FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to_____________
COMMISSION FILE NUMBER: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
FLORIDA 22-2671269
(State of incorporation) (IRS employer Ident. No.)
6531 NW 18TH COURT, PLANTATION, FL. 33313
(address of principal office) (Zip Code)
Issuer's telephone number: (954) 581-9800
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES __X_ NO_____ .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
amendment to this Form 10-KSB. [ ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR. -0-
Based on the average closing bid and asked prices of the common stock on the
latest practicable date, October 11, 1999, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $4,224,620 with
57,247,380 shares outstanding.
The number of shares outstanding of each of the issuer's classes of common
stock, as of October 11, 1999 was 57,247,380 As of October 11, 1999, the number
of shares outstanding of each of the issuer's classes of preferred stock were:
Series B Convertible Preferred-360, Series G Convertible Preferred-14, Series H
Convertible Preferred-49 and Series I Convertible Preferred-138.
Documents Incorporated By Reference
[None]
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN ITEM 6 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CAUTIONARY STATEMENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Imaging Diagnostic Systems, Inc. is a medical technology company that has
developed and is testing a Computed Tomography Laser Mammography ("CTLM(TM)")
for detecting breast cancer through the skin in a non-invasive procedure. The
CTLM(TM) employs a high-speed pico-second pulsed titanium sapphire laser and
proprietary scanning geometry and reconstruction algorithms to detect and
analyze tissue in the breast for indicia of malignancy or benignancy. The
components of the laser system are purchased from two unaffiliated parties and
assembled and installed into the CTLM(TM) by the Company.
In connection with the ctlm(tm) clinical investigational trials, we are
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) is designed to provide the
physician with objective data for interpretation and further clinical work-up.
Accordingly, we believe 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, we 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, our
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. We refined various software and hardware configurations and
components of the device based on these first images and filed a total of twelve
ancillary United States patents since 1996.
In November 1995, we began discussions with Strax Breast Diagnostic Institute to
conduct clinical trials at their facility. The original CTLM(TM) prototype used
an Argon pump laser, which required a 6-ton water chiller. The landlord of the
Strax office building was unwilling to allow us to install this chiller on the
roof because of its weight and its potential to leak water. In December 1995, we
learned of a new type of pump laser using diodes being developed by Spectra
Physics Lasers. This new laser was powered by a standard 110 volt outlet and
only required a small portable chiller to cool the crystal. Rather than
continuing to develop the CTLM(TM) with a laser that required massive cooling we
decided to wait for delivery of the first Solid State Diode Pump laser package
from Spectra-Physics. The lasers were delivered on January 24, 1996. Because it
was the first of its kind, many modifications had to be made by Spectra-Physics
field engineers to the lasers before it would operate to specification. We
immediately began re-engineering the CTLM(TM) to integrate this new laser into
its system.
After extensive testing of the laser system, we designed and built two
pre-production CTLM(TM) scanners, one of which would be installed at Strax. In
addition to the change in lasers, modifications were made in both the detection
scheme and software.
On December 12, 1995, we had a preliminary meeting with the Food and Drug
Administration to generally discuss the approach we would take to obtain
marketing clearance for our CTLMTM. We were advised that we would need to submit
and have approved a pre-market approval application ("PMA") in order to obtain
marketing clearance for the device. We were also advised that we would need to
submit an investigational device exemption ("IDE") application to the FDA in
order to commence human clinical trials of the device. An IDE allows a company
to conduct human clinical trials without filing an application for marketing
clearance.
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We submitted our IDE application on January 8, 1996, and it was approved
February 9, 1996. During calendar year 1996, among other matters, we further
refined the detection scheme and laser power configuration in order to obtain
substantially better image quality. In order to incorporate the changes, we were
required to submit to the FDA an amendment to our IDE application. Pursuant to
the IDE, as amended, we were authorized to scan 50 patients at the Strax Breast
Diagnostic Center in Lauderhill, Florida, and 20 additional patients at our
in-house facility. The CTLM(TM) was installed at Strax in November 1996, and
three patients were scanned. After scanning the three patients at Strax, we
learned of a different type of laser, which could be used in conjunction with
the new Solid State Diode Pump laser package from Spectra-Physics. We believed
that this additional laser component would greatly increase the performance and
image quality of the CTLM(TM). We halted the clinical investigational trials at
Strax in December 1996 and planned to resume the study after the second system
modification.
Strax, a not-for-profit corporation, requested a donation of $5,000 to be used
to purchase needed medical equipment for the institute, which we paid on
December 31, 1996. Because of the extensive re-engineering and design and the
delay in receiving the new laser components to be integrated into the system, we
were unable to complete and test the new system in a timely manner. In fact, the
first of these new components was not received until October 1997. Strax was
unwilling to wait until the engineering modifications were completed unless it
received compensation for the CTLM(TM) remaining on its premises. In light of
the fact that the owners of Strax were in the process of selling the center and
one of the proposed purchasers was a potential competitor, we declined to pay
any additional compensation. In November 1997, Strax requested that the CTLM(TM)
be removed from its premises. The CTLM(TM) was removed from Strax in November
1997. On May 20, 1998, our termination of the IDE protocol and our final report
was accepted by the FDA.
In February 1996, we entered into a letter of intent with an independent
distributor to place a CTLM(TM) at the Moscow Research Institute for
Diagnostics. The letter of intent is still in place however, due to the further
advances in laser technology the purchase of the new laser system, the
modification and redesign of the CTLM(TM) hardware and software, the actual
placement has been delayed.
In February 1997, we announced that the Institutional Review Board of Columbia
JFK Medical Center located in Atlantis, Florida, approved its request to
participate in the first phase of the clinical trials. Our liaison person and
proposed principal investigator was Dr. Donna M. Gallagher. After Dr. Gallagher
relocated, we did not pursue further involvement at the hospital.
In June 1998, our second IDE was granted. We were authorized to scan 20 patients
at our in-house facilities in Plantation, Florida and upon FDA approval, at
three additional clinical sites. On September 1 and September 10, 1998, we
formally submitted the first and second series of the 20 patient in-vivo (human)
images and corresponding interpretation data to the FDA.
The FDA responded to the submission on October 1998, asking that we limit future
submissions to significant findings, milestones, annual reports, or changes that
may effect the safety of the CTLM(TM). We scanned 20 women at our in-house
facility. These scans produced no significant findings, milestones or changes
that would effect the safety of the CTLM(TM) so there were no additional
submissions except for the request to expand the study to Nassau County Medical
Center.
We requested that we be permitted to expand the scope of the study to include a
medical facility where access to women with breast cancer was more practical.
Nassau County Medical Center was chosen because of the unusually high incidence
of breast cancer in the population they serve. It is reported that 1 woman in 7
will experience breast cancer if they live in this geographic area. Also Nassau
County represented that they performed a significant number of breast surgeries
each week, which we expected to provide a relatively constant supply of
histologically confirmed cases.
On January 14, 1999, we received notice that the IDE application to extend the
in-vivo study to Nassau County Medical Center was conditionally approved. We
immediately supplied the additional documentation required by the FDA, and the
conditions were complied with. The IDE application was limited to one
institution (Nassau County Medical Center) and 275 subjects. We had originally
intended to have the CTLM(TM) positioned at Nassau County Medical Center no
later than mid February 1999, however due to renovations at Nassau County
Medical Center, the delivery of the CTLM(TM) was postponed until the renovations
were complete.
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On March 3, 1999 the CTLM(TM) system was shipped to Nassau County Medical
Center. After several administrative problems, on June 21, 1999, we received
written representation from Nassau County that we could begin the clinical
investigational trials pursuant to the original IDE and the payment of
reasonable and customary charges for a three-month study. On July 8, 1999,
Nassau County began scanning patients for the clinical investigational trials.
On June 12, 1997, we were advised by patent counsel that Mr. Grable's patent,
filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was granted
with 4 independent and 24 subordinate claims. The independent claims serve to
provide an overall outline of the disclosure of the invention. The subordinate
claims provide additional information to identify pertinent details of the
invention as they relate to the respective specific independent claim.
In May 1998, we, 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
"Cautionary Statements-Dependence on Patent Licensed by Founder; Dependence on
Patents and other Proprietary Information", "Business-Patent" and
"Business-Patent License Agreement".
In January 1997, we applied for a patent for a fluorescence imaging scanner. We
have received Issue Notification indicating that the Patent was issued on
September 14, 1999, as Patent No 5,952,664.
BREAST CANCER
Breast cancer is one of the most common cancers among women and, notwithstanding
the currently available detection modalities, is the leading cause of death
among women aged 35 to 45. According to the American Cancer Society ("ACS"),
approximately one in eight women in the United States will develop breast cancer
during her lifetime. Nationwide, it is estimated that in 1998, approximately
178,700 new cases of invasive breast cancer will be diagnosed among women in the
United States, and an estimated 43,500 women will die from this disease.
Excluding skin cancers, the breast is the most frequent site of cancer among
American women accounting for 32% of incident cancers and 17% of cancer deaths.
It is the second leading cause of death for American women following lung cancer
and is the leading cause of cancer death among women aged 40 to 55. The annual
cost of breast cancer management in the United States alone is approximately $25
billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
98% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. Extensive
documentation demonstrates that mammography does not detect, on an average,
15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommended as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, ACS has published guidelines for breast cancer
screening including: (i) monthly breast self-examinations for all women over the
age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a
mammogram every one to two years for women between the ages of 40 and 49; (iv)
an annual mammogram for women age 50 or older. As a result of family medical
histories and other factors, certain women are at "high risk" of developing
breast cancer during their lifetimes. For these women, physicians often
recommend close monitoring, particularly if an abnormality posing increased risk
factors has been detected.
Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including diagnostic mammography and ultrasound,
a minimally invasive procedure such as fine needle aspiration or large core
needle biopsy. In each case, the potential benefits of additional diagnostic
testing must be balanced against the costs, risks and discomfort to the patient
associated with undergoing the additional procedures. Each of the currently
available non-surgical modalities for breast cancer detection has various
clinical limitations. While the minimally invasive procedures provide more
diagnostic information, there is still present a 4% miss-rate factor.
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Due in part to the limitations of the currently available modalities to identify
malignant lesions, a large number of patients with suspicious lesions proceed to
surgical biopsy, an invasive and expensive procedure. Approximately 800,000
surgical biopsies are performed each year in the United States, of which
approximately 700,000 result in the surgical removal of benign breast tissue.
The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000
per procedure. Thus biopsies of benign breast tissue cost the U.S. health care
system approximately $2.45 billion annually. In addition, biopsies result in
pain, scarring, and anxiety to patients. Patients who are referred to biopsy
usually are required to schedule the procedure in advance and generally must
wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
PHYSICAL EXAMINATION
Physical examinations of the breast are normally conducted by a physician or
clinician as part of a medical examination, or by a woman performing a
self-examination. 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, radiologists seek to characterize suspicious lesions.
Mammograms require subjective interpretation by a radiologist and are often
uncomfortable for the patient. Because x-ray mammography exposes the patient to
radiation, ACS recommends that mammograms be limited to once per year. In
addition, x-ray mammography is considered to be less effective for women under
the age of 50 who generally have radiographically dense breast tissue. The
average cost of a diagnostic mammogram is approximately $55 to $200 per
procedure (an average of $113) and requires the use of capital equipment ranging
in cost from approximately $75,00 to $225,000. It is expected that the CTLM(TM)
will cost approximately $350,000 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) 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
We have a limited history of operations. Since our inception in December 1993,
we have engaged principally in the development of the CTLMTM. We currently have
no source of operating revenue and have incurred net operating losses since our
inception. At June 30, 1999, we had an accumulated deficit of $35,092,999, after
discounts and dividends on Preferred Stock. The losses have resulted principally
from costs associated with our operations. We expect operating losses will
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increase for at least the next several years as total costs and expenses
continue to increase due principally to the anticipated commercialization of the
ctlmtm, development of, and clinical trials for, the CTLMTM and other research
and development activities. Our ability to achieve profitability will depend in
part on our ability to obtain regulatory approvals for our 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 we
will receive regulatory approvals for the development and commercial
manufacturing and marketing of our proposed products, or achieve profitability.
See Item 6. "Management's Discussion and Analyses of Financial Condition and
Results of Operations".
CTLM(TM)
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 purchased from two unaffiliated parties, and
assembled and installed into the CTLM(TM) by us.
Using the patient scans from our investigational clinical trials, we will
develop a clinical atlas of the optical properties of benign and malignant
tissues with respect to absorption and scattering parameters of light as it
passes through the tissue. This atlas will be expanded as we obtain additional
scans of breast abnormalities. The CTLM(TM) is designed to provide the physician
with objective data for interpretation and further clinical work-up.
Accordingly, we believe that the CTLM(TM) will improve early diagnosis, reduce
diagnostic uncertainty, and decrease the number of biopsies performed on benign
lesions. Further, THE CTLMTM does not expose the patient to ionizing radiation
or painful compression, which we believe 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 pendulous 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 CTLMTM 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. We believe 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.
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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.
We believe 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(TM) 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.
FLUORESCENCE IMAGING
We are investigating the use of fluorescent and PDT compounds in conjunction
with the CTLM(TM) for detection of breast abnormalities. Certain molecules
exhibit the phenomenon of emitting light after being illuminated by light of the
appropriate wavelength, i.e., from a laser. This characteristic is referred to
as fluorescence. The compounds that produce fluorescence are commonly referred
to as fluorescent dyes or simply "dyes". A number of pharmaceutical companies
are developing fluorescent dyes that selectively attach to specific types of
cells, one of which is PDT compounds, a cancer-seeking drug activated by light.
When cells with the dye attached are illuminated with light of the proper
wavelength, the dye will fluoresce at a unique wavelength. If the dye has been
designed to attach to cancer cells, the fluorescence will be produced at the
location where the cancer cells are situated.
We have signed non-disclosure/confidentiality agreements with two of these
companies in order to share technology for the use of the CTLM(TM) with
fluorescence and PDT's. In February 1999, we demonstrated that the CTLM(TM) has
the ability to both excite fluorescent dyes and to detect the fluorescent light
produced by the dye. These experiments were conducted by placing fluorescent
dyes inside a breast equivalent phantom and producing an image of the
fluorescence using data acquired by the CTLM(TM). The CTLM(TM) was adjusted to
produce laser light of the required wavelength and had optical filters installed
to allow the detectors to sense only the fluorescent light. The ability to
excite the dye, detect the location of the fluorescence within the simulated
breast, and create an image of the result has not, to our knowledge, been
accomplished before. In January 1997, we applied for a patent for a
fluorescence-imaging scanner. We have received Issue Notification indicating
that the Patent was issued on September 14, 1999, as Patent No 5,952,664.
The use of dyes, sometimes referred to as contrast agents or simply "contrast",
for radiographic imaging is a common medical practice. The use of contrast
agents for breast imaging is not currently a common medical practice. the fda
has recently approved the use of radioactive compounds to identify beast cancer
locations. The use of fluorescent dyes that are not radioactive compounds, for
breast imaging, we believe, has significant but presently undemonstrated role in
breast cancer detection. We intend to work with contrast agent manufacturers to
explore and possibly develop this emerging technique. The fda must first approve
The use of non-radioactive florescent dyes before they can be used commercially.
Such approval could take several years, if at all.
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) in the
United States. Because the CTLM(TM) is a medical device, it is subject to the
relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and
implementing its regulations. Pursuant to the FD&C Act, the Food and Drug
Administration ("FDA") regulates, among other things, the manufacture, labeling,
distribution, and promotion of the CTLM(TM) in the United States. The FD&C Act
requires that a medical device must (unless exempted by regulation) be cleared
or approved by the FDA before being commercially distributed in the United
States. The FD&C Act also requires that manufacturers of medical devices, among
other things, comply with the labeling requirements and to manufacture devices
in accordance with Good Manufacturing Practices ("GMPs"), which require that
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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.
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 for
which the FDA can determine that the safety and effectiveness of which 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
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.
Upon receipt of the PMA application, the FDA makes a threshold determination
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA is sufficiently complete to permit a
substantive review, the FDA will file the application. Once a PMA application
has been filed, the FDA has by regulation 180 days to review it; however the
review time may be extended significantly by the FDA asking for more information
or clarification of information already provided in the submission. During the
review period, an advisory committee may also evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
In addition, the FDA will inspect the manufacturing facility to ensure
compliance with the FDA's GMP requirements prior to approval of a PMA. While the
FDA has responded to PMA applications within the allotted time period, PMA
reviews generally take approximately 12 to 18 months or more from the date of
filing to approval. The PMA process is a lengthy and expensive one, and there
can be no assurance that a pma application will be reviewed within 180 days or
that the fda will approve a pma application. A Number of devices for which other
companies have sought PMA approval have never been approved for marketing. We
intend to file for expedited review of our PMA application. See Item 1.
"Business-Regulatory and Clinical Status, United States/FDA". If we were unable
to obtain FDA approval, it would have a material adverse effect on our business
and financial condition and could result in postponement of the
commercialization of the CTLM.(TM) See Item 1 "Business- Regulatory and Clinical
Status".
Any products manufactured or distributed by us pursuant to a PMA are or will be
subject to pervasive and continuing regulation by the FDA. The FDA Act also
requires that our products be manufactured in registered establishment and in
accordance with GMP regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The export of medical devices is also subject to
regulation in certain instances. In addition, the marketing and use of our
products may be regulated by various state agencies.
All lasers manufactured for us are subject to the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the FDA. The law requires laser manufacturers to file new product and annual
reports and to maintain quality control, product testing, and sales records, to
comply with labeling and certification requirements. Various warning labels must
be affixed to the laser, depending on the class for the product under the
performance standard.
<PAGE>
Both the fda and the individual states may inspect the manufacturers of our
products on a routine basis for compliance with current gmp regulations and
other requirements.
In addition to the foregoing, we are subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and fire hazard control. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business. See Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Extensive Government Regulation, No Assurance
of Regulatory Approvals".
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 laws of
certain European and Asian countries may permit us to begin marketing the
CTLM(TM) in Europe and Asia before marketing would be permitted in the United
States. In order to sell our products within the European Economic Area ("EEA"),
companies are required to achieve compliance with requirements of the Medical
Devices Directive ("MDD") and affix a "CE" marking on their products to attest
such compliance. In Europe, we will be required to obtain the certifications
necessary to enable the CE mark to be affixed to our products in order to
conduct sales in member countries of the European Union. We are in preliminary
preparations regarding CE certification. Component parts that have been
finalized are being tested in our laboratory. Some of the components are being
changed in order to improve performance, which has delayed the submission of the
CTLM(TM) for the CE certification. We have chosen DGM of Denmark as our
notifying body. A notifying body ("NB") is a regulatory body from the private
sector, which is responsible for the review and approval of the documentation
submitted by us in order to enable the CE mark to be affixed to products. SEE
ITEM 6. "MAnagement's Discussion and Analysis of Financial Condition and Results
of Operations-Cautionary Statements - Extensive Government Regulation, No
Assurance of Regulatory Approvals". 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)
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) The safety of operators, patients, and
maintenance persons is of great concern. The medical industry has
developed standards (as listed below) to maintain a high level of safety
for the protection from electrical and mechanical hazards. The industry
has also specified laser safety requirements for products that incorporate
laser-emitting devices. The standards listed below are very similar to the
guidelines utilized in the USA.
EN 60 601-1: Medical electrical equipment. Part 1: General requirements for
safety.
EN 60 601-1-1: Medical electrical equipment. Part 1: General requirements for
safety 1. Collateral standard: Safety requirements for medical electrical
systems.
EN 60 601-2-22: Medical electrical equipment. Part 2: Particular requirements
for the safety of diagnostic and therapeutic laser equipment.
IEC 825-1: Safetyof laser products. Part 1: Equipment classification,
requirements, and user's guide.
EN 60 950: Safety of Information Technology Equipment Including Business
Equipment.
SAFETY (EMC) An aspect of medical product safety that the medical industry
has also determined to be a safety factor is the electromagnetic
compatibility (EMC) of a product. EMC is the ability of a product to exist
in the presence of other products without the functionality of either
device being affected. The standard listed is currently some of the most
stringent requirements for products in this area.
EN 60 601-1-2: Medical electrical equipment. Part 1: General requirements for
safety 2. Collateral standard: Electromagnetic compatibility - requirements and
tests.
<PAGE>
PROGRAMMABLE ELECTRICAL SYSTEMS (SOFTWARE) The medical industry has
recently determined that the software that runs the safety features of
medical devices is as much a function of the safety features as the
hardware. For this reason, standards have been created to allow evaluation
of such software. As the CTLM(TM) does utilize software in some aspects of
such safety devices, evaluation in accordance with the most recent software
standards is required. These requirements are similar to the requirements
adopted by the FDA for the same purpose.
EN 60 601-1-4: Medical electrical equipment. Part 1: General requirements for
safety 4. Collateral standard: Programmable electrical medical systems.
QUALITY ASSURANCE SYSTEMS In efforts to assure quality processes, we are
utilizing the most recent quality control standards in the development of
our quality assurance program. The standards listed are particular to the
medical industry.
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 As clinical evaluations are required for the CTLM(TM)
and almost every country has a different way for the evaluations to be
performed and documented, we are required to perform our evaluations in
accordance with the most recent requirements. These documents state these
requirements.
EN 540: Clinical investigation of medical devices for human subjects.
Medical Devices Directive (93/42/EEC) Annex X: Clinical evaluations.
RISK ASSESSMENT Most safety requirements (especially requirements for
software) are driven from possible safety hazards. These hazards are
uncovered by a proper risk assessment as outlined in this standard.
prEN 1441: Medical devices - risk analysis.
ADDITIONAL MARKINGS/SYMBOLS/TERMINOLOGY/DOCUMENTATION These standards list
additional aspects of the CTLM(TM) that require additional information not
covered by the requirements listed above.
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.
In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be exported outside of the United States
unless they are approved for the use by any member country of the European Union
or certain other countries. These countries include Australia, Canada, Israel,
Japan, New Zealand, Switzerland, and South Africa. the device can be exported to
countries that have approved the device for use, provided that, certain FDA
notification requirements are met. There can be no assurance that we will meet
the FDA's export requirements or receive FDA export approval when such approval
is necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure to meet the FDA's export requirements or
obtain FDA export approval when required to do so, or obtain approval for
import, could have a material adverse effect on our business, financial
condition, cash flows and results of operations.
REGULATORY AND CLINICAL STATUS
UNITED STATES/FDA
<PAGE>
On March 19, 1998, we submitted the final report for the calibration portion of
our IDE. In addition, on March 19, 1998 we met with representatives of the FDA.
The purpose of the meeting was to describe several options to our IDE and to get
the FDA's perspective on these approaches. It was decided that we would conduct
clinical trials under the IDE with 20 patient studies performed in-house and
monitored by an Institutional Review Board ("IRB") established by us.
In April 1998, we appointed seven physicians and one physicist who were
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 our research
involving human subjects. Due to the completion of in-house IDE, this IRB is
inactive.
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:
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.
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.
Selection of subjects is equitable.
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.
Where appropriate, the research plan makes adequate provision for monitoring the
data collected to ensure the safety of subjects.
There are adequate provisions to protect the privacy of subjects and to maintain
the confidentiality of data.
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 our 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.
On May 15, 1998, we submitted a supplemental safety report to the FDA, which
encompasses all of the modifications and upgrades since the initial safety
report was filed.
In June 1998, we were granted our second investigational device exemption
("IDE") to conduct clinical trials. We were authorized to scan 20 patients at
our in-house facilities in Plantation, Florida. On September 1 and September 10,
1998, we formally submitted the first and second series of the 20 patient
in-vivo (human) images and corresponding interpretation data to the FDA.
The FDA responded to the submission on October 1998, asking that we limit future
submissions to significant findings, milestones, annual reports, or changes that
may effect the safety of the CTLM(TM). We scanned 20 women at our in-house
facility. These scans produced no significant findings, milestones or changes
that would effect the safety of the CTLM(TM) so there were no additional
submissions except for the request to expand the study to the Nassau County
Medical Center.
We requested that we be permitted to expand the scope of the study to include a
medical facility where access to women with breast cancer is more practical.
On January 14, 1999, we received notice that the IDE application to extend the
in-vivo study to Nassau County Medical Center was conditionally approved. We
received final approval to conduct the investigational study on February 26,
1999. This IDE application is limited to 1 institution (Nassau County Medical
Center) and 275 subjects. We selected the number 275 based on the distribution
of the types of breast conditions outlined in the IDE protocol. Pursuant to our
original discussions with the FDA, approximately 400 cases will be in the PMA
application when it is submitted. Because of the limited experience acquired
from the 20-patient in-house study, we elected to establish one clinical site,
Nassau County Medical Center and begin testing before expanding the next series
of clinical tests to additional locations.
The IRB for the Nassau County Study is comprised of twenty-three members. The
IRB was already formed and was not impaneled specifically for the CTLM(TM)
investigational clinical trials. None of the members of the Nassau County IRB
are affiliated with us or affiliated with any officer, director or employee of
the Company. The professional specialties and other information which regard to
the IRB members of the Nassau County Study is set forth in the following table.
Highest Degree Earned Professional Specialty Affiliation With Nassau County
M.D Neurology Yes
M.D Surgery Yes
M.D Pediatrics Yes
Reverend Other Fields, Religion Yes
M.D Obstetrics & Yes
Ph.D Psychiatry; Yes
M.D Pathology Yes
M.D., Medicine- Yes
M.B Administrator No
J.D Other Fields, Law No
M.D Psychiatry Yes
M.D Pediatrics Yes
Ph.D Obstetrics & Yes
M.D Psychiatry Yes
Ph.D Biostatistician Yes
Ph.D Anesthesiology Yes
B.S., Pharmacy Yes
Ph.D Medicine - Yes
Ph.D Pediatrics Yes
Ph.D Administrative Yes
M.D Director for Academic Yes
Ph.D Pathology Yes
M.D Academic Affairs Yes
<PAGE>
On March 3, 1999, we shipped the CTLM(TM) to Nassau County Medical Center. After
renovations of the room and air conditioning modifications were made to handle
the heat load of the lasers, our engineers and medical physicist completed the
installation and calibrated the CTLM(TM) on April 19, 1999. After further delays
because of misunderstandings regarding the IDE protocol and costs associated
with the clinical investigational trials, we began scanning patients on July 8,
1999.
The results of each patient's scan are compared to her mammogram by Nassau
County and then the scan and the mammogram are forwarded to us for our review.
The comparisons may be done individually after each scan or in batches.
Depending on the quality of the images, the software or hardware of the CTLM(TM)
may be adjusted to obtain maximum clarity.
At present, we have also entered into discussions with several hospitals, which
are located throughout the United States for potential clinical test sites. We
have received oral approvals of the protocol and site plan from three of the
proposed clinical sites. In order to expand our clinical trials to other sites,
the IDE application for Nassau County will have to be amended by supplying the
required documentation i.e. the protocol, signed investigator agreement, IRB
approvals and the informed consent form. Once a formal commitment has been
obtained and the IDE approved by the FDA, these sites will become operational.
See Item 6. "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Cautionary Statements-Government Regulation" and Item 1.
"Business-Regulatory and Clinical Status-United States/FDA" and "Business
Government Regulations"
We intend to perform studies at three or more hospitals each of which will
follow the same IDE protocol, as amended, for 275 volunteers to acquire
effectiveness data on 1,100 women. Of these, 400 will be selected for actual
submission. The reason for the plan to scan 1,100 women instead of only 400 is
that volunteers in these kinds of programs for various reasons may withdraw from
the study. These volunteers may not have a histological confirmation of their
respective condition, for example a woman dies before her surgery, or other
reason. Additionally, we plan to develop an atlas of clinical examples on CD-ROM
for teaching purposes. With a large number of examples of each breast condition
typically encountered, the atlas is expected to be of greater value.
In order to sell the CTLM(TM) commercially in the United States, we must obtain
marketing clearance from the FDA. A PMA application must be supported by
extensive data, including pre-clinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if the FDA determines that the
application is Sufficiently complete to permit substantive review, the agency
will "file" the application. Under the food, drug, and Cosmetic Act, the FDA has
180 days to review a PMA application.
The FDA has adopted a policy of expedited review that is available to medical
devices satisfying one or more of the following criteria:
The device addresses a condition, which is serious or life
threatening or presents a risk of serious injury for which no
alternative legally marketed diagnostic/therapeutic modality
exists.
The device addresses a condition, which is life threatening or
irreversibly debilitating, and provides for clinically important
earlier diagnosis or significant advances in safety and/or
effectiveness over existing alternatives.
The device represents a clear clinically meaningful advantage over
existing technology, defined as having major (not incremental)
increased effectiveness, or reduced risk compared to existing
technology.
The availability of the device is otherwise in the best interest
of the public health.
Although we believe that it qualifies for expedited review, there can be no
assurance that any such review will be granted or if granted, that the PMA will
be approved, or that such approval will be received on a timely basis. See Item
1. "Business-Government REGULATION".
FOREIGN
At present, we have not applied to the FDA for export approval for foreign
sales. However, we have begun the process of evaluating the CTLM(TM) for
application of regulatory approval marks and showing compliance with the Medical
<PAGE>
Device Directive ("MDD"), which are rules and regulations which must be complied
with before 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 we have taken or are 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 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 is chosen 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 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. We have completed our evaluation and have chosen DGM of Denmark to be
our Notified Body under the Medical Device Directives. This choice was made
based on the quality reputation of DGM in the medical field and the fact that
the member of DGM that is responsible for the product safety evaluations
("DEMKO") is a wholly owned subsidiary of Underwriters Laboratories, Inc. (UL).
We plan to work with UL to obtain approvals for the U.S. market. DGM has
provided us 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 -We believe 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.
Throughout the CTLM(TM) design process, we have made every effort to confirm
that it complies with all domestic and international safety standards. In this
manner, we are very much involved in the product safety evaluation and, although
we have not entered into contract with a NB for this purpose, it is in contact
with several regulatory agencies on a regular basis for guidance. We cannot
perform some of the evaluations, such as electrical magnetic compatibility
("EMC"), because those tests require costly equipment that is not cost effective
for us to purchase. There is also the consideration of new requirements, or new
interpretations of existing requirements, that may effect the CTLM(TM).
QUALITY ASSURANCE - Our current goal is to implement a full quality system at
our corporate offices. Our 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. Our QAM and the NB will need to
determine how much history is required for proper proof that the system is
adequate.
SOFTWARE EVALUATION - Our Software Manager heads the preparations for software
evaluation. 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, we have 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, we have completed a risk analysis for
the CTLM(TM) and are ready to proceed with the remainder of the documentation.
EFFICACY - Almost any market will require proof of the effectiveness of a
medical device. This is done by clinical trials and is a process that is the
same for the United States as for the EEA, however reporting methods may differ.
As we continue with clinical trials in the U. S., these efforts will also
benefit it in the EEA market.
SALES AND MARKETING
At present, our President is also the director of sales. As Director of Sales,
she is in charge 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 exists in both large and small hospitals and private clinics. The
international target market is large government and private hospitals.
<PAGE>
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
CTLMTM 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 CTLMTM, And the advantage of the CTLMTM over existing technology and
cancer detection methods. We have focused our efforts on establishing a presence
at major Breast Imaging Conferences that are held each year. Failure of our
products to gain market acceptance would have a material adverse effect on our
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 CTLMTM.
In order to market any products we may develop, a marketing and sales force with
technical expertise and distribution capability will have to be developed. There
can be no assurance that we will be able to establish sales and distribution
capabilities or that we will be successful in gaining market acceptance for any
products we may develop.
RELIANCE ON INTERNATIONAL SALES
The laws of certain European and Asian countries may permit us to begin
marketing the CTLM(TM) in Europe and Asia before marketing would be permitted in
the United States. See Item 1. "Business-Government Regulation". We intend to
commence international sales of the CTLM(TM) in Europe and Asia prior to
commencing commercial sales in the United States. Until we receive pre-market
approval from the FDA to market the CTLM(TM) in the United States, as to which
there can be no assurance, our revenues, if any, will be derived from sales to
international distributors. A significant portion of our 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 our 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 our 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 us.
In order for us to ship the CTLM(TM) outside of the United States, the following
information must be submitted to the FDA: (i) a complete description of the
device intended for export; (ii) the status of the device in the U.S.; (iii) a
letter from the appropriate foreign liaison (person with authority to sign a
letter of acceptance for the foreign government stating that (a) the device is
not in conflict with the laws for the country to which it is intended for
export; (b) the foreign government has full knowledge of the status of the
device in the U.S.; and (c) import is permitted or not objected to. The FDA
reviews export requests to determine that exportation of the device (1) is not
contrary to public health and safety and (2) has the approval of the country to
which it is intended for export. If the device meets the above criteria, it is
approved for export. See Item 6. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Cautionary Statements-Government
Regulation", "Business-Government Regulation" and "Business International
Distributors".
INTERNATIONAL DISTRIBUTORS
In January 1998, we 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) in the Republic of Turkey for a term of 18 months with an option to
renew for an additional one-year term. We believe that this alliance with Emtron
will give the CTLM(TM) tremendous exposure in the Republic of Turkey.
In April 1998, we entered into an exclusive International Distribution Agreement
with Focus Surgical LTD., to distribute the CTLM(TM) 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's(TM) 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 we obtain PMA
acceptance from the FDA. See Item 6. "Management's Discussion and Analysis of
<PAGE>
Financial Condition and Results of Operations-Cautionary Statements-Government
Regulation", "cCutionary Statements- 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.
In December 1998, we entered into distribution agreements with Consultronix and
Iberadac to distribute the CTLM(TM) throughout Poland and Portugal, and Spain,
respectively. The Agreements are for a term of 3 years, with a renewal option by
us for an additional ONE-YEAR, IF each distributor sells at least one CTLM(TM)
per year.
Consultronix was established in 1987 and employs 22 persons and markets medical
equipment throughout Poland in the field of OPHTHALMOLOGY, IMAGE DIAGNOSTIC, and
Urology. Iberadac distributes Radiology and Ultrasound equipment for Americare,
Capintec, Acuson and Fisher Imaging throughout Portugal and Spain.
We have already secured exclusive distributors as follows:
INTERNATIONAL DISTRIBUTORS BY COUNTRY
RENEWAL OPTION
COUNTRY TERM EXPIRATION BY THE COMPANY RENEWAL PERIOD
Australia 3 years 3/13/00 Yes 2 years
Austria 3 years 3/11/00 Yes 2 years
Belgium 1 year 2/9/2000 Yes 1 year
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
Holland 1 year 2/9/2000 Yes 1 year
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 12/31/00 Yes 2 years
Luxembourg 1 year 2/9/2000 Yes 1 year
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
Poland 3 years 12/3/02 Yes 1 year
Portugal 3 years 12/3/02 Yes 1 year
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
Spain 3 years 12/3/02 Yes 1 year
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
To date, we have not marketed, or generated revenues from the commercialization
of the CTLM(TM). Originally, we anticipated that the CTLM(TM) would be ready for
distribution in the summer of 1998. However, during the course of the clinical
trials, certain problems became evident, solutions to these problems had to be
found and adjustments had to be made to the CTLM(TM) to correct such problems.
Due to the delays in the Nassau County clinical investigational trials, we are
presently unable to project when the first distribution of the CTLM(TM) will
occur.
<PAGE>
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 our products by regulating the level
of reimbursement provided by such payors to the physicians and clinics utilizing
the CTLMTM or by refusing reimbursement. If examinations utilizing our products
were not reimbursed under these programs, our ability to sell our products may
be materially and/or adversely affected. There can be no assurance that
third-party payors will provide reimbursement for use of our 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
our 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, our 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 Item 6.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements- Limitation on Third Party Reimbursement;
Health Care Reform".
PRODUCT LIABILITY
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, and marketing of cancer detection products.
Significant litigation, not involving us, has occurred in the past based on the
allegations of false negative diagnoses of cancer. while the CTLMTM is being
developed as an adjunct to other diagnostic techniques, there can be no
assurance that we will not be subjected to future claims and potential
liability. Although the FDA does not require liability insurance and we did not
acquire it for the Strax or in-house clinical investigational trials, at
present, we carry $3,000,000 in product liability insurance at the request of
Nassau County, and will continue to carry it for all clinical testing and
subsequent distributors. See Item 6. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Cautionary Statements-Risk of
Product Liability".
COMPETITION
The medical device industry generally, and the cancer diagnostic imaging
segments in particular, are characterized by rapidly evolving technology-and
intense competition. Other companies in the medical device industry may be
developing, or could in the future attempt to develop, additional products that
are competitive with the CTLM(TM). The market in which we intend to participate
is highly competitive. Many of the companies in the cancer diagnostic and
screening markets have substantially greater technological, financial, research
and development, regulatory, manufacturing, human and marketing resources, and
experience than we do. Our competitors may succeed in developing or marketing
technologies and products that are more effective or less costly than ours, or
that would render our technology and products obsolete or noncompetitive. We may
not be able to compete against such competitors and potential competitors in
terms of manufacturing, marketing, and sales.
Largely, the CTLMTM will be competing with established imaging equipment such as
x-ray mammography equipment, ultrasound or high definition ultrasound systems,
Magnetic Resonance Imaging ("MRI") systems, thermography, diaphonography and
transilluminational devices. Physicians presently using these customary types of
imaging equipment may not use our products. Although we believe that our
products may offer certain technological advantages over our competitors'
currently-marketed products, earlier entrants in the market for a diagnostic
application often obtain and maintain significant market share relative to later
entrants.
