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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1998
COMMISSION FILE NO. 33360405
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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AMENDMENT NO. 1.
TO FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
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Florida 3845 22-2671269
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<S> <C> <C>
(State of Incorporation) (Primary Standard Industrial IRS Employer I.D. Number)
Classification Code Number)
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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
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(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. [___]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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- - ---------------------------------------------------------------------------------------------------------------------
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)
- - ---------------------------------------------------------------------------------------------------------------------
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COMMON STOCK, NO PAR VALUE 2,997,375 $.65 $1,948,293,70 $ 590.39
- - ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK, NO PAR , ISSUABLE UPON
CONVERSION OF THE SERIES H PREFERRED 2,661,698 $.65 $1,730,103.70 $ 524.27
STOCK (2) (3)
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COMMON STOCK, NO PAR VALUE, ISSUABLE 125,000 $.65 $ 81,250.00 $ 24.62
UPON EXERCISE OF WARRANTS
- - ---------------------------------------------------------------------------------------------------------------------
TOTAL (4) (5) 5,784,073 $.65 $3,759,647.40 $ 1,139.29
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(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 ask and low bid prices of the Registrant's Common Stock on the
NASDAQ Electronic Bulletin Board on November 10, 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, as a result of any future anti-dilution adjustments made in
accordance with the terms of the Company's Series H Convertible Preferred Stock
and the Warrants.
(3) Pursuant to the amended terms of the Registration Rights Agreement between
the Company and the Series H holder, the amount being registered is 100% 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.
(4) All of the shares of common stock registered herein will be sold by the
Selling Security Holders.
(5) A filing fee of $1,239,51 was paid in connection with the initial filing of
the Registration Statement.
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.
ii
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IMAGING DIAGNOSTIC SYSTEMS, INC.
CROSS REFERENCE SHEET
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FORM S-2 ITEM NUMBERS AND CAPTION HEADING IN PROSPECTUS
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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........................................PLAN OF DISTRIBUTION
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 SECURITIES
10. INTEREST OF NAMED EXPERTS AND COUNSEL..................................LEGAL MATTERS AND FINANCIAL STATEMENTS
11. INFORMATION WITH RESPECT TO THE REGISTRANT.............................PROSPECTUS SUMMARY, RISK FACTORS,
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION, BUSINESS, MANAGEMENT,
CERTAIN TRANSACTIONS, MARKET PRICE OF
SECURITIESS AND OTHER RELATED
STOCKHOLDER MATTERS, SALES OF
UNREGISTERED SECURITIES, PRINCIPAL
STOCKHOLDERS, DESCRIPTION OF CAPITAL
STOCK, FINANCIAL STATEMENTS
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.....................................FINANCIAL STATEMENTS AND SCHEDULES
iii
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SUBJECT TO COMPLETION, DATED ____________, 1998.
PROSPECTUS
5,729,069 SHARES
IMAGING DIAGNOSTIC SYSTEMS, INC.
COMMON STOCK
This prospectus ("Prospectus") relates to an aggregate of 5,729,069 shares (the
"Shares") of common stock, no par value (the "Common Stock"), of Imaging
Diagnostic Systems, Inc., a Florida corporation (the "Company"). Of the
5,729,069 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
November 5, 1998, the closing bid and asked price of the Common Stock as
reported on the OTC Bulletin Board was $.56 and $.62 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)
2,942,371 shares of Common Stock (100% of the number of shares that would be
required to be issued if the Series H Preferred Stock were converted on the day
before the filing of the Registration Statement (the "Registration Statement")
of which this Prospectus is a part (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) 970,996 shares of common
stock that were usual pursuant to private placements (iv) 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.
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
THE DATE OF THIS PROSPECTUS IS _______, 1998
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Selling
Security 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.
PROSPECTIVE INVESTORS SHOULD BE PREPARED TO SUSTAIN A LOSS OF THEIR ENTIRE
INVESTMENT. INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT
SHOULD NOT PURCHASE THESE SECURITIES. SEE "RISK FACTORS " BEGINNING ON PAGE 5 OF
THIS PROSPECTUS FOR A DISCUSSION OF MATTERS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THESE SECURITIES.
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
2
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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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed with
the Commission pursuant to the Exchange Act (the "34 Act"):
1. The Company's Quarterly Reports on Form 10-QSB for the fiscal
quarter ended September 30, 1998.
2. In addition, all documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14, or 15(d) of the
Exchange Act prior to the termination of the offering made by
this Prospectus shall be deemed to be incorporated by
reference into this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that
a statement contained in this Prospectus or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference in this Prospectus or in a
supplement hereto modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of
this Prospectus.
This Prospectus is accompanied by a copy of the Company's latest 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 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".
3
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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
Since its inception in December 1993, Imaging Diagnostic Systems, Inc. (the
"Company")has engaged principally in the development of 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 high-speed
pico-second pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms to detect and analyze tissue in the breast for indicia
of malignancy or benignancy. The components of the laser system are purchase
from two unaffiliated parties and assembled and installed into the CTLM(TM) by
the Company. See "Business". The Company is developing a clinical atlas of the
optical properties of benign and malignant tissues with respect to absorption
and scattering parameters as laser light pulses pass through the tissue. The
CTLM(TM) device is designed to provide the physician with objective data for
interpretation and further clinical work-up. Accordingly, the Company believes
that the CTLM(TM) will improve early diagnosis, reduce diagnostic uncertainty,
and decrease the number of biopsies performed on benign lesions. See "Business".
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 twenty
additional patients at its in-house facility. The CTLM(TM) device was installed
at Strax and patients were scanned. Prior to the completion of the 1997 IDE, the
Company was advised that greatly improved laser technology would soon become
available to the Company. The IDE at Strax 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 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" and
Business Government Regulations"
The Company's executive offices are located at 6531 NW 18th Court, Plantation,
Florida 33313. Its telephone number is (954) 581-9800.
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THE OFFERING
Securities Offered by Selling Security Holders
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Common Stock 5,508,049 (1)
SECURITIES OUTSTANDING
Common Stock 38,209,399 (2)
Series B Preferred Shares 450 (3)
Series H Preferred 108
Warrants 442,500 (4)
Options 4,128,371 (5)
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(Footnotes of following page)
4
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1) Pursuant to the terms of the Registration Rights Agreement between the
Company and the Series H holder, the amount being registered and included herein
is 100% 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.
2) Does not Include shares of common stock underlying the conversion privileges
in the Series B and Series H Convertible Preferred Shares which for the purpose
of this Prospectus are estimated at 14,394,879 and 2,661,698, respectively,
warrants and options to purchase 442,500 and 4,128,371 shares respectively and
3,500,000 shares to be issued is connection with the Patent Licensing Agreement.
The Series B Preferred has been noticed for conversion and the conversion of the
Series H Preferred, which is convertible at a price equal to lesser of
seventy-five percent (75%) of the lowest closing bid price of the Company's
Common Stock for the ten-day trading period ending on the day prior to the date
of conversion) or $.56, has been estimated at the conversion rate of $.3757 per
share, the conversion price if the Preferred Stock were converted on the day
before the filing of the Registration Statement.
3) On September 4, 1998, the Company received a notice of conversion from the
Series B holders. At present, due to the decline in the price of its common
stock, the Company does not have available enough authorized common stock to
convert the Series B. See " Market Price of Securities and Other Stockholder
Related Matters".
4) The options were issued in connection with the Company's Stock Option Plan
and/or in connection with Employment Agreements. The exercise price of the
options range from $.55 to $4.35 per share. The warrants were issued to
consultants, finders and private placement investors. The exercise price of the
warrants range from $1.09 to $5.00.
TRADING SYMBOL IMDS
USE OF PROCEEDS The Company will not receive any proceeds
from the sale of common stock by the
Selling Shareholders.
RISK FACTORS An investment in the securities
offered hereby involves a high
degree of risk. Prospective
investors should review carefully
and consider the factors described
in "Risk Factors."
RISK FACTORS
IN MAKING AN INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THOSE DESCRIBES ELSEWHERE HEREIN.
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 June 30, 1998, the Company has incurred
net losses of approximately $ 22,714,526. 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.
PENNY STOCK REGULATIONS AND RESTRICTIONS
The Securities Exchange Commission (the "Commission") has adopted regulations,
which generally define Penny Stocks to be an Equity Security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exemptions. At present, the market price of the
Company's Common Stock is
5
<PAGE>
substantially less than $5.00 per share and therefore may be designated as a
"penny stock." pursuant to the rules under the Securities Exchange Act of 1934,
as amended. Such a designation requires any broker or dealer selling such
securities to disclose certain information concerning the transaction, obtain a
written agreement from the purchaser, and determine that the purchaser is
reasonably suitable to purchase such securities. These rules may restrict the
ability of Broker / Dealers to sell the Company's Common Stock and may affect
the ability of Investors to sell their Shares. These rules may restrict the
ability of Broker/Dealers to sell the Company's Common Stock and may affect the
ability of shareholders to sell their Shares. The issuance of large amounts of
common stock upon conversion and the subsequent sale of such shares may further
depress the price of the common stock. In addition, since each new issuance of
common stock dilutes existing shareholders, the issuance of substantial
additional shares may effectuate a change of control of the Company.
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined from time to time by the board of directors. Accordingly, the board
of directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In addition, the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company.
The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. The lower the Average Price the greater the number of
share to be issued to the Holders, upon conversion, thus increasing the
potential profits to the Holder when the price per share increases and the
Holder sells the Common Shares. The preferred stocks potential for increased
share issuance and profit in addition to a stock overhang of an undeterminable
amount may depress the price of the Company's common stock.
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 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 in order to conduct sales in
member countries of the European Union. The Company is currently preparing the
necessary documentation for the CE certification, which is a lengthy process and
could take up to eight-months, and evaluating notifying bodies in various
countries in Europe. A notifying body ("NB") is a regulatory body from the
private sector, who is responsible for the review and approval of the
documentation submitted by the Company in order to enable the CE mark to be
affixed to products. The Company has not obtained such certificates and there
can be no assurance it
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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. See "Business- Regulatory and
Clinical Status
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.
PATENTS
The Company owns the rights, pursuant to an exclusive patent licensing
agreement, for the use of the patent for the CTLM(TM) technology. The patent is
owned by Richard Grable, the Company's Chief Executive Officer. See
"Business-Patent License Agreement". In addition, the Company has twelve
additional patents pending with regard to Optical Tomography. Neither the
Company nor Mr. Grable hold foreign patents, however patents have been applied
for in several foreign countries. See "Business Patents". The Company intends to
file for patents on products, including the CTLM(TM), for which it feels the
cost of obtaining a patent is economically reasonable in relation to the
expected protection obtained. There can be no assurances that any patent that
the Company applies for will be issued, or that any patents issued will protect
the Company's technology. If the patents the Company license or obtains are
infringed upon, or if the Company is required to defend any patent infringement
cases brought against it, it will require substantial capital, the expenditure
of which the Company might not be able to afford.
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 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,
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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 See "Business-Sales and
Marketing".
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and "Financial Statements".
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 Austost Anstalt Schaan and Balmore Funds S.A., which
represent 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 or if Company declines to use
the Equity Line of Credit the Company may seek such additional funding through
public or private financing or
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collaborative, licensing and other arrangements with corporate partners. If the
Company utilizes the Equity Line of Credit or additional funds are raised by
issuing equity securities, especially Convertible Preferred Stock, dilution to
existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. There can be no assurance, however,
that additional financing will be available when needed, or if available, will
be available on acceptable terms. Insufficient funds may prevent the Company
from implementing its business strategy or may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license to third parties rights to commercialize products or
technologies that the Company would otherwise seek to develop itself. See
"Market Price of Securities and Related Stockholder Matters-Financing/Equity
Line of Credit. At present only the Series B and Series H Preferred Stock is
outstanding. The Series B has been noticed for conversion. When and if the
Company converts the Series B Shares, the Holders may be entitled to an
aggregate of 12,852,002 common shares pursuant to the conversion and 1,542,877
shares pursuant to the dividend. If converted as of November 10, 1998 the Series
H Holders would be entitled to 2,661,698 shares. 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. See "Risk Factors-Sale
of Unregistered Securities-Financing/Equity Line of Credit" and "Sale of
Unregistered Securities-Financing/Equity Line of Credit.
ISSUANCE OF STOCK FOR SERVICES
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependant on it ability to
issue stock for services. Since 1996, the Company has issued an aggregate of
1,190,200 share of common stock pursuant to Registration Statements on Form S-8.
The aggregate fair market value of the shares was $2,069,259. The issuance of
large amounts of common stock for services rendered or to be rendered and the
subsequent sale of such shares may depress the price of the common stock. In
addition, since each new issuance of common stock dilutes existing shareholders,
the issuance of substantial additional shares may effectuate a change of control
of the Company. See "Note 16 to Financial Statements".
SALE OF UNREGISTERED SECURITIES, FINANCING/EQUITY LINE OF CREDIT".
On September 4, 1998, the Company received a notice of conversion from Weyburn
Overseas Limited and Goodland International Investment Ltd., the Series B
Holders, requesting the issuance of 4,559,846 and 10,639,642 shares of common
stock, respectively. The conversion rate of the Shares is 82% of the average
market price over a five-day period prior to conversion or approximately $.35014
per share. The Company contends that when and if the Company converts the
Preferred Shares, the Series B Holders may be entitle to an aggregate of
12,852,002 common shares pursuant to the conversion and 1,542,877 shares
pursuant to the dividend provision of the Preferred Shares, not the 15,199,488
shares set forth in their notice. On October 7, 1998 a lawsuit was filed against
the Company by the Series B Holders The lawsuit alleges that the Company
breached its contract of sale to the Series B Holders by, among other this
failing to convert the Series B Preferred Stock and failure to register the
common stock underlying the Preferred. The Series B Holders have demanded
damages in excess of $75,000, to be determined at trial, together with interest
costs and legal fees. The Company intends to defend this suit and has obtained
litigation counsel, who is in the processes of reviewing the case and filing an
answer. If the lawsuit is tried and a judgment is entered against the Company,
the Company estimates that the damages could be in excess of $4.5 million. The
Company is not financially able to redeem the Series B Preferred Shares and any
damages awarded to the Series B Holders would have a material adverse effect on
the Company and its ability to continue operations. See "Business-Legal
Proceedings" and "Sale of Unregistered Securities-Conversion of Preferred".
The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. The lower the Average Price the greater the number of
share to be issued to the Holders, upon conversion, thus increasing the
potential profits to the Holder when the price per share increases and the
Holder sells the Common Shares. The preferred stocks potential for increased
share issuance and profit in addition to a stock overhang of an undeterminable
amount may depress the price of the Company's common stock. If the Series H
Holders elected to convert their Preferred Shares as of November 5, 1998 the
Company would be required to issue 2,661,698 shares of common stock. The Company
is in technical default of the Registration Rights Agreement, which required the
Registration Statement to be declared effective by October 2, 1998. Pursuant to
the Registration Rights Agreement, is required to pay the Series H Holders, as
liquidated damages for failure to have the Registration Statement declared
effective, and not as a penalty, two (2%) percent of the
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principal amount of the Securities for the first thirty (30) days, and three
(3%) percent of the principal amount of the Securities for each thirty (30) day
period thereafter until the Company procures registration of the Securities At
present the Company is unable to pay the liquidated damages. Should the Series H
Holders decide to seek legal restitution, any damages awarded to the Series H
Holders would have a material adverse effect on the Company and its ability to
continue operations. In the event that the Company is not able to increase the
authorized common stock and the Series H 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 "Sale of Unregistered Securities-Series H Preferred".
The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital and will continue to do so in the future. In
deciding to issue Preferred Shares pursuant to the private placements, the
Company took into account the number of common shares authorized and
outstanding, the market price of the common stock at the time of each Preferred
sale and the number of common shares the Preferred share would have been
convertible into at the time of the sale. At the time of each private placement
of Preferred Stock there were enough shares, based on the price of the Company's
common stock at the time of the sale of the Preferred to satisfy the Preferred
conversion requirements. Although the Company's Board of Directors tried to
negotiate a floor on the conversion price of each series of Preferred Stock
prior to sale, it was unable to do so. In order to obtain working capital the
Company will continue to seek capital through debt or equity financing. The
Company will endeavor to negotiate the best transaction possible taking into
account the impact on its shareholders, dilution, loss of voting power and the
possibility of a change of control. However, in order to satisfy its working
capital needs, the Company may be forced to issue convertible securities with no
limitations on conversion. See "Sale of Unregistered Securities".
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.
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. See "Management".
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS/POSSIBLE CHANGE OF CONTROL
Management of the Company beneficially owns 39.5 % of the outstanding common
stock of the Company assuming no exercise of outstanding warrants and options..
After giving effect to the conversion of the Series B Preferred and the
estimated conversion of the Series H Preferred, Management will own 27.3 %. This
additional dilution to Management's ownership percentage may effectuate a change
in control of the Company. See "Principal Shareholders" and "Description of
Securities".
POSSIBLE CONFLICT OF INTEREST
Richard Grable and Linda Grable hold a majority of the seats on the
Company's Board of Directors (the "Board"). Consequently, they are in a position
to control their own compensation and to approve affiliated transactions, if
any. The Board's policy is to obtain unanimous consent for affiliated
transaction and compensation issues. Although the Company's Board intends to act
fairly and in full compliance with their fiduciary obligations, there can be no
assurance that the Company will not, as a result of the conflict of interest
described above, possibly enter into arrangements under terms less favorable
than it could have obtained had it been dealing with unrelated persons.
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HIGHLY COMPETITIVE MARKET.
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. See "Business".
TECHNICAL OBSOLESCENCE.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's proposed products obsolete. Although the Company believes that The
CTLM(TM) can be upgraded to maintain its state-of-the-art character, the
development of new technologies or refinements of existing ones might make the
Company's existing system technologically or economically obsolete, or cause a
reduction in the value of, or reduce the need for, the Company's CTLM(TM). There
can be no assurance that the development of new types of diagnostic medical
equipment or technology will not have a material adverse effect on the Company's
business, financial condition, and results of operations. Although the Company
is aware of no substantial technological changes pending, should such change
occur, there can be no assurance that the Company will be able to acquire the
new or improved systems which may be required to update the CTLM(TM).
RELIANCE ON INTERNATIONAL SALES.
The Company intends to commence international sales of the CTLM(TM) in Europe
and Asia prior to commencing commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market approval from the
FDA. See "Business-Government Regulation". Thus, until the Company receives
pre-market approval from the FDA to market the CTLM(TM)in the United States, as
to which there can be no assurance, the Company revenues, if any, will be
derived from sales to international distributors. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on the Company's ability to deliver products on a timely
basis. Future imposition of, or significant increases in the level of customs
duties, export quotas or other trade restrictions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The regulation of medical devices, particularly in Europe, continues to develop
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company. See "Business-Sale and Marketing" and
"Business-International Distributors".
In order to minimize the risk of doing business with distributors in countries
which hare having difficult financial times, the Company's International
Distribution Agreements all require payment via an irrevocable letter of credit
drawn on a United States bank prior to shipment of the CTLM(TM).
PRODUCT LIABILITY.
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLM(TM) device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not
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be subjected to future claims and potential liability. At present, the Company
does not carry product liability insurance. The Company intends to obtain
product liability insurance prior to testing at clinical sites and marketing the
CTLM(TM) device
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.
LACK OF DIVIDENDS
The Company has not paid a dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the Company's
Financial Statements and the Notes thereto, included elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 1998 and June 30, 1997.
- - ---------------------------------------------------
General and administrative expenses in the aggregate during the twelve months
ended June 30, 1998, were $4,478,055 representing an increase of $1,474,313 from
$3,003,742 during the twelve months ended June 30, 1997. The increase is due
primarily to substantial increases in amortization of deferred compensation
expense and consulting expenses.
