologies; City College of New York - MediScience, Inc.
TECHNICAL OBSOLESCENCE.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products obsolete. Although the Company believes that The
CTLM(TM) can be upgraded to maintain its state-of-the-art character, the
development of new technologies or refinements of existing ones might make the
Company's existing system technologically or economically obsolete,
10
<PAGE>
or cause a reduction in the value of, or reduce the need for, the Company's
CTLM(TM). There can be no assurance that the development of new types of
diagnostic medical equipment or technology will not have a material adverse
effect on the Company's business, financial condition, and results of
operations. Although the Company is aware of no substantial technological
changes pending, should such change occur, there can be no assurance that the
Company will be able to acquire the new or improved systems which may be
required to update the CTLM(TM).
RELIANCE ON INTERNATIONAL SALES.
The Company intends to commence international sales of the CTLM(TM) in Europe
and Asia prior to commencing commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market approval from the
FDA. Thus, until the Company receives pre-market approval from the FDA to market
the CTLM(TM)in the United States, as to which there can be no assurance, the
Company revenues, if any, will be derived from sales to international
distributors. A significant portion of the Company's revenues, therefore, may be
subject to the risks associated with international sales, including economical
and political instability, shipping delays, fluctuation of foreign currency
exchange rates, foreign regulatory requirements and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a timely basis. Future imposition of, or significant increases in
the level of customs duties, export quotas or other trade restrictions could
have a material adverse effect on the Company's business, financial condition
and results of operations. The regulation of medical devices, particularly in
Europe, continue to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company.
PRODUCT LIABILITY.
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing, marketing, and sale of cancer
detection products. Significant litigation, not involving the Company, has
occurred in the past based on the allegations of false negative diagnoses of
cancer. While the CTLM(TM) is being developed as a adjunct to other diagnostic
techniques, there can be no assurance that the Company will not be subjected to
future claims and potential liability.
LACK OF FEASIBILITY STUDY
The Company has not performed any market or feasibility study to assess the
interest, demand, or need for the CTLM(TM). There can be no assurance that any
such study would support Management's belief that sufficient demand will exist.
DIVIDENDS
The Company has not paid a dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future.
INFORMATION WITH RESPECT TO THE REGISTRANT
The information required to be disclosed herein is hereby incorporated by
reference. See "Documents Incorporated by Reference", "Prospectus Summary",
"Risk Factors" and "Material Changes"
MATERIAL CHANGES;
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Stock of the
Company as of July 10, 1998, as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group. calculated as required by the Act.
11
<PAGE>
The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,750,040 and 3,445,800 share
respectively. Both Richard Grable and Linda Grable specifically disclaims any
beneficial interest in each others shares.
<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) 33.6%
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 12,606,606(4) 33.6%
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 4,253,390(5) 11.7%
c/o 6351 NW 18th Court
Plantation, FL 33313
All officers and directors 16,859,996(6) 45.3%
as a group (3 persons)
- --------------------
</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 36,434,747 shares of Common Stock
outstanding as of July 10,1998. Shares of Common Stock subject to stock options
that are exercisable within 60 days as of July 10, 1998 are deemed outstanding
for computing the percentage of any other person or group.
(3)Includes 556,883 shares subject to options and 3,497,800 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership.
(4)Includes 556,883 shares subject to options and 7,995,040 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership.
(5)Includes 664,410 shares subject to options and 9,000 shares owned by the wife
of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6)Includes 1,778,176 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
OPTION GRANTS.
In January 1998, pursuant to employment agreements dated July 4, 1994, Richard
Grable, Linda Grable, and Allan Schwartz were granted options to purchase and
aggregate of 500,000 Common Shares each. The grants for were for the July 1996
and July 1997 anniversary dates of their employment and were never issued by
prior counsel for the Company. The options are non-qualified stock options,
vesting one year from the grant date and exercisible at an exercise price of
$0.31 per share. In January 1998, Richard Grable, Linda Grable, and Allan
Schwartz were granted options to purchase 22,883 and 34,602 shares of Common
Shares each pursuant to the Company's incentive stock option plan. These options
were earned in July 1996 and July 1997 but never issued. These shares are
exercisible at any time at an exercise price of $4.37 and $2.63 per share,
respectively.
PATENT LICENSE AGREEMENT
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of patents Patent number 5,692,511, issued on December 2, 1987 (the "Patent"),
which encompasses the technology for the CTLM(TM). The Company and Mr. Grable
has previously entered into an oral agreement for the exclusive license for the
patent that was never memorialized in written form.
Pursuant to the terms of the Agreement, the Company was granted the exclusive
right to modify, customize, maintain, incorporate, manufacture, sell, and
otherwise utilize and practice the Patent, all improvements thereto and all
technology related to the process, throughout the world. This license shall
apply to any extension or re-issue of the Patent. The term of the license is for
the life of the Patent and any renewal thereof, subject to termination, under
certain conditions. As consideration for the License, the Company issued to Mr.
Grable 3,500,000 shares of common stock and is required to issue and additional
3,500,000 shares in June 1999. In addition, the Company has
12
<PAGE>
agreed to pay to Mr., Grable a royalty based upon the net selling price (the
dollar amount earned from the sale by the Company, both international and
domestic, before taxes minus the cost of the goods sold and commissions or
discounts paid).of all products and goods in which the Patent is used, before
taxes and after deducting the direct cost of the product and commissions or
discounts paid (the "Royalty") as follows:
GROSS SALES PERCENTAGE
$0 to $1,999,999 in gross sales 10%
$2,000,000 to $3,999,999 in gross sales 9%
$4,000,000 to $6,999,999 in gross sales 8%
$7,000,000 to $9,999,999 in gross sales 7%
Greater than $10,000,000 in gross sales 6%
During the second year of the Agreement there is a minimum royalty provision of
$250,000. The Company is required to have the Agreement ratified by its
Shareholders at its next special or annual meeting of Shareholders and upon
obtaining such ratification, the Royalties set forth above shall take the place
of the Development Royalties set forth in the Amendment to Grable's Employment
Agreement dated February 23, 1995, and such Amendment shall become void and have
no effect.
The Agreement also contains anti dilution protection upon the occurrence of any
stock dividend, stock split, combination or exchange of shares, reclassification
or recapitalization of the Company's common stock, reorganization of the
Company, consolidation with or merger into or sale or conveyance of all or
substantially all of the Company's assets to another corporation or any other
similar event which serves to decrease the number of Shares issued pursuant to
the Agreement.
PATENT
On June 12, 1997, Imaging Diagnostic Systems, Inc. (the "Company") was advised
by its patent counsel, Shlesinger, Arkwright & Garvey, that the Company's patent
for the Diagnostic Tomographic Laser Imaging Apparatus had been granted, with 7
independent and 16 subordinate claims.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with NASDAQ to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no influence over the Company, had a questionable
background and owned a 5% interest in the Company.
As a result, the Company appealed the denial decision to the NASDAQ Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with
instructions to implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th, provided
NASDAQ with copies of all things necessary to satisfy any concerns that the
Panel had regarding the Shareholder. Prior to the time NASDAQ acted on the
proposal, Barrons published an inaccurate article stating that a NASDAQ
spokesman indicated that the listing would be denied. At all times up until the
date of this article the Company's stock traded at $3.00 and above. The article
had a predictable negative impact on the Company's stock and the price dropped
below $3.00, where it has stayed ever since the Barrons article, despite a
retraction from Barrons. Based upon this decline the NASDAQ staff has refused to
approve the Company for listing on the NASDAQ Small Cap Market.
The Company appealed the denial of the listing at an oral hearing before the
Committee in Washington DC on January 22, 1998. Pursuant to this meeting the
Panel determined to approve the Company for listing on the NASDAQ Small Cap
Market, subject to the following conditions:
13
<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 expires on May 11, 1998. To date the
Company has been unable to comply with the above conditions.
The Company immediately appealed this decision. The Company's Securities Counsel
was notified on May 19, 1998 that its appeal was denied. The Company filed an
appeal with the Securities and Exchange Commission. PRIVATE PLACEMENTS
Series C Preferred Stock
- ------------------------
On October 6, 1997, Imaging Diagnostic Systems, Inc. (the "Company") finalized
the private placement to foreign investors of 210 shares of its Series C
Convertible Preferred Stock ("the "Preferred Shares") at a purchase price of
$10,000 per share and Warrants to purchase up to 105,000 shares of the Company's
common stock at an exercise price of $1.63 per share. The offering was conducted
pursuant to Regulation S as promulgated under the Securities Act of 1933, as
amended (the ("Regulation S Sale").
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and nonassessable shares of common stock, no par value, of the Company to
be issued upon conversion will be determined by dividing (i) the sum of $10,000
by (ii) the Conversion Price (determined as hereinafter provided) in effect at
the time of conversion. The "Conversion Price" is equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion
provided, however, in no event will the Conversion Price be greater than $1.222
per share.
Pursuant to the Regulation S Sale documents, the Company was also required to
escrow an aggregate of 3,435,583 shares of its common stock (200% of the number
of shares the Purchasers would have received if the Preferred Shares were
exercised on the closing date of the Regulation S Sale). The shares underlying
the Preferred Shares and Warrants are entitle to demand registration rights
under certain conditions.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $220,500 for placement and legal fees. Net
proceeds to the Company of $1,079,500 were used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
Series D Preferred Stock
- ------------------------
On January 9, 1998, Imaging Diagnostic Systems, Inc. (the "Company") finalized
the private placement to foreign investors of 50 shares of its Series D
Convertible Preferred Stock ("the "Preferred Shares"), at a purchase price of
$10,000 per share and Warrants to purchase up to 25,000 shares of the Company's
common stock. The offering was conducted pursuant to Regulation S as promulgated
under the Securities Act of 1933, as amended (the "Regulation S Sale"). The
Preferred Shares are convertible, at any time, commencing 45 days from the date
of issuance and for a period of three years thereafter, in whole or in part,
without the payment of any additional consideration. The number of fully paid
and nonassessable shares of common stock, no par value, of the Company to be
issued upon conversion will be determined by dividing (i) the sum of $10,000 by
(ii) the Conversion Price (determined as hereinafter provided) in effect at the
time of conversion. The "Conversion Price" is equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion. The
shares underlying the Preferred Shares and Warrants are entitle to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to an unaffiliated Investment Banker for placement fees and paid its legal fees
of $5,000. Net proceeds to the Company of $495,000 were used for working capital
and the continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
14
<PAGE>
Series E Preferred Stock
- ------------------------
On February 5, 1998, Imaging Diagnostic Systems, Inc. (the "Company") finalized
the private placement to foreign investors of 50 shares of its Series E
Convertible Preferred Stock ("the "Preferred Shares"), at a purchase price of
$10,000 per share and Warrants to purchase up to 25,000 shares of the Company's
common stock. The offering was conducted pursuant to Regulation S as promulgated
under the Securities Act of 1933, as amended (the "Regulation S Sale"). The
Preferred Shares are convertible, at any time, commencing 45 days from the date
of issuance and for a period of three years thereafter, in whole or in part,
without the payment of any additional consideration. The number of fully paid
and nonassessable shares of common stock, no par value, of the Company to be
issued upon conversion will be determined by dividing (i) the sum of $10,000 by
(ii) the Conversion Price (determined as hereinafter provided) in effect at the
time of conversion. The "Conversion Price" is equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion.
The shares underlying the Preferred Shares and Warrants are entitle to demand
registration rights under certain conditions. In connection with the Regulation
S Sale, the Company issued 4 Preferred Shares to an unaffiliated Investment
Banker for placement fees and paid its legal fees of $5,000. Net proceeds to the
Company of $495,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM (TM)) device.
Series F Preferred Stock
- ------------------------
On February 20, 1998, Imaging Diagnostic Systems, Inc. (the "Company") finalized
a private placement to foreign investors of 75 shares of its Series F
Convertible Preferred Stock ("the " 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").
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
nonassessable shares of common stock, no par value, of the Company to be issued
upon conversion will be determined by dividing (i) the sum of $10,000 plus any
earned dividends by (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" is equal
to seventy percent (70%) of the Average Closing Price of the Corporation's
Common Stock for the five-day trading period ending on the day prior to the date
of conversion. The shares underlying the Preferred Shares are entitle to demand
registration rights under certain conditions.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $50,000 for placement and legal fees. Net
proceeds to the Company of $700,000 were used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM))
device.
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') and may be sold pursuant to this Prospectus. See " Selling
Security Holders" and "Plan of Distribution")..
Series H Preferred Stock
- ------------------------
On June 2, 1998, Imaging Diagnostic Systems, Inc. (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. The offering was conducted pursuant to Regulation D as promulgated under
the Securities Act of 1933, as amended (the "Regulation D Sale").
The number of fully paid and nonassessable shares of common stock, no par value,
of the Company to be issued upon conversion will be determined by dividing (i)
the sum of $10,000 (ii) the Conversion Price (determined as hereinafter
provided) in effect at the time of conversion. The "Conversion Price" is equal
to lesser of seventy-five percent (75%) of the Average Price (the lowest closing
bid price of the Corporation's Common Stock for the ten-ten-day trading period
ending on the day prior to the date of conversion. Two hundred percent of the
shares underlying the H Preferred Shares (7,200,000 shares) are included in the
Registration Statement of which this Prospectus is a part and may be sold
pursuant to this Prospectus. See "Selling Security Holders" and Plan of
Distribution".
15
<PAGE>
In connection with the Regulation D Sale, the Company paid an unaffiliated
Investment Banker an aggregate of $10,000 and 8 shares of the Series H Preferred
Stock for placement and legal fees. Net proceeds to the Company of $990,000 were
used for working capital and the continuous research, development and testing of
the Company's Computed Tomography Laser Mammography (CTLM (TM)) device.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS . There has been trading in the Company's
Common Stock since September 20, 1994. The following table sets forth, for each
of the fiscal periods indicated, the high and low trade prices for the Common
Stock, as reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1996
September 1995 $ .78 $ .71
December 1995 $3.15 $ .75
March 1996 $8.25 $8.00
June 1996 $3.90 $3.87
FISCAL YEAR 1997
September 1996 $3.93 $2.25
December 1996 $3.93 $1.43
March 1997 $4.12 $2.43
June 1997 $3.08 $2.62
FISCAL YEAR 1998
September 1997 $2.25 $1.87
December 1997 $1.61 $1.22
March 1998 $1.65 $1.02
June 1998 $0.78 $0.67
On June 30, 1998, the closing trade price of the Common Stock as reported on the
OTC Bulletin Board was $0.40. As of such date, there were approximately 745
holders of record of the Company's Common Stock.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends with respect to its
capital stock, and the current policy of the Board of Directors is to retain any
earnings to provide for the growth of the Company. Consequently, no cash
dividends are expected to be paid on the Company's Common Stock in the
foreseeable future.
SELLING SECURITY HOLDERS
The Selling Security Holders consist of the Series F Preferred Holders and the
Series H Preferred Holders. The registration statement of which this Prospectus
is a part is being filed, and the Shares offered hereby are included herein,
pursuant to registration rights as provided for in the subscription agreement
and registration rights agreements entered into between the Company and the
Selling Security Holders (collectively, the "Registration Rights"). Due to (i)
the ability of the Selling Security Holders to determine when and whether they
will sell any Shares under this Prospectus and (ii) the uncertainty as to how
many of the Warrants will be exercised and how many shares of Common Stock will
be issued upon conversion of shares of Series H Preferred, the Company is unable
to determine the exact number of Shares that will actually be sold pursuant to
this Prospectus. The number of fully paid and nonassessable shares of common
stock, no par value, of the Company to be issued upon conversion of the Series H
Preferred will be determined by dividing (i) the sum of $10,000 (ii) the
Conversion Price
16
<PAGE>
(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. Two hundred percent (7,200,000 shares) of the shares underlying the
H Preferred Shares are included in the Registration Statement of which this
Prospectus is a part and may be sold pursuant to this Prospectus. Since the
conversion price of the Series H Preferred shares is based on the market price
of the Company's Common Stock, the number of Shares subject to registration
rights will increase. If the market price of the Common Stock decreases and will
decrease if the market price increases.
The following table identifies each Selling Security Holder based upon
information provided to the Company, set forth as of July 29, 1998, with respect
to the Shares beneficially held by or acquirable by, as the case may be, each
Selling Security Holder and the shares of Common Stock beneficially owned by the
Selling Security Holders which are not covered by this Prospectus. No Selling
Security Holder or its affiliates have held any position, office or other
material relationship with the Company. The percentage figures reflected in the
table assume conversion of all shares of: Series H Preferred into 3,600,000
shares of Common Stock and exercise of all Warrants into 125,000 shares of
Common Stock.
<TABLE>
<CAPTION>
SERIES H HOLDERS
- ---------------------------------------------------------------------------------------------------------------------
NAME OF INVESTOR COMMON PREFERRED H COMMON SHARES COMMON SHARES TOTAL NUMBER OF
SHARES OWNED SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
PRIOR TO PREFERRED (1) WARRANTS REGISTERED (2)
OFFERING
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balmore Funds SA
C/0 Trident Trust Company
(BVI) Limited 36,821 50 1,800,000 50,000 3,650,000
Trident Chambers
Road Town
Tortola, British Virgin
Islands
- ---------------------------------------------------------------------------------------------------------------------
Austost Anstalt Schaan
Ladstrasse 163 121,321 50
9494 Furstentums 1,800,000 50,000 3,650,000
Vaduz, Liechtenstein
- ---------------------------------------------------------------------------------------------------------------------
Settondown Capital
International, Ltd
Charlotte House, Charlotte 0 8 266,667 25,000 558,334
Street
P.O. Box N 9204
Nassau, Bahamas
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the number of shares that would be required to be issued if the
Preferred Stock were converted at $.30 per share (75% of the lowest 10 day bid
price prior to registration.
(2) Amount being registered is 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 plus the shares underling the Warrants.
The Company has received a firm commitment 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 the Series H Holders through a
consortium of prominent European banking institutions. The Shares will be
purchased at a discount from the Market Price of the Company's Common Stock. 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.
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.
17
<PAGE>
<TABLE>
<CAPTION>
SERIES F HOLDERS
- ---------------------------------------------------------------------------------------------------------------------
NAME OF INVESTOR COMMON PREFERRED COMMON SHARES COMMON SHARES TOTAL NUMBER OF
SHARES OWNED SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
PRIOR TO PREFERRED (1) WARRANTS REGISTERED
OFFERING
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dominion Capital Fund
Canadian Advantage Ltd.
Partnership
C/o Thomas Kernaghan & Co. 1,334,996 0 0 0 1,334,996
Ltd.
365 Bay Street
Toronto, Ontario
- ---------------------------------------------------------------------------------------------------------------------
Canadian Advantage Ltd.
Partnership
C/o Thomas Kernaghan & Co.
Ltd. 636,379 0 0 0 636,379
365 Bay Street
Toronto, Ontario
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
PLAN OF DISTRIBUTION
The registration statement of which this Prospectus forms a part has been filed
pursuant to the registration rights included in Subscription Agreement between
the Company and the Selling Security Holders. To the Company's knowledge, as of
the date hereof, the Selling Security Holders has not entered into any
agreement, arrangement or understanding with any particular broker or market
maker with respect to the Shares offered hereby, nor does the Company know the
identity of the brokers or market makers which will participate in the offering.
The Shares covered hereby may be offered and sold from time to time by the
Selling Security Holders. The Selling Security Holders will act independently of
the Company in making decisions with respect to the timing, manner, and size of
each sale. Such sale may be made on the OTC Bulletin Board or otherwise, at
prices and on terms then prevailing or at prices related to the then market
price, or in negotiated transactions. The Shares may be sold by one or more of
the following methods: (a) a block trade in which the broker-dealer engaged by
the Selling Security Holders will attempt to sell Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by the broker-dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
To the best of the Company's knowledge, the Selling Security Holders have not,
as of the date hereof, entered into any arrangement with a broker or dealer for
the sale of shares through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales,
broker-dealers engaged by the Selling Security Holders may arrange for other
broker-dealers to participate. Broker-dealers may receive commissions or
discounts from the Selling Security Holders in amounts to be negotiated.
In offering the Shares, the Selling Security Holders and any broker-dealers who
execute sales for the Selling Security Holders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profits realized by the Selling Security Holders and the
compensation of such broker-dealer may be deemed to be underwriting discounts
and commissions.
Rule 10b-6 under the Exchange Act prohibits participants in a distribution from
bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made
to stabilize the price of a security in connection with a distribution of the
security.
This offering will terminate on the earlier of (a) the date on which such
Selling Security Holders's shares may be resold pursuant to Rule 144 under the
Securities Act; or (b) the date on which all Shares offered hereby have been
sold by the Selling Security Holders. There can be no assurance that the Selling
Security Holders will sell any or all of the shares of Common Stock offered
hereby
18
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of capital
stock of which 48,000,000 shares are common stock no par value and 2,000,000
shares are preferred, no par value. As of July 10, 1998 there were issued and
outstanding 36,434,747 shares of Common Stock and. 450 shares of Series B
Convertible Preferred Stock, 24 shares of Series D Convertible Preferred, 14
shares of Series E Convertible Preferred, 108 shares of Series H Convertible
Preferred, Options to purchase 2,760,409 shares and Warrants to purchase 442,500
shares of Common Stock of the Company.
At present, due to the decline in the price of its common stock, the Company
does not have available enough authorized common stock to convert its
outstanding Preferred Stock, warrant or options, should the holders wish to
convert. The conversion rate of the Preferred stock ranges from 82% to 75% of
the average market price over a five-day period prior to conversion. The Company
anticipates that it will need to increase its authorized common stock from
48,000,000 shares to 100,000,000 common shares in order to meet conversion
demands, enhance the ability of the Company to attract and retain qualified
employees, consultants, officers and directors by creating stock incentives and
rewards for their contributions to the success of the Company and for issuance
in connection with any future financing activities or corporate acquisition
using the Company's Common Stock. In the event that the Company is not able to
increase the authorized common stock and the Preferred Holders elect to convert
the Preferred Stock, the Company will be in breach of it contractual obligations
to such Holders and may be subject to litigation and the payment of damages and
penalties. See "Risk Factors".
COMMON STOCK
Holders of the Common Stock are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the
shareholders. There is no cumulative voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the Company (the
"Board") out of funds legally available thereof and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The rights of the holders of the Common Stock are subject to
any rights that may be fixed for holders of Preferred Stock. All of the
outstanding shares of Common Stock are fully paid and nonasseable.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in series and the
Board of Directors of the Corporation is authorized to establish and designate
series and to fix the number of shares and the relative voting, dividend,
conversion, liquidation, redemption, and other rights, preferences, and
limitations as between series, subject to such limitations as may be prescribed
by law; that the proper officers of the corporation are by this means authorized
to make, subscribe, acknowledge, execute, and file, or cause to be filed, such
certificate or certificates as may be required under the laws of the state of
Florida and other jurisdictions in connection with the issuance of shares of
preferred stock in series from time to and things as in its discretion may be
necessary or advisable in connection with such proposal.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH IN THE COMPANY'S ARTICLES OF INCORPORATION,
THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
ACT AND IS THEREFORE UNENFORCEABLE
19
<PAGE>
INTERESTS OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the securities being offered hereby
will be passed upon for the Company by Rebecca J. Del Medico, Esq., General
Counsel of the Company. Ms. Del Medico currently owns approximately 27,100
shares of common stock of the Company.
EXPERTS
The audited financial statements of Imaging Diagnostic Systems, Inc.
incorporated by referenced herein have been examined by Margolies, Fink and
Wichrowski, independent certified public accountants, for the periods and to the
extent set forth in their respective report and are incorporated herein in
reliance upon such report of said firm given under their authority as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Shares will be passed upon for the Company
by Rebecca J. Del Medico, General Counsel of the Company.
FINANCIAL INFORMATION
The information required to be disclosed herein is hereby incorporated by
reference from the Company' most recent report on form 10-KSB and its most
recent report on Form 10-QSB, both of which are being furnished with this
Prospectus.
20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the securities
being registered are as follows:
SEC Registration Fee.................................. $1,239.51
Edgar Formatting Fees................................. $ 1022.00
TOTAL $ 2261.51
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's Articles of Incorporation authorizes the Company to
indemnify directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH ABOVE, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE
21
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) Incorporated by reference to Exhibit
3.(i).6 of the Company's Form 10-KSB for the fiscal year ending June
30, 1996. File number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to the
Company's Registration Statement on Form S-1 dated July 1, 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).
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).
22
<PAGE>
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares.(See Exhibit 3.8, above).
5 Legal opinion of Rebecca J. Del Medico, Esq. dated July 30, 1997.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi.
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.
10.7 Form of Series H Preferred Stock Subscription Documents.
24.1 Consent of Rebecca J. Del Medico, Esq. included in the opinion filed as
Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
B) REPORTS ON FORM 8-K
99.1 Report dated October 15, 1997.
99.2 Report dated October 16, 1998
99.3 Report dated January 12, 1998.
99.4 Report dated February 13, 1998.
99.5 Report dated February 19, 1998.
99.6 Report dated March 6, 1998.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its legal counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
(b) The undersigned registrant hereby undertakes that:
(i) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon
Rule 430A and
23
<PAGE>
contained in a form of prospectus filed by the registrant pursuant to
Rule 424 (b) (1) or (4) or 497 (h) under the Securities Act shall be
deem to be part of the registration statement as of the time it was
declared effective.
(ii) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13 (a) or
Sections 15 (d) of the Securities Exchange Act of 1934 ( and where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15 (d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement be deemed to
be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plantation, State of Florida, on the 30th day of
July, 1998.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /S/LINDA B. GRABLE
---------------------------------------
Linda B. Grable, Chairman of the Board,
Director, and President.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: July 30, 1998 By: /S/ LINDA B. GRABLE
----------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: July 30, 1998 By: /S/ RICHARD J. GRABLE
------------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: July 30, 1998 By: /S/ ALLAN L. SCHWARTZ
----------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
24
<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[Mark One]
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to_____________
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
-----------------------
State of incorporation) (IRS employer Ident. No.)
6531 NW 18th Court, Plantation, FL. 33313
---------------------------------------
(address of principal office) (Zip Code)
Issuer's telephone number: (954)581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of class)
Indicate by check mark whether the Registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2)has been subject to such filing requirements for the past 90
days. Yes __X_ No_____ .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
amendment to this Form 10-KSB. /X/ State issuer's revenues for its most recent
fiscal year. -0- Based on the average closing bid and asked prices of the common
stock on the latest practicable date, September 24, 1997, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$22,503,933.
1
<PAGE>
The number of shares outstanding of each of the issuer's classes of common
equity, as of June 30, 1997: 24,905,084. The number of shares outstanding of the
issuer's class of preferred equity (Series B Convertible Preferred), as of June
30, 1997: 450.
Documents Incorporated By Reference
Proxy Statement dated September 7, 1997, issued in connection with the company's
annual meeting to be held on October 15, 1997. Also see Item 13. Exhibits and
Report on Form 8-k.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH HEREIN.
PART I
Item 1. Description of Business.
BUSINESS
Overview
Since its inception (December 10, 1993), Imaging Diagnostic Systems,
Inc. (the "Company") has been engaged in the research and development of its
cancer detection technology and developing, for commercial application its
Computed Tomography Laser Mammography (CTLMTM)device.
The CTLM is a device for detecting breast cancer through the skin ina
non-invasive and objective procedure. The CTLM employs a high-speed femto second
pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze masses in the breast for indicia
of malignancy or benignancy. The combination and incorporation of the foregoing
components into a device provide for enhanced diagnostic capabilities which the
company believes are superior to standard mammography diagnostic tools such as
ultra-sound and mammography. Based upon the known optical properties of benign
and malignant tissues (whether and to what extent light is impeded as it passes
through the tissue and the measurement of the impedance), the CTLM device is
designed to provide both the physician and patient with immediate, on-site,
objective interpretation and determination of further clinical work-up.