Currently, mammography is employed widely and our ability to sell the CTLMTM to
medical facilities will, in part, be dependent on our ability to demonstrate the
clinical utility of the CTLMTM as an adjunct to mammography and physical
examination and our 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 "medical optical
<PAGE>
imaging" which is a shorthand description of the technology the CTLMTM 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
our CTLMTM 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 our business, financial condition, and results of operations.
PATENTS
The patent for the CTLMTM was issued in December 1997 under Patent Number
569251. The Patent has a total of 4 independent claims and 24 subordinate
claims. The independent claims serve to provide an overall outline of the
disclosure of the invention. The subordinate claims provide additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim. We own 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. Richard Grable, our Chief
Executive Officer, owns the patent. In addition, we have twelve additional
United States patents pending with regard to Optical Tomography, as follows:
U.S. PATENTS PENDING
<TABLE>
<CAPTION>
PCT APPL. FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
<S> <C> <C> <C> <C> <C> <C>
Yes Diagnostic Tomographic Laser Imaging 6356 08/484,904 6/7/95 5,692,511 12/2/97
(Electronics & Imaging)
Yes Diagnostic Tomographic Laser Imaging 6356-US 08/952,821 7/31/98 Pending
(Patient Support Structure) in addition
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Device for Determining the Contour of the 6558-1 08/965,148 11/6/97 Pending
of an Object Being Scanned
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Device for Determining the Perimeter of 6559-1 08/965,149 11/6/97 Pending
Surface of an Object Being Scanned and for
Limiting Reflection from the Object
<PAGE>
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Data Acquisition Technique 6570 60/032,592 11/29/96 Pending
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Data Acquisition Technique Using Wall Eye 6571 60/032,593 11/29/96 Pending
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Detector Array with Variable Amplifiers 6572-1 08/979,328 11/26/97 Pending
in a Laser Imaging Device
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Detector Array for Use in a Laser Imaging 6573-1 08/963,760 11/4/97 Pending
Apparatus
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Method for Reconstructing the Image of an 6574-1 08/979,624 11/28/97 Pending
Scanned with a Laser Imaging Apparatus
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Fluorescent Imaging 6585 60/036088 1/17/97 5,952,664 9/14/99
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Laser Imaging Apparatus Using Biomedical 6647 09/008,477 1/16/98 Pending
Markers That Bind to Cancer Cells
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Phantom for Optical and Magnetic Resonance 6648 09/096,521 6/12/98 Pending
Imaging Quality Control
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
Yes Time-Resolved Breast Imaging Device 6707 09/199,440 11/25/98 Pending
PCT APPL FOR CASE # SERIAL # FILING DATE PATENT # PATENT DATE
No Array Used as a Multiple-Detector 6825 60/118,745 2/5/99 Pending
</TABLE>
Neither Mr. Grable nor we hold foreign patents, however the table below sets
forth certain information with regard to the patents that have been applied for.
FOREIGN PATENT APPLICATIONS PENDING
<TABLE>
<CAPTION>
AUSTRALIA
<S> <C> <C> <C> <C> <C>
INV. DATE INVOICE# DESCRIPTION FOR INTL. APPL. # FILING DATE
12/29/97 C974248JD National Phase in Diagnostic Tomographic Laser PCT/US95/08225 7/10/95
of PCT Appl.
CANADA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
2/4/98 C984481JPD National Phase in Canada Diagnostic Tomographic Laser PCT/US95/08225 7/10/95
of PCT Appl.
CHINA
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
5/27/98 PM986040JD Chinese Patent Appl. Diagnostic Tomographic Laser PCT/US95/08225 7/10/95
EUROPEAN
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
1/28/98 C984270JD National Stage in Europe Diagnostic Tomographic Laser PCT/US95/08225 7/10/95
JAPAN
2/5/98 C984482JPD Natl. Phase in Japan Diagnostic Tomographic Laser PCT/US95/08225 7/10/95
of PCT Appl.
<PAGE>
MEXICO
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
9/2/98 C987553JD National Phase in Mexico Diagnostic Tomographic PCT/US95/08225 7/10/95
PCT COVERS EUROPEAN PATENT
INV. DATE INVOICE # DESCRIPTION FOR INTL. APPL. # FILING DATE
1/3/97 P970502JD PCT Appl. For RJG Diagnostic Tomographic PCT/US95/08225 7/10/95
2/19/98 C984498JPD PCT Intl. Appl. of IDSI Detector Array for Use in 97 951 435.3 11/28/97
2/19/98 C984497JPD PCT Intl. Appl. of IDSI Method for Reconstructing 97 954 133.1 11/28/97
Scanned with a Laser
3/18/98 C985531JPD PCT Intl. Appl. Of Wake, Device for Determining the PCT/US97/19615 11/7/97
Grable & Rohler of an Object Being Scanned
Reflection from the Object
5/13/98 C986209JPD PCT Intl. Appl. of IDSI Apparatus for Determining 97 948 135.5 11/7/97
1/20/99 C999316JD PCT Intl. Appl. of IDSI Time-Resolved Breast PCT/US98/24939 11/25/98
6/21/99 C990756JD PCT Intl. Appl. of RJG Laser Imaging Apparatus PCT/US99/04287 4/1/99
</TABLE>
We intend to file for patents on products, including the CTLM(TM), for which we
feel 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 we apply for will be issued, or that any patents issued will protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent infringement cases brought against it, it will
require substantial capital, the expenditure of which we might not be able to
afford. See Item 6. "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Cautionary Statements-Patents".
PATENT LICENSING AGREEMENT
BACKGROUND
In December of 1993, Richard Grable, Linda Grable, and Allan L. Schwartz (the
"Founders"), formed 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 our energy source and a 386
processor that was extremely slow. Once the technology became available to speed
up the processing, 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, we 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. Although
we had an understanding with Mr. Grable that we would have the exclusive license
for use of the Patent and Mr. Grable would be paid a royalty, the Patent was not
actually issued until December 1997. The amount to be paid for the license and
other terms and conditions of the license were never discussed and the exclusive
license for the patent was never memorialized in written form. 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 development royalty based on sales of
the device. In February 1995, pursuant to an amendment to his July 5, 1994
employment agreement (the "Employment Agreement") he was granted a development
royalty based on the net sales of the CTLM(TM). We still did not have a binding
<PAGE>
agreement with regard to our use of the Patent at that time. When Mr. Grable
filed the patent application in June of 1995, the Board instructed our General
Counsel to draft an Exclusive Patent License Agreement. Our prior General
Counsel was involved with funding agreements, Federal filings, employment
contracts and other legal issues, which are inherent to a development stage
Company and never prepared the Patent License Agreement and we did not realize
that a formal agreement had not been executed.
NEGOTIATIONS
In Sseptember 1997, we hired new general counsel. In her review of our records,
she discovered that no agreement for the use of the Patent had been executed and
apprised the Board of Directors of this fact that we had no binding agreement
for the use of the Patent. Since it was always the intent of Mr. Grable to grant
us an exclusive license to the Patent, a licensing agreement was negotiated. Our
General counsel represented us and Mr. Grable retained separate counsel for
himself. Mr. Schwartz negotiated the terms of the Patent License Agreement on
our behalf. We did not seek the services of a financial advisor to issue a
fairness opinion with regard to the Patent License.
Even though Mr. Schwartz and Mr. Grable are both founders of Imaging, we believe
that the parties negotiating the transaction were independent of each other and
on equal footing. Mr. Schwartz had full knowledge of the patent, had physically
seen the original prototype, Mammoscan, operate in May of 1990 and recognized
the CTLM's(TM) potential to generate revenues upon receiving FDA marketiNg
clearance.
Moreover, we believe that the terms of the Patent License Agreement are fair and
comparable to terms that would have been required by an unaffiliated third party
holding the Patent, given the same circumstances and conditions that existed at
the time the Patent License was negotiated. Our belief is based on the following
facts and circumstances;
An oral understanding with Mr. Grable already existed regarding the Patent
License.
A Royalty Agreement was already included in Mr. Grable's Employment
Agreement.
The negotiations were conducted to agree on the number of shares to be issued as
consideration for the Patent License, to modify the terms of the royalty, and
memorialize the agreed upon terms in a written contract.
We had expended substantial funds for the development of the CTLM(TM) and
technically had no legal right for its use.
Mr. Grable and mr. schwartz both had a fiduciary duty to our shareholders and us
to formalize, in writing, the oral agreement regarding the patent.
The value of the Patent to Imaging was determined by the preparation of a
confidential three year pro-forma statement of operations beginning with fiscal
year June 30, 1998 and ending with fiscal year ended June 30, 2000.
This statement reflected an average of $35,615,732 Net Revenues over the last
two fiscal years assuming that we received FDA marketing clearance in the latter
part of calendar 1998. Since all of the revenues and our existence were totally
dependent on Mr. Grable's patent, it was determined that a reasonable one-time
license fee would be 10% of that average over the two-year period. That amount,
$3,561,573 was approximately the value of the shares ultimately agreed upon by
both parties. Due to the delays in obtaining the new laser system, the delays in
the modification and redesign of the CTLM(TM) and the delay in the commencement
of tHe Nassau County clinical investigational trials, we are unable to determine
when we might anticipate FDA marketing clearance. Moreover, due to these delays,
we are unable to determine when we will begin to generate revenue.
The lack of a fairness opinion by a financial advisor did not affect the
decision of the board, due to the foregoing and because:
<PAGE>
Under Mr. Grable's guidance, the development of the CTLM(TM) was nearing
completion.
This situation placed Mr. Grable in better bargaining position, which
strengthened as the CTLM(TM) moved closer to being a marketable medical imaging
device.
FDA clinical trials were underway.
Three external clinical sites at hospitals in the United States were being
planned.
The Board believed that the transaction was fair.
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. We rejected that offer and continued negotiating.
After several offers and counter offers and several discussions, Mr. Grable
accepted a lesser number of shares (7,000,000) 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. Under Mr.
Grable's prior employment agreement, once we began to generate revenues, we were
contractually obligated to pay the development Royalties set forth below
pursuant to Mr. Grable's Employment Agreement. The Development Royalties expired
in July 1999 with the expiration and replacement of Mr. Grable's prior
employment agreement.
Pursuant to the License Royalty structure, the percentage of Royalties to be
paid is in a declining scale as opposed to the ascending scale for the
Development Royalties. Although the License Royalty structure is higher on every
level than the Development Royalty structure, we believe that in the long run it
is more advantageous for us to pay a higher Royalty and have the legal and
exclusive right to use the patent as opposed to being obligated to pay a lower
development Royalty pursuant to an Employment Agreement, with no right to the
Patent. Moreover, at the $10,000,000 plus level (the level which represents the
sale of approximately 29 machines per year) the difference in the Royalty
structure is only 1%. The following is a comparison of the Development and
License Royalty structures:
DEVELOPMENT ROYALTY STRUCTURE LICENSING ROYALTY STRUCTURE
GROSS SALES PERCENTAGE GROSS SALES PERCENTAGE
$0 to $999,999 2.5% $0 to $1,999,999 10%
$1,000,000 to $1,999,999 3% $2,000,000 to $3,999,999 9%
$2,000,000 to $3,999,999 3.5% $4,000,000 to $6,999,999 8%
$4,000,000 to $9,999,999 4% $7,000,000 to $9,999,999 7%
Greater than $10,000,000 5% Greater than $10,000,000 6%
AGREEMENT
In June 1998, we entered into a Patent Licensing Agreement with Mr. Grable.
Pursuant to the terms of the Patent Licensing Agreement, we were 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, we issued to Mr. Grable 3,500,000 shares of Common Stock and an
additional 3,500,000 shares in June 1999. The market price of the Shares at the
time of the 1999 issuance was $.54 per Share. In addition, we have agreed to pay
to Mr. Grable, a royalty based upon the net selling price (the dollar amount
earned from the sale, 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. During the second year of the Agreement, we
must pay a minimum cash royalty of $250,000 at the end of the second year. Mr.
Grable has deferred this minimum cash royalty until we commence sales and
delivery of CTLM(TM) systems.
The Board of Directors did not submit the matter for a shareholder's vote prior
to the execution of the Patent License Agreement or the issuance of the shares,
since the Florida Business Corporation Act did not require shareholder approval.
The Patent Licensing 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 our Common Stock,
reorganization, consolidation with or merger into, or sale or conveyance of all,
or substantially all of our assets to another corporation or any other similar
<PAGE>
event which serves to decrease the number of Shares issued pursuant to the
Patent Licensing Agreement. See Item 6. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Cautionary Statements-Possible
Conflict of Interest" and "Certain Transactions". The Patent has generated no
revenues to date. We had anticipated generating revenues in the fourth fiscal
quarter beginning April 1999. However, due to the developmental and clinical
investigational trial delays, it is unlikely that these projections will be met.
OEM AGREEMENT
In January 1998, we entered into an Original Equipment Manufacturer Agreement
(OEM) with Imation Corp. ("Imation"). In December 1998, Imation's medical
imaging business in North America, Latin America, and Asia was purchased by the
Eastman Kodak Company. Immediately after the purchase by Kodak, we received
correspondence from Kodak, which confirmed that our OEM agreement would not be
changed by the acquisition of Imation. At that time, we purchased a new Dry View
Imager, which was delivered on April 5, 1999. The additional Imation Dry View
Imager on loan to us as a demonstrator was shipped to Nassau County Medical
Center on April 7, 1999.
Pursuant to the OEM Agreement, we have 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 us the right to market the Dry View Technology
directly or indirectly through our Distributors. The DryView(TM) imagesetting
film is a hard-dot quality film that requires no chemical processing, which
traditional image processoRS require. It also eliminates the need for a dark
room. 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. We believe that the Dry View Technology will provide our end users
with the most efficient, economical, and ecological product in the medical
industry due to the fact that the processing procedure for the DryView(TM) does
not use chemicals therefore eliminating the possibility of environmental
contamination, the need for a dark room and the cost of chemical processing.
It was originally believed that the OEM agreement could provide us with
immediate revenues from the direct sale of the Dry View Technology. As a result
of local marketing efforts in the immediate market of South Florida, it was
quickly determined that the marketing of this product would not be cost
effective since we would be competing with Imation's (now Kodak's own sales
force) and others who have greater resources and personnel than us. Due to this
competition factor, we have not marketed any DryView to date and will use the
technology as a value-added option to the CTLM(TM) when sold.
NASDAQ LISTING
On March 24, 1996, we filed an application with Nasdaq to be listed on the Small
Cap Market. Our 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 our outside shareholders (the "Shareholder"), who had no
control or relationship with us, other than as a minority shareholder had
record-keeping that was not in compliance with NASD regulations in his
previously owned broker-dealer and owned a 5% interest in us.
As a result, we 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 our proposal..."
We in fact, did implement our 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. For the 36 trading day
period prior to the date of this article our stock traded at $3.00 and above.
The article had a predictable negative impact on our stock and the price dropped
below $3.00 and did not recover, despite a retraction from Barron's on April 7,
1997. See Item 5. "Market for Registrant's Common Equity. Based upon this
decline the Nasdaq staff refused to approve our application for listing. On July
7, 1999, our Common Stock closed at $.31.
<PAGE>
We 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 which stated, in part
that despite our argument, the Panel was of the opinion that we must satisfy the
$4.00 per share bid price requirement as well as all other requirements for
initial listing. The Panel noted that there were in excess of 25,000,000 total
shares outstanding, which it stated, would allow us to effect a reverse split
sufficient to raise the bid price above the $4.00 minimum. The Panel was of the
opinion that we were in compliance with the net tangible assets requirement,
however the Panel expressed concern relating to our ability to maintain
compliance with the $2,000,000 net tangible assets requirement over the long
term. The Panel granted our 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.
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 our shareholders and vetoed the proposal for the
reverse split. The conditional listing expired on May 11, 1998.
We immediately appealed this decision to the Nasdaq Listing and Hearing Review
Council (the "Council"). On May 19, 1998, we received the Decision of the
Council, which affirmed the decision of the Panel. The Council stated that:
"In making this decision, we find unpersuasive our 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."
We contend that this determination is incorrect as we 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 our
plan to insulate itself. We believe that the Panel's exception, which
appears to be within our 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 our stock to be
fairly priced in the market. We note that at the time of our
consideration, the bid price for our Common Stock was 1 1/16. This is well
below Nasdaq's initial inclusion standards".
The Council also agreed with the Panel's determination to require a heightened
net tangible assets requirement based upon our history of losses which have
increased on a quarterly basis.
On June 11, 1998, we 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 our initial inclusion. We contended that:
v 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 Committee in the first appeal.
v That we satisfied the listing requirement and this fact was so recognized in
the Committee's Decision in the first appeal. v 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 our stock declined
below the initial listing requirement (but remained well above the
maintenance requirement).
Based upon price deficiency alone, we were denied listing.
<PAGE>
On August 8, 1998, we filed our 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, we filed our Reply Memorandum to the Brief of the Nasdaq
Stock Market. On July 21, 1999, we received an Opinion of the Commission
dismissing our application for review. The Commission found that Nasdaq did not
exceed its authority by requiring us to:
Satisfy the $4.00 per share bid price requirement.
Satisfy all other requirements for initial listing.
Evidence a minimum of $5,000,000 in net tangible assets.
EMPLOYEES
As of the date of this Report, we have 31 full-time employees, including our
three executive officers. A majority of our employees (18) are employed in the
areas of scientific and product research and development. Our ability to provide
our services is dependent upon our recruiting, hiring and retaining qualified
technical personnel. To date, we have been able to recruit and retain sufficient
qualified personnel. None of our employees are represented by a labor union. We
have not experienced any work stoppages and consider our relations with our
employees to be good.
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel. Therefore, we have entered into employment agreements
with certain 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 our research
and development programs and to our business. Our anticipated growth and
expansion into areas and activities requiring additional expertise, such as
marketing, will require the addition of new management personnel. Competition
for qualified personnel is intense and there can be no assurance that we will be
able to continue to attract and retain qualified personnel necessary for the
development of our business. See. Item 9. "Directors, Executive Officers,
Promoters and Control Persons; and Compliance with Section 16(a) of the Exchange
Act".
YEAR 2000
We have reviewed and tested our existing computer systems and our 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. We have invested, and will continue to invest, in improving our
information technology infrastructure to ensure that such infrastructure is Year
2000 compliant. Our information technology system employs Microsoft Windows NT
4.0 Network on three file servers and fifty workstations. The CTLM(TM) and its
proprietary software comprise its non-information technology that is not date
dependent.
We have successfully implemented the systems and programming changes necessary
to address Year 2000 issues and have spent approximately $2,500 for third party
software upgrades and Microsoft Developers Network software ("MSDN"). The MSDN
software allows our computer programmers to update our software to Y2K
compliance by recompiling the source code. We renewed and will continue to renew
our subscription to MSDN annually. We do not track the internal costs of our
Year 2000 Compliance Plan. These costs are principally related payroll costs for
our computer-engineering group.
We have received the latest MSDN update from Microsoft and our software
engineers have recompiled all of the proprietary software used in the CTLM(TM).
Our proprietary software is now Y2K compliant.
We are dependent on the following software programs to conduct our business
operations:
Accounting: Peachtree Complete, release 6.0
Manufacturing: Alliance Manufacturing Software, Ver. 2.4a
Operating Systems: Windows NT 4.0 and Windows 95
Word Processor: Microsoft Office Professional 97
Database: Oracle7
The Peachtree Complete, Alliance Mfg., and the Oracle7 are Year 2000 compliant.
The Microsoft Windows NT 4.0 and Windows 95 are compliant with minor issues.
Office Professional 97 is compliant. We believe that these software programs are
Y2K compliant, however, there is a risk that some or all of these programs will
have minor Y2K issues. We have in place a disaster recovery plan to deal with
any software or hardware failure.
We have tested our servers and workstations for Y2K compliance. All of our
computers have Intel Pentium processors. During stand-alone tests, the computers
with Intel Pentium processors were Y2K compliant. Software has been purchased to
test and repair non-compliant systems. The testing and re-mediation by our
Computer System Support Engineer has been completed and we are, as of the date
of this report, Y2K compliant.
We have not fully determined the extent to which we may be impacted by third
parties' systems, which may not be Year 2000 compliant. While we have begun
efforts to seek reassurance from our suppliers, there can be no assurance that
the systems of other companies, whom we deal with, will be Year 2000 compliant.
Third parties' non-compliance could have an adverse effect on us. Failure of
third party vendors to deliver parts and components timely could materially
affect our ability to manufacture and deliver CTLM(TM) systemS. Because of this
potential risk, a checklist of Y2K compliant vendors and sub-contractors has
been compiled and we have begun to expand our vendor and sub-contractor base to
safeguard us against this uncertainty. Our Year 2000 Compliance Committee has
prepared a worst case Y2K scenario which estimates that Internet access will be
severely impaired, including the ability to send and receive e-mail, possible
difficulty in connecting our computer to remote clinical sites, and delays in
shipment and delivery of parts, components and finished goods. Overall fear and
confusion of the Y2K problem may temporarily impair many companies, even those
who are Y2K compliant.
We can fully function without the use of the Internet and e-mail. Clinical data
will be sent via overnight delivery from the clinical sites to us. Fear and
confusion will diminish in a few weeks as companies and individuals learn that
most companies are compliant and operating without any major problems. Delays in
shipping will be a minor inconvenience as we will have stockpiled critical parts
and components in anticipation of Y2K. We have a Disaster Recovery Plan in place
to deal with software and hardware failures. This plan provides that all
computer workstations are backed up on tape every night and a spare server is
ready to be installed upon failure of any server in service. All of our clinical
data is stored separately on a RAID-5 system. RAID (redundant array of
independent disks) is a way of storing the same data in different places (thus,
redundantly) on multiple hard disks.
ITEM 2. DESCRIPTION OF PROPERTY
Our facilities are located at 6531 N.W. 18th Court, Plantation, Florida. The
facilities are owned by us and comprise a 24,000-sq. ft. building located on a 5
acre landscaped tract. In April 1999, we placed a mortgage on our property in
connection with the issuance of a Convertible Debenture. See Item 6.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Uncertain Ability to Meet Capital Needs and
Sale of Unregistered Securities-Convertible Debenture". We believe that our
facility is adequate for our current and reasonably foreseeable future needs. We
will assemble the CTLM(TM) at our facility from hardware components that will be
made by vendors according to Company specifications. The softwaRE components of
the CTLM(TM) device are developed by us.
ITEM 3. LEGAL PROCEEDINGS
On July 10, 1997, we 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") and Irina Struganova. The complaint alleges that Kamalov, an
ex-employee of ours, violated his employment agreement with us while employed.
After terminating his employment with us he violated non-compete,
confidentiality, and invention covenants of his agreement. We believe that Dr.
Kamalov appropriated our propriety information and used Company time and
resources to develop technology, which he removed from our premises for his own
personal use after terminating his employment. In order to obtain and keep in
place a temporary injunction that prohibited him from using the technology and
the propriety information, we had to post two bonds for an aggregate of
$100,000. The technical aspects of the case were very complicated and the Court
lifted the restraining order. We appealed and lost. Dr. Kamalov threatened to
file a counterclaim. Due to the substantial legal expenses incurred and to be
incurred by us in proceeding with the litigation, the possible addition of a
counterclaim and the complicated technical aspects of the case, our litigation
counsel recommended that we settle the matter. We entered into a settlement in
December 1998. Pursuant to the settlement, Dr. Kamalov retained $90,000 of the
$100,000 bond and the remainder was returned to us.
On October 7, 1998 a lawsuit was filed against us in the United States District
Court, Southern District of New York, by the Series B Holders (Case No. 98 Civ.
086). We were served on October 19, 1998. The lawsuit alleges that we breached
the 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. In April 1999, the Series B Preferred Stock was
purchased from the Series B Holders by an unaffiliated third party, Charlton
Avenue LLC ("Charlton"). On April 6, 1999, we entered into a Subscription
Agreement with Charlton whereby we agreed to issue to Charlton 138 shares of our
Series I, 7% Convertible Preferred Stock. Our Board of Directors established the
value of the Series I Preferred at $10,000 per share. Consideration for the
subscription was paid as follows:
(1) Forgiveness of all of the interest due and payable in
connection with the Series B convertible Preferred Stock
(approximately $725,795).
(2) Settlement and dismissal, with prejudice, of all
litigation concerning the Series B convertible Preferred
Stock.
(3) Cancellation of 112,500 Warrants that were issued with the
Series B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to
impose a limitation on the owner(s) of the Series B
Convertible Preferred Stock to ownership of not more than
4.99% of our outstanding Common Stock at any one time.
On August 25, 1999 the Company was served with a civil suit by Andrew Abraham
Skolnick, which we believe to be without merit. Our attorneys have filed for an
extension in order to prepare a motion for dismissal.
We are not aware of any other material legal proceedings, pending or
contemplated, to which we are, or would be a party to or of which any of our
property is, or would be, the subject. See Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters-Sale of Unregistered
Securities-Preferred Stock-Series B".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We have not submitted any matters to a vote of Security Holders. As of the 3rd
day of December 1998, Austost Anstalt Schaan, Avalon Capital Ltd., Balmore Funds
S.A., Steven Cohen, Canadian Capital Fund Ltd., Dominion Capital Funds Ltd.,
Linda B. Grable, Richard J. Grable, Deborah O'Brien, The Malcolm Kanan Empire
Trust and Allan L. Schwartz, (collectively "the Majority Common Shareholders"),
and Goodland International Investment Ltd., Weyburn Overseas Limited, Austost
Anstalt Schaan and Balmore Funds S.A. (collectively "the Majority Preferred
Shareholders authorized by written action, our adoption of an amendment to our
Certificate of Incorporation, as amended, to increase the authorized Common
Stock from 48,000,000 shares to 100,000,000 shares (the "Written Action").
Taking into account such provisions, the Majority Common Shareholders and the
Majority Preferred Shareholders (collectively, "the Majority Shareholders") were
entitled to and voted the number of shares set forth opposite their names:
<TABLE>
<CAPTION>
NAME # OF COMMON % OF COMMON # OF PREFERRED % OF
SHARES SHARES SHARES PREFERRED
OUTSTANDING (1) SHARES
OUTSTANDING (2)
<S> <C> <C> <C> <C>
Austost Anstalt Schaan (4) 342,533 .9% 50 8.96%
Avalon Capital Ltd. 673,401 1.7%
Balmore Funds S.A.(5) 342,533 .9% 50 8.96%
Steven Cohen 396,700 1.0%
Canadian Capital Fund Ltd. 636,379 1.65%
Dominion Capital Funds Ltd. 1,334,996 3.5%
Goodland International
Investment Ltd. (3) 315 56.45%
Linda B. Grable 3,497,800 9.1%
Richard J. Grable 7,995,040 20.8%
Deborah O'Brien 287,000 .75%
Allan L. Schwartz 3,579,980 9.3%
The Malcolm Kanan Empire Trust 1,200,000 3.1%
Weyburn Overseas Limited (2) 135 24.19%
TOTAL 20,328,462 52.8% 550 98.56%
</TABLE>
1. This column sets forth the percentage of the total number of common shares
outstanding as of December 3, 1998 (38,510,399 shares), the date the final
written action was executed and presented to our Board of Directors. As of
October 11, 1999, there are 57,247,380 shares of Common Stock outstanding.
2. This column set forth the percentage of the total number of Preferred
Shares outstanding as of December 3, 1998 (558 Shares).
3. Everest Capital Limited, is the investment manager for Weyburn Overseas
Limited and Goodland International Investments, Ltd. Mr. John Malloy is the
Managing Director of Everest Capital Limited, a British Virgin Island
corporation.
4. Thomas Hackl and Peter Nakowitz are the Directors of and have voting
control over Austost Anstalt Schaan, a British Virgin Island corporation.
5. Francois Morax and Matityahu Kaniel are the Directors of and have voting
control over Balmore Funds S.A., a Liechtenstein corporation.
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. In
addition the voting rights provided to the Common Stock holders, 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, we are required to increase the number of authorized shares
to effect such conversion. Preferred Holders, pursuant to the Certificates, are
granted voting rights, and voted solely for the purpose of increasing the number
of authorized shares to accommodate the conversion of their preferred shares
into common shares. Due to the decrease in our stock price, we did not have an
adequate number of common shares authorized to meet our contractual obligations
with regard to the conversion of the Preferred Stock. In addition, the Amendment
will insure that there are a sufficient number of shares of Common Stock
available for issuance upon exercise of outstanding stock options and warrants
and enhance our ability to attract and retain qualified employees, consultants,
officers and directors by enabling us to create stock options, incentives and
rewards for their contributions to our success. Moreover, until such time as we
are able to generate revenues, we are dependent on equity or other financing to
continue operations. We will require substantial additional funds for our
research and development programs, pre-clinical and clinical testing, operating
expenses, regulatory processes and manufacturing and marketing programs.
The issuance of large amounts of Common Stock upon conversion of the preferred
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. As of the date of this Report, there are
57,247,380 shares outstanding. Based on the average bid and ask closing price of
our Common Stock as of October 11, 1999 ($0.109) approximately 41,574,279 shares
would be required to convert the Series B shares, approximately 1,866,667 shares
would be required to convert the Series G shares, approximately 6,965,174 shares
would be required to convert the Series H shares, approximately 16,739,447 would
be required to convert the Series I shares, approximately 21,227,559 shares
would be required to convert the Debenture and, although we are contractually
prohibited from doing so approximately 167,410,714 shares would be required to
draw down the entire Equity Line of Credit. In addition, approximately 4,890,921
shares would be required for the exercise of options and warrants. Based upon
the foregoing, as of October 11, 1999, we would need in excess of 318 million
authorized shares to effectuate all conversion, utilize the total Equity Line of
Credit and fulfill our remaining stock related obligations including the current
issued and outstanding shares.
On January 28, 1999, we filed a Definitive Information Statement with the
Securities and Exchange Commission (the "Commission") with regard to the Written
Action. The Written Action became effective on February 18, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ over-the-counter bulletin board market
under the symbol IMDS. There has been trading in our Common Stock since
September 20, 1994. The following table sets forth, for each of the fiscal
periods indicated, the high/low and low/low bid 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/LOW BID LOW/LOW BID
FISCAL YEAR 1996
September 1995 $1.69 $0.56
December 1995 $4.31 $0.56
March 1996 $8.00 $2.56
June 1996 $7.38 $2.50
FISCAL YEAR 1997
September 1996 $3.93 $2.25
March 1997 $4.00 $2.50
December 1996 $4.50 $1.44
June 1997 $3.06 $2.44
FISCAL YEAR 1998
September 1997 $2.69 $1.44
December 1997 $1.56 $0.60
March 1998 $1.23 $0.61
June 1998 $1.39 $0.40
FISCAL YEAR 1999
September 1998 $0.56 $0.21
December 1998 $1.00 $0.35
March 31, 1999 $0.59 $0.34
June 30, 1999 $0.47 $0.28
On October 11, 1999, the closing trade price of the Common Stock as reported on
the OTC Bulletin Board was $.112. As of such date, there were approximately 745
holders of record of our Common Stock.
SALE OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT OF PREFERRED STOCK
We have 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, we 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 Shares 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 our
Common Stock at the time of the sale of the Preferred to satisfy the Preferred
conversion requirements. Although our 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 we will continue to
seek capital through debt or equity financing which may include the issuance of
Convertible Preferred Stock whose rights and preferences are superior than those
of the Common Stock holders. We will endeavor to negotiate the best transaction
possible taking into account the impact on our shareholders, dilution, loss of
voting power and the possibility of a change of control. However, in order to
satisfy our working capital needs, we may be forced to issue convertible
securities with no limitations on conversion. In addition, the dividends on the
Preferred Stock affect the net losses applicable to shareholders. There are also
adjustments as a result of the calculation of the deemed Preferred Stock
dividends applicable because we have entered into contracts providing for
discounts on the Preferred Stock when it is converted. As a result of the
dividends on cumulative Preferred Stock, the net loss per common shareholder has
increased from $.07 per share for fiscal year ending June 30, 1998 to $.02 per
share for fiscal year ending June 30, 1999. The cumulative total is $.21 per
share.
In the event that we issue Preferred Stock without a limit on the number of
shares that can be issued upon conversion and the price of our Common Stock
decreases, the percentage of shares outstanding that will be held by preferred
holders upon conversion will increase accordingly. The lower the market price
the greater the number of shares to be issued to the preferred 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
Stockholders potential for increased share issuance and profit, including
profits derived from shorting our Common Stock, in addition to a stock overhang
of an undeterminable amount, may depress the price of our Common Stock. In
addition, the sale of a substantial amount of Preferred Stock to relatively few
holders could effectuate a possible change of control. Moreover, in the event of
a voluntary or involuntary liquidation of the Company while the Preferred Stock
is outstanding, the holders will be entitled to a preference in distribution of
our property available for distribution equal to $10,000 per share. The
following table summarizes certain information with regard to the Series B, D,
E, G, H, and I Preferred Shares as of October 11, 1999.
<TABLE>
<CAPTION>
SERIES/# OF COMMON CONVERSION # OF COMMON SHARES APPROX. PRICE OR # OF COMMON SHARES
<S> <C> <C> <C> <C> <C>
B/360 $4.70 $3.85 1,168,831 $.379 to $.1131 4,651,651 (2)
D/50 $1.22 $.915 546,448 $.2265 to $.495 1,717,134
E/54 $1.093 $.81975 658,737 $.29775 to $.77475 1,282,826
G/14 $.34 $.255 1,490,196 $.1519 to $.10875 1,805,731
H/49 $.56 $.42 2,571,429 $5025 to $.10875 2,784,230
I/138 $.38 $.285 4,842,105 N/A N/A
</TABLE>
(1) Approximate number estimated for the purpose of this table only.
(2) Represents conversion of 90 shares of Series B Preferred Stock. The
remaining 360 shares remain unconverted. The conversion notice for the
Series B Preferred Stock previously received by us has been cancelled by
the new Series B Holders. In addition, pursuant to the issuance of the
Series I Preferred to the Series B Holders the 1,542,877 shares that were
required to be issued pursuant to the dividend provision of the Series B
Preferred Shares have been forgiven..
(3) Represents conversion of 59 shares of Series H Preferred Stock. The
remaining 49 shares remain unconverted. As of October 11, 1999, 2,924,731
shares would be required to convert the Series H shares at the conversion
price of $.2325 per share.
SERIES B PREFERRED STOCK
In December 1996, we sold an aggregate of 450 shares of our Series B Convertible
Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas Limited
("Weyburn") and Goodland International Investment Ltd. ("Goodland") pursuant to
Regulation D. At the time the placement was concluded, the average bid and ask
price of our Common Stock was approximately $4.70 per share. Net proceeds to us
of $4,500,000 were used for working capital and the continuous research,
development and testing of our CTLM(TM). No fees were paid IN connection with
this offering.
We filed a Registration Statement on Form S-1 registering the shares underlying
the Series B Preferred. The shares were never converted and the registration
statement is no longer current. On September 4, 1998, we received a notice of
conversion from Weyburn and Goodland requesting the issuance of 4,559,846 and
10,639,642 shares of Common Stock, respectively. The conversion rate was 82% of
the average market price over a five-day period prior to conversion or
approximately $.35014 per share. 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 was due to the decline in the market price
of our Common Stock. We have the option to pay the accrued dividends in Common
Stock.
On October 7, 1998 a lawsuit was filed against us in the United States District
Court, Southern District of New York, by the Series B Holders (Case No. 98 Civ.
086). See Item 3 "Legal Proceedings". On April 6, 1999, the Series B Preferred
Stock was sold by the Series B Holders to Charlton Avenue, LLC (Charlton), an
unaffiliated third party with no prior relationship to us or the Series B
Holders. On April 6, 1999, we also entered into a Subscription Agreement with
Charlton whereby we agreed to issue to Charlton 138 shares of our Series I, 7%
Convertible Preferred Stock. Our Board of Directors established the value of the
Series I Preferred at $10,000 per share. Consideration for the subscription was
paid as follows:
(1) Forgiveness of all of the accrued interest due and payable
(approximately $725,795) in connection with the Series B
convertible Preferred Stock.
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible Preferred Stock and the
exchange of mutual releases.
(3) Cancellation of 112,500 Warrants that were issued with the
Series B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to
impose a limitation on the owner(s) of the Series B
Convertible Preferred Stock to ownership of not more than
4.99% of our outstanding Common Stock at any one time. The
Series B Preferred is convertible at 82% of the average bid
price for the five trading days immediately preceding
conversion and pays a premium of 7% per annum. As of the date
of this Report, 60 shares of Series B Preferred Stock have
been converted into 1,931,123 shares of Common Stock at a
conversion price of $.379 per share, 10 shares have been
converted into 620,155 shares of Common Stock at a conversion
price of $.16125, 3 shares have been converted into 547,409
shares of Common Stock at a conversion price of $.127875, and
17 shares have been converted into 1,552,964 shares of Common
Stock at a conversion price of $.1131 leaving a balance of 360
shares not yet converted.