Compensation and related benefits during the twelve months ended June 30, 1998,
were $1,987,104 representing a decrease of $1,477,020 from $3,464,124 during the
twelve months ended June 30, 1997. The decrease in compensation and related
benefits is due to the additional compensation recorded in 1997 on the
compensatory stock options.
Research and development expenses during the twelve months ended June 30, 1998,
were $254,722 representing a decrease of $810,456 from $1,065,178 during the
twelve months ended June 30, 1997. This decrease is due primarily to finalizing
certain components of the CTLM(TM) device.
Advertising and promotion expenses during the twelve months ended June 30, 1998,
were $329,446 representing an increase of $162,926 from $166,520 during the
twelve months ended June 30, 1997. The increase is due primarily to the costs
associated with additional advertising in domestic and foreign medical imaging
and medical device publications particularly in advance of the Radiological
Society of North America's Annual Scientific Conference and Exhibition (RSNA)
held in Chicago, Illinois. The Company placed ads in three official RSNA
publications, Radiology, Daily Bulletin and On Display. Additional ads were
placed in the following publications: Diagnostic Imaging, Europe, Diagnostic
Imaging, U.S., IHE (International Hospital Equipment), and Access Radiology
Reference Guide.
Consulting expenses during the twelve months ended June 30, 1998, were
$1,220,676 representing an increase of $456,312 from $764,364 during the twelve
months ended June 30, 1997. The substantial increase is due primarily to the
hiring of outside consultants needed for special non-recurring projects required
prior to placing CTLM(TM) units into clinical trials. These special projects
included an operator's manual, service and parts manual, and risk factors
assessment written by technical writers. A laser physicist was hired to review
and prepare a special report on laser safety that was submitted to the FDA.
Professional expenses during the twelve months ended June 30, 1998, were
$454,730 representing an increase of $276,328 from $178,402 during the twelve
months ended June 30, 1997. The substantial increase is due primarily
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to additional legal fees regarding the NASDAQ appeal and the legal action taken
against a former employee. See "Business-Legal Proceedings".
Stockholder expenses during the twelve months ended June 30, 1998, were $75,608
representing an increase of $54,706 from $20,902 during the twelve months ended
June 30, 1997. The increase is due to the costs associated with preparing and
mailing the Company's annual report and Proxy Statement
Tradeshow expenses during the twelve months ended June 30, 1998, were $216,182
representing an increase of $61,400 from $154,782 during the twelve months ended
June 30, 1997. The increase is due to the costs associated with increasing the
Company's exhibit at the Radiological Society of North America's Annual
Scientific Conference and Exhibition from 20 ft. by 40 ft. to 40 ft. by 50 ft.
This increase in exhibit size was necessary to accommodate newly constructed
internally illuminated view boxes used to display the in-vivo images obtained
from the clinical trials conducted by the Company.
Travel and subsistence costs during the twelve months ended June 30, 1998, were
$111,559 representing a decrease of $84,026 from $195,585 during the twelve
months ended June 30, 1997. This decrease was primarily due to reducing the use
of out-of-state consultants wherever possible.
Rent expense during the twelve months ended June 30, 1998, was $26,213
representing a decrease of $22,684 from $48,897 during the twelve months ended
June 30, 1997. This decrease was primarily due to the purchase of equipment
during the fiscal year that was previously leased and the relocation to a
Company owned facility.
Interest expense during the twelve months ended June 30, 1998, were $55,543
representing an increase of $52,799 from $2,744 during the twelve months ended
June 30, 1997. The increase is due to interest paid on short-term loans used for
working capital for the Company.
Net interest income during the twelve months ended June 30, 1998, was $22,137
representing a decrease of $94,835 from $116,972 during the twelve months ended
June 30, 1997. This decrease is due to a decrease of funds invested by the
Company.
Depreciation and amortization expenses during the twelve months ended June 30,
1998, were $283,966 representing an increase of $53,919 from $230,047 during the
twelve month period ended June 30, 1997. This increase is due primarily to the
purchase additional laboratory equipment and manufacturing fixtures.
Comparative fiscal year June 30, 1997 numbers have been changed to reflect
restatement as per Financial Statement, Notes to Financial Statements, (3)
Restatements, Page F15.
BALANCE SHEET DATA
Liquidity and Capital Resources
- - -------------------------------
The Company has financed its operations since inception by the issuance of
equity securities with aggregate net proceeds of approximately $17,746,206 and
through loan transactions in the aggregate amount of $520,407. During Fiscal
1998, the Company received net proceeds of approximately $1,879,500 from the
private placement of its Series C Convertible Preferred Stock and Warrants,
approximately $495,000 from the private placement of its Series D Convertible
Preferred Stock and Warrants, approximately $495,000 from the private placement
of its Series E Convertible Preferred Stock and Warrants, approximately $700,000
from the private placement of its Series F Convertible Preferred Stock, all
pursuant to Regulation S of the Securities Act of 1933, as amended, and
approximately $990,000 from the private placement of its Series H Convertible
Preferred Stock and Warrants pursuant to Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.
The Company's combined cash and cash equivalents totaled $310,116 at June 30,
1998, representing a decrease of $73,107 from $383,223 at June 30, 1997. The
decrease in cash and cash equivalents is due to continuing operations.
The Company's prototype equipment totaled $-0- at June 30, 1998 and $1,216,585
at June 30, 1996. All direct costs associated with the prototype equipment have
been capitalized. The Company has reclassified the prototype equipment into
inventory as the development of the Computed Tomography Laser Mammography
(CTLM)(TM)
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device has been, for the most part, completed and the manufacture of five (5)
devices to be placed into clinical sites has commenced.
The Company's property and equipment, net, totaled $2,920,980 at June 30, 1998
and $3,293,297 at June 30, 1997. This decrease is due to depreciation and
retirement of certain equipment.
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begins, the Company is totally dependent upon debt and equity funding. In the
event that the Company is unable to obtain debt or equity financing or is unable
to obtain such financing on terms and conditions acceptable to the Company, the
Company may have to cease or severely curtail its operations. This would
materially impact the Company's ability to continue as a going concern.
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during fiscal
1998 was $3,540,001 primarily due to the Company's continued research and
development of the CTLM(TM) and preparations for FDA Clinical Trials including
the manufacture of five (5) CTLM(TM) Breast Imaging Systems and the hiring of
six additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) device and related software development
of $4,532,866 in fiscal 1997. At June 30, 1998, the Company had a working
capital of $(257,166) compared to a working capital of $(294,433) at June 30,
1997.
During fiscal 1998, the Company was able to raise a total of $5,399,599
less expenses through Regulation S and Regulation D transactions. The Company
will continue to seek equity or debt financing in order to meet its working
capital needs. The Company does not expect to generate a positive internal cash
flow for at least the next twelve-months due to the expected increase in
spending for research and development and the expected costs of commercializing
it initial product, the CTLM(TM). The Company will require additional funds for
its research and development, clinical testing, operating expenses, Food and
Drug Administration regulatory processes, and manufacturing and marketing
programs. Accordingly, the Company will be required to raise additional funds
prior to the end of calendar year 1998 in order to continue operations. The
Company plans to raise additional funds by either equity or debt financing,
including entering into a transaction(s) to privately place equity, either
common or preferred stock, or debt securities, or combinations of both; or by
placing equity into the public market through an underwritten secondary offering
or obtaining mortgage financing on it real property and improvements. If
additional funds are raised by issuing equity securities, dilution to existing
stockholders will result, and future investors may be granted rights superior to
those of existing stockholders. At the present time, the Company continues to
receive indications of interest to provide this additional funding. The Company,
however, continues to review and balance these indications of interest and
funding requirements against its strategic product development goals, working
capital need, and dilution to its shareholders.
No assurances, however, can be given that future financing would be available or
if available, that it could be obtained at terms satisfactory to the Company.
The Company's ability to effectuate its plan of and continue operations is
dependent on its ability to raise capital, structure a profitable business, and
generate revenues. If the Company's working capital were insufficient to fund
its operations, it would have to explore additional sources of financing.
Although the Company has a firm committment for a $15 million Equity Line of
Credit, it presently does not have available enough authorized stock to utilize
it. See "Sale of Unregistered Stock - Financing/Equity Line of Credit".
Capital expenditures for the fiscal 1998 were approximately $115,738 as compared
to approximately $2,815,923 for fiscal 1997. These expenditures were a direct
result of purchases of computer and other equipment, office, warehouse and
manufacturing fixtures, tradeshow equipment, computer software, laboratory
equipment, and other fixed assets. The Company anticipates that its capital
expenditures for fiscal 1999 will be approximately $100,000.
BUSINESS
OVERVIEW
Imaging Diagnostic Systems, Inc. (the "Company") is a medical technology company
that has developed and is testing a Computed Tomography Laser Mammography
("CTLM(TM)") device for detecting breast cancer through the skin in a
non-invasive procedure. The CTLM(TM) employs a high-speed pico-second pulsed
titanium sapphire laser
14
<PAGE>
and proprietary scanning geometry and reconstruction algorithms to detect and
analyze tissue in the breast for indicia of malignancy or benignancy. The
components of the laser system are purchased from two unaffiliated parties and
assembled and installed into the CTLM(TM) by the Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters as
laser light pulses pass through the tissue. The CTLM(TM) device is designed to
provide the physician with objective data for interpretation and further
clinical work-up. Accordingly, the Company believes that the CTLM(TM) will
improve early diagnosis, reduce diagnostic uncertainty, and decrease the number
of biopsies performed on benign lesions.
HISTORY
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first images
and filed a total of ten ancillary patents from 1996 to date, and intends to
file an additional 3 patent applications within the next six months. During this
period of time there were further advances in laser technology effecting the
size and stability of the laser component. The Company incorporated these
changes by purchasing a laser package manufactured by Spectra-Physics, Inc.
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLM(TM) device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and patients were scanned. Prior to the
completion of the 1996 IDE protocol, the Company was advised that greatly
improved laser technology would soon become available. The IDE protocol at Strax
and the Company was halted, pending the receipt of the new laser. In November
1997 the CTLM(TM) was removed from Strax and, on May 20, 1998, the Company's
termination of the IDE protocol and its final report was accepted by the FDA.
The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company is authorized to scan 20 patients at the Company's in-house facilities
in Plantation, Florida and upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.
On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 7 independent and 16 subordinate claims. In May 1998, the Company,
realizing that it had no formal written agreement in place with Mr. Grable,
immediately began negotiating with Mr. Grable for the exclusive use of the
patent. In June 1998, a written agreement was entered into. See
"Business-Patent" and "Business-Patent License Agreement".
BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her
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lifetime. Nationwide, it is estimated that in 1998, approximately 178,700 new
cases of invasive breast cancer will be diagnosed among women in the United
States, and an estimated 43,500 women will die from this disease. Excluding skin
cancers, the breast is the most frequent site of cancer among American women
accounting for 32% of incident cancers and 17% of cancer deaths. It is the
second leading cause of death for American women following lung cancer and is
the leading cause of cancer death among women aged 40 to 55. The annual cost of
breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommend as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; (iv)
an annual mammogram for women age 50 or older. As a result of family medical
histories and other factors, certain women are at "high risk" of developing
breast cancer during their lifetimes. For these women, physicians often
recommend close monitoring, particularly if an abnormality posing increased risk
factors has been detected.
Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.
Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
Physical Examination
- - --------------------
Physical examinations may be conducted by a physician or clinician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.
Mammography
- - -----------
Mammography is a non-invasive x-ray modality commonly used for both routine
breast cancer screening and as a diagnostic tool. A mammogram produces an image
of the internal structure of the breast that 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
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<PAGE>
the patient. Because x-ray mammography exposes the patient to radiation, ACS
recommends that mammograms be limited to once per year. In addition, x-ray
mammography is considered to be less effective for women under the age of 50 who
generally have radiographically dense breast tissue. The average cost of a
diagnostic mammogram is approximately $55 to $200 per procedure (an average of
$113), and requires the use of capital equipment ranging in cost from
approximately $75,00 to $225,000. It is expected that the CTLM(TM) device will
cost approximately $300,000 and the cost of a bilateral exam will be $125 to
$150. Due the high capital costs associated with mammography equipment and the
specialized training necessary to operate the equipment and to interpret
radiographic images, mammography is usually available only at specialty clinics
or hospitals.
Ultrasound
- - ----------
Ultrasound uses high frequency sound waves to create an image of soft tissues in
the body in a non-invasive manner. Like mammography, this image requires
interpretation by a physician. Ultrasound's principal role in breast cancer
diagnosis has been to assist the physician in determining whether a palpable
lesion is likely to be a cyst (usually benign) or a solid mass (potentially
cancerous). The average cost for an ultrasound of the breast is approximately
$125 to $500 per procedure (an average of $235) and requires the use of capital
equipment ranging in cost from approximately $60,000 to $200,000. Again, it is
expected that the CTLM(TM) device will cost approximately $350,000 and the cost
of an exam will be $125 to $150. Like mammography, ultrasound is generally
performed at specialty clinics or hospitals.
Biopsy
- - ------
Other currently available minimally invasive diagnostic techniques include fine
needle aspirations or core needle biopsy employing either the stereotactic or
hand held method. In each of these procedures a physician seeks to obtain either
cellular or tissue samples of suspicious lesions for cytodiagnosis or
histodiagnosis. Inadequate sampling can render these tests invalid. These
procedures are invasive, require follow-up, and range in cost from approximately
$370 to $1,000 per procedure.
THE COMPANY
The Company has a limited history of operations. Since its inception in December
1993, the Company has engaged principally in the development of the CTLM(TM).
The Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At June 30, 1998, the Company had an
accumulated deficit of $27,055,993. Such losses have resulted principally from
costs associated with the Company's operations. The Company expects operating
losses will increase for at least the next several years as total costs and
expenses continue to increase due principally to the anticipated
commercialization of the CTLM(TM), development of, and clinical trials for, the
CTLM(TM) and other research and development activities. The Company's ability to
achieve profitability will depend in part on its ability to obtain regulatory
approvals for its proposed products and develop the capacity to manufacture and
market any approved products either by itself or in collaboration with others.
There can be no assurance if and when the Company will receive regulatory
approvals for the development and commercial manufacturing and marketing of its
proposed products, or achieve profitability. See "Management's Discussion and
Analyses of Financial Condition and Results of Operations."
CTLM(TM)
- - --------
Since its inception in December 1993, the Company has been engaged in the
research, development and testing of its CTLM(TM) device. The CTLM(TM) is a
system for detecting breast cancer through the skin in a non-invasive procedure
that does not require compression or x-ray. The CTLM(TM) employs a high-speed
pico-second pulsed titanium sapphire laser and proprietary scanning geometry and
reconstruction algorithms that create contiguous cross sectional slice images of
the breast which are used in the detection and analysis of changes in the breast
for indicia of malignancy or benignancy. The components of the laser system are
purchase from two unaffiliated parties and assembled and installed into the
CTLM(TM) by the Company.
The Company is developing a clinical atlas of the optical properties of benign
and malignant tissues with respect to absorption and scattering parameters of as
it passes through the tissue. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and further clinical work-up.
Accordingly, the Company believes that the CTLM(TM) will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions. Further, the CTLM(TM) does not expose the patient
to ionizing radiation or painful
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<PAGE>
compression, which the Company believes are contributing factors to a portion of
the patient population not obtaining a conventional mammogram.
A breast exam utilizing the CTLM(TM) is non-invasive and can be performed by a
medical technician in less than 15 minutes. A patient lies face down on the
scanning table with a breast hanging pendulously in the scanning chamber. Once
the entire breast is scanned the other breast is placed in the chamber for
scanning. A bilateral breast scan (both breasts) takes approximately 15 minutes.
Each scan takes approximately 6-8 minutes. The CTLM(TM) has been designed in
such a way as to provide the physician and patient with quick access to
information concerning the probability that an identified lesion is malignant or
benign. The procedure is designed to provide the physician and patient with an
objective, on-site, immediate diagnostic decisions, including whether or not to
proceed to surgical biopsy. Further, the CTLM(TM) is designed to archive and
compare scans and provide the patient with a computer disc (CD) with images
produced from the date of her scan.
Comparison to Existing Diagnostic Modalities
- - --------------------------------------------
The CTLM(TM) differs from currently available breast imaging modalities employed
for the detection of breast cancer in that the CTLM(TM) will generate more
precise information for the clinician or doctor. The CTLM(TM) is designed to
generate, depending on the size of the breast, approximately 20 cross-sectional
images of a breast. A conventional screening mammography exam generates two
images of the breast. Cross-sectional imaging will allow a doctor or clinician
to isolate the location of the abnormality within the breast. By doing so, there
is greater resolution of the area where the specific abnormality resides.
Clinical efficacy of conventional mammography diminishes proportionately with
the abundance of fibroglandular breast tissue. Based upon this fact, limited
interpretability of a mammogram increases the risk that a lesion may be
overlooked, and diagnosis and treatment may be delayed; thus threatening the
patient's survival probability. Forceful compression of breast tissue in order
to aid in the distinction between so-called normal and abnormal breast tissue is
fairly effective, but is uncomfortable, and often painful. This discomfort level
poses an obstacle for many women in deciding to have their first mammogram or
deciding whether to ever return for an annual screening mammogram.
Scanning of the breast with the CTLM(TM) utilizes no compression of tissue. The
laser and detector array orbits 360 degrees around the breast gathering data
that is used to reconstruct multiple cross-sectional images of the breast's
internal structures. The Company believes that such images will provide the
physician with increased accuracy in lesion location, as well as determination
of the extent and involvement of breast disease. The CTLM(TM) will also be able
to produce a near three-dimensional view.
Breast augmentation through the use of either silicone or saline implants
renders another difficult situation when employing conventional mammography for
imaging. Although radiographic and positioning techniques have vastly improved
the ability to compress and image more breast tissue than ever before, there
still remains a certain amount of breast tissue unable to be imaged due to its
placement around the implant. This is not the case with CTLM(TM) scans. Due to
the free suspension of the breast in the CTLM(TM) scanning chamber, and the
ability of the CTLM(TM) to image the breast from the chest wall to the nipple,
data can be collected from around the entire breast. The scanning capacity of
the CTLM(TM) laser light transmission through the breast is not impeded by
silicone or saline implants.
The Company believes that the shortcomings of current breast cancer management,
which include discomfort and exposure to radiation, represent a significant
market opportunity for an objective technology that does not have these
shortcomings. The use of the CTLM device to detect breast cancer is believed to
be especially promising for women between the ages of 20 to 50 (over 50 million
women in the United States) for whom x-ray mammography has lower efficacy. These
women often present diffuse palpable benign breast conditions, which can mask
malignancies or pre-malignant conditions.
GOVERNMENT REGULATION
United States Regulation
- - ------------------------
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(TM) device in
the United States. Because the CTLM(TM) is a medical device, it is subject to
the relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act")
and implementing its regulations. Pursuant to the FD&C Act, the Food and Drug
Administration ("FDA") regulates, among other things,
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<PAGE>
the manufacture, labeling, distribution, and promotion of the CTLM(TM) in the
United States. The FD&C Act requires that a medical device must (unless exempted
by regulation) be cleared or approved by the FDA before being commercially
distributed in the United States. The FD&C Act also requires that manufacturers
of medical devices, among other things, comply with the labeling requirements
and to manufacture devices in accordance with Good Manufacturing Practices
("GMPs"), which require that companies manufacture their products and maintain
related documentation in a conformed manner with respect to manufacturing,
testing, and quality control activities. The FDA inspects medical device
manufacturers and distributors, and has broad authority to order recalls of
medical devices, to seize non-complying medical devices, to enjoin and/or impose
civil penalties, and to criminally prosecute violators.
