SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended: December 31, 1998
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
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IMAGING DIAGNOSTIC SYSTEMS, INC.
--------------------------------
(Name of small business issuer in its charter)
Florida 22-2671269
------- ----------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------ -----
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of December 31, 1998: were 39,356,401 shares of Common Stock, no par value;
and, 450 shares of Series B and 103 shares of Series H Preferred Convertible
Stock, no par value.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ------------------------------
Page
----
<S> <C>
Condensed Balance Sheet -
December 31, 1998 and June 30, 1998............................................... 3
Condensed Statement of Operations Six months ended December 31, 1998 and 1997,
and December 10, 1993(date of inception) to December 31, 1998................... 4
Condensed Statement of Cash Flows Six months ended December 31, 1998 and 1997,
and December 10, 1993 (date of inception) to December 31,1998..................... 5
Notes to Condensed Financial Statements ................................................ 6
Management's Discussion and Analysis of Financial Condition and Results................. 7
Part II - Other Information
Item 1, Legal Proceedings............................................................ 9
Item 2, Changes in Securities........................................................ 9
Item 3, Defaults Upon Senior Securities.............................................. 9
Item 4. Submission of Matters To a Vote of
Security Holders ............................................................ 9
Item 5, Other Information............................................................11
Item 6, Exhibits and Reports on Form 8-K.............................................18
</TABLE>
2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
CONDENSED BALANCE SHEET
Assets
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
(Unaudited) *Restated
<S> <C> <C>
Current Assets
Cash $ 26,604 $ 310,116
Inventory 3,654,680 3,214,045
Prepaid expenses 23,486 33,539
Other current assets 13,000 -
------------- ------------
Total Current Assets 3,717,770 3,557,700
------------- ------------
Property and Equipment, net 2,865,094 2,920,980
Other Assets 587,080 688,463
------------- ------------
Total Assets $ 7,169,944 $ 7,167,143
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable
and Accrued Expenses $ 1,697,990 $ 880,478
Accrued Dividends Payable 540,241 483,288
Loan Payable 1,371,824 285,407
Current maturity of capital
lease obligation 10,135 9,715
Other current liabilities 1,900,233 2,155,978
------------- ------------
Total Current Liabilities 5,520,423 3,814,866
------------- ------------
Long-term capital lease obligation 19,150 26,134
------------- ------------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div 4,500,000 4,500,000
Convertible Preferred (Series D) - 290,000
Convertible Preferred (Series E) - 240,000
Convertible Preferred (Series H) 1,030,000 1,080,000
Common Stock 25,497,905 23,983,073
Additional Paid-In-Capital 1,932,968 1,884,846
Deficit Accumulated during
development stage (30,560,974) (27,336,655)
------------- ------------
2,399,899 4,641,264
Less: subscription receivable (14,309) (14,309)
deferred compensation (755,219) (1,300,812)
------------- ------------
Total Stockholders' Equity 1,630,371 3,326,143
------------- ------------
Total Liabilities and Stockholders' Equity $ 7,169,944 $ 7,167,143
============= ============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
(Unaudited)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months End Since Inception
December 31, December 31, (12/10/93) to
1998 1997 1998 1997 December 31, 1998
-------------------- -------------------- -----------------
Restated Restated
<S> <C> <C> <C> <C> <C>
Compensation and related benefits:
Administrative/Engineering $ 642,422 $ 810,195 $ 350,358 $ 401,773 $ 7,117,660
Research and development 410,730 163,355 224,000 69,318 2,155,819
Research/Development expenses 73,971 310,400 27,196 154,563 2,992,865