SERIES C PREFERRED STOCK
On October 6, 1997, we 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 our
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 our
Common Stock at an exercise price of $1.63 per share and to purchase up to
50,000 warrants at an exercise price of $1.56. 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 our 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, without additional
consideration. Pursuant to the Subscription Agreement, the Series C Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock. Due to this contractual ownership limitation, the
Series C Preferred Shares were converted, in increments that, together with all
shares of our Common Stock held by the Holder, would not exceed 4.99% of our
outstanding Common Stock. The number of fully paid and non-assessable shares of
our Common Stock, no par value, issued upon conversion was determined by
dividing (i) the sum of $10,000 by (ii) the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion. The "Conversion
Price" was equal to seventy five percent (75%) of the Average Closing Price of
the Corporation's Common Stock for the five-day trading period ending on the day
prior to the date of conversion provided, however, in no event was the
Conversion Price to be greater than $1.222 per share.
Pursuant to the Regulation S Sale documents, we were also required to escrow an
aggregate of 3,435,583 shares of our 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 in the event
that Regulation S was amended prior the conversion of the Preferred Stock. This
right expired upon conversion.
In connection with this sale, we paid Settondown Capital International, Ltd., an
unaffiliated Investment Banker an aggregate of $220,500 for placement and legal
fees. Net proceeds to us of $1,879,500 were used for working capital and the
continuous research, development and testing of the CTLM(TM).
The Series C Preferred Stock was subsequently converted, in increments of less
than 4.9% of our outstanding shares, into an aggregate of 2,646,527 common
shares.
SERIES D PREFERRED STOCK
On January 9, 1998, we finalized the private placement to Avalon Capital Ltd. of
50 shares of our 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 our 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 our 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, without additional
consideration. Pursuant to the Subscription Agreement, the Series D Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock. Due to this contractual ownership limitation, the
Series D Preferred Shares were converted in increments that, together with all
shares of our Common Stock held by the Holder, would not exceed 4.99% of our
outstanding Common Stock. The number of fully paid and non-assessable shares of
our Common Stock, no par value, issued upon conversion was 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 were entitled to demand registration rights in the event that
Regulation S was amended prior the conversion of the Preferred Stock. This right
expired upon conversion.
In connection with the Regulation S Sale, we 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 us of $495,000
were used for working capital and the continuous research, development and
testing of the CTLM(TM). The Series D Preferred Stock was subsequently
converted, in incremenTS of less than 4.9% of our outstanding shares, into an
aggregate of 1,717,134 common shares.
SERIES E PREFERRED STOCK
On February 5, 1998, we finalized the private placement to Austost Anstalt
Schaan and Balmore Funds S.A. of 50 shares of our 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 our 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 our 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 without additional
consideration. Pursuant to the Subscription Agreement, the Series E Holder, or
any subsequent holder of the Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock. Due to this contractual ownership limitation, the
Series E Preferred Shares were converted, in increments that, together with all
shares of our Common Stock held by the Holder, would not exceed 4.99%. The
number of fully paid and non-assessable shares of our Common Stock, no par
value, issued upon conversion was 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 were entitled to demand
registration rights in the event that Regulation S was amended prior the
conversion of the Preferred Stock. This right expired upon conversion.
In connection with the Regulation S Sale, we 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 us of $495,000
were used for working capital and the continuous research, development and
testing of the CTLM(TM).
The Series E Preferred Stock was subsequently converted, in increments of less
than 4.9% of our outstanding shares, into an aggregate of 1,282,826 common
shares.
SERIES F PREFERRED STOCK
On February 20, 1998, we finalized a private placement to Dominion Capital Fund,
LTD and Canadian Advantage, LTD of 75 shares of our 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 our 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 were convertible, at any time, commencing May
15, 1998 and for a period of two years thereafter without additional
consideration. Pursuant to the Subscription Agreement, the Series F Holder, or
any subsequent holder of the F Preferred Shares, was prohibited from converting
any portion of the Preferred Stock which would result in the Holder being deemed
the beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock. Due to this contractual ownership limitation, the
Series F Preferred Shares were converted, in increments that, together with all
shares of our Common Stock held by the Holder, would not exceed 4.99% of our
outstanding Common Stock. The number of fully paid and non-assessable shares of
our Common Stock, issued upon conversion was 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 in the event that Regulation S was
amended prior the conversion of the Preferred Stock. Pursuant to these demand
rights the 1,971,375 shares of Common Stock issued upon the conversion of the
Series F Preferred are being registered on behalf of the Holders (the "Series F
Preferred Holders") pursuant to a Registration Statement on Form SB-2 (the
"Registration Statement").
In connection with the Regulation S Sale, we paid, Rolcan Finance, Ltd. an
aggregate of $50,000 for placement and legal fees. Net proceeds to us of
$700,000 were used for working capital and the continuous research, development
and testing of the CTLM(TM).
SERIES G PREFERRED STOCK
On March 17, 1999, we finalized a private placement to Amro International, S.A.,
Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd. of 35 shares of our
Series G Convertible Preferred Stock (the "Preferred Shares") at a purchase
price of $10,000 per share and two year Warrants to purchase 65,625 shares of
our Common Stock at an exercise price of $.50 per share. 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 our Common Stock was approximately
$.34 per share. In connection with the Regulation D Sale, we paid Settondown
Capital International, Ltd., and Libra Finance S.A., unaffiliated Investment
Bankers an aggregate of 3 shares of the Series G Preferred Stock for placement
and legal fees. Net proceeds to us of $350,000 will be used for working capital
and the continuous research, development and testing of the CTLM(TM).
The Series G Preferred has no dividend provisions. The number of fully paid and
non-assessable shares of Common Stock 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 (i) seventy-five percent (75%) discount
to the two lowest bids in a ten day period immediately preceding the conversion
date; or (ii) $.54. There is no floor on the conversion price and no time limits
on conversion. The shares can be converted at any time without additional
consideration. Pursuant to the Subscription Agreement, and Series G Designation,
the Series G Holder, or any subsequent holder of the Preferred Shares, is
prohibited from converting any portion of the Preferred Stock which would result
in the Holder being deemed the beneficial owner, in accordance with the
provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, of
4.99% or more of the then issued and outstanding Common Stock . Due to this
ownership limitation, the Series G Preferred Shares can only be converted in
increments that, together with all shares of our Common Stock held by the
Holder, would not exceed 4.99%. Pursuant to the terms of the Registration Rights
Agreement we were required to register 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. In the event that the Registration
Statement was not filed within 14 days from the closing or that it is not
declared effective within 60 days, we will be required to pay the Series G
Holders, as liquidated damages, for failure to have the Registration Statement
declared effective; and not as a penalty of three (3%) percent of the principal
amount of the Securities for each thirty (30) day period thereafter until we
procure registration of the Securities. In the event that the Registration
Statement is not declared effective within 120 days, the Series G Holders have
the right to force us to redeem the Series G Preferred at a redemption price of
120% of the face value of the Preferred. Pursuant to the Registration Rights
Agreement, 100% of that number of shares that would be required to be issued if
the G Preferred Stock were converted on the day before the filing of the
Registration Statement (1,634,409) are being registered on behalf of the
Holders.
Since the conversion price of the Series G 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 our Common Stock decreases, the
percentage of shares outstanding that will be held by the Series G Holders upon
conversion will increase accordingly. The lower the Average Price, the greater
the number of shares 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 our Common Stock.
In the event of a voluntary or involuntary liquidation while the Series G
Preferred is outstanding the holders are entitled to a preference in
distribution of our property available for distribution equal to $10,000 per
share.
As of the date of this Report, 22 shares of Series G Preferred Stock have been
converted into 1,805,731 shares of Common Stock at a conversion price range of
$.10875 to $.1519 per share.
SERIES H PREFERRED STOCK
On June 2, 1998, we finalized a private placement to Austost Anstalt Schaan and
Balmore Funds S.A. of 100 shares of our Series H Convertible Preferred Stock
(the "Preferred Shares") at a purchase price of $10,000 per share and 75,000 A
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 our Common Stock was approximately $.56 per share. In connection with the
Regulation D Sale, we 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 us of
$990,000 were used for working capital and the continuous research, development
and testing of the CTLM(TM).
The number of fully paid and non-assessable shares of Common Stock 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 the 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 at any time without
additional consideration. Pursuant to the Subscription Agreement, the Series H
Holder, or any subsequent holder of the Preferred Shares, is prohibited from
converting any portion of the Preferred Stock which would result in the Holder
being deemed the beneficial owner, in accordance with the provisions of Rule
13d-3 of the Securities Exchange Act of 1934, as amended, of 4.99% or more of
the then issued and outstanding Common Stock. Due to this contractual ownership
limitation, the Series H Preferred Shares can only be converted in increments
that, together with all shares of our Common Stock held by the Holder, would not
exceed 4.99%. Pursuant to the terms of the Registration Rights Agreement, as
amended, we have registered herein 100% of 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 (2,924,731 shares). We are 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, we are 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%) 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 we procure registration of the Securities. Pursuant to
the Registration Rights Agreement, liquidated damages of $169,000 have accrued
as of March 31, 1999. We are presently unable to comply with the liquidated
damage provision payment and no assurances can be given that it will be able to
do so in the future. On March 25, 1999, we issued 424,242 shares of restricted
Common Stock with registration rights to the Series H shareholders in lieu of
cash for liquidated damages through March 2, 1999. The value of these shares was
$140,000, leaving a balance of $29,000 due for liquidated damages through March
31, 1999. We have the option of paying the accrued dividends and liquidated
damages in Common Stock.
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 our 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 shares 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 our Common Stock.
In the event of a voluntarily or involuntarily liquidation while the Series H
Preferred is outstanding the holders are entitled to a preference in
distribution of our property available for distribution equal to $10,000 per
share.
As of the date of this Report, 5 shares, 35 shares, 5 shares, 5 shares, 5
shares and 4 shares of Series H Preferred Stock have been converted into
99,502, 1,190,476, 333,333, 333,333, 459,770 and 367,816 shares of Common Stock
at a conversion price of $.5025, $.21, $.15, $.15, $.10875, and $.10875 per
share, respectively.
SERIES I PREFERRED
On April 6, 1999, we also entered into a Subscription Agreement with Charlton
whereby we agreed to issue to Charlton 138 shares of our Series I, 7%
Convertible Preferred Stock. Our Board of Directors established the value of the
Series I Preferred at $10,000 per share. Consideration for the subscription was
paid as follows:
(1) Forgiveness of all of the interest due and payable
(approximately $725,795) in connection with the Series B
convertible Preferred Stock.
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible Preferred Stock and the
exchange of mutual releases.
(3) Cancellation of 112,500 Warrants that were issued with the
Series B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to
impose a limitation on the owner(s) of the Series B
Convertible Preferred Stock to ownership of not more than
4.99% of our outstanding Common Stock at any one time.
The Series I Preferred pay a 7% premium, to be paid in cash or freely trading
Common Stock in our sole discretion, at the time of each conversion. The number
of fully paid and non-assessable shares of Common Stock 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 seventy five percent (75%) of the
Average Closing Price of our Common Stock for the five-day trading period ending
on the day prior to the date of the conversion. The shares can be converted at
any time without additional consideration. Pursuant to the Series I Designation
and the Subscription Agreement, the Series I Holder, or any subsequent holder of
the Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, of 4.99% or more of the then issued and outstanding Common
Stock. Due to this contractual ownership limitation, the Series I Preferred
Shares can only be converted in increments that, together with all shares of our
Common Stock held by the Holder, would not exceed 4.99%.
Pursuant to the Registration Rights Agreement, 100% of that number of shares
that would be required to be issued if the I Preferred Stock were converted on
the day before the filing of the Registration Statement (5,935,484) are being
registered on behalf of the Holders.
Since the conversion price of the Series I 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 our Common Stock decreases, the
percentage of shares outstanding that will be held by the Series I Holders upon
conversion will increase accordingly. The lower the Average Price, the greater
the number of shares 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 our Common Stock.
In the event of a voluntarily or involuntarily liquidation while the Series I
Preferred is outstanding the holders are entitled to a preference in
distribution of our property available for distribution equal to $10,000 per
share.
The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of our Common Stock was
approximately $.39 per share.
As of the date of this Report, no shares of the Series I Preferred Stock have
been converted.
CONVERTIBLE DEBENTURE
We also entered into a Subscription Agreement with Charlton, pursuant to which
Charlton purchased a Convertible Debenture for $1,100,000. In addition, we may
draw down a second tranche in the amount of $825,000 anytime thirty (30) days
after the effective date of the Registration Statement as long as we maintain an
average closing bid price of $.45 for the ten (10) trading days immediately
prior to the date we request the second funding tranche. We may draw down a
third tranche in the amount of $825,000 anytime sixty (60) days after the
effective date of the Registration Statement as long as we maintain an average
closing bid price of $.45 for the ten (10) trading days immediately prior to the
date we request the third funding tranche. When concluded, assuming all the
conditions set forth above are met, the proceeds from the Debenture offering
will be $2,750,000.
The Debentures pay a 7% premium, to be paid at our sole discretion, in cash or
freely trading Common Stock at the time of each conversion and is secured by
mortgage on our corporate office building. The Debentures are subject to
automatic conversion at the end of two years from the date of issuance. The
Mortgage will be released after the Registration Statement covering the Common
Stock underlying the Debentures has been declared effective and upon the earlier
of (a) the day we qualify for listing on AMEX or NASDAQ, as long as said listing
requirements are not being met through a reverse split of our Common Stock or
(b) 180 days from the date the Company receives the third tranche, as described
above.
Pursuant to the Registration Rights Agreement, 100% of that number of shares
that would be required to be issued if the Debenture were converted on the day
before the filing of the Registration Statement (4,731,183 shares) are being
registered on behalf of the Holders.
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 seventy five percent (75%) of the Average Closing Price of
our Common Stock for the five-day trading period ending on the day prior to the
date of the conversion. The Debenture can be converted at any time without
additional consideration. Pursuant to the Subscription Agreement, the Debenture
Holder, or any subsequent holder of the Debenture, is prohibited from converting
any portion of the Debenture which would result in the Holder being deemed the
beneficial owner, in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued
and outstanding Common Stock of the Company. Due to this contractual ownership
limitation, the Debentures can only be converted in increments that, together
with all shares of our Common Stock held by the Holder, would not exceed 4.99%.
Since the conversion price of the Series I 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 our Common Stock decreases, the
percentage of shares outstanding that will be held by the Debenture Holders upon
conversion will increase accordingly. The lower the Average Price, the greater
the number of shares 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 our Common Stock.
In the event of a voluntary or involuntary liquidation of the Company while the
Debenture is outstanding the holders are entitled to a preference in
distribution of our property available for distribution equal to the Debentures
then outstanding principal and interest and will be able to foreclose against
the Mortgage.
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 our Common Stock was
approximately $.39 per share.
The proceeds from the sale of the Debenture ($1,100,000) and subsequent tranches
of $915,000 totaling $2,015,000 will be used for clinical investigational trial
expenses and working capital. As of the date of this Report, no portion of the
Convertible Debenture has been converted.
PRIVATE PLACEMENT OF COMMON STOCK
In August 1998, the Company sold 200,000 shares of restricted Common Stock to
Frank Giambroni, an unaffiliated third party, pursuant to Regulation D for an
aggregate purchase price of $60,000. No placement fee was paid in connection
with this offering. Net proceeds of $59,990 were used to pay the salaries of our
non-executive employees. At the time the placement was concluded, the average
bid and ask price of our Common Stock was approximately $.28 per share. These
shares are subsequently being registered herein.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of Common Stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. These Shares are included in the
Registration Statement. At the time the sale occurred, the average bid and ask
price of our Common Stock was $.595. The Note bears interest at the rate of 12%
per annum. The Note is personally guaranteed by Linda B. Grable, our President.
The repayment of the Note, which was originally due on October 2, 1998 was
extended three times and now due August 2, 1999. We have not received a notice
of default in connection with this Note. In connection with the sale, the
Company paid the sum of $23,000 to Manchester Asset Management, Ltd., an
unaffiliated third party, as a placement fee. Net proceeds of $227,000 were used
as follows: (i) salaries ($21,849-executive officers and $62,447-employees) (ii)
machinery and equipment $5,959; (iii) operating expenses ($55,240-inventory
parts and assemblies, employee health insurance, workers comp. and property
insurance) and (iv) working capital $82,000). Pursuant to the terms of the Note
the principal and interest is payable in cash, however the Company may try to
negotiate repayment in Common Stock. The Company intends to repay the note
either from the Debenture or other equity and/or debt financing or by the
issuance of additional securities.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of Common Stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. These Shares are included in the Registration Statement. No placement
fee was paid in connection with this offering, however the Company did issue
5,000 shares of Common Stock to Goldstein, Goldstein and Reis LLC, an
unaffiliated third party, as payment for the attorneys fees incurred by the
Purchaser pursuant to the offering. At the time the placement was concluded, the
average bid and ask price of our 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, was extended three times and is now due August
2, 1999. We have not received a notice of default in connection with the Note.
The Note is personally guaranteed by Linda B. Grable, our President. Net
proceeds of $100,000 were used as follows: (i) salaries ($21,849-executive
officers and $62,448-employees) and (ii) working capital $15,703. Pursuant to
the terms of the Note the principal and interest is payable in cash, however the
Company may try to negotiate repayment in Common Stock. The Company intends to
repay the note either from the Debenture or other equity and/or debt financing
or by the issuance of additional securities.
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of Common Stock, to GCA Strategic Investment Fund Ltd.,
an unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $210,000. These Shares are included in the Registration Statement. At
the time the placement was concluded, the average bid and ask price of our
Common Stock was approximately $.43 per share. The Note bore interest at the
rate of 12% per annum and was personally guaranteed by Linda B. Grable, our
President. In connection with the sale, the Company paid the sum of $23,000 to
LKB Financial LLC, an unaffiliated third party, as a placement fee. Net proceeds
of $100,000 were used as follows: (i) salaries ($21,849-executive officers and
$62,448-employees) and (ii) working capital $15,703. The Note, and all accrued
interest, was paid in January 1999. The officers of the Company provided the
payment for this loan through the sale of a portion of their shares of our
Common Stock.
In November 1998, we issued 286,000 shares of Common Stock as partial
consideration for a $115,000 aggregate loan to the Company by Deborah O'Brien,
an employee. At the time the loan was concluded, the average bid and ask price
of our Common Stock was approximately $.625 per share. We are also obligated to
repay the lender the sum of $50,000.00. In January 1999, we issued a Note
evidencing this indebtedness. The Note bears interest at the rate of 7% per
annum and is due and payable upon demand. Net proceeds OF $115,000 WERE USED AS
follows: (i) salaries ($21,849-executive officers and $62,447-employees) (ii)
operating expenses ($16,345-inventory parts and assemblies, employee health
insurance, workers comp. and property insurance) and (iv) working capital
($14,359). We were also obligated to repay the lender the sum of $50,000.00. On
April 8, 1999, the company paid the balance due on the loan of $47,396 to the
lender. These Shares are included in the Registration Statement.
ISSUANCE OF STOCK FOR SERVICES
The Company from time to time, has and may continue to issue stock for services
performed and to be performed by consultants, all of which have been
unaffiliated. The consultants provided the following consulting services
pursuant to their Consulting Agreements.
Legal-General Counseling.
Legal-Litigation Counseling.
Investor Relations-Introducing the Company and our emerging technology
to stockbrokers and the investment community.
Shareholder Relations-Keeping shareholders informed of new
developments.
Public Relations-Creating public awareness of the Company and our
emerging technology to the public through print and electronic media.
Product Planning & Feasibility-Research into all aspects of product
planning and our acceptance into the medical imaging marketplace.
Clinical Site Consulting-Selection and introduction to potential
clinical sites.
Design Consulting-Design and feasibility of components for the
CTLM(TM).
SEC Filing and Compliance-Filing and compliance consultation.
Engineering-Mechanical engineering and prototype development.
Video Production Consultant-Script writing and production consultation.
Since we have generated no revenues to date, our ability to obtain and retain
consultants may be dependent on our ability to issue stock for services in lieu
of cash payment. Since 1996, we have issued an aggregate of 1,806,500 shares of
Common Stock to independent consultants pursuant to Registration Statements on
Form S-8. The aggregate fair market value of the shares was $2,327,151. 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.
FINANCING/EQUITY LINE OF CREDIT
The Company will require substantial additional funds for our research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. Our capital
requirements will depend on numerous factors, including the progress of our
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
our existing research, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish. Moreover, our 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.
On November 20, 1998, the Company finalized a $15 Million, three year, Equity
Line of Credit Agreement, whereby the Company, as it deems necessary, may raise
capital through the sale of our Common Stock to Austost Anstalt Schaan and
Balmore Funds S.A., which represent a consortium of prominent European banking
institutions (the "Investors"). Austost Anstalt Schaan and Balmore Funds S.A.
will be deemed the beneficial owners of the shares.
Pursuant to the Equity Line of Credit Agreement, the Company may, but is not
obligated to, sell to the Investors shares of our Common Stock at a purchase
price of 80% of the market price if the shares are traded on the OTC Bulletin
Board and 85% of the market price if traded on Nasdaq Small Cap Stock Market or
American Stock Exchange. As of October 11, 1999, based on the closing price on
that date of $.112, 167,410,714 shares of Common Stock would have to be issued
in order to completely utilize the Equity Line of Credit. However, if the
Company utilizes the Equity Line of Credit, it intends to do so over a period of
three years, at times that are as advantageous as possible to the Company. It
addition, the limitations set forth below would prohibit the Company from
utilizing the entire Line of Credit at one time.
The Investors are committed, subject to certain limitations discussed below, to
purchase that number of shares noticed for sale by the Company (the "Put
Notice"), however the maximum amounts that the Company can require the Investor
to purchase at any one time are indicated in the table below opposite the
heading Closing Price (the range in which the Closing Price is on the date the
Company elects to exercise our right to tender a notice of sale to the
Investors, referred to as the "Put Date") and below the heading 30 Day Average
Daily Trading Volume (the range of the trading volume of our Common Stock for
the thirty day trading period prior to the Put Date).
<TABLE>
<CAPTION>
30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG. 30-DAY AVG.
<S> <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 the Company elects to
exercise our right to tender a notice requiring the Investors to purchase shares
of our Common Stock.
The Investors obligations under the Equity Line of Credit are contingent upon
any effect on the business, Bid Price, trading volume of the Common Stock,
operations, properties, prospects, results of operations, or financial condition
of the Company that is material and adverse to the Company and our subsidiaries
and affiliates, individually, or taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of our obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, or the
Warrants in any material respect.
The right of the Company to deliver a Put Notice and the obligation of the
Investors hereunder to acquire and pay for the Put Shares is subject to the
normal and customary contract representations and warranties, breach of contract
provisions and the following conditions:
1. The Company shall have filed with the SEC a Registration Statement with
respect to the resale of at least that amount of Common Stock contained in the
Put Notice (the "Securities").
2. The Registration Statement shall have previously become effective and shall
remain effective until the Securities are sold or until two years from the date
of issuance and (i) no notice has been received that the SEC has issued or
intends to issue a stop order or that the SEC otherwise has suspended or
withdrawn the effectiveness of the Registration Statement, either temporarily or
permanently, or intends or has threatened to do so (unless the SEC's concerns
have been addressed and the Investors are reasonably satisfied that the SEC no
longer is considering or intends to take such action), and (ii) no other
suspension of the use or withdrawal of the effectiveness of the Registration
Statement or related prospectus shall exist. The Registration Statement must be
declared effective by the SEC prior to the first and each subsequent Put Date.
3. The Company shall have obtained all permits and qualifications required by
any state for the offer and sale of the Put Shares, or shall have the
availability of exemptions therefrom. The sale and issuance of the Put Shares
shall be legally permitted by all laws and regulations to which we are subject.
4. No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction that prohibits or directly and
adversely affects any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement.
5. Since the date of the Equity Line of Credit Agreement, no event has had or is
reasonably likely to have a material adverse effect on the Company and our
operations has occurred.
6. The trading of our Common Stock has not been suspended, and the Common Stock
has not been de-listed or threatened by de-listing, and the issuance of the
Securities to the Investors shall not violate the shareholder approval
requirements of the OTC Bulletin Board, the Nasdaq Small-Cap Market, or the
American Stock Exchange, as applicable.
7. The number of Put Shares to be purchased by each Investor will not exceed the
number of such shares which, when aggregated with all other shares of Common
Stock then owned by such Investor beneficially or deemed beneficially owned by
such Investor, would result in any Investor owning more than 4.99% of all of
such Common Stock as would be outstanding on such Closing Date, as determined in
accordance with Rule 13d-3 of the Exchange Act and the regulations promulgated
thereunder.
8. The closing bid price of our Common Stock must equal or exceed $.50 per share
for the six day period commencing three (3) trading days immediately preceding
the Put Notice, the trading day the Put Notice is deemed delivered and the two
trading days immediately following the Trading Day on which a Put Notice is
deemed to be delivered.
9. The average trading volume for the Common Stock over the previous thirty
trading days must exceed 25,000 shares per Trading Day.
The Investors, as holders of Common Stock, shall have the same rights as all
other holders of 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 non-assessable.
Although the equity line of credit is in place, the Company and the investors
will have to amend the agreement to provide for a draw down and issuance of the
Common Stock pursuant to Regulation D and then registration of the shares or the
Company will have to file a shelf registration, if such registration is
available to the Company at the time that it intends to use the equity line of
credit.
Although no assurances can be made, the Company anticipates that it will need
approximately $9,000,000, in addition to our present capital requirements, 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 or if the Equity Line is
unavailable due to the price of our Common Stock or we are unable to comply with
the registration provision, we may seek additional funding through public or
private financing, collaboration, licensing and other arrangements with
corporate partners. See Item 6. "Management's Discussion and Analysis of
Financial Discussion" and Results of Operations and "Financial Statements".
If we utilize 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
us from implementing our business strategy or may require us to delay, scale
back, or eliminate certain research and product development programs or to
license to third parties rights to commercialize products or technologies that
we would otherwise seek to develop ourselves.
In connection with the Equity Line of Credit Agreement, we issued 25,000 shares
of Common Stock to Goldstein, Goldstein and Reis LLC, an unaffiliated third
party, as payment for the attorney fees incurred by the Equity Line funders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth below should be read in conjunction with our Financial
Statements and the Notes thereto, included elsewhere in this Report.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998.
General and administrative expenses in the aggregate during the twelve months
ended June 30, 1999, were $4,002,054 representing a decrease of $476,001 from
$4,478,055 during the twelve months ended June 30, 1998. General and
administrative expenses in the aggregate are derived from deducting compensation
and related benefits, research and development expenses, depreciation and
amortization and adding interest income to the net loss as presented on the
Statement of Operations. The decrease is due primarily to a reduction in the
costs of hiring outside consultants, attorneys and advertising. Selling, general
and administrative expenses during the twelve months ended June 30, 1999, were
$385,824 representing a decrease of $10,928 from $396,752 during the twelve
months ended June 30, 1998.
Compensation and related benefits during the twelve months ended June 30, 1999,
were $2,421,796 representing an increase of $434,692 from $1,987,104 during the
twelve months ended June 30, 1998. The increase in compensation is due to the
hiring of an additional software engineer, a medical physicist and a clinical
application specialist required for the clinical investigational trials.
Research and development expenses during the twelve months ended June 30, 1999,
were $71,508 representing a decrease of $183,214 from $254,722 during the twelve
months ended June 30, 1998. This decrease is due primarily to finalizing certain
components of the CTLMTM.
Advertising and promotion expenses during the twelve months ended June 30, 1999,
were $27,273 representing a decrease of $302,173 from $329,446 during the twelve
months ended June 30, 1998. The decrease was due primarily to the reduction of
advertising in domestic and foreign medical imaging and medical device
publications.
Consulting expenses during the twelve months ended June 30, 1999, were $89,637
representing a decrease of $1,131,039 from $1,220,676 during the twelve months
ended June 30, 1998. The decrease was due primarily to the elimination of
outside consultants needed for special non-recurring projects required prior to
placing CTLM(TM) units into clinical trials.
Insurance costs during the twelve months ended June 30, 1999, were $172,416
representing an increase of $9,867 from $162,549 during the twelve months ended
June 30, 1998. The increase was due primarily to additional premiums for
Workers' Comp., Health Insurance, and Property and Casualty Insurance.
Professional expenses during the twelve months ended June 30, 1999, were
$292,828 representing a decrease of $161,902 from $454,730 during the twelve
months ended June 30, 1998. The decrease was due primarily to reduced legal
expenses. See Item 3. "Legal Proceedings".
Stockholder expenses during the twelve months ended June 30, 1999, were $65,165
representing a decrease of $10,443 from $75,608 during the twelve months ended
June 30, 1998. The decrease was due primarily to a reduction in mailings to
stockholders.
Trade show expenses during the twelve months ended June 30, 1999, were $151,403
representing a decrease of $64,779 from $216,182 during the twelve months ended
June 30, 1998. The decrease is due to attending fewer trade shows and making no
changes to the exhibit for the 1998 Radiological Society of North America's 84th
Scientific Assembly and Annual Meeting in Chicago, IL.
Travel and subsistence costs during the twelve months ended June 30, 1999, were
$111,361 representing a decrease of $198 from $111,559 during the twelve months
ended June 30, 1998. This decrease was primarily due to reduced travel and
housing expenses for consultants.
Rent expense during the twelve months ended June 30, 1999, was $28,808
representing an increase of $2,595 from $26,213 during the twelve months ended
June 30, 1998. This increase was primarily due to the rental of certain test
equipment.
Interest expense during the twelve months ended June 30, 1999, was $688,644
representing an increase of $633,101 from $55,543 during the twelve months ended
June 30, 1998. The increase was due to interest paid on short-term loans used
for working capital for the Company and the deemed interest recorded on the
issuance of the Convertible Debenture.
Loan placement expenses and fees during the twelve months ended June 30, 1999,
were $201,494 representing an increase of $201,494 from $-0- during the twelve
months ended June 30, 1998. The increase was due to expenses and fees associated
with arranging short-term loans used for working capital for the Company.
Depreciation and amortization expenses during the twelve months ended June 30,
1999, were $312,956 representing an increase of $28,990 from $283,966 during the
twelve-month period ended June 30, 1998. This increase is due primarily to the
depreciation associated with the purchase of additional laboratory equipment and
manufacturing fixtures.
Liquidated damage costs during the twelve months ended June 30, 1999, were
$260,000 representing an increase of $260,000 from $-0- during the twelve months
ended June 30, 1998. The increase was due our technical default of the
Registration Rights Agreement regarding the Series H Cv. Preferred Stock. We
were required to have the Registration Statement be declared effective by
October 2, 1998. We paid the Series H Holders in stock, the liquidated damages
due under the Registration Rights Agreement.
Interest income during the twelve months ended June 30, 1999, was $1,120
representing a decrease of $21,017 from $22,137 during the twelve months ended
June 30, 1998. This decrease was due to a decrease of funds invested by the
Company.
Dividends on cumulative Preferred Stock from discount at issuance during the
twelve months ended June 30, 1999, were $619,974 representing a decrease of
$1,121,041 from $1,741,015 during the twelve-month period ended June 30, 1998.
This decrease is due primarily to the reduction of the issuance of additional
series of cumulative Preferred Stock with conversion features below market
value.
Dividends on cumulative Preferred Stock earned during the twelve months ended
June 30, 1999, were $329,176 representing an increase of $14,176 from $315,000
during the twelve-month period ended June 30, 1998. This increase is due
primarily to the additional accrued dividends on the Series B cumulative
Preferred Stock.
BALANCE SHEET DATA
We have financed our operations since inception by the issuance of equity
securities with aggregate net proceeds of approximately $18,310,670 and through
non-affiliate net loan transactions in the aggregate amount of $2,154,731.
During Fiscal 1999, we received net proceeds of approximately $380,000 from the
private placement of our Series G Convertible Preferred Stock and $1,100,000
through the issuance of a Convertible Debenture pursuant to Regulation D and
Section 4(2) of the Securities Act of 1933, as amended.
Our combined cash and cash equivalents totaled $70,037 at June 30, 1999,
representing a decrease of $240,079 from $310,116 at June 30, 1998. The decrease
in cash and cash equivalents is due to continuing operations.
The Company does not expect to generate a positive internal cash flow for at
least the next several years due to the expected increase in spending for
research and development and the expected costs of commercializing our initial
product, the CTLM(TM).
Our inventory totaled $3,698,343 at June 30, 1999, and $3,214,045 at June 30,
1998. Our property and equipment, net, totaled $2,707,994 at June 30, 1999 and
$2,920,980 at June 30, 1998. This decrease is due to depreciation and retirement
of certain equipment.
LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company andour continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate an
internal cash flow, and, until we begin to market and sell the CTLM(TM), we are
totally dependent upon debt and equity funding. In tHE event that we are unable
to obtain debt or equity financing or are unable to obtain such financing on
terms and conditions acceptable to us, we may have to cease or severely curtail
our operations. This would materially impact our ability to continue as a going
concern.
We have financed our 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 1999 was
$3,699,728 primarily due to our purchase of materials to continue the
manufacture of five (5) CTLM(TM) Breast Imaging Systems and the hiring OF four
additional employees, compared to net cash used by operating activities of
research and development of the CTLM(TM) and relatED software development of
$3,540,001 in fiscal 1998. At June 30, 1999, the Company had a working capital
of $487,774 compared to a working capital of $(257,166) at June 30, 1998. The
Company has revised its estimated annual fixed commitment from $8.8 million to
4.2 million, of which $2.6 million will be required to complete FDA clinical
trials through PMA submission and to prepare for the manufacture of the
CTLM(TM). Although no assurances can be made, we anticipate that we will need
approximately $9 million over the next two year period to complete all necessary
stages in order to enable us to market the CTLM(TM) in the United States and
foreign countries. SubstantialLY all of the $9 million will be used to purchase
inventory, sub-contracted components, tooling, manufacturing templates and
non-recurring engineering costs associated with preparation for full capacity
manufacturing and assembly.
On May 27, 1998, we entered into an irrevocable commitment with a consortium of
prominent banking institutions to invest up to $15 million in the Company over
the next three years. A formal Equity Line of Credit Agreement was to be
drafted, reviewed, and executed at a later date. On May 28, 1998, we issued a
press release announcing the $15 million commitment. In this press release we
also stated that this financing would eliminate our financial concerns and allow
us to focus strictly on bringing the world's first laser based mammography
system to market. The foregoing statements, which were made in the May 28th
announcement, are no longer accurate because we were unable to draw on the
equity credit line. Due to the unavailability of the principals of the
investors, the workload of the investors' attorney and the time and effort spent
by us in filing the Information Statement and Registration Statement, the formal
Equity Line of Credit Agreement was delayed. During this time the price of our
stock declined from $.54 on May 27, 1998 to $.26 on August 27, 1998. As a result
of the stock price decline, we could not utilize the Equity Line because the
stock price was below the minimum price at which the banking institutions are
required to purchase our equity securities. Moreover, due to the stock price
decline, we had to increase our number of authorized shares in order to have
shares available for the conversion of the Series B and other preferred shares.
The increase in shares required an information statement filing with the
Securities and Exchange Commission. Since we already had a commitment for the
equity line of credit and could not utilize the equity line due to the stock
price decline and the need for additional shares, we centered our time, efforts
and resources on the Information Statement and Registration Statement and the
Equity Agreement was not finalized until November 20, 1998. Although the equity
line of credit is in place, we are unable to utilize it at the present time due
to; (i) the price of our Common Stock is now trading below the $.50 required
closing price; (ii) the Company and the investors will have to amend the
agreement to provide for a draw down and issuance of the Common Stock pursuant
to Regulation D and then registration of the shares; or (iii) the Company will
have to file a shelf registration, if the such registration is available to the
Company at the time that it intends to use the equity line of credit.
"Sale of Unregistered Securities-Financing/Equity Line of Credit.
During fiscal 1999, we were able to raise a total of $564,464 less expenses
through Regulation D transactions. We will continue to seek equity or debt
financing in order to meet our working capital needs. We do 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 our initial product, the CTLM(TM). We will
require additional funds for our research and development, clinical testinG,
operating expenses, Food and Drug Administration regulatory processes, and
manufacturing and marketing programs. Accordingly, we will be required to raise
additional funds prior to the end of calendar year 1999 in order to continue
operations. We plan 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 our 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.
No assurances, however, can be given that future financing would be available or
if available, that it could be obtained at terms satisfactory to us. Our ability
to effectuate our plan of and continue operations is dependent on our ability to
raise capital, structure a profitable business, and generate revenues. If our
working capital were insufficient to fund our operations, it would have to
explore additional sources of financing. Although we have a firm commitment for
a $15 million Equity line of Credit, we must first register the shares to be
issued pursuant to the credit line. At present, we have no plans to register
such shares, but may do so in the future. Item 5. "Market For Registrant's
Common Equity And Related Stockholder Matters-Sale of Unregistered
Stock-Financing/Equity Line of Credit".
Capital expenditures for the fiscal 1999 were approximately $64,423 as compared
to approximately $115,738 for fiscal 1998. These expenditures were a direct
result of purchases of computer and other equipment, office, warehouse and
manufacturing fixtures, trade show equipment, computer software, laboratory
equipment, and other fixed assets. We anticipate that our capital expenditures
for fiscal 2000 will be approximately $100,000.