Pursuant to the FD&C Act, the FDA classifies medical devices intended for human
use into three classes: Class I, Class II, and Class III. In general, Class I
devices are products the safety and effectiveness of which the FDA determines
can be reasonably assured by general controls under the FD&C Act relating to
such matters as adulteration, misbranding, registration, notification, records
and reports, and GMPs. Class II devices are products for which the FDA
determines that these general controls are insufficient to provide reasonable
assurance of safety and effectiveness, and that require special controls such as
the promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in Class III, such as the
Company's CTLM,(TM) require pre-market approval, as described below.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some devices may
qualify for clearance under a Section 510(k) procedure, which is not applicable
to the CTLM(TM) since it is a Class III device. Since the CTLM(TM) does not
qualify for the 510(k) procedure it must apply to the FDA for pre-marketing
approval ("PMA") before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results of
clinical studies, and preparing an application is a detailed and time consuming
process. Once a PMA application has been submitted, the FDA's review may be
lengthy and may include requests for additional data. By statute and regulation,
the FDA may take up to 180 days to review a PMA application, although such time
period may be extended. Furthermore, there can be no assurance that a PMA
application will be reviewed with 180 day or that a PMA application will be
approved by the FDA. The Company intends to file for expedited review of its PMA
application. See "Regulatory and Clinical Status, United States/FDA". The
inability of the Company to obtain FDA approval would have a material adverse
effect on the Company's business and financial condition and could result in
postponement of the commercialization of the CTLM.(TM) See "Business- Regulatory
and Clinical Status".
Foreign Regulation
- - ------------------
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter that that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit the
Company to begin marketing the CTLM(TM) device in Europe and Asia before
marketing would be permitted in the United States. In Europe, the Company must
obtain certification necessary to enable the "CE" Mark to be affixed to the
CTLM(TM) device, which will allow the Company to market the systems throughout
Europe. The process to obtain a CE mark is lengthy and time consuming. Following
are the listed standards and steps that must be complied with in order to obtain
a CE Mark in order to distribute the CTLM(TM) device in the European Economic
Area (EEA). The listed standards are for the EEA market only and additional
document/standards exists for other markets. These standards may have direct or
indirect reference to additional standards and additional standards may apply:
Safety (Electrical/Mechanical)
-----------------------------
EN 60 601-1: Medical electrical equipment. Part 1: General
requirements for safety.
EN 60 601-1-1: Medical electrical equipment. Part 1: General
requirements for safety 1. Collateral standard: Safety
requirements for medical electrical systems.
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<PAGE>
EN 60 601-2-22: Medical electrical equipment. Part 2:
Particular requirements for the safety of diagnostic and
therapeutic laser equipment.
IEC 825-1: Safety of laser products. Part 1: Equipment
classification, requirements, and user's guide.
EN 60 950: Safety of Information Technology Equipment
Including Business Equipment.
Safety (EMC)
-----------
EN 60 601-1-2: Medical electrical equipment. Part 1: General
requirements for safety 2. Collateral standard:
Electromagnetic compatibility - requirements and tests.
Programmable Electrical Systems (Software)
-----------------------------------------
EN 60 601-1-4: Medical electrical equipment. Part 1: General
requirements for safety 4. C collateral standard: Programmable
electrical medical systems.
Quality Assurance Systems
-------------------------
EN 29001 : Quality Systems - Model for Quality Assurance in
design/development, production, installation, and servicing.
EN 46001 : Specification for Application of EN 29001 to the
manufacture of medical devices.
Clinical Evaluations
--------------------
EN 540: Clinical investigation of medical devices for human
subjects.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
Risk Assessment
---------------
prEN 1441: Medical devices - risk analysis.
Additional Markings/Symbols/Terminology/Documentation
-----------------------------------------------------
prEN 980: Terminology, symbols and information provided with
medical devices. Graphical symbols for use in the labeling of
medical devices.
prEN 1041: Terminology, symbols and information provided with
medical devices. Information supplied by the manufacturer with
medical devices.
Medical Devices Directive (93/42/EEC) Annex X: Clinical
evaluations.
Although the Company has begun the process for application of regulatory
approval marks and showing compliance with the Medical Devices Directive (MDD)
which allows placement of the CE mark, there can be no assurance that such
approval will be received on a timely basis, or at all. See "Business-Regulatory
and Clinical Status".
REGULATORY AND CLINICAL STATUS
United States/FDA
- - -----------------
On March 19, 1998 the Company submitted the final Report for the Company's IDE.
Also on March 19, 1998 the Company met with representatives of the FDA. The
purpose of the meeting was to describe several options to the Company's IDE and
to get the FDA's perspective on these approaches. It was decided that the
Company will conduct clinical trials under the IDE with 20 patient studies
performed in-house and monitored by an Institutional
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<PAGE>
Review Board ("IRB") established by the Company. The information obtained from
the study will be submitted to the FDA to enable the Company to commence the
clinical studies at three unaffiliated clinical sites.
In April 1998 the Company appointed seven physicians and one physicist who are
specialists in the following fields: Gynecology/Obstetrics and Mammography (4),
breast surgery (1), Neurology (1), Radiology (1), and optics and laser
engineering (1), to serve on the IRB. The IRB was appointed to review, to
approve the initiation of, and to conduct periodic review of the Company's
research involving human subjects. The primary purpose of the IRB is to assure,
both in advance and by periodic review, that appropriate steps are taken to
protect the rights and welfare of humans participating as subjects of the
research. To accomplish this purpose, IRB's use a group process to review
research protocols and related materials (e.g., informed consent documents and
investigator brochures) to ensure that:
(i) Risks to subjects are minimized by using procedures that are
consistent with sound research design and that do not unnecessarily expose
subjects to risk, and whenever appropriate, by using procedures already
being performed on the subjects for diagnostic or treatment purposes.
(ii) Risks to subjects are reasonable in relation to anticipated benefits
(if any) to subjects, and the importance of the knowledge that may be
expected to result.
(iii) Selection of subjects is equitable.
(iv) Informed consent will be sought from each prospective subject or the
subject's legally authorized representative and will be documented in
accordance with, and to the extent required, by the FDA's informed consent
regulation.
(v) Where appropriate, the research plan makes adequate provision for
monitoring the data collected to ensure the safety of subjects.
(vi) There are adequate provisions to protect the privacy of subjects and
to maintain the confidentiality of data.
(vii) Appropriate additional safeguards have been included in the study to
protect the rights and welfare of subjects who are members of a vulnerable
group.
The IRB is not responsible for nor does it participate in obtaining data, the
interpretation of data or clinical results, or the approval of the CTLM(TM). The
IRB does not receive any compensation for its services; however, if pursuant to
FDA requirements, one of the members should supervise the actual scanning of
women, they are paid a supervisory clinical honorarium of $250 per day. The
optics and laser engineer IRB member also serves and has served for the past
three years, as a consultant to the Company on an "as needed" basis. He receives
a consulting fee from the Company of $700 per month. The Neurology IRB member is
married to one of the Company's engineers.
On May 15, 1998 the Company submitted a supplemental safety report to the FDA
which encompasses all of the modifications and upgrades since the initial safety
report was filed.
In order to collect the clinical data for the PMA, the Company was granted, in
June 1998, its second investigational device exemption ("IDE") to conduct
clinical trials. An IDE allows a company to conduct human clinical trials
without filing an application for marketing clearance. The Company is authorized
to scan 20 patients at its in-house facilities in Plantation, Florida. On
September 1 and September 10, 1998, the Company formally submitted the first and
second series of the 20 patient in-vivo (human) images and corresponding
interpretation data to the FDA. Upon completion and submission of the 20 patient
in-vivo studies, the Company intends to initiate, upon FDA approval, the 400
case clinical study at three prominent United States hospitals. See
"Business-Government Regulation." Once the 400 case clinical study is completed,
the Company plans to file a Pre-Market Approval application (PMA) with the FDA
to obtain marketing clearance.
The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first independent clinical site. The Company
has submitted the IDE protocol to the hospital on November 10, 1998. NCMC's IRB
must review and approved the IDE Protocol. The documents are being sent to the
FDA for their approval. Once approved by the FDA, the Company is granted
permission, assuming the 20 patient in-vivo studies have been completed, to
proceed with the clinical trials described in the IDE protocol. The Company is
still evaluating sites in Miami, Chicago, Los Angeles and Boston.
21
<PAGE>
In order to sell the CTLM(TM) device commercially in the United States, the
Company must obtain marketing clearance from the FDA. A PMA application must be
supported by extensive data, including pre-clinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of the
device. Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit substantive review, the agency
will "file" the application. Under the Food, Drug and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:
o The device addresses a condition, which is serious or life
threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
o The device addresses a condition, which is life threatening or
irreversibly debilitating, and provides for clinically
important earlier diagnosis or significant advances in safety
and/or effectiveness over existing alternatives.
o The device represents a clear clinically meaningful advantage
over existing technology, defined as having major (not
incremental) increased effectiveness or reduced risk compared
to existing technology.
o The availability of the device is otherwise in the best
interest of the public health.
Although the Company believes that it qualifies for expedited review, there can
be no assurance that any such review will be granted of if granted that the PMA
will be approved or that such approval will be received on a timely basis. See "
Business-Government Regulation".
Foreign
- - -------
The Company has begun the process of evaluating the CTLM(TM) for application of
regulatory approval marks and showing compliance with the MDD which allows
placement of the CE Mark. Many steps need to be taken into consideration with
the end goal of accessing the EEA market. The following is a brief explanation
of the steps the Company has taken or is currently taking to achieve this goal.
Evaluating and Securing a Notified Body ("NB") - The role of an NB is to assist
manufacturers (domestic and international) in showing compliance with the
governmental regulations that govern that specific category. Each country's
government is able to designate a Competent Authority, which, among other
things, is responsible for the evaluation of regulatory non-governmental
agencies in their country for designation as a NB.
An agency can be approved to be a NB for different categories (i.e. electrical
products, machinery, medical, etc.).. For instance, the NB that the Company will
choose will be one that is approved to assist manufacturers in showing
compliance with MDD. As MDD is very encompassing (product safety, quality
assurance, EMC, software, etc) some NBs are only approved to assist
manufacturers in certain areas (i.e. quality assurance evaluations) and the
manufacturer will need to look to another NB for assistance in the other areas.
The Company is in the process of evaluating applicable NBs and intends to select
a NB that can assist it in all matters of the MDD.
The evaluation and acceptance of an appropriate NB is critical since changing an
NB once chosen is a costly matter. Great care must be taken in finding a NB with
a reputation for educated interpretation of requirements and excellent customer
service. The Company believes that they have found a NB that will provide this
type of service and has notified them of its intent to utilize them. The
proposed NB has provided the Company with information on the necessary steps in
accessing the market of the EEA, however no contracts have been entered into at
this time.
Product Safety Evaluation - The Company believes that one of the most important
aspects of product safety is the design of the product. If safety standards are
not considered through the design of the product, the product safety evaluation
may require that the mechanical and electrical parts of the product be
re-designed. The Company has made every effort to confirm throughout the
CTLM(TM) design process that it is in compliance with all domestic and
international safety standards. In this manner, the Company is very much
involved in the product safety evaluation and, although the Company has not
entered into contract with a NB for this purpose, it is in contact with several
regulatory agencies on a regular basis for guidance. There are, however, some
considerations that cannot be anticipated, such as electrical magnetic
compatibility ("EMC"), which requires equipment that is not cost effective
22
<PAGE>
for the Company to purchase in order to evaluate. There is also the
consideration of new requirements, or new interpretations of existing
requirements, that may effect the CTLM(TM).
Quality Assurance - The Company's current goal is to implement a full quality
system at the Company's corporate offices. The Company's Quality Assurance
Manager ("QAM") has begun the process of implementation in accordance with the
required standards. After implementation of the quality system, auditors are
required to review a history of the system in particular how it works and how
the normal difficulties that occur in design and manufacturing were overcome.
The Company's QAM and the NB will need to determine how much history is required
for proper proof that the system is adequate.
Software Evaluation - The preparations for software evaluation are headed by the
Company's Software Manager. Because the standards in this area are relatively
new to the industry, regulatory agencies will be very cautious in the
evaluation. Through advice from the proposed NB, the Company has begun document
preparation for evaluation submission. One of the larger steps in documentation
preparation for this evaluation is the risk analysis for the device. Although
there may be changes to the CTLM(TM) that may effect the report, the Company has
completed a risk analysis for the CTLM(TM) and is ready to proceed with the
remainder of the documentation.
Efficacy - Almost any market will require the proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is
basically the same for the United States as for the EEA, however reporting
methods may differ. As the Company continues with clinical trials in the U. S.,
these efforts will also benefit it in the EEA market.
SALES AND MARKETING
The Company presently employs a Director of Sales. At present, his job consists
of locating, obtaining and coordinating with strategic marketing and
distribution companies who have established marketing capabilities, both
domestic and international. The target domestic market includes most of the over
10,000 mammography centers across the United States, which exist in both large
and small hospitals and private clinics. The international target market is
large government and private hospitals.
Since the field of Medical Optical Imaging is relatively new to most
radiologists and mammographers and to the extent that, and rate of which, the
CTLM(TM) achieves market acceptance and penetration will depend on many
variables. These include, but are not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy, and
cost-effectiveness of the CTLM(TM), and the advantage of the CTLM(TM) device
over existing technology and cancer detection methods. The Company has focused
its efforts on establishing a presence at major Breast Imaging Conferences that
are held each year. Failure of the Company's products to gain market acceptance
would have a material adverse effect on the Company's business, financial
condition, and results of operations. There can be no assurance that physicians
or the medical community in general will accept and/or utilize the CTLM(TM).
In order to market any products it may develop, the Company will have to develop
a marketing and sales force with technical expertise and distribution
capability. There can be no assurance that the Company will be able to establish
sales and distribution capabilities or that the Company will be successful in
gaining market acceptance for any products it may develop.
Reliance on International Sales.
- - -------------------------------
The laws of certain European and Asian countries may permit the Company to begin
marketing the CTLM(TM) device in Europe and Asia before marketing would be
permitted in the United States. See "Business-Government Regulation." The
Company intends to commence international sales of the CTLM(TM) in Europe and
Asia prior to commencing commercial sales in the United States, where sales
cannot occur unless and until the Company receives pre-market 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
23
<PAGE>
operations. The regulation of medical devices, particularly in Europe, continues
to develop and there can be no assurance that new laws or regulations will not
have an adverse effect on the Company. See "Risk Factors-Government Regulation".
INTERNATIONAL DISTRIBUTORS
In January 1998, the Company entered into an International Distribution
Agreement with Emtron, a leading medical equipment distributor based in the
Republic of Turkey. Emtron currently represents products for companies such as
Summit Technology, Sunrise Medical Technology, Iris Medical Instruments, Telsar,
and Medlab, among many others, in the Republic of Turkey. Emtron appears to have
a strong presence in the industry, marketing to the 30 university hospitals, the
Social Security System (which has over 100 hospitals) and larger private
hospitals in Turkey.
Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of Turkey for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.
In April 1998, the Company entered into an exclusive International Distribution
Agreement with Focus Surgical LTD., to distribute the CTLM(TM) device to
hospitals and clinics throughout the United Kingdom and Ireland. The term of the
Agreement is three years, with a minimum purchase requirement of 10, 12, and 15
CTLM(TM) devices in the first, second, and third year(s) of the Agreement,
respectively. For the purpose of the Agreement, the first year is deemed to
begin when the Company obtains PMA acceptance from the FDA. See "Risk
Factors-Government Regulation, "Risk Factors-Reliance ON International Sales"
AND Description of Business -Government Regulation. Focus Surgical currently
distributes non-competitive laser products for companies such as Sunrise Medical
Technologies and Baltec, among many others. The Company has already secured
exclusive distributors as follows:
<TABLE>
<CAPTION>
INTERNATIONAL DISTRIBUTORS BY COUNTRY
Renewal
Option
Country Term Expiration by IDSI Renewal Period
------- ---- ---------- ------- --------------
<S> <C> <C> <C> <C>
Australia 3 years 3/13/00 Yes 2 years
Austria 3 years 3/11/00 Yes 2 years
Brunei 3 years 3/13/00 Yes 2 years
China 3 years 3/13/00 Yes 2 years
Ecuador 3 years 10/12/00 Yes 3 years
France 29 months 12/31/98 Yes 2 years
Germany 3 years 3/11/00 Yes 2 years
Hong Kong 3 years 3/13/00 Yes 2 years
India 3 years 3/13/00 Yes 2 years
Indonesia 3 years 3/13/00 Yes 2 years
Ireland 3 years 3/29/01 Yes 1 year
Israel 2 years 12/31/98 Yes 2 years
Italy 29 months 11/30/98 Yes 2 years
Macau 3 years 3/13/00 Yes 2 years
Malaysia 3 years 3/13/00 Yes 2 years
New Zealand 3 years 3/13/00 Yes 2 years
Philippines 3 years 3/13/00 Yes 2 years
Russia 3 years 3/11/00 Yes 2 years
San Marino 29 months 11/30/98 Yes 2 years
Singapore 3 years 3/13/00 Yes 2 years
South Korea 2 years 2/10/99 Yes 2 years
Switzerland 3 years 3/11/00 Yes 2 years
Turkey 18 months 7/19/99 Yes 1 years
United Kingdom 3 years 3/29/01 Yes 1 year
Vatican City 29 months 11/30/98 Yes 2 years
</TABLE>
24
<PAGE>
To date, the Company has not marketed, or generated revenues from the
commercialization of the CTLM(TM).
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payors (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of the Company's products by regulating
the level of reimbursement provided by such payors to the physicians and clinics
utilizing the CTLM(TM) or by refusing reimbursement. If examinations utilizing
the Company's products were not reimbursed under these programs, the Company's
ability to sell its products may be materially and/or adversely affected. There
can be no assurance that third-party payors will provide reimbursement for use
of the Company's products. Several states and the U.S. government are
investigating a variety of alternatives to reform the health care delivery
system and further reduce and control health care spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial
condition and results of operations. In international markets, reimbursement by
private third-party medical insurance providers, including governmental insurers
and independent providers, varies from country to country. In certain countries,
the Company's ability to achieve significant market penetration may depend upon
the availability of third-party governmental reimbursement. Revenues and
profitability of medical device companies may be affected by the continuing
efforts of governmental and third party payers to contain or reduce the cost of
health care through various means. See "Risk Factors- Limitation on Third Party
Reimbursement; Health Care Reform".
PRODUCT LIABILITY
The Company's business exposes it to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of cancer detection
products. Significant litigation, not involving the Company, has occurred in the
past based on the allegations of false negative diagnoses of cancer. While the
CTLM(TM) device is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that the Company will not be subjected to future
claims and potential liability. At present, the Company does not carry product
liability insurance. The Company intends to obtain product liability insurance
prior to testing at clinical sites and marketing the CTLM(TM) device. See "Risk
Factors-Product Libility".
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. See "Risk
Factors-Competition"
To a great extent, the CTLM(TM) will be competing with established imaging
equipment such as x-ray mammography equipment, ultrasound or high definition
ultrasound systems, Magnetic Resonance Imaging ("MRI") systems, and
thermography, diaphonography and transilluminational devices. Physicians
presently using these customary types of imaging equipment may not use the
Company's products. Currently, mammography is employed widely and the Company's
ability to sell the CTLM(TM) device to medical facilities will, in part, be
dependent on the Company's ability to demonstrate the clinical utility of the
CTLM(TM) device as an adjunct to mammography and physical examination and its
advantages over other available diagnostic tests.
The competition for developing a commercial device utilizing computed
tommography techniques and laser technology is difficult to ascertain given the
proprietary nature of the technology. There are a significant number of academic
institutions involved in various areas of research involving "optical medical
imaging" which is a shorthand description of the technology the Company's
CTLM(TM) device utilizes. A brief list of the most prestigious of these
institutions includes the University of Pennsylvania, The City College of New
York, and University College London. Two of these institutions have granted
licenses on certain patented technologies to two companies: University of
Pennsylvania - Non-Invasive Technologies; City College of New York -
MediScience, Inc.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
the Company's CTLM(TM) obsolete. There can be no assurance that the development
of new types of diagnostic medical equipment or technology will not have a
material adverse effect on the Company's business, financial condition and
results of operations
PATENTS
25
<PAGE>
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 "Patent"). The Company owns the rights, to the Patent pursuant to an
exclusive patent licensing agreement, for the use of the Patent for the CTLM(TM)
technology. The life of a Patent is 17 years. The Patent is owned by Richard
Grable, the Company's Chief Executive Officer. In addition, the Company has
twelve additional patents pending with regard to Optical Tomography. Neither the
Company nor Mr. Grable hold foreign patents, however the table below sets forth
certain information with regard to the patents that have been applied for.