Advertising/Promotion 31,578 294,469 24,829 269,386 905,419
Selling/General/Administrative 350,863 493,696 255,407 164,293 1,653,000
Clinical expenses 13,793 4,652 9,917 4,025
374,468
Consulting expenses 75,687 484,797 45,691 479,651 3,012,271
Insurance costs 82,788 92,112 37,773 43,995 411,579
Professional fees 306,197 339,975 266,167 222,985 1,658,032
Stockholder expenses -- 73,487 -- 20,654 96,510
Trade show expenses 82,850 99,003 41,207 59,273 588,308
Travel and subsistence costs 61,190 55,406 28,858 38,648 518,349
Rent expense 19,264 21,623 10,487 21,623 266,725
Interest expense 147,765 -- 147,022 -- 230,361
Depreciation and amortization 113,746 138,747 56,873 69,374 789,608
Amortization of
deferred compensation 755,219 729,156 377,609 364,578 3,309,031
Interest Income (696) (13,751) (22) (12,823) (198,113)
------------- ------------ ------------ ------------ ------------
3,167,367 4,097,322 1,903,372 2,371,316 25,881,892
------------- ------------ ------------ ------------ ------------
Net Loss ($ 3,167,367) ($ 4,097,322) ($ 1,903,372) ($ 2,371,316) ($25,881,892)
Dividends on cumulative Pfd. Stock:
From discount at issuance -- (888,171) -- (182,433) (4,074,609)
Earned (56,953) (158,794) -- (79,397) (604,473)
------------- ------------ ------------ ------------ ------------
Net loss applicable to common
shareholders ($ 3,224,320) ($ 5,144,287) ($ 1,903,372) ($ 2,633,146) ($30,560,974)
============= ============ ============ ============ =============
Net loss per common share:
Basic:
Net loss per common share ($ .09) ($ .21) ($ .05) ($ .11) ($ 1.31)
============= ============ ============ ============ =============
Weighted average no. of shares 38,102,301 25,581,160 38,436,155 25,963,757 23,403,077
============= ============ ============ ============ =============
Diluted:
Net loss per common share ($ .09) ($ .21) ($ .05) ($ .11) ($ 1.31)
============= ============ ============ ============ =============
Weighted average no. of shares 38,102,301 25,581,160 38,436,155 25,963,757 23,403,077
============= ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Since inception
Ended December 31, (12/10/93) to
1998 1997 December 31, 1998
-------------------- -----------------
Restated
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss ($3,167,367) ($4,097,322) ($25,881,892)
Changes in assets and liabilities 1,780,786 1,824,408 13,248,279
----------- ----------- ------------
Net cash provided by operations (1,386,581) (2,272,914) (12,633,613)
----------- ----------- ------------
Investments
Capital expenditures (59,748) (587,711) (6,519,733)
----------- ----------- ------------
Cash used for investments (59,748) (587,711) (6,519,733)
----------- ----------- ------------
Cash flows from financing activities:
Repayment of capital lease obligation (6,564) (5,468) (21,004)
Proceeds from stockholder loan, net 1,086,417 360,407 1,371,824
Proceeds from issuance of preferred stock -- 2,600,000 12,659,500
Net proceeds from issuance of common stock 82,964 97,547 5,169,670
Net cash provided by financing activities 1,162,817 3,052,486 19,179,990
----------- ----------- ------------
Net increase (decrease) in cash (283,512) 191,861 26,604
Cash, beginning of period 310,116 383,223 --
----------- ----------- ------------
Cash, end of period $ 26,604 $ 575,084 $ 26,604
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared December 31, 1998. The results of operations for the
six-month period ended December 31, 1998 is not necessarily indicative of the
results to be expected for the full year. Prior 1997 financial statements on a
three-month and six-month basis have been restated to conform with Form 10-KSB
financial statements for fiscal years ending June 30, 1997 and June 30, 1998
which have been restated.
NOTE 2 GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon debt and equity funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. Management has been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for capital requirements to date. There is no assurance that
once development of the CTLMTM prototype is completed and Drug Administration
marketing clearance is obtained, that the CTLM(TM) will achieve market
acceptance or that the Company will achieve a profitable level of operations.