During the year ending June 30, 1999 we signed a Subscription Agreement for a
Convertible Debenture and borrowed from officers and other third parties. We had
no outstanding bank loans as of June 30, 1999. Our annual fixed commitments,
including salaries and fees for current employees and consultants, rent,
payments under license agreements and other contractual commitments were
previously estimated to be approximately $8.8 million, as of the date of this
report we have revised the annual fixed commitment to be $4.2 million. We
anticipate that this commitment is likely to increase as additional agreements
are entered into and additional personnel are retained. We will require
substantial additional funds for our research and development programs,
pre-clinical and clinical investigational studies, operating expenses,
regulatory processes, and manufacturing and marketing programs, which are
presently estimated at approximately $500,000. The foregoing projections are
subject to many conditions most of which are beyond our control. Our future
capital requirements will depend on many factors, including the following: the
progress of our research and development projects; the progress of pre-clinical
and clinical testing; the time and cost involved 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; changes and developments in our existing collaborative,
licensing and other relationships and the terms of any new collaborative,
licensing and other arrangements that we may establish; and the development of
commercialization activities and arrangements. We do not expect to generate a
positive internal cash flow for at least several years due to expected increases
in capital expenditures, working capital and ongoing losses, including the
expected cost of commercializing the CTLM(TM). We do not haVE sufficient cash to
fund our operations until the end of the fiscal year ending June 30, 2000 and
therefore will require additional funding through private debt or equity
financing, or collaborative licensing or other arrangements with strategic
partners. There can be no assurance that such financing can be obtained or, if
it is obtained, that the terms thereof will be acceptable. We plan to continue
our policy of investing excess funds, if any, in a daily cash management account
at First Union National Bank.
We entered into an agreement with The Hawke Group to provide financial public
relations from October 15, 1997 to April 15, 1998. As part of their financial
public relations engagement, The Hawke Group requested pro-forma projections for
their Stock Highlights page. The Company furnished estimated revenues and
pre-tax income in October 1997. The projections were based on statistics
published in Diagnostic Imaging, an imaging trade journal, and our estimate of
the number of CTLM(TM) Systems that could be sold. IN October 1997, the Company
believed it could capture 30 units representing $7.5 million of the worldwide
mammography market of $400 million in the first year. The domestic market
represented a mammography market of $150 million. In the second and third year,
the Company estimated that it could sell 75 and 186 foreign units and 135 and
300 domestic units, respectively. The Company believed it could achieve these
projections because of the delivery of the laser components from Spectra-Physics
in October 1997, which would enable it to resume clinical investigational trials
and build a clinical atlas of case studies. Our Pacific Rim distributor
representing thirteen Asian countries had stated that they were willing to
purchase ten CTLM(TM) Systems immediately once we couLD provide a CD-ROM of
clinical cases. We also had specific indications of interest for an additional
twenty CTLM(TM) Systems which were TO be sold in the Pacific Rim once the
initial atlas was updated to include clinical data collected from the first ten
Pacific Rim countries. Although FDA export is required for any exportation of
the CTLM(TM), FDA marketing clearance is not required for Pacific RIM countries.
Concurrent with the foreign sales, we believed we would have at least three
clinical investigational sites in the United States providing the data required
for Pre-Market Approval (PMA) from the FDA. Over the next few years, industry
predictions are that mammography sales will increase due to replacement of older
systems. The third year after the introduction of a new medical imaging device
usually creates a demand as imaging centers and hospitals feel that they will
lose market share if they cannot provide the new technology to their patients.
New technology generates new business as experienced with MRI. A forward-looking
disclaimer was included directly below the projections.
In February 1999, the Company, in an interview with the Miami Herald affirmed
the basic projections qualifying them by stating that the results were
anticipated for the fiscal year ending June 30, 2000. Below is a comparison of
the Hawke Projections and the February 1999 Projections.
<TABLE>
<CAPTION>
HAWKE PROJECTIONS FEBRUARY 1999 PROJECTIONS
<S> <C>
FISCAL YEAR 6-30-98 FISCAL YEAR 6-30-00
30 foreign units at approximately $250,000 30 foreign units at approximately $250,000
per unit per unit
no domestic no domestic
estimated revenue $7.5mm estimated revenue $7.5mm
pre-tax income ($4mm) pre-tax income ($4mm)
FISCAL YEAR 6-30-99 FISCAL YEAR 6-30-01
75 foreign units at approximately $250,000 75 foreign units at approximately $250,000
per unit per unit
135 domestic units at approximately $350,000 135 domestic units at approximately
per unit $350,000 per unit
estimated revenue $65.9mm estimated revenue $65.9mm
pre-tax income $32mm pre-tax income $32mm
FISCAL YEAR 6-30-00 FISCAL YEAR 6-30-02
186 foreign units at approximately $250,000 186 foreign units at approximately
$250,000 per unit $350,000 per unit
300 domestic units at approximately $350,000 300 domestic units at approximately
per unit $350,000 per unit
estimated revenue $151.5mm estimated revenue $151.5mm
pre-tax income $85.9mm pre-tax income$85.9mm
</TABLE>
Due to the delay in the commencement of the Nassau County clinical
investigational trials, we are unable to determine when we anticipate FDA
marketing clearance or will be able to begin foreign distribution, since we have
deferred foreign distribution of the CTLM(TM) until such time as we have
collected enough clinical data to compile an atlas of CTLM(TM) images. The delay
in the commencement of the Nassau County investigational trials has made the
February 1999 revenue projections unattainable and we are presently unable to
determine when it will begin to generate revenue.
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
We have and may continue to issue stock for services performed and to be
performed by consultants. Since we have generated no revenues to date, our
ability to obtain and retain consultants may be dependent on our ability to
issue stock for services. Since July 1, 1996 to the filing date of this Report,
we have issued an aggregate of 1,806,500 shares of Common Stock pursuant to
Registration Statements on Form S-8. The aggregate fair market value of the
shares was $2,327,151. 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
"Issuance of Stock for Services" and "Note 17 to Financial Statements".
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-KSB under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as in our press releases or oral statements that may be made by the Company
or by officers, directors or employees of the Company acting on our behalf, that
are not historical fact constitute "forward-looking statements". Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Factors that might cause such a
difference include, without limitation, the information set forth below. In
addition to statements which explicitly describe such risks and uncertainties,
statements labeled with the terms "believes", "belief', "expects", "plans" or
"anticipates" should be considered uncertain and forward-looking. All cautionary
statements made in this Report should be read as being applicable to all related
forward-looking statements wherever they appear.
We have a limited history of operations. Since our inception in December
1993, we have engaged principally in the development of the CTLM(TM), which
has not been approved for sale in the United States.
We have not applied to the FDA for export approval for foreign sales.
We have little experience in manufacturing, marketing and selling our
products.
We currently have no source of operating revenue and had an
accumulated deficit at June 30, 1999, of approximately $35,092,999,
after discounts and dividends on Preferred Stock.
We expect operating losses will increase for at least the next several
years.
Our ability to achieve profitability will depend in part on our ability to:
obtain regulatory approvals for our CTLM(TM),
develop the capacity to manufacture and market the CTLM(TM),
either by itself or in collaboration with others,
market acceptance of the CTLM(TM).
We have received an opinion from our auditors stating the fact that we
have suffered substantial losses and have yet to generate an internal
cash flow. This raises substantial doubt about our ability to continue
as a going concern.
We will require substantial additional funds for clinical testing of
the CTLM(TM), research and development programS, pre-clinical and
clinical testing of other proposed products, regulatory processes,
manufacturing and marketing programs and operating expenses (including
general and administrative expenses).
v Our fixed commitments, including salaries and fees for current
employees and consultants, equipment rent, payments under license
agreements and other contractual commitments, are substantial and would
increase if additional agreements are entered into and additional
personnel are retained.
We do not expect to generate a positive internal cash flow for at least
several years due to expected increases in capital expenditures,
working capital needs, and ongoing losses, including the expected cost
of commercializing the CTLM(TM).
Our cash requirements may vary materially from those now planned due to
the progress of research and development programs, results of clinical
testing, relationships with strategic partners, if any, changes in the
focus and direction of our research and development programs,
competitive and technological advances, the FDA and foreign regulatory
processes and other factors.
We require additional capital to fund our operations.
If additional funds are raised by issuing equity securities, further
dilution to existing stockholders will result, and future investors
may be granted rights superior to those of existing stockholders.
There can be no assurance that additional financing will be available
when needed, or if available, will be available on acceptable terms.
We have already granted a mortgage on our corporate property as
security for the convertible debenture and therefore, in all
likelihood, would be unable to use such property to collateralize any
additional financing.
Insufficient funds may prevent us from implementing our business
strategy and will require us to further delay, scale back, or eliminate
certain aspects of our research, product development, and marketing
program.
Our future capital requirements will depend on many factors, including:
The progress of our research and development projects;
The progress of pre-clinical and clinical testing;
The time and cost involved 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;
Changes and developments in our existing collaborative, licensing
and other relationships;
The terms of any new collaborative, licensing and other arrangements
that the Company may establish; and
The development of commercialization activities and arrangements.
Conducting clinical trials will require the expenditure of substantial
additional funds, which the Company does not currently have available.
Furthermore, there can be no assurance that:
Results obtained in any additional trials will be consistent
with the results obtained in trials conducted by the Company
to date.
Results obtained in any clinical trial or series of clinical trials
will be consistent among all study sites.
Results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies
conducted in Europe or other locations outside of the U.S.
Any such results, or the filing of the PMA will be accepted by the FDA.
We intend to file our PMA at the conclusion of our clinical trials. If
and when the PMA is accepted for filing by the FDA, it will be
designated for review under the FDA's Expedited Review policy. There
can be no assurance, that such Expedited Review status will be
maintained or result in a more expeditious approval, or approval at
all.
We are subject to Penny Stock Regulations and Restrictions, which will
restrict the ability of Broker / Dealers to sell our common stock and
may affect the ability of Investors to sell their shares.
The price of our common stock as well as many biotech and medical
device stocks in general, is highly volatile, which may
negatively impact the liquidity and value of your shares.
Our Articles of Incorporation empower our Board of Directors, without
stockholder approval, to designate and issue additional series of
Preferred Stock with dividend, liquidation, conversion, voting or other
rights, including the right to issue convertible securities with no
limitations on conversion. Such Preferred Stock, when issued, could:
Adversely affect the voting power or other rights of the holders of our
Common Stock.
Substantially dilute the common shareholder's interest.
Depress the price of our Common Stock.
Be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of
the Company.
Discourage or prevent an acquisition of the Company.
We own the rights, pursuant to an exclusive patent licensing agreement
with Richard Grable, our Chief Executive Officer, for the use of the
patent for the CTLM(TM) technology. We have 12 additional United States
patents pending with regard to OpticAL Tomography, many of which are
based on the original CTLM(TM) technology. In the event that that we
breach the patent licensing agreement, we could lose the licensing
rights to the CTLM(TM) technology. The loss of the patent license would
cause to us TO cease operations.
Our ability to compete effectively in the medical products industry
will depend on our success in protecting our proprietary technology,
both in the United States and abroad.
At present we have only one product, the CTLM(TM), which, after gaining
FDA marketing clearance, will account for substantialLY all of our
revenues for the foreseeable future. Failure to gain regulatory
approvals or market acceptance for the CTLM(TM) would have a material
adverse effect on our business, financial condition, cash flows, and
results of operations.
We purchase certain laser components for the CTLM(TM) from two
unaffiliated laser suppliers on an as needed basis. THE disruption or
termination of our laser suppliers could have a short-term adverse
effect on our ability to manufacture the CTLM(TM).
There can be no assurance that physicians or the medical community in
general will accept and utilize the CTLM(TM) or any othER products
developed by us.
We have limited internal marketing and sales resources and personnel.
Sales and service in the international market will be dependent upon
distributors already under agreement. We will continue to seek
distributors for those countries not yet represented.
Third-party payors (Medicare, Medicaid, private health insurance
companies, and other organizations) may affect the pricing or relative
attractiveness of our products by regulating the level of reimbursement
provided by such payors to the physicians and clinics and imaging
centers utilizing the CTLM(TM) or any other products that the Company
may develop or BY refusing reimbursement.
In certain countries, our ability to achieve significant market
penetration may depend upon the availability of third party and
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 costs of
health care through various means.
We have had to rely on the private placement of Preferred and Common
Stock and Convertible Debentures to obtain working capital and will
continue to do so in the future. In order to obtain working capital we
will continue to seek capital through debt or equity financing which
may include the issuance of Convertible Preferred Stock whose rights
and preferences are superior to those of the Common Stock holders.
In the event that we issue convertible Preferred Stock or Convertible
Debentures without a limit on the number of shares that can be issued upon
conversion and the price of our Common Stock decreases, the percentage
of shares outstanding that will be held by such holders upon conversion
will increase accordingly. The lower the market price, the greater the
number of shares to be issued to such 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
Stockholders and debenture holders potential for increased share
issuance and profit, including profits derived from shorting our Common
Stock, in addition to a stock overhang of an undeterminable amount, may
depress the price of our Common Stock. In addition, the sale of a
substantial amount of Preferred Stock to relatively few holders could
effectuate a possible change of control. Moreover, in the event of a
voluntarily or involuntarily liquidation of the Company while the
Preferred Stock is outstanding, the holders will be entitled to a
preference in distribution of our property.
We have amended our Articles of Incorporation, to increase our
authorized Common Stock from 48,000,000 shares to 100,000,000 common
shares in order to facilitate the conversion of the Series B
Convertible Preferred Stock and Series H Convertible Preferred Stock,
the only Preferred Series outstanding at that time. We now have issued
and outstanding approximately $5,610,000 of convertible preferred
securities and $2,015,000 of convertible debentures. Due to the low
market price of our Common Stock and the conversion of a substantial
number of Preferred Shares, we may have to increase our authorized
Common Stock. Based on the average high and low price of our Common
Stock as of October 11, 1999 ($.109), approximately 88,373,126 shares
would be required to convert all of our convertible securities.
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific,
technical and managerial personnel.
Management of the Company beneficially owns 37.3%, including options,
of the outstanding Common Stock of the Company assuming no exercise of
outstanding warrants, options, or convertible Preferred Stock. Although
Management owns less than 50.1% of the outstanding Common Stock, since
the Company does not have cumulative voting, and since, in all
likelihood the officers will be voting as a block and will be able to
obtain proxies of other shareholders, Management will continue to
remain in a position to elect all of our directors and control policies
and operations of the Company. After giving effect to the estimated
conversion of the Preferred Stock and the Debentures, Management will
own 15%. This additional dilution to Management's ownership percentage
could effectuate a change in control of the Company.
Richard Grable and Linda Grable hold a majority of the seats on our
Board of Directors. Consequently, they are in a position to control
their own compensation and to approve affiliated transactions, if any.
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, human and marketing resources, manufacturing
and experience than the Company.
We have limited experience in the manufacture of medical products for
clinical trials or commercial purposes. Should we decide to manufacture
our products, our manufacturing facilities would be subject to the full
range of the current Quality System Regulation ("QSR") (formerly the
Good Manufacturing Practices (GMP) regulation). We also may be subject
to the risks of delay or difficulty in manufacturing and we would
require substantial additional capital to establish such manufacturing
facilities.
We have used certain third parties to manufacture and deliver
components of the CTLM(TM) and intend to continue to do so in tHE
future. Such third parties must adhere to the QSR enforced by the FDA
through our facilities inspection program and such third parties'
facilities must pass a plant inspection before the FDA will grant
pre-market approval of our products. There can be no assurance that the
third-party manufacturers on which we depend will be in compliance with
the QSR at the time of the pre-approval inspection or will maintain
such compliance.
The qualification of additional or replacement suppliers for certain
components of the CTLM(TM)or services is a lengthy process. We rely on
single suppliers for certain services and components. If we encounter
delays or difficulties with our third-party suppliers in producing,
packaging, or distributing components of the CTLM(TM), market introduction
and subsequent sales would be adversely affected. If we have to rely on
alternative sources of supply, we may not be able to enter into alternative
supply arrangements at commercially acceptable rates, if at all. If we
are unable to obtain or retain qualified third-party manufacturers on
commercially acceptable terms, we may not be able to commercialize our
products as planned. Our dependence upon third parties for the
manufacture of our products may adversely affect our profit margins
and our ability to develop and deliver our products on a timely and
competitive basis.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will
not render our proposed products obsolete.
Originally, we anticipated that the CTLM(TM) would be ready for distribution in
the summer of 1998, however during the course OF clinical trials, we learned of
certain problems with particular components of the CTLM(TM), which needed to be
corrected. Due to theSE delays and the delay in our start of the Nassau County
Clinical Investigational trials, we cannot predict when the CTLM(TM) will BE
ready for distribution.
Until we receive pre-market approval from the FDA, a significant
portion of our revenues, will come from international sales of the
CTLM(TM) in Europe and Asia and therefore, may be subject to the
following:
economical and political instability,
shipping delays,
fluctuation of foreign currency exchange rates,
foreign regulatory requirements and various trade restrictions,
future imposition of, or significant increases in the level of
customs duties, export quotas or other trade restrictions.
In order to minimize the risk of doing business with distributors in countries
which are having difficult financial times, our 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). See Item 1.
"Business-Government Regulation"
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, and marketing of cancer detection products. We
carry product and professional liability insurance in the amount of $3,000,000,
for all clinical sites. A successful claim against the Company in excess of our
insurance coverage could cause the Company to cease operations. See Item 1.
"Business-Product Liability".
We have not performed any market or feasibility study to assess the
interest, demand, or need for the CTLM(TM). See Item 1.
"Business" and "Business-Competition".
We have not paid a dividend on our Common Stock and do not intend to pay
dividends.
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
PAGE
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5-9
Statement of Cash Flows F-10-11
Notes to Financial Statement F-12-46
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-10
Notes to Financial Statements F-12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1999 and 1998 and for the period December 10, 1993 (date of
inception) to June 30, 1999. 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, 1999 and 1998 and the results
of its operations and its cash flows for the years ended June 30, 1999 and 1998
and for the period December 10, 1993 (date of inception) to June 30, 1999 in
conformity with generally accepted accounting principles.
The Company is in the development stage as of June 30, 1999 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.
<PAGE>
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 5. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 31, 1999
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
<S> <C> <C>
Current assets:
Cash $ 70,037 $ 310,116
Loans receivable - employees 30,950 --
Inventory 3,698,343 3,214,045
Prepaid expenses 58,250 33,539
------------ ------------
Total Current Assets 3,857,580 3,557,700
------------ ------------
Property and equipment, net 2,707,994 2,920,980
Other Assets 561,158 688,463
------------ ------------
$ 7,126,732 $ 7,167,143
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,597,083 $ 1,363,766
Loans payable 1,232,271 285,407
Current maturities of capital lease obligations
10,572 9,715
Other current liabilities 529,880 2,155,978
Total current liabilities 3,369,806 3,814,866
Convertible debenture 1,100,000 --
Long-term capital lease obligations 15,561 26,134
Total liabilities 4,485,367 3,841,000
Commitments and contingencies
Redeemable convertible preferred stock
(Series G), no par value; authorized 38 shares,
issued 38 and 0 shares , respectively 477,117 --
Stockholders' equity:
Convertible preferred stock (Series B),
7% cumulative annual dividend, no par value;
authorized 450 shares, issued 390 and 450
shares respectively 3,900,000, 4,500,000
Convertible preferred stock (Series D),
no par value; authorized 54 shares,
issued 0 and 29 shares, respectively -- 290,000
Convertible preferred stock (Series E),
no par value; authorized 54 shares,
issued 0 and 24 shares, respectively -- 240,000
Convertible preferred stock (Series H),
no par value; authorized 108 shares,
issued 68 and 108 shares, respective 680,000 1,080,000
Convertible preferred stock (Series I),
7% cumulative annual dividend, no par value;
authorized 138 shares, issued 138 and
0 shares respectively 1,380,000
Common stock, no par value; authorized
100,000,000 shares, issued 49,297,675
and 36,493,544 shares, respectively 29,820,729 23,983,073
Additional paid-in capital 1,490,827 1,884,846
Deficit accumulated during the
development stage (35,092,999) (27,336,655)
2,178,557 4,641,264
Less: subscriptions receivable (14,309) (14,309)
Deferred compensation -- (1,300,812)
Total stockholders' equity 2,164,248 3,326,143
------------ ------------
$ 7,126,732 $ 7,167,143
============ ============
</TABLE>
<PAGE>
See accompanying notes to the financial statements.
<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, 1999 June 30, 1998 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 1,477,296 $ 1,210,526 $ 7,952,534
Research and development 944,500 776,578 2,689,589
Research and development expenses 71,508 254,722 2,990,402
Advertising and promotion expenses 27,273 329,446 901,114
Selling, general and administrative expenses 385,824 396,752 1,687,961
Clinical expenses 16,764 9,859 377,439
Consulting expenses 89,637 1,220,676 3,026,221
Insurance costs 172,416 162,549 501,207
Professional fees 292,828 454,730 1,644,663
Stockholder expenses 65,165 75,608 161,675
Trade show expenses 151,403 216,182 656,861
Travel and subsistence costs 111,361 111,559 568,520
Rent expense 28,808 26,213 276,269
Interest expense 688,644 55,543 771,240
Loan placement expenses and fees 201,494 -- 201,494
Depreciation and amortization 312,956 283,966 988,818
Amortization of deferred compensation 1,510,437 1,418,938 4,064,250
Liquidated damages costs 260,000 -- 260,000
Interest income (1,120) (22,137) (198,537)
------------ ------------ ------------
6,807,194 6,981,710 29,521,720
------------ ------------ ------------
Net loss (6,807,194) (6,981,710) (29,521,720)
Dividends on cumulative preferred stock:
From discount at issuance (619,974) (1,741,015) (4,694,583)
Earned (329,176) (315,000) (876,696)
------------ ------------ ------------
Net loss applicable to common shareholders $ (7,756,344) $ (9,037,725) $(35,092,999)
============ ============ ============
Net loss per common share:
Basic
NET LOSS PER COMMON SHARE $ (.20) $ (.32) $ (1.41)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 39,333,668 27,882,886 24,932,484
============ ============ ============
Diluted
NET LOSS PER COMMON SHARE $ (.20) $ (.32) $ (1.41)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 39,333,668 27,882,886 24,932,484
============ ============ ============
</TABLE>
See accompanying notes to thefinancial statements.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
PREFERRED STOCK (**) COMMON STOCK Additional During the
Number of Number of Paid-In Development Subs. Deferred
Shares Amount Shares Amount Capital Stage Receivable Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 10,
1993(date of inception) -0- $ -0- -0- $ -0- $ -0- $-0- $ -0- $ -0- $-0-
Issuance of common stock,
restated for reverse
stock split -- -- 510,000 50,000 -- -- -- -- 50,000
Acquisition of public shell -- -- 178,752 -- -- -- -- -- --
Net issuance of additional
shares of stock -- -- 15,342,520 16,451 -- -- -- -- 16,451
Common stock sold -- -- 36,500 36,500 -- -- -- -- 36,500
Net Loss -- -- -- -- -- --
-- -- (66,951) -- -- (66,951)
Balance at June 30, 1994 -- -- 16,067,772 102,951 -- (66,951) -0- -- 36,000
Common stock sold -- -- 1,980,791 1,566,595 -- -- (523,118) -- 1,043,477
Common stock issued in
exchange for services -- -- 115,650 102,942 -- -- -- -- 102,942
Common stock issued with
employment agreement -- -- 75,000 78,750 -- -- -- -- 78,750
Common stock issued for
compensation -- -- 377,500 151,000 -- -- -- -- 151,000
Stock options granted -- -- -- -- 622,500 -- -- (622,500) --
Amortization of deferred
compensation -- -- -- -- -- -- -- 114,375 114,375
Forgiveness of officers'
compensation -- -- -- -50,333 -- -- -- 50,333
Net Loss -- -- --
-------- -------- ----------
-- -- (1,086,436) -- -- (1,086,436)
----------- ----------- ---------- -------- -------- ----------
BALANCE AT JUNE 30, 1995 -- -- 18,616,713 2,002,238 672,833 (1,153,387) (523,118) (508,125) 490,441
</TABLE>
(CONTINUED)
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
PREFERRED STOCK (**) COMMON STOCK Additional During the
Number of Number of Paid-In Development Subs. Deferred
Shares Amount Shares Amount Capital Stage Receivable Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 - - 18,616,713
2,002,238 672,833 (1,153,387) (523,118) (508,125) 490,441
Preferred stock sold,
including dividends 4,000 3,600,000 - -
1,335,474 (1,335,474) - - 3,600,000
Common stock sold - - 700,471 1,561,110 -
- - - 1,561,110
Cancellation of stoc
subscription - - (410,500) (405,130) -
- 405,130 - -
Common stock issued in
exchange for services - - 2,503,789 4,257,320 -
- - - 4,257,320
Common stock issued with
exercise of stock options - - 191,500 104,375
- - (4,375) - 100,000
Common stock issued with
exercise of options
for compensation - - 996,400 567,164 -
- - - 567,164
Conversion of preferred
stock to common stock (1,600) (1,440,000) 420,662 1,974,190
(534,190) - - - -
Common stock issued
as payment of preferred
stock dividends - - 4,754 14,629 -
(14,629) - - -
Dividends accrued on preferred
stock not yet converted - - - - -
(33,216) - - (33,216)
Collection of stock
subscriptions - - - - -
- 103,679 - 103,679
Amortization of deferred
compensation - - - -
- - 232,500 232,500
Forgiveness of officers'
compensation - - - - 100,667
- - - 100,667
NET LOSS (RESTATED) - - -
- - (6,933,310) - - (6,933,310)
BALANCE AT JUNE 30,
1996 (RESTATED) 2,400 2,160,000 23,023,789 10,075,896
1,574,784 (9,470,016) (18,684) (275,625) 4,046,355
</TABLE>
(CONTINUED)
See accompanying notes to the financial statements.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
PREFERRED STOCK (**) COMMON STOCK Additional During the
Number of Number of Paid-In Development Subs. Deferred
Shares Amount Shares Amount Capital Stage Receivable Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1996 (RESTATED) 2,400 2,160,000 23,023,789 10,075,896
1,574,784 (9,470,016) (18,684) ( 275,625) 4,046,355
Preferred stock sold,
including dividends 450 4,500,000 - -
998,120 (998,120) - - 4,500,000
Conversion of preferred
stock to common stock (2,400) (2,160,000) 1,061,202
2,961,284 (801,284) - - - -
Common stock issued in
exchange for services - - 234,200 650,129 -
- - - 650,129
Common stock issued
for compensation - - 353,200 918,364
- - - - 918,364
Common stock issued
with exercise of stock options - - 361,933 1,136,953
- - - (33,750) - 1,103,203
Cancellation of stock
issued to employee - - (150,000) (52,500) -
- - - (52,500)
Common stock issued
as payment of preferred
stock dividends - - 20,760 49,603 -
(16,387) - - 33,216
Dividends accrued
on preferred
stock not yet converted - - - - -
(168,288) - - (168,288)
Stock options granted - - - - 1,891,500
- - (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) 450 4,500,000 24,905,084 15,739,729
3,663,120 (18,298,930) (35,559) (1,379,125) 4,189,235
</TABLE>
(CONTINUED)
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
PREFERRED STOCK (**) COMMON STOCK Additional During the
Number of Number of Paid-In Development Subs. Deferred
Shares Amount Shares Amount Capital Stage Receivable Compensation Total
<S> <C> <C> <C> <C> C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1997 (RESTATED) 450 4,500,000 24,905,084 15,739,729
3,663,120 (18,298,930) (35,559) (1,379,125) 4,189,235
Preferred stock sold,
including dividends
and placement fees 501 5,010,000 - -
1,290,515 (1,741,015) - - 4,559,500
Conversion of preferred
stock to common stock (340) (3,400,000) 6,502,448
4,644,307 (1,210,414) - - - 33,893
Common stock sold - - 500,000 200,000 -
- - - 200,000
Common stock issued
in exchange for services - - 956,000 1,419,130
- - - - 1,419,130
Common stock issued
for compensation - - 64,300 54,408
- - - - 54,408
Common stock issued with
exercise of stock options - - 65,712 22,999
- - - - 22,999
Common stock issued in
exchange for
licensing agreement - - 3,500,000 1,890,000 (3,199,000)
- - - (1,309,000)
Dividends accrued on
preferred
stock not yet converted - - - - -
(315,000) - - (315,000)
Stock options granted - - - - 1,340,625
- - (1,340,625) -
Collection of stock
subscriptions - - - 12,500
- - 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 611 6,110,000 36,493,544 23,983,073
----------------- ------------- ------------------ ------------
1,884,846 (27,336,655) (14,309) (1,300,812) 3,326,143
- ---------------- -------------- --------------- ------------- -------------
</TABLE>
(CONTINUED)
See accompanying notes to the
financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD DECEMBER 10, 1993 (DATE OF INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Defecit
Accumulated
PREFERRED STOCK (**) COMMON STOCK Additional During the
Number of Number of Paid-In Development Subs. Deferred
Shares Amount Shares Amount Capital Stage Receivable Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1998 611 6,110,000 36,493,544 23,983,073
1,884,846 (27,336,655) (14,309) (1,300,812) 3,326,143
Preferred stock issued
- - satisfaction of debt 138 1,380,000 - -
(161,348) (492,857) - - 725,795
Conversion of preferred
stock to common stock (153) (1,530,000) 4,865,034
1,972,296 (442,296) - - - -
Common stock sold - - 200,000 60,000
- - - - 60,000
Common stock issued-exchange
for services
and compensation - - 719,442 301,210 -
- - - 301,210
Common stock issued
- repayment of debt - - 2,974,043 1,196,992 -
- - - 1,196,992
Common stock issued in
exchange for loan fees - - 480,000 292,694
- - - - 292,694
Common stock issued with
exercise of stock options - - 65,612 124,464
- - - - 124,464
Common stock issued in
satisfaction of
licensing agreement payable - - 3,500,000 1,890,000
-
-
-
-
1,890,000
Redeemable preferred stock sold, deemed dividend - - - -
-
(127,117)
-
-
(127,117)
Dividends accrued-preferred stock not yet converted - - - - -
(329,176) - - (329,176)
Stock options granted - - - - 209,625
- - (209,625) -
Amortization of deferred compensation - - - - -
- - 1,510,437 1,510,437
NET LOSS - - -
-------------------- -------------------- ---------------------
- - (6,807,194) - - (6,807,194)
- ------------------- ----------------------- --------------- --------------------- --------------------- -------------
BALANCE AT JUNE 30, 1999 596 $ 5,960,000 49,297,675 $ 29,820,729 $
================= ============ ============= ============ =======
1,490,827
$
(35,092,999)
$
(14,309)
$
-
$
2,164,248
</TABLE>
** See Note 16 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999
-------------- -------------- ----------------
<S> <C> <C> <C>
NET LOSS $ (6,807,194) $ (6,981,710) $(29,521,720)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 312,956 283,966 988,818
Amortization of deferred compensation 1,510,437 1,418,938 4,064,250
Noncash compensation and consulting expenses 593,904 1,379,938 7,982,051
Decrease in restricted certificate of deposit -- 103,500 --
(Increase) decrease in loans receivable - other (44,310) 10,073 (44,310)
Increase in inventory (484,298) (155,782) (640,080)
(Increase) decrease in prepaid expenses (24,711) 23,253 (58,250)
(Increase) decrease in other assets 91,758 (97,828) (15,705)
Increase in accounts payable and accrued expenses 887,828 529,220 1,768,306
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES 263,902 (53,569) 529,880
------------ ------------ ------------
TOTAL ADJUSTMENTS 3,107,466 3,441,709 14,574,960
------------ ------------ ------------
NET CASH USED FOR OPERATING ACTIVITIES (3,699,728) (3,540,001) (14,946,760)
------------ ------------ ------------
Cash flows from investing activities:
Prototype equipment -- (1,582,446) (2,799,031)
CAPITAL EXPENDITURES (64,423) (115,738) (3,725,417)
NET CASH USED FOR INVESTING ACTIVITIES (64,423) (1,698,184) (6,524,448)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (9,716) (8,928) (24,156)
Proceeds from convertible debenture 1,100,000 -- 1,100,000
Proceeds from loan payable, net 1,869,324 285,407 2,154,731
Proceeds from issuance of preferred stock 380,000 4,559,500 13,039,500
NET PROCEEDS FROM ISSUANCE OF COMMON STOCK 184,464 329,099 5,271,170
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,524,072 5,165,078 21,541,245
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (240,079) (73,107) 70,037
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 310,116 383,223 -0-
- -------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,037 $ 310,116 $ 70,037
============ ============ ============
</TABLE>
See accompanying notes to thefinancial statements.
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, 1999 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
cash paid for interest $ 16,628 $ 3,105$ 46,786
================ ================ =========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ 221,788 $ 1,325,530 $ 4,837,747
============== ============== ==============
Issuance of common stock as loan fees in
connection with loans to the company $ 292,694 $ - $ 292,694
============== ===================== ===============
Issuance of common stock as satisfaction of
loans payable $ 939,100 $ - $ 939,100
============== ===================== ===============
Issuance of common stock as satisfaction of
certain accounts payable $ 257,892 $ - $ 257,892
============== ===================== ===============
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 $ - $ 581,000 $ 581,000
===================== =============== ===============
Issuance of common stock for
compensation $ 79,422 $ 54,408 $ 1,770,358
=============== ================ ==============
Issuance of common stock through
exercise of incentive stock options $ - $ - $1,103,203
===================== ===================== ===============
Issuance of common stock as
payment for preferred stock dividends $ - $ - $ 64,232
===================== ===================== ================
Acquisition of property and equipment
through the issuance of a capital
lease payable $ - $ - $ 50,289
===================== ===================== ================
</TABLE>
See accompanying notes to the financial statements.
<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 ("CTLMTM")
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 CTLMTM device
was exhibited at the "RSNA" conference November 26-30, 1995. ThE Company
exhibited the pilot production run CTLMTM device at the "RSNA" conference held
in Chicago on December 2-6, 1996. A further refined CTLMTM device and clinical
images were exhibited at the "RSNA" conference held in Chicago on December 1-5,
1997. A new design of the scanning bed along with images from the 20 patient
clinical study were exhibited at the RSNA conference held in Chicago on November
30 through December 4, 1998.
The initial CTLMTM 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 CTLMTM 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 January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo study to Nassau County Medical Center (NCMC) in East Meadow,
New York was conditionally approved. On July 8, 1999, the Company commenced a
275 patient clinical investigational study at NCMC.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) BACKGROUND (CONTINUED)
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. On September 14, 1999, the Company was advised by patent counsel that a
patent for laser imaging apparatus using biomedical markers that bind to cancer
cells was issued.
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
CTLMTM device is completed and finally gains Federal Drug Administration
marketing clearance, that the Company will achieve a profitable level of
operations.
(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,
work-in-process and completed units under testing, are carried
at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Prototype equipment
THE DIRECT COSTS ASSOCIATED WITH THE FINAL CTLMTM 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 CTLMTM 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 $164,942 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.
(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.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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
CTLMTM 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 CTLMTM 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.
(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.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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, 1999.
(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.
(l) Deemed preferred stock dividend
The accretion resulting from the incremental yield embedded in
the conversion terms of the convertible preferred stock is
computed based upon the discount from market of the common stock
at the date the preferred stock was issued. The resulting deemed
preferred stock dividend subsequently increases the value of the
common shares upon conversion.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Discount on convertible debt
The discount which arises as a result of the allocation of
proceeds to the beneficial conversion feature upon the issuance
of the convertible debt increases the effective interest rate of
the convertible debt and will be reflected as a charge to
interest expense. The amortization period will be from the date
of the convertible debt to the date the debt first becomes
convertible.
(n) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
(3) RESTATEMENT
The Company had restated the June 30, 1997 and 1996 financial statements 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. These statements were
also restated to correct the calculation of the deemed dividends on the
cumulative preferred stock as a result of the discount at issuance. The effect
of this change was an increase to the net loss applicable to common shareholders
of $283,965 ($.01 per share) and $337,074 ($.02 per share) for the fiscal years
ended June 30, 1997 and 1996, respectively.
THE COMPANY HAD BEEN CAPITALIZING THE COSTS ASSOCIATED WITH THE FINAL
DEVELOPMENT OF THE CTLMTM software from its initial acquisition PHASE TO THE
SOFTWARE BEING USED IN THE CTLMTM 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.
1997 1996
-------------- --------------- ------
INCREASE IN NET LOSS $ 161,583 $ 1,383,532
============= ===========
Per share data:
BASIC $ .01 $ .06
================= ================
DILUTED $ .01 $ .06
================= ================
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 17)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(5) GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon the debt and equity
funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. 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 CTLMTM device is completed and finally gains Federal
Drug Administration marketing clearance, that the Company will achieve a
profitable level of operations.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INVENTORIES
Inventories consisted of the following:
JUNE 30,
1999 1998
Raw materials $ 2,125,035 $ 1,296,864
Work-in process 391,875 1,917,181
COMPLETED UNITS UNDER TESTING 1,181,433 -
------------- --------------
$ 3,698,343 $ 3,214,045
============ ============
(7) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
JUNE 30,
1999 1998
Furniture and fixtures $ 246,730 $ 245,219
Building and land (See Note 12) 2,084,085 2,084,085
Clinical equipment 30,714 -
Computers and equipment 516,551 487,143
CTLMTM software costs 352,932 352,932
Trade show equipment 154,468 153,193
LABORATORY EQUIPMENT 191,548 190,031
--------- --------------
3,577,028 3,512,603
LESS: ACCUMULATED DEPRECIATION (869,034) (591,623)
------------ --------------
TOTALS $2,707,994 $ 2,920,980
============= ============
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLMTM software costs 5 years
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) PROPERTY AND EQUIPMENT (CONTINUED)
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
CTLMTM software at June 30, 1999 and 1998 are $67,666 and $138,180,
respectively, which represents the net REALIZABLE VALUE OF THE CTLMTM software
at the end of each period presented.