Accordingly, the Company believes that the CTLM, will improve early diagnosis,
reduce diagnostic uncertainty and decrease the number of biopsies performed on
benign lesions. See Item 1. "Description of Business- Comparison to Existing
Diagnostic Modalities." In addition, the CTLMTM device does not expose the
patient to ionizing radiation or the breast to painful compression. Which the
Company believes are the contributing factors that contribute to a portion of
the patient population not obtaining a conventional mammogram.
During the first year of operations, the Company researched the
interaction between high speed, rapid pulsed (Ti:Sapphire) laser technology and
various detection technologies associated with standard computed tomographic
("CT") schemes. Using this research the Company developed the first prototype of
the CTLMTM able to create images of a breast. The Company refined various
software and hardware configurations and components of the prototype based on
these first images, and filed a patent in June 1995. During this period of time
there were further advances in laser technology effecting the size and stability
of the laser component. The Company capitalized upon these advances by
purchasing a laser package manufactured by
2
<PAGE>
Spectra-Physics, Inc. and incorporating it into the CTLMTM. On December 12,
1995, the Company had a preliminary meeting with the Food and Drug
Administration to discuss the approach the Company would need to take to obtain
marketing clearance for its CTLMTM device. The Company was advised that it would
need to submit for approval a pre-market approval application ("PMA") in order
to obtain marketing clearance for the device. Further, the Company also needed
to submit an investigational device exemption ("IDE") application to the FDA in
order to commence human clinical trials of the device. The Company submitted its
IDE application on January 8, 1996, and it was approved February 9, 1996. During
calendar year 1996, among otherdevelopments, the Company further refined the
detection scheme and laser power configuration in order to obtain substantially
better image quality. In order to incorporate the changes into the CTLMTM the
Company was required to submit an amendment to its IDE application. In November,
1996 the Company installed its first CTLM(TM) device at the Strax Breast
Diagnostic Center.
On June 12, 1997, the Company was advised by patent counsel that the
patent filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus "was
granted with 7 independent and 16 subordinate claims.
The competition for developing a commercial device utilizing computed
tomography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's CTLMTM
device utilizes. A brief list of the most prestigious of these institutions
includes the University of Pennsylvania, The City College of New York, and
University College London. Two of these institutions have granted licenses on
certain patented technologies to two companies: University of Pennsylvania -
Non-Invasive Technologies; City College of New York - MediScience, Inc.
The market in which the Company intends to participate is highly
competitive. Many companies may succeed in developing products that are more
effective or less costly than the Company's products or such companies may be
successful in manufacturing and marketing their products than the Company.
Physicians using imaging equipment such as x-ray mammography equipment,
ultrasound or high frequency ultrasound systems, Magnetic Resonance Imaging
(MRI) systems, and thermography, diaphonography and transilluminational devices
may be reluctant to the CTLMTM. Currently, mammography is the most popular
choice for the detection of breast cancer. The Company's ability to sell the
CTLMTM device to medical facilities will, in part, be dependent on the Company's
ability to demonstrate the clinical utility of the CTLMTM device as an adjunct
to mammography and physical examination as well as the CTLMTM's advantages over
other available diagnostic tests.
To date, due to the necessity of complying with all applicable United
States government regulations, the Company has not begun to market or sell the
CTLMTM and therefore has not generated revenues from the commercialization of
the CTLMTM. From inception to June 30, 1997 the Company has sustained
accumulated losses of $16,288,314. The Company's results may vary significantly
from period to period depending on several factors, such as the timing of
certain expenses and the progress of the Company's research and development and
commercialization programs, all of which may be affected by the availability of
funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Breast Cancer
Background
3
<PAGE>
Breast cancer is one of the most common cancers among women
and, notwithstanding the currently available detection modalities, is
the leading cause of death among women aged 35 to 45. According to the
American Cancer Society ("ACS"), (i) approximately one in eight women
in the United States will develop breast cancer during her lifetime;
(ii) Nationwide it is estimated that approximately 43,900 women will
die from this disease in 1997; (iii) In the United States in 1997
approximately 180,200 women will be diagnosed with breast cancer.
Excluding skin cancers, the breast is the most frequent site of cancer
among American women accounting for 32% of incident cancers and 17% of
cancer deaths; (iv) Breast cancer is the second leading cause of death
for American women following lung cancer; (vi) In Europe in 1990,
approximately 170,000 cases of cancer were discovered, with an
estimated 73,000 deaths; and (vii) The annual cost of breast cancer
management in the United States alone is approximately $25 billion.
There is widespread agreement within the health care industry that
screening for breast cancer, when combined with appropriate follow-up,
will reduce mortality from the disease. According to the National
Cancer Institute ("NCI"), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18%
after it has spread to other organs such as the lung, liver or brain.
Extensive documentation demonstrates that mammography misses, on
average, 15%-20% of breast cancer detected by physical exam alone.
Breast cancer screening is generally recommended as a routine
part of preventive healthcare for women over the age of 20
(approximately 90 million in the United States). For these women, ACS
has published guidelines for breast cancer screening
including:(i)monthly breast self-examinations for all women over the
age of 20;(ii)a baseline mammogram for women by the age of 40;(iii)a
mammogram every one to two years for women between the ages of 40 and
49;(iv)an annual mammogram for women age 50 or older. As a result of
family medical histories and other factors, certain women are at "high
risk" of developing breast cancer during their lifetimes. For these
women, physicians often recommend close monitoring, particularly if an
abnormality posing increased risk factors has been detected.
Each year approximately eight million women in the United States
require diagnostic testing for breast cancer due to the appearance of a physical
symptom, such as a palpable lesion, pain or nipple discharge, which was
discovered through self or physical examination (approximately seven million) or
a nonpalpable lesion detected by screening x-ray mammography (approximately one
million). Once a physician has identified a suspicious lesion in a woman's
breast, the physician may recommend further diagnostic procedures, including
diagnostic mammography and ultrasound or a minimally invasive procedure such as
fine needle aspiration or large core needle biopsy. In each case, the potential
benefits of additional diagnostic testing must be balanced against the costs,
risks and discomfort to the patient associated with undergoing the additional
procedures. Each of the currently available non-surgical modalities for breast
cancer detection has various clinical limitations. While the minimally invasive
procedures provide more diagnostic information, there is still a 4% miss-rate
factor present.
Due in part to the limitations of the currently available modalities to
identify malignant lesions, a large number of patients with suspicious lesions
proceed to surgical biopsy, an invasive and expensive procedure. According to
the ACS approximately 800,000 surgical biopsies are performed each year in the
United States, of which approximately 700,000 result in the
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surgical removal of benign breast tissue. The average cost of a surgical biopsy
ranges from approximately $1,000 to $5,000 per procedure. Thus biopsies of
benign breast tissue cost the U.S. health care system approximately $2.45
billion annually. In addition, biopsies may result in pain, scarring and anxiety
to patients. Patients who are referred to biopsy usually are required to
schedule the procedure in advance and generally must wait up to 48 ours for
their biopsy results.
Screening and Diagnostic Modalities
Physical Examination
Physical examinations may be conducted by a physician or
clinician as part of a medical examination, or by a woman performing a
breast self-examination; however, a physical examination of the breast
can only detect relatively large lesions, which may be advanced
cancers. Furthermore, physical examination of the breast does not
reliably distinguish between malignant and benign tissue. More than
half the women who menstruate will have a lump in a breast at some
point, but fewer than 10% of such lumps will be malignant.
Mammography
Mammography is a non-invasive x-ray modality commonly used for
both routine breast cancer screening and as a diagnostic tool. A
mammogram produces and image of the internal structure of the breast
which is intended to display lesions as white spots against the black
and/or white background of normal tissue. In a screening mammogram,
radiologists seek to detect suspicious lesions, while in a diagnostic
mammogram radiologist seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are
often uncomfortable for the patient. Because x-ray mammography exposes
the patient to radiation, the ACS recommends mammograms be limited to
one per year. In addition, x-ray mammography is considered to be less
effective for women under the age of 50 who generally have
radiographically dense breast tissue. The average cost of a diagnostic
mammogram is approximately $55 to $200 per procedure (an average cost
of $113) and requires the use of capital equipment ranging in cost from
approximately $75,00 to $225,000. It is expected that the CTLMTM device
will cost approximately $300,000 and the cost of a bilateral exam will
be $125 to $150. The foregoing average cost figures are based on a
survey of 23 ACR and FDA certified facilities in Broward County,
Florida, conducted during the month of March, 1997. Due the high
capital costs associated with mammography equipment and the specialized
training necessary to operate the equipment and to interpret
radiographic images, mammography is usually available only at specialty
clinics or hospitals.
Ultrasound
Ultrasound uses high frequency sound waves to create an image
of soft tissues in the body in a non-invasive manner. Like mammography,
this image requires interpretation by a physician. Ultrasound's
principal role in breast cancer diagnosis has been to assist the
physician in determining whether a palpable lesion is likely to be a
cyst (usually benign) or a solid mass (potentially cancerous). The
average cost for an ultrasound of the breast is approximately $125 to
$500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000.
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The foregoing average cost figures are based on a survey of 23 ACR and FDA
certified facilities in Broward County, Florida, conducted during the month of
March, 1997. Again, it is expected that the CTLM device will cost approximately
$300,000 and the cost of an exam will be $125 to $150. Like mammography,
ultrasound is generally performed at specialty clinics or hospitals.
The Computed Tomography Laser Mammography Device
A bilateral breast examination, utilizing the CTLM device is
performed by a Technologist. This procedure last approximately 15
minutes with the patient resting in a comfortable prone position. One
breast at a time is pendulous in the aperture housing the scanning
device. Once the entire breast is scanned the other breast is placed in
the chamber for scanning. Each scan takes approximately 6-8 minutes.
Based upon the known optical properties of benign and malignant
tissues, the procedure is designed to provide both the physician and
patient with immediate, on-site, objective interpretation and
determination of further clinical work-up. Further, the device is
designed to archive and compare scans and provide the patient with a
computer disc (CD) of her scan.
Biopsy
Other currently available minimally invasive diagnostic
techniques include fine needle aspirations or core needle biopsy
employing either the stereotactic or hand held method. In each of these
procedures a physician seeks to obtain either cellular or tissue
samples of suspicious lesions for cytodiagnosis or histodiagnosis.
Inadequate sampling can render these tests invalid. These procedures
are invasive, require follow-up and range in cost from approximately
$370 to $1,000 per procedure.
Comparison to Existing Diagnostic Modalities
The CTLMTM device differs from currently available breast
imaging modalities employed for the detection of breast cancer by
generating more precise information for the clinician or doctor. The
CTLM device generates, depending on the size of the breast,
approximately 20 cross-sectional images of a breast. A conventional
screening mammography exam generates 2 images of the breast.
Cross-sectional imaging allows a doctor or clinician to isolate the
location of the abnormality within the breast. By doing so, there is
greater resolution of the area where the specific abnormality resides.
Clinical efficacy of conventional mammography diminishes
proportionately with the abundance of fibroglandular breast tissue. Based upon
this fact, limited interpretability of a mammogram increases the risk that a
lesion may be overlooked, and diagnosis and treatment may be delayed; thus
threatening the patient's survival probability. Vigorous compression of breast
tissue in order to aid in the distinction between so-called normal and abnormal
breast tissue is fairly effective, but does pose an obstacle for many women
either deciding to have their first mammogram or deciding whether to ever return
for an annual screening mammogram.
Scanning of the breast with the CTLM device is accomplished in such a
manner that utilizes no compression of tissue. The gathering of data from
360(Degree) around the breast yields multiple cross-sectional images which are
representative of a near three-dimensional view of its internal structures. Such
an acquisition provides the physician with increased
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accuracy in lesion location, as well as determination of the extent and
involvement of breast disease processes. Conventional two-dimensional imaging
with mammography and ultrasound does not provide such quick and complete
information.
Breast augmentation through the use of either silicone or saline
implants renders another difficult situation when employing conventional
mammography for imaging. Although radiographic and positioning techniques have
vastly improved the ability to compress and image more breast tissue than ever
before, there still remains a certain amount of breast tissue unable to be
imaged due to its placement around the implant. With free suspension of the
breast in the CTLM scanning chamber, and the ability of the device to image the
breast from the chest wall to the nipple, data can be collected from around the
entire breast. Either silicone or saline implants do not impede light
transmission through the breast.
The Company believes that the shortcomings of current breast cancer
management which include discomfort and exposure to radiation represent a
significant market opportunity for an objective technology which does not have
these shortcomings. The use of the CTLM device to detect breast cancer is
believed to be especially promising for women between the ages of 20 to 50 (over
50 million women in the United States) for whom x-ray mammography has lower
efficacy. These women often present diffuse palpable benign breast conditions
which can mask malignancies or pre-malignant conditions.
Regulatory and Clinical Status
In order to sell the CTLM device commercially in the United States the
Company must obtain marketing clearance from the FDA. The Company plans to file
a PMA with the FDA to obtain marketing clearance. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review which is available to
medical devices satisfying one or more of the following criteria:
O The device addresses a condition which is serious or life
threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
O The device addresses a condition which is life threatening or
irreversibly debilitating, and provides for clinically
important earlier diagnosis or significant advances in safety
and/or effectiveness over existing alternatives.
0 The device represents a clear clinically meaningful advantage
over existing technology, defined as having major (not
incremental) increased effectiveness or reduced risk compared
to existing technology.
O The availability of the device is otherwise in the best
interest of the public health.
On February 9, 1996, the FDA approved the Company's Investigational
Device Exemption (IDE) application. An approved IDE application permits a
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device, that would otherwise be subject to marketing clearance, to be shipped
lawfully for the purpose of conducting a clinical study. Further, the Company
supplemented the IDE to allow for the scanning of 7-10 patients in-house for
calibration purposes. On April 3, 1997, the Company was granted approval
pursuant to the IDE to scan an additional 20 patients at its facilities to
conduct comparative studies.
The IDE authorizes the Company to conduct a Phase I study at the Strax
Breast Diagnostic Institute located in Lauderhill, Florida (the "Strax Center").
The Phase I study involves scanning 50 patients with differing breast
abnormalities and comparing the results with other diagnostic modalities such as
ultra-sound and standard x-ray mammography. These 50 patients will be involved
in the study for the limited period of time for the Phase I study. In addition
to the 50 patients, the Company received authorization from the FDA on April 3,
1997, to scan an additional 20 patients at the Company's facilities. These
patient scans will be compared against mammography and MRI. As of May 2, 1997,
the Company has scanned 15 patients at its facility and 3 patients at the Strax
Center. It is anticipated the Phase I study will take 60-90 days. After the
Phase I study is completed and the results are reviewed by the FDA, the Company
will submit its Phase II application to the FDA. The Phase II study will
encompass the establishment of 4-6 clinical sites at major hospitals in the
United States and, in addition to comparing the results to existing modalities,
the results will be compared against actual biopsies. These clinical sites will
be used to accumulate the approximately 400-500 clinical studies to be submitted
with the PMA application.
The delay between the date of approval of the IDE and the installation
of the device at the Strax Center was due to the availability of a new laser
package which was installed in the CTLMTM. These technological improvements to
the laser component of the CTLMTM resulted in increased scanning capabilities.
The Company was required to submit to the FDA for approval an amendment to the
Company's existing IDE application to incorporate the changes prior to
installing the device at the Strax Center. The FDA also requested that the
Company conduct a clinical test to support the amendment to the IDE application.
The Company received approval for the amendment on April 3, 1997.
Sales and Marketing
The laws of certain European and Asian countries may permit
the Company to begin marketing the CTLM device in Europe and Asia
before marketing would be permitted in the United States. The Company
is considering potential distribution agreements with strategic
marketing partners in Europe and Asia and has entered into a
distribution agreement with Euro Trading & Finance S.r.l. to market and
service the device in Italy.
Known Uncertainties
Limited Operating History; Continuing Operating Losses;
Uncertainty of Future Profitability
The Company has a limited history of operations. Since its inception in
December 1993, the Company has engaged principally in the development of the
CTLMTM device. The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At June 30, 1997, the Company
had an accumulated deficit of $16,288,314. Such losses have resulted principally
from costs associated with the Company's operations. The Company expects
operating losses will increase for at least the next several years as
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total costs and expenses continue to increase due principally to the anticipated
commercialization of the CTLMTM device, development of, and clinical trials for,
the proposed CTLMTM device and other research and development activities. The
Company's ability to achieve profitability will depend in part on its ability to
obtain regulatory approvals for its proposed products and develop the capacity
to manufacture and market any approved products either by itself or in
collaboration with others. There can be no assurance if and when the Company
will receive regulatory approvals for the development and commercial
manufacturing and marketing of its proposed products, or achieve profitability
is highly uncertain. See "Management's Discussion and Analyses of Financial
Condition and Results of Operations."
Government Regulation
The manufacture and sale of medical devices, including the CTLMTM
device, are subject to extensive regulation by numerous governmental authorities
in the United States, principally the FDA and corresponding state agencies, and
in other countries. In the United States, the Company's products are regulated
as medical devices and are subject to the FDA's pre-market clearance or approval
requirements. Securing FDA clearances and approvals may require the submission
of extensive clinical data and supporting information to the FDA. The Company
cannot file its PMA application for the CTLMTM device until its clinical trials
are completed. There can be no assurance, however, that the clinical trials will
be successfully completed, or if completed, will provide sufficient data to
support a PMA application for the CTLMTM device. Nor can there be any assurance
that the FDA will not require the Company t conduct additional clinical trials
for the CTLMTM device. The process for obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain and frequently requires
from one to several years from the date of FDA submission, if pre-market
approval is obtained at all. Sales of medical devices outside the United States
are subject to international regulatory requirements that vary from country to
country. The time required to gain approval for sale internationally may be
longer or shorter than that required for FDA approval and the requirements may
differ. In Europe, the Company will be required to obtain the certifications
necessary to enable the CE mark to be affixed to the Company's products by
mid-1998 in order to conduct sales in member countries of the European Union.
The Company has not obtained such certificates and there can be no assurance it
will be able to do so in a timely manner, or at all. Regulatory approvals, if
granted, may include significant limitations on the indicated uses for which the
product may be marketed. In addition, to obtain such approvals, the FDA ands
certain foreign regulatory authorities may impose numerous other requirements
with which other medical device manufacturers must comply. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Product approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The third-party manufacturers upon which the Company depends to
manufacture its products are required to adhere to applicable FDA regulations
regarding GMPs and similar regulations in other countries, which include
testing, control and documentation requirements. Ongoing compliance with GMP
regulations and other applicable regulatory requirements will be monitored by
periodic inspections by the FDA and by comparable agencies in other countries.
Failure to comply with applicable regulatory requirements, including marketing
and promoting products for unapproved use, could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant pre-market clearance or approval for devices, withdrawal of approvals
and criminal prosecution. Changes in existing regulations or adoption of new
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government regulations or polices could prevent or delay regulatory approval of
the Company's products. Certain material changes to medical devices also are
subject to FDA review and clearance or approval. There can be no assurance that
the Company will be able to obtain FDA approval of a PMA application for the
CTLMTM device on a timely basis, or at all, and delays and delays in receipt of
or failure to obtain such approvals or clearances, the loss of previously
obtained approvals, or failure to comply with existing or future regulatory
requirements that would have material adverse effect on the Company's business,
financial condition and results of operations.
See "Business - Government Regulation."
Early Stage of Product Development
The Company's proposed products and future product development efforts
are at an early stage. Accordingly, there can be no assurance that any of the
Company's proposed products will be found to be safe and effective, can be
developed into commercially viable products, can be manufactured on a large
scale or will be economical to market, or will achieve or sustain market
acceptance. There is, therefore, a risk that the Company's product development
efforts will not prove to be successful.
Dependence Upon U.S. Pre-Market Approval
Under the provisions of the Federal Food and Cosmetic Act
("the FDC Act"), the Company must obtain pre-market approval from the
FDA prior to commercial use in the United States of the proposed CTLMTM
device. There can be no assurance if or when the Company will receive
any such clearances or approvals. Obtaining FDA pre-market approval may
impose costly requirements on the Company and may delay for a
considerable period of time, or prevent, the commercialization of the
CTLMTM device.
Dependence on Market Acceptance
There can be no assurance that physicians or the medical
community in general will accept and utilize the CTLMTM device. The
extent that, and rate of which, the CTLMTM device achieves market
acceptance and penetration will depend on many variables including, but
not limited to, the establishment and demonstration in the medical
community of the clinical safety, efficacy and cost-effectiveness of
the CTLMTM device, the advantage of the CTLMTM device over existing
technology and cancer detection methods, third-party reimbursements
practices and the Company's manufacturing, quality control, marketing
and sales efforts. Failure of the Company's products to gain market
acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business
- Sales and Marketing," "Business - Manufacturing" and "Business -
Reimbursement."
Limited Marketing and Sales Capability
In order to market any products it may develop, the Company
will have to develop a marketing and sales force with
technical expertise and distribution capability. There can be
no assurance that the Company will be able to establish sales
and distribution capabilities or that the Company will be
successful in gaining market acceptance for any products it
may develop. The Company
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intends to pursue and has secured one or more distribution
arrangements in Europe and Asia with strategic marketing
partners who have established marketing capabilities. There
can be no assurance that the Company on its own, or through
arrangements with others, will be able to enter into such
arrangements on acceptable terms, if at all. To the extent
that the Company arranges with third parties to market its
products, the success of such products may depend on the
efforts of such third parties. There can be no assurance that
the Company will be able to enter any such strategic alliance
in Europe or that any of the Company's proposed marketing
schedules or plans can or will be met. See "Reliance on
International Sales," "Business - Sales and Marketing," and
See Business - Government Regulation".
Limitation on Third-Party Reimbursement; Health Care Reform
In the United States, suppliers of health care products and
services are greatly affected by Medicare, Medicaid and other
government insurance programs, as well as by private insurance
reimbursement programs. Third-party payors (Medicare, Medicaid, private
health insurance companies and other organizations) may affect the
pricing or relative attractiveness of the Company's products by
regulating the level of reimbursement provided by such payors to the
physicians and clinics utilizing the CTLMTM device or by refusing
reimbursement. If examinations utilizing the Company's products were
not reimbursed under these programs, the Company's ability to sell its
products may be materially and/or adversely affected. There can be no
assurance that third-party payors will provide reimbursement for use of
the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending on
health care items and services, limit coverage for new technology and
limit or control the price health care providers and drug and device
manufacturers may charge for their services and products, respectively.
If adopted and implemented, such reforms could have material adverse
effect on the Company's business, financial condition and results of
operations. In international markets, reimbursement by private
third-party medical insurance providers, including governmental
insurers and independent providers, varies from country to country. In
certain countries, the Company's ability to achieve significant market
penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical
device companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the cost of
health care through various means. See "Business - Reimbursement."
Uncertain Ability to Meet Capital Needs
The Company will require substantial additional funds for its
research and development programs, preclinical and clinical testing,
operating expenses, regulatory processes and manufacturing and
marketing programs. The Company's capital requirements will depend on
numerous factors, including the progress of its research and
development programs, results of preclinical and clinical testing, the
time and cost invoked in obtaining regulatory approvals, the cost of
filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments and changes in the Company's existing research, licensing
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and other relationships and the terms of any new collaborative,
licensing and other arrangements that the Company may establish.
Moreover, the Company's fixed commitments, including salaries and fee
for current employees and consultants, and other contractual agreements
and are likely to increase as additional agreements are entered into
and additional personnel are retained. See "Business - - Patents,"
"Business - Licenses and Other Agreements," "Management - Employment
Agreements," "Certain Transactions" and "Notes to Financial
Statements." The Company may need to raise additional capital to fund
its future operations and may seek such additional funding through
public or private financing or collaborative, licensing and other
arrangements with corporate partners. If additional funds are raised by
issuing equity securities, dilution to existing stockholders will
result and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that
additional financing will be available when needed, or if available,
will be available on acceptable terms. Insufficient funds may prevent
the company from implementing its business strategy or may require the
Company to delay, scale back, or eliminate certain of its research and
product development programs or to license to third parties rights to
commercialize products or technologies that the Company would otherwise
seek to develop itself.
Dependence on Qualified Personnel
Due to the specialized scientific nature of the Company's
business, the Company is highly dependent upon its ability to attract
and retain qualified scientific, technical and managerial personnel.
Therefore the Company has entered into employment agreements with
certain of its executive officers and employees. The loss of the
services of existing personnel as well as the failure to recruit key
scientific, technical and managerial personnel in a timely manner would
be detrimental to the Company's research and development programs and
to its business. The Company's anticipated growth and expansion into
areas and activities requiring additional expertise, such as marketing,
will require the additional of new management personnel. Competition
for qualified personnel is intense and there can be no assurance that
the Company will be able to continue to attract and retain qualified
personnel necessary for the development of its business. See "Business
- Employees and Management."
Competition
The market in which the Company intends to participate is
highly competitive. Many of the companies in the cancer diagnostic and
screening markets have substantially greater technological, financial,
research and development, manufacturing, human and marketing resources
and experience than the Company. Such companies may succeed in
developing products that are more effective or less costly than the
company's products or such companies may be successful in manufacturing
and marketing their products than the Company. Physicians using imaging
equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, Magnetic Resonance Imaging (MRI) systems,
and thermography, diaphonography and transilluminational devices may
not use the company's products. Currently mammography is employed
widely and the Company's ability to demonstrate the Company's ability
to sell the CTLMTM device to medical facilities will, in part, be
dependent on the Company's ability to demonstrate the clinical utility
of the CTLMTM device as an adjunct to mammography and physical
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examination and its advantages over other available diagnostic tests.
The competition for developing a commercial device utilizing computed
tomography techniques and laser technology is difficult to ascertain
given the proprietary nature of the technology. There are a significant
number of academic institutions involved in various areas of research
involving "optical medical imaging" which is a shorthand description of
the technology the Company's CTLMTM device utilizes. A brief list of
the most prestigious of these institutions includes the University of
Pennsylvania, The City College of New York, and University College
London. Two of these institutions have granted licenses on certain
patented technologies to two companies: University of Pennsylvania -
Non-Invasive Technologies; City College of New York - MediScience, Inc.
Technical Obsolescence
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products obsolete. There can be no assurance that the
development of new types of diagnostic medical equipment or technology will not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business Competition."
Reliance on International Sales
The Company intends to commence international sales of the CTLMTM
device in Europe and Asia prior to commencing commercial sales in the United
States, where sales cannot occur unless and until the Company receives
pre-market approval from the FDA. Thus, until the Company receives pre-market
approval from the FDA to market the CTLMTM device, as to which there can be no
assurance, the Company revenues, if any, will be derived from sales to
international distributors. A significant portion of the Company's revenues,
therefore, may be subject to the risks associated with international sales,
including economical and political instability, shipping delays, fluctuation of
foreign currency exchange rates, foreign regulatory requirements and various
trade restrictions, all of which could have a significant impact on the
Company's ability to deliver products on a timely basis. Future imposition of,
or significant increases in the level of, customs duties, export quotas or other
trade restrictions could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business - Sales
and Marketing," the regulation of medical devices, particularly in Europe,
continue to develop and there can be no assurance that new laws or regulations
will not have an adverse effect on the Company.
Product Liability
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing and marketing of cancer
detection products. Significant litigation, not involving the Company, has
occurred in the past based on the allegations of false negative diagnoses of
cancer. While the CTLM(TM) device is being developed as a adjunct to other
diagnostic techniques, there can be no assurance that the Company will not be
subjected to future claims and potential liability.
Employees
As of September 24, 1997, the Company had 31 full-time employees,
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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.
Item 2. Description of Property
The Company's facilities are located at 6531 N.W. 18th Court,
Plantation, Florida. The facilities are owned by the Company and comprise a
24,000 sq. ft. building located on a 5 acre landscaped tract. The Company
believes that its facility is adequate for its current and reasonably
foreseeable future needs. The Company will assemble the device at its facility
from hardware components that will be made by vendors to Company specifications.