NOTE 3 SERIES D PREFERRED
Effective December 31, 1997, the Board of Directors amended the Articles of
Incorporation of the Company in order to designate a class of shares as Series D
Convertible Preferred. The Series D Preferred is non-voting, can be converted
into common stock of the Company and has rights and preferences that materially
limit or qualify the rights of the holders of registered common stock, including
a liquidation preference of $10,000 per share.
NOTE 4 SERIES B AND H PREFERRED
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 alleges
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. The Series B Holders have demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. The Company intends to defend this lawsuit and has obtained litigation
counsel. The Company believes that should the lawsuit be tried and a judgement
is entered against the Company, it is possible that the estimate of damages
could be in excess of $4.5 million. The Company does not have the financial
ability to rescind the transaction and any award for damages would have a
material adverse effect on the Company and its ability to continue operations.
Management of the Company believes that once the additional shares are available
for issuance, it is reasonably possible that this lawsuit may be settled.
Pursuant to the terms of the Registration Rights Agreement ("RR Agreement")
between the Company and the Series H Holder, the Company has registered that
number of shares that would be required to be issued if the Series H Preferred
Stock were converted. The Company is in technical default of the "RR Agreement",
which required the Registration Statement to be declared effective by October 2,
1998. The Company filed Amendment No. 1 to the Registration Statement on
November 16, 1998. The "RR Agreement" requires the Company to pay the Series H
6
<PAGE>
Holder 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 days, and
three (3%) percent of the principal amount of the Securities for each thirty day
period thereafter until the Company procures registration of the Securities. The
Company is presently unable to comply with the liquidated damage provision
payments and no assurances can be given that it will be able to do so in the
future.
Management of the Company has determined that a reasonable estimate of potential
damages to the Company to defend these defaults would be approximately $100,000,
and this amount has been accrued by the Company during October 1998. In
addition, the Company has accrued $100,000 as potential liquidated damages
resulting from the delay in effecting the Registration Statement, through
December 31, 1998.
THIS REPORT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. THESE
FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE
CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD
LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1)
COMPETITIVE PRESSURE IN THE COMPANY'S INDUSTRY INCREASES SIGNIFICANTLY; (2)
DELAYS, COSTS OR DIFFICULTIES RELATED TO OBTAINING THE APPROVAL OF THE FOOD AND
DRUG ADMINISTRATION ("FDA") FOR THE SALE AND MARKETING OF THE COMPANIES COMPUTED
TOMOGRAPHY LASER MAMMOGRAPHY (CTLM(TM)) DEVICE ARE GREATER THAN EXPECTED; (3)
MARKET ACCEPTANCE OF THE CTLM(TM); AND (4) GENERAL ECONOMIC CONDITIONS ARE LESS
FAVORABLE THAN EXPECTED.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses from continuing operations, before discounts
and dividends on convertible preferred stock issuances, since inception through
December 31, 1998 of approximately $25,881,892. The Company anticipates that
loss from operations will continue for at least the next year, primarily due to
an anticipated increase in marketing and manufacturing expenses associated with
the commercialization of the CTLMtm and other research and development
activities. There can be no assurances that the CTLMtm will achieve market
acceptance or that sufficient revenues will be generated from sales of the
CTLMtm to allow the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and six months ended
December 31, 1998, were $255,407 and $350,863, respectively, representing an
increase of $91,114 and a decrease of $142,833 for the corresponding periods for
1997. The increase during the three-month period ending December 31, 1998, was
primarily due to certain administrative costs associated with registration delay
penalties on Series H Convertible Preferred Stock and placement fees.
Compensation and related benefits during the three months and six months ended
December 31, 1998, were $574,358 and $1,053,152, respectively, representing an
increase of $103,267 and an increase of $79,602 for the corresponding periods
for 1997. This increase was primarily due to additional compensation expenses as
a result of the hiring of 3 additional employees during the calendar year 1998.