AMORTIZATION EXPENSE RELATED TO THE CTLMTM software for each period presented in
the statement of operations is as follows:
PERIOD ENDED AMOUNT
------------ ---------
6/30/99 $ 70,514
6/30/98 70,587
PRIOR 144,165
----------
TOTAL $ 285,266
=========
(8) OTHER ASSETS
Other assets consist of the following:
JUNE 30,
1999 1998
Patent license agreement, net of accumulated
amortization of $34,176 and $0, respectively $ 546,824 $ 581,000
UL and CE approvals, net of accumulated
amortization of $1,371 and $0, respectively 6,854 1,383
Court bond - 100,000
SECURITY DEPOSITS 7,480 6,080
--------- ------------
TOTALS $ 561,158 $ 688,463
============ ============
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 CTLMTM . 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
7,000,000 shares of common stock. The License agreement has been recorded at the
historical cost basis of the chief executive officer, who owns the patent. A
liability had been recorded as of June 30, 1998 for the fair market value of the
remaining shares that were issued in June 1999. (see Note 10)
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JUNE 30,
1999 1998
Accounts payable - trade $773,827 $ 774,952
Preferred stock dividends payable 86,669 483,288
Accrued property taxes payable 15,585 15,585
Insurance financing payable - 10,233
Accrued compensated absences 30,297 38,530
Accrued interest payable 461,462 18,546
Payroll taxes payable - 4,250
Liquidated damages payable
(see Note 16) 120,000 -
Accrued wages payable 109,243 -
OTHER 18,382 18,382
------------ -------------
TOTALS $ 1,597,083 $ 1,363,766
============= ===========
(10) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
JUNE 30,
1999 1998
Patent licensing agreement
payable (see Note 8) $ - $ 1,890,000
ACCRUED COMPENSATION-STOCK OPTIONS 529,880 265,978
-------------- -----------
$ 529,880 $ 2,155,978
============= ============
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.
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) LOANS PAYABLE
Loans payable consisted of the following:
June 30,
1999 1998
Loan payable $ 300,407 $ 285,407
LOANS PAYABLE TO OFFICERS 443,864 -
LOANS PAYABLE TO RELATED PARTIES 488,000 -
-------------- -------------
$ 1,232,271 $ 285,407
============ =============
The Company has borrowed a total of $475,407, 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, 1999. Accrued
interest of $36,427 is reflected in accrued expenses on the balance sheet.
The officers of the Company have made loans during the year totaling $1,433,487.
The loans are non-interest bearing and the remaining balances were due by August
31, 1999. On May 18, 1999 the officers were issued a total of 2,171,743 shares
of stock as full satisfaction ($874,100) of the loans outstanding at that date.
In addition to the loans outstanding at June 30, 1999, the officers have loaned
an additional $152,241 subsequent to June 30, 1999, and an additional $450,795
has been repaid, $20,000 in cash and the balance of $430,795 in common stock of
the Company.
The Company has received various loans from related parties (stockholders of the
Company) during the year totaling $1,093,000. A total of $605,000 has been
repaid as of June 30, 1999. These loans bore interest at rates varying from 6%
to 15%, and accrued interest as of June 30, 1999 amounted to $38,921. The
balance of these loans was due to be paid by August 31, 1999.
(12) CONVERTIBLE DEBENTURE
On April 6, 1999 the Company entered into a Subscription Agreement with the
Purchaser of the Series B Convertible Preferred Stock (see Note 16), whereby the
Purchaser agreed to purchase $2,750,000 of the Company's Debentures. The
Debentures pay a 7% premium, to be paid in cash, or freely trading common stock
in the Company's sole discretion, at the time of each conversion ("the Dividend
Payment Date"). The Debentures are subject to automatic conversion at the end of
the two years from the date of issuance, at which time all Debentures
outstanding will be converted based upon a formula detailed within the Debenture
document.
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) CONVERTIBLE DEBENTURE (CONTINUED)
The Debentures are secured by a mortgage on the Company's land and building.(see
Note 7) The mortgage shall only be released upon the Company meeting certain
conditions described in the mortgage document. The funds are available to the
Company as follows:
1. The Purchaser irrevocably agreed to purchase $1,100,000 of
the Debentures, which will net the Company proceeds of
$1,000,000 after fees.
2. The Company may draw a second $825,000 ($750,000 net of fees)
anytime thirty days after the effective date of the S-2
Registration Statement (July 29, 1999), as long as the Company
maintains an average bid price of $.45 for the ten trading days
immediately prior to the Company's request for the funding.
3. The Company may draw a final $825,000 ($750,000 net of fees)
anytime sixty days after the effective date of the Registration
Statement, as long as the Company maintains an average bid price
of $.45 for the ten trading days immediately prior to the
Company's request for the funding.
The Series I Preferred and the Debenture also limits the Holders to ownership of
not more than 4.99% of the Company's outstanding common stock at any one time.
The shares underlying the Series B Preferred, the Series I Preferred and the
Debentures have registration rights and were registered in the Company's S-2
Registration Statement.
The Company has received $1,100,000 as of June 30, 1999 and an additional
$650,000, net, between August 11, 1999 to September 13, 1999. Interest of
$18,142 has been accrued as of June 30, 1999 and the interest relating to the
discount at issuance of $367,972 was expensed during the period, as the
debenture can be converted immediately, and would have no conversion period.
(CONTINUED)
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 7) and the obligation has been
recorded as debt. At June 30, 1999, approximate future minimum lease payments
under capitalized lease obligations were as follows:
YEAR ENDING JUNE 30,
2000 $ 12,384
2001 12,384
2002 4,128
-----------
Total minimum lease payments 28,896
LESS AMOUNT REPRESENTING INTEREST (2,763)
Present value of net minimum lease payments 26,133
LESS CURRENT PORTION (10,572)
LONG-TERM PORTION $ 15,561
=========
The Company also leases certain office equipment under an operating lease
expiring in June 2002. Minimum future lease payments under the non-cancelable
operating lease having a remaining term in excess of one year as of June 30,
1999 are as follows:
YEAR ENDING JUNE 30, AMOUNT
2000 $ 3,676
2001 3,676
2002 3,676
TOTAL MINIMUM FUTURE LEASE PAYMENTS $ 11,028
(CONTINUED)
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 $22,693,000 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 $7,716,000 and $5,675,000 at June 30, 1999 and 1998, 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, 1998 to June 30, 1999 was an increase of
approximately $2,041,000.
(15) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at
a purchase price of $10,000 per share and two year warrants to purchase 65,625
shares of the Company's common stock at an exercise price of $.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the Securities
Act of 1933, as amended.
The Series G Preferred Stock has no dividend provisions. The 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
non-assessable 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 G 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 $.54 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 three preferred shares to an
unaffiliated investment banker for placement and legal fees, providing net
proceeds to the Company of $350,000. The shares underlying the preferred shares
and warrant are entitled to demand registration rights under certain conditions.
Pursuant to the Registration Rights Agreement ("RRA") the Company is required to
register 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 S-2
Registration Statement. In the event the Registration Statement was not declared
effective within 120 days, the Series G Holders had the right to force the
Company to redeem the Series G Preferred Stock at a redemption price of 120% of
the face value of the preferred stock. The Registration Statement was declared
effective on July 29, 1999. As of June 30, 1999, the redemption amount of the
Series G Preferred Stock is $380,000.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) 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. All Series of the convertible preferred stock are not redeemable and
automatically convert into shares of common stock at the conversion rates three
years after issuance.
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
non-assessable 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.
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.
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 non-assessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases.(see Series I)
As of June 30, 1999, 60 shares of the Series B Preferred Stock had been
converted into 1,931,123 shares of the Company's common stock.
During the years ended June 30, 1999 and 1998 the Company issued a total of six
Private Placements of convertible preferred stock (see schedule incorporated
into Note 16). 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, and warrants to purchase up to 50,000 shares of the Company's common
stock at an exercise price of $1.562 per share. The agreement was executed
pursuant to Regulation S as promulgated by the Securities Act of 1933, as
amended. As of June 30, 1999 none of the warrants had been exercised.
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 non-assessable 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)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) 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. As of June 30, 1999 none of the
warrants had been exercised.
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 non-assessable 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. As of June 30, 1999 none of the
warrants had been exercised.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 of any additional consideration, into
fully paid and non-assessable 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 non-assessable 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.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 Series H-"A" warrants to purchase up
to 75,000 shares of the Company's common stock at an exercise price of $1.00
per share, and Series H-"B" warrants to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $1.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the
Securities Act of 1933, as amended. As of June 30, 1999 none of the warrants
had been exercised.
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 non-assessable 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 was in technical default of the Registration Rights Agreement
("RRA"), which required the S-2 Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company was 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. On March 25,
1999, the Company issued 424,242 shares of common stock as partial payment
of the liquidated damages. The total expense for the year ended June 30,
1999 amounted to $260,000, and a balance of $120,000 is outstanding as of
June 30, 1999. (See Note 9)
SERIES I PREFERRED STOCK
On April 6, 1999, the Company entered into a Subscription Agreement with the
Purchaser of the Series B Preferred Stock whereby the Company agreed to
issue 138 shares of its Series I, 7% Convertible Preferred Stock
($1,380,000). The consideration for the subscription agreement was paid as
follows:
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
1. Forgiveness of approximately $725,795 of accrued interest (dividends)
in connection with the Series B Convertible Preferred stock. The Company
recorded the forgiveness of the accrued interest (dividends) by reducing
the accrual along with a reduction in the accumulated deficit. 2.
Settlement of all litigation concerning the Series B Convertible Preferred
stock. 3. Cancellation of 112,500 warrants that were issued with the
Series B Convertible Preferred stock. 4. A limitation on the owner(s) of
the Series B Convertible Preferred stock to ownership of not more than
4.99% of the Company's outstanding common stock at any one time.
The Series I Preferred stock pays a 7% premium, to be paid in cash or freely
trading common stock at the Company's sole discretion, upon conversion.
The Series I Preferred Stock is convertible, at any time, in whole or in
part, without the payment of any additional consideration, into fully paid
and non-assessable 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 I 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.
Pursuant to the Series I designation and the Subscription Agreement, the
Series I Holder, or any subsequent holder of the Preferred Shares, is
prohibited from converting any portion of the Preferred Stock which would
result in the Holder being deemed the beneficial owner of 4.99% or more of
the then issued and outstanding common stock of the Company.
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, 1999, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(16) CONVERTIBLE PREFERRED STOCK (CONTINUED)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <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 54 540,000
Conversion of pfd stock (210) (2,100,000) (25) 250,000 (30) (300,000)
Balance at June 30, 1998 -- -- -- 4,500,000 29 290,000 24 240,000
Sale of Series I
Conversion of pfd stock (60) (600,000) (29) (290,000) (24) (240,000)
Balance at June 30, 1999 -- $- 390 $ 3,900,000 $- $-
Additional information:
Discount off market price 25% 18% 25% 25% 25%
Fair market value-issue date $ 8.31 $ 3.25 $1.63 $ 0.99 $ 1.07
Deemed preferred stock $ 1,335,474 $998,121 $705,738 $182,433 $182,250
dividend
SERIES F SERIES H SERIES I Total Total
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 (2,400) (2,160,000)
Series A conversion 450 4,500,000
Balance at June 30, 1997
Sale of preferred stock
(Series C - H) 75 750,000 108 1,080,000 501 5,010,000
Conversion of pfd stock (75) (750,000) (340) (3,400,000)
Balance at June 30, 1998 108 1,080,000 611 6,110,000
Sale of Series I 138 1,380,000 138 1,380,000
Conversion of pfd stock (40) (400,000) (153) (1,530,000)
Balance at June 30, 1999 $- $- 68 $ 680,000 138 1,380,000 596 $ 5,960,000
Additional information:
Discount off market price 30% 25% 25%
Fair market value-issue date
$ 1.24 $ 0.57 $0.38
Deemed preferred stock dividend $ 318,966 $ 351,628 $ 492,857
</TABLE>
(CONTINUED)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) 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 have 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 WERE ISSUED TO A COMPANY EXECUTIVE PURSUANT TO AN
EMPLOYMENT AGREEMENT. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) 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 non-cash 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 16)
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 options 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)
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) 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 comprised of 27,000
shares ($33,750) exercised and paid for at $1.25 per share, and
334,933 shares ($1,103,203) acquired in the exchange for options
tendered in a cashless transaction.
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 16) 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 were 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 were 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)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) 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. The excess
of the fair market value of the common stock over the historical
cost basis of the patent license was recorded as a distribution
to the shareholder; recorded as a reduction to additional
paid-in capital of $3,199,000.
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) were received by the Company.
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
Majority Shareholders consent with respect to the Amendment was effective on
February 18, 1999.
During the year ended June 30, 1999, the Company issued a total of 12,804,131
shares ($5,837,656) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(17) COMMON STOCK (CONTINUED)
1. The Company sold 200,000 shares on August 5, 1998 in a
Regulation D offering at $.30 per share, and
received cash proceeds of $60,000.
2. In June 1999, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000), representing the balance
of shares to be issued as consideration for the exclusive Patent
License Agreement (see Notes 8 and 10).
3. On November 9, 1998, the Company issued 15,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $10,800 were recorded as the market value of the
stock on that date was $.72 per share.
4. A total of 65,612 non-qualified stock options were exercised
and proceeds of $22,964 ($.35 per share) was received by the
Company. An additional $101,500 was received this year for stock
sold in the prior year.
5. A total of 480,000 shares were issued in connection with
loans that were received by the Company. The total loan fee
expenses (based on the market value of the stock at the date of
issuance) charged to the statement of operations for the year
was $292,694, or an average of $.61 per share.
6. A total of 2,974,043 share were issued as repayment of
various accounts payable and loans payable during the year. A
total of $1,196,992 (average of $.40 per share) of debts were
satisfied through the issuance of the stock.
7. On December 11, 1998, bonus stock was issued to Company
employees, for 130,200 shares. Compensation expense of $79,422
was charged as the fair market value at that date was $.61 per
share.
8. On March 26, 1999, the Company issued 424,242 shares of stock
as partial-payment ($140,000) on the liquidated damages in
connection with Series H Preferred Stock. The fair market value
at that date was $.33 per share.
9. During the year at total of 150,000 shares was issued for to
various independent parties for services rendered to the
Company. Expenses of $81,788 were charged, or an average price
of $.50 per share.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) 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.
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:
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) STOCK OPTIONS (CONTINUED)
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
SHARES WTD. AVG. PRICE SHARES WTD. AVG. PRICE
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
Granted 786,635 .48 750,000 .43
Exercised -- (65,612) .35
Canceled (82,500) 3.37 --
Outstanding at June 30, 1999 1,406,031 .53** 2,568,676 2.24
======== ========
**On June 25, 1999, the exercise price of 502,225 outstanding incentive
stock options was restated to $.60 per share. The Company has recorded
compensation of $330,569 during the fiscal year ended June 30, 1999 as a
result of this re-pricing, in accordance with the guidelines discussed in
the proposed FASB interpretation of APB Opinion No. 25.
At June 30, 1999 and 1998, 1,096,825 and 451,513, respectively, of the incentive
stock options were vested and exercisable and 2,568,676 and 1,884,288,
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.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) STOCK OPTIONS (CONTINUED)
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.
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.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) STOCK OPTIONS (CONTINUED)
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).
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.
On July 5, 1998, 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 $622,500 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (one year).
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) STOCK OPTIONS (CONTINUED)
At various dates during the year ended June 30, 1999, the Company issued to
various employees incentive options to purchase 786,635 shares of common
stock at prices ranging from $.46 to $.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, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
Weighted
average
Range of remaining Weighted Weighted
EXERCISE PRICES SHARES LIFE (YEARS) AVG. PRICE SHARES AVG. PRICE
$ .35 - 1.25 3,224,707 8.16 $ .54 2,915,501 $ .54
1.36 - 2.94 750,000 7.00 1.36 750,000 1.36
$ .35 - 2.94 3,974,707 7.94 $ .70 3,665,501 $ .70
================================================================================
At June 30, 1999, 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 "additional incentive stock options" to
exercise their incentive stock options, and acquire shares of common stock. The
compensation cost that has been charged against income for the officers was
$(66,667) and $(53,570) for 1999 and 1998, respectively.
The weighted average Black-Scholes value of options granted during 1999 and 1998
was $.42 and $1.44 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)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(18) STOCK OPTIONS (CONTINUED)
From
Inception
(December 10,
Year Ended Year Ended 1993) to
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- --------------
Net loss to
common shareholders -
AS REPORTED $ (7,756,344) $ (9,037,725) $ (35,092,999)
============= ============ =============
PRO FORMA $ (7,469,637) $ (9,297,781) $ (35,365,868)
============= ============ =============
Basic loss per share -
AS REPORTED $ (.20) $ (.32) $ (1.41)
================ ================ ==================
PRO FORMA $ (.19) $ (.34) $ (1.42)
================ ================ ==================
Diluted loss per share -
AS REPORTED $ (.20) $ (.32) $ (1.41)
================ ================ ==================
PRO FORMA $ (.19) $ (.34) $ (1.42)
================ ================ ==================
For purposes of the preceding pro-forma 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 1999 and 1998, respectively: no dividend yield;
volatility of 28.2% and 7.1%; risk-free interest rate of 6% and 6.5%; and an
expected term of five years.
(19) 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,
1999 was $94,514.
(CONTINUED)
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these instruments. The fair value of the Company's debt obligations is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
At June 30, 1999 and 1998, the aggregate fair value of the Company's debt
obligations approximated its carrying value.
(21) 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 expired on July 6, 1999 and new employment agreements were entered
into on August 30, 1999. The new agreements are for a term of five years and
provide for compensation to these individuals at the annual rate of $286,225,
$119,070, and $119,070, respectively. The agreements provide for annual
increases based upon changes in the Consumer Price Index, but in no event shall
the cost of living increase be less than seven percent. The agreements provide
for bonus arrangements and other normal benefits.
AS ADDITIONAL CONSIDERATION FOR HIS DEVELOPMENT EFFORTS IN THE CTLMTM 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 CTLMTM 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.
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the CTLMTM 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.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(21) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 1, 1997, the accounting firm of Margolies and Fink, Certified
Public Accountants for the Company, changed the accounting firm's name to
Margolies, Fink and Wichrowski, Certified Public Accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning directors and
executive officers of the Company:
NAME AGE POSITION
Richard J. Grable 57 Chief Executive Officer and Director
Linda B. Grable 62 Chairman of the Board and President
Allan L. Schwartz 57 Executive Vice-President, Chief
Financial Officer and
Director.
Richard Grable, Allan Schwartz and Linda Grable are founders of the Company and
as such may be deemed "promoters" and "parents" as defined in the Rules and
Regulations promulgated under the Securities Act, as those terms are defined in
the rules and regulations promulgated under the Securities Act. Directors serve
until the next meeting of shareholders. Officers serve at the pleasure of the
Board of Directors.
RICHARD J. GRABLE
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).
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 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 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 our directors and
executive officers, and persons who own more than 10 percent of our 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 our knowledge, based solely on review of the copies of such
reports furnished to the Company, all Section 16(a) filing requirements
applicable to our officers and directors were complied with during the year
ended June 30, 1998. We have 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
The following table sets forth the compensation awarded to, earned by or paid to
our Chief Executive Officer and other executive officers for services rendered
to the Company during 1999 and 1998. No other person, who, during 1999 and 1998
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".
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
Name & Principal
Position Year Salary (2) Other Annual Restricted Securities/Underlying
Compensation Stock Awards Option/SARs (1)
<S> <C> <C> <C> <C> <C>
Richard J. Grable, CEO And 1997 $289,779 $115,000 $268,000 22,883
Director
Linda B. Grable, President 1997 $ 97,451 $115,000 $268,000 22,883
and Director
Allan L. Schwartz, Exec 1997 $111,534 $115,000 $268,000 130,410
VP, CFO and Director
</TABLE>
(1) The aggregate dollar value of the 1998 and 1999 options, based on the
averaged high and low price on June 30, 1999 are as follows: Richard J. Grable
- -$341,321 Linda B. Grable-$341,321; and Allan L. Schwartz-$341,321.
(2) The salaries include compensation, which has been accrued and not paid as of
June 30, 1999 in the amounts as follows: Richard J. Grable $59,630, Linda B.
Grable $24,806 and Allan L. Schwartz $24,806.
EMPLOYMENT AGREEMENTS
We entered into five-year employment agreements with Mr. Richard J. Grable, Mr.
Allan L. Schwartz and Ms. Linda B. Grable that expire on August 29, 2004.
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. In
addition, Messrs. Grable and Schwartz and Ms. Grable each receive a car
allowance of $500 per month. Each employment agreement provides for bonuses,
health insurance, car allowance, and related benefits, and a cost of living
adjustment of 7% per annum. No bonuses have been paid to date.
The following table sets forth certain information with regard to the
Options/SAR grants by the Company to Management for the fiscal year ended June
30, 1999.
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
No. of Securities % of Total Options Exercise or Market Price
Underlying Options Granted to Employees Base Price On Date of Expiration
Name Granted In Fiscal Year ($/Share) Grant Date
<S> <C> <C> <C> <C> <C>
Richard J. 250,000 16% $.17 $.44 7/5/03
Grable 208,333 14$ $.48 $.44 7/5/03
Linda B. 250,000 16% $.17 $.44 7/5/03
Grable 208,333 14$ $.48 $.44 7/5/03
Allan L 250,000 16% $.17 $.44 7/5/03
Schwartz 208,333 14$ $.48 $.44 7/5/03
</TABLE>
STOCK OPTION PLANS
("The 1995 Plan"). For the fiscal year ended June 30, 1999, 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.
On August 30, 1999, we established an Equity Incentive Plan. The Shareholders
must approve the 1999 Plan within one year. The MAXIMUM NUMBER OF SHARES THAT
CAN BE GRANTED UNDER THE 1999 PLAN IS 15,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. The series, rights and preferences of the
preferred shares are to be determined by the Company's Board of Directors. The
1999 Plan also includes any stock available for future Stock Rights under the
1995 Plan. See Item 13 (a) Exhibit 10.20.
Under both 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.
Pursuant to stock option agreements, Mr. Richard J. Grable, Mr. Allan L.
Schwartz and Mrs. Linda B. Grable each have an option to purchase 2,500,000
shares of common stock or preferred stock. These options vest in equal
installments over a five-year period at an exercise price of $.21 per share
(110% of the fair market value of the shares on the date of grant). The Stock
Option Agreement terminates on August 30, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock of the
Company as of October 11, 1999 as to (a) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of our 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 11,494,540 and 3,572,300 shares
respectively. Both Richard Grable and Linda Grable specifically disclaim any
beneficial interest in each other's shares.
NAME AND ADDRESS NUMBER OF SHARES OWNED % OF OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY (1)(2) SHARES OF COMMON STOCK
- ------------------- ------------------- ----------------------
RICHARD J. GRABLE 16,983,506(3) 29.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
LINDA B. GRABLE 16,983,506(4) 29.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALLAN L. SCHWARTZ 4,380,893(5) 7.7%
C/O 6351 NW 18TH COURT
PLANTATION, FL 33313
ALL OFFICERS AND DIRECTORS 21,364,399 (6) 37.3%
AS A GROUP (3 PERSONS)
(1) Except as indicated in the footnotes to this table, based on information
provided by such persons, the persons named in the table above have sole
voting power and investment power with respect to all shares of Common Stock
shown beneficially owned by them.
(2) Percentage of ownership is based on 57,247,380 shares of Common Stock
outstanding as of October 11, 1999 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 October 11, 1999 are deemed
outstanding for computing the percentage of that person and the group.
(3) Includes 958,333 shares subject to options and 3,572,300 shares owned by the
wife of Richard J. Grable, Linda B. Grable, of which he disclaims beneficial
ownership.
(4) Includes 958,333 shares subject to options and 11,494,540 shares owned by
the husband of Linda B. Grable, Richard J. Grable, of which she disclaims
beneficial ownership.
(5) Includes 958,333 shares subject to options and 9,000 shares owned by the
wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial
ownership.
(6) Includes 1,916,666 shares subject to options held by Linda and Richard
Grable and 958,333 shares subject to options held by Allan Schwartz. Also
includes 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz,
of which he disclaims beneficial ownership.
DIVIDEND POLICY
To date, we have not declared or paid any dividends with respect to our 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 our Common Stock in the foreseeable future.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard J. Grable and Linda B. Grable are husband and wife. Further, Richard J.
Grable and Linda B. Grable are each "Control Persons" as a result of their
control of a majority voting power of our outstanding stock. Both parties
disclaim, however, any beneficial interest or ownership in the shares owned by
the other party.
In September and October 1998, Linda Grable, our President, personally
guaranteed three promissory notes issued by the Company to third parties. Ms.
Grable received no compensation for these guarantees. As of the date of this
Report, one of the three Notes has been repaid.
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, our Chief Executive Officer. Mr. Grable is the owner of the
Patent, which encompasses the technology for the CTLM(TM). The Company and Mr.
Grable has previously entered into an oral agreement for the exclusive license
for the patent that was never memorialized in written form. The term of the
license is for the life of the Patent (17 years) and any renewals, subject to
termination, under certain conditions. As consideration for the License, we
issued to Mr. Grable 3,500,000 shares of Common Stock and is required to issue
an additional 3,500,000 shares in June 1999. In addition, we have agreed to pay
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. During the
second year of the Agreement there is a minimum cash royalty provision of
$250,000 payable at the end of the second year which Mr. Grable has deferred
until we commence sales and delivery of CTLM(TM) Systems. See Item 1.
"Business-Patent Licensing Agreement".
Since October 1998, we have accrued $109,243 in salaries payable to our
executive officers and directors, Richard J. Grable, Allan Schwartz and Linda B.
Grable, due to our lack of working capital. These salaries remain unpaid to date
and will be paid as soon as the Company determines that the funds are available.
In January 1999 and February 1999, Richard Grable, our Chief Executive Officer,
director and founder sold an aggregate of 831,743 shares of our Common Stock
owned by him in excess of four years, pursuant to Rule 144 and lent the
aggregate proceeds of approximately $347,775 directly to the Company.
In January 1999, February 1999 and March 1999, Linda Grable, our President,
director and founder sold an aggregate of 520,000 shares of our Common Stock
owned by her in excess of four years, pursuant to Rule 144 and lent the
aggregate proceeds of approximately $166,618 directly to the Company.
In December 1998, January 1999 and February 1999, Allan Schwartz, our Executive
Vice President, director and founder sold an aggregate of 820,000 shares owned
by him in excess of four years, pursuant to Rule 144 and lent the aggregate
proceeds of approximately $359,707 directly to the Company.
The loans to the Company by Messers. Grable, Schwartz and Ms. Grable were
interest free and were evidenced by promissory notes. The December, January,
February and March promissory notes were due on January 30, 1999, February
28,1999, March 31, 1999 and April 30, 1999, respectively. The net proceeds were
recorded as a loan payable to each respective founder.
A meeting of the Board of Directors was held on May 12, 1999 to review and act
upon the previously adopted schedule of repayment of the loans, interest and
potential tax liability. Based on an opinion of the Founders personal outside
counsel and upon advice of a tax advisor, the Board voted to rescind the
previously adopted resolution. The new resolution authorized the repayment of
the December, January, February, and March promissory notes in full by the
issuance of shares equal to the number of shares sold. The restricted shares
issued as repayment for the loan bear registration rights. Since the loans were
repaid on a share for share basis with no other consideration, the Founders have
been advised that there is no capital gain and therefore no tax liability.
Messrs. Grable, Schwartz and Ms. Grable received 831,743, 820,000, and 520,000
shares of our restricted Common Stock, respectively as payment in full for the
loans from December 1998 to March 1999.
In May 1999, Messrs. Grable and Schwartz each sold 110,000 shares, respectively,
of our Common Stock owned by them in excess of four years, pursuant to Rule 144
and lent the aggregate proceeds of approximately $91,759 directly to the
Company. The loans to the Company are evidenced by interest free promissory
notes, which are due, and payable on June 30, 1999.
In June 1999, Messrs. Grable and Schwartz each sold 280,000 and 315,020 shares,
respectively, of our Common Stock owned by them in excess of four years,
pursuant to Rule 144 and lent the aggregate proceeds of approximately $201,795
directly to the Company. The loans to the Company are evidenced by interest free
promissory notes, which are due, and payable on July 31, 1999.
In July 1999, Mr. Schwartz sold 500,000 shares of our Common Stock owned by him
in excess of four years, pursuant to Rule 144 and lent the aggregate proceeds of
approximately $137,241 directly to the Company. The loan to the Company
evidenced by an interest free promissory note, which is due, and payable on
August 31, 1999.
The loans to the Company by Messers. Grable and Schwartz were interest free and
were evidenced by promissory notes. The May, June, July promissory notes were
due on June 30, 1999, July 31, 1999 and August 31, 1999, respectively. The net
proceeds were recorded as a loan payable to each respective founder.
Messrs. Grable and Schwartz received 390,000 and 925,500 shares of our
restricted Common Stock, respectively as payment in full for the loans from May
1999 to July 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of our 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 our 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 our
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 our 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 our 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 our 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 our 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 our
Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of our 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 our 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.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation.
3.15 Amended Certificate of Amendment-Series B Designation.
4.1 Instruments Defining the Rights of Security Holders - Designation of
Series B Convertible Preferred Shares. (See Exhibit 3.3, above).
4.2 Instruments Defining the Rights of Security Holders - Designation of
Series C Convertible Preferred Shares. (See Exhibit 3.4, above).
4.3 Instruments Defining the Rights of Security Holders -Designation of
Series D Convertible Preferred Shares. (See Exhibit 3.5, above).
4.4 Instruments Defining the Rights of Security Holders - Designation of
Series E Convertible Preferred Shares. (See Exhibit 3.6, above).
4.5 Instruments Defining the Rights of Security Holders - Designation of
Series F Convertible Preferred Shares. (See Exhibit 3.7, above).
4.6 Instruments Defining the Rights of Security Holders -Designation of
Series H Convertible Preferred Shares. (See Exhibit 3.8, above).
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares. (See
Exhibit 3.13, above).
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares. (See Exhibit
3.15, above).
4.10 Convertible Debenture
10.1 Form of Subscription Agreement by and between Imaging Diagnostic
Systems, Inc. and Alfred Ricciardi. Incorporated by reference
to our Registration Statement on Form S-2, File Number 333-59539.
10.2 Patent Licensing Agreement. Incorporated by reference to our
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 our 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 our Registration Statement on Form S-2, File Number
333-60405.
10.7 Form of Series H Preferred Stock Subscription Documents. Incorporated
by reference to our Registration Statement on Form S-2, File Number
333-60405.
10.8 OEM Agreement incorporated by reference to Exhibit 10.8 of our 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 our Form 10-KSB for the fiscal year ending June 30, 1998.
10.10 Focus Distribution Agreement (United Kingdom and Ireland).
Incorporated by reference to our Form 10 QSB/A filed on April 2,1999.
10.11 Focus Distribution Agreement (Benelux countries). Incorporated by
reference to our Amendment number 1 to Registration on
Form S-2, File Number 333-60405.
10.12 Syncor Distribution Agreement. Incorporated by reference to our
Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
our Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference
to our Form 10 KSB/A filed on April 9,1999.
10.16 Form of Series I Preferred Stock Subscription Documents.
Incorporated by reference to our Amendment number 1 to Registration
on Form S-2, File Number 333-60405.
10.17 Form of Debenture Subscription Documents. Incorporated by referenc
to our Amendment number 1 to Registration on Form S-2,
File Number 333-60405.
10.18 Form of Mortgage. Incorporated by reference to our Amendment number 1
to Registration on Form S-2, File Number 333-60405.
10.19 Form of Series G Subscription Documents. Incorporated by reference
to our Amendment number 1 to Registration on Form S-2, File Number
333-60405.
10.20 1999 Equity Incentive Plan
10.21 Form of Debenture in the amount of $825,000
10.22 Registration Rights Agreement $825,000 Convertible Debenture
10.23 Subscription Agreement $825,000 Convertible Debenture
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
BY: /S/LINDA B. GRABLE
Linda B. Grable, Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Annual Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/S/LINDA B. GRABLE Chairman of the Board and President October 11, 1999
- --------------------
Linda B. Grable
/S/RICHARD J. GRABLE Director and Chief Executive Officer October 11, 1999
- --------------------
Richard J. Grable
/S/ALLAN L. SCHWARTZ Director, Executive Vice-President October 11, 1999
- -------------------- (Principal Accounting and Financial
Allan L. Schwartz Officer)
<PAGE>
Exhibit 10.20 1999 Equity Incentive Plan
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
1999 EQUITY INCENTIVE PLAN
ARTICLE 1: PURPOSE
1.1 GENERAL. The purpose of the Imaging Diagnostic Systems, Inc. 1999
Equity Incentive Plan (the "Plan") is to promote the interests of Imaging
Diagnostic Systems, Inc. (the "Company"), by enabling the Company to motivate,
attract, and retain the services of persons upon whose judgment, efforts, and
contributions the success of the Company's business depends. The plan is further
intended to align the personal interests of such persons with the interests of
stockholders of the Company through equity participation in the Company's growth
and success. Capitalized terms not otherwise defined in the text are defined in
Article 14.
ARTICLE 2: EFFECTIVE DATE; TERM.
2.1 EFFECTIVE DATE. The Plan shall become effective at the date and
time of its approval by the stockholders of the Company (the "Effective Date").
The Plan shall be submitted to the stockholders of the Company for their
approval at the 1999 Annual Meeting of the Company.
2.2 TERM. This Plan shall terminate on the tenth (10th)
anniversary of the Effective Date, subject to Article 12.
ARTICLE 3: SHARES SUBJECT TO THE PLAN.
3.1 NUMBER OF SHARES. The maximum number of shares of Stock reserved
and available for delivery pursuant to Stock Rights or which may be used to
provide a basis of measurement or valuation of a Stock Right shall be equal to
the sum of (a) 15,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, the Series Rights and preferences of which are to be determined
by the Company's Board of Directors, plus (b) any shares of Stock available for
future Stock Rights under the Predecessor Plan as of the Effective Date, plus
(c) the additional shares of Stock described below in this Article 3. No
additional grants shall be made under the Predecessor Plan after the Effective
Date. The limitations of this Article 3 shall be subject to adjustment as
provided in Section 11.1.
3.2 LAPSED STOCK RIGHTS. To the extent that a Stock Right under the
Plan or the Predecessor Plan is forfeited, terminates, expires or lapses for any
reason, any shares of Stock subject to the Stock Right will again be available
for the grant of a Stock Right under the Plan. To the extent any shares of Stock
covered by an Stock Right are not delivered to a Participant or beneficiary
because the Stock Right is forfeited, terminates, expires or lapses for any
reason, or the shares of Stock are not delivered because the Stock Right is
settled in cash, such shares shall not be deemed to have been delivered for
purposes of determining the maximum number of shares of Stock available for
delivery under the Plan.
3.3 PAYMENTS IN STOCK. Any shares of Stock tendered (by delivery or
attestation) to the Company in connection with payment for Stock purchased
pursuant to the Plan or any Predecessor Plan or payment of withholding taxes
with respect to any Stock Right shall be added back to the aggregate number of
shares reserved and available for Stock Rights under the Plan and only the
number of shares of Stock issued net of the number of shares tendered shall be
deemed delivered for purposes of determining the maximum number of shares of
Stock available for delivery under the Plan.
3.4 LIMITATIONS. Subject to adjustment as provided in Section 11.1, the
following additional limitations apply under the Plan:
(a) The maximum number of shares of Stock that may be delivered
pursuant to Stock Rights of Incentive Stock Options, Non-Qualified
Stock Options or other Stock Rights shall be 15,000,000 shares.
(b) In no event shall the aggregate fair market value (determined at
the time an Incentive Stock Option is granted) of Common Stock for
which Incentive Stock Option's granted to any employee are exercisable
for the first time by such employee during any calendar year (under all
stock option plans of the Company and any Related Corporation) exceed
$100,000.
(c) The maximum payment that can be made for Stock Rights granted to
any one individual pursuant to Section 8 (Stock-Reference Stock Rights)
shall be $500,000 for any single or combined performance goal
established for any annual performance. If an Stock Right granted under
Section 8 is, at the time of grant, denominated in shares, the value of
the shares of Stock for determining this maximum individual payment
amount will be the Fair Market Value of the shares of Stock on the
first day of the applicable performance period.
3.5 STOCK DISTRIBUTED. Any Stock distributed pursuant to a Stock Right
may consist, in whole or in part, of authorized and unissued Stock, treasury
Stock, or Stock purchased on the open market.
ARTICLE 4: ELIGIBILITY.
4.1 GENERAL. Stock Rights may be granted only to an individual who is
an officer, director or employee (including employees who also are directors or
officers), consultants, independent contractors, or advisers of the Company or a
Subsidiary, and to other individuals the Company or a Subsidiary proposes to
engage in one of the foregoing capacities, as determined by the Committee.
<PAGE>
ARTICLE 5: ADMINISTRATION.
5.1 ADMINISTRATORS. The Plan will be administered by the Company's
Board of Directors (the "Committee"). The Board may, in its discretion, delegate
its powers with respect to the Plan to an employee benefit plan committee or any
other committee. A majority of the members of any such Committee shall
constitute a quorum, and all determinations of the Committee shall be made by
the majority of its members present at a meeting. Any determination of the
Committee under the Plan may be made without notice or meeting of the Committee
by a writing signed by all of the Committee members.