The software components of the device are developed by Company.
Item 3. Legal Proceedings
On July 10, 1997, the Company filed an action in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, case no. 97-10533, against
Mr. Valey Kamalov ("Kamalov"). The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Upon filing the complaint, the Company sought and was granted
injunctive relief against Kamalov during the pendency of the proceedings.
The Company is not aware of any other material legal proceedings,
pending or contemplated, to which the Company is, or would be, a party or of
which any of its property is, or would be, the subject.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the over-the-counter bulletin
board market. There has been trading in the Company's Common Stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high and low trade prices for the Common Stock, as
reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown or commissions and may not necessarily represent actual transactions.
Quarter Ending High Bid Low Bid
Fiscal Year 1995
----------------
September/1994 $1.38 $1.00
December/1994 $1.44 $ .75
March/1995 $2.19 $ .50
June/ 1995 $2.12 $1.46
Fiscal Year 1996
----------------
September/1995 $ .78 $ .71
December/1995 $3.15 $ .75
March/1996 $8.25 $8.00
June/ 1996 $3.90 $3.87
14
<PAGE>
Fiscal Year 1997
----------------
September/1996 $3.93 $2.25
December/1996 $3.93 $1.43
March/1997 $4.12 $2.43
June/1997 $3.06 $2.69
On June 30, 1997, the closing trade price of the Common Stock as
reported on the OTC Bulletin Board was $2.69. As of such date, there were
approximately 607 holders of record of the Company's Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Twelve Months Ended June 30, 1997 and June 30, 1996. General and
administrative expenses in the aggregate during the twelve months ended June 30,
1997, were $2,212,998 representing a decrease of $486,992 from $2,699,990 during
the twelve months ended June 30, 1996. The decrease is due primarily to a
substantial decrease of professional fees as a result of hiring employees and
non-recurring expenses associated with the clinical sites and attendant
expenses. Compensation and related benefits during the twelve months ended June
30, 1997, were $3,934,294 representing an increase of $2,484,063 from $1,450,231
during the twelve months ended June 30, 1996. The increase in compensation and
related benefits is due to the hiring of an additional 10 employees and the
exercise of incentive and non-qualified stock options by its employees. Research
and development expenses during the twelve months ended June 30, 1997, were
$1,682,064 representing an decrease of $100,865 from $1,782,929 during the
twelve months ended June 30, 1996. This decrease is due primarily to finalizing
certain components of the CTLM device.
Net interest income during the twelve months ended June 30, 1997, was
$114,228 representing an increase of $55,920 from $58,308 during the
twelvemonths ended June 30, 1996. This increase is due to an increase of funds
invested by the Company.
Depreciation and amortization expenses during the twelve months ended
June 30, 1997, were $202,365 representing an increase of $90,693 from $111,672
during the twelve month period ended June 30, 1996. This increase is due
primarily to the purchase of the Company's current facility and the attendant
improvements.
Balance Sheet Data
Liquidity and Capital Resources
The Company has financed its operations since inception by the issuance
of equity securities with aggregate net proceeds of approximately $12,8586,000.
In March, 1996 the Company received net proceeds of approximately $3,600,000
from the private placement of its Series A Convertible Preferred Stock offering,
approximately $1,600,000 from the private placement of its common stock pursuant
to Regulation S of the Securities Act of 1933, as amended, and approximately
$2,000,000 from the exercise of options that were granted for services rendered.
In December, 1996 the Company received net proceeds of approximately $4,500,000
from the private placement of Series B Convertible Preferred Stock and Warrants
15
<PAGE>
pursuant to Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.
The Company's combined cash and cash equivalents totaled $383,223 at
June 30, 1997, representing a decrease of $3,592,131 from $3,975,354 at June 30,
1996. The decrease in cash and cash equivalents is due to continuing operations.
The Company's prototype equipment totaled $1,216,585 at June 30, 1997
and $575,338 at June 30, 1996. All direct costs associated with the prototype
equipment have been capitalized. The increase in prototype equipment is due to
an increase in the development of the Computed Tomography Laser Mammography
(CTLMTM) device and the manufacture of five (5) devices to be placed into
clinical sites.
The Company's property and equipment, net, totaled $3,320,979 at June
30, 1997 and $657,132 at June 30, 1996. This increase is due to the purchase of
a building and the attendant improvements.
The Company does not expect to generate a positive internal cash flow
for at least the next twelve (12) months due to the expected increase in
spending for research and development and the expected costs of commercializing
it initial product, the CTLM device. The Company will require additional funds
for its research and development, pre-clinical and clinical testing, operating
expenses, Food and Drug Administration regulatory processes, and manufacturing
and marketing programs. Accordingly, the Company will be required to raise
additional funds prior to the end of calendar year 1997 in order to continue
operations. The Company plans to raise additional funds by either: entering into
a transaction(s) to privately place equity, either common or preferred stock, or
debt securities, or combinations of both; or, placing equity into the public
market through an underwritten secondary offering. At the present time, the
Company continues to receive indications of interest to provide this additional
funding. The Company, however, continues to review and balance these indications
of interest and funding requirements against its strategic product development
goals.
On September 24, 1997, the Corporation entered into an agreement with a
merchant banker for the sale, pursuant to Regulation S, of up to a total of 200
shares of Series C Convertible Preferred Stock ("Preferred") and Warrants to
purchase up to 100,000 shares of the Company's common stock, exercisable at a
price equal to the Closing bid price of the common stock as of the Closing Date
of the Regulation S Sale (the "Closing Date"), for a total amount of up to
$2,000,000. The Preferred is convertible at 75% of the average closing price of
the Company's common stock for the five-day trading period ending on the day
prior to the date of conversion but in no event will the conversion price be
greater than 75% of the average price on the Closing Date, as determined by the
average price over the five consecutive trading days ending the trading day
prior to the Closing Date. See Financial Statements Note (18) Subsequent Event.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Independent Auditor's Report F-1
Financial Statements
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-7
Notes to Financial Statement F-9
16
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective August 1, 1997, the accounting firm of Margolies and Fink,
Certified Public Accounts for the Company, changed the accounting firms name to
Margolies, Fink and Wichrowski, Certified Public Accounts.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; and
compliance With Section 16(a) of the Exchange Act.
All Directors hold their offices until the next shareholder meeting of
the Company and until their successors are elected and qualified or until their
earlier resignation or removal. Officers are appointed by and serve at the
discretion of the Board of Directors.
Business Experience
Richard J. Grable, 55
Mr. Grable has served as Chief Executive Officer and a Director of the
Company since 1994.
From March, 1994, to the Present: Mr. Grable is Chief Executive Officer
and a Director of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a
manufacturer of diagnostic imaging systems. Mr. Grable is primarily responsible
for the development of the CTLMtm device.
From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Fla., a
manufacturer of breast imaging systems.
From March, 1992, to December, 1993: Mr. Grable was a an engineering
consultant for Lintronics Technologies, Inc., Tampa, Fla., a manufacturer of
breast imaging systems.
From August, 1991 to February, 1992: Mr. Grable was an engineering
consultant for Audio Intelligence Devices, Inc., Ft. Lauderdale, Fla., a
manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant
for Telmed, Inc., Ft. Lauderdale, Fla., a software and electronic design
company.
Linda B. Grable, 60
Mrs. Grable has served as President and Chairman of the Board of
Directors of the Company since 1994.
From March, 1994, to Present: Mrs. Grable is President and a Director
of Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic
imaging systems.
17
<PAGE>
From September, 1991, to February, 1994: Mrs. Grable was President and
Director of VCC Communications, Inc., Tampa, Fla., a manufacturer of voltage
controlled oscillators (VCO).
From August, 1988, to April, 1991: Mrs. Grable was President of
Lintronics International Ltd., Inc., Plantation, Fla., a manufacturer of breast
imaging systems.
Allan L. Schwartz, 55
Mr. Schwartz has served as Executive Vice-President, Chief Financial
Officer and a Director of the Company since 1994.
From March, 1994, to Present: Mr. Schwartz is Executive Vice-President
and Chief Financial Officer of Imaging Diagnostic Systems, Inc., Sunrise, Fla.,
a manufacturer of diagnostic imaging systems.
From April, 1993, to February, 1994: Mr. Schwartz was President and
Director of DynaMed Technologies, Inc., Coral Springs, Florida, a company that
developed neural network software for use with laser imaging systems.
From August, 1991, to April, 1993: Mr. Schwartz was President and
Director of Tron Industries, Inc., North Lauderdale, Florida, a developer of low
voltage neon novelty products.
From April, 1991, to July, 1991: Mr. Schwartz worked as a manufacturing
consultant for SE Enterprises, Miami, Fla., a manufacturer of prototype homes.
Peter S. Knezevich, 41
Mr. Knezevich served as the Company's General Counsel and Vice
President from April, 1995 until September 16, 1997, when he resigned for
personal reasons.
Robert H. Wake, 48
From April, 1995, to Present: Mr. Wake is Director of Engineering for
Imaging Diagnostic Systems, Inc., Sunrise, Fla., a manufacturer of diagnostic
imaging systems.
From January, 1994, to March, 1995: Mr. Wake was a consultant to
various companies in 3-D computer imaging.
From October, 1986, to December, 1993: Mr. Wake founded and was
President of Reality Imaging Corporation, Solon, Ohio, a manufacturer of 3-D
computer imaging systems. Mr. Wake invented the Voxel Flinger 3-D imaging
technology.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's outstanding
stock. Both parties disclaim, however, any beneficial interest or ownership in
the shares owned by the other party.
18
<PAGE>
Item 10. Executive Compensation
The information required by this item is hereby incorporated herein by
reference to pages 5 through 7 of the Company's Proxy Statement dated September
7, 1997 issued, in connection with its annual meeting to be held on October 15,
1997 ( the "Proxy Statement").
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is hereby incorporated herein by
reference to page 3 of the Company's Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated herein by
reference to page 4 of the Company's Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
A) Exhibits included herein:
Exhibit
No. Description
--- -----------
(3)(i).7 Amendment to Article of Incorporation - Designation of Series
B Convertible Preferred Shares. Filed as an Exhibit to the Registration
Statement on Form S-1 declared effective on July 10,1997. File Number 333-21243.
(3)(i).6 Amendment to Article of Incorporation - Designation of Series
A Convertible Preferred Shares.*
(3)(i).5 Articles of Incorporation (Florida)*
(3)(ii).1 By-Laws(Florida)
(3)(i).4 Certificate of Dissolution*
(3)(i).3 Articles of Incorporation and By-Laws(New Jersey)**
(3)(i).1 Certificate and Plan of Merger**
(3)(i).2 Certificate of Amendment**
(4).1 Instruments Defining the Rights of Security
Holders - Designation of Series A Convertible
Preferred Shares.(See Exhibit (3), above).
(10).1 Facilities Lease(s)**
(10).2 Incentive Stock Option Plan**
(10).3 Non-Qualified Stock Option Plan**
(10).4 Employment Agreement(s)**
(10).5 Lock Up Agreement By and Between The Company
and Richard J. Grable, Linda B. Grable, and Allan L.
Schwartz*
19
<PAGE>
(11) Schedule of computation of net loss per share.
Filed as an Exhibit to the Company's Form 10-KSB for the
year ending June 30, 1996.
** Filed as an exhibit to the Company's Form 10-SB, as amended, file number
0-26028, filed on May 6, 1995.
B) Reports on Form 8-K
99.1 Report dated June 12, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/Linda B. Grable
-------------------
Linda B. Grable
Chairman of the Board,
Director, and President.
September 26, 1997
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
By: /s/Linda B. Grable
------------------
Linda B. Grable
Chairman of the Board and President
Date: September 26, 1997
By: /s/Richard J. Grable
--------------------
Richard J. Grable
Director and Chief Executive Officer
Date: September 26, 1997
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz
Director and Executive Vice-President
Dated: September 26, 1997
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1997 and 1996 and for the period December 10, 1993 (date of
inception) to June 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 1997 and 1996 and the results
of its operations and its cash flows for the years ended June 30, 1997 and 1996
and for the period December 10, 1993 (date of inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the change in accounting for software
development costs.
The Company is in the development stage as of June 30, 1997 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 6, 1997
F-1
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheet
June 30, 1997 and 1996
ASSETS
1997 1996
----------- ----------
Current assets:
Cash $ 383,223 $ 3,975,354
Restricted certificate of deposit 103,500 --
Loans receivable-other 10,073 --
Prepaid expenses 56,792 15,900
----------- -----------
Total current assets 553,588 3,991,254
----------- -----------
Property and equipment, net 3,320,979 657,132
Prototype equipment 1,216,585 575,338
Other assets 9,635 53,010
----------- -----------
$ 5,100,787 $ 5,276,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 519,546 $ 205,750
Current maturities of capital lease obligations 8,928 --
Stockholder loans -- 77,833
----------- -----------
Total current liabilities 528,474 283,583
----------- -----------
Long-term capital lease obligations 35,849 --
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series A),
5% cumulative annual dividend, no par
value; authorized 2,000,000 shares,
issued 0 and 2,400 shares, respectively -- 2,160,000
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par
value; authorized 450 shares, issued
450 and 0 shares, respectively 4,500,000 --
Common stock, no par value; authorized
48,000,000 shares, issued 24,905,084 and
23,023,789 shares, respectively 14,662,966 9,941,066
Additional paid-in capital 1,815,496 1,372,540
Deficit accumulated during the
development stage (16,288,314) (8,186,146)
----------- -----------
4,690,148 5,287,460
Less: subscriptions receivable (35,559) (18,684)
deferred compensation (118,125) (275,625)
----------- -----------
Total stockholders' equity 4,536,464 4,993,151
----------- -----------
$ 5,100,787 $ 5,276,734
=========== ===========
See accompanying notes to the financials.
F-2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 3,776,794 $ 1,217,731 $ 5,247,472
Research and development 616,886 239,669 968,511
Research and development expenses 1,065,178 1,543,260 2,664,172
Advertising and promotion expenses 166,520 272,698 544,395
Selling, general and
administrative expenses 528,753 297,229 905,385
Clinical expenses 33,506 317,310 350,816
Consulting expenses 764,364 832,075 1,715,908
Insurance costs 121,287 34,097 166,242
Professional fees 178,402 630,284 897,105
Stockholder expenses 20,902 -- 20,902
Trade show expenses 154,782 85,623 289,276
Travel and subsistence costs 195,585 99,826 345,600
Rent expense 48,897 130,848 221,248
Interest expense 2,744 -- 27,053
Depreciation and amortization 202,365 111,672 364,214
Amortization of deferred compensation 157,500 232,500 504,375
Interest income (116,972) (58,308) (175,280)
----------- ----------- ------------
7,917,493 5,986,514 15,057,394
----------- ----------- ------------
Net loss (7,917,493) (5,986,514) (15,057,394)
Dividends on cumulative preferred stock:
From discount at issuance (714,155) (998,400) (1,712,555)
Earned (184,675) (47,845) (232,520)
Amortization of preferred stock discount 714,155 -- 714,155
----------- ----------- ------------
Net loss applicable to common
shareholders $(8,102,168) $(7,032,759) $(16,288,314)
=========== =========== ============
Net loss per common share:
Weighted average number of common shares 24,222,966 21,354,155 20,082,632
=========== =========== ============
Primary net loss per common share $ (.33) $ (.33) $ (.81)
=========== =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
-------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- -0- $ -0-
---------- ---------- ----------- -----------
Issuance of common stock, restated for reverse
stock split - - - -
Acquisition of public shell - - - -
Net issuance of additional shares of stock - - - -
Common stock sold - - - -
Net loss - - - -
---------- ---------- ----------- -----------
Balance at June 30, 1994 - - - -
Common stock sold - - - -
Common stock issued in exchange for services - - - -
Common stock issued with employment agreement - - - -
Common stock issued for compensation - - - -
Stock options granted - - - -
Amortization of deferred compensation - - - -
Forgiveness of officers' compensation - - - -
Net loss - - - -
---------- ---------- ----------- -----------
Balance at June 30, 1995 - - - -
---------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Common Stock
----------------------- Accumulated
Number of Additional During the
Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- $ -0- $ -0- $ -0-
---------- ---------- ---------- -------- ---------
Issuance of common stock, restated for reverse
stock split 510,000 50,000 - - -
Acquisition of public shell 178,752 - - - -
Net issuance of additional shares of stock 15,342,520 16,451 - - -
Common stock sold 36,500 36,500 - - -
Net loss - - - (66,951) -
---------- --------- --------- ------- --------
Balance at June 30, 1994 16,067,772 102,951 - (66,951) -0-
Common stock sold 1,980,791 1,566,595 - - (523,118)
Common stock issued in exchange for services 115,650 102,942 - - -
Common stock issued with employment agreement 75,000 78,750 - - -
Common stock issued for compensation 377,500 151,000 - - -
Stock options granted - - 622,500 - -
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - 50,333 - -
Net loss - - - (1,086,436) -
---------- --------- --------- ---------- ----------
Balance at June 30, 1995 18,616,713 2,002,238 672,833 (1,153,387) (523,118)
---------- --------- --------- ---------- ----------
Deferred
Compensation Total
------------- ------------
<S> <C> <C>
Balance at December 10, 1993(date of inception) $ -0- $ -0-
------------- ------------
Issuance of common stock, restated for reverse
stock split - 50,000
Acquisition of public shell - -
Net issuance of additional shares of stock - 16,451
Common stock sold - 36,500
Net loss - (66,951)
------------- ------------
Balance at June 30, 1994 - 36,000
Common stock sold - 1,043,477
Common stock issued in exchange for services - 102,942
Common stock issued with employment agreement - 78,750
Common stock issued for compensation - 151,000
Stock options granted (622,500) -
Amortization of deferred compensation 114,375 114,375
Forgiveness of officers' compensation - 50,333
Net loss - (1,086,436)
------------- ------------
Balance at June 30, 1995 (508,125) 490,441
------------- ------------
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
---------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 - - - -
------------- ------------- ----------- --------------
Preferred stock sold, including dividends 4,000 3,600,000 - -
Common stock sold - - - -
Cancellation of stock subscription - - - -
Common stock issued in exchange for services - - - -
Common stock issued with exercise of stock options - - - -
Common stock issued with exercise of options
for compensation - - - -
Conversion of preferred stock to common stock (1,600) (1,440,000) - -
Common stock issued as payment of preferred
stock dividends - - - -
Dividends accrued on preferred
stock not yet converted - - - -
Collection of stock subscriptions - - - -
Amortization of deferred compensation - - - -
Forgiveness of officers' compensation - - - -
Net loss - - - -
---------- ----------- ----------- -----------
Balance at June 30, 1996 2,400 2,160,000 - -
Deficit
Common Stock Accumulated
----------------------- Additional During the
Number of Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
----------- ---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
<C>
Balance at June 30, 1995 18,616,713 2,002,238 672,813 (1,153,387) (523,118)
---------- --------- --------- ---------- ----------
Preferred stock sold, including dividends - - 998,400 (998,400) -
Common stock sold 70,471 1,561,110 - - -
Cancellation of stock subscription (410,500) (405,130) - - 405,130
Common stock issued in exchange for services 2,503,789 4,257,320 - - -
Common stock issued with exercise of stock
options 191,500 104,375 - - (4,375)
Common stock issued with exercise of options
for compensation 916,400 367,164 - - -
Conversion of preferred stock to common stock 420,662 1,839,360 (399,360) - -
Common stock issued as payment of preferred
stock dividends 4,754 14,629 - (14,629) -
Dividends accrued on preferred
stock not yet converted - - - (33,216) -
Collection of stock subscriptions - - - - 103,679
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - 100,667 - -
Net loss - - - (5,986,514) -
---------- --------- --------- ---------- ----------
Balance at June 30, 1996 23,023,789 9,941,066 1,372,540 (8,186,146) (18,684)
---------- --------- --------- ---------- ----------
</TABLE>
Deferred
Compensation Total
------------ ----------
Balance at June 30, 1995 (508,125) 490,441
--------- ----------
Preferred stock sold, including dividends - 3,600,000
Common stock sold -
1,561,110
Cancellation of stock subscription - -
Common stock issued in exchange for services - 4,257,320
Common stock issued with exercise of stock options - 100,000
Common stock issued with exercise of options
for compensation - 567,164
Conversion of preferred stock to common stock - -
Common stock issued as payment of preferred
stock dividends - -
Dividends accrued on preferred
stock not yet converted - (33,216)
Collection of stock subscriptions - 103,679
Amortization of deferred compensation 232,500 232,500
Forgiveness of officers' compensation - 100,667
Net loss - (5,986,514)
--------- ----------
Balance at June 30, 1996 (275,625) 4,993,151
--------- ----------
Continued)
See accompanying notes to the financial statements.
F - 5
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1997
<TABLE>
<CAPTION>
Preferred Stock (Series A) Preferred Stock (Series B)
---------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 2,400 2,160,000 - -
---------- ----------- ---------- -----------
Preferred stock sold, including dividends - - 450 4,500,000
Conversion of preferred stock to common stock (2,400) (2,160,000) - -
Common stock issued in exchange for services - - - -
Common stock issued for compensation - - - -
Common stock issued with exercise of stock options - - - -
Common stock issued with exercise of stock options
through stock appreciation rights - - - -
Cancellation of stock issued to employee - - - -
Common stock issued as payment of preferred
stock dividends - - - -
Payment of accrued dividends on converted shares - - - -
Dividends accrued on preferred
stock not yet converted - - - -
Collection of stock subscriptions - - - -
Amortization of deferred compensation - - - -
Amortization of preferred stock dividend - - - -
Net loss - - - -
---------- ---------- --------- ----------
Balance at June 30, 1997 - $ - 450 $4,500,000
---------- ---------- --------- ----------
Deficit
Common Stock Accumulated
---------------------------- Additional During the
Number of Paid-In Development Subscriptions
Shares Amount Capital Stage Receivable
----------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C>
<C> <C>
Balance at June 30, 1996 23,023,789 9,941,066 1,372,340 (8,186,146) (8,614)
------------ ------------ ------------ ------------ ------------
Preferred stock sold, including dividends -- -- 714,144 (714,155) --
Conversion of preferred stock to common stock 1,041,202 2,759,040 599,040 -- --
Common stock issued in exchange for services 214,200 630,129 -- -- --
Common stock issued for compensation 313,200 918,364
Common stock issued with exercise of stock options 17,000 33,750 11,521 -- (33,750)
Common stock issued with exercise of stock options
through stock appreciation rights 334,933 363,514 950,473 -- --
Cancellation of stock issued to employee (150,000) (52,500) -- -- --
Common stock issued as payment of preferred
stock dividends 20,760 49,603 -- (49,603) --
Payment of accrued dividends on converted shares -- -- -- 33,216 --
Dividends accrued on preferred
stock not yet converted -- -- -- (168,288) --
Collection of stock subscriptions -- -- -- -- 16,875
Amortization of deferred compensation -- -- -- -- --
Amortization of preferred stock dividend -- -- (714,155) 714,155 --
Net loss -- -- -- (7,917,493) --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 24,905,084 $ 14,662,966 $ 1,185,496 $(16,288,314) $ (35,519)
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Deferrred
Compensation Total
-------------- ---------
<S> <C> <C>
Balance at June 30, 1996 (215,625) 4,993,151
--------- ----------
Preferred stock sold, including dividends - 4,500,000
Conversion of preferred stock to common stock - -
Common stock issued in exchange for services - 650,129
Common stock issued for compensation - 918,364
Common stock issued with exercise of stock options - 91,521
Common stock issued with exercise of stock options
through stock appreciation rights - 1,313,989
Cancellation of stock issued to employee - (52,500)
Common stock issued as payment of preferred
stock dividends - -
Payment of accrued dividends on converted shares - 33,216
Dividends accrued on preferred
stock not yet converted - (168,288)
Collection of stock subscriptions - 16,875
Amortization of deferred compensation 157,500 157,500
Amortization of preferred stock dividend - (7,917,493)
Net loss - (7,917,493
--------- ----------
Balance at June 30, 1997 $(118,125) $4,536,464
--------- ----------
</TABLE>
See accompanying notes to the financial statements.
F - 6
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
Net loss $ (7,917,493) $ (5,986,514) $(15,057,394)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 202,365 111,672 364,214
Amortization of deferred compensation 157,500 232,500 504,375
Noncash compensation and consulting expenses 2,957,128 3,049,113 6,310,516
(Increase) in restricted certificate of deposit (103,500) -- (103,500)
(Increase) decrease in loans receivable
-shareholders and others (10,073) 48,600 (10,073)
(Increase) decrease in prepaid expenses (40,892) (15,900) (56,792)
(Increase) decrease in other assets 43,375 (50,346) (9,635)
Increase in accounts payable
and accrued expenses 178,724 88,074 351,258
------------ ------------ ------------
Total adjustments 3,384,627 3,463,713 7,350,363
------------ ------------ ------------
Net cash used for operating activities (4,532,866) (2,522,801) (7,707,031)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment (641,247) (304,963) (1,216,585)
Capital expenditures (2,815,923) (471,930) (3,545,256)
------------ ------------ ------------
Net cash used for investing activities (3,457,170) (776,893) (4,761,841)
------------ ------------ ------------
Cash flows from financing activitie
Repayment of capital lease obligation (5,512) -- 5,512)
Proceeds from stockholder loans, net (77,833) 29,060 --
Proceeds from issuance of preferred stock 4,500,000 3,600,000 8,100,000
Net proceeds from issuance of common stock (18,750) 3,629,929 4,757,607
------------ ------------ ------------
Net cash provided by financing activities 4,397,905 7,258,989 12,852,095
------------ ------------ ------------
Net increase (decrease) in cash (3,592,131) 3,959,295 383,223
Cash and cash equivalents at beginning of period 3,975,354 16,059 -0-
------------ ------------ ------------
Cash and cash equivalents at end of period $ 383,223 $ 3,975,354 $ 383,223
============ ============ ============
</TABLE>
(Continued)
See accompanying notes to the financial statements.
F - 7
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,744 $ -- $ 27,053
=========== =========== ==========
Supplemental disclosures of noncash investing and financing activities:
Issuance of common stock and options
in exchange for services $ 650,129 $ 2,487,025 $3,290,429
=========== =========== ==========
Issuance of common stock in
exchange for property and equipment $ -- $ 10,900 $ 89,650
=========== =========== ==========
Issuance of common stock for compensation $ 918,364 $ 567,164 $1,636,528
=========== =========== ==========
Issuance of common stock through
exercise of incentive stock options $ 1,405,510 $ -- $1,405,510
=========== =========== ==========
Issuance of common stock as
payment for preferred stock dividends $ 49,603 $ 14,629 $ 64,232
=========== =========== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ 50,289 $ -- $ 50,289
=========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-8
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI-Fl."). IDSI-Fl. was formed
on December 10, 1993.(see Note 4) Effective July 1, 1995 the Company changed its
corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial CTLM(TM) prototype has been developed with the use of
"Ultrafast Laser Imaging Technology"(TM), and this technology was first
introduced at the "RSNA" scientific assembly and conference during late November
1994. The completed CTLM(TM) device was exhibited at the "RSNA" conference
November 26-30, 1995. The Company exhibited the pilot production run CTLM(TM)
device at the "RSNA" conference held in Chicago on December 1-6, 1996. The
Company filed its initial patent application for the CTLM(TM) device on June 7,
1995 and has subsequently filed for foreign patent protection.
The initial CTLM(TM) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements. The Food and Drug Administration (FDA) approved
calibration Investigational Device Exemption ("IDE") clinical testing in the
Company's laboratory. This phase of clinical testing was approved for a small
number of calibration scans on volunteers. At the conclusion of the calibration
studies, the Company will commence its first clinical trial at the Strax
Diagnostic Breast Institute under a Phase I - IDE application, which was
approved by the FDA on February 9, 1996. Four additional clinical sites are
planned by the end of calendar 1997.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM(TM) prototype is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
F-9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months or less and investment in money market funds are considered to be cash
equivalents by the Company.