Advertising and promotion expenses during the three months and six months ended
December 31, 1998, were $24,829 and $31,578 representing a decrease of $244,557
and $262,891 for the corresponding periods for 1997. The decrease is due
primarily to the reduction of advertising in domestic and foreign medical
imaging and medical device publications, public relations and investor public
relations expenses.
Consulting expenses during the three months and six months ended December 31,
1998, were $45,691 and 75,687 representing a decrease of $433,960 and $409,110
for the corresponding periods for 1997. The decrease is due primarily to the
termination of outside consultants needed for special non-recurring projects
required prior to placing CTLM(TM) units into clinical trials
Professional expenses during the three months and six months ended December 31,
1998, were $266,167 and $306,197 representing an increase of $43,182 and a
decrease of $33,778 for the corresponding periods for 1997.
7
<PAGE>
The three-month increase is due primarily to an increase in legal fees on legal
matters described in Item 1. Legal Proceedings.
There were no Stockholder expenses during the three months and six months ended
December 31, 1998, representing a decrease of $20,654 and $73,487 for the
corresponding periods for 1997. The decrease is due to the fact that the Company
did not do any stockholder mailings during this quarter. However, the costs
associated with preparing and mailing the Company's Information Statement and
Annual Report and Proxy Statement will be recorded as a stockholder expense in a
subsequent quarter.
Tradeshow expenses during the three months and six months ended December 31,
1998 were $41,207 and $82,850 representing a decrease of $18,066 and $16,153 for
the corresponding periods for 1997. The decrease is due to no changes or
modifications were required to the Company's 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 three months and six months ended
December 31, 1998 were $28,858 and $61,190 representing a decrease of $9,790 and
an increase of $5,784 for the corresponding periods for 1997. The three-month
decrease was primarily due to reduced travel and housing expenses for
consultants
Rent expense during the three months and six months ended December 31, 1998, was
$10,487 and 19,264 representing a decrease of $11,136 and $2,359 for the
corresponding periods for 1997. This decrease was primarily due to the
expiration of certain rent-to-own equipment agreements.
Interest expense during the three months and six months ended December 31, 1998
were $147,022 and $147,765 representing an increase of $147,022 and $147,765 for
the corresponding periods for 1997. The increase is due to the interest paid on
short-term loans during the respective periods.
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $26,604 as of December
31, 1998. This is a decrease of $283,512 from $310,116 for the year ended June
30, 1998. 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 its common stock to Austost Anstalt Schaan and
Balmore Funds S.A., which represent a consortium of prominent European banking
institutions (the "Investors"). See Item 5, Other Information.
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development and the expected costs of commercializing its initial
product, the CTLM(TM) device.
Property and Equipment was valued at $2,865,094 as of December 31, 1998. The
decrease from $2,920,980 of $55,886 is due primarily to the reclassification of
certain equipment to inventory.
Inventory was valued as of December 31, 1998, at $3,654,680. This represents an
increase of $440,635 from $3,214,045 for the year ended June 30, 1998. This
increase is due primarily to an increase in developmental and manufacturing
activities leading to the commercialization of the CTLM(TM) device.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 10, 1997, the Company filed an action in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, case no. 97-10533, against
Dr. Valey Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that
Kamalov, an ex-employee of the Company, violated his employment agreement with
the Company while employed and after terminating his employment with the Company
by violating non-compete, confidentiality, and invention covenants of the
agreement. Due to the substantial legal expenses incurred and to be incurred by
the Company in proceeding with the litigation, the Company entered into a
settlement in December 1998. Pursuant to the settlement the Company was required
to and paid the sum of $90,000 to the Defendants.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders have
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. The Company intends to defend this suit and has
obtained litigation counsel, who is in the processes of reviewing the case and
filing an answer. If the lawsuit is tried and a judgment is entered against the
Company, the Company estimates that the damages could be in excess of $4.5
million. The Company does not have the financial ability to rescind the
transaction and any award for damages would have a material adverse effect on
the Company and its ability to continue operations.