The Company intends to file for patents on products, including the CTLM(TM), for
which it feels the cost of obtaining a patent is economically reasonable in
relation to the expected protection obtained. There can be no assurances that
any patent that the Company applies for will be issued, or that any patents
issued will protect the Company's technology. If the patents the Company license
or obtains are infringed upon, or if the Company is required to defend any
patent infringement cases brought against it, it will require substantial
capital, the expenditure of which the Company might not be able to afford. See
"Risk Factors-Patents"
<TABLE>
<CAPTION>
FOREIGN PATENT APPLICATIONS PENDING
<S> <C> <C> <C> <C> <C> <C>
Australia Intl.
Inv. Date Invoice# Description For Our Case Intl. Appl. # Filing Date
12/29/97 C974248JD National Phase in Australia Diagnostic Tomographic Laser 6356-AU PCT/US95/08225 7/10/95
Imaging Apparatus
of PCT Appl.
Canada Intl.
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
2/4/98 C984481JPD National Phase in Canada Diagnostic Tomographic Laser 6356-CA PCT/US95/08225 7/10/95
Imaging Apparatus
of PCT Appl.
China Intl.
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
5/27/98 PM986040JD Chinese Patent Appl. Diagnostic Tomographic Laser 6356-CN PCT/US95/08225 7/10/95
Imaging Apparatus
For Invention
European Intl.
Patent
Office
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
1/28/98 C984270JD National Stage in Europe Diagnostic Tomographic Laser 6356-EP PCT/US95/08225 7/10/95
Imaging Apparatus
of PCT Appl.
Intl.
Japan
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
2/5/98 C984482JPD Natl. Phase in Japan Diagnostic Tomographic Laser 6356-JP PCT/US95/08225 7/10/95
Imaging Apparatus
of PCT Appl.
Mexico Intl.
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
9/2/98 C987553JD National Phase in Mexico Diagnostic Tomographic Laser 6356-MX PCT/US95/08225 7/10/95
Imaging Apparatus
of PCT Appl.
PCT Covers Intl.
European
Countries
26
<PAGE>
Inv. Date Invoice # Description For Our Case Intl. Appl. # Filing Date
1/3/97 P970502JD PCT Appl. For RJG Diagnostic Tomographic 6356-1 PCT/US95/08225 7/10/95
Imaging Apparatus
2/19/98 C984498JPD PCT Intl. Appl of IDSI Detector Array for Use in a 6573-WO PCT/US97/20970 11/28/97
Laser Imaging Apparatus
2/19/98 C984497JPD PCT Intl. Appl of IDSI Method for Reconstructing 6574-WO PCT/US97/23160 11/28/97
the Image of an Object
Scanned with a Laser Imaging
Apparatus
3/18/98 C985531JPD PCT Intl. Appl. Of Wake, Device for Determining the 6559-WO PCT/US97/19615 11/7/97
Perimeter of the Surface
Grable & Rohler of an Object Being Scanned
and for Limiting
Reflection from the Object
Surface
5/13/98 C986209JPD PCT Intl. Appl of IDSI Apparatus for Determining 6558-WO PCT/US97/19614 11/7/97
the Perimeter of the
Surface of an Object Being
Scanned
</TABLE>
PATENT LICENSING AGREEMENT
Background
- - ----------
In December of 1993 Richard Grable, Linda Grable and Allan L. Schwartz (the
"Founders"), Imaging Diagnostic Systems, Inc., which at that time was a
privately held Florida corporation (the "Private Company"). The sole purpose of
the Private Company was to further develop Richard Grable's invention, a CT
laser breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already
been exhibited at the RSNA 89' session and held the promise of a new, emerging
technology for the detection of breast abnormalities without compression or
ionizing X-rays. This device used a laser diode for its energy source and a 386
processor that was extremely slow. Once the technology required to speed up the
processing became available the Founders believed that this device would be a
major breakthrough in the early detection of breast cancer.
It was unanimously decided that the Private Company should merge with a public
shell and raise its initial seed funding through the sale of common stock
pursuant to Regulation D, Rule 504. On April 14, 1994 the Company merged with
Alkan Corp., a New Jersey public company. Alkan Corp.'s name was changed to
Imaging Diagnostic Systems Inc. and the privately held Company was dissolved. It
was understood at the time of the merger that Mr. Grable would be compensated
for his patent when issued and that he would receive a royalty based on sales of
the device. This royalty was granted pursuant to an amendment to his employment
agreement dated July 5, 1994. When Mr. Grable filed the patent application in
June of 1995, the Board instructed the Company's General Counsel to draft an
Exclusive Patent License Agreement. With the day to day excitement of a
development stage Company, the Company's General Counsel was involved with
funding agreements, Federal filings, employment contracts and other legal issues
and never prepared the Patent License Agreement
Negotiations
- - ------------
At the first meeting held with the Company's new General Counsel, the Board of
Directors was informed that the Patent License Agreement was never drafted and
signed. The Company's General counsel represented the Company and Mr. Grable
retained separate counsel for himself. Mr. Schwartz negotiated the terms of the
Patent License Agreement on behalf of the Company.
Even though Mr. Schwartz and Mr. Grable are both founders of the Company and the
Company did not seek services of a financial advisor with regard to the Patent
License, the Company believes that such negotiations were conducted at "arms
length". The three main issues for negotiation were; (i) consideration for the
patent license; (ii) royalties based on sales and (iii) exclusive rights. Mr.
Grable was already entitle to royalty payments pursuant to his amended
employment contract, however the Company had no legal right to use the Patent
other than through an oral agreement. As Chief Executive Officer and a Director
of the Company, Mr. Grable had a fiduciary duty to the Company and its
Shareholders to formalize, in writing, the oral agreement regarding the Patent.
Under Mr. Grable's guidance, the development of the CTLM(TM) was nearing
completion, FDA clinical trials were underway, and three external clinical sites
at hospitals in the United States were being planned. This situation placed Mr.
27
<PAGE>
Grable in better bargaining position, which strengthened as the CTLM(TM) moved
closer to being a marketable medical imaging device.
Initially, Mr. Grable's counsel advised him to request 15 million shares of
common stock that would be immediately registered in order to afford Mr. Grable
protection against dilution. The Company rejected that offer and continued
negotiating. After several offers and counter offers and several discussions,
Mr. Grable accepted a lesser number of shares with anti-dilution provisions and
agreed to payment of the licensing fee in two installments, one year apart and
agreed to accept restricted shares with no registration rights. In addition, a
new royalty structure, based upon the net selling price of all products and
goods in which the Patent is used, before taxes and after deducting the direct
cost of the product and commissions or discounts paid was agreed to.
Pursuant to the new Royalty structure, the percentage of Royalties to be paid is
in a declining scale as opposed to the ascending scale contained in the
Amendment to Mr. Grable's Employment Agreement. The Company believes that the
new structure is much more advantageous to the Company.
Agreement
- - ---------
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 (17 years) and any renewal thereof, subject to
termination, under certain conditions. As consideration for the License, on June
5, 1998, 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. The market
price of the Shares at the time of issuance was $.54 per Share. In addition, the
Company has agreed to pay to Mr. Grable, a royalty based upon the net selling
price (the dollar amount earned from the sale by the Company, both international
and domestic, before taxes minus the cost of the goods sold and commissions or
discounts paid), of all products and goods in which the Patent is used, before
taxes and after deducting the direct cost of the product and commissions or
discounts paid (the "Royalty") as follows:
GROSS SALES PERCENTAGE
----------- ----------
$0 to $1,999,999 in gross sales 10%
$2,000,000 to $3,999,999 in gross sales 9%
$4,000,000 to $6,999,999 in gross sales 8%
$7,000,000 to $9,999,999 in gross sales 7%
Greater than $10,000,000 in gross sales 6%
During the second year of the Agreement there is a minimum cash royalty
provision of $250,000. The Development royalties contained in Mr. Grable's
Employment Agreement range from 2.5% to a maximum of 5% based on varying levels
of gross sales. The Company believes that the new Royalty is more beneficial to
the Company since the percentage scale decreases as the gross sales volumes
increase. In order for the Royalties set forth above to take the place of the
development royalties set forth in the Amendment to Mr. Grable's Employment
Agreement dated February 23, 1995, and for such Amendment to become void and
have no effect, the Company is required to have the Agreement ratified by its
Shareholders at its next special or annual meeting of Shareholders. Not
withstanding the need for shareholder ratification for the substitution of the
Royalties, the Patent Licensing Agreement does not require shareholder approval
in order to be valid.
The Agreement also contains anti-dilution protection upon the occurrence of any
stock dividend, stock split, combination or exchange of shares, reclassification
or re-capitalization of the Company's common stock, reorganization of the
Company, consolidation with or merger into or sale or conveyance of all or
substantially all of the Company's assets to another corporation or any other
similar event which serves to decrease the number of Shares issued pursuant to
the Agreement. See "Risk Factors-Possible Conflict of Interest" and "Certain
Transactions". The Patent has generated no revenues to date. The Company
anticipates that it will receive revenues related to the Patent its third fiscal
quarter beginning January 1999, however no assurance can be given in this
regard.
OEM Agreement
- - -------------
28
<PAGE>
In January 1998, the Company entered into an Original Equipment Manufacturer
Agreement (OEM) with Imation Corp .("Imation"), a worldwide leader in the
imaging and information industry. Imation Corp. is a $2.2 billion global
technology company that creates system, product, and service solutions for the
handling, storage, transmission, and use of images and information.. Imation's
strategic partners include, 3M, Matsushita, Adobe, Minolta Cemax-Icon, MKE,
Compaq, NEC Exabyte, NetCo Com., General Electric, Seagate Hewlett-Packard,
StorageTek, IBM and Tandberg Data.
Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty-free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface (the
"Dry View Technology").
The OEM Agreement also gives the Company the right to market the Dry View
Technology directly or indirectly through its Distributors. The DryView(TM)
imagesetting film is a hard-dot quality film that requires no chemical
processing. This dry film product was developed by Imation based on the same
technology used to develop Imation's DryView(TM) Laser Imaging System for the
medical imaging market. The dry image setting film is used in a number of dry
film imagesetters developed by systems developers including Scitex Corporation
Ltd., ECRM Incorporated, Ultre Division of Linotype-Hell Company and Exxtra
Corporation. The Company believes that the Dry View Technology will provide the
Company's end uses with the most efficient, economical, and ecological product
in the medical industry. In addition, the marketing of the Dry View Technology
can provide immediate revenues to the Company as well as generate additional
revenues when packaged with the CTLM(TM). No Dry View Technology has been
marketed by the Company to date.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with Nasdaq to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no control or relationship with the Company, other
than as a minority shareholder, had a questionable background and owned a 5%
interest in the Company.
As a result, the Company appealed the denial decision to the Nasdaq Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with
instructions to implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th provided
Nasdaq with copies of all documentation necessary to satisfy any concerns that
the Panel had regarding the Shareholder. On March 31, 1997, prior to the time
Nasdaq acted on the proposal, Barron's published an inaccurate article stating
that a Nasdaq spokesman indicated that the listing would be denied. At all times
up until the date of this article the Company's stock traded at $3.00 and above.
The article had a predictable negative impact on the Company's stock and the
price dropped below $3.00, where it has stayed ever since the Barron's article,
despite a retraction from Barron's on April 7, 1997. On June 13, 1997 the
Company received correspondence from the NASDAQ Listing Qualification Staff
stating that the since the Company failed to maintain a bid price equal to or in
excess of the $3.00 minimum requirement, the Staff could not approve the
Company's application for listing.
The Company appealed the denial of the listing at an oral hearing before the
Nasdaq Qualification Hearing Panel (the "Panel") in Washington D.C. on January
22, 1998. On February 10, 1998, the Panel issued its decision granting the
Company's request for initial inclusion on the Nasdaq Small Cap Market, subject
to the following conditions:
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.
29
<PAGE>
Due to the substantial amount of preferred shares outstanding at the time, the
Board of Directors determined that a reverse split at this time would be
detrimental to the interests of its shareholders and vetoed the proposal for the
reverse split. The conditional listing expired on May 11, 1998.
The Company immediately appealed this decision to the Nasdaq Listing and Hearing
Review Council (the "Council"). On May 19, 1998 the Company received the
Decision of the Council which affirmed the decision of the Panel. The Council
stated that:
"In making this decision, we find unpersuasive the Company's argument that
on remand, it was not required to satisfy the initial inclusion bid
requirement, or by implication, any of the other listing requirements. In
fact the purpose of a remand and the continuing role of the staff in the
process is to provide assurance that the Company satisfied Nasdaq listing
requirement at the time it was listed, a fact that the Company likely
understood when it went through the re-application process following
remand."
The Company contends that this determination is incorrect in that the Company
never went through a re-application process following remand. The Council went
on to state, in part, that:
"The Company could have no reasonable expectation that it received a
waiver of Nasdaq listing standard. The decision merely determines that the
ownership of the shareholder at issue would not prevent listing, given the
Company's plan to insulate itself. We believe that the Panel's exception,
which appears to be within the Company's control to achieve, was
appropriate. While the incorrect Barron's article was unfortunate, we note
that a retraction was later printed and sufficient time has passed to
allow the Company's stock to be fairly priced in the market.
On June 11, 1998, the Company filed an Application for Review before the United
States Securities and Exchange Commission to appeal the Decision of the Council.
The basis for the appeal was that the Council erred in affirming the Panel's
decision placing conditions upon the Company's initial inclusion. The Company
contends that: (i) it did satisfy all the listing requirements on a timely basis
but was initially rejected for listing by the Nasdaq Staff and Panel on grounds
that were ultimately reversed by the Council in the first appeal; (ii) that the
Company satisfied the listing requirement and this fact was so recognized in the
Council's Decision in the first appeal; (iii) that due to the four month delay
cased by the Nasdaq Staff; dilatory review process, and the irresponsible
remarks made by a Nasdaq Staff member to Barron's; the price of the Company's
stock declined below the initial listing requirement (but remained well above
the maintenance requirement). Based upon price deficiency alone, the Company was
denied listing.
On August 8, 1998, the Company filed it's Brief in Support of Application for
Review. Nasdaq's brief was due on September 10, 1998 and filed on September 15,
1998. On September 25, 1998, the Company filed its Reply Memorandum to the Brief
of the Nasdaq Stock Market. As of November 5, 1998, no hearing has been
scheduled.
EMPLOYEES
As of November 4, 1997, the Company had 31 full-time employees, including its
three executive officers, and 2 part-time employees. A majority of the Company's
employees (22) are employed in the areas of scientific and product research and
development. The Company's ability to provide its services is dependent upon the
Company recruiting, hiring and retaining qualified technical personnel. To date,
the Company has been able to recruit and retain sufficient qualified personnel.
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good.
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. "Directors, Executive Officers, Promoters and Control Persons; and
Compliance with Section 16(a) of the Exchange Act".
30
<PAGE>
YEAR 2000
The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant.
The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and is currently reviewing the
cost of such actions. The Company expects such modifications to its CTLM(TM)
products and internal computer systems will be made on a timely basis; however
there can be no assurance there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time the Company is unable to
estimate the cost of its Year 2000 compliance, if any.
PROPERTY
The Company's facilities are located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by the Company and comprise a 24,000-sq. ft.
building located on a 5 acre landscaped tract. The Company believes that its
facility is adequate for its current and reasonably foreseeable future needs.
The Company will assemble the device at its facility from hardware components
that will be made by vendors to Company specifications. The software components
of the device are developed by the Company.
LEGAL PROCEEDINGS
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov"). The complaint alleges that Kamalov, an ex-employee of the
Company, violated his employment agreement with the Company while employed and
after terminating his employment with the Company by violating non-compete,
confidentiality, and invention covenants of the agreement. Upon filing the
complaint, the Company sought and was granted injunctive relief against Kamalov
during the pendency of the proceedings. On November 19, 1997, after a hearing,
the Court granted Kamalov's motion to dissolve the injunction. On December 17,
1997, the Company filed a timely notice of appeal in the District Court of
Appeal of Florida, Fourth District, Appeal No. 98-58. Briefs have been filed by
both parties and the appeal is pending. Oral Argument has not been set as of the
date of this Report.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders have
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. The Company intends to defend this suit and has
obtained litigation counsel, who is in the processes of reviewing the case and
filing an answer. If the lawsuit is tried and a judgment is entered against the
Company, the Company estimates that the damages could be in excess of $4.5
million. The Company does not have the financial ability to rescind the
transaction and any award for damages would have a material adverse effect on
the Company and its ability to continue operations.
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.
MANAGEMENT
The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Richard J. Grable 56 Chief Executive Officer and Director
Linda B. Grable 61 Chairman of the Board and President
Allan L. Schwartz 56 Executive Vice-President, Chief
Financial Officer and Director.
</TABLE>
31
<PAGE>
Richard Grable, Allan Schwartz and Linda Grable are founders of the
Company and as such may be deemed "promoters" and "parents" as defined in the
Rules and Regulations promulgated under the Securities Act, as those terms are
defined in the rules and regulations promulgated under the Securities Act.
Directors serve until the next meeting of shareholders. Officers serve at the
pleasure of the board of directors.
Richard J.Grable
Richard J. Grable has been Chief Executive Officer and a director of the Company
since 1994 and is primarily responsible for the development of the CTLM(TM)
device. From January, 1994, to February, 1994: Mr. Grable was vice-president,
research and development, for Lintronics Technologies, Inc., Tampa, Florida, a
manufacturer of breast imaging systems. From March, 1992, to December, 1993: Mr.
Grable was a an engineering consultant for Lintronics Technologies, Inc., Tampa,
Florida, a manufacturer of breast imaging systems. From August, 1991 to
February, 1992: Mr. Grable was an engineering consultant for Audio Intelligence
Devices, Inc., Ft. Lauderdale, Florida, a manufacturer of surveillance devices.
From May, 1990, to July, 1991: Mr. Grable was an engineering consultant for
Telmed, Inc., Ft. Lauderdale, Florida, a software and electronic design company.
Linda B. Grable
Linda B. Grable has been President and Chairman of the Board of Directors of the
Company since 1994. From September 1991, to February, 1994, Mrs. Grable was
President and Director of VCC Communications, Inc., Tampa, Florida, a
manufacturer of voltage controlled oscillators (VCO). From August, 1988, to
April, 1991: Mrs. Grable was President of Lintronics International Ltd., Inc.,
Plantation, Florida, a manufacturer of breast imaging systems.
Allan L. Schwartz
Allan L. Schwartz has been Executive Vice-President, Chief Financial Officer and
a Director of the Company since 1994. From April 1993, to February 1994: Mr.
Schwartz was President and Director of DynaMed Technologies, Inc., Coral
Springs, Florida, a company that developed neural network software for use with
laser imaging systems. From August, 1991, to April, 1993: Mr. Schwartz was
President and Director of Tron Industries, Inc., North Lauderdale, Florida, a
developer of low voltage neon novelty products. From April 1991, to July 1991:
Mr. Schwartz worked as a manufacturing consultant for SE Enterprises, Miami,
Florida, a manufacturer of prototype homes.
Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
serve at the discretion of the board.
KEY EMPLOYEE
Robert H. Wake is the Company's Director of Engineering and has been employed as
such since April 1995. From January, 1994 to March, 1995, Mr. Wake was a
consultant to various companies in 3-D computer imaging. From October, 1986, to
December, 1993: Mr. Wake founded and was President of Reality Imaging
Corporation, Solon, Ohio, a manufacturer of 3-D computer imaging systems. Mr.