(c) Prototype equipment
The direct costs associated with the final CTLM(TM) prototypes have
been capitalized. On June 17, 1996 the Company's Director of Research and
Development and the Director of Engineering decided to discontinue with the
development of the then current generation proprietary scanner and data
collection system (components of the prototype CTLM(TM) device) and to begin
development of a third generation scanner and data collection system. As a
result, certain items amounting to $677,395 were reclassified as follows:
$512,453 as research and development expense and $164,941 as computer and lab
equipment. The costs associated with the completed prototype units placed at
clinical test locations will be transferred to clinical equipment at their
historical cost. The prototype costs will be amortized over a period of five
years upon placement of the equipment at the clinical testing locations.
(d) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortizationare computed using
straight-line methods over the estimateduseful lives of the related assets.
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, capitalization of software development costs begins upon the
establishment of technological feasibility for the product. The establishment of
technological
(Continued)
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Property, equipment and software development costs (Continued)
feasibility and the ongoing assessment of the recoverability of these
costs requires considerable judgement by management with respect to certain
external factors, including, but not imited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. After considering the above factors, the Company has determined that
software development costs, incurred subsequent to the initial acquisition of
the basic software technology, should be properly expensed. Such costs are
included in research and development expense in the accompanying statements of
operations.
(e) Research and Development
Research and development expenses consist principally of expenditures
for equipment and outside third-party consultants which are used in testing and
the development of the Company's prototypes, product software and compensation
to specific company personnel. The non-payroll related expenses include testing
at outside laboratories, parts associated with the design of initial components
and tooling costs, and other costs which do not remain with the developed
CTLM(TM) prototype. The software development costs are with outside third-party
consultants involved with the implementation of final changes to the developed
software. All research and development costs are expensed as incurred.
(f) Net loss per share
Net loss per share of common stock is computed by dividing the net loss
applicable to common shareholders by the weighted average number of common
shares outstanding and common stock equivalents. Stock options and the
convertible preferred stock are considered common stock equivalents unless their
inclusion would be anti-dilutive.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires an
asset and liability approach for financial accounting and reporting for income
taxes. Under SFAS 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the year that includes the enactment date.
(h) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
F-11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(3) RESTATEMENT
The Company had been capitalizing the costs associated with the final
development of the CTLM(TM) software from its initial acquisition phase to the
software being used in the CTLM(TM) machine currently undergoing tests at
clinical locations. Effective December 31, 1996, the Company has restated its
financial statements to expense all additional costs incurred since the
acquisition of the original software. Accordingly, the Company has expensed a
total of $869,692 as additional research and development costs through December
31, 1996, of which $436,736 was applicable to the fiscal year ended June 30,
1996.
(4) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger.(see Note 14)
(4) MERGER (Continued)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(5) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. In addition, management has been able
to raise the necessary capital to reach
F-12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
this stage of product development and has been able to fund any capital
requirements to date. There is no assurance that once the development of the
CTLM(TM) prototype is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(6) RESTRICTED CERTIFICATE OF DEPOSIT
The Company has issued an irrevocable letter of credit, due on October 4, 1997,
towards the purchase of laboratory equipment. The letter of credit is secured
with the certificate of deposit.
(7) STOCKHOLDERS' LOANS - RECEIVABLES AND PAYABLES
Certain of the major shareholders have advanced funds to the Company during 1995
and 1996. These loans are unsecured and non-interest bearing. These loans have
been repaid in full during the year ended June 30, 1997.
(8) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
----------------------------
1997 1996
----------- ----------
Furniture and fixtures $ 240,029 $ 28,199
Building and land 2,081,399 --
Clinical equipment 250,000 --
Computers and equipment 389,373 164,270
CTLM(TM) software costs 352,932 352,932
Trade show equipment 153,193 81,416
Laboratory equipment 179,862 153,758
Leasehold improvements -- 38,407
----------- ---------
3,646,788 818,982
Less: accumulated depreciation (325,809) (161,850)
----------- ---------
Totals $ 3,320,979 $ 657,132
=========== =========
F-13
<PAGE>
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(TM) software costs 5 years
Leasehold improvements Length of
lease
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 1997 and 1996 are $225,007 and $279,353,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented. Amortization expense related to the
CTLM(TM) software for each period presented in the statement of operations is as
follows:
(8) PROPERTY AND EQUIPMENT (Continued)
Period ended Amount
------------ ---------
6/30/97 $ 54,345
6/30/96 54,345
6/30/95 19,160
6/30/94 73
---------
Total $ 127,923
=========
(9) OTHER ASSETS
Other assets consist of the following:
June 30,
---------------------
1997 1996
--------- --------
Deposit on purchase of new building $ -- $ 50,000
Security deposits 9,635 3,010
--------- --------
Totals $ 9,635 $ 53,010
========= ========
The Company had paid a $50,000 deposit on the acquisition of a building, with a
purchase price of $1,250,000, as of June 30, 1996, which was finally acquired on
August 29, 1996.
F - 14
<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:
June 30,
----------------------
1997 1996
--------- ---------
Accounts payable - trade $ 276,096 $ 165,047
Preferred stock dividends payable 168,288 33,216
Accrued property taxes payable 14,000 --
Accrued compensated absences 56,632 --
Payroll taxes payable 4,530 7,487
--------- ---------
Totals $ 519,546 $ 205,750
========= =========
(11) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 8) and the obligation has been
recorded as debt. At June 30, 1997, approximate future minimum lease payments
under capitalized lease obligations were as follows:
Year ending June 30,
--------------------
1998 $ 12,384
1999 12,384
2000 12,384
2001 12,384
2002 4,128
---------
Total minimum lease payments 53,664
Less amount representing interest (8,887)
---------
Present value of net minimum lease payments 44,777
Less current portion (8,928)
---------
Long-term portion $ 35,849
=========
(Continued)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
The Company also leases certain office equipment under an operating lease
expiring in June 1998. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 1997 for the next year total
$3,396.
(12) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $11,045,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $3,755,000 and $1,538,500 at June 30, 1997 and 1996, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1996 to June 30, 1997 was an increase of
approximately $2,216,500.
(13) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
The holders of the Series A Preferred Stock may convert up to 50% prior to May
28, 1996, and may convert their remaining shares subsequent to May 28, 1996
without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (I) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
(Continued)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) CONVERTIBLE PREFERRED STOCK (Continued)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
(Continued)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) CONVERTIBLE PREFERRED STOCK (Continued)
The holders of the Series B Preferred Stock may convert up to 34% of the Series
B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of the Series
B Preferred Stock 100 days from issuance (March 27, 1997), and may convert their
remaining shares 120 days from issuance (April 19, 1997) without the payment of
any additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series B Preferred Stock will
receive shares determined by dividing (I) the sum of $10,000 by the (ii)
"Conversion Price" in effect at the time of conversion. The "Conversion Price"
shall be equal to eighty-two percent (82%) of the Market Price of the Company's
common stock; provided, however, that in no event will the "Conversion Price" be
greater than $3.85. The warrants are exercisable at any time for an exercise
price of $5.00 and will expire five years from the date of issue.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1997, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $168,288 of accrued
dividends payable.
(Continued)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. The Company has
an escrow agent as custodian for these unpaid shares. During the year ended June
30, 1996, 410,500 shares of the common stock related to these receivables were
canceled and $103,679 was collected on the receivable. The unpaid balance on
these original sales and other subsequent sales of common stock, in the amount
of $35,559, as of June 30, 1997, is reflected as a reduction to stockholder's
equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
During the year ended June 30, 1995, the wages accrued to the officers of the
Company in the amount of $151,000, was satisfied with the issuance of 377,500
shares of restricted common stock. Compensation expenses had been charged during
the fiscal year pursuant to the employment agreements with the officers. In
addition, during the year ended June 30, 1995, 75,000 shares of restricted
common stock were issued to a company executive pursuant to the employment
agreement with this executive. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(Continued)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) COMMON STOCK (Continued)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.
As of June 30, 1997, there were a total of 1,507,378 shares of common stock
issued as a result of the conversion of the Series A Convertible Preferred Stock
and the related accumulated dividends. (See Note 13)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock options and were exercised
in a "cash-less" transaction, resulting in compensation to the officers of
$567,164. Compensation cost was measured as the excess of fair market value of
the shares received over the value of the SAR shares tendered in the
transaction. The excess of fair market value at July 15, 1995 approximated $.57
per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($4,721,900) of its common stock. The conversion of Series A Convertible
Preferred Stock accounted for the issuance of 1,081,962 shares ($2,808,643). The
remaining 799,333 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 31,200
shares. Research and development expenses of $90,480 was charged as the fair
market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees,
3,200 shares. Compensation expense of $10,463 was charged as the fair market
value at that date was $3.27 per share.
3. On January 3, 1997 bonus stock was issued to the officers of the
Company, 350,000 shares. Compensation expense of $907,900 was charged, as the
fair market value at that date was $2.59 per share.
(Continued)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting services of $11,500
were recorded, representing the fair market value ($2.88 per share) on that
date.
5. Services rendered by an independent consultant during June 1997 in
exchange for 199,000 shares. Consulting expenses of $548,149 was charged, as the
fair market value on the date of the transaction was approximately $2.75 per
share.
6. Exercise of incentive stock options, 361,933 shares ($397,264).
7. The Company repurchased 150,000 shares ($52,500), which had been
previously acquired by one of its employees.
(15) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan
(the "Plan"), whereby officers and employees of the Company may be granted
options to purchase shares of the Company's common stock. Under the plan, an
officer may be granted non-qualified options to purchase shares of common stock
over the next five calendar years, at a minimum of 250,000 shares per calendar
year. The exercise price shall be thirty-five percent of the fair market value
at the date of exercise. On July 5, 1995 the Board of Directors authorized an
amendment to the Plan to provide that upon exercise of the option, the payment
for the shares exercised under the option may be made in whole or in part with
shares of the same class of stock. The shares to be delivered for payment would
be valued at the fair market value of the stock on the day preceding the date of
exercise. The portion of the plan applicable to the officers of the Company was
terminated effective July 1, 1996.
The incentive stock option plan was approved by the Board of Directors
and adopted by the shareholders at the March 29, 1995 annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal
to at least 100% of the fair market value of the common stock as of the date of
grant. The exercise price of incentive options to officers, or affiliated
persons, must be at least 110% of the fair market value as of the date of grant.
(Continued)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) STOCK OPTIONS (Continued)
The Company records the discount from fair market value on the non-qualified
stock options as a charge to deferred compensation at the date of grant of grant
and credits additional paid-in capital. The compensation is amortized to income
over the vesting period of the options.
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Options
----------------------- ------------------------------
Shares Option Price Shares Option Price
-------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 71,429 $1.40 2,250,000 (1)
Exercised -- --
------- ----------
Outstanding at June 30, 1995 71,429 $1.40 2,250,000
Granted 782,563 $ .81 - 8.16 --
Exercised (164,956) $1.25 (1,400,831) $.35 - 1.18
-------- ----------
Outstanding at June 30, 1996 689,036 $ .81 - 8.16 849,169 (1)
Granted 363,427 $2.56 - 4.37 --
Exercised (395,384) (2) --
Canceled -- (399,169) (3)
-------- ----------
Outstanding at June 30, 1997 657,079 $ .81 - 8.16 450,000 (1)
======== ==========
</TABLE>
(1) The option price of the non-qualified options for shares issued to
officers of the Company is thirty-five percent of the fair market value at the
date of exercise. The option price of the remaining shares ranged from $.35 per
share for one individual, and the greater of $.50 per share or thirty-five
percent of the fair market value at the date of exercise for the other
individual. When the non-qualified shares were exercised, the fair market value
of the common stock ranged from $.94 to $1.18 per share. The exercise of 50,000
shares by an individual was rescinded in January 1997, and the remaining money
($52,500) returned.
(2) Of the total 395,384 options that were exercised during the year
ended June 30, 1997, 27,500 of these options were incentive stock options
exercised by one of the employees at $1.25. (The incentive options were granted
on September 20, 1995 at fair market value, no compensation was recorded.) The
remaining 367,884 options were exercised by officers and an employee of the
Company pursuant to their Stock Appreciation Rights, and they acquired a total
of 334,933 shares of common stock. A charge to compensation expense of
$1,405,510, for the fair value of the common stock issued in excess of the
exercise price, was made during the period
(Continued)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) STOCK OPTIONS (Continued)
(3) The remaining nonqualified options which were granted and not
exercised by the officers of the Company have been canceled and that plan, with
respect to the officers, was terminated effective July 1, 1996.
At June 30, 1997, 308,084 of the incentive stock options were vested and
exercisable and the 450,000 non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following option transactions have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase 1,500,000 shares of common stock at 35% of the fair market
value at the date of exercise. Compensation expense of $567,164 was recorded
during the year ended June 30, 1994 as a result of the discount from the market
value at the date of exercise.
On November 7, 1994, the Company granted 300,000 non-qualified options to its
general counsel, currently a vice-president of the Company, at an exercise price
of $0.50 per share. Deferred compensation of $150,000 was recorded on the
transaction and is being amortized over the vesting period. The options were all
exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per year,
or a total of 450,000 shares, during the period March 30, 1995 and ending March
31, 1998. The exercise price shall be $0.35 per share. The options do not "vest"
until one year from the anniversary date. Deferred compensation of $472,500 was
recorded on the transaction and is being amortized over the vesting period. The
Company also granted the individual, incentive options to purchase 71,429 shares
of common stock at an exercise price of $1.40 per share. The options expire on
March 30, 1998.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise price
of $0.93 per share (110% of the fair market value). The options expire on
September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per share.
The options expire on September 1, 2000.
(Continued)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) STOCK OPTIONS (Continued)
At various dates during the fiscal year ended June 30, 1996, the Company issued
to various employees incentive options to purchase 340,935 shares of common
stock at prices ranging from $0.81 to $8.18. In all instances, the exercise
price was established as the fair market value of the common stock at the date
of grant, therefore no compensation was recorded on the issuance of the options.
In most cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise price
of $4.37 per share (110% of the fair market value). The options expire on July
4, 2001.
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 294,778 shares of common stock
at prices ranging from $2.56 to $3.81. In all instances, the exercise price was
established as the fair market value of the common stock at the date of grant,
therefore no compensation was recorded on the issuance of the options. In most
cases, one-third of the options vest one year from the grant date, with
one-third vesting each of the next two years. The options expire in ten years
from the grant date.
(16) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1997 was $346,000.
(17) COMMITMENTS AND CONTINGENCIES
On July 5, 1994, the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $104,000 (amended by Board of Directors effective
January 15, 1997), and $104,000, respectively.
(Continued)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMITMENTS AND CONTINGENCIES (Continued)
Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000; or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months. On April 1, 1995, the Company entered into a two year
agreement with its vice-president and general counsel, and provides for annual
compensation of $85,000. This contract was extended on June 16, 1997, providing
for annual compensation of $95,000, with no limit as to the term.
As additional consideration for his development efforts in the CTLM(TM)
prototype, the chief executive officer has been granted a "development royalty"
which will be paid based upon the net foreign and domestic sales, after direct
costs and commissions, of the CTLM(TM) device. The royalty percent ranges from
2.5% to a maximum of 5%, based upon varying levels of gross sales.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The contract
also provided for the issuance of 75,000 restricted shares of the Company's
common stock. Compensation expense ($1.05 per share), in the amount of $78,750
was recorded on the transaction.
During the years ended June 30, 1997 and 1996, employment agreements were
initiated with individuals in various positions within the Company. Annual
payments for compensation under these agreements amount to $634,000 and
$357,000, respectively, in the aggregate.
On July 1, 1996, the Company entered into a "Re-Seller Agreement" with an
organization located in Italy, for the sole purpose of providing the
organization with exclusive distribution rights within the three countries
defined by the agreement. The term of this agreement shall be for twenty-nine
months, and the Company and Distributor agree to renew the agreement for an
additional two years if the Distributor makes purchases of the CTLM(TM) device
in an aggregate amount of at least four million U.S. dollars ($4,000,000) during
the Initial Term of this agreement.
(Continued)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) SUBSEQUENT EVENT
On September 10, 1997, the Company executed a formal "Term Sheet" with an
investor to raise additional equity capital. The Company will receive net
proceeds of approximately $1,780,000, after commissions, by issuing in a
Regulation D Private Placement shares of its common stock. The actual number of
shares of common stock to be issued will be determined at closing, and will be
based upon an average price of the common stock, five days prior to closing. The
closing of this offering is expected to take place within fifteen days. The
stock will be restricted under Rule 144 for either a one or two year period,
which will also be finalized at closing. The Company will also issue 400,000
warrants, exercisable over the next five years, at an exercise price equal to
twice the closing price of the private placement offering.
On September 11, 1997, the Company accepted a letter of intent for the issuance
of $2,500,000 of "Series C Convertible Preferred Stock". The holders of the
preferred shares shall have demand registration rights pursuant to a
registration rights agreement which shall be signed contemporaneously with the
subscription agreement. The closing of this offering is expected to take place
within fifteen days.
F - 26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
From Inception
(December 10, 1993
Year Ended Year Ended to
June 30, 1997 June 30, 1996 June 30, 1997)
-------------- -------------- -----------------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Net loss $(7,917,493) $ (5,986,514) $(15,057,394)
Less:
Preferred stock dividends on the
issuance of the convertible stock
with discounted conversion price 714,155 998,400 1,712,555
Preferred stock dividends earned by
the preferred shareholders 184,675 47,845 232,520
Add:
Amortization of discounted
preferred dividends pro-rata
over conversion period 714,155 -- 714,155
------------ ------------ ------------
Net loss applicable to common
shareholders for primary loss
per share $ (8,102,168) $ (7,032,759) $(16,288,314)
============ ============ ============
Weighted average number of common
shares outstanding during the period 24,222,966 21,354,155 20,082,632
============ ============ ============
Net loss per common share $ (.33) $ (.33) $ (.81)
============ ============ ============
</TABLE>
Notes -
(A) No common stock equivalents have been added in the computation of
net loss per share as their effect would be anti-dilutive.
(B) As a result of the issuance of the preferred stock below the fair
market value of the common shares at the date of issuance, a "deemed" preferred
dividend has been charged to accumulated deficit at the date of issuance and is
amortized into the conversion cost of the common stock over the period of
conversion. The calculation is made by multiplying the total number of shares to
be converted by the discount per share to arrive at the deemed preferred
dividend. The resulting amount is then charged to accumulated deficit with a
corresponding credit to additional paid-in capital.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
SUPPORTING SCHEDULE
<TABLE>
<CAPTION>
From
Inception
Years Ended June 30, (December 10,
-------------------------- 1993) to June 30,
1997 1996 1997
---------- ---------- -----------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding during the period before the
conversion of the preferred stock 23,321,836 21,318,171 19,829,233
Add - weighted average of common shares
converted during the period 901,130 35,984 253,399
---------- ---------- ----------
Total weighted average of common shares
outstanding during the period 24,222,966 21,354,155 20,082,632
========== ========== ==========
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number:0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
----------------------- -------------------------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------ -------
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of March 31, 1998: 29,639,201 shares of Common Stock, no par value; and, 450
shares of Series B, 49 shares of Series D, 44 shares of Series E, and 75 shares
of Series F Preferred Convertible Stock, no par value.
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Part I - Financial Information Page
- -------------------------------- ----
Condensed Balance Sheet -
March 31, 1998 and June 30, 1997.......................... 3
Condensed Statement of Operations Three months and nine months
ended March 31, 1998 and 1997, and December 10,
1993(date of inception) to March 31, 1998................. 4
Condensed Statement of Cash Flows Nine months ended March 31,
1998 and 1997, and December 10, 1993(date of inception)
to March 31, 1998......................................... 5
Notes to Condensed Financial Statements ........................ 6
Management's Discussion and Analysis of
Financial Condition and Results................................. 7
Part II - Other Information
Item 1, Legal Proceedings.................................... 9
Item 2, Changes in Securities................................ 9
Item 3, Defaults Upon Senior Securities...................... 9
Item 4, Submission of Matters to a Vote of
Security Holders .................................... 10
Item 5, Other Information.................................... 10
Item 6, Exhibits and Reports on Form 8-K..................... 14
Signature ...................................................... 14
2
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
<TABLE>
<CAPTION>
Assets
March 31, 1998 June 30, 1997
-------------- -------------
Unaudited) *
<S> <C> <C>
Current Assets
Cash $ 426,890 $ 486,723
Prepaid expenses 12,653 56,792
Loan Receivable 1,573 10,073
Other current assets 120,489 -
--------------- ---------------
Total Current Assets 561,605 553,588
--------------- ---------------
Property and Equipment, net 3,361,544 3,320,979
--------------- ---------------
Prototype Equipment 2,246,290 1,216,585
Other Assets 9,635 9,635
--------------- ---------------
2,255,925 1,226,220
--------------- ---------------
Total Assets $ 6,179,074 $ 5,100,787
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 731,295 $ 519,546
Accrued Dividends Payable 404,721 -
Current maturity of capital
lease obligation 9,572 8,928
Shareholder Loans 360,407 -
--------------- ---------------
Total Current Liabilities 1,505,995 528,474
--------------- ---------------
Long-term capital lease
obligation 28,580 35,849
--------------- ---------------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div. 4,500,000 4,500,000
Convertible Preferred (Series D) 490,000 -
Convertible Preferred (Series E) 440,000 -
Convertible Preferred (Series F) 750,000 -
Common Stock 19,172,593 14,662,966
Additional Paid-In-Capital 2,448,503 1,815,496
Deficit Accumulated during
development stage (23,121,038) (16,288,314)
--------------- ---------------
4,680,058 4,690,148
Less subscription receivable (35,559) (35,559)
Less deferred compensation - (118,125)
--------------- ---------------
Total Stockholders' Equity 4,644,499 4,536,464
--------------- ---------------
Total Liabilities and
Stockholders' Equity $ 6,179,074 $ 5,100,787
=============== ===============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
<TABLE>
<CAPTION>
9 Months Ended 3 Months Ended Since Inception
March 31, March 31, (12/10/93) to
1998 1997 1998 1997 March 31, 1998
------------------ --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Operating Expenses:
Compensation and related
benefits:
Administrative/Engineering $ 1,261,163 $ 2,038,666 $ 424,184 $ 1,456,428 $ 6,508,635
Research and development 288,177 378,953 124,822 81,173 1,256,688
Research/Development expenses 367,581 866,973 57,181 254,292 3,031,753
Advertising/Promotion 319,280 128,291 24,811 26,062 863,675
General/Administrative 653,109 405,208 159,413 129,736 1,558,494
Clinical expenses 7,096 13,950 2,444 2,098 357,912
Consulting expenses 808,091 67,170 323,294 29,750 2,523,999
Insurance costs 129,790 91,483 37,678 32,339 296,032
Professional fees 423,499 114,635 83,524 48,963 1,320,604
Stockholder expenses 74,348 23,373 861 -- 95,250
Trade show expenses 134,802 149,330 35,799 34,534 422,813
Travel and subsistence costs 74,146 133,417 18,740 46,469 419,746
Rent expense 16,320 44,634 (5,303) 8,128 237,568
Interest expense 2,126 391 2,126 -- 29,175
Depreciation and amortization 208,120 163,392 69,373 51,127 54,088
Amortization of
deferred compensation 118,125 118,125 39,375 39,375 622,500
Interest Income (19,245) (95,932) (5,494) (44,515) (194,525)
------------ ------------ ------------ ----------- ------------
4,866,528 4,642,059 1,392,828 2,195,959 19,904,407
------------ ------------ ------------ ----------- ------------
Net Loss ($ 4,866,528) ($ 4,624,059) ($ 1,392,828) ($ 2,195,959) ($19,904,407)
Dividends on cumulative preferred
stock:
From discount at issuance (1,729,763) (714,155) (514,729) -- (3,461,833)
Earned (236,433) (107,218) (77,639) (78,750) (468,953)
Amortization of preferred stock
discount -- 417,780 -- 357,077 714,155
------------ ------------ ----------- ---------- ------------
Net loss applicable to common
shareholders ($ 6,832,724) ($ 5,045,652) ($ 1,985,196) ($1,836,703) ($23,121,038)
============ ============ =========== ========== ============
Net loss per common share ($ .26) ($ .21) ($ .07) ($ .08) ($ 1.09)
============ ============ =========== ========== ============
Weighted avg
no. of common shares 26,447,340 24,066,132 28,764,621 24,566,531 21,223,268
============ ============ ========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Since inception
Ended March 31, (12/10/93) to
1998 1997 March 31, 1998
----------------------------------------------- -----------------
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss $ (4,866,528) $ (4,642,059) $(19,904,407)
Changes in assets and liabilities 1,753,179 1,883,887 9,118,067
------------ ------------ ------------
Net cash provided by operations (3,112,809) (2,758,172) (10,716,340)
------------ ------------ ------------
Investments
Capital expenditures (1,278,388) (3,233,944) (5,140,200)
------------ ------------ ------------
Cash used for investments (1,278,388) (3,233,944) (5,140,200)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (6,625) (1,923) (12,137)
Other financing activities 360,407 (77,833) 360,407
Proceeds from issuance of preferred stock 3,850,000 7,000,000 11,950,000
Net proceeds from issuance of common stock 127,582 (52,500) 4,885,189
Net cash provided by financing activities 4,331,364 6,867,744 17,183,459
------------ ------------ ------------
Net increase(decrease) in cash (59,833) 875,628 426,890
Cash, beginning of period 486,723 3,975,354 --
------------ ------------ ------------
Cash, end of period $ 426,890 $ 4,850,982 $ 426,890
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared March 31, 1998. The results of operations for the nine-month
period ended March 31, 1998 is not necessarily indicative of the results to be
expected for the full year.
NOTE 2 - GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begins, the Company is totally dependent upon debt and equity funding. See Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In the event that the Company is unable to obtain debt or equity financing or is
unable to obtain such financing on terms and conditions acceptable to the
Company, the Company may have to cease or severely curtail its operations. This
would materially impact the Company's ability to continue as a going concern.
However, management of the Company is continually negotiating with various
outside entities for additional funding necessary to complete the clinical
testing phase of development, required before they can receive FDA marketing
clearance. Management has been able to raise the capital necessary to reach this
stage of product development and has been able to obtain funding for capital
requirements to date. There is no assurance that once development of the CTLMTM
prototype is completed and if and when Federal Drug Administration marketing
clearance is obtained, that the CTLM(TM) will achieve market acceptance or that
the Company will achieve a profitable level of operations.
Note 3 - Series E & F Preferred
Effective February 3, 1998 and February 26, 1998, the Board of Directors amended
the Articles of Incorporation of the Company in order to designate classes of
shares as Series E and F Convertible Preferred. The Series E and F Preferred are
non-voting, can be converted into common stock of the Company and have rights
and preferences that materially limit or qualify the rights of the holders of
registered common stock, including a liquidation preference of $10,000 per
share.
6
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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 IN THE COMPANY'S FORM
10-KSB FOR FISCAL YEAR ENDED 1997.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses since inception through March 31, 1998 of
approximately $19,904,407. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLMtm , the costs associated with the clinical trials
and other research and development activities. There can be no assurances that
the CTLMtm will achieve market acceptance or that sufficient revenues will be
generated from sales of the CTLMtm to allow the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and nine months
ended March 31, 1998, were $159,413 And $653,109, respectively, representing an
increase of $29,677 and an increase of $247,901 for the corresponding periods
for 1997. The increase during the three-month period ending March 31, 1998 was
primarily due to certain administrative costs associated with the further
development of the CTLM(TM) breast-imaging device.
Compensation and related benefits during the three months and nine months ended
March 31, 1998, were $549,006 and $1,549,340 respectively, representing a
decrease of $988,595 and a decrease of $868,279 for the corresponding periods
for 1997. This decrease was primarily due to the elimination of additional
compensation expenses.