5.2 AUTHORITY OF THE COMMITTEE. Subject to ratification of the grant or
authorization of each Stock Right by the Committee (but only if so required by
applicable state law), and subject to the terms of the Plan, the Committee shall
have the exclusive power, authority, and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Stock Rights to be granted to each
Participant;
(c) Determine the number of Stock Rights to be granted and the number
of shares of Stock subject to a Stock Right;
(d) Prescribe the form of each Stock Right Agreement, which need not be
identical for each Participant;
(e) Determine the terms and conditions of any Stock Right granted under
the Plan, including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the Stock
Right, any schedule for lapse of forfeiture restrictions or
restrictions on the exercisability of an Stock Right and accelerations
or waivers thereof, any performance criteria, and any modification or
amendment of any Stock Right previously granted, based in each case on
such considerations as the Committee in its sole discretion determines;
(f) Determine whether, to what extent, and under what circumstances an
Stock Right may be settled in, or the exercise price of an Stock Right
may be paid in, cash, Stock, other Stock Rights, or other property, or
an Stock Right may be canceled, forfeited, or surrendered;
(g) Decide all other matters that must be determined in connection with
a Stock Right;
(h) Establish, adopt, or revise any rules or regulations, as it may
deem necessary or advisable to administer the Plan;
(i) Interpret the Plan, any Stock Right, and any Stock Right Agreement
in its discretion; and
(j) Make all other decisions and determinations that may be required
under the Plan or as the Committee deems necessary or advisable to
administer the Plan.
5.3 LIABILITY. No members of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any stock
right granted under it. No member of the Committee shall be liable for any act
or omission of any other member of the Committee or for any act or omission on
his own part, including but not limited to the exercise of any power and
discretion given to him under the Plan, except those resulting from his own
gross negligence or willful misconduct.
5.4 GRANTS TO THE COMMITTEE. Stock Rights may be granted to members of
the Committee, whether such grants are in their capacity as directors, officers
or consultants, but no discretionary Stock Rights shall be granted to any person
who is, at the time of the proposed grant, a member of the Committee unless such
grant has been approved by a majority vote of the disinterested members of the
Committee. All grants of Stock Rights to members of the Committee shall in all
other respects be made in accordance with the provisions of this Plan applicable
to other eligible persons. Members of the Committee who are either (i) eligible
for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may
vote on any matters affecting the administration of the Plan or the grant of any
Stock Rights pursuant to the Plan, except that no such member shall act upon the
granting to himself of discretionary Stock Rights but any such member may be
counted in determining the existence of a quorum at any meeting of the Committee
during which action is taken with respect to the granting to him of Stock
Rights.
5.5 DECISIONS BINDING. All decisions, interpretations, and
determinations by the Committee with respect to the Plan, any Stock Right, and
any Stock Right Agreement are final, binding, and conclusive on all parties.
ARTICLE 6: STOCK OPTIONS.
6.1 GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(A) EXERCISE PRICE. The exercise price per share of Stock under an
Option shall be determined by the Committee, provided that such
exercise price shall not be less than eight-five percent (75%) of the
Fair Market Value as of the date of grant in the case of a
Non-Qualified Stock Option and one hundred percent (100%) of such Fair
Market Value in the case of an Incentive Stock Option. In the case of
an Incentive Stock Option to be granted to an employee owning stock
which represents more than 10 percent (10%) of the total combined
voting power of all classes of stock of the Company or any Related
Corporation, the price per share specified in the agreement relating to
such Incentive Stock Option shall not be less than 110 percent (110%)
of the fair market value per share of Common Stock on the date of grant
and such Incentive Stock Option shall not be exercisable after the
expiration of 5 years from the date of grant.
(B) PAYMENT. Payment for Stock issued upon exercise of an Option shall
be made in accordance with Article 9 of the Plan.
(C) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part;
provided, that no Option may be exercisable prior to six months
following the date of the grant of such Option. The Committee also
shall determine the expiration date of each Option and the performance
or other conditions, if any, that must be satisfied before all or part
of an Option may be exercised. The Committee may provide in any Stock
Right Agreement with respect to an Option for expiration prior to its
expiration date, or for accelerated exercisability, in the event of the
Participant's death, disability, retirement, termination of service, or
other events.
(D) EVIDENCE OF OPTION. All Options shall be evidenced by a written
Agreement between the Company and the Participant. The Agreement shall
include such provisions as may be specified by the Committee. The
Agreement shall specify whether the Option is an Incentive Stock Option
or a Non-Qualified Option.
6.2 INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(A) EXERCISE PRICE. The exercise price per share of Stock shall be set
by the Committee, provided that the exercise price for any Incentive
Stock Option may not be less than the Fair Market Value as of the date
of the grant.
(B) EXERCISE. In no event may any Incentive Stock Option be exercisable
for more than ten years from the date of its grant.
(C) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value
(determined as of the time a Stock Right is granted) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.00. Any Options granted that exceed this threshold shall be
automatically deemed Non-Qualified Options.
(D) TEN PERCENT OWNERS. An Incentive Stock Option may be granted to a
Ten Percent Owner, provided that at the time such option is granted the
exercise price per share of Stock shall not be less than 110% of the
Fair Market Value and such option by its terms is not exercisable after
the expiration of five (5) years from the date of its grant.
(E) EXPIRATION OF INCENTIVE STOCK OPTIONS. No award of an Incentive
Stock Option may be made pursuant to this Plan after the expiration of
ten (10) years from the Effective Date.
(F) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive
Stock Option may be exercised only by the Participant.
(G) EMPLOYEES ONLY. Only common law employees of the Company or a
Subsidiary are eligible to receive Incentive Stock
Options.
ARTICLE 7: RESTRICTED STOCK AWARDS.
7.1 RESTRICTED STOCK AWARDS. The Committee is authorized to make Stock
Awards of Restricted Stock to Participants either in the form of a grant of
Stock or an offer to sell Stock to a Participant, in such amounts and subject to
such terms, conditions and restrictions as may be selected by the Committee. All
Awards of Restricted Stock shall be evidenced by an Agreement. A Stock Award
Agreement may specify whether, and to what extent, holders of Restricted Stock
Awards shall have voting, dividend, and other rights of holders of Stock.
7.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, including without
limitation "vesting" or forfeiture restrictions, as the Committee may impose.
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Committee
determines at the time of the grant of the Stock Right or thereafter.
7.3 FORFEITURE. Except as otherwise determined by the Committee at the
time of the grant of the Stock Right or thereafter, upon termination of
employment during the applicable restriction period, Restricted Stock that is at
that time subject to restrictions shall be forfeited and reacquired by the
Company; provided, however, that the Committee may provide in any Stock Right
Agreement that restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in specified circumstances, and the
Committee may in other cases waive in whole or in part restrictions or
forfeiture conditions relating to Restricted Stock.
7.4 PAYMENT AND CERTIFICATES FOR RESTRICTED STOCK. If a Restricted
Stock Right provides for the purchase of Stock by a Participant, payment shall
be made pursuant to Article 9 of the Plan. Restricted Stock granted under the
Plan may be evidenced in such manner, as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company shall retain physical possession of the certificate until such time
as all applicable restrictions lapse.
7.5 RESTRICTIONS ON RESTRICTED STOCK RIGHTS. Each Restricted Stock
Right shall be subject to such conditions, restrictions and contingencies, as
the Committee shall determine. These may include continuous service and/or the
achievement of performance goals. The performance goals that may be used by the
Committee for such Stock Rights may be based on one or more business criteria
that apply to the individual participant, a business unit of the Company, a
Subsidiary or the Company as a whole, and/or performance as compared with that
of other publicly traded companies. Such criteria may include, but are not
limited to, stock price, market share, sales, earnings, earnings per share,
return on equity, or costs. The Committee may designate a single performance
goal criterion, or multiple performance goal criteria.
ARTICLE 8: STOCK REFERENCE STOCK AWARDS.
8.1 GRANT OF STOCK-REFERENCE AWARDS. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants such other
Stock Rights that are payable in, valued in whole or in part by reference to, or
otherwise, based on or related to shares of Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including without limitation shares
of Stock awarded purely as a "bonus" and not subject to any restrictions or
conditions, other rights convertible or exchangeable into shares of Stock, and
Stock Rights valued by reference to book value of shares of Stock or the value
of securities of or the performance of specified divisions or Subsidiaries of
the Company.
8.2 RESTRICTIONS ON STOCK-REFERENCE AWARDS. Each Stock-Reference Award
shall be subject to such conditions, restrictions and contingencies, as the
Committee shall determine. These may include continuous service and/or the
achievement of performance goals. The performance goals that may be used by the
Committee for such Stock Rights may be based on one or more business criteria
that apply to the individual participant, a business unit of the Company, a
Subsidiary, or the Company as a whole, and/or performance as compared with that
of other publicly traded companies. Such criteria may include, but are not
limited to, stock price, market share, sales, earnings, earnings per share,
return on equity, or costs. The Committee may designate a single performance
goal criterion, or multiple performance goal criteria.
<PAGE>
ARTICLE 9: PAYMENT FOR STOCK PURCHASES;
WITHHOLDING TAXES; RELOAD OPTIONS.
9.1 PAYMENT. Payment for Stock purchased pursuant to the Plan may be
made in cash (by check) or, where expressly approved for the Participant by the
Committee in a Stock Right Agreement (or otherwise in writing where permitted by
law):
(a) By cancellation of indebtedness of the Company to the Participant;
(b) By surrender of (or attestation to the ownership of) Stock, valued
at Fair Market Value on the date new Stock is purchased under the Plan;
provided, however, that such surrender or attestation shall not be
permitted if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect
to the Stock Right for financial reporting purposes;
(c) By tender of a full recourse promissory note having such terms as
may be approved by the Committee, secured by the Stock purchased, and
bearing interest at a rate sufficient to avoid imputation of income
under Sections 482 and 1274 of the Code; provided, however, that
Participants who are not employees of the Company shall not be entitled
to purchase Stock with a promissory note unless the note is adequately
secured by collateral other than the Stock; provided, further, that in
the case of newly issued shares of Stock, the portion of the Purchase
Price equal to the par value of the Stock, if any, must be paid in cash
or other legal consideration;
(d) By waiver of compensation due or accrued to Participant for
services rendered;
(e) By tender of property acceptable to the Committee;
(f) With respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock then exists:
(1) Through a "same day sale" commitment from Participant and
a broker-dealer that is a member of the National Association
of Securities Dealers (a "NASD Dealer") whereby Participant
irrevocably elects to exercise the Option and to sell a
portion of the Stock so purchased to pay for the exercise
price and any applicable withholding taxes, and whereby the
NASD Dealer irrevocably commits upon receipt of such Stock to
forward the exercise price and any such withholding taxes
directly to the Company;
(2) Through a "margin" commitment from Participant and a NASD
Dealer whereby Participant irrevocably elects to exercise the
Option and to pledge the Stock so purchased to the NASD Dealer
in a margin account as security for a loan from the NASD
Dealer in the amount of the exercise price and any applicable
withholding taxes, and whereby the NASD Dealer irrevocably
commits upon receipt of such Stock to forward the exercise
price and any such withholding taxes directly to the Company;
or
(3) Through any other "cashless exercise" procedure approved
by the Committee; or
(g) By any combination of the foregoing.
9.2 LOAN GUARANTEES. The Committee may help the Participant pay for
Shares purchased under the Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9.3 TAX WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy federal, state and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan. Whenever,
under the Plan, payments in satisfaction of Stock Rights are to be made in cash,
such payment shall be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements. With respect to withholding required upon
any taxable event relating to the issuance of Stock under the Plan, Participants
may elect, subject to the Committee's approval and any rules or policies adopted
by the Committee from time to time, to satisfy the withholding requirement, in
whole or in part, by having the Company or any Subsidiary withhold shares of
Stock having a Fair Market Value on the date of withholding equal to the amount
to be withheld for tax purposes. The Committee may, at the time any Stock Right
is granted, require that any and all applicable tax withholding requirements be
satisfied by the withholding of shares of Stock as set forth above.
9.4 RELOAD OPTIONS. Stock Right Agreements may contain a provision
pursuant to which a Participant who pays all or a portion of the exercise price
of an Option or the tax required to be withheld pursuant to an exercise of an
Option by surrendering shares of Stock pursuant to Sections 9.1 or 9.3,
respectively, shall be automatically granted an Option for the purchase of Stock
equal to the number of shares surrendered (a "Reload Option"). The grant of the
Reload Option shall be effective on the date the Participant surrenders the
shares of Stock in respect of which the Reload Option is granted (the "Reload
Date"). The Reload Option shall have an exercise price equal to the Fair Market
Value of the Stock on the Reload Date, and shall have a term which is no longer,
and which shall lapse no later, than the original term of the underlying option.
If stock otherwise available under an Incentive Stock Option is withheld
pursuant to Section 9.3, any Reload Option granted in connection with the
withholding shall be treated as a new Incentive Stock Option, subject to the
rules set forth in Section 6.2.
<PAGE>
ARTICLE 10: ADDITIONAL PROVISIONS
APPLICABLE TO STOCK RIGHTS.
10.1 STAND-ALONE, TANDEM, AND SUBSTITUTE STOCK RIGHTS. Stock Rights
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Stock Right granted under the Plan. Stock Rights granted in addition to or
in tandem with other Stock Rights may be granted either at the same time as or
at a different time from the grant of such other Stock Rights.
10.2 EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Stock Right for a payment in cash,
Stock, or another Stock Right, based on the terms and conditions the Committee
determines and communicates to the Participant at the time the offer is made.
10.3 TERM OF STOCK RIGHT. The term of each Stock Right shall be for the
period as determined by the Committee, provided that in no event shall the term
of any Incentive Stock Option or a Stock Appreciation Right granted in tandem
with the Incentive Stock Option exceed a period of ten years from the date of
its grant.
10.4 FORM OF PAYMENT FOR STOCK RIGHTS. Subject to the terms of the Plan
and any applicable law or Stock Right Agreement, payments or transfers to be
made by the Company or a Subsidiary on the grant or exercise of an Stock Right
may be made in such forms as the Committee determines at or after the time of
grant, including without limitation, cash, Stock, other Stock Rights, or other
property, or any combination, and may be made in a single payment or transfer,
in installments, or on a deferred basis, in each case determined in accordance
with rules adopted by, and at the discretion of, the Committee.
10.5 LIMITS ON TRANSFER. No right or interest of a Participant in any
Stock Right may be pledged, encumbered, or hypothecated to or in favor of any
party other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided below, no Stock Right
shall be assignable or transferable by a Participant other than by will,
beneficiary designation or the laws of descent and distribution or, except in
the case of an Incentive Stock Option, pursuant to a qualified domestic
relations order as defined in Section 414(p)(1)(A) of the Code or Title I of the
Employee Retirement Income Security Act, or the rules there under. The Committee
may determine and specify in any Stock Right Agreement for an Stock Right other
than an Stock Right that includes an Incentive Stock Option, at the time of
granting an Stock Right or thereafter, that a Participant may assign or
otherwise transfer all or a portion of the rights represented by the Stock Right
to specified individuals or classes of individuals, or to a trust benefiting
such individuals or classes of individuals, or to a partnership or other entity
in which all partners or equity owners are such individuals, subject to such
restrictions, limitations, or conditions as the Committee deems to be
appropriate.
10.6 STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with federal or state
securities laws, rules, and regulations and the rules of any national securities
exchange or automated quotation system on which the Stock is listed, quoted, or
traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock.
ARTICLE 11: CHANGES IN CAPITAL
STRUCTURE; CHANGE OF CONTROL.
11.1 GENERAL ADJUSTMENTS. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Stock, a declaration of a dividend
payable in a form other than Stock in an amount that has a material effect on
the price of the Stock, a combination or consolidation of the outstanding Stock
(by classification or otherwise) into a lesser number of shares of Stock, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of (a) the number of shares of Stock available for future Stock Rights under
Article 3, (b) the limitations set forth in Article 3, (c) the number and kind
of shares of Stock covered by each outstanding Stock Right or (d) the exercise
price under each outstanding Option or other Stock Right in the nature of rights
that may be exercised. Except as provided in this Article 11, a Participant
shall have no rights by reason of any issue by the Company of stock of any class
or securities convertible into stock of any class, any subdivision or
consolidation of shares of stock of any class, the payment of any stock dividend
or any other increase or decrease in the number of shares of stock of any class.
11.2 DISSOLUTION OR LIQUIDATION. To the extent not previously
exercised, Stock Rights shall terminate immediately prior to the dissolution or
liquidation of the Company.
11.3 REORGANIZATIONS. In the event that the Company is a party to a
merger, consolidation, or other reorganization, outstanding Stock Rights shall
be subject to the agreement of merger, consolidation, or reorganization. The
Committee shall cause such agreement to provide, (a) for the continuation of
outstanding Stock Rights by the Company (if the Company is a surviving
corporation), (b) for their assumption by the surviving corporation or its
parent or subsidiary, (c) for the substitution by the surviving corporation or
its parent or subsidiary of its own Stock Rights for such Stock Rights, (d) for
accelerated vesting, accelerated expiration and/or lapse of restrictions, or (e)
for settlement in cash or cash equivalents.
11.4 EFFECT OF CHANGE IN CONTROL. The Committee may determine and
specify in any Stock Right Agreement, at the time of granting an Stock Right or
thereafter, that any or all outstanding Options and other Stock Rights in the
nature of rights that may be exercised shall become fully exercisable and any or
all restrictions on other Stock Rights shall lapse, upon the effectiveness of a
Change of Control, subject to the following limitations:
(a) In the case of an Incentive Stock Option, the acceleration of
exercisability shall not occur without the Participant's written consent.
(b) If the Company and the other party to the transaction constituting
a Change in Control agree that such transaction is to be treated as a
"pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the acceleration of
exercisability shall not occur to the extent that the surviving
entity's independent public accountants determine in good faith that
such acceleration would preclude the use of "pooling of interests"
accounting.
ARTICLE 12: AMENDMENT, MODIFICATION,
AND TERMINATION.
12.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the
Committee, at any time and from time to time, the Committee may terminate,
amend, or modify the Plan. An amendment or modification of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations and rules.
12.2 STOCK RIGHTS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Stock
Right previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 13: GENERAL PROVISIONS.
13.1 NO RIGHTS TO STOCK RIGHTS. No Participant or employee shall have
any claim to be granted any Stock Right under the Plan, and neither the Company
nor the Committee is obligated to treat Participants and employees uniformly.
13.2 NO STOCKHOLDERS RIGHTS. No Stock Right gives the Participant any
of the rights of a stockholder of the Company unless and until shares of Stock
are in fact issued to such person in connection with such Stock Right.
13.3 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Stock Right
Agreement shall interfere with or limit in any way the "at will" nature of any
Participant's employment or other relationship with the Company or any
Subsidiary, nor confer upon any Participant any right to continue in the
employment or any other relationship of the Company or any Subsidiary, and the
Company and each Subsidiary reserve the right to terminate any Participant's
employment or other relationship at any time.
13.4 UNFUNDED STATUS OF STOCK RIGHTS. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Stock Right, nothing
contained in the Plan or any Stock Right Agreement shall give the Participant
any rights that are greater than those of a general creditor of the Company or
any Subsidiary.
13.5 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare, or other benefit plan of the
Company or any Subsidiary.
13.6 EXPENSES. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.
13.7 TITLES AND HEADINGS. The titles and headings of the Articles and
Sections in the Plan are for convenience of reference only, and in the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
13.8 FRACTIONAL SHARES. No fractional shares of stock shall be issued
and the Committee shall determine, in its discretion, whether cash shall be
given in lieu of fractional shares or whether such fractional share will be
eliminated by rounding up.
13.9 SECURITIES LAW COMPLIANCE. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Section 16 or its successors under the Exchange Act. To the extent
any provision of the Plan or any Stock Right Agreement or any action by the
Committee fails to so comply, it shall be void to the extent required by law and
voidable as deemed advisable by the Committee.
13.10 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of Stock Rights in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act any of the shares of Stock paid under the
Plan. The Company may restrict the issuance or transfer of such shares in such
manner as it deems advisable to ensure the satisfaction of all legal
requirements relating to their registration, qualification or listing or any
exemption there from.
13.11 GOVERNING LAW. The Plan and all Stock Right Agreements shall be
construed in accordance with and governed by the laws of the State of Florida.
13.12 NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan nor
the submission of the Plan to the stockholders of the Company for approval shall
be construed as creating any limitations upon the right and authority of the
Committee to adopt such other incentive compensation arrangements (which
arrangements may be applicable either generally to a class or classes of
individuals or specifically to a particular individual or individuals) as the
Committee in its discretion determines desirable, including, without limitation,
the granting of stock options or other rights otherwise than under the Plan.
ARTICLE 14: DEFINITIONS.
14.1 Definitions. The following words and phrases shall have the
following meanings for purposes of this Plan:
(a) "Stock Right" means any Option, Restricted Stock Stock Right, or
Stock-Reference Stock Right, or any other right or interest
relating to Stock, cash or property, granted to a Participant
under the Plan.
(b) "Stock Right Agreement" means any written agreement, contract, or
other instrument or document evidencing a Stock Right.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means and includes each of the following:
(1) Any transaction or series of transactions, whereby any
person (as that term is used in Section 13 and 14(d)(2) of the Exchange
Act), is or becomes the beneficial owner (as that term is used in
Section 13(d) of the Exchange Act) directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities; provided,
that for purposes of this paragraph, the term "person" shall exclude
(i) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or of a Subsidiary and (ii) a corporation
owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common
stock of the Company.
(2) Any merger, consolidation, or liquidation of the Company
in which the Company is not the continuing or surviving corporation or
pursuant to which Stock would be converted into cash, securities, or
other property, other than (i) a merger or consolidation with a wholly
owned Subsidiary, (ii) a reincorporation of the Company in a different
jurisdiction, or (iii) other transaction in which there is no
substantial change in the stockholders of the Company, where in the
case of (i), (ii) or (iii) all then outstanding Stock Rights are
assumed by the successor corporation, which assumption shall be binding
on all Participants;
(3) Any merger or consolidation of the Company with or into
another entity or any other corporate reorganization, if more than 50%
of the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not stockholders of
the Company immediately prior to such merger, consolidation or other
reorganization.
(4) The sale, transfer, or other disposition of all or
substantially all of the assets of the Company.
(5) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are directors who
either (i) had been directors of the Company on the date 24 months
prior to the date of the event that may constitute a Change in Control
(the "original directors") or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a
majority of the aggregate of the original directors who were still in
office at the time of the election or nomination and the directors
whose election or nomination was previously so approved.
A transaction shall not constitute a Change of Control if its sole
purpose is to change the state of incorporation of the Company or to create a
holding company that will be owned in substantially the same proportions by the
persons who held the Company's securities immediately before such transaction.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" means the committee of the Board described in Article
5.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" means with respect to Stock or any other
property, the fair market value of such Stock or other property determined by
such methods or procedures as may be established from time to time by the
Committee. Unless otherwise determined by the Committee, the Fair Market Value
of Stock as of any date shall be the closing price for the Stock as reported on
the NASDAQ National Market (or on any national securities exchange on which the
Stock is then listed) for that date or, if no closing price is so reported for
that date, the closing price on the next preceding date for which a closing
price was reported.
(i) "Incentive Stock Option" means an Option that is intended to
meet the requirements of Section 422 of the Code or any
successor provision thereto.
(j) "Non-Qualified Stock Option" means an Option that is not intended
to be an Incentive Stock Option.
(k) "Option" means a right granted to a Participant under Article 6 of
the Plan to purchase Stock at a specified price during specified time periods.
An Option may be either an Incentive Stock Option or a Non-Qualified Stock
Option.
(l) "Participant" means a person who, as an officer, director,
employee, director, consultant, independent contractor, or adviser of the
Company or any Subsidiary, has been granted a Stock Right under the Plan.
(m) "Predecessor Plan" means the 1995 Incentive Stock Option
Plan of the Company.
(n) "Plan" means the Imaging Diagnostic Systems, Inc. 1999 Equity
Incentive Plan, as amended from time to time.
(o) "Restricted Stock Stock Right" means Stock granted to a Participant
or offered for sale to a Participant under Article 7.
(p) "Securities Act" means the Securities Act of 1933, as amended.
(q) "Stock" means the common stock of the Company and such other
securities of the Company that may be substituted for Stock pursuant to Article
11.
(r) "Stock-Reference Stock Right" means a right, granted to a
Participant under Article 8.
(s) "Subsidiary" means any corporation of which a majority of the
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
(t) "Ten Percent Owner" means any individual who, at the date of grant
of an Incentive Stock Option, owns stock possessing more than ten percent of the
total combined voting power of all classes of Stock of the Company or a
Subsidiary. For purposes of determining such percentage, the following rules
shall apply:
(1) The individual with respect to whom such percentage is being
determined shall be considered as owning the Stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants; and
(2) Stock owned, directly or indirectly, by or for a corporation,
partnership, estate, or trust, shall be considered as being owned
proportionately by or for its stockholders, partners, or beneficiaries.
<PAGE>
Exhibit 10.21 Form of Debenture in the amount of $825,000
<PAGE>
FORM OF DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CONVERTIBLE DEBENTURE ISSUED AUGUST , 1999
CONVERTIBLE DEBENTURE DUE AUGUST , 2001
PRINCIPAL AMOUNT $ 825,000
NUMBER 102
FOR VALUE RECEIVED, IMAGING DIAGNOSTIC SYSTEMS, INC., a New York
corporation (the "Company"), hereby promises to pay CHARLTON AVENUE, LLC or
registered assigns (the "Holder") on March 31, 2001, (the "Maturity Date"), the
principal amount of EIGHT HUNDRED TWENTY-FIVE THOUSAND Dollars ($825,000) U.S.,
and to pay interest on the principal amount hereof, in such amounts, at such
times and on such terms and conditions as are specified herein.
ARTICLE 1. INTEREST
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the rate of Seven Percent (7.0%) per year,
payable at the time of each conversion until the principal amount hereof is paid
in full or has been converted. Interest shall be computed on the basis of a 360
day year of 12, 30 day months. Each payment shall be paid in cash or in freely
trading Common Stock of the Company, at the Company's option. If paid in Common
Stock, the number of shares of the Company's Common Stock to be received shall
be determined by dividing the dollar amount of the interest by the then
applicable Market Price as of the interest payment date. "Market Price" shall
mean 75% of the average of the 5-day closing bid prices, as reported by
Bloomberg, LP for the five (5) consecutive trading days immediately preceding
the date of conversion. If the interest is to be paid in cash, the Company shall
make such payment within 5 business days of the date of conversion. If the
interest is to be paid in Common Stock, said Common Stock shall be delivered to
the Holder, or per Holder's instructions, within 5 business days of the receipt
of the Notice of Conversion and the original Debenture. The Debentures are
subject to automatic conversion at the end of two years from the date of
issuance at which time all Debentures outstanding will be automatically
converted based upon the formula set forth in Section 3.2. The closing shall be
deemed to have occurred on the date the funds are received by the Company or its
Counsel (the "Closing Date").
ARTICLE 2. METHOD OF PAYMENT
This Debenture must be surrendered to the Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall have
the option of paying the interest on this Debenture in United States dollars or
in common stock upon conversion pursuant to Article 1 hereof. The Company may
draw a check for the payment of interest to the order of the Holder of this
Debenture and mail it to the Holder's address as shown on the Register (as
defined in Section 7.2 below). Interest and principal payments shall be subject
to withholding under applicable United States Federal Internal Revenue Service
Regulations.
ARTICLE 3. CONVERSION
SECTION 3.1. CONVERSION PRIVILEGE
(a) The Holder of this Debenture shall have the right, at its option,
to convert it into shares of common stock, no par value per share, of the
Company ("Common Stock") at any time following the Closing Date and which is
before the close of business on the Maturity Date, except as set forth in
Section 3.1(c) below. The number of shares of Common Stock issuable upon the
conversion of this Debenture is determined pursuant to Section 3.2 and rounding
the result to the nearest whole share.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is at least $10,000 or a
whole multiple of $10,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture shall also apply to the conversion of a
portion of it. This Debenture may not be converted, whether in whole or in part,
except in accordance with Article 3.
(c) In the event all or any portion of this Debenture remains
outstanding on the second anniversary of the date hereof, the unconverted
portion of such Debenture will automatically be converted into shares of Common
Stock on such date in the manner set forth in Section 3.2.
SECTION 3.2. CONVERSION PROCEDURE.
(A) DEBENTURES. Upon receipt by the Company or its designated attorney
of a facsimile or original of Holder's signed Notice of Conversion and the
receipt of the original Debenture to be converted in whole or in part in the
manner set forth in 3.2(b) below, the Company shall instruct its transfer agent
to issue one or more Certificates representing that number of shares of Common
Stock into which the Debenture is convertible in accordance with the provisions
regarding conversion set forth in Exhibit A hereto. The Seller's transfer agent
or attorney shall act as Registrar and shall maintain an appropriate ledger
containing the necessary information with respect to each Debenture.
(B) CONVERSION PROCEDURES. The face amount of this Debenture may be
converted anytime after the earlier of the effective date of the registration
statement or ninety (90) calendar days following the Closing Date. Such
conversion shall be effectuated by surrendering to the Company, or its attorney,
this Debenture to be converted together with a facsimile or original of the
signed Notice of Conversion which evidences Holder's intention to convert the
Debenture indicated. The date on which the Notice of Conversion is effective
("Conversion Date") shall be deemed to be the date on which the Holder has
delivered to the Company or its designated attorney a facsimile or original of
the signed Notice of Conversion, as long as the original Debenture(s) to be
converted are received by the Company or its designated attorney within 5
business days thereafter.
(C) COMMON STOCK TO BE ISSUED. Upon the conversion of any Debentures
and upon receipt by the Company or its attorney of a facsimile or original of
Holder's signed Notice of Conversion Seller shall instruct Seller's transfer
agent to issue Stock Certificates without restrictive legend or stop transfer
instructions, if at that time the Registration Statement has been deemed
effective (or with proper restrictive legend if the Registration Statement has
not as yet been declared effective), in the name of Holder (or its nominee) and
in such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Seller, except as may be set
forth herein.
(D) (I) CONVERSION RATE. HOLDER IS ENTITLED, AT ITS OPTION TO CONVERT
the face amount of this Debenture, plus accrued interest, anytime following the
Closing Date, at 75% of the 5-day average closing bid price, as reported by
Bloomberg LP, for the five (5) consecutive trading days immediately preceding
the applicable Conversion Date (the "Conversion Price"). No fractional shares or
scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share.
(II) MOST FAVORED FINANCING. If after the Closing Date, but prior to
the Holder's conversion of all the Debentures, the Company raises money under
either Regulation D or Regulation S on terms that are more favorable than those
terms set forth in this Debenture, then in such event, the Holder at its sole
option shall be entitled to completely replace the terms of this Debenture with
the terms of the more beneficial Debenture as to that balance, including accrued
interest and any accumulated liquidated damages, remaining on Holder's original
investment. The Debentures are subject to a mandatory, 24 month conversion
feature at the end of which all Debentures outstanding will be automatically
converted, upon the terms set forth in this section ("Mandatory Conversion
Date").
(e) Nothing contained in this Debenture shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the maximum
rate permitted by governing law. In the event that the rate of interest required
to be paid exceeds the maximum rate permitted by governing law, the rate of
interest required to be paid thereunder shall be automatically reduced to the
maximum rate permitted under the governing law and such excess shall be returned
with reasonable promptness by the Holder to the Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the Certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Holder a new Debenture equal to the unconverted amount, if so requested in
writing by Holder.
(g) In the event the Common Stock is not delivered per the written
instructions of the Holder, within five business days after the receipt of the
Notice of Conversion and original stock certificate (the "Delivery Date"), then
in such event the Company shall pay to Holder in cash or Common Stock, at the
Company's option, one percent (1%) of the purchase price of the Debentures being
converted per each day after the fifth business day following the Conversion
Date that the Common Stock is not delivered.
The Company acknowledges that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Debenture a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this section is due to the unavailability of authorized but unissued
shares of Common Stock, the provisions of this section shall not apply, but
instead the provisions of Section 3.2(h) shall apply.
The Company shall make any payments incurred under this section in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Holder's right to
pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Holder within 10 business days after the
Conversion Date.
(h) The Company shall at all times reserve (or make alternative written
arrangements for reservation or contribution of shares or stockholder approval
to authorize additional shares as described in the proxy statement for the
August 31, 1998, meeting) and have available all Common Stock necessary to meet
conversion of the Debentures by all Holders of the entire amount of Debentures
then outstanding. If, at any time Holder submits a Notice of Conversion and the
Company does not have sufficient authorized but unissued shares of Common Stock
(or alternative shares of Common Stock as may be contributed by Stockholders)
available to effect, in full, a conversion of the Debentures (a "Conversion
Default", the date of such default being referred to herein as the "Conversion
Default Date"), the Company shall issue to the Holder all of the shares of
Common Stock which are available, and the Notice of Conversion as to any
Debentures requested to be converted but not converted (the "Unconverted
Debentures"), upon Holder's sole option, may be deemed null and void. The
Company shall provide notice of such Conversion Default ("Notice of Conversion
Default") to all existing Holders of outstanding Debentures, by facsimile,
within three (3) business day of such default (with the original delivered by
overnight or two day courier), and the Holder shall give notice to the Company
by facsimile within five business days of receipt of the original Notice of
Conversion Default (with the original delivered by overnight or two day courier)
of its election to either nullify or confirm the Notice of Conversion.
The Company agrees to pay to all Holders of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Debentures held by each Holder where N = the number
of days from the Conversion Default Date to the date (the "Authorization Date")
that the Company authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Holder of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Holder's option, payable as follows: (i) in
the event Holder elects to take such payment in cash, cash payments shall be
made to such Holder of outstanding Debentures by the fifth day of the following
calendar month, or (ii) in the event Holder elects to take such payment in
stock, the Holder may convert such payment amount into Common Stock at the
conversion rate set forth in section 4(d) at anytime after the 5th day of the
calendar month following the month in which the Authorization Notice was
received, until the expiration of the mandatory 24 month conversion period.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Debenture a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Debenture.
Nothing herein shall limit the Holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock.
(i) The Company shall furnish to Holder such number of prospectuses and
other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.
(j) Other than the Mandatory Conversion provisions contained in this
Debenture which are not limited by the following, in no other event shall the
Holder be entitled to convert that amount of Debentures in excess of that amount
upon conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debentures), and (2) the number of shares of Common
Stock issuable upon the conversion of the Debentures with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock of the Company. For purposes of this provision to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13 (d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13 D and G thereunder, except as otherwise provided in
clause (1) of such provision. Furthermore, the Company shall not permit such
conversions that would violate the provisions of this section.
SECTION 3.3. FRACTIONAL SHARES. The Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion of this Debenture. Instead, the Company shall round up or down, as
the case may be, to the nearest whole share.
SECTION 3.4. TAXES ON CONVERSION. The Company shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of shares
of Common Stock upon the conversion of this Debenture. However, the Holder shall
pay any such tax which is due because the shares are issued in a name other than
its name.
SECTION 3.5. COMPANY TO RESERVE STOCK. The Company shall reserve the
number of shares of Common Stock required pursuant to and upon the terms set
forth in Section 3(a) of the Subscription Agreement related to this Debenture,
to permit the conversion of this Debenture subject to certain options granted to
the Company and referred to in Section 3(a) of the Subscription Agreement. All
shares of Common Stock which may be issued upon the conversion hereof shall upon
issuance be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
SECTION 3.6. RESTRICTIONS ON TRANSFER. This Debenture has not been
registered under the Securities Act of 1933, as amended, (the "Act") and is
being issued under Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. This Debenture and the Common Stock issuable upon the
conversion thereof may only be offered or sold pursuant to registration under or
an exemption from the Act.
SECTION 3.7. MERGERS, ETC. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such successor, purchaser or transferee shall amend this Debenture to
provide that it may thereafter be converted on the terms and subject to the
conditions set forth above into the kind and amount of stock, securities or
property receivable upon such merger, consolidation, sale or transfer by a
holder of the number of shares of Common Stock into which this Debenture might
have been converted immediately before such merger, consolidation, sale or
transfer, subject to adjustments which shall be as nearly equivalent as may be
practicable to adjustments provided for in this Article 3.
ARTICLE 4. MERGERS AND ADJUSTMENTS
Section 4.1 Mergers. The Company shall not consolidate or merge into,
or transfer all or substantially all of its assets to, any person, unless such
person assume in writing the obligations of the Company under this Debenture and
immediately after such transaction no Event of Default exists. Any reference
herein to the Company shall refer to such surviving or transferee corporation
and the obligations of the Company shall terminate upon such written assumption.
SECTION 4.2 PREFERENCES
No preferences or distribution will be given to the common shareholders
in preference to the preferred shareholders, and for the purpose of such
distributions the debentureholder shall be treated as a preferred shareholder .
ARTICLE 5. REPORTS
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or current report that it files
with the Securities and Exchange Commission promptly after the filing thereof
and a copy of any annual, quarterly or other report or proxy statement that it
gives to its shareholders generally at the time such report or statement is sent
to shareholders.