ITEM 2. CHANGES IN SECURITIES.
Pursuant to a written action of a majority of the Common and Preferred
shareholders (the "Written Action"), the Company's adopted an amendment (the
"Amendment"), to the Company's Certificate of Incorporation, as amended, to
increase the authorized common stock, no par value per share ("Common Stock"),
of the Company from 48,000,000 shares to 100,000,000 shares. On January 28,
1999, the Company filed a Definitive Information Statement with the Securities
and Exchange Commission (the "Commission") with regard to the Written Action.
The Amendment became effective on February 18, 1999. See Item 4. "Submission of
Matters to a Vote of Security Holders".
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company has not submitted any matters to a vote of Security Holders. As of
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, the Company's
adoption of an amendment (the "Amendment"), to the Company's Certificate of
Incorporation, as amended, to increase the authorized common stock, no par value
per share ("Common Stock"), of the Company 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:
9
<PAGE>
<TABLE>
<CAPTION>
% OF COMMON % OF SHARES
# OF COMMON SHARES # OF PREFERRED PREFERRED
NAME SHARES OUTSTANDING (1) SHARES OUTSTANDING (2)
- ---- ------ --------------- ------ ---------------
<S> <C> <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%
Steve 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 the Company's Board of
Directors. As of February 17, 1999, there are 39,381,401 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, the Company is required to increase the number of
authorized shares to effect such conversion. Preferred Holders, pursuant to the
Certificates, are granted voting right, 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 the Company's
stock price, the Company did not have an adequate number of common shares
authorized to meet its 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 the ability of the Company
to attract and retain qualified employees, consultants, officers and directors
by enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependant on equity or other
financing to continue operations. The Company will require substantial
additional funds for its research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes and manufacturing and
marketing programs.
The 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 of the Company. As of February 17, 1999, there
are 39,381,401 shares outstanding. Based on the closing price of the
10
<PAGE>
Company's common stock as of February 16, 1999 ($.52), 2,641,026 shares would be
required to convert the Series H shares and, although the Company is
contractually prohibited from doing so, 36,057,692 shares would be required to
draw down the entire Equity Line of Credit. See "Equity Line of Credit". In
addition, 14,394,879 shares are required to fulfill the Series B conversion and
interest, 4,570,871 shares would be required for the exercise of options and
warrants and 3,500,000 shares are required to be issued to Mr. Grable in July
1999 pursuant to the Patent Licensing Agreement. Based upon the foregoing, as of
February 17, 1999, the Company would need in excess of 104 million authorized
shares to effectuate all conversion, utilize the total Equity Line of Credit and
fulfill its remaining stock related obligations.
On January 28, 1999, the Company 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.
ITEM 5. OTHER INFORMATION.
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. At the time the placement was concluded,
the average bid and ask price of the Company's common stock was approximately
$.28 per share. No placement fee was paid in connection with this offering. Net
proceeds of $59,990 were used to pay the salaries of the Company's non-executive
employees. These shares were subsequently registered pursuant to a Form S-2
Registration Statement.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. At the time the sale occurred the
average bid and ask price of the Company's common stock was $.595. The Note
bears interest at the rate of 12% per annum. The 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 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). These Shares are being registered pursuant to a
Form S-2 Registration Statement. The Company is presently negotiating the terms
of an equity and/or debt financing with unaffiliated third parties, that is
different and apart from the Equity Line of Credit discussed above, the proceeds
of which, if consummated, will be used in part to repay the Note. See
"Financing/Equity Line of Credit.
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. 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 the Company's common stock was
approximately $.50 per share. The Note bears interest at the rate of 12% per
annum. The Note, which was originally due 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. The Note is
personally guaranteed by Linda B. Grable, the Company's 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. These Shares are being
registered pursuant to a Form S-2 Registration Statement. The Company is
presently negotiating the terms of an equity and a debt financing, with
unaffiliated third parties, that is different and apart from the Equity Line of
Credit discussed above, the proceeds of which, if consummated, will be used in
part to repay the Note. See "Financing/Equity Line of Credit.