7
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BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $426,890 as of March
31, 1998. This is a decrease of $$59,833 from $486,723 for the year ended June
30, 1997. On February 4, 1998 and February 20, 1998, Imaging Diagnostic Systems,
Inc. finalized private placement transactions resulting in $500,000 and $750,000
in equity financing respectively. See Item 5, Other Information.
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development, the costs associated with the clinical trials and the
expected costs of commercializing its initial product, the CTLM(TM) device.
Property and Equipment was valued at $3,361,544 as of March 31, 1998. The
overall gross increase of $40,565 is due primarily to the purchase of additional
laboratory equipment.
Prototype Equipment was valued as of March 31, 1998, at $2,246,290. This
represents an increase of $1,029,705 from $1,216,585 for the year ended June 30,
1997. This increase is due primarily to an increase in developmental activities
leading to the commercialization of the CTLM(TM) device.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during the
third quarter of 1998 was $1,072,828 primarily due to the Company's continued
research and development of the CTLM(TM) device and preparations for FDA
Clinical Trials including the manufacture of five (5) CTLM(TM) Breast Imaging
Systems, compared to net cash used by operating activities of research and
development of the CTLM(TM) device and related software development of
$2,195,959 in the same quarter of 1997. At March 31, 1998, the Company had a
working capital of $1,301,900 compared to a working capital of $3,016,343 at
March 31, 1997.
During the third quarter of 1998, the Company was able to raise a total of
$1,690,000 less expenses through Regulation S transactions. The Company may
continue to receive working capital from the exercise of stock options, private
placements and long term debt and operations. If the Company's working capital
is insufficient to fund its operations, it would have to explore additional
sources of financing. No assurances, however, can be
8
<PAGE>
given that future financing would be available or if available, that it could be
obtained at terms satisfactory to the Company. The Company's ability to
effectuate its plan of and continue operations is dependent on its ability to
raise capital, structure a profitable business, and generate revenues.
Capital expenditures for the third quarter of 1998 were approximately $92,615 as
compared to approximately $191,137 for the third quarter of fiscal 1997. These
expenditures were a direct result of purchases of computer and other equipment,
office, warehouse and manufacturing fixtures, tradeshow equipment, computer
software, laboratory equipment and other fixed assets. The Company anticipates
that the balance of its capital needs for fiscal 1998 will be approximately
$53,000. The Company will continue to seek equity or debt financing in order to
meet its working capital needs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Effective February 3, 1998, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of shares
as Series E Convertible Preferred. The Series E Preferred is non-voting, can be
converted into common stock of the Company and has rights and preferences that
materially limit or qualify the rights of the holders of registered common
stock, including a liquidation preference of $10,000 per share. See Item 5
"Other Information - Private Placements".
Effective February 26, 1998, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of shares
as Series F Convertible Preferred. The Series F Preferred is non-voting, can be
converted into common stock of the Company and has rights and preferences that
materially limit or qualify the rights of the holders of registered common
stock, including a liquidation preference of $10,000 per share. See Item 5
"Other Information - Private Placements".
Item 3. Defaults Upon Senior Securities.
None.
9
<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. Pursuant to this meeting the
Panel determined to approve the Company for listing on the NASDAQ Small Cap
Market, subject to the following conditions:
1. On or before May 11, 1998, the Company must effect a reverse stock split
sufficient to raise its bid price to, or above $4.00 per share for the opening
of one trading day or in
10
<PAGE>
the alternative, on or before May 11, 1998, the Company must have and retain for
10 consecutive trading days a $4.00 bid price through natural forces.
2. On or before May 11, 1998, the Company must make a public filing with
the SEC and NASDAQ evidencing a minimum of $5,000,000 in net tangible assets.
The Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for the
reverse split. The conditional listing expires on May 11, 1998. To date the
Company has been unable to comply with the above conditions.
The Company immediately appealed this decision. The Company's Securities Counsel
was notified on May 19, 1998 that its appeal was denied. The Company has thirty
(30) days to file an appeal with the Securities and Exchange Commission. The
Company intends to file an appeal in this matter.
PATENTS
In December 1997, the patent for the CTLM(TM) was issued by the United States
Department of Commerce Patent and Trademark Office under Patent Number 5692311.
The Company has twelve patents pending with regard to Optical Tomography.
PRIVATE PLACEMENTS
On February 4, 1998, the Company finalized a $500,000 private placement to
foreign investors of 50 shares of its Series E Convertible Preferred Stock ("the
"Preferred Shares") and Warrants to purchase up to 25,000 shares of the
Company's common stock. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale");
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company to
be issued upon conversion will be determined by dividing (i) the sum of $10,000
by (ii) the Conversion Price (determined as hereinafter provided) in effect at
the time of conversion. The "Conversion Price" is equal to seventy five percent
(75%) of the Average Closing Price of the Corporation's Common Stock for the
five-day trading period ending on the day prior to the date of conversion but in
no event greater than $.82 per share.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker a total of 4 shares of the Preferred Stock and $5,000 for
placement and legal fees.
Net proceeds to the Company of $495,000 will be used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
On February 20, 1998, the Company finalized a $750,000 private placement to
foreign investors of 75 shares of its Series F Convertible Preferred Stock ("the
"Preferred Shares"). The Preferred Stock pays a dividend of 6% per annum. The
offering was conducted pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended (the "Regulation S Sale");
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<PAGE>
The Preferred Shares are convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in whole or in
part, without the payment of any additional consideration. The number of fully
paid and non-assessable shares of common stock, no par value, of the Company to
be issued upon conversion will be determined by dividing (i) the sum of $10,000
by (ii) the Conversion Price (determined as hereinafter provided) in effect at
the time of conversion. The "Conversion Price" is equal to seventy percent (70%)
of the Average Closing Price of the Corporation's Common Stock for the five-day
trading period ending on the day prior to the date of conversion.
In connection with the Regulation S Sale, the Company paid an unaffiliated
Investment Banker a total of $50,000 for expenses and legal fees.
Net proceeds to the Company of $700,000 will be used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
The Company is currently negotiating with investors for additional funding
through private placement. The proceeds from this funding will be used to
continue the development of and the continuation of clinical trials for the
Company's Computed Tomography Laser Mammography (CTLM (TM)) device.
<PAGE>
INTERNATIONAL DISTRIBUTION
--------------------------
In April 1998, the Company entered into an exclusive International Distribution
with Focus Surgical LTD, to distribute the CTLM(TM) device to hospitals and
clinics throughout the United Kingdom and Ireland. The term of the Agreement is
three years, with a minimum purchase requirement of 10, 12 and 15 CTLM(TM)
devices in the first, second and third year(s) of the Agreement, respectively.
Focus Surgical currently distributes noncompetitive laser products for companies
such as Sunrise Medical Technologies and Baltec, among many others.
The Company has already secured exclusive distributors for the following
territories: Italy, France, South Korea, the Pacific Rim including China,
Switzerland, Moscow, Germany, Austria, the Republic of Turkey and Ecuador.
Based on its present research and development and supplier production schedules,
the Company anticipates that the CTLM(TM) device will be ready for distribution
this Summer.
FDA UPDATE
----------
On March 19, 1998 the Company submitted the final Report for the Company's IDE.
Also on March 19, 1998 the Company met with representatives of the FDA. The
purpose of the meeting was to describe several options to the Company's IDE and
to get the FDA's perspective on these approaches. It was decided that the
Company will complete the first phase with 20 patient studies performed in-house
and monitored by an Institutional Review Board ("IRB") established by the
Company. The information obtained from the study will be submitted to the FDA to
enable the Company to commence the second phase at three unaffiliated clinical
sites.
12
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In April 1998 the Company appointed eight specialists in the fields of
Gynecology and Obstetrics, Mammography, breast surgery, Neurology and optics and
laser engineering to serve on the IRB. 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.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3. Amendment to Articles of Incorporation (Designation of
Series E Preferred Stock)
3.1 Amendment to Articles of Incorporation (Designation of
Series F Preferred Stock)
(b) Reports on Form 8-K
Form 8-K dated February 19, 1998. Form 8-K dated March 16, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
------------------------
Allan L. Schwartz
Executive Vice-President
Chief Financial Officer
Dated: May 20, 1998
14
<PAGE>
EXHIBIT 3
ARTICLES OF AMENDMENT
CERTIFICATE OF DESIGNATION
IMAGING DIAGNOSTIC SYSTEMS, INC.
1. Designation. The designation of the series of Preferred Stock fixed
by this resolution shall be "Series E Convertible Preferred Stock" (hereinafter
referred to as the "Convertible Preferred Stock").
2. Conversion Rights.
(a) Right to Convert. The holder of any shares of Series D
Convertible Preferred Stock (the "Preferred Stock") may, at any
time, commencing 45 days from the date of issuance and for a
period of three years thereafter, convert all or a portion of the
Preferred Stock, without the payment of any additional
consideration therefor, into that number of fully paid and
non-assessable shares of common stock, no par value, of the
Corporation as is determined by dividing (i) the sum of $10,000
by (ii) the Conversion Price (determined as hereinafter provided)
in effect at the time of conversion. The "Conversion Price" shall
be equal to seventy five percent (75%) of the Average Closing
Price of the Corporation's Common Stock for the five-day trading
period ending on the day prior to the date of conversion
provided, however, that in no event will the Conversion Price be
greater than 75% of the Average Price on the Closing Date. For
purposes of this Section 2, the Market Price shall be the average
of the closing bid prices of the Common Stock over the five
consecutive trading days ending on the trading day immediately
preceding the date of the Conversion Notice (as defined in
Section 2(b) hereof), as (i) quoted by Bloomberg, L.P. or if not
quoted by Bloomberg, L. P., then (ii) as reported by the National
Association of Securities Automated Quotation System ("NASDAQ"),
or if not quoted by NASDAQ then; (iii) the average of the closing
bid prices of the Common Stock in the over-the-counter market
over the five consecutive trading days ending on the trading day
immediately preceding the date of the Conversion Notice; or (iv)
in the event the Common Stock is listed on a national stock
exchange, the Market Price shall be the average of the closing
prices of the Common Stock on such exchange, as reported in The
Wall Street Journal over the five consecutive trading days
immediately preceding the date of the Conversion Notice.
(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.
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<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.
3
<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.
4
<PAGE>
EXHIBIT 3.1
AMENDED ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF IMAGING DIAGNOSTIC SYSTEMS, INC.
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to the written consent dated February 19, 1998, duly executed by all of
the members of the Corporation's Board of Directors, adopting the resolutions
providing for the issuance of up to 75 shares of the Corporation's authorized
but unissued preferred stock, no par value, to be designated the Series F
Convertible Preferred Stock (the "Preferred Stock"), and the Amendment of the
Corporation's Articles of Incorporation to provide for the Preferred Stock, and
there being no shareholder action required, the Corporation Articles of
Incorporation are hereby Amended as follows:
ARTICLE III CAPITAL STOCK
-------------------------
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES F
CONVERTIBLE PREFERRED STOCK
1. Designation and Rank. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 75 Shares of "Series F Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred Stock"),
all of which shall rank equally and be identical in all respects.
2. Conversion Rights. (a) Right to Convert. The holder of any shares of Series F
Convertible Preferred Stock (the "Preferred Stock") may, at any time, commencing
May 15, 1998 and for a period of two years thereafter, convert all or a portion
of the Preferred Stock, without the payment of any additional consideration
therefor, into that number of fully paid and non-assessable shares of common
stock, no par value, of the Corporation as is determined by dividing (i) the sum
of $10,000 by (ii) the Conversion Price (determined as hereinafter provided) in
effect at the time of conversion. The "Conversion Price" shall be equal to
seventy percent (70%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of the
conversion. For purposes of this Section 2, the Market Price shall be the
average of the closing bid prices of the Common Stock over the five consecutive
trading days ending on the trading day immediately preceding the date of the
Conversion Notice (as defined in Section 2(b) hereof), as (i) quoted by
Bloomberg, L.P. or if not quoted by Bloomberg, L.P., then (ii) as 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.
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<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
round up or down, as the case may be, to the nearest share. Before any holder of
the Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer agent
for the Preferred Stock, and shall give written notice by facsimile or otherwise
(the "Conversion Notice") to the Corporation at such office that such holder
elects to convert the same and shall state therein such holder's name or the
name of its nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, but in any event within five business days of the date
of its receipt of the Conversion Notice and original Preferred Stock
Certificate, issue and deliver or cause to be issued and delivered to such
holder of Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice by facsimile or otherwise, and
the person or persons entitled to receive the share of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Upon the conversion of any
shares of Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued as a new series by the
Corporation at any time.
(c) Notices of Record Date. In the event of (i) any declaration by the
Corporation of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any capital reorganization of the
Corporation, any classification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, and any transfer of
all or substantially all of the assets of the Corporation to any other
Corporation, or any other entity or person, or any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, the Corporation shall
mail to each holder of Preferred Stock at least twenty (20) days prior to the
record date specified therein, a notice specifying (i) the date on which any
such record is to be declared for the purpose of such dividend or distribution
and a description of such dividend or distribution; (ii) the date on which any
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective; and
(iii) the time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon such reorganization, transfer, consolidation, merger, dissolution or
winding up.
2
<PAGE>
(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 tock into which such shares of
Convertible Preferred Stock are convertible after the happening of any of the
events described in clauses (i)through(iv) above shall be the number of such
shares of Common Stock into which such shares of Preferred Stock would have been
converted if so converted immediately prior to the happening of such event or
any record date with respect thereto.
(e) Common Stock Reserved. The Corporation shall reserve and keep available out
of its authorized but unissued Common Stock such numbers of shares of Common
Stock as shall from time to time be sufficient to effect conversion of all of
the then outstanding shares of Preferred Stock. In the event there are
insufficient shares to effect a conversion, the Corporation shall increase the
number of authorized shares to effect conversion , the holder shall be entitled
to vote with the holders of the Common Stock, as a single class, where each
share of Preferred Stock shall be entitled to that number of votes to which it
would be entitled had all of its shares of Preferred Stock been converted into
shares of Common Stock were notice of conversion given on the date of such vote.
No sale or disposition of all or substantially all of the Corporation's assets
shall take place without approval of the holders of the Convertible Preferred
Stock, voting as a single class.
(f) Voting Rights of Convertible Preferred Stock. Except as otherwise required
by law and as provided for in Section 2(e), the holders of outstanding shares of
Preferred Stock shall not be entitled to vote on any matters submitted to the
stockholders of the Corporation.
3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Preferred
Stock shall be outstanding, the holders of the then outstanding shares of
Preferred Stock shall have a preference in distribution of the Corporation's
property available for the distribution to the holders of any other class of
capital stock of the Corporation, including but not limited to, the Common
Stock, equal to $10,000.00 consideration per share.
3
<PAGE>
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
reasonable be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of the 25th day of February 1998.
- -------------------------------------------
/s/ Linda B. Grable, President and Director
- ------------------------------------------------------------
/s/ Allan L. Schwartz, Executive Vice President and Director
- ----------------------------------------------------------
/s/Richard J. Grable, Chief Executive Officer and Director
4
<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES ACT OF 1934
(AMENDMENT No.__)
Filed by the Registrant[ X ] Filed by a party other than the Registrant[ ] Check
the appropriate box: [ ] Preliminary proxy statement [ X ] Definitive proxy
statement [ ] Definitive additional materials [ ] Soliciting materials pursuant
to Sec. 240.14a-11(c) or Sec. 240.14a-12
Imaging Diagnostic Systems, Inc.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the Appropriate Box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which
transaction applies:______________________
(2) Aggregate number of securities to which
transaction applies:______________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 __/
(4) Proposed maximum aggregate value of
transaction:_______________________
(5) Total fee paid:____________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:___________________
(2) Form, Schedule or Registration Statement No.:_____________
(3) Filing Party:________________
(4) Date Filed:__________________
1
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18th Court
Plantation, Florida 33313
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held on
October 15, 1997
TO THE STOCKHOLDERS OF IMAGING DIAGNOSTIC SYSTEMS, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Imaging Diagnostic Systems, Inc., a Florida Corporation (the "Company"), will be
held on Wednesday, October 15, 1997, at 9:00 a.m. at the Sheraton Suites,
located at 311 N. University Dr., Plantation, Florida, for the following
purposes:
1. To elect three (3) directors to serve a one year term expiring upon the 998
Annual Meeting of Stockholders or until his/her successor is duly elected and
qualified.
2. To ratify the selection of Margolies, Fink and Wichrowski, CPA as independent
auditors for the Company for the fiscal year ending June 30, 1998.
3. To transact such other business as may properly come before the meeting or
any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on Friday,
August 15, 1997, as the record date for the determination of stockholders
entitled to notice of and to vote at this Annual Meeting and at any adjournment
or postponement thereof.
By Order of the Board of Directors
/s/ Allan L. Schwartz
------------------------
Allan L. Schwartz
Secretary
2
<PAGE>
Plantation, Florida
September 7, 1997
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. HOWEVER,
TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK, SIGN, DATE
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE PREPAID
ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING THE MEETING MAY
VOTE IN PERSON EVEN IF HE OR SHE RETURNED A PROXY. PLEASE NOTE, HOWEVER, THAT IF
A BROKER HOLDS YOUR SHARES OF RECORD, OR BANK OR OTHER NOMINEE AND YOU WISH TO
VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN
YOUR NAME.
3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18th Court
Plantation, Florida 33313
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors (the "Board") of Imaging Diagnostic
Systems, Inc. (the "Company") to be held on Wednesday, October 15, 1997, at 9:00
a.m. at the Sheraton Suites, located at 311 N. University Dr., Plantation,
Florida, or any adjournment or adjournments thereof, for the purposes set forth
herein and in the accompanying Notice of Annual Meeting. The Company intends to
mail this Proxy Statement and the accompanying proxy card on or about September
7, 1997 to all shareholders entitled to vote at the Annual Meeting.
RECORD DATE; OUTSTANDING SHARES
Only stockholders of record at the close of business on Friday, August
15, 1997 (the "Record Date"), are entitled to receive notice of and to vote at
the meeting. On the Record Date, there were outstanding 24,782,584 shares of
Common Stock.
REVOCABILITY OF PROXIES
If a person who has executed and returned a proxy is present at the
meeting and wishes to vote in person, he or she may elect to do so and thereby
suspend the power of the proxy holders to vote his or her proxy. A proxy also
may be revoked before it is exercised by filing with the Secretary of the
Company a duly signed revocation of proxy bearing a later date.
VOTING AND SOLICITATION
Each share of Common Stock issued and outstanding on the record date
shall have one vote on the matters presented herein, except that with respect to
the election of directors, each share of Common Stock is entitled to one vote
for a nominee for each director position. Stockholders do not have the right to
cumulate votes in the election of directors.
4
<PAGE>
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies
including preparation, assembly, printing and mailing of this proxy statement,
the proxy and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward such beneficial owners. Original solicitation of proxies by
mail may be supplemented by telephone, facsimile, telegram or personal
solicitation by directors, officers, or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services, but Jersey Transfer & Trust Co. will be paid a fee,
estimated to be about $2,000 if it renders solicitation services.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's Annual Meeting of Stockholders
to held in 1998 must be received by the Company no later than March 31, 1998 in
order that they may be included in the proxy statement and form of proxy
relating to the meeting.
SHARE OWNERSHIP BY PRINICPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock
of the Company as of June 30, 1997, as to (a) each person known to the Company
who beneficially owns more than 5% of the outstanding shares of its Common
Stock; (b) each current director, nominee for director and named executive
officer; and (c) all executive officers and directors of the Company as a group.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ------------------- ----------------------
Richard J. Grable 9,419,496(3) 38%
Chief Executive Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 9,419,496(4) 38%
President and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 3,924,113(5) 16%
Executive Vice President,
Chief Financial Officer
and Director
c/o 6351 NW 18th Court
Plantation, FL 33313
Peter S. Knezevich 263,657(6) 1%
Vice President and
General Counsel
c/o 6351 NW 18th Court
Plantation, FL 33313
All officers and directors 13,539,700 55%
as a group (4 persons)
5
<PAGE>
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole voting
power and investment power with respect to all shares of Common Stock shown
beneficially owned by them.
(2) Percentage of ownership is based on 24,685,084 shares of Common Stock
outstanding as of June 30, 1997. Shares of Common Stock subject to stock options
that are exercisable within 60 days as of June 30, 1997 are deemed outstanding
for computing the percentage of any other person or group.
(3) Includes 56,666 shares subject to options and 4,320,315 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership.
(4) Includes 56,666 shares subject to options and 5,042,515 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims beneficial
ownership.
(5) Includes 164,133 shares subject to options and 5,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6) Includes 12,225 shares subject to options.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires that the Company's directors and executive officers,
and persons who own more than 10% of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% beneficial owners are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, its officers,
directors and greater than 10% beneficial owners complied with all applicable
Section 16(a) filing requirements.
6
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Three directors are to be elected at the meeting. All three directors
are to be elected for the term expiring in 1998. Information on the nominees
follows.
Richard J. Grable: Mr. Grable is Chief Executive Officer of the Company
and is the inventor of the CTLMtm device. He has been in the medical imaging
field since 1973. Mr. Grable has been a Director and Officer of the Company
since its inception.
Linda B. Grable: Mrs. Grable is President of the Company and Chairman
of the Board of Directors. She has 15 years experience in the marketing and
sales of imaging equipment. Mrs. Grable has been a Director and Officer of the
Company since its inception.
Allan L. Schwartz: Mr. Schwartz is Executive Vice-President of the
Company and is responsible for its financial affairs. He is an operationally
oriented executive with a wide range of management, marketing, field
engineering, construction, investment banking, and business development
experience. Mr. Schwartz has been a Director and Officer of the Company since
its inception.
Compensation of Directors
Each director who is not an employee of the Company receives an annual
retainer of $500 plus a fee of $100 for each Board meeting attended. Under a
deferred compensation plan, directors may elect to defer with interest all or
part of such compensation for varying periods of time.
Family Relationships
Mr. Richard J. Grable and Mrs. Linda B. Grable are husband and wife.
Further, Richard J. Grable and Linda B. Grable are each "Control Persons" as a
result of their control of a majority voting power of the Company's outstanding
stock. Both parties disclaim, however, any beneficial interest or ownership in
the shares owned by the other party.
Board Meetings and Committees
The Board of Directors met 9 times during the fiscal year ended June
30, 1997. The Company has no standing Committees.
Required Vote
Each nominee receiving a majority of the number of affirmative votes of
the shares of the Company's Common Stock present and entitled to vote at the
Annual Meeting on this matter shall be elected as the Directors.
The Board of Directors of the Company recommends a vote FOR the election of
the nominees named above. Proxies solicited by the Board of Directors will be
voted FOR the named nominee unless instructions are given to the contrary.
7
<PAGE>
Management
Directors and Executive Officers
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Name and Other Long Term
Principal Annual Compensation Annual Restricted
Position Age Year Salary ($) Compensation Stock Awards
($)(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard J. Grable 55 1995 $100,000
CEO and Director 1996 $183,333(1)
1997 $289,779 $115,000 $268,000
Linda B. Grable 60 1995 $ 65,000
President and 1996 $ 91,000(1)
Director 1997 $ 97,451 $115,000 $268,000
Allan L. Schwartz 55 1995 $ 84,000
Exec. V.P., CFO and 1996 $124,000(1)
Director 1997 $111,534 $115,000 $268,000
Peter S. Knezevich 41 1995 $ 12,500
General Counsel 1996 $ 56,000
Vice President 1997 $ 87,500 $134,000
</TABLE>
(1) Salary includes the following amounts which had accrued as of fiscal year
end 1995 and which were paid in fiscal year 1996: $20,000, Richard J. Grable;
$20,000, Allan L. Schwartz; and, $13,000, Linda B. Grable.
(2) Mr. Grable and Mr. Schwartz and Mrs. Grable were granted a restricted stock
bonus of 100,000 shares; Mr. Knezevich was granted a restricted stock bonus of
50,000 shares. On the date of grant the bid price was $2.68 a shares.
8
<PAGE>
Option Grants. The following table sets forth certain information
concerning grants of options to purchase Common Stock to the Named Executive
Officers during the fiscal year ended June 30, 1997.
Option/SAR Grants in Last Fiscal Year
Individual Grants
Potential Realizable
<TABLE>
<CAPTION>
Potential Realizable
Value at Annual Rates
Number of Percent of of Stock Price
Securities Total Options
Appreciation for Option
Underlying Granted to Exercise or Term(1)
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
<C> <C>
Richard J. Grable (2)22,883 4% $4.37 7/4/01 $34,009 $76,999
Linda B. Grable (3)22,883 4% $4.37 7/4/01 $34,009 $76,999
Allan L. Schwartz (4)22,883 4% $4.37 7/4/01 $34,009 $76,999
</TABLE>
(1) Potential realizable values are based on the fair market value per
share as determined by the Company for financial statement purposes and
represents hypothetical gains that could be achieved for the respective options
if exercised at the date of the grant. The dollar amounts set forth in these
columns are the result of calculations at the zero percent, five percent and ten
percent rates set by the Securities and Exchange Commission and are not intended
to forecast possible future appreciation, if any, of the Common Stock price.
There can be no assurance that such potential realizable values will not be more
or less than indicated in the table above.
(2) On July 4, 1996, Mr. Grable was granted an option to purchase
22,883 shares of common stock pursuant to the Company's incentive stock option
plan.
(3) On July 4, 1996, Mrs. Grable was granted an option to purchase
22,883 shares of common stock pursuant to the Company's incentive stock
optionplan.
(4) On July 4, 1996, Mr. Schwartz was granted an option to purchase
22,883 shares of common stock pursuant to the Company's incentive stock option
plan.
9
<PAGE>
Fiscal Year-End Option Values. The following table sets forth certain
information concerning the number and value of securities underlying exercisable
and unexercisable stock options as of the fiscal year ended June 30, 1997 by the
Name Executive Officers.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of
In-The-Money
Options
Number of at Fiscal
Underlying Year End($) Number of Value of
Securities Exercised/ Options at Underlying
Options/SARs Unexercised Fiscal Year End(#) Securities
Unexercised Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard J. Grable 82,515 $216,549 22,883/0 0
Linda B. Grable 82,515 $216,549 22,883/0 0
Allan L. Schwartz 0 0 130,410/0 $189,032
Peter S. Knezevich 95,669 $257,810 12,225/0 0
</TABLE>
Employment Agreements
The Company entered into five-year employment agreements with each of
Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable
beginning July 6, 1994. Pursuant to the terms of the employment agreements, the
annual salaries during the Company's development stage are as follows: Richard
J. Grable: $250,000; Linda B. Grable: $78,000; on January 15, 1997, Ms. Grable's
salary was increased to $104,000; and, Allan L. Schwartz: $104,000. During the
Company's operational stage the salary of Allan L. Schwartz will increase to
$156,000. In addition, each employment agreement provides for bonuses, health
insurance, car allowance, and related benefits, and a cost of living adjustment
of 7% per year. The bonuses are 5% of the adjusted consolidated net earnings of
the Company; no bonuses have been paid. Richard J. Grable receives a royalty
bonus based on sales of the CTLM device. The Company entered into an employment
agreement with Peter S. Knezevich on June 16, 1997, for a salary of $95,000 per
year.
Stock Option Plans
The Company has established an incentive stock option plan, as defined
by Section 422, Internal Revenue Code of 1986. For the fiscal year ended June
30, 1997, all of the executive officers were participants in this plan, except
for Mr. Knezevich.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Margolies, Fink and Wichrowski CPA
as independent public accountants of the Company with respect to its operations
for the fiscal year 1998, subject to ratification by the holders of Common Stock
of the Company. The firm has audited the Company's financial statements since
1994. Representatives of the firm are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
There will be presented at the Annual Meeting a proposal for the
ratification of this appointment, which the Board of Directors believes is
advisable and in the best interests of the stockholders. If the appointment of
Margolies, Fink and Wichrowski, CPA is not ratified, the matter of appointment
of independent public accountants will be considered by the Board of Directors.