Wake invented the Voxel Flinger 3-D imaging technology.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership, furnishing the Company with copies of all
Section 16(a) forms they file. To the best of the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the year ended June 30, 1998. The Company has not received
copies of amended Form 13 D from Goodland International Investments Limited and
Weyburn Overseas Limited indicating their ability to convert and/or the
conversion of the Series B Preferred Shares into common shares in excess of 10%
of the outstanding shares.
EXECUTIVE COMPENSATION
32
<PAGE>
The following table sets forth the compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and other executive officers for services
rendered to the Company during 1998 and 1997. No other person, who, during 1997
and 1996 served as an executive officer of the Company, had a total annual
salary and bonus in excess of $100,000. Also see "Stock Option Plan-Option/SAR
Grants in Last Fiscal Year".
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------- -------------------------------------------------------
Name & Principal
Position Year Salary Other Annual Restricted Securities/Underlying
Compensation(3) Stock Awards Option/SARs (1) (2)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard J. Grable, 1996 $183,333
CEO and Director 1997 $289,779 $115,000 $268,000 22,883
1998 $286,225 534,602 (3)
- - ---------------------------------------------------------------------------------------------------------
Linda B Grable, 1996 $91,000
President and 1997 $97,451 $115,000 $268,000 22,883
Director 1998 $119,070 534,602(4)
- - ---------------------------------------------------------------------------------------------------------
Allan L. Schwartz, 1996 $124,000
Exec. V.P., CFO and 1997 $111,534 $115,000 $268,000 130,410
Director 1998 $119,070 534,602 (3)
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate dollar value of the 1997 and 1998 options, based on the
averaged high and low price on June 30, 1998 are as follows: Richard J.
Grable -$225,781.42; Linda B. Grable-$225,781; and Allan L.
Schwartz-$269,329.86.
(2) Does not include qualified options to purchase 208,333 shares a $.48 per
share (110% of fair market value on day of issuance) and non-qualified
options to purchase 250,000 shares at $.17 per share (35%) of fair market
value on day of grant) issued to each of Messrs. Grable and Schwartz and
Ms Grable on July 6, 1998.
(3) On April 15, 1997, the Company paid addition alone-time compensation to
the three officers to cover Federal Income Taxes on stock options
exercised in f/y 1996. The officers, based on information provided by the
General Counsel to the Company at that time, believed that the exercise of
said options were not taxable until the shares were sold. Upon review by
the outside auditors, it was determined that the exercise of those options
must be treated as additional wages and subject to Federal Income Taxes.
If the officers were correctly advised they would have not exercised the
options and would not have been subject to Federal Income Taxes. The Board
of Directors, considering the above circumstances, decided to pay each
officer one-time additional compensation to cover the coast of the
additional Federal Income Taxes due.
(4) Includes 250, 000 non-qualifies options that were required, by contract,
to be issued in July 1997 but were not issued until January 2, 1998.
Employment Agreements
- - ---------------------
The Company entered into five-year employment agreements with each of Mr.
Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B. Grable that expire
July 6, 1999. Pursuant to the terms of the employment agreements, base annual
salaries, after giving effect to cost of living adjustments, are as follows:
Richard J. Grable: $286,224.96; Linda B. Grable: $119,069.52 and Allan L.
Schwartz $119,069.52. During the Company's operational stage the salary of Allan
L. Schwartz salary will increase to $156,000. In addition, in fiscal 1998
Messrs. Grable and Schwartz and Ms. Grable each receive a car allowance of $500
per month. Each employment agreement provides for bonuses, health insurance, car
allowance, and related benefits, and a cost of living adjustment of 7% per
annum. The bonuses are equal to 5% of the adjusted consolidated net earnings of
the Company. No bonuses have been paid to date. In addition, pursuant to each
Agreement, Mr. Richard J. Grable and Mr. Allan L. Schwartz and Mrs. Linda B.
Grable each have an option to purchase 250,000 shares of common stock each
calendar year at 35% of the fair market value of the common stock of the Company
at the time of grant.
Richard Grable will receive a royalty bonus of 2.5% to a maximum of 5%, based
upon varying levels of gross sales of the CTLM(TM) device. Upon ratification of
the Patent Licensing Agreement at the next annual meeting of shareholders, the
royalties as outlined in that agreement will take the place of those set forth
in the original employment agreement. See "Risk Factors-Possible Conflict of
Interest" and "Business-.Patent Licensing Agreement" and "Certain Transactions".
The following table sets forth certain information with regard to the
Options/SAR grants by the Company to Management for the fiscal year ended June
31, 1998.
33
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
No. of Securities %of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price On Date of Expiration
Name Granted In Fiscal Year ($/Share) Grant Date
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- - ------------------------------------------------------------------------------------------------
Linda B. 250,000 14% $.31 $.85 1/2/02
Grable (1) 250,000 14% $.31 $.65 1/2/02
34,602 1.9% $2.63 $2.39 1/2/02
- - ------------------------------------------------------------------------------------------------
Allan L. 250,000 14% $.31 $.85 1/2/02
Schwartz 250,000 14% $.31 $.65 1/2/02
(1) 34,602 1.9% $2.63 $2.39 1/2/02
- - ------------------------------------------------------------------------------------------------
</TABLE>
(1) In January 1998, pursuant to employment agreements dated July 4, 1994,
Richard Grable, Linda Grable, and Allan Schwartz were granted options to
purchase and aggregate of 500,000 Common Shares each. The grants for were for
the July 1996 and July 1997 anniversary dates of their employment and were never
issued by prior counsel for the Company. The options are non-qualified stock
options, vesting one year from the grant date and exercisable at an exercise
price of $0.31 per share (35% of the fair market value on the date of issuance).
In January 1998, Richard Grable, Linda Grable, and Allan Schwartz were granted
options to purchase 22,883 and 34,602 shares of Common Shares each pursuant to
the Company's incentive stock option plan. These options were earned in July
1996 and July 1997 but never issued due to the oversight of previous counsel,
however the options for the 22,883 shares were disclosed in the Company's Proxy
Statement last year. These shares are exercisable at any time at an exercise
price of $4.37 and $2.63 per share, respectively (110% of the fair market value
on the contractual date of issuance). Does not include qualified options to
purchase 208,333 shares at $.48 per shares (110% of the fair market value on
July 5, 1998) and 250,000 shares at $.44 per share issued to each of Richard
Grable Linda Grable and Allan Schwartz on July 5, 1998 pursuant to their
employment and stock option agreements.
Stock Option Plans
- - ------------------
The Company has established an incentive stock option plan, as defined by
Section 422, Internal Revenue Code of 1986. For the fiscal year ended June 30,
1998, all of the executive officers were participants in this plan. The plan was
approved by the Board of Directors and adopted by the shareholders at the March
29, 1995 annual meeting. The plan provides for the granting, exercising and
issuing of incentive option pursuant to Internal Revenue Code Section 422. The
Company may grant incentive stock options to purchase up to 5% of the issued and
outstanding common stock of the Company at any time. The Board of Directors has
direct responsibility for the administration of the plan.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock, as of the date of
grant. The exercise price of incentive options to officers, or affiliated
persons, must be at least 110% of the fair market value as of the date of grant.
Pursuant to sock option agreements, Mr. Richard J. Grable, Mr. Allan L. Schwartz
and Mrs. Linda B. Grable each have an option to purchase that number of shares
equal to $100,000 divided by 110% of the fair market value of the shares on July
6th of each year. The Stock Option Agreement terminates on September 1, 1999.
The Company intends to establish a new stock and option plan and present it for
shareholder approval at its next annual meeting.
CERTAIN TRANSACTIONS
Richard J. Grable and. Linda B. Grable are husband and wife. Further, Richard J.
Grable and Linda B. Grable are each "Control Persons" as a result of their
control of a majority voting power of the Company's outstanding stock. Both
parties disclaim, however, any beneficial interest or ownership in the shares
owned by the other party.
From time to time Linda Grable, the Company's President, has personally
guaranteed promissory notes issued by the Company to third parties. Ms. Grable
received no compensation for these guarantees.
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of the Patent, which encompasses the technology for the CTLM(TM) device. The
Company and Mr. Grable has previously entered into an oral agreement for the
exclusive license for the
34
<PAGE>
patent that was never memorialized in written form.
See "Risk Factors-Possible Conflict of Interest" and "Description of
Business-Patent Licensing Agreement".
MARKET PRICE OF SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ over-the-counter bulletin
board market under the symbol IMDS. There has been trading in the Company's
Common Stock since September 20, 1994. The following table sets forth, for each
of the fiscal periods indicated, the high and low trade prices for the Common
Stock, as reported on the OTC Bulletin Board. These per share quotations reflect
inter-dealer prices in the over-the-counter market without real mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1996
September 1995 $ .78 $ .71
December 1995 $3.15 $ .75
March 1996 $8.25 $8.00
June 1996 $3.90 $3.87
FISCAL YEAR 1997
September 1996 $3.93 $2.25
December 1996 $3.93 $1.43
March 1997 $4.12 $2.43
June 1997 $3.08 $2.62
FISCAL YEAR 1998
September 1997 $2.25 $1.87
December 1997 $1.61 $1.22
March 1998 $1.65 $1.02
June 1998 $0.78 $0.67
FISCAL YEAR 1999
September 1998 $0.58 $0.50
On November 10, 1998, the closing trade price of the Common Stock as reported on
the OTC Bulletin Board was $0.68. As of such date, there were approximately 745
holders of record of the Company's Common Stock.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of Security Holders. As of
July 10, 1998, Austost Anstalt Schaan, Balmore Funds S.A., Dominion Capital
Funds, Ltd., Canadian Capital Fund Ltd., Avalon Capital Ltd., Richard J. Grable,
Weyburn Overseas Limited, Linda B. Grable, Goodland International Investment
Ltd. and Allan L. Schwartz, (collectively "the Majority Shareholders"),
authorized, by written action, the Company's adoption of an Amendment to the
Company's Articles of Incorporation increasing the Company's authorized shares
from 48,000,000 shares to 100,000,000 shares.
Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. The
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Due to the decrease in the
Company's stock price, the Company no longer has an adequate number of common
shares authorized to meet its contractual obligations with regard to the
conversion of the Preferred Stock. The Certificates also provide that the
holders of the Preferred Shares shall be entitled to vote with the holders of
the Common Stock, as a single class, where each share of Preferred Stock shall
be entitled to that number of votes to which it would be entitled had all of its
shares of Preferred Stock been converted into shares of Common Stock were notice
of conversion given on the date of such vote.
35
<PAGE>
On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission (the "Commission") with regard to the Written
Action. On September 4, 1998, the Company received a comment letter from the
Commission and on October 29, 1998 filed a revised Information Statement
addressing the Commission's comments. The Majority Shareholders consent with
respect to the Amendment will take effect 20 days from the time that the
Commission advises the Company that it has no further comments.
SALE OF UNREGISTERED SECURITIES
The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital. In deciding to issue Preferred Shares pursuant
to the private placements, the Company took into account the number of common
shares authorized and outstanding, the market price of the common stock at the
time of each Preferred sale and the number of common shares the Preferred share
would have been convertible into at the time of the sale. At the time of each
private placement of Preferred Stock there were enough shares, based on the
price of the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's Board of
Directors tried to negotiate a floor on the conversion price of each series of
Preferred Stock prior to sale, it was unable to do so. See "Risk
Factors-Authorization and Discretionary Issuance of Preferred Stock", "Risk
Factors-Capital Needs and Need For Additional Authorized Common Stock" and Risk
Factors- Sale of Unregistered Securities, Financing/equity Line of Credit".
Series B Preferred Stock
- - ------------------------
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("Weyborn") and Goodland International Investment Ltd. ("Goodland")
pursuant to Regulation D. The Company filed a Registration Statement of Form S-1
registering the share underlying the Series B Preferred. The shares were never
converted and the registration statement is no longer current. On September 4,
1998, the Company received a notice of conversion from the Weyburn and Goodland
requesting the issuance of 4,559,846 and 10,639,642 shares of common stock,
respectively. The conversion rate of the Shares is 82% of the average market
price over a five-day period prior to conversion or approximately $..35014 per
share. The Company contends that when and if the Company converts the Preferred
Shares, the Series B Holders may be entitle to an aggregate of 12,852,002 common
shares pursuant to the conversion and 1,542,877 shares pursuant to the dividend
provision of the Preferred Shares, not the 15,199,488 shares set forth in their
notice. At the time the B Preferred Shares were issued, the conversion rate
would have been $3.85 per share and the Preferred shares would have been
convertible into 1,168,831 shares. The increase in the number of shares to be
issued upon conversion is due to the decline in the market price of the
Company's Common Stock. At present the Company does not have available enough
authorized common stock to convert the Series B Shares.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders have
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. The Company intends to vigorously defend this
suit and has obtained litigation counsel, who is in the processes of reviewing
the case and filing an answer. If the lawsuit is tried and a judgment is entered
against the Company, the Company estimates that the damages could be in excess
of $4.5 million.
Series C Preferred Stock
- - ------------------------
On October 6, 1997, the Company finalized the private placement to Austost
Anstalt Schaan, UFH Endowment, Inc., Chris Baum, Avalon Capital Limited,
Dominion Capital, Ltd. and The Cuttyhunk Fund Limited and aggregate of 210
shares of its Series C Convertible Preferred Stock ("the "Preferred Shares") at
a purchase price of $10,000 per share and Warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per share.
The offering was conducted pursuant to Regulation S as promulgated under the
Securities Act of 1933, as amended (the ("Regulation S Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $1.63 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.9%, 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
36
<PAGE>
effect at the time of conversion. The "Conversion Price" was equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of
conversion provided, however, in no event was the Conversion Price to be greater
than $1.222 per share.
Pursuant to the Regulation S Sale documents, the Company was also required to
escrow an aggregate of 3,435,583 shares of its common stock (200% of the number
of shares the Purchasers would have received if the Preferred Shares were
exercised on the closing date of the Regulation S Sale). The shares underlying
the Preferred Shares and Warrants were entitled to demand registration rights
under certain conditions.
In connection with this sale, the Company paid Settondown Capital International,
Ltd., an unaffiliated Investment Banker an aggregate of $220,500 for placement
and legal fees. Net proceeds to the Company of $1,879,500 were used for working
capital and the continuous research, development and testing of the Company's
Computed Tomography Laser Mammography (CTLM (TM)) device.
The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 2,646,827
common shares.
Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement to Avalon
Capital Ltd. of 50 shares of its Series D Convertible Preferred Stock ("the
"Preferred Shares"), at a purchase price of $10,000 per share and Warrants to
purchase up to 25,000 shares of the Company's common stock at an exercise price
of $1.22 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.22 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.9%, without the payment of any additional consideration. The number
of fully paid and non-assessable shares of common stock, no par value, of the
Company to be issued upon conversion will be determined by dividing (i) the sum
of $10,000 by (ii) the Conversion Price (determined as hereinafter provided) in
effect at the time of conversion. The "Conversion Price" was equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of
conversion. The shares underlying the Preferred Shares and Warrants are entitled
to demand registration rights under certain conditions.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series D Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,717,134
common shares.
Series E Preferred Stock
- - ------------------------
On February 5, 1998, the Company finalized the private placement to Austost
Anstalt Schaan and Balmore Funds S.A. of 50 shares of its Series E Convertible
Preferred Stock (the "Preferred Shares"), at a purchase price of $10,000 per
share and Warrants to purchase up to 25,000 shares of the Company's common stock
at an exercise price of $1.093 per share. The offering was conducted pursuant to
Regulation S as promulgated under the Securities Act of 1933, as amended (the
"Regulation S Sale"). At the time the placement was concluded, the average bid
and ask price of the Company's common stock was approximately $1.093 per share.
The Preferred Shares were convertible, at any time, commencing 45 days from the
date of issuance and for a period of three years thereafter, in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.9%, without the payment of any additional consideration. The number
of fully paid and non-assessable shares of common stock, no par value, of the
Company to be issued upon conversion will be determined by dividing (i) the sum
of $10,000 by (ii) the Conversion Price (determined as hereinafter provided) in
effect at the time of conversion. The "Conversion Price" is equal to seventy
five percent (75%) of the Average Closing Price of the Corporation's Common
Stock for the five-day trading period ending on the day prior to the date of
conversion.
The shares underlying the Preferred Shares and Warrants are entitled to demand
registration rights under certain conditions.
37
<PAGE>
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000. Net proceeds to the Company of
$495,000 were used for working capital and the continuous research, development
and testing of the Company's Computed Tomography Laser Mammography (CTLM(TM))
device.
The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of the Company's outstanding shares, into an aggregate of 1,334,455
common shares.
Series F Preferred Stock
- - ------------------------
On February 20, 1998, the Company finalized a private placement to Dominion
Capital Fund, LTD and Canadian Advantage, LTD of 75 shares of its Series F
Convertible Preferred Stock (the "F Preferred Shares") at a purchase price of
$10,000 per share. The offering was conducted pursuant to Regulation S as
promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.31 per share
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 increments that, together
with all shares of the Company's common stock held by the Holder, would not
exceed 4.9%, without the payment of any additional consideration. The number of
fully paid and non-assessable shares of common stock, no par value, of the
Company to be issued upon conversion will be determined by dividing (i) the sum
of $10,000 plus any earned dividends by (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to seventy percent (70%) of the Average Closing Price of the
Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of conversion. The shares underlying the Preferred Shares are
entitled to demand registration rights under certain conditions.
In connection with the Regulation S Sale, the Company paid, Rolcan Finance, Ltd.
an aggregate of $50,000 for placement and legal fees. Net proceeds to the
Company of $700,000 were used for working capital and the continuous research,
development and testing of the Company's Computed Tomography Laser Mammography
(CTLM (TM))
device.
The 1,971,375 shares of Common Stock issued pursuant to the conversion of the
Series F Preferred are being registered on behalf of the Holders (the "Series F
Preferred Holders") pursuant to the Registration Statement of which this
Prospectus is a part..
Series H Preferred Stock
- - ------------------------
On June 2, 1998, the Company finalized a private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 100 shares of its Series H Convertible
Preferred Stock (the "Preferred Shares") at a purchase price of $10,000 per
share and 75,000A Warrant and 50,000 B Warrants. The A and B Warrants are
exercisable at $1.00 and $1.50 per share, respectively. The offering was
conducted pursuant to Regulation D as promulgated under the Securities Act of
1933, as amended (the "Regulation D Sale"). At the time the placement was
concluded, the average bid and ask price of the Company's common stock was
approximately $.56 per share. In connection with the Regulation D Sale, the
Company paid Settondown Capital International, Ltd., an unaffiliated Investment
Banker an aggregate of $10,000 and 8 shares of the Series H Preferred Stock for
placement and legal fees. Net proceeds to the Company of $990,000 were used for
working capital and the continuous research, development and testing of the
Company's Computed Tomography Laser Mammography (CTLM (TM)) device. No shares of
the Series H Convertible Preferred Stock have been converted as of the date of
this Information Statement.
The number of fully paid and non-assessable shares of common stock, no par
value, of the Company to be issued upon conversion will be determined by
dividing (i) the sum of $10,000 (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" is equal to lesser of seventy-five percent (75%) of the Average Price
(the lowest closing bid price of the Corporation's Common Stock for the ten-day
trading period ending on the day prior to the date of conversion). There is no
floor on the conversion price and no time limits on conversion. The shares can
be converted in increments that, together with all shares of the Company's
common stock held by the Holder, would not exceed 4.9%. Pursuant to the terms of
the Registration Rights Agreement between the Company and the Series H holder,
the Company has registered herein that 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 (2,661,698 shares). The Company is in technical
default of the Registration Rights Agreement, which required the Registration
Statement to be declared effective by October 2, 1998. Pursuant to the
Registration Rights Agreement, the Company is required to pay the Series H
Holders in cash or in stock, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, two (2%)
38
<PAGE>
percent of the principal amount of the Securities for the first thirty (30)
days, and three (3%) percent of the principal amount of the Securities for each
thirty (30) day period thereafter until the Company procures registration of the
Securities. The Company is presently unable to comply with the liquidated damage
provision payments.