ARTICLE 6. DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment, other than a payment of principal, for a period
of 5 business days thereafter, (c) the Company fails to comply with any of its
other agreements in this Debenture and such failure continues for the period and
after the notice specified below, (d) the Company pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined): (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against it in
an involuntary case; (iii) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all of its property or
(iv) makes a general assignment for the benefit of its creditors or (v) a court
of competent jurisdiction enters an order or decree under any Bankruptcy Law
that: (A) is for relief against the Company in an involuntary case; (B) appoints
a Custodian of the Company or for all or substantially all of its property or
(C) orders the liquidation of the Company, and the order or decree remains
unstayed and in effect for 60 days, (e) the Company's Common Stock is no longer
listed on any recognized exchange including electronic over-the-counter bulletin
board. As used in this Section 6.1, the term "Bankruptcy Law" means Title 11 of
the United States Code or any similar federal or state law for the relief of
debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator
or similar official under any Bankruptcy Law. A default under clause (c) above
is not an Event of Default until the holders of at least 25% of the aggregate
principal amount of the Debentures outstanding notify the Company of such
default and the Company does not cure it within five (5) business days after the
receipt of such notice, which must specify the default, demand that it be
remedied and state that it is a "Notice of Default".
SECTION 6.2. ACCELERATION. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
remaining principal amount of this Debenture to be due and payable. Upon such
declaration, the remaining principal amount shall be due and payable
immediately.
ARTICLE 7. REGISTERED DEBENTURES
SECTION 7.1. SERIES. This Debenture is one of a numbered series of
Debentures which are identical except as to the principal amount and date of
issuance thereof and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 and the regulations of the Securities and
Exchange Commission promulgated thereunder. Such Debentures are referred to
herein collectively as the "Debentures". The Debentures shall be issued in whole
multiples of $10,000.
SECTION 7.2. RECORD OWNERSHIP. The Company, or its attorney, shall
maintain a register of the holders of the Debentures (the "Register") showing
their names and addresses and the serial numbers and principal amounts of
Debentures issued to or transferred of record by them from time to time. The
Register may be maintained in electronic, magnetic or other computerized form.
The Company may treat the person named as the Holder of this Debenture in the
Register as the sole owner of this Debenture. The Holder of this Debenture is
the person exclusively entitled to receive payments of interest on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
SECTION 7.3. REGISTRATION OF TRANSFER. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
this Debenture is presented to the Company with a request to register the
transfer hereof and the Debenture is duly endorsed by the appropriate person,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received evidence satisfactory to it that such transfer is
rightful and in compliance with all applicable laws, including tax laws and
state and federal securities laws. When this Debenture is presented for transfer
and duly transferred hereunder, it shall be canceled and a new Debenture showing
the name of the transferee as the record holder thereof shall be issued in lieu
hereof. When this Debenture is presented to the Company with a reasonable
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in such denominations as agreed to by the Company and
Holder.
SECTION 7.4. WORN OR LOST DEBENTURES. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has been
lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in
place of the original Debenture if the Holder so requests by written notice to
the Company actually received by the Company before it is notified that the
Debenture has been acquired by a bona fide purchaser and the Holder has
delivered to the Company an indemnity bond in such amount and issued by such
surety as the Company deems satisfactory together with an affidavit of the
Holder setting forth the facts concerning such loss, destruction or wrongful
taking and such other information in such form with such proof or verification
as the Company may request.
ARTICLE 8. INVESTMENT INTENT
Holder is acquiring this Debenture and the underlying common stock for
his own account, for investment and not with a view to, or for his own account,
for investment and not with a view to, or for resale in connection with, the
distribution thereof. Holder has no present intention of reselling or
distributing any of the securities. Holder does not have any contract,
undertaking, agreement or arrangement with any person to sell or transfer to
such person or to any third person any of the securities. The acquisition of the
securities for investment is consistent with Holder's financial needs.
ARTICLE 9 NOTICES
Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person or
mailed by first class mail, postage prepaid and directed to the Holder of the
Debenture at its address as it appears on the Register or if to the Company to
its principal executive offices. The time when such notice is sent shall be the
time of the giving of the notice.
ARTICLE 10. TIME
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. A "business day" shall
mean a day on which the banks in New York are not required or allowed to be
closed.
ARTICLE 11. WAIVERS
The holders of a majority in principal amount of the Debentures may
waive a default or rescind the declaration of an Event of Default and its
consequences except for a default in the payment of principal or conversion into
Common Stock.
ARTICLE 12. RULES OF CONSTRUCTION
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
ARTICLE 13. GOVERNING LAW
The validity, terms, performance and enforcement of this Debenture
shall be governed and construed by the provisions hereof and in accordance with
the laws of the State of Florida applicable to agreements that are negotiated,
executed, delivered and performed solely in the State of Florida.
ARTICLE 14. ACCESS TO INFORMATION.
The Holder has had the opportunity to ask questions of, and receive
answers from management of the Company regarding the terms and conditions of
this Debenture, and the transactions contemplated thereby, as well as the
affairs of the Company and related matters. The Holder may have access to
whatever additional information concerning the Company, its financial condition,
its business, its prospects, its management, its capitalization, and other
similar matters that the Holder or his purchaser representative, if any,
desires, provided that the Company can acquire such information without
unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a) thereunder, the
Holder and his purchaser representative may have, at the offices of the Company,
at any reasonable hour, after reasonable prior notice, access to the materials
set forth in the Rule which the Company can obtain without unreasonable effort
or expense.
The Holder has had the opportunity to obtain additional information
necessary to verify the accuracy of the information referred to the above
paragraph.
ARTICLE 15. SEVERABILITY.
In the event any parts of this Debenture are found to be void, the
remaining provisions of this Debenture shall nevertheless be binding with the
same effect as though the void parts were deleted.
ARTICLE 16. LITIGATION
(A) FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based
thereon, or arising out of, under, or in connection with, this Debenture or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the courts of the State of Florida. The Company and Holder hereby expressly and
irrevocably submits to the jurisdiction of the federal Courts of the State of
Florida for the purpose of any such litigation as set forth above and
irrevocably agree to be bound by any final judgment rendered thereby in
connection with such litigation. The Company and Holder further irrevocably
consent to the service of process by registered mail, postage prepaid, or by
personal service within or without the State of Florida. The Company and Holder
hereby expressly and irrevocably waives, to the fullest extent permitted by law,
any objection which it may have or hereafter may have to the laying of venue of
any such litigation brought in any such court referred to above and any claim
that any such litigation has been brought in any inconvenient forum. To the
extent that the Company or Holder have or hereafter may acquire any immunity
from jurisdiction of any court or from any legal process (whether through
service or notice, attachment prior to judgment, attachment in aid of execution
or otherwise) with respect to itself or its property the Company and Holder
hereby irrevocably waive such immunity in respect of their obligations under
this Debenture and the other loan documents.
(B) WAIVER OF JURY TRIAL. The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by jury
in respect of any litigation based hereon, or arising out of, under, or in
connection with, this agreement, or any course of conduct, course of dealing,
statements (whether oral or written) or actions of the Holder or the Company.
The Company acknowledges and agrees that it has received full and sufficient
consideration for this provision and that this provision is a material
inducement for the Holder entering into this agreement.
(C) SUBMISSION TO JURISDICTION. Any legal action or proceeding in
connection with this Debenture or the performance hereof may be brought in the
state and federal courts located in Florida, and the parties hereby irrevocably
submit to the exclusive jurisdiction of such courts for the purpose of any such
action or proceeding.
ARTICLE 17. SECURITY INTEREST
This Debenture is secured, by a mortgage (in the form attached hereto
as Exhibit ____ and incorporated herein) from the COMPANY TO THE HOLDER,
ENCUMBERING THE COMPANY'S REAL PROPERTY LOCATED AT 6531 NW 18TH Court,
Plantation Florida, up to an amount equal to the principal amount of this
Debenture and all accrued interest.
ARTICLE 18. RELEASE OF MORTGAGE
Once the registration statement covering the Common Stock underlying
this Debenture is declared effective, the mortgage securing this Debenture shall
be released upon the earlier of (a) the day the Company qualifies for listing on
AMEX or NASDAQ, as long as said listing requirements are not being met through a
reverse split of the Company's Common Stock or (b) 180 days from the date the
Company receives its third funding tranche as set forth in a separate
Subscription Agreement between the Purchaser and the Company concerning the
Company's convertible debentures.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the date
first written above.
IMAGING DIAGNOSTIC SYSTEMS, INC.
BY _____
Linda B. Grable its President duly authorized
<PAGE>
Exhibit A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order
to Convert the Debentures.)
The undersigned hereby irrevocably elects, as of ______________, 199_
to convert $_________________ of the Debentures into Shares of Common Stock (the
"Shares") of IMAGING DIAGNOSTIC SYSTEMS, INC. (the "Company") according to the
conditions set forth in the Subscription Agreement dated _________________,1999.
Date of Conversion_________________________________________
Applicable Conversion Price_________________________________
Number of Shares Issuable upon this conversion______________
Signature___________________________________________________
[Name]
Address_____________________________________________________
- ------------------------------------------------------------
Phone______________________ Fax___________________________
<PAGE>
Assignment of Debenture
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
(name, address and SSN or EIN of assignee)
DOLLARS ($ )
- ------------------------------------------------------
(principal amount of Debenture, $5,000 or integral multiples of $5,000)
of principal amount of this Debenture together with all accrued and unpaid
interest hereon.
DATE: SIGNED:
(Signature must conform in all
respects to name of Holder shown of face of Debenture)
Signature Guaranteed:
<PAGE>
Exhibit 10.22 Registration Rights Agreement $825,000 Convertible Debenture
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (THE "AGREEMENT") DATED AS OF AUGUST
___, 1999, BY AND AMONG IMAGING DIAGNOSTIC SYSTEMS, INC., a Florida corporation
(the "Company"), and the undersigned, (the "Subscriber").
W I T N E S S E T H
WHEREAS, pursuant to Subscription Agreement (the "Subscription
Agreement"), by and among the Company and the Subscriber, the Company has agreed
to sell and the Subscriber has agreed to purchase an aggregate of $825,000 of
convertible debentures (the "Debentures") of the Company convertible into shares
of the Company's Common Stock, no par value per share (the "Common Stock") upon
the terms and conditions set forth in the accompanying Subscription Agreement;
and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Subscriber purchasing the Debentures, the Company has agreed to provide the
Subscriber with certain registration rights with respect to the Common Stock;
NOW THEREFORE, in consideration of the mutual promises, representation,
warranties, covenants and conditions set forth in the Subscription Agreement and
this Registration Rights Agreement, the Company and the Subscriber agree as
follows:
1.CERTAIN DEFINITIONS. As used in this Agreement the following
terms shall have the following respective meanings:
"Closing Date" shall mean the dat net funds in the amount of $750,000
are received by the Company.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, no par value per
share.
"Registrable Shares" shall mean (i) the Common Stock, (ii) any Common
Stock of the Company issued or issuable in respect of the Debentures issued to
the Subscriber, or upon any stock split, stock dividend, recapitalization or
similar event; provided, however, that shares of Common Stock or other
securities shall no longer be treated as Registrable Shares if (a) they have
been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, (b) they have been sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933 so that all transfer restrictions and restrictive
legends with respect thereto are removed upon consummation of such sale or (c)
they are available for sale under Rule 144 or otherwise, in the opinion of
counsel to the Company, without compliance with the registration and prospectus
delivery requirements of the Securities Act of 1933 so that no transfer
restrictions or restrictive legends will appear upon the Common Stock
certificates following the consummation of such sale.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933 and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement. Said registration shall include all amendments,
post-effective amendments and supplements to any such registration statement as
may be necessary under the Act and the regulations of the Commission to keep
such registration effective with respect to the Registrable Shares until two (2)
years following the Closing Date.
"Registration Expenses" shall mean all expenses incurred by the Company
in compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of one counsel for Subscriber, and the reasonable expenses of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company). The Company shall not be responsible for any Underwriting
fees or Commissions.
The "Reserved Shares" shall mean the shares of Common Stock issuable
upon conversion of the Shares that have been duly and validly reserved for
issuance, and upon issuance which shall be duly and validly issued, fully paid,
and non-assessable.
The "Act" shall mean the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Shares.
2. REGISTRATION.
(A) MANDATORY REGISTRATION. The Company shall use its best efforts to
prepare and file with the SEC, no later than thirty (30) days after the Closing
Date, a Registration Statement on Form S-2 (or any other available form),
covering a sufficient number of shares of Common Stock for the Subscriber but in
no event less than 5,500,000 shares of Common Stock into which the Debentures
issued to Subscriber would be convertible. Such Registration Statement shall
state that, in accordance with the Securities Act, it also covers such
indeterminate number of additional shares of Common Stock as may become issuable
to prevent dilution resulting from Stock splits, or stock dividends). If at any
time after the Closing Date, the number of registered shares of common stock
only covers 50% of the total number of shares of common stock that would be
issuable upon conversion of the then remaining balances of the Debentures issued
to the Subscriber, then the Company shall, within twenty (20) business days
after receipt of written notice from any Subscriber, either (i) amend the
Registration Statement filed by the Company pursuant to the preceding sentence,
if such Registration Statement has not been declared effective by the SEC at
that time, to register all shares of Common Stock into which the Debentures may
be converted, or (ii) if such Registration Statement has been declared effective
by the SEC at that time, file with the SEC an additional Registration Statement
on Form S-2 (or any other available form), to register the shares of Common
Stock into which the Shares may be converted that exceed the aggregate number of
shares of Common Stock already registered.
(B) UNDERWRITTEN OFFERING. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Subscribers acting by majority in interest of the Registrable Shares subject to
such underwritten offering shall have the right to select one legal counsel to
represent their interests, and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. The
Subscriber(s) who hold the Registrable Shares to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of such investment banker or bankers and manager or managers so
selected in accordance with this Section 2(b) (other than fees and expenses
relating to registration of Registrable Shares under federal or state securities
laws, which are payable by the Company pursuant to Section 5 hereof) with
respect to their Registrable Shares and the fees and expenses of such legal
counsel so selected by the Subscriber.
(C) CERTAIN FEES. The Company shall pay cash liquidated damages
as follows:
(i) 1.0% of the principal amount of the Debentures for each 30 day
period, or portion thereof, that the registration ceases to remain effective
during the "Registration Period" as defined in Section 3(a);
(ii) 1.0% of the principal amount of the Debentures if the Registration
Statement covering this offering is not declared effective within 90 days
following the Closing Date; and
(iii) 2.0% of the principal amount of the Debentures for each 30
day period, or portion thereof, 120 days following the
Closing Date that registration is not declared effective.
The above damages shall continue until the obligation is fulfilled, and
shall be paid within 5 business days after each 30 day period. Failure of the
Company to make payment within said 5 business days shall be considered a
default. The Company acknowledges that its failure to meet any of its
obligations under either Section 2(c) (i), (ii) or (iii) of this Agreement will
cause the Subscriber to suffer damages in an amount that will be difficult to
ascertain. Accordingly, the parties agree that it is appropriate to include in
this Agreement a provision for liquidated damages. The parties acknowledge and
agree that the liquidated damages provision set forth in this section represents
the parties' good faith effort to qualify such damages and, as such, agree that
the form and amount of such liquidated damages are reasonable and will not
constitute a penalty. The payment of liquidated damages shall not relieve the
Company from its obligations to deliver the Common Stock pursuant to the terms
of this Agreement and the Subscription Agreement.
3. OBLIGATION OF THE COMPANY. In connection with the registration of
the Registrable Shares, the Company shall do each of the following:
(a) Prepare promptly, and file with the SEC within thirty (30) days of
the Closing Date, a Registration Statement with respect to not less than the
number of Registrable Shares provided in Section 2(a), above, and thereafter use
its best efforts to cause each Registration Statement relating to Registrable
Shares to become effective the earlier of (A) five business days after notice
from the Securities and Exchange Commission that the Registration Statement may
be declared effective, or (B) ninety (90) days after the Closing Date, and keep
the Registration Statement effective at all times until two (2) years following
the Closing Date (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Shares of the Company covered by the Registration Statement until
such time as all of such Registrable Shares have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement;
(c) Furnish to each Subscriber whose Registrable Shares are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as the Subscriber may reasonably request in order to facilitate the disposition
of the Registrable Shares owned by such Subscriber;
(d) Use reasonable efforts to (i) register and qualify the Registrable
Shares covered by the Registration Statement under such other securities or blue
sky laws of such jurisdictions as the Subscriber(s) who hold a majority in
interest of the Registrable Shares being offered reasonably request and in which
significant volumes of shares of Common Stock are traded, (ii) prepare and file
in those jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualification in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Shares for sale in SUCH JURISDICTIONS: PROVIDED, HOWEVER, that the
Company shall not be required in connection therewith or as a condition thereto
to (A) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(d), (B) subject itself to general
taxation in any such jurisdiction, (C) file a general consent to service of
process in any such jurisdiction, (D) provide any undertakings that cause more
than nominal expense or burden to the Company or (E) make any change in its
articles of incorporation or by-laws or any then existing contracts, which in
each case the Board of Directors of the Company determines to be contrary to the
best interests of the Company and its stockholders;
(e) As promptly as practicable after becoming aware of such event,
notify each Subscriber of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and uses its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Subscriber as such Subscriber may
reasonably request;
(f) As promptly as practicable after becoming aware of such event,
notify each Subscriber who holds Registrable Shares being sold (or, in the event
of an underwritten offering, the managing underwriters) of the issuance by the
SEC of any notice of effectiveness or any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, either to (i)
cause all the Registrable Shares covered by the Registration Statement to be
listed on a national securities exchange and on each additional national
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable Shares
is then permitted under the rules of such exchange, or (ii) secure designation
of all the Registrable Shares covered by the Registration Statement on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Shares on the NASDAQ National Market System; or if, despite the
Company's commercially reasonable efforts to satisfy the preceding clause (i) or
(ii), the Company is unsuccessful in doing so, to secure NASD authorization and
quotation for such Registrable Shares on either the SmallCap Market or the
over-the-counter bulletin board and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Shares;
(h) Provide a transfer agent for the Registrable Shares not later
than the effective date of the Registration Statement;
(i) Cooperate with the Subscribers who hold Registrable Shares being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Shares to be offered pursuant to the Registration Statement and
enable such certificates for the Registrable Shares to be in such denominations
or amounts as the case may be, as the Subscribers may reasonably request and
registration in such names as the Subscribers may request; and, within five (5)
business days after a Registration Statement which includes Registrable Shares
is ordered effective by the SEC, the Company shall deliver, and shall cause
legal counsel selected by the Company to deliver, to the transfer agent for the
Registrable Shares (with copies to the Subscribers whose Registrable Shares are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(j) Take all other reasonable actions necessary to expedite and
facilitate distribution to the Subscriber of the Registrable Shares pursuant to
the Registration Statement.
The Company shall use its best efforts to effect such registration (including,
without limitation, the execution of an undertaking to file amendments,
post-effective amendments, and supplements appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Act and the Regulations of the
Commission) as may be so requested and as would permit or facilitate the sale
and distribution of all or such Registrable Shares as are specified in such
request.
4. EXPENSES OF REGISTRATION. Except as set forth in this Agreement the
Company shall bear all Registration Expenses incurred in connection with any
registration, qualification or compliance of the Registrable Shares pursuant to
this Agreement. All Selling Expenses shall be born by the Subscriber.
5. REGISTRATION PROCEDURES. The Company shall advise the Subscriber of
the initiation of a registration under the Agreement and as to the completion
thereof. At its expenses the Company will:
(a) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act and the Regulations of the Commission with respect to the
disposition of securities covered by such registration statement; and
(B) CONCERNING THE SECURITIES.The issuance, sale and delivery
of the Shares have been duly authorized by all required corporate action on the
part of Company, and when issued, sold and delivered in accordance with the
terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their terms,
subject to the laws of bankruptcy and creditors' rights generally. At least
5,500,000 shares of Common Stock issuable upon conversion of the Debentures
issued to Subscriber, based upon the current price of the Company's Common
Stock, have been duly and validly reserved for issuance and, upon issuance shall
be duly and validly issued, fully paid, and non-assessable (the "Reserved
Shares"). The Company shall use its best efforts to file within twenty (20) days
additional Registration Statements and/or amendments thereto whenever the number
of registered shares of common stock only covers 50% of the total number of
shares of common stock that would be issuable upon conversion of the then
remaining balance of the Debentures issued to the Subscriber.
Prior to conversion of all the Shares, if at anytime the conversion of
all the Shares outstanding results in an insufficient number of Reserved Shares
being available to cover all the conversions, then in such event, the Company
will move to call and hold a shareholder's meeting within 45 days of such event
for the sole purpose of authorizing additional Shares to facilitate the
conversions. In such an event the Company shall: (1) recommend its current or
future officers, directors and other control people to vote their shares in
favor of increasing the authorized number of shares of Common Stock and (2)
recommend to all shareholders to vote their shares in favor of increasing the
authorized number of shares of Common Stock . Company represents and warrants
that under no circumstances will it deny or prevent Subscriber's right to
convert the Shares as permitted under the terms of the Subscription Agreement or
this Registration Rights Agreement.
6. INDEMNIFICATION.
(a) The Company will indemnify and hold harmless the
Subscriber, each of its stockholders, executives, employees, representatives,
affiliates, officers, directors and partners, and each person controlling the
Subscriber, with respect to which registration has been effected pursuant to
this Agreement against all claims, losses, damages and liabilities (or actions,
proceedings or settlements in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus or other document incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Act or any rule or regulation thereunder
applicable to the Company and will reimburse the Subscriber, each of its
stockholders, executives, employees, representatives, affiliates, officers,
directors and partners, and each person controlling the Subscriber for any legal
and any other expenses as they are reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
provided, however, that the indemnity contained in this Section 6(a) shall not
apply to amounts paid in settlement of any such claim, loss, damage, liability
or action if such Settlement is effected without the consent of the Company, and
provided further that the Company shall not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by the Subscriber and stated to be specifically for use
in the registration statement filed pursuant to this Agreement. The foregoing
indemnity agreement is further subject to the condition that insofar as it
relates to any untrue prospectus, such indemnity agreement shall not inure to
the benefit of the foregoing unindemnified parties if copies of a final
prospectus correcting the misstatement, or alleged misstatement, omission or
alleged omission upon which such loss, liability, claim or damage is based is
timely delivered to such indemnified party and a copy thereof was not furnished
to the person asserting the loss, liability, claim or damage.
(b) The Subscriber will indemnify the Company, each of its
stockholders, executives, employers, representatives, affiliates, directors,
officers and each person who controls the Company within the meaning of the Act
and the rules and regulations thereunder against all claims, losses, damages and
liabilities (or actions, proceedings, or settlements in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or other document incident to any such
registration or based upon any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation of the Act or any rule of regulation
thereunder applicable to the Company and will reimburse the Company, and its
stockholders, executives, employers, representatives, affiliates, directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expense reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, and only to the extent, that such untrue statement (or alleged untrue
statement) or omission or alleged omission) relating to such holder is made in
such registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by the Subscriber and stated to be specifically for use therein;
provided, however, that the obligations of the Subscriber shall be limited to an
amount equal to the proceeds to the Subscriber and provided further that such
indemnification obligations shall not apply if the Company modifies or changes
to a material extent the written information furnished by such Holder.
(c) Each party entitled to indemnification under this Section
6 (an "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party, (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at such indemnified party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall except
with the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
7. INFORMATION BY HOLDER OF REGISTRABLE SHARES. The Company's
obligation to register the Registrable Shares shall be contingent upon the
Subscriber's timely furnishing to the Company such information regarding the
Subscriber and the distribution proposed by such holder of Registrable Shares as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration referred to in this Agreement.
8. TRANSFERS OR ASSIGNMENTS OF REGISTRATION RIGHTS. The Subscriber's
rights under this Agreement to cause the Company to register the Registrable
Shares may be transferred or assigned by the Subscriber only to affiliates of
the Subscriber or to a purchaser of the Shares, or any portion of the Shares, in
the principal amount of at least $50,000 or at least 50 Shares and such
assignment shall only be effective upon delivery of written notice of such
assignment to the Company within thirty (30) days of the assignment. Upon such
assignment the assignee shall have all the rights and obligations of the
Subscriber hereunder.
9. MISCELLANEOUS.
9.1 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to
conflict of laws principles.
9.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.3 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
9.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, or delivered by hand or by messenger or courier delivery
service, addressed (a) if to the Subscriber, at the address listed in the
Subscription Agreement or at such other address as the Subscriber shall have
furnished to the Company in writing, or (b) if to the Company, at its executive
office, or at such other address as the Company shall have furnished to the
Subscriber in writing.
9.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Registrable Shares, upon any
breach or default of the Company under this Agreement, shall impair any such
right, power, or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiesce therein, or of or in any similar
breach or default thereunder occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
9.6 COUNTERPARTS. This agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument. An executed facsimile counterpart of this Agreement shall be
effective as an original.
9.7 SEVERABILITY. In the case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
9.8 AMENDMENTS. This provision of this Agreement may be amended at any
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the owners of all of the Registrable Shares as of the date of
such amendment or waiver.
9.9 TERMINATION OR REGISTRATION RIGHTS.This Agreement shall terminate
at such time as there ceases to be any outstanding Shares, Debentures issued to
the Subscriber and Series B Shares.
The foregoing Registration Rights Agreement is hereby executed as of
the date first above written.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By:____________________________
Linda B. Grable, President
HOLDER OF THE CONVERTIBLE DEBENTURE
CHARLTON AVENUE, LLC
By__________________________
Exhibit 10.23 Subscription Agreement $825,000 Convertible Debenture
<PAGE>
--------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Maximum Offering: $825,000
This offering consists of $825,000 of the Company's Convertible
Debentures convertible into the
Company's Common Stock.
--------------------
SUBSCRIPTION AGREEMENT
-------------------
SUBSCRIPTION PROCEDURES
The Convertible Debentures of Imaging Diagnostic Systems, Inc. (the
"Company" or "Seller") is being offered (the "Debentures"). The Debentures to
purchase Common Stock will be transferable to the extent that any such transfer
is permitted by law. This offering is being made in accordance with the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Rule 506 of Regulation D promulgated under the Act (the
"Regulation D Offering").
In order to purchase Debentures, each subscriber (the "Investor") must
complete and execute a questionnaire (the "Investor Questionnaire"), a
subscription agreement (the "Subscription Agreement"), and an Internal Revenue
Service Form W-9 or other appropriate form as may be applicable. In addition,
the Investor must make a payment to an escrow fund for the purchase of the
Debentures. All subscriptions are subject to acceptance by the Company, which
shall not occur until the Company has returned the Company Signature Page and
the Debentures representing the Debentures purchased to the Investor.
The Investor Questionnaire is designed to enable the Investor to
demonstrate the minimum legal requirements under federal and state securities
laws to purchase the Debentures. The Signature Page for the Investor
Questionnaire and the Subscription Agreement contain representations relating to
the subscription and should be reviewed carefully by each investor.
Also included is an Internal Revenue Service Form W-9:
"Request for Taxpayer Identification Number and
Certification" for U.S. citizens or residents of the U.S.
for U.S. federal income tax purposes only. (Foreign
investors should consult their tax advisors regarding the
need to complete Internal Revenue Service Form W-9 and any
other forms that may be required).
If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any premiums paid by the Company. In order to
eliminate or reduce such withholding tax you may submit a properly executed
I.R.S. Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or
I.R.S. Form 1001 (Ownership Exemption or Reduced Trade Certificate), claiming
exemption from withholding or eligibility for treaty benefits in the form of a
lower rate of withholding tax on interest or premiums.
Payment must be made by wire transfer as provided below:
Immediately available funds should be sent via wire transfer to the escrow
account stated below and the completed subscription documents should be
forwarded to the Escrow Agent. Your subscription funds will be deposited into a
non-interest bearing escrow account of Joseph B. LaRocco, Esq., Escrow Agent, at
First Union Bank of Connecticut, Stamford, Connecticut. In the event of a
termination of the Offering or the rejection of this subscription, all
subscription funds will be returned without interest. The wire instructions are
as follows:
First Union Bank of Connecticut
Executive Office
300 Main Street, P. O. Box 700
Stamford, CT 06904-0700
ABA #: 021101108
Swift #: FUNBUS33INT
Account #: 20000-2072298-4
Acct.Name: Joseph B. LaRocco, Esq. Trustee Account
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
TO: IMAGING DIAGNOSTIC SYSTEMS, INC.
This Subscription Agreement is made between IMAGING DIAGNOSTIC SYSTEMS,
INC., a Florida corporation, (the "Company" or "Seller"), and the undersigned
prospective purchaser ("Purchaser") who is subscribing hereby for the Company's
Convertible Debentures, no par value (the "Debentures"), together with a 7%
dividend , to be paid in cash or freely trading Common Stock (if the
Registration Statement covering this offering has been declared effective at
that time) in the Company's sole discretion, at the time of each conversion. The
Debentures being offered will be separately transferable to the extent that any
such transfer is permitted by law. The conversion terms of the Debentures are
set forth in Section 4 hereof and the form of Notice of Conversion is attached
hereto as Exhibit A. This subscription is submitted to Purchaser in accordance
with and subject to the terms and conditions described in this Subscription
Agreement together with any Exhibits thereto, relating to an offering (the
"Offering") of the Debentures. The Offering comprises (i) an offering of the
Debentures to accredited investors (the "Regulation D Offering") in accordance
with the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D promulgated under the
Act ("Regulation D").
1. SUBSCRIPTION.
(a) The undersigned hereby irrevocably subscribes for and agrees to
purchase $825,000 of the Company's Debentures. The Company shall pay a 7%
premium, to be paid in cash or freely trading Common Stock (if the Registration
Statement covering this Offering has been declared effective at that time), in
the Company's sole discretion, at the time of each conversion (the "Dividend
Payment Date"). If the premium is to be paid in cash, the Company shall make
such payment within five business days of the Dividend Payment Date. If the
premium is to be paid in Common Stock, said Common Stock shall be delivered to
the Purchaser, or per Purchaser's instructions, within five business days of the
Dividend Payment Date. The Debentures are subject to automatic conversion at the
end of two years from the date of issuance at which time all Debentures
outstanding will be automatically converted based upon the formula set forth in
Section 4(d) hereof. The closing shall be deemed to have occurred on the date
the funds are received by the Company (the "Closing Date"). The Company may draw
down the third tranche in the amount of $825,000) anytime sixty (60) days after
the effective date of the Registration Statement as long as the Company
maintains an average closing bid price of $.45 for the ten (10) trading days
immediately prior to the date the Company requests the third funding tranche.
The Debentures shall be secured by a mortgage on the company's land and
building. The mortgage shall only be released after the Registration Statement
covering the Common Stock underlying the Debentures, the Series I Convertible
Preferred Stock and the Series B Convertible Preferred Stock has BEEN DECLARED
EFFECTIVE AND upon the earlier of (a) the day the Company qualifies for listing
on AMEX or NASDAQ, as long as said listing requirements are not being met
through a reverse split of the Company's Common Stock or (b) 180 days from the
date the Company receives the third tranche, as described above.
(b) Upon receipt by the Company of the requisite payment for the
Debentures being purchased, the Debentures so purchased will be forwarded by the
Escrow Agent, Joseph B. LaRocco, to the Purchaser and the name of such Purchaser
will be registered on the Preferred Stock transfer books of the Company as the
record owner of such Debentures. The Escrow Agent shall not be liable for any
action taken or omitted by him in good faith and in no event shall the Escrow
Agent be liable or responsible except for the Escrow Agent's own gross
negligence or willful misconduct. The Escrow Agent has made no representations
or warranties in connection with this transaction and has not been involved in
the negotiation of the terms of this Agreement or any matters relative thereto.
Seller and Purchaser each agree to indemnify and hold harmless the Escrow Agent
from and with respect to any suits, claims, actions or liabilities arising in
any way out of this transaction including the obligation to defend any legal
action brought which in any way arises out of or is related to this Agreement.
The Escrow Agent is not rendering securities advice to anyone with respect to
this proposed transaction; nor is the Escrow Agent opining on the compliance of
the proposed transaction under applicable securities law.
2. REPRESENTATIONS AND WARRANTIES.
The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The undersigned has been furnished with, and has carefully
read the applicable form of Registration Rights AGREEMENT ANNEXED
HERETO AS EXHIBIT B (THE "REGISTRATION RIGHTS AGREEMENT"), AND is
familiar with and understands the terms of the Offering. With respect
to tax and other economic considerations involved in his investment,
the undersigned is not relying on the Company. The undersigned has
carefully considered and has, to the extent the undersigned believes
such discussion necessary, discussed with the undersigned's
professional legal, tax, accounting and financial advisors the
suitability of an investment in the Company, by purchasing the
Debentures, for the undersigned's particular tax and financial
situation and has determined that the investment being made by the
undersigned is a suitable investment for the undersigned.
(b) The undersigned acknowledges that all documents, records,
and books pertaining to this investment which the undersigned has
requested have been made available for inspection by the undersigned.
(c) The undersigned has had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on
behalf of the Company concerning the Offering and all such questions
have been answered to the full satisfaction of the undersigned.
(d) The undersigned will not sell or otherwise transfer the
Debentures or the Debentures issued upon conversion of the Debentures
without registration under the Act or applicable state securities laws
or an exemption therefrom. The Debentures have not been registered
under the Act or under the securities laws of certain states. The
Common Stock underlying the Debentures are to be registered by the
Company pursuant to the terms of the Registration Rights Agreement
attached hereto as Exhibit B and incorporated herein and made a part
hereof. The undersigned represents that the undersigned is purchasing
the Debentures for the undersigned's own account, for investment and
not with a view to resale or distribution except in compliance with the
Act. The undersigned does not now have or, in the future, will not take
any short position or hedge position in the Company's Common Stock
until the total number of Debentures are converted, nor will the
undersigned make any promissory notes and/or pledges to that effect of
the Company's Common Stock. The undersigned has not offered or sold any
portion of the Debentures being acquired nor does the undersigned have
any present intention of dividing the Debentures with others or of
selling, distributing or otherwise disposing of any portion of the
Debentures either currently or after the passage of a fixed or
determinable period of time or upon the occurrence or non-occurrence of
any predetermined event or circumstance in violation of the Act. Except
as provided in the Registration Rights Agreement, the Company has no
obligation to register the Debentures.
(e) The undersigned recognizes that an investment in the
Debentures involves substantial risks, including loss of the entire
amount of such investment. Further, the undersigned has carefully read
and considered the schedule entitled Pending Litigation matters
attached hereto as Exhibit C.
(f) Legends (i) The undersigned acknowledges that each
certificate representing the Debentures unless registered pursuant to
the Registration Rights Agreement, shall be stamped or otherwise
imprinted with a legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE. NOTWITHSTANDING THE
FOREGOING, THE COMMON STOCK INTO WHICH THE SECURITIES
EVIDENCED BY THIS CERTIFICATE ARE CONVERTIBLE ARE ALSO SUBJECT
TO THE REGISTRATION RIGHTS SET FORTH IN EACH OF THAT CERTAIN
SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT BY
AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF EACH
IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
(ii) The Common Stock issued upon conversion shall contain the
following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN INCLUDED IN THE
COMPANY'S REGISTRATION STATEMENT INITIALLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON __________, 199_, AND
MAY BE SOLD IN ACCORDANCE WITH THE COMPANY'S PROSPECTUS DATED
___________, 199_, WHICH FORMS A PART OF SUCH REGISTRATION
STATEMENT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
(g) The undersigned acknowledges and agrees that it shall not
be entitled to seek any remedies with respect to the Offering from any
party other than the Company.
(h) This Subscription Agreement is executed and delivered on
behalf of a corporation, and: (i) such corporation has the full legal
right and power and all authority and approval required (a) to execute
and deliver, or authorize execution and delivery of, this Subscription
Agreement and all other instruments (including, without limitation, the
Registration Rights Agreement) executed and delivered by or on behalf
of such corporation in connection with the purchase of the Debentures
and (b) to purchase and hold the Debentures: (ii) the signature of the
party signing on behalf of such corporation is binding upon such
corporation; and (iii) such corporation has not been formed for the
specific purpose of acquiring the Debentures, unless each beneficial
owner of such entity is qualified as an accredited investor within the
meaning of Rule 501(a) of Regulation D and has submitted information
substantiating such individual qualification.
(i) The undersigned shall indemnify and hold harmless the
Company and each stockholder, executive, employee, representative,
affiliate, officer, director or control person of the Company, who is
or may be a party or is or may be threatened to be made a party to any
threatened, pending or contemplated action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of or
arising from any actual or alleged misrepresentation or misstatement of
facts or omission to represent or state facts made or alleged to have
been made by the undersigned to the Company or omitted or alleged to
have been omitted by the undersigned, concerning the undersigned or the
undersigned's subscription for and purchase of the Debentures or the
undersigned's authority to invest or financial position in connection
with the Offering, including, without limitation, any such
misrepresentation, misstatement or omission contained in this
Subscription Agreement, the Questionnaire or any other document
submitted by the undersigned, against losses, liabilities and expenses
for which the Company, or any stockholder, executive, employee,
representative, affiliate, officer, director or control person of the
Company has not otherwise been reimbursed (including attorneys' fees
and disbursements, judgments, fines and amounts paid in settlement)
actually and reasonably incurred by the Company, or such officer,
director stockholder, executive, employee, representative, affiliate or
control person in connection with such action, suit or proceeding.
(j) The undersigned is not subscribing for the Debentures as a
result of, or pursuant to, any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or
meeting.