The Board of Directors of the Company recommends a vote FOR the
appointment of Margolies, Fink and Wichrowski, CPA as the Company's independent
accountants for the fiscal year ending June 30, 1998.
10
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/ Allan L. Schwartz
---------------------------
Allan L. Schwartz
Secretary
11
<PAGE>
APPENDIX A
IMAGING DIAGNOSTIC SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 15, 1997
The undersigned hereby appoints Richard J. Grable and Allan L. Schwartz
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of Imaging Diagnostic
Systems, Inc. which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of Imaging Diagnostic Systems, Inc. to be held at
Sheraton Suites, located at 311 N. University Dr., Plantation, Florida, on
October 15, 1997, at 9:00 a.m., local time, ant at any and all continuations and
adjournments thereof, with all powers that the undersigned would possess if
personally sent, upon and in respect of the following matters and in accordance
with the following instructions, with discretionary authority as to any and all
other matters that may properly come before the meeting.
(Continued, and to be signed on the other side)
Please mark your votes as this [X]
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2 AS MORE SPECIFICALLY DESCRIBED
IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL
BE VOTED IN ACCORDANCE THEREWITH.
FOR WITHOLDER FOR
PROPOSAL 1: To elect three (3) directors [ ] [ ] to hold office until the 1998
Annual Meeting of Stockholders.
Nominees: Richard J. Grable, Linda B. Grable, and Allan L. Schwartz
Instruction: To withhold authority to vote for any nominee, write the nominee's
name in the space provided below.
- ----------------------------------------------------
PROPOSAL 2: To ratify selection of FOR AGAINST ABSTAIN
Margolies, Fink and Wichrowski CPA, [ ] [ ] [ ]
as independent public accountants
of the Company for its fiscal
year ending June 30, 1998.
I PLAN TO ATTEND THE MEETING [ ]
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorney-in-fact should add their titles. If signer is a
corporation, please give full corporate name and have a duly authorized officer,
stating title. If signer is a partnership, please sign in partnership name by
authorized person.
Signature____________________________________ Date________________ PLEASE VOTE,
DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE WHICH IS
POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION SEQUENTIAL
PAGE NUMBER
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of the Company's Form 10-KSB for the fiscal year ending
June 30, 1995.
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit
3.(i).6 of the Company's Form 10-KSB for the fiscal year ending June
30, 1996. File number 033-04008.3.3 Amendment to Articles of
Incorporation (Designation of Series B Convertible Preferred Shares).
Incorporated by reference from Registration statement on Form S-1
Dated July 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated October 15, 1997,
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference from Form 8-k
dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). 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.
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).
<PAGE>
EXHIBIT DESCRIPTION SEQUENTIAL
PAGE NUMBER
4.5 Instruments Defining the Rights of Security Holders Designation of
Series F Convertible Preferred Shares. ( See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders Designation of
Series H. See Exhibit 3.8, above
5 Legal opinion of Rebecca J. Del Medico, Esq.
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.
10.7 Form of Series H Preferred Stock Subscription Documents.
24.1 Consent of Rebecca J. Del Medico, Esq. included in the opinion filed
as Exhibit 5 hereto.
24.2 Consent of Independent Certified Public Accountants.
Accountants.
EXHIBIT 5
IMAGING DIAGNOSTIC SYSTEMS, INC.
[Letterhead of Registrant]
July 30, 1998
Imaging Diagnostic Systems, Inc.
6531 N.W. 18th Court
Plantation, FL 33313
Re: Registration Statement on Form S-2
Gentleman:
This opinion is submitted pursuant to applicable rules of the Securities and
Exchange Commission with respect to the registration by Imaging Diagnostic
Systems, Inc. (the "Company") of an aggregate of 7,130,467 shares of Common
Stock, no par value (the "Common Stock") pursuant to a Registration Statement on
Form S-2.
In my capacity as general counsel to the Company, I have examined the original,
certified, conformed, or other copies of the Company's Certificate of
Incorporation, Bylaws and corporate minutes provided to me by the Company. In
all such examinations, I have assumed the genuineness of all signatures on
original documents, and the conformity to originals or certified documents of
all copies submitted to me as conformed, photostat or other copies. .In passing
upon certain corporate records and documents of the Company, I have necessarily
assumed the correctness and completeness of the statements made or included
therein by the Company, and I express no opinion thereon. Based upon and in
reliance of the foregoing, I am of the opinion that the Common Stock has been
and the shares underlying the Series H Preferred Stock and the Warrants will be,
upon conversion or exercise, validly issued, fully paid and non-assessable. I
hereby consent to the use of this opinion in the Registration Statement on Form
S-2 to be filed with the Commission.
/s/Rebecca J. Del Medico
- ------------------------
Rebecca J. Del Medico General Counsel
EXHIBIT 10.6
FORM OF SERIES F PREFERRED STOCK SUBSCRIPTION DOCUMENTS.
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
FOR CONVERTIBLE PREFERRED SHARES
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT"), AND MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN
REGULATION S OF THE 1933 ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF,
U.S. PERSONS (AS DEFINED IN REGULATION S OF THE 1933 ACT) EXCEPT
PURSUANT TO REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE 1933 ACT.
This Offshore Securities Subscription Agreement ("Agreement") is
executed in reliance upon the transaction exemption afforded by Regulation S
("Regulation S") as promulgated by the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended ("1933 ACT").
This Agreement has been executed by the undersigned in connection with
the offshore offering pursuant to Regulation S of an amount not exceeding
$750,000 of the 1998 Series F Convertible Preferred Stock (the "Shares") of
IMAGING DIAGNOSTICS SYSTEMS, INC
Electronic Bulletin Board Symbol "IMDS" a corporation organized under the laws
of Florida, United States of America (the "Issuer" or "Company").
The Undersigned Purchaser:
NAME:_____________________________________
ADDRESS:__________________________________
__________________________________________
__________________________________________
, a non "U.S. person" (the "Purchaser") hereby represents and warrants to, and
agrees with, Issuer as follows:
1. The Offering.
a. The undersigned hereby subscribes for ___________ Convertible
Preferred Shares (the "Shares"), at the aggregate subscription price of
U.S.$10,000 per share, payable in United States Dollars, for a total
consideration of $___________Dollars (the "Subscription Proceeds"). The
Shares shall pay an 6% cumulative dividend payable in common stock at
the time of each conversion. The Shares are subject to a mandatory, 24
month conversion feature at the end of which all Shares outstanding
will be automatically converted ("Mandatory Conversion") based upon the
conversion formula set forth in Section 7.d.
b. Form of Payment. Purchaser shall pay the total Subscription
Proceeds hereunder by delivering good funds by wire transfer in United
States Dollars into the escrow account as follows:
First Union Bank of Connecticut
Stamford Executive Office
300 Main Street, P.O. Box 700
Stamford, CT 06904-0700
ABA # 021101108
Swift # FUNBUS33
Account: 20000-2072298-4
Account Name: Joseph B. LaRocco, Esquire - Trustee Account
<PAGE>
2. Subscriber Representations; Access to Information; Independent
Investigation.
a. Offshore Transaction. Purchaser represents and warrants to
Issuer as follows:
(i) Neither the Purchaser nor any person or entity for whom the
Purchaser is acting as fiduciary is a U.S. person. A U.S. person means
any one of the following:
(1) any natural person resident in the United States of
America;
(2) any partnership or corporation organized or
incorporated under the laws of the United States;
(3) any estate of which any executor or administrator is
a U.S. person;
(4) any trust of which any trustee is a U.S. person;
(5) any agency or branch of a foreign entity located in
the United States;
(6) any non-discretionary account or similar account
(other than an estate or trust) held by a dealer or
other fiduciary for the benefit or account of a
U.S. person;
(7) any discretionary account or similar account
(other than an estate or trust) held by a dealer or
other fiduciary organized, incorporated, or (if an
individual) resident in the Untied States; and
(8) any partnership or corporation if:
(A) organized or incorporated under the laws of any
foreign jurisdiction; and
(B) formed by a U.S. person, principally for the
purpose of investing in securities not registered
under the Securities Act, unless it is organized or
incorporated, and owned, by accredited investors (as
defined in Rule 501(a) under the Securities Act) who
are not natural persons, estates or trusts.
(ii) At the time the buy order was originated, Purchaser was outside
the United States and is outside the United States as of the date of
the execution and delivery of this Agreement. No offer to purchase the
Shares to Purchaser was made to a person in the United States.
(iii) Purchaser is purchasing the Shares for its own account or for the
account of beneficiaries for whom the Purchaser has full investment
discretion with respect to the Shares and whom the Purchaser has full
authority to bind so that each such beneficiary is bound hereby as if
such beneficiary were a direct purchaser hereunder and all
representations, warranties and agreements herein were made directly by
such beneficiary. Purchaser is not purchasing the Shares on behalf of
any U.S. person and the sale has not been prearranged with a purchaser
in the United States.
(iv) Purchaser represents and warrants and hereby agrees that all
offers and sales of the Shares by it or by persons acting on its behalf
shall only be made (A) in compliance with the safe harbor contained in
Regulation S; (B) pursuant to registration of Shares under the
Securities Act; or (C) pursuant to an exemption from registration.
(v) Purchaser understands and acknowledges that the Shares have not
been registered under the 1933 Act and may not be offered or sold in
the United States or to U.S. persons or for the account or benefit of a
U.S. person (other than distributors as defined in Regulation S) unless
the Shares are registered under the Securities Act or an exemption from
the registration requirements is available.
(vi) Purchaser acknowledges that the purchase of the Shares involves a
high degree of risk and further acknowledges that it can bear the
economic risk of the purchase of the Shares, including the total loss
of its investment. Purchaser acknowledges that it has obtained the
advice of competent legal counsel in its domicile
<PAGE>
jurisdiction that Purchaser is qualified under the laws of its domicile
to purchase the securities offered hereunder and that the offer and
sale of said securities will not violate the laws of its domicile
jurisdiction.
(vii) Purchaser understands that the Shares are being offered and sold
to it in reliance on the rules promulgated under Regulation S and that
the Issuer is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of Purchaser set forth herein in order to determine the
applicability of such rules and the legality of Purchaser to acquire
the Shares.
(viii) Purchaser is sufficiently experienced in financial and business
matters to be capable of evaluating the merits and risks of its
investments, and to make an informed decision relating thereto.
(ix) In evaluating its investment, Purchaser has consulted with its own
investment and/or legal and/or tax advisors.
(x) Purchaser understands that in the view of the SEC the statutory
basis for the exemption claimed for this transaction would not be
present if the offering of Shares, although in technical compliance
with Regulation S, is part of a plan or scheme to evade the
registration provision of the Securities Act. Purchaser is acquiring
the Shares for investment purposes and has no present intention to sell
the Shares in the United States, to a U.S. person or for the account or
benefit of a U.S. person. Purchaser hereby confirms that the purpose of
including the Purchaser Representation Letter (see Exhibit B attached
hereto) to facilitate the transfer of the certificates representing the
Shares into street name, is to enable Purchaser to comply with the
requirements of certain offshore portfolio management regulations and
the security requirements of offshore lenders for margin loans.
(xi) Purchaser is neither an underwriter of, nor a dealer in, the
Shares. Purchaser is not participating, pursuant to a contractual
agreement, in the distribution of the Shares.
(xii) Purchaser represents and warrants that neither it nor any of its
affiliates will directly or indirectly maintain any short position in
Shares, Common Stock or any other securities of the Issuer so long as
any of the Shares have not been converted into Common Stock; (xiii)
Purchaser represents and warrants that it is an "accredited investor"
as that term is defined in Regulation D.
(xiv) The undersigned is not subscribing for the Shares as a result of,
or pursuant to, any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or
meeting.
(xv) The Purchaser is purchasing the Shares for its own account for
investment, and not with a view toward the resale or distribution
thereof. Purchaser is neither an underwriter of, nor a dealer in, the
Shares or the Common Stock issuable upon conversion thereof and is not
participating in the distribution or resale of the Shares or the Common
Stock issuable upon conversion or exercise thereof.
If Purchaser is purchasing the Shares subscribed for
hereby in representative or fiduciary capacity, the representations and
warranties in this Offshore Securities Subscription Agreement shall be
deemed to have been made on behalf of the person or persons for whom
Purchaser is so purchasing.
The foregoing representations and warranties are true
and accurate as of the date hereof, shall be true and accurate as of
the date of the acceptance by the Issuer of Purchaser's subscription,
and shall survive thereafter. If Purchaser has knowledge, prior to the
acceptance of its Offshore Securities Subscription Agreement by the
Issuer, that any such representations and warranties shall not be true
and accurate in any respect, the Purchaser, prior to such acceptance,
will give written notice of such fact to the Issuer specifying which
representations and warranties are not true and accurate and the
reasons therefor.
b. Current Public Information. Purchaser acknowledges that Purchaser
has acquired and carefully reviewed the Issuer's annual report on Form 10-KSB
for its fiscal year ended June 30, 1997, and its quarterly reports on Form
10-QSB filed for the quarters ended September 30, 1997, and December 31, 1997,
the proxy statement September 7, 1997 and Forms 8-K filed since June 1997
(together, the "SEC Reports"). Except as set forth in this Agreement and the SEC
Reports, no representations or warranties have been made to Purchaser by the
Issuer or any agent, employee or affiliate of the Issuer, and in entering into
this transaction Purchaser is not relying upon any information, other than that
provided pursuant to this Agreement and the SEC Reports and the results of
independent investigation by Purchaser.
<PAGE>
c. Independent Investigation; Access. Purchaser acknowledges that
Purchaser, in making the decision to purchase the Shares subscribed for, has
relied upon independent investigations made by it and its Purchaser
representative, if any, and Purchaser and such representatives, if any, have,
prior to any sale to Purchaser, had an opportunity to ask questions of, and to
receive answers from Issuer or any person acting on its behalf concerning the
terms and conditions of this offering. Purchaser and its advisors, if any, have
been furnished with access to all publicly available materials relating to the
business, finances and operations of the Issuer and materials relating to the
offer and sale of the Shares which have been requested. Purchaser and its
advisors, if any, have received complete and satisfactory answers to any such
inquiries.
d. No Government Recommendations or Approval. Purchaser understands
that no federal or state agency has made or will make any finding or
determination relating to the fairness for public investment in the Shares, or
has passed or made, or will pass on or make, any recommendation or endorsement
of the Shares.
e. Entity Purchases. If Purchaser is a partnership, corporation or
trust, the person executing this Agreement on its behalf represents and warrants
that:
(i) He or she has made due inquiry to determine the truthfulness of the
representations and warranties made pursuant to this Agreement;
(ii) He or she is duly authorized (if the undersigned is a trust, by
the trust agreement) to make this investment and to enter into and
execute this Agreement on behalf of such entity.
(f) Limits on Amount of Conversion and Ownership. Other than the
Mandatory Conversion provisions contained in this Agreement, in no event shall
the Purchaser be entitled to convert that amount of Shares in excess of that
amount upon conversion of which the sum of (1) the number of shares of Common
Stock beneficially owned by the Purchaser and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the ownership of
the unconverted portion of the Shares), and (2) the number of shares of Common
Stock issuable upon the conversion of the Shares with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Purchaser and its affiliates of more than 4.9% of the
outstanding shares of Common Stock of the Company. For purposes of this
provision to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (1) of such provision.
3. Issuer Representations.
Issuer represents and warrants to the Purchaser as follows:
a. Reporting Company Status. Seller is a "Reporting Issuer" as defined
by Rule 902 of Regulation S. Seller has registered its Common Stock, no
par value per share (the "Common Stock"), pursuant to the Securities
Exchange Act of 1933, as amended (the "Exchange Act"), and the Common
Stock is listed and trades on the Electronic Bulletin Board. Seller has
filed all material required to be filed pursuant to all reporting
obligations under Section 15(d) of the Exchange Act for a period of at
least twelve (12) months immediately preceding the offer or sale of the
Securities (or for such shorter period that Seller has been required to
file such material).
b. Offshore Transaction. Issuer has not offered Convertible Preferred
Shares to any person in the United States or to any U.S. person or for
the account or benefit of any U.S. person. At the time the buy order
was originated, Issuer and/or its agent reasonably believed that
Purchaser was outside of the United States and was not a U.S. Person.
Issuer and/or its agent reasonably believe that the transaction has not
been prearranged with a Purchaser in the United States.
(i) At the time the buy order was originated, Seller
and/or its agents reasonable believe the Purchaser was outside
of the United States and was not a U.S. person, based on the
representations of Purchaser.
(ii) Seller and/or its agents reasonably believe that
the transaction has not been pre-arranged with a buyer in the
United States, based on the representations of Purchaser.
<PAGE>
(iii) No offer to buy or sell the Securities was or
will be made by Seller to any person in the United States.
(iv) The sale of the Securities by Seller pursuant to
this Agreement will be made in accordance with the provisions
and requirements of Regulation S provided that the
representations and warranties of Purchaser in Section 2(a)
hereof are true and correct.
(v) The transactions contemplated by this Agreement
(a) have not been and will not be pre-arranged by Seller with
a purchaser located in the United States or a purchaser which
is a U.S. Person, and (b) are not and will not be part of a
plan or scheme by Seller to evade the registration provisions
of the 1933 Act.
c. No Directed Selling Efforts. In regard to this transaction, Issuer,
has not conducted any "directed selling efforts" as that term is
defined in Rule 902 of Regulation S nor has Issuer conducted any
general solicitation relating to the offer and sale of Convertible
Preferred Shares to U.S. persons residing within the United States or
elsewhere.
d. Shares. The Shares and shares of Common Stock issuable upon
conversion of the Shares, when issued and delivered will be duly and
validly authorized and issued, fully paid and non-assessable and will
not subject the holders thereof to any liability by reason of being
such holders. The stock certificates representing Common Stock issued
upon conversion of the Shares shall be unlegended and there shall be no
stop transfer instructions issued in relation to such common stock.
e. Authority to Enter Agreement. This Agreement and the transaction
contemplated thereunder, when acknowledged by the signature of an
officer of the Issuer, has been duly authorized, validly executed and
delivered on behalf of the Issuer and is a valid and binding agreement
of the Issuer in accordance with its terms.
f. Non-contravention. The execution and delivery of this Agreement, the
consummation of the issuance of the Shares and the transactions
contemplated hereunder do not and will not conflict with or result in a
breach by the Issuer of any of the terms or provisions of, or
constitute a default under, the certificate of incorporation or by-laws
of the Issuer (or any equivalent documents thereto) or any indenture,
mortgage, deed of trust, or other material agreement or instrument to
which the Issuer 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 decrees, judgment, or order of any court, federal or
state regulatory body, administrative agency or other governmental body
having jurisdictions over the Issuer or any of its properties or
assets.
g. Prior Shares Issued Under Regulation S or Regulation D. In the past
twelve months the Company raised $ 2,600,000 in Regulation S offerings
of which $500,000 has not yet been converted. The Company has raised $
-0- in Regulation D offerings in the past twelve months of which $ -0-
has not yet been converted.
h. Current Authorized Shares. As of February 19, 1998, there were
48,000,000 authorized shares of Common Stock of which approximately
27,798,304 shares of Common Stock were deemed issued and outstanding on
a fully diluted basis.
i. Securities Law Compliance. Based upon the representations and
warranties of the Purchaser in Section 2 and of all other Purchasers
executing similar agreements in connection with this offering, with
respect to the Company's actions, to the best of the Company's
knowledge, (i) the offer and the sale of Shares has been made so as to
conform in all respects with the requirements of Regulation S and with
the requirements of all other published rules and regulations of the
SEC currently in effect relating to offerings to non-residents of the
United States of the type contemplated herein; and (ii) neither the
offer, sale or delivery of the Shares under the terms of this Agreement
will violate Section 5 of the Securities Act, as presently in effect.
j. Filings. Issuer undertakes and agrees pursuant to the sale of its
securities under Regulation S to make all necessary filings in
connection with the sale of its securities as required by the laws and
regulations of the United States, including, Form 8-K and mandatory
NASDAQ notification, if any. Issuer further agrees, with respect to the
filing of Form 8-K, that it will only identify Purchaser as an
"accredited investor" as that term is defined in Regulation D and will
not disclose Purchaser's name in Form 8-K or otherwise unless such
disclosure is required by law.
<PAGE>
k. Use of Proceeds. Issuer represents that the net proceeds of this
offering will be used for working capital.
l. Concerning the Securities.The issuance, sale and delivery of the
Shares have been duly authorized by all required corporate action on
the part of Issuer, and when issued, sold and delivered in accordance
with the terms hereof and thereof for the consideration expressed
herein and therein, will be duly and validly issued, fully paid and
non-assessable. A sufficient number of shares of Common Stock upon
conversion of the Shares has been duly and validly reserved for
issuance and upon issuance in accordance with the terms of the Shares,
shall be duly and validly issued, fully paid, and non-assessable and
will not subject the holders thereof, if such persons are non-U.S.
persons, to personal liability by reason of being such holders. There
are no pre-emptive rights of any shareholder of Issuer.
m. Distributor. Each distributor participating in the offering of the
Shares, if any, has agreed in writing, a copy of which has been
delivered to Issuer with this Agreement, that all offers and sales of
the Shares prior to the expiration of a period commencing on the date
of the Closing of the last purchase and sale of the Convertible
Preferred Shares offered by the Issuer and ending 40 days thereafter
(the "Restricted Period") shall only be made (A) in compliance with the
safe harbor contained in Regulation S; (B) pursuant to registration of
Shares under the Securities Act; or (C) pursuant to an exemption from
registration.
n. SEC Reports. The SEC Reports are all the documents (other than
preliminary materials) that Issuer has been required to file with the
SEC from December 31, 1996, to the date hereof. As of their respective
dates, none of the SEC Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, and no
material event has occurred since the filing of Issuer's SEC Report on
Form 10-KSBA for the year ended December 31, 1996, which could make any
of the disclosures contained therein misleading. The financial
statements of Issuer included in the SEC Reports have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited financial
statements, only to normal recurring year-end audit adjustments) and
present fairly the consolidated financial position of Issuer and its
consolidated subsidiaries as at the dates thereof and the consolidated
results of their operations and changes in financial position for the
periods then ended.
o. Information Supplied. The information supplied by Issuer to
Purchaser in connection with the offering of the Shares does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements, in the light of the
circumstances in which they were made, not misleading.
p. Threatened or Pending Litigation. The Company is not aware of any
material threatened or pending litigation or investigation or other
proceeding other than those matters disclosed in its SEC Reports.
q. True Statements. Neither this Agreement nor any of the SEC Reports
contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under
which such statements are made. There exists no fact or circumstances
which, to the knowledge of the Company, materially and adversely
affects the business, properties, assets, or conditions, financial or
otherwise, of the Company, which has not been set forth in this
Agreement or disclosed in such documents.
r. Delivery Instructions. On the Closing Date the Shares being
purchased hereunder shall be delivered to Joseph B. LaRocco, Esq. as
Escrow Agent, who will simultaneously wire to the Company the funds
being held in escrow, less placement fees, at which time the Escrow
Agent shall then have the Shares delivered to the Purchaser, per the
Purchaser's instructions.
s. Non-contravention. The execution and delivery of this Agreement by
the Company, the issuance of the Shares, and the consummation by the
Company of the other transactions contemplated by this Agreement, and
the Preferred Stock do not and will not conflict with or result in a
breach by the Company of any of the terms or provisions of, or
constitute a default under, the (i) certificate of incorporation or
by-laws of the Company, (ii) any indenture, mortgage, deed of trust, or
other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, (iii) any
material existing applicable law, rule, or regulation or any applicable
decree, judgment, or (iv) order of any court, United States federal or
state regulatory body, administrative agency, or other governmental
body having jurisdiction over the Company or
<PAGE>
any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the
transactions contemplated herein.
t. No Default. Except as set forth in the Company's SEC Reports the
Company is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or
agreement to which it is a party or by which it or its property is
bound, and neither the execution of, nor the delivery by the Company
of, nor the performance by the Company of its obligations under, this
Agreement or the Preferred Stock, other than the conversion provision
thereof, will conflict with or result in the breach or violation of any
of the terms or provisions of, or constitute a default or result in the
creation or imposition of any lien or charge on any assets or
properties of the Company under, (i) any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound,
(ii) any statute applicable to the Company or its property, (iii) the
Certificate of Incorporation or By-Laws of the Company, (iv) any decree
, judgment, order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company regulation of any
court or governmental agency or body having jurisdiction over the
Company or its properties, or (v) the Company's listing agreement for
its Common Stock.
4. Restricted Period; Conversion.
Rule 903 (c) under Regulation S restricts Purchaser from offering and
selling the Shares, or the Common Stock into which the Shares are convertible,
to U.S. persons or for the account or benefit of a U.S. person during the forty
(40) day Restricted Period.
5. Reliance on Representations.
Purchaser understands that the offer and sale of the Shares is not
being registered under the Securities Act. Issuer is relying on the rules
governing offers and sales made outside the United States pursuant to Regulation
S. Rules 901 through 903 of Regulation S govern this transaction.
6. Transfer Agent Instructions.
a. Legends on Certificate. Purchaser may transfer the Shares
to persons other than U.S. persons in accordance with Regulation S
prior to the expiration of the 40 day restricted period. Accordingly,
Purchaser acknowledges that the Company will instruct its transfer
agent to place a stop transfer order with respect to certificates
representing the Shares and that such certificates will bear the
following legend:
"The shares represented by this certificate have been issued
pursuant to Regulation S promulgated under the Securities Act
of 1933, as amended ("Act"), and have not been registered
under the Act. These shares may not be offered or sold within
the United States or to or for the account of a "U.S. Person"
(as that term is defined in Regulation S) until after May 15,
1998. The terms of conversion are subject to a Subscription
Agreement that was entered into with the Company.
b. Purchaser Representation Letter. Issuer agrees to accept a
Purchaser's Representation Letter from the Purchaser in the form of
Exhibit "B" attached, as sole and sufficient evidence that the
Purchaser has complied with applicable securities laws and upon receipt
of such a letter shall promptly transfer, or instruct the transfer
agent, for the Convertible Preferred Shares, if any, to transfer the
Shares into "Street Name", if so requested by Purchaser, as
expeditiously as practical after receipt of the certificates and the
Purchaser Representation Letter.
c. Transfer Agent Instructions. Issuer shall issue, or
instruct the transfer agent for the Shares, if any, to issue one or
more share certificates representing Shares, in the names of qualified
purchasers to be specified prior to Closing. All of the Shares so
issued will be issued pursuant to Regulation S. Issuer warrants further
that the Shares shall be freely transferable on the books and records
of Issuer subject to compliance with Regulation S and other applicable
securities laws and the terms of this Agreement.