The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. The lower the Average Price the greater the number of
share to be issued to the Holders, upon conversion, thus increasing the
potential profits to the Holder when the price per share increases and the
Holder sells the Common Shares. The preferred stocks potential for increased
share issuance and profit in addition to a stock overhang of an undeterminable
amount may depress the price of the Company's common stock.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series H Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000,000 consider per share.
PRIVATE PLACEMENT OF COMMON STOCK
- - ---------------------------------
In August 1998, the Company sold 200,000 shares of restricted common stock to an
unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $60,000. At the time the placement was concluded, the average bid and
ask price of the Company's common stock was approximately $.28 per share. These
shares were subsequently registered pursuant to an S-2 Registration Statement.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to an unaffiliated third
party, pursuant to Regulation D, for an aggregate purchase price of $250,000. At
the time the sale occurred the average bid and ask price of the Company's common
stock was $.595. The Note bears interest at the rate of 12% per annum. The
repayment of the Note which was originally due on October 2, 1998, has been
extended to December 2, 1998. The Note is personally guaranteed by Linda B.
Grable, the Company's President. These Shares are included in the Registration
Statement of which this Prospectus is a part. See "Selling Security Holders".
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to an unaffiliated third party, pursuant
to Regulation D for an aggregate purchase price of $100,000. At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.50 per share. The Note bears interest at the rate of
12% per annum. The note which was originally due November 2, 1998 has been
extended to December 2, 1998. The Note is personally guaranteed by Linda B.
Grable, the Company's President. These Shares are included in the Registration
Statement of which this Prospectus is a part. See "Selling Security Holders".
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to an unaffiliated third party,
pursuant to Regulation D for an aggregate purchase price of $210,000 At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.43 per share. The Note bears interest at the
rate of 12% per and is due and payable on November 19, 1998. The Note is
personally guaranteed by Linda B. Grable, the Company's President. In connection
with the sale, the Company paid the sum of $22,500 to LKB Financial LLC as a
placement fee. These Shares are included in the Registration Statement of which
this Prospectus is a part. See "Selling Security Holders".
In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 loan to the Company by Deborah O'Brien, an
employee. The Company is also obligated to repay the lender the sum of
$50,000.00. There is no note evidencing this debt. These Shares are included in
the Registration Statement of which this Prospectus is a part. See "Selling
Security Holders".
FINANCING/EQUITY LINE OF CREDIT
The Company will require substantial additional funds for its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked in obtaining regulatory
39
<PAGE>
approvals, the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, competing technological and
market developments and changes in the Company's existing research, licensing
and other relationships and the terms of any new collaborative, licensing and
other arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
and other contractual agreements are likely to increase as additional agreements
are entered into and additional personnel are retained.
The Company has a firm commitment for, and is in the process of finalizing, an
agreement for a $15 Million, three year Equity Line of Credit whereby the
Company, as it deems necessary, may raise capital through the sale of its common
stock to Austost Anstalt Schaan and Balmore Funds S.A., which represent a
consortium of prominent European banking institutions. The Shares will be
purchased at 80% of the market price if the shares are traded in the OTC
Bulletin Board and 85% of the market price if traded on Nasdaq Small Cap Stock
Market or American Stock Exchange.
The maximum amount that the Company can require the Investor to purchase is set
forth in the table below :
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg.
Daily Daily Daily Trading Daily Daily Trading Daily
Closing Price Trading Trading Volume Trading Volume Trading
Volume Volume 75,001-100,000 Volume 125,001-150,000 Volume
25,000-50,000 50,001-75,000 100,001-125,000 150,001 and
Above
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.50-$1.00 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
- - -------------------------------------------------------------------------------------------------------------
$1.01 - $1.50 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
- - -------------------------------------------------------------------------------------------------------------
$1.51 - $2.00 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
- - -------------------------------------------------------------------------------------------------------------
$2.01 - $2.50 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
- - -------------------------------------------------------------------------------------------------------------
$2.51 - $3.00 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
- - -------------------------------------------------------------------------------------------------------------
$3.01 - $3.50 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
- - -------------------------------------------------------------------------------------------------------------
$3.51 - $4.00 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
- - -------------------------------------------------------------------------------------------------------------
$4.01 - Above $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
The number of shares noticed for sale by the Company must be the subject of an
effective Registration Statement prior to the time Company elects to exercise
its right to tender a notice requiring the Investors to purchase shares 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 or is the Equity Lines is unavailable due to the price of the
Company's common stock, the Company may seek additional funding through public
or private financing, collaboration, licensing and other arrangements with
corporate partners. See "Management's Discussion and Analysis of Financial
Discussion" and Results of Operations and "Financial Statements" and "Risk
Factors".
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. Moreover substantial dilution may
result in a change in control of the Company. There can be no assurance,
however, that additional financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may prevent
the Company from implementing its business strategy or may require the Company
to delay, scale back, or eliminate certain of its research and product
development programs or to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself.
At present, due to the decline in the price of its common stock, the Company
does not have available enough authorized common stock to utilize the Equity
Line of Credit. See "Business-Legal Proceedings" and "Submission of Matters to a
Vote of Security Holders"
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of the
Company as of November 5, 1998 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock;
(b) each current director executive officer; and (c) all executive officers and
directors of the Company as a group, calculated as required by the Act.
The actual number of shares of Common stock held by Richard Grable and Linda
Grable, without giving effect to options, are 7,750,040 and 3,445,800 share
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares.
<TABLE>
<CAPTION>
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- - ------------------- ------------------- ----------------------
<S> <C> <C>
Richard J. Grable 12,606,606(3) 32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313
Linda B. Grable 12,606,606(4) 32.5%
C/o 6351 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 4,253,390 (5) 10.9%
C/o 6351 NW 18th Court
Plantation, FL 33313
Weyburn Overseas Limited 4,455,000 (6) 10.5%
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda
Goodland International 10,744,488 (6) 22.2%
Investment LTD.
C/o Everest Capital Limited
The Bank of Butterfield Bldg.
65 Front Street
6th Floor
Hamilton HM JX, Bermuda
All officers and directors 16,859,996 (7) 43.4%
as a group (3 persons)
</TABLE>
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole
voting power and investment power with respect to all shares of Common Stock
shown beneficially owned by them.
(2) Percentage of ownership is based on 37,989,399 shares of Common Stock
outstanding as of October 12, 1998 plus each person's options that are
exercisable within 60 days. Shares of Common Stock subject to stock options
that are exercisable within 60 days as of July 10, 1998 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 556,883 shares subject to options and 3,497,800 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership. Does not include options to purchase 208,333 shares at $.48 per
share and 250,000 shares at $.44, which are not exercisable within the next
60 days.
(4) Includes 556,883 shares subject to options and 7,995,040 shares owned by the
husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.44, which are not exercisable within
the next 60 days.
(5) Includes 664,410 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership. Does not include options to purchase 208,333 shares at
$.48 per share and 250,000 shares at $.44, which are not exercisable within
the next 60 days.
(6) Includes 4,455,000 AND 10,744,488 shares underlying the Series B Preferred,
for which the Company has received a notice of conversion. From Weyburn
Overseas Limited ("Weyburn") and Goodland International Ltd. ("Goodland")
respectively. Everest Capital Limited, is the investment manager for
Weyburn and Goodland. Mr. John Malloy is the Managing Director of Everest
Capital Limited, a British Virgin Island corporation. Does not include
Warrants to purchase 112,500 shares at $5.00 per share.
(7) Includes 1,778,176 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership.
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. "See Risk Factors-Lack of Dividends".
41
<PAGE>
SELLING SECURITY HOLDERS
The Selling Security Holders consist of certain common Stock 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 (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. 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. See "Sale of
Unregistered Securities-Financing/Equity Line of Credit.
The following table identifies each Selling Security Holder based upon
information provided to the Company, set forth as of November 5, 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 except for Deborah O'Brien have held
any position, office or other material relationship with the Company. Ms.
O'Brien is an employee of the Company. Ms. O'Brien shares were issued as partial
compensation for a $115,000 loan to the Company. The percentage figures
reflected in the table assume conversion of all shares of: Series H Preferred
into 2,661,698 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 SHARES PREFERRED H COMMON SHARES COMMON SHARES TOTAL NUMBER OF
OWNED PRIOR TO SHARES OWNED UNDERLYING UNDERLYING SHARES TO BE
OFFERING PREFERRED (1) WARRANTS REGISTERED (2)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balmore Funds SA
C/0 Trident Trust Company
(BVI) Limited 0 50 1,224,381 50,000 1,274,381
Trident Chambers
Road Town
Tortola, British Virgin
Islands
- - ---------------------------------------------------------------------------------------------------------------------
Austost Anstalt Schaan
Ladstrasse 163 0 50 1,224,381
9494 Furstentums 50,000 1,274,381
Vaduz, Liechtenstein
- - ---------------------------------------------------------------------------------------------------------------------
Settondown Capital
International, Ltd
Charlotte House, Charlotte 200,000 8 212,936 25,000 437,936
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 $.3757 per share (75% of the lowest 10 day bid
price prior to registration.
(2) Amount being registered is 100% 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.
(3) 10,000 of which would be issued pursuant to the Equity Credit Line
Agreement.
42
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
- - ---------------------------------------------------------------------------------------------------------------------
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
- - ---------------------------------------------------------------------------------------------------------------------
Scott Hugh Goldstein
C/o 65 Broadway 10th floor 25,000 0 0 0 25,000
New York, NY 10006 (1)
- - ---------------------------------------------------------------------------------------------------------------------
Sheldon E. Goldstein
C/o 65 Broadway 10th Floor 25,000 0 0 0 25,000
New York, NY 10006 (1)
- - ---------------------------------------------------------------------------------------------------------------------
Deborah O'Brien 0 0 0
C/o 6531 NW 18th Court 287,800 286,000
Plantation FL 33313
- - ---------------------------------------------------------------------------------------------------------------------
GCA Strategic Investment 0 0 0
Fund Ltd 210,000 210,000
- - ---------------------------------------------------------------------------------------------------------------------
Avalon Capital, Inc.
487 Sherwood Drive 80,000
Salusaliton CA 94965
- - ---------------------------------------------------------------------------------------------------------------------
Frank Giambroni
118 Park Ave 200,000 0 0 0 200,000
Bay Head, NJ 08742
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 7,500 shares which will be issued upon execution of the Equity
Credit Line Agreement.
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.
43
<PAGE>
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.
The Selling Shareholders have been advised by the Company that during the time
each is engaged in distribution of the securities covered by this Prospectus,
each must comply with Rule 10b-5 and Regulation M under the Exchange Act and
Pursuant thereto: (i) each must not engage in any stabilization activity in
connection with the Company's securities; (ii) each must furnish each broker
through which securities covered by this Prospectus may be offered the number of
copies of this Prospectus which are required by each broker; and (iii) each must
not bid for or purchase any securities of the Company or attempt to induce any
person to purchase any of the Company's securities other than as permitted under
the Exchange Act Release 34-38067 (December 20, 1996) have been advised that
they must coordinate their sales under this Prospectus with each other and the
Company for purposes of Regulation M.
This offering will terminate on the earlier of (a) the date on which such
Selling Security Holders' 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
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 November 5, 1998 there were issued and
outstanding 37,904,399 shares of Common Stock and. 450 shares of Series B
Convertible Preferred Stock, 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 for the Series B and Series
H is 82% and 75% of the average market price over a five-day period prior to
conversion, respectively. 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-Capital Needs and Need
for Additional Authorized Common Stock".
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
44
<PAGE>
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. See "Risk
Factors-Authorization and Discretionary Issuance of Preferred Stock"
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE PROVISIONS SET FORTH IN THE COMPANY'S ARTICLES OF INCORPORATION,
THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
ACT AND IS THEREFORE UNENFORCEABLE
INTERESTS OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the securities being offered hereby
will be passed upon for the Company by Rebecca J. Del Medico, Esq., General
Counsel of the Company. Ms. Del Medico currently owns approximately 42,100
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 following financial statements should be read in conjunction with the
financial statement information contained in and incorporated by reference from
the Company's most recent report on Form 10-QSB which is being furnished with
this Prospectus.
45
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1-2
FINANCIAL STATEMENTS:
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5-8
Statements of Cash Flows F-9-10
Notes to Financial Statements F-11-39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheet of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1998 and 1997 and for the period December 10, 1993 (date of
inception) to June 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 1998 and 1997 and the results
of its operations and its cash flows for the years ended June 30, 1998 and 1997
and for the period December 10, 1993 (date of inception) to June 30, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the changes in accounting for software
development costs and recording the compensation on stock options in accordance
with Accounting Principles Board Opinion No. 25.
The Company is in the development stage as of June 30, 1998 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F - 1
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered losses and has yet to
generate an internal cash flow that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 5. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
- - ------------------------------
Margolies, Fink and Wichrowski
Pompano Beach, Florida
August 6, 1998
F - 2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheet
June 30, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(restated)
<S> <C> <C>
Current assets:
Cash $ 310,116 $ 383,223
Restricted certificate of deposit - 103,500
Loans receivable-other - 10,073
Inventory 3,214,045 -
Prepaid expenses 33,539 56,792
--------------- --------------
Total current assets 3,557,700 553,588
--------------- --------------
Property and equipment, net 2,920,980 3,293,297
Prototype equipment - 1,216,585
Other assets 3,887,463 9,635
--------------- --------------
$ 10,366,143 $ 5,073,105
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,363,766 $ 519,546
Loan payable 285,407 -
Current maturities of capital lease obligations 9,715 8,928
Other current liabilities 2,155,978 319,547
--------------- --------------
Total current liabilities 3,814,866 848,021
--------------- --------------
Long-term capital lease obligations 26,134 35,849
--------------- --------------
Total liabilities 3,841,000 883,870
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock (Series B), 7% cumulative annual dividend, no par value;
authorized 450 shares, issued 450 shares 4,500,000 4,500,000
Convertible preferred stock (Series D), no par value; authorized 54 shares,
issued 29 and 0 shares, respectively 290,000 -
Convertible preferred stock (Series E), no par value; authorized 54 shares,
issued 24 and 0 shares, respectively 240,000 -
Convertible preferred stock (Series H), no par value; authorized 108 shares,
issued 108 and 0 shares, respectively 1,080,000 -
Common stock, no par value; authorized 48,000,000 shares, issued 36,493,544
and 24,905,084 shares, respectively 23,986,376 15,402,655
Additional paid-in capital 4,799,881 3,379,155
Deficit accumulated during the development stage (27,055,993) (17,677,891)
--------------- --------------
7,840,264 5,603,919
Less: subscriptions receivable (14,309) (35,559)
deferred compensation (1,300,812) (1,379,125)
--------------- --------------
Total stockholders' equity 6,525,143 4,189,235
--------------- --------------
$ 10,366,143 $ 5,073,105
=============== ==============
</TABLE>
See accompanying notes to the financial statements.
F - 3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- --------------
(restated)
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 1,210,526 $ 2,847,238 $ 6,475,238
Research and development 776,578 616,886 1,745,089
Research and development expenses 254,722 1,065,178 2,918,894
Advertising and promotion expenses 329,446 166,520 873,841
Selling, general and
administrative expenses 396,752 528,753 1,302,137
Clinical expenses 9,859 33,506 360,675
Consulting expenses 1,220,676 764,364 2,936,584
Insurance costs 162,549 121,287 328,791
Professional fees 454,730 178,402 1,351,835
Stockholder expenses 75,608 20,902 96,510
Trade show expenses 216,182 154,782 505,458
Travel and subsistence costs 111,559 195,585 457,159
Rent expense 26,213 48,897 247,461
Interest expense 55,543 2,744 82,596
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Interest income ( 22,137) (116,972) (197,417)
--------------- -------------- ---------------
6,981,710 7,646,119 22,714,526
--------------- -------------- ---------------
Net loss (6,981,710) (7,646,119) (22,714,526)
Dividends on cumulative preferred stock:
From discount at issuance (2,081,392) (714,155) (3,793,947)
Earned (315,000) (184,675) (547,520)
--------------- -------------- ---------------
Net loss applicable to common shareholders $ (9,378,102) $ (8,544,949) $ (27,055,993)
=============== ============== ===============
Net loss per common share:
Basic
Net loss per common share $ (.34) $ (.35) $ (1.25)
=============== ============== ===============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
=============== ============== ===============
Diluted
Net loss per common share $ (.34) $ (.35) $ (1.25)
=============== ============== ===============
Weighted average number of common shares 27,882,886 24,222,966 21,574,057
=============== ============== ===============
</TABLE>
See accompanying notes to the financial statements.