11
<PAGE>
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 At the time the placement was concluded, the average bid and
ask price of the Company's common stock was approximately $.43 per share. The
Note bore interest at the rate of 12% per annum, was due and payable on November
19, 1998. The Note and all accrued interest was fully paid in February 1999 from
funds provided by officers and directors of the Company through the sale of a
portion of their shares of the Company's common stock. The Note was personally
guaranteed by Linda B. Grable, the Company's 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 $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
sub-assemblies, employee health insurance, workers comp. and property insurance)
and (iv) working capital ($82,000). These Shares are being registered pursuant
to a Form S-2 Registration Statement.
In November, the Company 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 the Company's common stock was approximately $.625 per share. The Company is
also obligated to repay the lender the sum of $50,000.00. In January, the
Company 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). These Shares are being registered pursuant to a
Form S-2 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 its 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 its emerging
technology to the public through print and electronic media.
Product Planning & Feasibility-Research into all aspects of product planning and
its 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.
12
<PAGE>
Video Production Consultant-Script writing and production consultation.
Since the Company has generated no revenues to date, its ability to obtain and
retain consultants may be dependant on it ability to issue stock for services in
lieu of cash payment. In December 1998, the Company issued an aggregate of
616,000 shares of common stock with an aggregate market value of $397,513.50 to
nine consultants for the Company, pursuant to a Registration Statement on Form
S-8. Since 1996, the Company has 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 its research and
development programs, pre-clinical and clinical testing, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company's
capital requirements will depend on numerous factors, including the progress of
its research and development programs, results of pre-clinical and clinical
testing, the time and cost invoked in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
and other contractual agreements are likely to increase as additional agreements
are entered into and additional personnel are retained.
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 its 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 the Company's common stock at a
purchase price of 80% of the market price if the shares are traded in the OTC
Bulletin Board and 85% of the market price if traded on Nasdaq Small Cap Stock
Market or American Stock Exchange. Although the Company is contractually
prohibited from doing, as of February 17, 1999, based on the closing price on
that date of $.52, 36,057,692 shares would be required to draw down the entire
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 irrevocably 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 its 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 the
Company's common stock for the thirty day trading period.
prior to the Put Date).
13
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg. 30-Day Avg.
Daily Daily Daily Trading Daily Daily Trading Daily
Closing Price Trading Trading Volume Trading Volume Trading
Volume Volume 75,001-100,000 Volume 125,001-150,000 Volume
25,000-50,000 50,001-75,000 100,001-125,000 150,001 and
Above
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.50-$1.00 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
- -------------------------------------------------------------------------------------------------------------
$1.01 - $1.50 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
- -------------------------------------------------------------------------------------------------------------
$1.51 - $2.00 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
- -------------------------------------------------------------------------------------------------------------
$2.01 - $2.50 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
- -------------------------------------------------------------------------------------------------------------
$2.51 - $3.00 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
- -------------------------------------------------------------------------------------------------------------
$3.01 - $3.50 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
- -------------------------------------------------------------------------------------------------------------
$3.51 - $4.00 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
- -------------------------------------------------------------------------------------------------------------
$4.01 - Above $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
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The number of shares noticed for sale by the Company must be the subject of an
effective Registration Statement prior to the time Company elects to exercise
its right to tender a notice requiring the Investors to purchase shares of the
Company's Common Stock.
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 its subsidiaries
and affiliates, individually, or taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, or the
Warrants in any material respect.
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 if 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
14
<PAGE>
legally permitted by all laws and regulations to which the
Company is 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 its operations has occurred.
6. The trading of the Company's Common Stock has not been
suspended, and the common stock has not been delisted or
threatened by delisting, 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 the Company's 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 exceeds 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 nonasseable.