7. TERMS OF CONVERSION.
a. Shares. Upon the Company's receipt of a facsimile or
original of Purchaser's signed Notice of Conversion, and the original Preferred
Share Certificates the Company shall instruct its transfer agent to issue one or
<PAGE>
more Certificates representing that number of shares of Common Stock into which
the Shares are convertible in accordance with the provisions regarding
conversion set forth in Exhibit A hereto. The Seller's transfer agent or
attorney shall act as Registrar and shall maintain an appropriate ledger
containing the necessary information with respect to each Share.
b. Conversion Date. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Shares to be converted
together with a facsimile or original of the signed Notice of Conversion which
evidences Purchaser's intention to convert those Shares indicated. The date on
which the Notice of Conversion is effective ("Conversion Date") shall be deemed
to be the date on which the Purchaser has delivered to the Company a facsimile
or original of the signed Notice of Conversion and the original Shares to be
converted. The Company shall deliver to the Purchaser, or per the Purchaser's
instructions, the shares of Common Stock, without restrictive legend within 5
business days of the Conversion Date.
c. Common Stock to be Issued Without Restrictive Legend. Upon
the conversion of any Shares and upon receipt by the Company or its attorney of
a facsimile or original of Purchaser's signed Notice of Conversion (See Exhibit
A), Seller shall instruct Seller's transfer agent to issue Stock Certificates
without restrictive legends in the name of Purchaser (or its nominee) and in
such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Seller.
d. Conversion Rate. Except as provided in subsection 2f,
Purchaser is entitled to convert, at anytime after May 15, 1998, the entire face
amount of the Shares, plus accrued interest, at seventy percent (70%) of the 5
day average closing bid price, as reported by Bloomberg, LP for the 5 trading
days immediately preceding the applicable Conversion Date (the "Conversion
Price"). No fractional shares or scrip representing fractions of shares will be
issued on conversion, but the number of shares issuable shall be rounded up or
down, as the case may be, to the nearest whole share. The Shares are subject to
a mandatory, 24 month conversion feature at the end of which all Shares
outstanding will be automatically converted, upon the terms set forth in this
section ("Mandatory Conversion Date").
e. Nothing contained in this Subscription Agreement shall be
deemed to establish or require the payment of interest to the Purchaser at a
rate in excess of the maximum rate permitted by governing law. In the event that
the rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.
f. It shall be the Company's responsibility to take all
necessary actions and to bear all such costs to issue the Certificate of Common
Stock as provided herein, including the responsibility and cost for delivery of
an opinion letter to the transfer agent, if so required. The person in whose
name the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Shares that are to be converted in part, the Company shall issue to the
Purchaser new Shares equal to the unconverted amount, if so requested by
Purchaser.
g. In the event the Common Stock is not delivered per the
written instructions of the Purchaser, within 5 (five) business days after the
Conversion Date, then in such event the Company shall pay to Purchaser one
percent (1%) in cash, of the dollar value of the Shares being converted per each
day after the fifth business day following the Conversion Date that the Common
Stock is not delivered.
The Company acknowledges that its failure to deliver the Common Stock
within 5 business days after the Conversion Date will cause the Purchaser to
suffer damages in an amount that will be difficult to ascertain. Accordingly,
the parties agree that it is appropriate to include in this Agreement a
provision for liquidated damages. The parties acknowledge and agree that the
liquidated damages provision set forth in this section represents the parties'
good faith effort to qualify such damages and, as such, agree that the form and
amount of such liquidated damages are reasonable and will not constitute a
penalty. The payment of liquidated damages shall not relieve the Company from
its obligations to deliver the Common Stock pursuant to the terms of this
Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 7 is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 7(g) shall not
apply but instead the provisions of Section 7(h) shall apply.
<PAGE>
The Company shall make any payments incurred under this Section 7(g) in
immediately available funds within three (3) business days from the date of
issuance of the applicable Common Stock. Nothing herein shall limit a
Purchaser's right to pursue actual damages or cancel the conversion for the
Company's failure to issue and deliver Common Stock to the Purchaser within
tenth (10) business days after the Conversion Date.
h. The Company shall at all times reserve and have available
all Common Stock necessary to meet conversion of the Shares by all Purchasers of
the entire amount of Shares then outstanding. If, at any time Purchaser submits
a Notice of Conversion and the Company does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the Shares (a "Conversion Default", the date of such default being referred to
herein as the "Conversion Default Date"), the Company shall issue to the
Purchaser all of the shares of Common Stock which are available, and the Notice
of Conversion as to any Shares requested to be converted but not converted (the
"Unconverted Shares"), upon Purchaser's sole option, may be deemed null and
void. The Company shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Purchasers of outstanding Shares, by
facsimile, within one (1) business day of such default (with the original
delivered by overnight or two day courier), and the Purchaser shall give notice
to the Company by facsimile within five business days of receipt of the original
Notice of Conversion Default (with the original delivered by overnight or two
day courier) of its election to either nullify or confirm the Notice of
Conversion.
The Company agrees to pay to all Purchasers of outstanding Shares
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Shares held by each Purchaser where N = the number of
days from the Conversion Default Date to the date (the "Authorization Date")
that the Company authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining Shares. The Company shall send notice
("Authorization Notice") to each Purchaser of outstanding Shares that additional
shares of Common Stock have been authorized, the Authorization Date and the
amount of Purchaser's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows: (i)
in the event Purchaser elects to take such payment in cash, cash payments shall
be made to such Purchaser of outstanding Shares by the fifth day of the
following calendar month, or (ii) in the event Purchaser elects to take such
payment in stock, the Purchaser may convert such payment amount into Common
Stock at the conversion rate set forth in section 7(d) at anytime after the 5th
day of the calendar month following the month in which the Authorization Notice
was received, until the expiration of the mandatory 24 month conversion period.
The company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Shares will cause the Purchaser to suffer damages in an amount
that will be difficult to ascertain. Accordingly, the parties agree that it is
appropriate to include in this Agreement a provision for liquidated damages. The
parties acknowledge and agree that the liquidated damages provision set forth in
this section represents the parties' good faith effort to quantify such damages
and, as such, agree that the form and amount of such liquidated damages are
reasonable and will not constitute a penalty. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Agreement.
Nothing herein shall limit the Purchaser's right to pursue actual
damages or cancel the Notice of Conversion for the Company's failure to maintain
a sufficient number of authorized shares of Common Stock.
8. Closing Date and Escrow Agent.
The date of the issuance of the Shares in the name of the Purchaser
(the "Closing Date") shall be the date funds are wired to the Company. Closing
shall be effected through delivery of funds and certificates to the Escrow
Agent. Purchaser shall forthwith deliver the necessary funds as indicated in
Paragraph 1 to the Escrow Agent. Share Certificates will be delivered at the
instructions of the Issuer to the Escrow Agent: Joseph B. LaRocco, Esquire, 1055
Washington Boulevard, Stamford, Connecticut 06901. Purchaser herein instructs
the Escrow Agent, and gives the Escrow Agent its good and sufficient authority
to release the Subscription Proceeds, less placement fees to which the Issuer
has agreed in writing, in connection with the purchase of the Shares, upon
receipt by the Escrow Agent of said Shares subscribed for, subject to the terms
and conditions of any Escrow Agreement in effect between the Issuer and the
Escrow Agent. Purchaser and Issuer agree that the Escrow Agent, in his capacity
as Escrow Agent, has no liability as a result of any fraudulent or unlawful
conduct of any party other than the Escrow Agent and agree to hold the Escrow
Agent harmless in such event. The Escrow Agent shall not be liable for any
action taken or omitted by him in good faith and in no event shall the Escrow
Agent be liable or responsible except for the Escrow Agent's own gross
negligence or willful misconduct. The Escrow Agent has made no representations
or warranties in connection with this transaction and has not been involved in
the negotiation of the terms of this Agreement or any matters relative thereto.
Seller and
<PAGE>
Purchaser each agree to indemnify and hold harmless the Escrow Agent
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 Agreement.
The Escrow Agent is not rendering securities advice to anyone with respect to
this proposed transaction; nor is the Escrow Agent opining on the compliance of
the proposed transaction under applicable securities law. In the event the Share
Certificates are not received by the Escrow Agent from the Issuer within Five
(5) Business Days of the date of receipt of the Escrowed Funds, the Escrow Agent
shall return the Escrowed funds without interest to the Purchaser by wire
transfer pursuant to written instructions.
9. Conditions to the Company's Obligation to Sell.
Issuer reserves the right to reject this Agreement prior to signing by
Issuer. Purchaser understands that Issuer's obligation to sell the Shares
subscribed for hereunder is conditioned upon:
a. The receipt and acceptance by Issuer of this Agreement for all the
Shares as evidenced by execution of this subscription agreement by the
Chief Executive Officer or Chief Financial Officer of the Issuer. The
acceptance of funds by the Issuer's counsel shall be deemed to be
constructive acceptance of this Agreement. Purchaser understands this
Agreement is irrevocable; and
b. Delivery into the Escrow Agent by Purchaser of good U.S. funds as
payment in full for the purchase of the Shares and all fees.
10. Conditions to Purchaser's Obligation to Purchase.
Issuer understands that Purchaser's obligation to purchase the Shares
subscribed for hereunder is conditioned upon the following:
a. execution and delivery of this Agreement;
b. delivery to the Escrow Attorney of an opinion letter signed by
counsel for the Company in the form attached hereto as Exhibit
C; and
c. delivery of Shares.
11. Governing Law.
This agreement shall be governed by and construed under the laws of the
State of Florida without regard to its choice of law principles.
12. Change in Regulation S.
(a) During the twenty-four month period following issuance of the
Shares, if there is any change in Regulation S that would restrict the
conversion of the Shares free of legend into Common Stock according to the terms
and conditions set forth in this Agreement, or impose a restrictive period,
longer than ninety (90) days, before which such Common Stock may be used by the
holders without registration, then in such event Purchaser may notify the
Company in writing that Purchaser demands that the Company file a registration
statement under the 1933 Act covering the registration of all the Purchaser's
Common Stock issuable upon conversion ("Registrable Securities"). Upon receipt
of such notice, the Company shall, effect as soon as practicable, and in any
event within 120 days of the receipt of such request, the registration under the
1933 Act of all Registrable Securities which the Purchaser requests, (a "Demand
Registration"). All such action required by Company to complete the registration
shall be done as soon as possible at Company's sole cost and expense, except for
Blue Sky fees and costs and Purchaser's attorney fees and costs.
(b) If the Purchaser initiating the registration request hereunder
("Initiating Purchaser") intends to distribute the Registrable Securities
covered by their request by means of an underwriting, it shall so advise the
Company as a part of its request made pursuant to this Section 12 and the
Company shall include such information in the written notice referred to in
Section 12(a). In such event, the right of any Purchaser to include his
Registrable Securities in such registration shall be conditioned upon such
Purchaser's participation in such underwriting and the inclusion of such
Purchaser's Registrable Securities in the underwriting. All Purchasers proposing
to distribute their securities through such underwriting shall, together with
the Company enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Purchasers, and reasonably acceptable to the Company;
provided that no Purchaser shall be required to
<PAGE>
make any representations other than with respect to its ownership of Registered
Securities and its intended method of distribution. All underwritten fees, costs
and discounts shall be at the sole cost of Purchaser(s)
(c) The Company is not obligated to effect a demand registration under
this Section 12 if in the written opinion of counsel to the Company reasonably
acceptable to the person or persons from whom written request for registration
has been received (and satisfactory to the Company's transfer agent to permit
the transfer) that registration under the 1933 Act is not required for the
immediate public transfer of the Registrable Securities free of legend pursuant
to Rule 144 or other applicable provisions.
(d) If the Company is not able to effect the Demand Registration within
120 days of the Company's receipt of written notice to file a Demand
Registration, then the Company shall pay to each Purchaser of outstanding Shares
liquidated damages equal to two percent (2%) in cash, of the dollar value of the
Shares still owned for each 30 day beyond 120 days of the receipt of a request
for a Demand Registration until such registration is complete. The Company shall
make payment within 5 business days following each thirty day period, and if not
so paid, interest at the rate of 10% per annum shall accrue on the late payment.
The two percent (2%) in liquidated damages per said 30 day period will cease
accruing on the one year anniversary of the issuance of the Shares, but shall
still be payable by the Company at the end of each thirty day period.
The Company acknowledges that its failure to register the Common Stock
within 120 days of the receipt of a request for a Demand Registration will cause
the Purchaser to suffer damages in an amount that will be difficult to
ascertain. Accordingly, the parties agree that it is appropriate to include in
this Agreement a provision for liquidated damages. The parties acknowledge and
agree that the liquidated damages provision set forth in this section represents
the parties' good faith effort to qualify such damages and, as such, agree that
the form and amount of such liquidated damages are reasonable and will not
constitute a penalty. The payment of liquidated damages shall not relieve the
Company from its obligations to deliver the Common Stock pursuant to the terms
of this Agreement.
13. Entire Agreement. This Agreement constitutes the entire agreement among the
parties hereof with respect to the subject matter hereof and supersedes any and
all prior or contemporaneous representations, warranties, agreements and
understandings in connection therewith. This Offshore Securities Subscription
Agreement may be amended only in writing executed by all parties hereto.
14. Independent Counsel. The undersigned acknowledge that they have been advised
to consult with their own attorneys and financial advisors regarding this
Agreement.
15. Submission to Jurisdiction.
(a) Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the courts of the state of Florida. The Company hereby expressly and irrevocably
submits to the jurisdiction of the state and federal Courts of the state of
Florida for the purpose of any such litigation as set forth above and
irrevocably agrees to be bound by any final judgment rendered thereby in
connection with such litigation. The Company further irrevocably consents to the
service of process by registered mail, postage prepaid, or by personal service
within or without the State of Florida. The Company hereby expressly and
irrevocably waives, to the fullest extent permitted by law, any objection which
it may have or hereafter may have to the laying of venue of any such litigation
brought in any such court referred to above and any claim that any such
litigation has been brought in any inconvenient forum. To the extent that the
Company has or hereafter may acquire any immunity from jurisdiction of any court
or from any legal process (whether through service or notice, attachment prior
to judgment, attachment in aid of execution or otherwise) with respect to itself
or its property. The Company hereby irrevocably waives such immunity in respect
of its obligations under this agreement and the other loan documents.
(b) Waiver of Jury Trial. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Holder or the
Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(c) Submission To Jurisdiction. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought in the
state and federal courts located in Florida, and the
<PAGE>
parties hereby irrevocably submit to the non-exclusive jurisdiction of such
courts for the purpose of any such action or proceeding.
16. Miscellaneous.
(a) All pronouns and any variations thereof used herein shall be deemed
to refer to the masculine, feminine, impersonal, singular or plural, as the
identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or canceled,
except by an instrument in writing signed by the party effecting the same
against whom any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed: (i) if to the
Company, at its principal executive offices or (ii) if to the undersigned, at
the address for correspondence set forth in the Questionnaire, or at such other
address as may have been specified by written notice given in accordance with
this paragraph 16(c).
(d) This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida, and shall be binding
upon the undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company, its
successors and assigns. If any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statue or rule of law, then such
provisions shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof that may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
(e) This Subscription Agreement, together with the Exhibits referred to
herein and made a part hereof, constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended only
by a writing executed by both parties hereto.
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
17. Full Name and Address of Purchaser for Registration Purposes:
NAME:___________________________________________________________
ADDRESS:________________________________________________________
________________________________________________________________
________________________________________________________________
TELE.NO.___________________ FAX NO.____________________
CONTACT NAME:_____________________________________________
18. Delivery Instructions: (If different from Registration Name):
NAME:___________________________________________________________
ADDRESS:________________________________________________________
________________________________________________________________
TELE. NO._____________________ FAX NO.____________________
CONTACT NAME:_______________________________________________________
SPECIAL INSTRUCTIONS:________________________________________________
________________________________________________________________
<PAGE>
19. Issuer's Acceptance Based Upon Purchaser Representations.
Issuer is accepting this subscription based upon and in reliance upon
the representations and warranties of Purchaser contained herein, including
without limitation, those contained in section 2 and this Agreement would not be
accepted by Issuer in the absence of such representations and warranties.
IN WITNESS WHEREOF, this Offshore Securities Subscription Agreement was duly
executed as of the _______ day of _____________________, 1998.
Company Name:____________________________________________________________
Purchaser
By:____________________________________________
Official Signatory of Purchaser
Name (Printed):_________________________________________________________
Title:_____________________________________________________________
Country of Execution:____________________________________________________
Accepted this ___ day of the month of _________________________, 1998.
IMAGING DIAGNOSTICS SYSTEMS, INC
By:______________________________________________
Linda Grable, its President duly authorized
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
Preferred Shares.)
The undersigned hereby irrevocably elects, as of ______________, 199_
to convert ________ 1998 Series F Preferred Shares into shares of Common Stock
of ______________________ (the "Company") according to the conditions set forth
in the Subscription Agreement dated _____________, 199_. A. The undersigned
represents that it is not a U.S. Person as defined in Regulation S promulgated
under the Securities Act of 1933, as amended, and is not converting the Shares
on behalf of any U.S. Person.
Date of Conversion*_________________________________________
Applicable Conversion Price_________________________________
Number of shares of Common Stock____________________________
Signature___________________________________________________
[Name]
Address for delivery of the Common Stock __________________________
________________________________________________________________
________________________________________________________________
Phone______________________ Fax______________________________
Please call me at ________________ if you need to confirm this facsimile Notice
of Conversion.
<PAGE>
EXHIBIT B
PURCHASER REPRESENTATION LETTER
Dear Sirs:
The undersigned__________________, has purchased on _______________,
1998, ______________ Series F Convertible Preferred Shares (the "Shares") of
IMAGING DIAGNOSTICS SYSTEMS, INC (the "Company"). In connection with such
purchase, the undersigned, has executed and delivered a subscription agreement
("Subscription Agreement") of your design. As the transaction restriction period
has expired, the undersigned hereby requests that the Shares be transferred into
"Street Name" of __________________________.
The undersigned represents and warrants as follows:
(1) The offer to purchase the Shares was made to it outside of the United States
and the undersigned was, at the time the Subscription Agreement was executed and
delivered, and is now, outside the United States;
(2) It is not a U.S. Person (as such term is defined in Section 902(a) of
Regulation S promulgated under the United States Securities Act of 1933 (the
"Securities Act"); and it has purchased the Shares for its own account and not
for the account or benefit of any U.S. person;
(3) All offers and sales by the undersigned of the Shares shall be made pursuant
to an effective registration statement under the Securities Act or pursuant to
and exemption from, or in a transaction not subject to the registration
requirements of, the Securities Act;
(4) It is familiar with and understands the terms, conditions and requirements
contained in Regulation S and definitions of U.S. persons contained in
Regulation S;
(5) The undersigned has not engaged in any "directed selling efforts" (as such
term is defined in Regulation S) with respect to the Shares or the Common Stock
that is issuable upon conversion; and
(6) The undersigned purchased its Shares with investment intent and at the time
of the purchase of said Shares had no interest to sell, dispose of or otherwise
transfer the Shares. The purpose for this request is to facilitate the
management of the undersigned's investment accounts.
(7) The undersigned has not entered into any short sales with respect to the
Common Stock of the Company during the period that it owned the Shares;
(8) Limits on Amount of Conversion and Ownership. Other than the Mandatory
Conversion provisions contained in the Subscription Agreement which are not
limited by the following, in no other event shall the Purchaser be entitled to
convert that amount of Shares in excess of that amount upon conversion of which
the sum of (1) the number of shares of Common Stock beneficially owned by the
Purchaser and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the Shares), and (2) the number of shares of Common Stock issuable upon the
conversion of the Shares with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the Purchaser and its
affiliates of more than 4.9% of the outstanding shares of Common Stock of the
Company. For purposes of this provision to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13 (d) of
the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (1) of such provision.
(9) Purchaser acknowledges that the Company's Common Stock is traded on a
"designated offshore securities market" as defined in Regulation S. Purchaser
shall request any selling broker in accordance with reasonable business
practices to effect transactions in the Common Stock if feasible in the
"designated offshore securities market".
Dated this ___ day of the month of ___________________, 199 .
By:
- ----------------------------- ------------------------
Official Signature of Purchaser Title
<PAGE>
EXHIBIT C
Form of Pre-Closing Opinion Letter
_______________, 1998
Purchasers of (Company) (Describe Securities)
Re: (Company)
Ladies and Gentlemen:
We have acted as counsel to (Company), a corporation incorporated under the laws
of the State of _____________ (the "Company"), in connection with the proposed
issuance and sale of ______________ (the "Securities") pursuant to the related
Offshore Securities Subscription Agreement (including all Exhibits and
Appendices thereto) (collectively the "Agreements") with ________________
("Distributor"), dated _________________ between the Company and the
Distributor.
In connection with rendering the opinions set forth herein, we have examined
drafts of the Agreement, the Company's Certificate of Incorporation, and its
Bylaws, as amended to date (other documents - describe), the proceedings of the
Company's Board of Directors taken in connection with entering into the
Agreements, and such other documents, agreements and records as we deemed
necessary to render the opinions set forth below.
In conducting our examination, we have assumed the following: (i) that each of
the Agreements has been executed by each of the parties thereto in the same form
as the forms which we have examined, (ii) the genuineness of all signatures, the
legal capacity of natural persons, the authenticity and accuracy of all
documents submitted to us as copies, (iii) that each of the Agreements has been
duly and validly authorized, executed, and delivered by the party or parties
thereto other than the Company, and (iv) that each of the Agreements constitutes
the valid and binding agreement of the party or parties thereto other than the
Company, enforceable against such party or parties in accordance with the
Agreements' terms.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of _____________, is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions where the Company 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 conduct its
business;
2. The authorized capital stock of the Company consists of ___________ shares of
Common Stock, ___________ par value per share ("Common Stock") and __________
shares of Preferred Stock, par value $__________ per share; (describe classes if
applicable)
3. 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;
4. When duly countersigned by the Company's transfer agent and registrar, and
delivered to you or upon your order against payment of the agreed consideration
therefor in accordance with the provisions of the Agreements, the Securities
(and any Common Stock to be issued upon the conversion of the Securities) as
described in the Agreements represented thereby will be duly authorized and
validly issued, fully paid and nonassessable;
5. The company has the requisite corporate power and authority to enter into the
Agreements and to sell and deliver the Securities and the Common Stock to be
issued upon the conversion of the Securities as described in the Agreements;
each of the Agreements has been duly and validly authorized by all necessary
corporate action by the Company 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
<PAGE>
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;
6. To the best of our knowledge, 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
provisions 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 statue or regulation or as other, (iv) or any judgment, decree or
order of any court of governmental body having jurisdiction over the Company or
any of its property.
7. The issuance of Common Stock upon conversion of the Series ____ Preferred
Stock in accordance with the terms and conditions of the Certificate of
Designation and the Agreements, will not violate the applicable listing
agreement between the Company and any securities exchange or market on which the
Company's securities are listed.
8. To our knowledge, after due inquiry, there is no pending or threatened
litigation investigation or other proceedings against the Company (except as
described in Exhibit A hereto).
This opinion is rendered only with regard to the matters set out in the numbered
paragraphs above. No other opinions are intended nor should they be inferred.
This opinion is based solely upon the laws of the State of ___________, as
currently in effect, and the (General) Corporation Law of the State of
___________ and does not include an interpretation or statement concerning the
laws of any other state or jurisdiction. Insofar as the enforceability of the
Agreements may be governed by the laws of other states, we have assumed that
such laws are identical in all respects to the laws of the State of
_____________.
The opinions expressed herein are given to you solely for your use in connection
with the transaction contemplated by the Agreements and may not be relied upon
by any other person or entity or for any other purpose without our prior
consent.
Very truly yours,
By:__________________________
EXHIBIT 10.7
FORM OF SERIES H PREFERRED STOCK SUBSCRIPTION DOCUMENTS.
THESE SECURITIES HAVE 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 SUBSCRIPTION AGREEMENT 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 MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
CONVERTIBLE PREFERRED
SUBSCRIPTION AGREEMENT
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the Series H Convertible Preferred
Stock (hereinafter referred to as the "Preferred Stock") of IMAGING DIAGNOSTIC
SYSTEMS, INC. (NASDAQ symbol "IMDS"), located at 6531 NW 18th Court, Plantation,
FL 33313, a corporation organized under the laws of Florida, USA (hereinafter
referred to as the "Company"). The terms on which the Preferred Stock may be
converted into Common Stock and the other terms of the Preferred Stock are set
forth in the Certificate of Designation annexed hereto as Exhibit A. In
addition, the Company will sell to Subscriber Twenty Five Thousand (25,000)
Warrant A's to purchase Common Stock commencing six months after the Closing
Date (as defined below) for a period of five (5) years thereafter, as per the
terms of Warrant A annexed hereto as Exhibit B, and Twenty Five Thousand
(25,000) Warrant B's to purchase Common Stock commencing six months after the
Closing Date (as defined below) for a period of five (5) years thereafter, as
per the terms of Warrant B (both the Warrant A's and Warrant B's are also
hereinafter referred to collectively as the "Warrants") annexed hereto as
Exhibit C.The Company shall issue to Settondown Capital International, Ltd. (the
"Placement Agent"), in return for services rendered (in addition to fees set
forth in the Escrow Agreement), the number of shares of Preferred Stock equal to
eight (8%) percent of the number of shares of Preferred Stock issued to the
Purchasers pursuant to the terms of the Subscription Agreement, and a Warrant A
to purchase twenty five thousand (25,000) shares of Common Stock. This
Subscription and, if accepted by the Company, the offer and sale of the
Preferred Stock (the "Shares"), the issuance of the Warrants , and the shares
Common Stock underlying both the Preferred Stock and Warrants, (collectively the
"Securities"), are being made in reliance upon the provisions of Regulation D
under the Act.
The undersigned entities listed on Schedule A annexed hereto
(hereinafter collectively referred to as "Subscribers" or the "Purchasers"),
hereby represents and warrants to, and agrees with the Company as follows:
1. Agreement to Sell, Issue, and Purchase the Securities.
(a) The Company will sell and the Purchasers will buy
Preferred Stock and Warrants, and the Company will issue to the Placement Agent
the number of shares of Preferred Stock equal to eight (8%) percent of the
number of shares of Preferred Stock issued to the Purchaser pursuant to the
terms of the Subscription Agreement and a Warrant A to Purchase twenty five
thousand (25,000) shares of Preferred Stock, in reliance upon the
representations and warranties of the Company, Placement Agent, and Purchasers
contained in this Agreement, upon the terms and conditions hereinafter set forth
in this Agreement and all Exhibits annexed hereto an aggregate of one hundred
eight (108) shares of Preferred Stock and one Warrant A to purchase twenty five
thousand (25,000) shares of Common Stock, for an aggregate purchase price of One
Million ($1,000,000) U.S. Dollars based on U.S. $10,000 per share (the "Purchase
Price").
(b) Form of Payment. Subscribers shall pay the Purchase Price
by delivering good funds in United States Dollars by wire transfer to Goldstein,
Goldstein & Reis, LLP, as Escrow Agent, against delivery of the original
Preferred Stock and Warrants as per the separate Escrow Agreement annexed hereto
as Exhibit C, as payment in full for the Securities.
<PAGE>
(c) Wire Instructions. Wire instructions for Goldstein,
Goldstein & Reis, LLP are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of
United States Trust Company of New York
Account No. 920-1-073195
In favor of
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
2. Representation and Warranties of the Subscribers and the
Placement Agent. Each of Subscribers, and the Placement Agent, acknowledges,
represents, warrants and agrees as follows:
(a) Organizations and Authorization. Each of the Subscribers,
and the Placement Agent, are duly incorporated or organized and validly existing
in the country of their incorporation or organization and has all requisite
power and authority to purchase and hold the Securities. The decision to invest
and the execution and delivery of this Agreement by each of the Subscribers and
the Placement Agent, the performance by each of the Subscribers, and the
Placement Agent, of their obligations hereunder and the consummation by each of
the Subscribers and the Placement Agent of the transactions contemplated hereby
have been duly authorized and requires no other proceedings on the part of the
Subscribers or the Placement Agent. The Undersigned's signatory has all right,
power and authority to execute and deliver this Agreement on behalf of the
Subscribers and the Placement Agent. This Agreement has been duly executed and
delivered by the Subscribers and the Placement Agent, and, assuming the
execution and delivery hereof and acceptance thereof by the Company, will
constitute the legal, valid and binding obligations of the Subscribers and the
Placement Agent, enforceable against the Subscribers and the Placement Agent in
accordance with its terms.
(b) Evaluation of Risks. The Subscribers and the Placement
Agent have 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.
(c) Independent Counsel. Each of the Subscribers and the
Placement Agent acknowledges that it has been advised to consult with its own
attorney regarding legal matters concerning the Company and to consult with its
tax advisor regarding the tax consequences of acquiring the Securities.