F - 4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
-------------------- ------------------ Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 10, 1993(date of inception) -0- $ -0- -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - 510,000 50,000 -
Acquisition of public shell - - 178,752 - -
Net issuance of additional shares of stock - - 15,342,520 16,451 -
Common stock sold - - 36,500 36,500 -
Net loss - - - - -
-------- --------- ------------ ---------- ---------
Balance at June 30, 1994 - - 16,067,772 102,951 -
Common stock sold - - 1,980,791 1,566,595 -
Common stock issued in exchange for services - - 115,650 102,942 -
Common stock issued with employment agreement - - 75,000 78,750 -
Common stock issued for compensation - - 377,500 151,000 -
Stock options granted - - - - 622,500
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - - - 50,333
Net loss - - - - -
-------- --------- ------------ ---------- ---------
Balance at June 30, 1995 - - 18,616,713 2,002,238 672,833
-------- --------- ------------ ---------- ---------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at December 10, 1993(date of inception) $ -0- $ -0- $ -0- $ -0-
Issuance of common stock, restated for reverse
stock split - - - 50,000
Acquisition of public shell - - - -
Net issuance of additional shares of stock - - - 16,451
Common stock sold - - - 36,500
Net loss (66,951) - - (66,951)
------------ ----------- ---------- ------------
Balance at June 30, 1994 (66,951) -0- - 36,000
Common stock sold - (523,118) - 1,043,477
Common stock issued in exchange for services - - - 102,942
Common stock issued with employment agreement - - - 78,750
Common stock issued for compensation - - - 151,000
Stock options granted - - (622,500) -
Amortization of deferred compensation - - 114,375 114,375
Forgiveness of officers' compensation - - - 50,333
Net loss (1,086,436) - - (1,086,436)
------------ ----------- ---------- ------------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
------------ ----------- ---------- ------------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 5
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
-------------------- ------------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
-------- -------- ----------- -------- -------
<S> <C> <C> <C>
Balance at June 30, 1995 - - 18,616,713 2,002,23 672,833
------- ---------- ------------ ---------- ------------
Preferred stock sold, including dividends 4,000 3,600,000 - - 998,400
Common stock sold - - 700,471 1,561,110 -
Cancellation of stock subscription - - (410,500) (405,130) -
Common stock issued in exchange for services - - 2,503,789 4,257,320 -
Common stock issued with exercise of stock option - - 191,500 104,375 -
Common stock issued with exercise of options
for compensation - - 996,400 567,164 -
Conversion of preferred stock to common stock (1,600) (1,440,000 420,662 1,839,360 (399,360)
Common stock issued as payment of preferred
stock dividends - - 4,754 14,629 -
Dividends accrued on preferred
stock not yet converted - - - - -
Collection of stock subscriptions - - - - -
Amortization of deferred compensation - - - - -
Forgiveness of officers' compensation - - - - 100,667
Net loss - - - - -
---------- ---------- ------------ ---------- ------------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 9,941,066 1,372,540
---------- ---------- ------------ ---------- ------------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ---------- ------------ -------------
Preferred stock sold, including dividends (998,400) - - 3,600,000
Common stock sold - - - 1,561,110
Cancellation of stock subscription - 405,130 - -
Common stock issued in exchange for services - - - 4,257,320
Common stock issued with exercise of stock option - (4,375) - 100,000
Common stock issued with exercise of options
for compensation - - - 567,164
Conversion of preferred stock to common stock - - - -
Common stock issued as payment of preferred
stock dividends (14,629) - - -
Dividends accrued on preferred
stock not yet converted (33,216) - - (33,216)
Collection of stock subscriptions - 103,679 - 103,679
Amortization of deferred compensation - - 232,500 232,500
Forgiveness of officers' compensation - - - 100,667
Net loss (6,933,310) - - (6,933,310)
----------- ---------- ------------ -------------
Balance at June 30, 1996 (restated) (9,132,942) (18,684) (275,625) 4,046,355
----------- ---------- ------------ -------------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 6
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- ------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 9,941,066 1,372,540
------- ----------- ----------- ----------- ----------
Preferred stock sold, including dividends 450 4,500,000 - - 714,155
Conversion of preferred stock to common stock (2,400) (2,160,000) 1,061,202 2,759,040 (599,040)
Common stock issued in exchange for services - - 234,200 650,129 -
Common stock issued for compensation - - 353,200 918,364 -
Common stock issued with exercise of stock option - - 27,000 33,750 -
Common stock issued with exercise of stock options,
through stock appreciation rights - - 334,933 1,103,203 -
Cancellation of stock issued to employee - - (150,000) (52,500) -
Common stock issued as payment of preferred
stock dividends - - 20,760 49,603 -
Payment of accrued dividends on converted shares - - - - -
Dividends accrued on preferred
stock not yet converted - - - - -
Stock options granted - - - - 1,891,500
Collection of stock subscriptions - - - - -
Amortization of deferred compensation - - - - -
Net loss (restated) - - - - -
------- ----------- ----------- ----------- ----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,402,655 3,379,155
------- ----------- ----------- ----------- ----------
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1996 (restated) (9,132,942) (18,684) ( 275,625) 4,046,355
---------- --------- ---------
Preferred stock sold, including dividends (714,155) - - 4,500,000
Conversion of preferred stock to common stock - - - -
Common stock issued in exchange for services - - - 650,129
Common stock issued for compensation - - - 918,364
Common stock issued with exercise of stock option - (33,750) - -
Common stock issued with exercise of stock options
through stock appreciation rights - - - 1,103,203
Cancellation of stock issued to employee - - - (52,500)
Common stock issued as payment of preferred
stock dividends (49,603) - - -
Payment of accrued dividends on converted shares 33,216 - - 33,216
Dividends accrued on preferred
stock not yet converted (168,288) - - (168,288)
Stock options granted - - (1,891,500) -
Collection of stock subscriptions - 16,875 - 16,875
Amortization of deferred compensation - - 788,000 788,000
Net loss (restated) (7,646,119) - - (7,646,119)
---------- --------- --------- ------------
Balance at June 30, 1997 (restated) (17,677,891) (35,559) (1,379,125) 4,189,235
---------- --------- --------- ------------
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 7
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Period December 10, 1993 (date of inception) to June 30, 1998
<TABLE>
<CAPTION>
Preferred Stock (**) Common Stock
--------------------- -------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
------ --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,402,655 3,379,155
------ ----------- ----------- ------------ --------------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 - - 1,630,892
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,984,684 (1,550,791)
Common stock sold - - 500,000 200,000 -
Common stock issued in exchange for services - - 956,000 1,419,130 -
Common stock issued for compensation - - 64,300 54,408 -
Common stock issued with exercise of stock option - - 65,712 22,999 -
Common stock issued in exchange for
licensing agrement - - 3,500,000 1,890,000 -
Dividends accrued on preferred
stock not yet converted - - - - -
Stock options granted - - - - 1,340,625
Collection of stock subscriptions - - - 12,500 -
Amortization of deferred compensation - - - - -
Net loss - - - - -
------ ----------- ----------- ------------ --------------
Balance at June 30, 1998 611 $6,110,000 36,493,544 $ 23,986,376 $ 4,799,881
====== =========== =========== ============ ==============
(RESTUBBED TABLE CONTINUED)
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----- ---------- ------------ -----
Balance at June 30, 1997 (restated) (17,677,891) (35,559) (1,379,125) 4,189,235
------------- ------------ ------------ -------------
Preferred stock sold, including dividends
and placement fees (2,081,392) - - 4,559,500
Conversion of preferred stock to common stock - - - 33,893
Common stock sold - - - 200,000
Common stock issued in exchange for services - - - 1,419,130
Common stock issued for compensation - - - 54,408
Common stock issued with exercise of stock option - - - 22,999
Common stock issued in exchange for
licensing agrement - - - 1,890,000
Dividends accrued on preferred
stock not yet converted (315,000) - - (315,000)
Stock options granted - - (1,340,625) -
Collection of stock subscriptions - 21,250 - 33,750
Amortization of deferred compensation - - 1,418,938 1,418,938
Net loss (6,981,710) - - (6,981,710)
------------- ------------ ------------ -------------
Balance at June 30, 1998 $ (27,055,993) $ (14,309) $ (1,300,812) $ 6,525,143
============= ============ ============ =============
</TABLE>
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F - 8
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
-------------- -------------- ---------------
(restated)
<S> <C> <C> <C>
Net loss $ (6,981,710) $ (7,646,119) $ (22,714,526)
--------------- -------------- ---------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 283,966 230,047 675,862
Amortization of deferred compensation 1,418,938 788,000 2,553,813
Noncash compensation and consulting expenses 1,379,938 2,654,821 7,388,147
(Increase) decrease in restricted certificate of deposit 103,500 (103,500) -
(Increase) decrease in loans receivable - other 10,073 (10,073) -
Increase in inventory (155,782) - (155,782)
(Increase) decrease in prepaid expenses 23,253 (40,892) (33,539)
(Increase) decrease in other assets (97,828) 43,375 (107,463)
Increase in accounts payable and accrued expenses 529,220 88,074 880,478
Increase (decrease) in other current liabilities (53,569) (536,599) 265,978
--------------- -------------- ---------------
Total adjustments 3,441,709 3,113,253 11,467,494
--------------- -------------- ---------------
Net cash used for operating activities (3,540,001) (4,532,866) (11,247,032)
--------------- -------------- ---------------
Cash flows from investing activities:
Prototype equipment (1,582,446) (641,247) (2,799,031)
Capital expenditures (115,738) (2,815,923) (3,660,994)
--------------- -------------- ---------------
Net cash used for investing activities (1,698,184) (3,457,170) (6,460,025)
--------------- -------------- ---------------
Cash flows from financing activities:
Repayment of capital lease obligation (8,928) (5,512) (14,440)
Proceeds from stockholder loans, net - (77,833) -
Proceeds from loan payable, net 285,407 - 285,407
Proceeds from issuance of preferred stock 4,559,500 4,500,000 12,659,500
Net proceeds from issuance of common stock 329,099 (18,750) 5,086,706
--------------- -------------- ---------------
Net cash provided by financing activities 5,165,078 4,397,905 18,017,173
--------------- -------------- ---------------
Net increase (decrease) in cash (73,107) (3,592,131) 310,116
Cash and cash equivalents at beginning of period 383,223 3,975,354 -0-
--------------- -------------- ---------------
Cash and cash equivalents at end of period $ 310,116 $ 383,223 $ 310,116
=============== ============== ===============
(Continued)
</TABLE>
See accompanying notes to the financial statements.
F - 9
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- -------------
(restated)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,105 $ 2,744 $ 30,158
================= ============== ==============
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ 1,325,530 $ 650,129 $ 4,615,959
================= ============== ==============
Issuance of common stock in
exchange for property and equipment $ - $ - $ 89,650
================= ============== ==============
Issuance of common stock and other current liability
in exchange for patent licensing agreement $ 3,780,000 $ - $ 3,780,000
================= ============== ==============
Issuance of common stock for
compensation $ 54,408 $ 918,364 $ 1,690,936
================= ============== ==============
Issuance of common stock through
exercise of incentive stock options $ - $ 1,103,203 $ 1,103,203
================= ============== ==============
Issuance of common stock as
payment for preferred stock dividends $ - $ 49,603 $ 64,232
================= ============== ==============
Acquisition of property and equipment
through the issuance of a capital
lease payable $ - $ 50,289 $ 50,289
================= ============== ==============
</TABLE>
See accompanying notes to the financial statements.
F - 10
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc.("IDSI- Fl."). IDSI-Fl. was
formed on December 10, 1993.(see Note 4) Effective July 1, 1995 the Company
changed its corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in ultrafast electro-optic technology and
the unique knowledge of medical imaging devices held by the founders of the
Company. Previously, the technology for these imaging devices had not been
available. The initial Computed Tomography Laser Mammography ("CTLM(TM)")
prototype has been developed with the use of "Ultrafast Laser Imaging
Technology"TM, and this technology was first introduced at the "RSNA" scientific
assembly and conference during late November 1994. The completed CTLM(TM) device
was exhibited at the "RSNA" conference November 26-30, 1995. The Company
exhibited the pilot production run CTLM(TM) device at the "RSNA" conference held
in Chicago on December 2-6, 1996. A further refined CTLM(TM) device and clinical
images were exhibited at the "RSNA" conference held in Chicago on December 1-5,
1997.
The initial CTLM(TM) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements. The Company has completed a series of calibration scans
under an approved Investigational Device Exemption ("IDE") from the Food and
Drug Administration ("FDA"). This IDE authorized 50 patient scans at the Strax
Breast Diagnostic Center and 20 additional patients at its in-house facility.
Prior to the completion of the 1996 IDE, the Company was advised that greatly
improved laser technology would soon be available. The IDE at Strax was halted,
pending receipt of the new laser system. In November 1997 the CTLM(TM) was
removed from Strax and, on May 20, 1998, the Company's termination of the IDE
and its final report was accepted by the FDA.
The Company was granted, in June 1998, its second IDE authorizing the scanning
of 20 patients at the Company's in-house facilities. On September 1 and 10,
1998, the Company formally submitted the first and second series of the 20
patient in-vivo (human) images and corresponding interpretation data to the FDA.
On June 12, 1997, the Company was advised by patent counsel that its chief
executive officer's patent, filed June 5, 1995 was granted with 7 independent
and 16 subordinate claims. Foreign patent applications have been filed and are
pending.
The Company is currently in a development stage and is in the process of raising
additional capital. There is no assurance that once the development of the
CTLM(TM) device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(Continued)
F - 11
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three
months or less and investment in money market funds are considered to
be cash equivalents by the Company.
(c) Inventory
Inventories, consisting principally of raw materials and
work-in-process, are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Prototype equipment
The direct costs associated with the final CTLM(TM) prototypes have been
capitalized. On June 17, 1996 the Company's Director of Research and Development
and the Director of Engineering decided to discontinue with the development of
the then current generation proprietary scanner and data collection system
(components of the prototype CTLM(TM) device) and to begin development of a
third generation scanner and data collection system. As a result, certain items
amounting to $677,395 were reclassified as follows: $512,453 as research and
development expense and $164,941 as computer and lab equipment. The original
amortization period of two years was increased to five years to provide for the
estimated period of time the clinical equipment would be in service to gain FDA
approval.
During the fiscal year ended June 30, 1998, the costs associated with
the various pre-production units available for sale have been
reclassified as inventory and the remaining costs which will no longer
benefit future periods were expensed to research and development costs.
(Continued)
F - 12
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful lives of
the related assets.
Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, capitalization of software development costs begins
upon the establishment of technological feasibility for the product.
The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable
judgement by management with respect to certain external factors,
including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. After considering the above factors, the Company has
determined that software development costs, incurred subsequent to the
initial acquisition of the basic software technology, should be
properly expensed. Such costs are included in research and development
expense in the accompanying statements of operations.
(f) Research and development
Research and development expenses consist principally of expenditures
for equipment and outside third-party consultants which are used in
testing and the development of the Company's CTLM(TM) device, product
software and compensation to specific company personnel. The
non-payroll related expenses include testing at outside laboratories,
parts associated with the design of initial components and tooling
costs, and other costs which do not remain with the developed CTLM(TM)
device. The software development costs are with outside third-party
consultants involved with the implementation of final changes to the
developed software. All research and development costs are expensed as
incurred.
(g) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per Share"),
which requires the reporting of both basic and diluted earnings per
share. Basic net loss per share is determined by dividing loss
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted into common
stock, as long as the effect of their inclusion is not anti-dilutive.
(Continued)
F - 13
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Patent license agreement
The patent license agreement will be amortized over the seventeen year
life of the patent, the term of the agreement.
(i) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal
1997. As permitted by SFAS 123, the Company continues to measure
compensation costs in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", but
provides pro forma disclosures of net loss and loss per share as if the
fair value method (as defined in SFAS 123) had been applied beginning
in fiscal 1997.
(j) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). This statement requires companies to write
down to estimated fair value long-lived assets that are impaired. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable. In performing the review of recoverability the
Company estimates the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an
impairment loss is recognized. The Company has determined that no
impairment losses need to be recognized through the fiscal year ended
June 30, 1998.
(k) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under SFAS 109, the effect
on deferred taxes of a change in tax rates is recognized in income in
the year that includes the enactment date.
(Continued)
F - 14
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with the current period presentation.
(3) RESTATEMENT
The June 30, 1997 and 1996 financial statements have been restated to properly
reflect the accrual of compensation and recording of deferred compensation on
the qualified and non-qualified stock options for the officers, and the
correction of an accumulated depreciation understatement of $27,682 for the year
ended June 30, 1997. The effect on net loss from the compensation restatement
was an increase of $946,796 for the year ended June 30, 1996 and a decrease of
$299,055 for the year ended June 30, 1997.
The Company had been capitalizing the costs associated with the final
development of the CTLM(TM) software from its initial acquisition phase to the
software being used in the CTLM(TM) device currently undergoing clinical
testing. Effective December 31, 1996, the Company restated its financial
statements to expense all additional costs incurred since the acquisition of the
original software. Accordingly, the Company expensed a total of $869,692 as
additional research and development costs through December 31, 1996, of which
$436,736 was applicable to the fiscal year ended June 30, 1996.
(4) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger.(see Note 16)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(Continued)
F - 15
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(5) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. To date, management has been able to
raise the necessary capital to reach this stage of product development and has
been able to fund any capital requirements. However, there is no assurance that
once the development of the CTLM(TM) device is completed and finally gains
Federal Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.
(6) RESTRICTED CERTIFICATE OF DEPOSIT
The Company had issued an irrevocable letter of credit, which matured on October
4, 1997, towards the purchase of laboratory equipment. The letter of credit was
secured with the certificate of deposit.
(7) INVENTORIES
Inventories consisted of the following:
June 30,
--------------------------------
1998 1997
--------------- ---------------
Raw materials $ 1,296,864 $ -
Work-in process 1,917,181 -
------------- -------------
$ 3,214,045 $ -
============= =============
(Continued)
F - 16
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
--------------------------------
1998 1997
-------------- --------------
Furniture and fixtures $ 245,219 $ 240,029
Building and land 2,084,085 2,081,399
Clinical equipment - 250,000
Computers and equipment 487,143 389,373
CTLM(TM) software costs 352,932 352,932
Trade show equipment 153,193 153,193
Laboratory equipment 190,031 179,862
--------------- --------------
3,512,603 3,646,788
Less: accumulated depreciation (591,623) (353,491)
--------------- --------------
Totals $ 2,920,980 $ 3,293,297
=============== ==============
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(TM) software costs 5 years
</TABLE>
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(TM) software at June 30, 1998 and 1997 are $138,180 and $225,007,
respectively, which represents the net realizable value of the CTLM(TM) software
at the end of each period presented.
(Continued)
F - 17
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) PROPERTY AND EQUIPMENT (Continued)
Amortization expense related to the CTLM(TM) software for each period presented
in the statement of operations is as follows:
Period ended Amount
------------ --------
6/30/98 $ 70,587
6/30/97 70,587
6/30/96 54,345
6/30/95 19,160
6/30/94 73
-----------
Total $ 214,752
===========
(9) OTHER ASSETS
Other assets consist of the following:
June 30,
-----------------------------
1998 1997
--------------- -----------
Patent license agreement $ 3,780,000 $ -
Court bond 100,000 -
Security deposits 6,080 9,635
Other 1,383 -
--------------- -----------
Totals $ 3,887,463 $ 9,635
=============== ===========
During June 1998, the Company finalized an exclusive Patent License Agreement
with its chief executive officer. The officer is the owner of patents issued on
December 2, 1997 which encompasses the technology of the CTLM(TM) . Pursuant to
the terms of the agreement, the Company was granted the exclusive right to
modify, customize, maintain, incorporate, manufacture, sell, and otherwise
utilize and practice the Patent, all improvements thereto and all technology
related to the process, throughout the world. The license shall apply to any
extension or re-issue of the Patent. The term of license is for the life of the
Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
3,500,000 shares of common stock and is required to issue an additional
3,500,000 shares in June 1999. The License agreement has been recorded at the
fair market value of the total 7,000,000 shares on the date of the agreement
($.54 per share), in accordance with the guidelines of Accounting Principles
Board Opinion No. 29 ("Accounting for Nonmonetary Transactions"). A liability
has been recorded for the remaining shares to be issued in June 1999. (see Note
11)
(Continued)
F - 18
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -------------
(restated)
<S> <C> <C>
Accounts payable - trade $ 774,952 $ 276,096
Preferred stock dividends payable 483,288 168,288
Accrued property taxes payable 15,585 14,000
Insurance financing payable 10,233 -
Accrued compensated absences 38,530 56,632
Accrued interest 18,546
Payroll taxes payable 4,250 4,530
Other 18,382 -
------------- -------------
Totals $ 1,363,766 $ 519,546
============= =============
</TABLE>
(11) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Patent licensing agreement payable (see Note 9) $ 1,890,000 $ -
Accrued compensation-stock options 265,978 319,547
------------ -----------
$ 2,155,978 $ 319,547
============ ===========
</TABLE>
The Company anticipates that the items included in other current liabilities
will be liquidated through the issuance of common stock within the next fiscal
year.
(12) LOAN PAYABLE
During the year ended June 30, 1998, the Company borrowed $460,407, from an
unrelated third-party on an unsecured basis. The loan accrues interest at a rate
of 6% per annum and is payable on demand. The Company has repaid $175,000 as of
June 30, 1998. Accrued interest of $18,546 is reflected in accrued expenses on
the balance sheet.
(Continued)
F - 19
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) LEASES
The Company has entered into a lease arrangement which expires in 2002 for its
telephone equipment. This arrangement transfers to the Company substantially all
of the risks and benefits of ownership of the related asset. The asset has been
capitalized as property and equipment (see Note 8) and the obligation has been
recorded as debt. At June 30, 1998, approximate future minimum lease payments
under capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
Year ending June 30,
-------------------
<S> <C> <C>
1999 $ 12,384
2000 12,384
2001 12,384
2002 4,128
-----------
Total minimum lease payments 41,280
Less amount representing interest (5,431)
-----------
Present value of net minimum lease payments 35,849
Less current portion (9,715)
-----------
Long-term portion $ 26,134
===========
</TABLE>
The Company also leases certain office equipment under an operating lease
expiring in June 2002. The Company's lease for its office space expired during
the fiscal year ended June 30, 1997.
Minimum future lease payments under the non-cancelable operating lease having a
remaining term in excess of one year as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal year ended
June 30, Amount
----------------- ----------
<S> <C> <C>
1999 $ 3,370
2000 3,676
2001 3,676
2002 3,676
----------
Total minimum future lease payments $ 14,398
==========
</TABLE>
(Continued)
F - 20
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $16,691,000 to offset future
taxable income. Such carryforwards expire in years beginning 2009. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $5,675,000 and $3,755,000 at June 30, 1998 and 1997, respectively.
The Company has reduced the deferred tax asset resulting from its tax loss
carryforwards by a valuation allowance of an equal amount as the realization of
the deferred tax asset is uncertain. The net change in the deferred tax asset
and valuation allowance from July 1, 1997 to June 30, 1998 was an increase of
approximately $1,920,000.