Although no assurances can be made, the Company anticipates that it will need
approximately $8,000,000 over the next two year period to complete all necessary
stages in order to enable it to market the CTLM(TM) in the United States and
foreign countries. If the need should arise for capital in excess of the Equity
Line of Credit or is the Equity Lines is unavailable due to the price of the
Company's common stock, the Company may seek additional funding through public
or private financing, collaboration, licensing and other arrangements with
corporate partners. See "Management's Discussion and Analysis of Financial
Discussion" and Results of Operations and "Financial Statements".
If the Company utilizes the Equity Line of Credit or additional funds are raised
by issuing equity securities, especially Convertible Preferred Stock, dilution
to existing Shareholders will result and future investors may be granted rights
superior to those of existing Shareholders. Moreover, substantial dilution may
result in a change in control of the Company. There can be no assurance,
however, that additional financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may prevent
the Company from implementing its business strategy or may require the Company
to delay, scale back, or eliminate certain of its research and product
15
<PAGE>
development programs or to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself.
CLINICAL UPDATE
On September 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. In December 1998, the Company completed the 20 patient in-vivo images
and submitted them 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 was conditionally approved. This IDE application is limited to one
institution (Nassau County Medical Center) and 275 subjects. The Company had
originally intended to have the CTLM(TM) positioned at Nassau County Medical
Center not later than mid February, however due to renovations at Nassau County
Medical Center, the delivery of the CTLM(TM) has been postponed until such time
as the renovations are complete.
CERTAIN TRANSACTIONS
In September and October 1998 Linda Grable, the Company's 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
prospectus, one of the three Notes has been repaid. See "Private Placement of
Common Stock".
In January 1999, Richard Grable, the Company's Chief Executive Officer, director
and founder sold an aggregate of 359,100 shares of the Company's common stock
owned by him and lent the aggregate proceeds of $193,191.46 directly to the
Company.
In January 1999, Linda Grable, the Company's President, director and founder
sold an aggregate of 50,000 shares of the Company's common stock owned by her
and lent the aggregate proceeds of $29,495 directly to the Company.
In December 1998 and January 1999, Allan Schwartz, the Company's Executive
President, director and founder sold an aggregate of 600,000 shares and lent the
aggregate proceeds of $274,673 directly to the Company.
In February 1999, the Company's Board of Director voted to compensate Messrs.
Grable, Schwartz and Ms. Grable (the "Founders") for the shares they sold on
behalf of the Company due to the following financial loss. incurred by the
Founders.
1. The Founders will have to pay income tax of approximately 18%
on the money received from the sale of the shares without
having received any personal benefit from the sales,
2. The Founders have reduced their percentage ownership in the
company by the number of shares that have been sold, and
3. The Founders will loose the tax benefit of having held the
their shares for more than 2 years.
In order to make the founders whole the Company will replace the shares sold by
the Founders as follows;
1. A share for share replacement of the shares sold,
2. Shares equaling 18% of the money provided to the Company based
on the 5-day average closing price of the stock preceding the
date the funds were transferred to the Company to recover the
tax ramifications,
3. Shares equaling 10% of the money provided to the Company based
on the 5-day average closing price of the stock preceding the
date the funds were transferred to the Company to cover the
difference in tax bracket (28% - 18%) that will occur through
sale of shares not held for 2 years, and
16
<PAGE>
4. Shares equaling 10% of the money provided to the Company based
on the 5-day average closing price of the stock proceeding the
date the funds were transferred to the Company to as an
incentive to sell the free-trading shares.
No shares have been issued to date.
YEAR 2000
The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant. The Company's
information technology system employs Microsoft Windows NT 4.0 Network on three
file servers and fifty workstations. The Company's product (the CTLM (TM)) and
its proprietary software comprise its non-information technology that is not
date dependent.