(d) No Registration. Each of the Subscribers and the Placement
Agent acknowledge and understand that the limited private offering and sale and
issuance of Securities pursuant to this Agreement has not been reviewed or
approved by the SEC or by any state securities commission, authority or agency,
and is not registered under the Act or under the securities or "blue sky" laws,
rules or regulations of any state. Each of the Subscribers and the Placement
Agent acknowledge, understand and agree that the Securities are being offered
and sold hereunder pursuant to (i) a private placement exemption to the
registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of
such Act and Regulation D promulgated under such Act, and (ii) a similar
exemption to the registration provisions of applicable state securities laws.
(e) Subscribers and the Placement Agent are Accredited
Investors. The Subscribers and the Placement Agent are each an "Accredited
Investor" as defined below who represents and warrants it is included within one
or more of the following categories of "Accredited Investors."
(ii) Any bank as defined in
Section 3(a)(2) of the Act, or any savings
and loan associated or other institution as
defined in Section 3(a)(5)A of the Act
whether acting in it individual or fiduciary
capacity; any broker or dealer registered
pursuant to Section 15 of the 1934 Act; any
insurance company as defined in Section
2(13) of the Act; any investment company
registered under the Investment Company Act
of 1940 or a business development company as
defined in Section 2(a)(48) of that Act; any
Small Business Investment Company licensed
by the U.S. Small Business Administration
under Section 301(c) or (d) of the Small
Business Act of 1958; any plan established
and maintained by a state, its political
subdivisions, or any agency or
instrumentality of a state or its political
subdivision, for the benefits of its
employees if such plan has total assets in
excess of $5,000,000; and employee benefit
plan within the meaning of Title I of the
Employee Retirement Income Security Act of
1974 if the investment decision is made by a
plan fiduciary, as defined in Section 3(21)
of such Act, which is either a bank, savings
and loan association, insurance company, or
registered investment advisor, or if the
employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed
plan, with investment decisions made solely
by persons that are accredited investors;
<PAGE>
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
(f) Investment Intent. Without limiting its ability to resell
the Securities pursuant to an effective registration statement, Subscribers and
the Placement Agent are acquiring the Securities solely for their own account
and not with a view to the distribution, assignment or resale to others.
Subscribers and Placement Agent understand and agree that they may bear the
economic risk of their investment in the Securities for an indefinite period of
time. Subscribers and Placement Agent does not now have or, in the future, will
not take any short position or hedge position in the Company's Common Stock for
so long as any portion of that Subscriber's or Placement Agent's Preferred Stock
remains outstanding. Notwithstanding the foregoing, the Subscribers and
Placement Agent may enter into a short or hedge position provided that such
short or hedge position is limited to the number of shares of Common Stock the
Subscribers or Placement Agent would receive upon any particular conversion of
Preferred Stock by the Subscribers or Placement Agent and (b) such short or
hedge position would be limited to the number of shares of Common Stock received
upon any exercise of the Warrants associated with this transaction.
(g) Transfer Restrictions. See Certificate of Designation
annexed hereto as Exhibit A.
(h) Registration Rights. The parties have entered into a
Registration Rights Agreement (Exhibit E).
(i) No Advertisements. The Subscribers and the Placement Agent
are not subscribing for the Securities 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.
(j) As required by Florida Law, the Subscribers and the
Placement Agent also acknowledge and agree that:
(i) The undersigned has been furnished with, and understands
the terms of the Offering. With respect to tax and other economic considerations
involved in his investment, the undersigned is not relying on the Company. The
undersigned has carefully considered and has, to the extent the undersigned
believes such discussion necessary, discussed with the undersigned's
professional legal, tax, accounting and financial advisors the suitability of an
investment in the Company, by purchasing the Shares, for the undersigned's
particular tax and financial situation and has determined that the investment
being made by the undersigned is a suitable investment for the undersigned.
(ii) The undersigned acknowledges that all documents, records,
and books pertaining to this investment which the undersigned has requested have
been made available for inspection by the undersigned.
(iii) The undersigned has had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on behalf of
the Company concerning the Offering and all such questions have been answered to
the full satisfaction of the undersigned.
(iv) The undersigned will not sell or otherwise transfer the
Shares without registration under the Act or applicable state securities laws or
an exemption therefrom. The Shares have not been registered under the Act or
under the securities laws of certain states.
<PAGE>
(v) The undersigned represents that the undersigned is
purchasing the Shares for the undersigned's own account, for investment and not
with a view to resale or distribution except in compliance with the Act. The
undersigned has not offered or sold any portion of the Shares being acquired nor
does the undersigned have any present intention of dividing the Shares with
others or of selling, distributing or otherwise disposing of any portion of the
Shares either currently or after the passage of a fixed or determinable period
of time or upon the occurrence or non-occurrence of any predetermined event or
circumstance in violation of the Act. Except as provided herein, the Company has
no obligation to register the Shares.
(vi) The undersigned recognizes that an investment in the
Shares involves substantial risks, including loss of the entire amount of such
investment.
(vii) Legends (i) The undersigned acknowledges that each
certificate representing the Shares unless registered, shall be stamped or
otherwise imprinted with a legend substantially in the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
NOTWITHSTANDING THE FOREGOING, THE COMMON STOCK ARE ALSO
SUBJECT TO THE REGISTRATION RIGHTS SET FORTH IN THAT CERTAIN
SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT BY
AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF EACH
IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
(viii) The undersigned acknowledges and agrees that it shall
not be entitled to seek any remedies with respect to the Offering from any party
other than the Company.
(ix) The Purchasers are purchasing the Securities for their
own account for investment, and not with a view toward the resale or
distribution thereof. Purchasers are neither an underwriter of, nor a dealer in,
the Shares and are not participating in the distribution or resale of the
Securities.
(x) In making an investment decision, Purchasers must rely on
their own examination of the Company and the terms of this offering, including
the merits and risks involved. The Securities have not been recommended by any
Federal or State Securities Commission or Regulatory Authority. Furthermore, the
foregoing authorities have not confirmed the accuracy or determined the adequacy
of this document. Any representation to the contrary is a criminal offense.
(xi) The Regulation D Offering is intended to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements made by
the undersigned herein and in the Questionnaire.
(xii) The undersigned acknowledges and is aware that except
for the three day rescission rights provided under Florida law, the undersigned
is entitled to cancel, terminate or revoke this subscription, and any agreements
made in connection herewith shall survive my death or disability.
(xiii) The undersigned has had the opportunity to ask
questions of, and receive answers from management of the Company regarding the
terms and conditions of this Subscription Agreement, and the transactions
contemplated thereby, as well as the affairs of the Company and related matters.
(xiv) The undersigned understands that he may have access to
whatever additional information concerning the Company, its financial condition,
its business, its prospects, its management, its capitalization, and other
similar matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
(xv) The undersigned has had the opportunity to obtain
additional information necessary to verify the accuracy of the information
referred to above.
3. General Representations and Warranties of the Company. The Company
hereby represents and warrants to, and covenants with, the Subscribers and the
Placement Agent that the following are true and correct as of the date hereof
and as of the Closing Date.
<PAGE>
(a) 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 on the
Company.
(b) Capitalization. As of May 31, 1998 the authorized capital
stock of the Company consists of 48,000,000 shares of Common Stock, no par value
per share, of which 30,772,314 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), fifty four (54) shares of non-voting Preferred
Stock which are designated as Series D Convertible Preferred Stock (forty nine
(49) of which are outstanding), 54 shares of non-voting Preferred Stock which
are designated as Series E Convertible Preferred Stock (forty (40) of which are
outstanding), fifty four (54) shares of non-voting Preferred Stock which are
designated as Series F Convertible Preferred Stock (fifty (50) of which are
outstanding), one hundred fifty (150) shares of non-voting Preferred Stock which
are designated as Series G Convertible Preferred Stock (none of which are
outstanding), and one hundred eight (108) shares of non-voting Preferred Stock
which are designated as Series H Convertible Preferred Stock which will be
designated as such simultaneously with the execution of this Agreement. All
issued and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable.
(c) 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 Shares and the
performance of the Company's obligations hereunder has been taken. This
Agreement (including all Exhibits annexed hereto) 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 Section 4(d) of this Agreement. Upon
their issuance and delivery pursuant to this Agreement, the Shares will be
validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however, that the Shares are subject to restrictions on
transfer under state and/or federal securities laws. The issuance and sale of
the Shares will not give rise to any preemptive right or right of first refusal
or right of participation on behalf of any person.
(d) 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 on the Company's business and financial condition.
(e) 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 on the
properties, business, condition (financial or otherwise), results of operations
or prospects of the Company. No event or circumstance has occurred or exists
with respect to the Company or its properties, business, condition (financial or
otherwise), results of operations or prospects, which, under applicable law,
rule or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed.
(f) 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 the
transaction documents, including the conversion provision of the Preferred
Stock, 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.
(g) 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
<PAGE>
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 on
the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
(h) 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
Shares, or the consummation of any other transaction contemplated hereby.
(i) Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's 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 on the business or
financial condition of the Company.
(j) 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.
(k) 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,
conditions, affairs 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.
(l) 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.
(m) 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.
(n) Required Governmental Permits. 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.
(o) 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 Debentures are outstanding, the
Company will take no action, which would impact their continued listing or
eligibility of the Company for such listing.
(p) Other Outstanding Securities/Financing Restrictions. Other
than warrants and options to acquire shares of Common Stock as disclosed in the
Reports, options issued to certain employees in January, 1998 pursuant to the
Company's stock option plan, and an aggregate of 750,000 options recently issued
to the Company's officers and directors, 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.
(q) Use of Proceeds. The Company represents that the net
proceeds from this offering will be used for working capital.
(r) Accuracy of Reports and Information. The Company is in
full compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and shall maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the
Exchange Act and the Common Stock trades on the OTC Bulletin Board.
(s) Further Representations and Warranties of the Company. For
so long as any Securities held by any of the Subscribers and the Placement Agent
remain outstanding, the Company acknowledges, represents, warrants and agrees as
follows:
(i) 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.
(ii) It will permit the Subscribers to exercise its
right to convert the Preferred Stock by telecopying an executed and
completed Notice of
<PAGE>
Conversion to the Company and delivering the original Notice of
Conversion and the certificate representing the Preferred Stock to the
Company by express courier. Each business date on which a Notice of
Conversion is telecopied to and received by the Company in accordance
with the provisions hereof shall be deemed a conversion date. The
Company will transmit the certificates representing shares of Common
Stock issuable upon conversion of any Preferred Stock (together with
the certificates representing the Preferred Stock not so converted) to
the Subscriber via express courier, by electronic transfer or otherwise
within three business days after the conversion date if the Company has
received the original Notice of Conversion and Preferred Stock
certificate being so converted by such date. In addition to any other
remedies which may be available to the Subscriber, in the event that
the Company fails for any reason to effect delivery of such shares of
Common Stock within five business days from the date of delivery of the
Preferred Stock and original Notice of Conversion, the Subscriber will
be entitled to revoke the relevant Notice of conversion by delivering a
notice to such effect to the Company whereupon the Company and the
Subscriber shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion. Liquidated
damages under this Section 3(ii) shall continue to run from the sixth
(6th) business day from the original Conversion Date up until the time
that the Notice of Conversion is revoked or the Common Stock has been
delivered, at which time liquidated damages shall cease. The Notice of
Conversion and Preferred Stock representing the portion of the Shares
converted shall be delivered as follows:
To the Company:
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, FL 33313
Fax: (954) 581-0555
In the event that the Common Stock issuable upon conversion of
the Preferred Stock is not delivered within five (5) business days of receipt by
the Company of a valid Conversion Notice and the Preferred Stock to be converted
(such date of receipt referred to as the "Conversion Date"), the Company shall
pay to the Purchaser, in immediately available funds, upon demand, as liquidated
damages for such failure and not as a penalty, for each $100,000 of Preferred
Stock sought to be converted, $500 for each of the first ten (10) days and
$1,000 per day thereafter that the Conversion Shares are not delivered, which
liquidated damages shall run from the sixth (6th) business day after the
Conversion Date. Any and all payments required pursuant to this paragraph shall
be payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price.
(u) 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 Securities and Exchange Commission 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. The Company has timely
filed all requisite forms, reports and exhibits thereto with the Securities and
Exchange Commission.
(v) 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 Subscriber or the Placement Agent that (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or in the earnings, business affairs, business
prospects, properties or assets of the Company, or (ii) could reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement.
(w) Opinion of Counsel. Purchaser shall, upon purchase of the
Shares, receive an opinion letter from counsel to the Company, and the Company
represents that it will immediately obtain such an opinion from counsel to the
satisfaction of the Transfer Agent, 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.
<PAGE>
(v) The Preferred Stock, which shall be issued at the
closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) The Subscription Agreement (including all
Exhibits annexed thereto), the issuance of the Shares and the issuance
of Common Stock, upon conversion of the 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 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 Purchaser set forth in this
Subscription Agreement, the offer, issuance and sale of the Convertible
Preferred Stock and Conversion Shares to be issued upon exercise to the
Purchaser pursuant to this Purchase Agreement are exempt from the
registration requirements of the Securities Act.
(ix) As of May 31, 1998 the authorized capital stock
of the Company consists of 48,000,000 shares of Common Stock, no par
value per share, of which 30,772,314 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), fifty four
(54) shares of non-voting Preferred Stock which are designated as
Series D Convertible Preferred Stock (forty nine (49) of which are
outstanding), 54 shares of non- voting Preferred Stock which are
designated as Series E Convertible Preferred Stock (forty (40) of which
are outstanding), fifty four (54) shares of non-voting Preferred Stock
which are designated as Series F Convertible Preferred Stock (fifty
(50) of which are outstanding), one hundred fifty (150) shares of
non-voting Preferred Stock which are designated as Series G Convertible
Preferred Stock (none of which are outstanding), and one hundred eight
(108) shares of non-voting Preferred Stock which are designated as
Series H Convertible Preferred Stock which will be designated as such
simultaneously with the execution of this Agreement. 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
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in the Agreements; each of the Agreements has
been duly and validly authorized by all necessary corporate action by
the Company 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.
(x) Opinion of Counsel. The Company will obtain for
each of the Subscribers, and the Placement Agent, at the Company's
expense, any and all opinions of counsel which may be required in order
to convert, exercise or sell the Securities, including, but not limited
to, obtaining for each of the Subscribers, at the Company's expense an
opinion of counsel, subject only to receipt of a Notice of Conversion
in the Form of Exhibit D, duly executed by the particular Subscriber
which shall be satisfactory to the Transfer Agent, directing the
Transfer Agent to remove the legend.
(y) Mandatory Conversion. In the event the Shares
have not been converted two (2) years from the Closing Date, the Shares
shall automatically be converted as if the Purchaser voluntarily
elected such conversion in accordance with the procedure, terms and
conditions set forth in this Agreement.
(z) Dilution. The Company is aware and acknowledges
that conversion of the Preferred Stock and/or exercise of the Warrants
could cause dilution to existing shareholders and could significantly
increase the outstanding number of shares of Common Stock.
<PAGE>
(aa) Restrictions on Future Financings/Right of First Refusal.
The Company agrees that it will not enter into any private debt or equity
financing which is convertible into Common Stock until the earlier of: (i) one
hundred eighty (180) days after the Effective Date; or (iii) each of the
Subscribers gives written approval for such additional financing.
Notwithstanding the foregoing, if the Subscribers do not provide the Company
with at least One Million Dollars ($1,000,000) Dollars in funding (subject to
the terms of the commitment letter, including all exhibits thereto, dated May
28, 1998) within forty five (45) days from the Closing Date, the aforementioned
restriction on future financing shall be waived, without waving the remaining
terms of this Section or this Agreement (including all Exhibits annexed hereto).
In the event the Company wishes to obtain further financing in the form of any
discounted or reset convertible securities convertible into Common Stock within
one (1) year following the Closing Date, the Purchasers shall have the right of
first refusal to participate in such offering and shall have ten (10) business
days to reply in writing after receipt of written notice of such offering from
the Company. Provided, however, that this restriction does not apply with
respect to the Company obtaining up to Sixteen Million ($16,000,000) Dollars in
financing pursuant to a commitment letter dated May 28, 1998.
4. Representations and Warranties of the Company, the
Placement Agent, and Subscribers. Each of Subscribers, Placement Agent, and the
Company, represent to the other the following with respect to itself:
(a) Subscription Agreement. This Subscription Agreement has
been duly authorized, validly executed and delivered on behalf of the Company,
the Placement Agent, and each Subscriber, 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.
(b) Non-contravention. The execution and delivery of the
Subscription Agreement (including all Exhibits annexed hereto) and the
consummation of the issuance of the Securities and the transaction contemplated
by the Subscription Agreement do not and will not conflict with or result in a
breach by the Company, the Placement Agent, or any Subscriber of any of the
terms or provisions of, or constitute a default under, the articles of
incorporation or by-laws of the Company, the Placement Agent, or any of the
Subscribers, or any indenture, mortgage, deed of trust of other material
agreement or instrument to which the Company, the Placement Agent, or any of the
Subscribers 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, and the Placement Agent, or any of the Subscribers or any of its
properties or assets.
(c) Approvals. Neither the Company, the Placement Agent, nor
any of the Subscribers is aware of any authorization, approval or consent of any
governmental body which is legally required for the issuance and sale of the
Securities.
(d) Indemnification. Each of the Company, the Placement Agent,
and the Subscribers agrees 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.
5. Restrictions on Conversion of Preferred Stock. The
Subscribers or any subsequent holder of the Preferred Stock (the "Holder") shall
be prohibited from converting any portion of the Preferred Stock which would
result in any of the Subscribers or the Holder being deemed the beneficial
owner, in accordance with the provisions of the Securities Exchange Act of 1934,
as amended, of 9.99% or more of the then issued and outstanding Common Stock of
the Company.
6. Intentionally Left Blank
7. Stock Delivery Instructions/Legend. The Preferred Stock
Certificates shall be delivered to Escrow Agent on a delivery versus payment
basis as set forth in the Escrow Agreement.
The Certificate or Certificates representing the Shares shall
be subject to a legend restricting transfer under the Securities Act of 1933,
such legend to be substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION UNDER SAID ACT."
8. Closing Date. The date of the issuance and receipt of
Securities and Purchase Price, as well as the satisfaction of the conditions set
forth in Sections 9 and 10 herein (the "Closing Date"), shall be mutually agreed
upon as to time and place. Both parties agree and acknowledge that time is of
the essence concerning the closing of the deal.
9. Conditions to the Company's Obligation to Sell. Each of the
Subscribers understands that the Company's obligation to sell the Preferred
Stock are conditioned upon:
<PAGE>
(a) The receipt and acceptance by the Company of this
Subscription Agreement and all Exhibits thereto by an authorized officer; and
(b) Delivery into escrow by Subscribers of good funds as
payment in full for the purchase of the Securities, as well as copies of
executed stock powers which originals shall be forwarded immediately to Escrow
Agent; and
(c) All representations and warranties of the Subscribers
shall remain true and correct as of the Closing Date.
10. Conditions to Subscriber's Obligation to Purchase. The
Company understands that Subscriber's obligation to purchase the Preferred Stock
is conditioned upon:
(a) Acceptance by Subscribers of a satisfactory Subscription
Agreement and all Exhibits hereto for the sale of the Securities;
(b) Delivery of the original Preferred Stock and Warrants
as described herein;
(c) All representations and warranties of the Company
shall remain true and correct as of the Closing Date;
(d) Receipt of opinion of counsel; and
(e) Proof of a filed Certificate of Designation for the
Preferred Stock.
11. Miscellaneous.
(a) 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 or the state 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.
(b) 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.
(c) In lieu of the original, a facsimile transmission or copy
of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document.
(d) This Agreement and Exhibits hereto constitute the entire
agreement between the Subscriber and the Company with respect to the subject
matter hereof. This Agreement may be amended only by a writing executed by both
of them.
(e) Each of the Subscribers, and the Placement Agent,
represents to the Company that the representations and warranties of each of the
Subscribers and the Placement Agent, contained herein are complete and accurate
and may be relied upon by the Company in determining the availability of an
exemption from registration under federal and state securities laws in
connection with a private offering of securities.
(f) 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 no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
<PAGE>
(g) Each of the Company and the Subscribers agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
(h) 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 one (1%) percent of the
gross amount raised for legal and escrow fees pursuant to the Escrow Agreement
and, the number of shares of Preferred Stock equal to eight (8%) percent of the
total number of shares of Preferred Stock issued to the Subscribers, and one
Warrant A to purchase 25,000 shares of Common Stock as Placement Agent Fees..
IN WITNESS WHEREOF, this Subscription Agreement was duly executed on the date
first written below.
Agreed to and Accepted as of the
day of June, 1998
IMAGING DIAGNOSTIC SYSTEMS, INC.
By____________________________
Linda B. Grable, President
AUSTOST ANSTALT SCHAAN,
Purchaser
By___________________________
Name:
Title:
BALMORE FUNDS S.A.
Purchaser
By___________________________
Name:
Title:
SETTONDOWN CAPITAL INTER-
-NATIONAL, LTD.
Placement Agent
By___________________________
Anthony L.M. Inder Riden
<PAGE>
SCHEDULE A
1. AUSTOST ANSTALT SCHAAN
733 Fuerstentum
Lichenstein Landstrasse 163
Telephone: 011 431.53.453.2951
Facsimile: 011 431.53.453.2895
Attention: Thomas Hackl
Investment Amount: $500,000.00
No. of Shares of Preferred Stock:
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
Tel.: 011-411-71-201-6262
Fax: 011-441-71-201-4800
Attn: Francois Morax
Investment Amount: $500,000.00
No. of Shares of Preferred Stock:
No. of shares of Common Stock
underlying Warrant A:
No. of shares of Common Stock
underlying Warrant B:
<PAGE>
EXHIBIT B
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
IMAGING DIAGNOSTIC SYSTEMS, INC.
The undersigned do hereby certify that, pursuant to the authority
conferred upon the Board of Directors of IMAGING DIAGNOSTIC SYSTEMS, INC. (the
"Corporation") a corporation organized and existing under the Florida Business
Corporation Act, by Florida Statute 607.0821 and Florida Statute 607.0602 and
pursuant to the written consent dated May 28, 1998, duly executed by all of the
members of the Corporation's Board of Directors, adopting the resolutions
providing for the issuance of up to 108 shares of the Corporation's authorized
but unissued preferred stock, no par value, to be designated the Series H
Convertible Preferred Stock (the "Preferred Stock"), and the Amendment of the
Corporation's Articles of Incorporation to provide for the Preferred Stock, and
there being no shareholder action required, the Corporation Articles of
Incorporation are hereby Amended as follows:
ARTICLE III CAPITAL STOCK
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF SERIES H
CONVERTIBLE PREFERRED STOCK
1. Designation and Rank. The number and designation of the series of Preferred
Stock fixed by this amendment shall be 108 Shares of "Series H Convertible
Preferred Stock" (hereinafter referred to as the "Convertible Preferred Stock"),
all of which shall rank equally and be identical in all respects.
2. Conversion Rights.
(a) Right to Convert. The holder of any shares of Series H Convertible Preferred
Stock (the "Preferred Stock") may, at any time, for a period of two years
thereafter, convert all or a portion of the Preferred Stock and any accrued
interest thereon, without the payment of any additional consideration therefor,
into that number of fully paid and non-assessable shares of common stock, no par
value, of the Corporation as is determined by dividing (i) the sum of $10,000 by
(ii) the Conversion Price (determined as hereinafter provided) in effect at the
time of conversion. The "Conversion Price" shall be equal to the lesser of $.53
or seventy five percent (75%) of the Average Closing Price of the Corporation's
Common Stock for the ten-day trading period ending on the day prior to the date
of the conversion (the "Lookback Period"). On the last trading day of each
month, starting on the first day of the 5th month from the Closing Date, the
Lookback period will be increased by two trading days until the Lookback period
equals a maximum of twenty two (22) trading days. For purposes of this Section
3, the Average Price shall be the lowest closing bid price of the Common Stock
during the Lookback period 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.
(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 3(b), receive a
fraction of a share of Common Stock thereon, then in lieu of any such fractional
share to which such holder would otherwise be entitled, the Corporation shall
round up or down, as the case may be, to the nearest share. Before any holder of
the Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer agent
for the Preferred Stock, and shall give written notice by facsimile or otherwise
(the "Conversion Notice") to the Corporation at such office that such holder
elects to convert the same and shall state therein such holder's name or the
name of its nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, but in any event within five business days of the date
of its receipt of the Conversion Notice and original Preferred Stock
Certificate, issue and deliver or cause to be issued and delivered to such
holder of Preferred Stock, or to its nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled. Such conversion shall be deemed to have been made on the date that
the Corporation receives the Conversion Notice by facsimile or otherwise, and
the person or persons entitled to receive the share of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Upon the conversion of any
shares of Preferred Stock, such shares shall be restored to the status of
authorized but unissued shares and may be reissued as a new series by the
Corporation at any time.
(c) Notices of Record Date. In the event of (i) any declaration by the
Corporation of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution
<PAGE>
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.
(e) Common Stock Reserved. The Corporation shall reserve and keep available out
of its authorized but unissued Common Stock such numbers of shares of Common
Stock as shall from time to time be sufficient to effect conversion of all of
the then outstanding shares of Preferred Stock. In the event there are
insufficient shares to effect a conversion, the Corporation shall increase the
number of authorized shares to effect conversion , the holder shall be entitled
to vote with the holders of the Common Stock, as a single class, where each
share of Preferred Stock shall be entitled to that number of votes to which it
would be entitled had all of its shares of Preferred Stock been converted into
shares of Common Stock were notice of conversion given on the date of such vote.
No sale or disposition of all or substantially all of the Corporation's assets
shall take place without approval of the holders of the Convertible Preferred
Stock, voting as a single class.
(f) Voting Rights of Convertible Preferred Stock. Except as otherwise required
by law and as provided for in Section 3(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.
4. 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.
5. 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
reasonable be, to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Convertible Preferred Stock.
IN WITNESS WHEREOF, this Amendment to the Articles of Incorporation has
been executed and attested by the undersigned duly authorized officers of the
Corporation as of the 28th day of May 1998.
------------------------------------------
Linda B. Grable, President and Director
------------------------------------------
Allan L. Schwartz, Executive Vice President and Director
------------------------------------------
Richard J. Grable, Chief Executive Officer and Director
<PAGE>
EXHIBIT C
THESE SECURITIES HAVE 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 12,500 Shares of Common Stock of
IMAGING DIAGNOSTIC SYSTEMS, INC.
THIS CERTIFIES that, for value received, SETTONDOWN CAPITAL
INTERNATIONAL, LTD.(the "Investor"), is entitled, upon the terms and subject to
the conditions hereinafter set forth, at any time on or after November 2, 1998,
and on or prior to November 2, 2003 (the "Termination Date") but not thereafter,
to subscribe for and purchase from IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida
corporation (the "Company"), twelve thousand five hundred (12,500) 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 Convertible Preferred Subscription Agreement dated as of
June , 1998, in the aggregate amount of One Million ($1,000,000) 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, 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 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.
<PAGE>
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 June , 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.
2
<PAGE>
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 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 which has not been then exercised, 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 or the state
courts in connection with any dispute arising under this Agreement 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.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: June __, 1998 IMAGING DIAGNOSTIC SYSTEMS, INC.
By__________________________________
Linda B. Grable, President
3
<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, 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, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant 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, 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.
2
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-2 n this Registration Statement on Form S-2 of our report
dated August 6, 1997, which appears on page F1 of our financial statements
included in the Imaging Diagnostic Systems, Inc. Form 10-KSB, dated September
26, 1997 and to the reference to our firm under the caption "Experts" in the
Prospectus.
/s/ MARGOLIES, FINK AND WICHROWSKI
-----------------------------------
Margolies, Fink and Wichrowski
Pompano Beach, Florida
July 30, 1998