(k) The undersigned or the undersigned's representatives, as
the case may be, has such knowledge and experience in financial, tax
and business matters so as to enable the undersigned to utilize the
information made available to the undersigned in connection with the
Offering to evaluate the merits and risks of an investment in the
Debentures and to make an informed investment decision with respect
thereto.
(l) The Purchaser is purchasing the Debentures for its own
account for investment, and not with a view toward the resale or
distribution thereof. Purchaser is neither an underwriter of, nor a
dealer in, the Debentures or the Common Stock issuable upon conversion
thereof and is not participating in the distribution or resale of the
Debentures or the Common Stock issuable upon conversion thereof.
3. SELLER REPRESENTATIONS.
(A) CONCERNING THE SECURITIES.The issuance, sale and delivery of the
Debentures have been duly authorized by all required corporate action on the
part of the Company, and when issued, sold and delivered in accordance with the
terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their TERMS,
SUBJECT TO THE LAWS OF BANKRUPTCY AND CREDITORS' RIGHTS GENERALLY. AT LEAST
5,500,000 shares of Common Stock issuable upon conversion of the Debentures have
been duly and validly reserved for issuance and, upon issuance shall be duly and
validly issued, fully paid, and non-assessable (the "Reserved Shares"). The
Company shall use its best efforts to file within 30 days additional
Registration Statements and/or amendments thereto whenever the Reserved Shares
only cover 50% of the Debentures, Series I Convertible Preferred Stock and
Series B Convertible Preferred Stock.
Prior to conversion of all the Debentures, if at anytime the conversion
of all the Debentures outstanding results in an insufficient number of Reserved
Shares being available to cover all the conversions and exercises, then in such
event, the Company will move to call and hold a shareholders' meeting within 45
days of such event for the purpose of authorizing additional shares to
facilitate the conversions. In such an event the Company shall: (1) recommend to
its current or future officers, directors and other control people to vote their
Shares in favor of increasing the authorized number of Shares of Common Stock
and (2) recommend to all stockholders to vote their Shares in favor of
increasing the authorized number of Shares of Common Stock . The Company
represents and warrants that under no circumstances other, than the default of
Purchaser or as provided in Section 5 hereof, will it deny or prevent
Purchaser's right to convert the Debentures as permitted under the terms of this
Subscription Agreement or the Registration Rights Agreement.
(B) AUTHORITY TO ENTER AGREEMENT. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
(C) NON-CONTRAVENTION. The execution and delivery of this
Agreement and the consummation of the issuance of the Debentures, and the
transactions contemplated by this Agreement do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, the articles of incorporation or by-laws of the
Company, or any indenture, mortgage, deed of trust, or other material agreement
or instrument to which the Company is a party or by which it or any of its
properties or assets are bound, or any existing applicable law, rule, or
regulation of the United States or any State thereof or any applicable decree,
judgment, or order of any Federal or State court, Federal or State regulatory
body, administrative agency or other United States governmental body having
jurisdiction over the Company or any of its properties or assets.
(D) COMPANY COMPLIANCE. The Company represents and warrants that the
Company and its subsidiaries are: (i) in full compliance, to the extent
applicable, with all reporting obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; (ii) not in violation of any
term or provision of its article of incorporation or by-laws; (iii) not in
default in the performance or observance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any mortgage, deed of trust, indenture or other instrument or
agreement to which they are a party, either singly or jointly, by which it or
any of their property is bound or subject except at set forth in Exhibit C.
Furthermore, the Company is not aware of any other facts which it has not
disclosed which could have a material adverse effect on the business, condition
(financial or otherwise), operations, earnings, performance, properties or
prospects of the Company and its subsidiaries taken as a whole.
(E) PENDING LITIGATION. Except as otherwise disclosed in Exhibit C,
there is (i) no action, suit or proceeding before or by any court, arbitrator or
governmental body now pending or, to the knowledge of the Company, threatened or
contemplated to which the Company or any of its subsidiaries is or may be a
party or to which the business or property of the Company or any of its
subsidiaries is or may be bound or subject, (ii) no law, statute, rule,
regulation, order or ordinance that has been enacted, adopted or issued by any
governmental body or that, to the knowledge of the Company, has been proposed by
any governmental body materially adversely affecting the Company or any of its
subsidiaries, (iii) no injunction, restraining order or order of any nature by a
federal, state or foreign court or governmental body of competent jurisdiction
to which the Company or any of its subsidiaries is subject issued that, in the
case of clauses (i), (ii) and (iii) above, (x) is reasonably likely to, singly
or in the aggregate, result in a material adverse effect on the business,
condition (financial or otherwise), operations, earnings, performance,
properties or prospects of the Company effect, and its subsidiaries taken as a
whole or (y) would interfere with or adversely affect the issuance of the
Debentures reasonably likely to render this Subscription Agreement or the
Debentures, or any portion thereof, invalid or unenforceable.
(F) ISSUANCE OF THE DEBENTURES. No action has been taken and no law,
statute, rule, regulation, order or ordinance has been enacted, adopted or
issued by any governmental body that prevents the issuance of the Debentures or
the Common Stock issuable upon conversion thereof; no injunction, restraining
order or order of any nature by a federal or state court of competent
jurisdiction has been issued that prevents the issuance of the Debentures or the
Common Stock issuable upon thereof or suspends the sale of the Debentures or the
Common Stock issuable upon conversion thereof in any jurisdiction; and no
action, suit or proceeding is pending against or, to the best knowledge of the
Company, threatened against or affecting, the Company, any of its subsidiaries
or, to the best knowledge of the Company, before any court or arbitrator or any
Governmental Body that, if adversely determined, would prohibit, interfere with
or adversely affect the issuance or marketability of the Debentures or the
Common Stock issuable upon conversion thereof or render the Subscription
Agreement or the Debentures , or any portion thereof, invalid or unenforceable.
(g) The Company shall indemnify and hold harmless the Purchaser and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Purchaser, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from any actual or alleged
misrepresentation or misstatement of facts or omission to represent or state
facts made or alleged to have been made by the Company to the Purchaser or
omitted or alleged to have been omitted by the Company, concerning the Purchaser
or the Purchaser's subscription for and purchase of the Debentures or the
Purchaser 's authority to invest or financial position in connection with the
Offering, including, without limitation, any such misrepresentation,
misstatement or omission contained in this Subscription Agreement, the
Questionnaire or any other document submitted by the Company, against losses,
liabilities and expenses for which the Purchaser, or any stockholder, executive,
employee, representative, affiliate, officer, director or control person of the
Purchaser has not otherwise been reimbursed (including attorneys' fees and
disbursements, judgments, fines and amounts paid in settlement) actually and
reasonably incurred by the Purchaser, or such officer, director stockholder,
executive, employee, representative, affiliate or control person in connection
with such action, suit or proceeding.
(H) NO CHANGE. Other than filings required by the Blue Sky or federal
securities law, no consent, approval or authorization of or designation,
declaration or filing with any governmental or other regulatory authority on the
part of the Company is required in connection with the valid execution, delivery
and performance of this Agreement. Any required qualification or notification
under applicable federal securities laws and state Blue Sky laws of the offer,
sale and issuance of the Debentures, has been obtained on or before the date
hereof or will have been obtained within the allowable period thereafter, and a
copy thereof will be forwarded to counsel for the Purchaser.
(I) TRUE STATEMENTS. Neither this Agreement nor any of the "Disclosure
Documents", as hereinafter defined, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements contained herein or therein not misleading in the light of the
circumstances under which such statements are made. There exists no fact or
circumstances which, to the knowledge of the Company, materially and adversely
affects the business, properties or assets, or conditions, financial or
otherwise, of the Company, which has not been set forth in this Subscription
Agreement or disclosed in such documents.
(j) The Purchaser has been advised that the Company has not retained
any independent professionals to review or comment on this Offering or otherwise
protect the interests of the Purchaser. Although the Company has retained its
own counsel, neither such counsel nor any other firm, including Joseph B.
LaRocco, Esq., has acted on behalf of the Purchaser, and the Purchaser should
not rely on the Company's legal counsel or Joseph B. LaRocco, Esq. with respect
to any matters herein described.
(k) There has never been represented, guaranteed, or warranted to the
undersigned by any broker, the Company, its officers, directors or agents, or
employees or any other person, expressly or by implication (i) the percentage of
profits and/or amount of or type of consideration, profit or loss to be
realized, if any, as a result of the Company's operations; and (ii) that the
past performance or experience on the part of the management of the Company, or
of any other person, will in any way result in the overall profitable operations
of the Company.
(L) PRIOR PREFERRED STOCK ISSUED UNDER REGULATION S OR REGULATION D. In
the past thirty-six months the Company raised $3,850,000 in Regulation S
offerings of Preferred Stock of which none remains unconverted. The Company has
raised $6,950,000 in Regulation D offerings of Preferred Stock and Debentures in
the past thirty-six months of which the principal amount of approximately
$5,930,000 remains unconverted.
(M) CURRENT AUTHORIZED DEBENTURES. As of August 2, 1999, there were
100,000,000 authorized Debentures of Common Stock of which approximately
39,381,401 shares of Common Stock were issued and outstanding on a fully diluted
basis
(N) DISCLOSURE DOCUMENTS. The Disclosure Documents are all the
documents (other than preliminary materials) that the Company has been required
to file with the Securities and Exchange Commission (the "SEC") from June 30,
1998, to the date hereof including the Company's Definitive Information
Statement and the Registration Statement on Form S-2, as amended. As of their
respective dates, none of the Disclosure Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and except as
disclosed in the Disclosure Documents no material event has occurred since the
Company's filing on Form 10-KSBA for the year ended June 30, 1998 which could
make any of the disclosures contained therein misleading. The financial
statements of the Company included in the Disclosure Documents have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited financial statements, subject
only to normal recurring year-end audit adjustments) and present fairly the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the consolidated results of their operations and
changes in financial position for the periods then ended. Purchaser acknowledges
that the Finiancial Statements contained in Form 10-KSB and the Form S-2 are
being amended pursuant to SEC comments.
(O) INFORMATION SUPPLIED. The information supplied by the Company to
Purchaser in connection with the offering of the Debentures does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in the light of the circumstances in which they were
made, not misleading. There exists no fact or circumstances which, to the
knowledge of the Company, materially and adversely affects the business,
properties, assets, or conditions, financial or otherwise, of the Company which
has not been set forth in this Agreement or disclosed in such documents.
(P) DELIVERY INSTRUCTIONS. On the Closing Date the Debentures being
purchased hereunder shall be delivered to Joseph B. LaRocco, Esq. as Escrow
Agent, who will simultaneously wire to the Company the funds being held in
escrow, less placement fees and escrow fees, at which time the Escrow Agent
shall then have the Debentures delivered to the Purchaser, per the Purchaser's
instructions.
(Q) NON-CONTRAVENTION. The execution and delivery of this Agreement by
the Company, the issuance of the Debentures, and the consummation by the Company
of the other transactions contemplated by this Agreement, do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under, the (i) certificate of
incorporation or by-laws of the Company, (ii) any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, (iii) any material
existing applicable law, rule, or regulation or any applicable decree, judgment,
or (iv) order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein.
(R) NO DEFAULT. Except as set forth in the Company's Disclosure
Documents, the Company is not in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it or its property is bound, and neither the
execution of, nor the delivery by the Company of, nor the performance by the
Company of its obligations under, this Agreement or the or the Debentures, other
than the conversion provision thereof, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, (i) any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound, (ii) any
statute applicable to the Company or its property, (iii) the Certificate of
Incorporation or By-Laws of the Company, (iv) any decree , judgment, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company regulation of any court or governmental agency or body having
jurisdiction over the Company or its properties, or (v) the Company's listing
agreement for its Common Stock.
(S) USE OF PROCEEDS. The Company represents that the net proceeds of
this offering will be used for working capital.
(T) ARTICLES OF AMENDMENT, BOARD RESOLUTION AND OPINION LETTER. The
Company shall deliver to the Escrow Agent the following: (a) a copy and proof of
filing of the Articles of Amendment to the Articles of Incorporation; (b) a copy
of the Board Resolution authorizing this offering; and (c) a copy of an opinion
letter which shall be attached to this Agreement as Exhibit D.
(U) COLLATERAL. The Company has agreed to provide collateral in the
form of its office facility in Plantation, Florida. It is understood that the
Purchaser shall release its collateral interest in the land and building to the
extent that it does not fulfill its obligation to provide the full amount of the
new capital indicated in this offering. The Company further agrees to place in
escrow a sufficient number of free-trading Founder's shares to cover the
conversion of the Debentures. The free-trading Debentures are to be made
available to Purchaser to satisfy conversions until the registration does go
effective, but may not be used unless the registration statement has not been
deemed effective by 120 days from the Closing Date.
(V) CONSULTING FEE. The Company shall pay a consulting fee of $75,000
upon closing of the second funding tranche in the amount of $825,000. The
Company shall pay a consulting fee of $75,000 upon closing of the third funding
tranche in the amount of $825,000.
4. TERMS OF CONVERSION.
(A) DEBENTURES. Upon the Company's receipt of a facsimile or original
of Purchaser's signed Notice of Conversion and delivery of the Debenture the
Company shall instruct its transfer agent to issue one or more certificates
representing that number of shares of Common Stock into which the Debentures are
convertible in accordance with the provisions regarding conversion set forth in
this Section 4. The Company's transfer agent shall act as Registrar and shall
maintain an appropriate ledger containing the necessary information with respect
to each share.
(B) CONVERSION DATE. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Debentures to be converted
together with a facsimile or original of the signed Notice of Conversion which
evidences Purchaser's intention to convert those Debentures indicated. The date
on which the Notice of Conversion is effective ("Conversion Date") shall be
deemed to be the date on which the Purchaser has delivered to the Company a
facsimile or original of the signed Notice of Conversion, as long as the
original Debentures to be converted are received by the Company or its
designated attorney within five business days thereafter. As long as the
Debentures to be converted are received by the Company within five business days
after it receives a facsimile or original of the signed Notice of Conversion,
the Company shall deliver to the Purchaser, or per the Purchaser's instructions,
the shares of Common Stock, with restrictive legends as set forth in this
Agreement, within five business days of receipt of the Debentures to be
converted.
(C) COMMON STOCK TO BE ISSUED WITH RESTRICTIVE LEGEND. Upon the
conversion of any Debentures and upon receipt by the Company or its attorney of
a facsimile or original of Purchaser's signed Notice of Conversion (See Exhibit
A), the Company shall instruct the Company's transfer agent to issue Stock
Certificates with restrictive legends as set forth in this Agreement in the name
of Purchaser (or its nominee) and in such denominations to be specified at
conversion representing the number of Debentures of Common Stock issuable upon
such conversion, as applicable. The Company warrants that no instructions, other
than these instructions, have been given or will be given to the transfer agent
and that the Common Stock shall otherwise be freely transferable on the books
and records of the Company.
(D) CONVERSION RATE. ANYTIME AFTER THE CLOSING DATE, PURCHASER IS
ENTITLED TO CONVERT the entire face amount of the Debentures, plus accrued
premiums, at 75% of the five day average closing bid price, as reported by
Bloomberg, LP for the five trading days immediately preceding the applicable
Conversion Date (the "Conversion Price"). No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share.
The Debentures are subject to a mandatory, 24-month conversion feature
at the end of which all Debentures outstanding will be automatically converted,
upon the terms set forth in this section ("Mandatory Conversion Date").
(e) Nothing contained in this Subscription Agreement shall be deemed to
establish or require the payment of interest to the Purchaser at a rate in
excess of the maximum rate permitted by governing law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
stockholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Purchaser new Debentures equal to the unconverted amount, if so requested by
Purchaser.
(g) In the event the Common Stock is not delivered per the written
instructions of the Purchaser, within five business days after the receipt of
the Notice of Conversion and original stock certificate (the "Delivery Date"),
then in such event the Company shall pay to Purchaser in cash or Common Stock,
at the Company's option, one percent (1%) of the purchase price of the
Debentures being converted per each day after the fifth business day following
the Conversion Date that the Common Stock is not delivered.
The Company acknowledges that its failure to deliver the Common Stock
on or before the Delivery Date will cause the Purchaser to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this Section 4 represents the parties' good faith effort to
quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of liquidated damages shall not relieve the Company from its obligations to
deliver the Common Stock pursuant to the terms of this Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 4 is due to the unavailability of authorized but
unissued Debentures of Common Stock, the provisions of this Section 4(g) shall
not apply, but instead the provisions of Section 4(h) shall apply.
The Company shall make any payments incurred under this Section 4(g) in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Purchaser's right
to pursue actual damages or cancel the conversion for the Company's failure to
issue and deliver Common Stock to the Purchaser within 10 business days after
the Conversion Date.
(h) The Company shall at all times reserve and have available all
shares of the Common Stock necessary to meet conversion of the Debentures by all
Purchasers of the entire amount of Debentures then outstanding. If, at any time
Purchaser submits a Notice of Conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Debentures (a "Conversion Default", the date of
such default being referred to herein as the "Conversion Default Date"), the
Company shall issue to the Purchaser all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Debentures requested to be
converted but not converted (the "Unconverted Debentures"), upon Purchaser's
sole option, may be deemed null and void. The Company shall provide notice of
such Conversion Default ("Notice of Conversion Default") to all existing
Purchasers of outstanding Debentures, by facsimile, within two business days of
such default (with the original delivered by overnight or two-day courier), and
the Purchaser shall give notice to the Company by facsimile within five business
days of receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two-day courier) of its election to either nullify or
confirm the Notice of Conversion.
The Company agrees to pay to all Purchasers of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Debentures held by each Purchaser where N = the
number of days from the Conversion Default Date to the date (the "Authorization
Date") that the Company authorizes a sufficient number of shares of Common Stock
to effect conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Purchaser of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Purchaser's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows: (i)
in the event Purchaser elects to take such payment in cash, cash payments shall
be made to such Purchaser of outstanding Debentures by the fifth day of the
following calendar month, or (ii) in the event Purchaser elects to take such
payment in stock, the Purchaser may convert such payment amount into Common
Stock at the conversion rate set forth in Section 4(d) at anytime after the 5th
day of the calendar month following the month in which the Authorization Notice
was received, until the expiration of the mandatory 24-month conversion period.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Purchaser to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this Section 4 represents the parties' good faith effort to
quantify such damages and, as such, agree that the form and amount of such
liquidated damages are reasonable and will not constitute a penalty. The payment
of liquidated damages shall not relieve the Company from its obligations to
deliver the Common Stock pursuant to the terms of this Agreement.
Nothing herein shall limit the Purchaser's right to pursue actual
damages or cancel the conversion for the Company's failure to maintain a
sufficient number of authorized shares of Common Stock.
(i) The Company shall furnish to Purchaser such number of prospectuses
and other documents incidental to the registration of the shares of Common Stock
underlying the Debentures, including any amendment of or supplements thereto.
5. LIMITS ON AMOUNT OF CONVERSION AND OWNERSHIP.
Other than the Mandatory Conversion provisions contained in this
Agreement which are not limited by the following, in no other event shall the
Purchaser be entitled to convert that amount of Debentures in excess of that
amount upon conversion of which the sum of (1) the number of shares of Common
Stock beneficially owned by the Purchaser and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the ownership of
the unconverted portion of the Debentures), and (2) the number of shares of
Common Stock issuable upon the conversion of the Debentures with respect to
which the determination of this proviso is being made, would result in
beneficial ownership by the Purchaser and its affiliates of more than 4.9% of
the outstanding shares of Common Stock of the Company. For purposes of this
provision to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulations 13 D and G thereunder, except as otherwise
provided in clause (1) of such provision. Furthermore, the Company shall not
permit such conversions that would violate the provisions of this Section 5.
6. DELIVERY INSTRUCTIONS.
The Debentures being purchased hereunder shall be delivered to Joseph
B. LaRocco, Esq. as Escrow Agent, who will hold them in escrow until funds have
been wired to the Company at which time the Escrow Agent shall then have the
Debentures delivered to the Purchaser, per the Purchaser's instructions.
7. UNDERSTANDINGS.
The undersigned understands, acknowledges and agrees with the Company
as follows:
FOR ALL SUBSCRIBERS:
(a) This Subscription may be rejected, in whole or in part, by the
Company in its sole and absolute discretion at any time before the date set for
closing unless the Company has given notice of acceptance of the undersigned's
subscription by signing this Subscription Agreement.
(b) No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Debentures.
(c) The representations, warranties and agreements of the undersigned
and the Company contained herein and in any other writing delivered in
connection with the transactions contemplated hereby shall be true and correct
in all material respects on and as of the date of the sale of the Debentures,
and as of the date of the conversion and exercise thereof, as if made on and as
of such date and shall survive the execution and delivery of this Subscription
Agreement and the purchase of the Debentures.
(d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE DEBENTURES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THE
MEMORANDUM OR THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
(e) The Regulation D Offering is intended to be exempt from
registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and the provisions of Regulation D thereunder, which is in part
dependent upon the truth, completeness and accuracy of the statements made by
the undersigned herein and in the Questionnaire.
(f) It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the Securities Act and Regulation D, any
transferee may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
(g) THE DEBENTURES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED
OF EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
(H) NASAA UNIFORM LEGEND
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT OF 1933 AND THE APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
(i) The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
(j) The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
(k) The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
(l) The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
8. SUBMISSION TO JURISDICTION
(A) FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Purchaser shall be brought and maintained exclusively
in the federal courts of the State of Florida. The Company and Purchaser hereby
expressly and irrevocably submit to the exclusive jurisdiction of the federal
Courts of the State of Florida for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation. The Company and Purchaser further
irrevocably consent to the service of process by registered mail, postage
prepaid, or by personal service within or without the State of Florida. The
Company and Purchaser hereby expressly and irrevocably waive, to the fullest
extent permitted by law, any objection which it may have or hereafter may have
to the laying of venue of any such litigation brought in any such court referred
to above and any claim that any such litigation has been brought in any
inconvenient forum. To the extent that the Company or Purchaser have or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property the Company and Purchaser hereby irrevocably waive such immunity in
respect of their obligations under this Agreement and the other loan documents.
(B) WAIVER OF JURY TRIAL. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Purchaser or
the Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(C) SUBMISSION TO JURISDICTION. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought only in
the federal courts located in Florida, and the parties hereby irrevocably submit
to the exclusive jurisdiction of such courts for the purpose of any such action
or proceeding.
9. MISCELLANEOUS.
(a) All pronouns and any variations thereof used herein shall be deemed
to refer to the masculine, feminine, impersonal, singular or plural, as the
identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof shall
be waived, modified, changed, discharged, terminated, revoked or canceled,
except by an instrument in writing signed by the party effecting the same
against whom any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by registered mail, return receipt requested, addressed: (i) if to the
Company, at its executive offices or (ii) if to the undersigned, at the address
for correspondence set forth in the Questionnaire, or at such other address as
may be specified by written notice given in accordance with this paragraph 9(c).
(d) This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Florida,
as such laws are applied by Florida courts to agreements entered into, and to be
performed in, Florida by and between residents of Florida, and shall be binding
upon the undersigned, the undersigned's heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company, its
successors and assigns. If any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statue or rule of law, then such
provisions shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof that may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
(e) This Subscription Agreement, together with Exhibits A, B, C and D
attached hereto and made a part hereof, constitute the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by both parties hereto.
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
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<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION QUESTIONNAIRE
INVESTOR NAME:
The information contained in this Questionnaire is being furnished in
order to determine whether the undersigned CORPORATION'S Subscription to
purchase the Debentures described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned CORPORATION understands, however, that the
Company may present this Questionnaire to such parties as it deems appropriate
if called upon to establish that the proposed offer and sale of the Debentures
is exempt from registration under the Securities Act of 1933, as amended.
Further, the undersigned CORPORATION understands that the offering is required
to be reported to the Securities and Exchange Commission and to various state
securities and "blue sky" regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED CORPORATION
MUST COMPLETE FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE CORPORATION.
1. The undersigned CORPORATION: (a) has total assets in excess
of $5,000,000; (b) was not formed for the specific purpose of
acquiring the Debentures and (c) has its principal place of
business in ______________________ .
2. Each of the shareholders of the undersigned CORPORATION is
able to certify that such shareholder meets at least one of
the following three conditions:
(A) the shareholder is a natural person whose
individual net worth* or joint net worth with his
or herpouse exceeds $10,000,000; or
(B) the shareholder is a natural person who had an
individual income* in excess of $200,000 in each of
1997 and 1998 and who reasonably expects an
individual income in excess of $200,000 in 1999; or
(C) Each of the shareholders of the undersigned
CORPORATION is able to certify that such shareholder
is a natural person who, together with his or her
spouse, has had a joint income in excess of $300,000
in each of 1997 and 1998 and who reasonably expects a
joint income in excess of $300,000 during 1999; and
the undersigned CORPORATION has its principal place
of business in ________________.
* For purposes of this Questionnaire, the term "net worth" means the excess of
total assets over total liabilities. In determining income, an investor should
add to his or her adjusted gross income any amounts attributable to tax-exempt
income received, losses claimed as a limited partner in any limited partnership,
deductions claimed for depletion, contributions to IRA or Keogh retirement plan,
alimony payments and any amount by which income from long-term capital gains has
been reduced in arriving at adjusted gross income.
3. The undersigned CORPORATION is:
(A) a bank as defined in Section 3(a)(2) of the
Securities Act; or
(B) a savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its individual or
fiduciary capacity; or
(C) a broker or dealer registered pursuant to
Section 15 of the Securities Exchange Act of
1934; or
(D) an insurance company as defined in Section 2(13
of the Securities Act; or
(E) An investment company registered under the
Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940; or
(F) a small business investment company licensed by
the U.S. Small Business Administration under Section
301 (c) or (d) of the Small Business Investment Act
of 1958; or
(G) a private business development company as
defined in Section 202(a) (22) of the Investment
Advisors Act of 1940.
II. OTHER CERTIFICATIONS.
By signing the Signature Page, the undersigned certifies the following:
(A) That the CORPORATION'S purchase of the Debentures will be
solely for the CORPORATION'S own account and not for the
account of any other person or entity; and
(B) that the CORPORATION'S name, address of principal place of
business, place of incorporation and taxpayer identification number as
set forth in this Questionnaire are true, correct and complete.
III. GENERAL INFORMATION
(A) PROSPECTIVE PURCHASER (THE CORPORATION)
Name: __________________________________________________________
Principal Place of Business: _________________________________________
__
ADDRESS FOR CORRESPONDENCE (IF DIFFERENT):
(Number and Street)
- ----------------------------------------------------------------
(City) (State) (Zip Code)
Telephone Number:________________________________________________
(Area Code) (Number)
JURISDICTION OF INCORPORATION:________________________________
Date of Formation:_________________________________________________
Taypayer Identification Number:______________________________________
Number of Shareholders:____________________________________________
(b) INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.
Name:___________________________________________________________
Position or Title:___________________________________________________
IMAGING DIAGNOSTIC SYSTEMS, INC.
CORPORATION SIGNATURE PAGE
YOUR SIGNATURE ON THIS CORPORATION SIGNATURE PAGE EVIDENCES THE
AGREEMENT BY THE PURCHASER TO BE BOUND BY THE QUESTIONNAIRE AND THE SUBSCRIPTION
AGREEMENT.
1. The undersigned hereby represents that (a) the information contained
in the Questionnaire is complete and accurate and (b) the Purchaser will notify
Imaging Diagnostic Systems, Inc. immediately if any material change in any of
the information occurs prior to the acceptance of the undersigned Purchaser's
subscription and will promptly send Imaging Diagnostic Systems, Inc.
written confirmation of such change.
2. The undersigned officer of the Purchaser hereby certifies that he
has read and understands this Subscription Agreement.
3. The undersigned officer of the Purchaser hereby represents and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Debentures and sign this Subscription Agreement
on behalf of _______________ and, further, that ____________________ has all
requisite authority to purchase the Debentures and enter into this Subscription
Agreement.
4. The undersigned acknowledges and is aware that except for the three
day rescission rights provided under Florida law, the undersigned is entitled to
cancel, terminate or revoke this subscription, and any agreements made in
connection herewith shall survive my death or disability.
5. The undersigned has had the opportunity to ask questions of, and
receive answers from management of the Company regarding the terms and
conditions of this Subscription Agreement, and the transactions contemplated
thereby, as well as the affairs of the Company and related matters.
6. The undersigned understands that he may have access to whatever
additional information concerning the Company, its financial condition, its
business, its prospects, its management, its capitalization, and other similar
matters that he may desire, provided that the Company can acquire such
information without unreasonable effort or expense. In addition, as required by
ss.517.061(11)(a)(3), Florida Statutes, and Rule 3E-500.05(a) thereunder, the
undersigned understands that he may have, at the offices of the Company, at any
reasonable hour, after reasonable prior notice, access to the materials set
forth in the Rule which the Company can obtain without unreasonable effort or
expense.
7. The undersigned has had the opportunity to obtain additional
information necessary to verify the accuracy of the information referred to
above.
- -------------------------- --------------------------
Number of Debentures subscribed for Date
(Purchaser)
By: _______________________
(Signature)
Name: ____________________ Title: _____________________
(Please Type or Print) (Please Type or Print)
THE DEBENTURES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT.
COMPANY ACCEPTANCE PAGE
THIS SUBSCRIPTION AGREEMENT ACCEPTED AND AGREED
TO THIS ____ DAY OF AUGUST, 1999
IMAGING DIAGNOSTIC SYSTEMS, INC.
BY__________________________________
LINDA B. GRABLE, PRESIDENT
EXHIBIT A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED OWNER IN ORDER TO CONVERT
THE CONVERTIBLE DEBENTURES)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS, AS OF ______________, 199_
TO CONVERT $__________ OF DEBENTURES INTO COMMON STOCK OF IMAGING DIAGNOSTIC
SYSTEMS, INC. (THE "COMPANY") ACCORDING TO THE CONDITIONS SET FORTH IN THE
SUBSCRIPTION AGREEMENT DATED AUGUST____, 1999.
DATE OF CONVERSION_________________________________________
APPLICABLE CONVERSION PRICE_________________________________
NUMBER OF DEBENTURES ISSUABLE UPON THIS CONVERSION______________
SIGNATURE___________________________________________________
[NAME]
ADDRESS_____________________________________________________
- ------------------------------------------------------------
PHONE______________________ FAX___________________________
EXHIBIT D
Form of Pre-Closing Opinion Letter
Purchasers of (Company) (Describe Securities)
Re: (Company)
Ladies and Gentlemen:
I have acted as counsel to Imaging Diagnostic Systems, Inc., a corporation
incorporated under the laws of the State of Florida (the "Company"), in
connection with its offering, pursuant to Regulation D, for the proposed
issuance and sale of an aggregate of $825,000 of Convertible Debentures (the
"Securities") pursuant to the Subscription Agreement and the Registration Rights
Agreement (including all Exhibits and Appendices thereto) (collectively the
"Agreements") with _______________________. and
___________________("Purchasers"), dated August______, 1999 between the Company
and the Purchasers. This Opinion is furnished pursuant to Section ______________
of the Agreement and is given with consent of the Company. Capitalized terms
that are not otherwise defined in this opinion shall have the definitions set
forth in the Agreements.
I do not express any opinion concerning any law other than the laws of Florida
and the federal securities law of the United States.
This opinion has been prepared and is to be construed in accordance with the
Report on Standards for Florida Opinions dated April 8, 1991 issued by the
Business Law Section of the Florida Bar (the "Standards") The Standards are
incorporated by reference into this opinion.
In connection with rendering the opinion set forth herein, I have relied, with
your approval, as to factual matters that affect our opinion, solely on my
examination of the following documents or certificates (the "Documents") and
have made no independent verification of the facts asserted to be true and
correct in those documents, including the factual representations and warranties
contained in the Agreements.
A. Drafts of the Agreements
B. The Company's Certificate of Incorporation, and its Bylaws, as amended
to date.
C. The Company's annual report under Form 10-KSB issued for the
year ending June 30, 1998, the Company's Reports on Forms
10-KSB, 10-QSB and 8-K filed with the Securities and Exchange
Commission, Registration Statements on Form S-1 and S-2 and
the Company's most recent Proxy Statement and Information
Statement (collectively the "Reports")
D. Minutes of the Board of Directors Meeting of December 21, 1998, 1998
approving the subject transaction
E. Certificate of Officers and Directors.
In conducting my examination, I have assumed the following: (i) that each of the
Agreements has been executed by each of the parties thereto in the same form as
the forms which I have examined, (ii) the genuineness of all signatures, the
legal capacity of natural persons, the authenticity and accuracy of all
documents submitted to me as copies, (iii) that each of the Agreements has been
duly and validly authorized, executed, and delivered by the party or parties
thereto other than the Company, and (iv) that each of the Agreements constitutes
the valid and binding agreement of the party or parties thereto other than the
Company, enforceable against such party or parties in accordance with the
Agreements' terms.
Based upon the foregoing, and subject to the qualifications and limitations
stated in this opinion and the Standards, we are of the opinion that:
Based upon and subject to the foregoing, I am of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Florida, is duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company owns or leases properties, maintains employees
or conducts business, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company, and has all
requisite corporate power and authority to own its properties and conduct its
business;
2. The authorized capital stock of the Company consists of 100,000,000
Debentures of Common Stock, no par value per share ("Common Stock") and
2,000,000 Debentures of Preferred Stock, no par value, 450 of which have been
designated as Series B, 75 of which have been designated as Series G, 108 of
which have been designated as Series H and 455 of which have been designated as
Series I..
3. The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of
the Securities Exchange Act of 1934, as amended and the Company has timely filed
all the material required to be filed pursuant to Sections 13(a) or 15(d) of
such Act for a period of at least twelve months preceding the date hereof;
4. When duly countersigned by the Company's transfer agent and registrar, and
delivered to you or upon your order against payment of the agreed consideration
therefor in accordance with the provisions of the Agreements, the Securities
(and any Common Stock to be issued upon the conversion of the Securities) as
described in the Agreements represented thereby will be duly authorized and
validly issued, fully paid and non-assessable;
5. The company has the requisite corporate power and authority to enter into the
Agreements and to sell and deliver the Securities and the Common Stock to be
issued upon the conversion of the Securities as described in the Agreements;
each of the Agreements has been duly and validly authorized by all necessary
corporate action by the Company to our knowledge, no approval of any
governmental or other body is required for the execution and delivery of each of
the Agreements by the Company or the consummation of the transactions
contemplated thereby; each of the Agreements has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other laws
affecting creditors rights generally, and except as to compliance with federal,
state, and foreign securities laws, as to which no opinion is expressed;
6. To the best of our knowledge, the execution, delivery and performance of the
Agreements by the company and the performance of its obligations thereunder do
not and will not constitute a breach or violation of any of the terms and
provisions of, or constitute a default under or conflict with or violate any
provisions of (i) the Company's Certificate of Incorporation or By-Laws, (ii)
any indenture, mortgage, deed of trust, agreement or other instrument to which
the Company is a party or by which it or any of its property is bound, (iii) any
applicable statue or regulation or as other, (iv) or any judgment, decree or
order of any court of governmental body having jurisdiction over the Company or
any of its property.
7. The issuance of Common Stock upon conversion of the Securities in accordance
with the terms and conditions of the Certificate of Designation and the
Agreements, will not violate the applicable listing agreement between the
Company and any securities exchange or market on which the Company's securities
are listed.
8. To our knowledge, after due inquiry, there is no pending or threatened
litigation investigation or other proceedings against the Company (except as
described in Exhibit A hereto).
This opinion is rendered only with regard to the matters set out in the numbered
paragraphs above. No other opinions are intended nor should they be inferred.
This opinion is based solely upon the laws of the State of Florida, as currently
in effect, and the Florida Business l) Corporation Act and does not include an
interpretation or statement concerning the laws of any other state or
jurisdiction. Insofar as the enforceability of the Agreements may be governed by
the laws of other states, we have assumed that such laws are identical in all
respects to the laws of the State of Florida.
The opinions expressed herein are given to you solely for your use in connection
with the transaction contemplated by the Agreements and may not be relied upon
by any other person or entity or for any other purpose without our prior
consent.
Very truly yours,
Rebecca J. Del Medico, General Counsel
<PAGE>
EXHIBIT C
LITIGATION
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.
DEFAULTS
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. The Series B Holders have demanded damages in excess of $75,000, to be
determined at trial, together with interest, costs, and legal fees.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. The Note bears interest at the rate of
12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, was due on January 15, 1999, and remains
unpaid to date. The Company has not received a notice of default in connection
with this Note.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. The Note bears interest at the rate of 12% per annum. The Note, which
was originally due on November 2, 1998, was extended twice, became due on
January 15, 1999, and remains unpaid to date. The Company has not received a
notice of default in connection with the Note.
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"). Pursuant to the terms of the
Registration Rights Agreement, as amended, between the Company and the Series H
holder, the Company is required to register 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 (2,661,698 shares). The Company
filed Amendment 1 to the Registration Statement on November 16 1998. The Company
is in technical default of the Registration Rights Agreement, which required the
Registration Statement to be declared effective by October 2, 1998. Pursuant to
the Registration Rights Agreement, the Company is required to pay the Series H
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty, two (2%) percent of the principal
amount of the Securities for the first thirty (30) days, and three (3%) percent
of the principal amount of the Securities for each thirty (30) day period
thereafter until the Company procures registration of the Securities. To date,
the liquid damages were paid by the issuance of common stock.
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