(15) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
The holders of the Series A Preferred Stock could have converted up to 50% prior
to May 28, 1996, and may convert their remaining shares subsequent to May 28,
1996 without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
(Continued)
F - 21
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
(Continued)
F - 22
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
As of June 30, 1998, none of the Series B Preferred Stock or the associated
warrants had been converted, and there was a total of $483,288 of accrued
dividends payable.
During the year ended June 30, 1998 the Company issued five Private Placements
of convertible preferred stock (see schedule incorporated into Note 15). The
Private Placements are summarized as follows:
Series C Preferred Stock
------------------------
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 105,000
shares of the Company's common stock at an exercise price of $1.63 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series C Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion.
(Continued)
F - 23
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event
will the "Conversion Price" be greater than $1.222. Pursuant to the
Regulation S documents, the Company was also required to escrow an aggregate
of 3,435,583 shares of its common stock (200% of the number of shares the
investor would have received had the shares been converted on the closing
date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment
banker $220,500 for placement and legal fees, providing net proceeds to the
Company of $1,879,500.
Series D Preferred Stock
------------------------
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.22 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series D Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series D Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy-five percent (75%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series E Preferred Stock
------------------------
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.093 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended.
The Series E Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment
(Continued)
F - 24
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
of any additional consideration, into fully paid and nonassessable shares of
the Company's no par value common stock based upon the "conversion formula".
The conversion formula states that the holder of the Series E Preferred
Stock will receive shares determined by dividing (i) the sum of $10,000 by
the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series F Preferred Stock
------------------------
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in
Common Stock at the time of each conversion and are convertible, at any
time, commencing May 15, 1998 and for a period of two years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series F Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy percent (70%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company paid an unaffiliated investment
banker $50,000 for placement and legal fees, providing net proceeds to the
Company of $700,000. The shares underlying the preferred shares and warrant
are entitled to demand registration rights under certain conditions.
Series H Preferred Stock
------------------------
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 126,500
shares of the Company's common stock at an exercise price of $1.00 per
share. The agreement was executed pursuant to Regulation D as promulgated by
the Securities Act of 1933, as amended.
(Continued)
F - 25
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
The Series H Preferred Stock is convertible, at any time, for a period of
two years thereafter, in whole or in part, without the payment of any
additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series H Preferred Stock
will receive shares determined by dividing (i) the sum of $10,000 by the
(ii) "Conversion Price" in effect at the time of conversion. The "Conversion
Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of
the Average Closing Price of the Company's common stock for the ten-day
trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and
paid $10,000 to an unaffiliated investment banker for placement and legal
fees, providing net proceeds to the Company of $990,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
The Company is currently in technical default of the Registration Rights
Agreement ("RRA"), which required the Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company is required
to pay the Series H holders, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, 2% of the
principal amount of the Securities for the first thirty days, and 3% of the
principal amount of the Securities for each thirty day period thereafter
until the Company procures registration of the Securities.
The agreements provide that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 1998:
(Continued)
F - 26
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
<TABLE>
<CAPTION>
(15) Convertible Preferred Stock (Continued)
Series A Series B Series C Series D
-------- -------- -------- --------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000
Conversion of preferred
stock (210) (2,100,000) (25) (250,000)
--------- ----------- ---- ----------- ----- ----------- ----- ---------
Balance at June 30, 1998 - $ - 450 $4,500,000 - $ - 29 $290,000
========= =========== ==== =========== ===== =========== ===== =========
(RESTUBBED TABLE CONTINUED)
Series E Series F Series H Totals
-------- -------- -------- ------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 54 540,000 75 750,000 108 1,080,000 501 5,010,000
Conversion of preferred
stock (30) (300,000) (75) (750,000) (340) (3,400,000)
------- --------- ----- ---------- ----- ----------- ------- ------------
Balance at June 30, 1998 24 $240,000 - $ - 108 $ 1,080,000 611 $6,110,000
======= ========= ===== ========== ===== =========== ======= ============
(Continued)
</TABLE>
F - 27
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company. (See
Statement of Stockholders' Equity)
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expenses has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock was issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(Continued)
F - 28
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.
As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends. (See Note 15)
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock appreciation
rights ("SAR") shares tendered in the transaction. The excess of fair market
value at July 15, 1995 approximated $.57 per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends, accounted for the issuance of
1,081,962 shares ($2,808,643). The remaining 799,333 shares were issued as
follows:
1. Services rendered by independent consultants in exchange for 31,200
shares. Research and development expenses of $90,480 was charged as the
fair market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees,
3,200 shares. Compensation expense of $10,463 was charged as the fair
market value at that date was $3.27 per share.
3. On January 3, 1997 bonus stock was issued to the officers of the
Company, 350,000 shares. Compensation expense of $907,900 was charged, as
the fair market value at that date was $2.59 per share.
(Continued)
F - 29
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting services of
$11,500 were recorded, representing the fair market value ($2.88 per
share) on that date.
5. Services rendered by an independent consultant during June 1997 in
exchange for 199,000 shares. Consulting expenses of $548,149 was
charged, as the fair market value on the date of the transaction was
approximately $2.75 per share.
6. Exercise of incentive stock options, 361,933 shares ($1,136,953).
7. The Company repurchased 150,000 shares ($52,500), which had been
previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 15) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 100,000
shares. Consulting expenses of $221,900 was charged as the fair market
value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange for 200,000
shares. Consulting expenses of $400,000 was charged as the fair market
value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange for 40,000
shares. Consulting expenses of $67,480 was charged as the fair market
value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange for 166,000
shares. Public relations expenses of $269,750 was charged as the fair
market value at October 24, 1997 was $1.63 per share.
5. On December 15, 1997, bonus stock was issued to Company employees, for
39,300 shares. Compensation expense of $41,658 was charged as the fair
market value at that date was $1.06 per share.
(Continued)
F - 30
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
6. Services rendered by an independent consultant in exchange for
250,000 shares. Consulting expenses of $320,000 was charged as the fair
market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May 1998 in
exchange for 200,000 shares. Consulting expenses of $140,000 was
charged, as the fair market value on that date was $.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a Regulation D
offering at $.40 per share, and received cash proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive officer
3,500,000 shares ($1,890,000) as consideration for an exclusive Patent
License Agreement (see Note 8). The market value of the stock on this
date was $.54 per share.
10. On June 11, 1998, the Company issued 25,000 shares to its corporate
counsel as additional bonus compensation. Legal expenses of $12,750
were recorded as the market value of the stock on that date was $.51
per share.
11. A total of 65,712 non-qualified stock options were exercised and
proceeds of $22,999 ($.35 per share) was received by the Company.
(17) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
(Continued)
F - 31
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This plan
provides for the granting, exercising and issuing of incentive stock options
pursuant to Internal Revenue Code Section 422. The Company may grant incentive
stock options to purchase up to 5% of the issued and outstanding common stock of
the Company at any time. The Board of Directors has direct responsibility for
the administration of these plans.
The exercise price of the incentive options to employees must be equal to at
least 100% of the fair market value of the common stock as of the date of grant.
The exercise price of incentive options to officers, or affiliated persons, must
be at least 110% of the fair market value as of the date of grant.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Options
------------------------------ ------------------------------
Shares Wtd. Avg. Price Shares Wtd. Avg. Price
------------ ---------------- ------------- ----------------
<S> <C> <C>
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $ 1.40 1,500,000 $ 1.12
Exercised - -
------------- -------------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
------------- ------------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 -
------------- ------------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised - (65,712) .35
Canceled (175,205) 4.25 -
------------- ------------
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
============= ============
(Continued)
</TABLE>
F - 32
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At June 30, 1998 and 1997, 451,513 and 270,526, respectively, of the incentive
stock options were vested and exercisable and 1,884,288 and 1,200,000,
respectively, of the non-qualified stock options were fully vested and
exercisable. The stock options vest at various rates over periods up to ten
years. Shares of authorized common stock have been reserved for the exercise of
all options outstanding. The following summarizes the option transactions that
have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense of
$567,164 was recorded during the year ended June 30, 1996 as a result of the
discount from the market value.
On November 7, 1994, the Company granted 300,000 non-qualified options to
its general counsel, currently a vice-president of the Company, at an
exercise price of $0.50 per share. Deferred compensation of $150,000 was
recorded on the transaction and is being amortized over the vesting period.
The options were all exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per
year, or a total of 450,000 shares, during the period March 30, 1995 and
ending March 31, 1998. The exercise price shall be $0.35 per share. The
options do not "vest" until one year from the anniversary date. Deferred
compensation of $472,500 was recorded on the transaction and is being
amortized over the vesting period. The Company also granted the individual,
incentive options to purchase 75,000 shares of common stock at an exercise
price of $1.40 per share. The options originally expired on March 30, 1998,
but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense was
recorded during the year ended June 30, 1996 as a result of the discount
from the market value.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise
price of $0.93 per share (110% of the fair market value). The options expire
on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per
share. The options expire on September 1, 2000.
(Continued)
F - 33
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 328,681 shares of
common stock at prices ranging from $0.81 to $8.18. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise
price of $4.37 per share (110% of the fair market value). The options expire
on July 4, 2001.
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Deferred compensation of
$1,891,500 was recorded on the transaction and is being amortized over the
remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 shares of common
stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise
price of $2.94 per share (110% of the fair market value). The options expire
on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $1,340,625 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (two years).
(Continued)
F - 34
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common
stock at prices ranging from $.55 to $2.60. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
The following table summarizes information about all of the stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Outstanding options Exercisable options
----------------------------------------------- --------------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
--------------- ------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .35 - 1.25 1,374,720 8.61 $ .83 1,252,490 $ .78
1.36 - 2.94 975,115 7.85 1.59 936,552 1.55
3.10 - 5.08 236,349 7.67 3.93 146,759 4.34
----------------------------------------------------------------------------------------------------
$ .35 - 5.08 2,586,184 8.24 $ 1.40 2,335,801 $ 1.31
====================================================================================================
</TABLE>
At June 30, 1998, the Company has two stock-based compensation plans, which have
been previously described. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans with respect to its
employees, however compensation has been recorded with respect to its officers
due to their provisions of utilizing stock appreciation rights to exercise their
incentive stock options. The compensation cost that has been charged against
income for the officers was $(53,570) and $475,955 for 1998 and 1997,
respectively. The weighted average Black-Scholes value of options granted during
1998 and 1997 was $1.44 and $2.03 per option, respectively. Had compensation
cost for the Company's fixed stock-based compensation plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of SFAS 123, the Company's pro forma net loss and pro forma net loss
per share would have been as indicated below:
(Continued)
F - 35
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net loss to common shareholders -
As reported $ (9,378,102) $ (8,544,949) $ (27,055,993)
============= ============ =============
Pro forma $ (9,638,158) $ (8,758,447) $ (27,615,569)
============= ============ =============
Basic loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
Diluted loss per share -
As reported $ (.34) $ (.35) $ (1.25)
============= ============ =============
Pro forma $ (.35) $ (.36) $ (1.28)
============= ============ =============
</TABLE>
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: no dividend yield;
volatility of 7.1% and .2%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.
(18) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance at June 30,
1998 was $350,698.
(Continued)
F - 36
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) COMMITMENTS AND CONTINGENCIES
On July 5, 1994 the Company entered into five-year employment agreements with
its chief executive officer, president and executive vice-president. The
agreements provide for compensation to these individuals, during the Company's
development stage, at the annual rate of $250,000 (amended by Board of Directors
effective January 1, 1996), $104,000 (amended by Board of Directors effective
January 15, 1997), and $104,000, respectively.
Additional provisions have been made in these agreements for salary adjustments
to all of the individuals including bonus arrangements, once the Company is
operational. During the fourth quarter (May 1, 1995) of the fiscal year ended
June 30, 1995, the officers of the Company agreed to permanently forgive any
compensation provided in their employment contracts until the Company
establishes an adequate cash flow. The Company reinstated the compensation to
these officers beginning November 1, 1995. The total amount of compensation
forgiven by these officers amounted to $151,000; or $100,667 during the fiscal
year ended June 30, 1996 and $50,333 during the fiscal year ended June 30, 1995.
The financial statements reflect this compensation as a contribution to the
paid-in capital of the Company in the appropriate accounting periods. As a
result, the officers were paid at fifty-percent of their employment contract for
a period of twelve months.
On April 1, 1995, the Company entered into a two year agreement with its
vice-president and general counsel, and provides for annual compensation of
$85,000. This contract was extended on June 16, 1997, providing for annual
compensation of $95,000, with no limit as to the term. The officer resigned
during the fiscal year ended June 30, 1998.
As additional consideration for his development efforts in the CTLM(TM) device,
the chief executive officer has been granted a "development royalty" which will
be paid based upon the net foreign and domestic sales, after direct costs and
commissions, of the CTLM(TM) device. The royalty percent ranges from 2.5% to a
maximum of 5%, based upon varying levels of gross sales. Upon ratification of
the patent licensing agreement, entered into on June 2, 1998, at the Company's
next annual shareholder meeting, the royalties as outlined in that agreement
will take the place of those set forth in the original employment contract. The
royalty percentages in the new agreement start at 10% and decrease to 6% as
gross sales volumes increase.
On April 9, 1995, the Company entered into a three-year employment agreement
with its Director of Engineering at an annual salary of $100,000. The agreement
was extended for an additional two years during 1998 at an annual salary of
$110,000. The contract also provided for the issuance of 75,000 restricted
shares of the Company's common stock. Compensation expense ($1.05 per share), in
the amount of $78,750 was recorded on the transaction.
During the years ended June 30, 1998, 1997 and 1996, employment agreements were
initiated with individuals in various positions currently within the Company.
Annual payments for compensation under these agreements amount to $170,000,
$536,500 and $206,500, respectively, in the aggregate.
(Continued)
F - 37
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the CTLM(TM) device. The
terms of these agreements range from eighteen months to three years. The Company
has the right to renew the agreements, with renewal periods ranging from one to
three years.
During the year ended June 30, 1998, the Company entered into an agreement for a
fifteen million dollar, three year equity line of credit, whereby the Company,
as it deems necessary, may raise capital through the sale of its common stock to
a consortium of prominent European banking institutions. The shares will be
purchased by the consortium at a discount from the fair market value of the
Company's common stock.
(20) SUBSEQUENT EVENTS
The Company has selected Nassau County Medical Center of East Meadow, Long
Island, New York, to be its first external clinical site. The Company has
submitted its Investigational Device Exemption ("IDE") protocol to the
hospital's Institutional Review Board, which is scheduled to meet on October 14,
1998 to review the IDE protocol. Upon approval, documents will be forwarded to
the Food and Drug Administration ("FDA") for their approval. The Company will be
contacted by the FDA granting permission to proceed with the clinical trials
described in the IDE protocol.
The Company has applied for a conventional first mortgage, of up to $2,000,000,
on its office and manufacturing facility located in Plantation, Florida. At
present, a commitment letter with respect to this mortgage is still pending.
During the period subsequent to the end of the fiscal year, the Company has
borrowed approximately $410,000 in three separate transactions. The Company
issued 480,000 shares of common stock in conjunction with the borrowings.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any
action to be taken at an annual or special meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if the action is
taken by a majority of outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Company is in the process of completing the revisions to the Information
Statement. The Majority Shareholders consent with respect to the Amendment will
take effect twenty days from the notification that the SEC has no further
comments with respect to the Information Statement.
(Continued)
F - 38
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) SUBSEQUENT EVENTS (Continued)
On September 4, 1998, the Company received a notice of conversion from the
Series B Preferred Stockholders. At present, due to the decline in the price of
its common stock, the Company does not have enough authorized common stock to
convert the Series B and the Series H Preferred Stockholders, should the Series
H holders wish to convert. The Company is in technical breach of its agreement
with the Series B holders. In the event that the Company is not able to increase
the authorized common stock, the Company will continue to be in breach of its
contractual obligations to the Series B holders and may be subject to litigation
and the payment of damages and penalties.
F - 39
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information representations must not be 5,784,073 SHARES or
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security IMAGING DIAGNOSTIC SYSTEMS, INC.
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by any person in any jurisdiction COMMON STOCK
in which such offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
imply that the information in this Prospectus is correct as of any time
subsequent to the date of this prospectus.
-----------------
TABLE OF CONTENTS
-----------------
----------------
Page PROSPECTUS
Available Information....................... 2 ----------------
Incorporation of Certain
Documents By Reference...................... 3
Prospectus Summary.......................... 4
Risk Factors................................ 5
Management Discussion and Analysis of
Financial Condition and Results of IMAGING DIAGNOSTIC SYSTEMS, INC.
Operation................................ 12 6531 NW 18TH COURT
Business.................................... 15 PLANTATION, FLORIDA 33313
Management.................................. 32 (954) 581-9800
Certain Transactions........................ 34
Market Price of Security and Other Related
Stockholder Matters....................... 35
Sales of Unregistered Securities............ 36
Dividend Policy ............................ 41
Principal Stockholders...................... 42
Selling Security Holders.................... 42
Plan of Distribution........................ 43
Description of Securities................... 44
Changes in and Disagreements with NOVEMBER ___, 1998
Accountants .............................. 45
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... 45
Interests Of Named Experts and Counsel...... 45
Experts..................................... 45
Legal Opinions.............................. 45
Financial Information....................... 45
Until ____________, 1998 (25 days after the date
hereof) all dealers effecting transactions in the
registered securities, whether or not participating
in the distribution, may be required to deliver a
</TABLE>
<PAGE>
Prospectus.
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
II-1
<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).
II- 2
<PAGE>
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
5 Legal opinion of Rebecca J. Del Medico, Esq., dated November 12, 1997.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
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
None
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.
II- 3
<PAGE>
(b) The undersigned registrant hereby undertakes that:
(i) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424 (b) (1) or (4) or 497 (h) 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 Amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plantation, State of Florida, on the 6th day of
November, 1998.
<TABLE>
<CAPTION>
<S> <C>
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
Amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: November 12, 1998 By: /S/ LINDA B. GRABLE
----------------------
Linda B. Grable, Chairman of the Board
Director and President
Dated: November 12, 1998 By: /S/ RICHARD J. GRABLE
------------------------
Richard J. Grable, Director
and Chief Executive Officer
Dated: November 12, 1998 By: /S/ ALLAN L. SCHWARTZ
----------------------
Allan L. Schwartz, Director
and Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
II- 4
<PAGE>
INDEX TO 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 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).
<PAGE>
4.4 Instruments Defining the Rights of Security Holders Designation of
Series E Convertible Preferred Shares. See Exhibit 3.6, above).
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders - Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
5 Legal opinion of Rebecca J. Del Medico, Esq., dated November 6, 1997.
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference to the
Company's Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-2, File Number 333-59539.
10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.4 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable are incorporated by reference to Exhibit 10(c) of the
Form 10-SB.
10.5 Lock Up Agreement By and Between the Company and Richard J. Grable,
Linda B. Grable, and Allan L. Schwartz, is incorporated by reference to
Exhibit 10.5 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1996. File number 033-04008.
10.6 Form of Series F Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to the Company's Registration Statement on Form S-2, File
Number 333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of the
Company's Form 10-KSB for the fiscal year ending June 30, 1998.
10.9 Form of Equity Line of Credit Agreement incorporated by reference to
Exhibit 10.9 of the Company's Form 10-KSB for the fiscal year ending
June 30, 1998.
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
None
EXHIBIT 5
IMAGING DIAGNOSTIC SYSTEMS, INC.
[Letterhead of Registrant]
November 12, 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 common stock, shares underlying the Series H Preferred Stock and the
Warrants will be, upon conversion exercise or issuance, 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
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Rebecca J. Del Medico General Counsel
EXHIBIT 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Amendment No: 1 to Registration Statement
on Form S-2 of our report dated August 6, 1998, relating to the financial
statements of the Imaging Diagnostic Systems, Inc., and to the reference to our
firm under the caption "Experts" in the Prospectus.
/s/ MARGOLIES, FINK AND WICHROWSKI
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Margolies, Fink and Wichrowski
Pompano Beach, Florida
November 9, 1998