The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and has spent approximately $2,500
for third party software upgrades and Microsoft Developers Network software
(MSDN). The MSDN software allows the Company's computer programmers to update
its software to Y2K compliance by recompiling the source code. The Company
renews its subscription to MSDN annually. The Company expects such modifications
to its CTLM(TM) products and internal computer systems will be made on a timely
basis; however there can be no assurance there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations. The Company's Year 2000 Compliance Committee
estimates that an additional $35,000 will be spent to complete the Year 2000
Compliance Plan. The Company does not track the internal costs of its Year 2000
Compliance Plan. These costs are principally related payroll costs for its
computer-engineering group.
The Company has received the latest MSDN update from Microsoft and its software
engineers have recompiled all of the proprietary software used in the CTLM(TM).
The Company's proprietary software is now Y2K compliant. The Company is
dependent on the following software programs to conduct its 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. The Company believes that these software
programs are Y2K compliant however there is a risk that some or all of these
programs will have minor Y2K issues. The Company has in place a disaster
recovery plan to deal with any software or hardware failure.
The Company has begun testing its servers and workstations for Y2K compliance.
All of its 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 the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
17
<PAGE>
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time, the Company is unable to
estimate the cost of its Year 2000 compliance, if any. Failure of third party
vendors to deliver parts and components timely could materially affect the
Company's ability to manufacture and deliver CTLM(TM) Systems. Because of this
potential risk, the Company has expanded its vendor and sub-contractor base to
safeguard itself against this uncertainty. A checklist of Y2K compliant vendors
and sub-contractors will be compiled with a projected completion date of June
30, 1999.
The Company's Year 2000 Compliance Committee has prepared a worst case Y2K
scenario. It estimates that Internet access will be severely impaired including
the ability to send and receive e-mail, possible difficulty in connecting the
Company's 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.
The Company 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 the
Company. 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 the Company
will have stockpiled critical parts and components in anticipation of Y2K. The
Company has 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3. Amendment to Articles of Incorporation (Increase of Authorized
Common Stock)
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
------------------------
Allan L. Schwartz
Executive Vice-President
Chief Financial Officer
Dated: February 19, 1999
18
AMENDMENT TO
ARTICLES OF INCORPORATION
Of
IMAGING DIAGNOSTIC SYSTEMS, INC
Pursuant to the written actions dated July 10, 1998 and December 3, 1998,
duly executed by a majority of the shareholders of Imaging Diagnostic Systems,
Inc. entitled to vote thereon, and ratification of such written action by the
Company's Board of Directors, the Corporation's Articles of Incorporation to
provide for and increase in the authorized Common Stock, pursuant to the
relevant provisions of Chapter 607 of the Florida Statutes are hereby Amended as
follows:
ARTICLE I
---------
The name of the corporation is IMAGING DIAGNOSTIC SYSTEMS, INC.
ARTICLE III CAPITAL STOCK
-------------------------
The maximum number of shares of capital stock that this corporation is
authorized to have outstanding at any one time is 102,000,000 (ONE HUNDRED TWO
MILLION) shares, no par value. The 102,000,000 shares of no par value capital
stock of the Corporation shall be designated as follows:
100,000,000 common shares
2,000,000 Preferred Shares, the rights, and preferences of which are
to be designated by the Company's Board of Directors.
Except as amended above the remainder of the Company's Article of
Incorporation shall remain unchanged, and are hereby ratified and confirmed
The foregoing Amendments to the Articles of Incorporation were duly adopted on
July 10, 1998 and December 3, 1998 by written action by a majority of the
holders of the Corporation's common stock, no par value and the holders of the
Preferred Shares., and approved by a sufficient number of votes pursuant to the
Florida Statutes.
ATTESTED TO: IMAGING DIAGNOSTIC SYSTEMS, INC
By: /s/Allan L. Schwartz, By:/s/Linda Grable,
------------------------------- -----------------------------
Executive Vice President and Director President and Director
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<PERIOD-START> OCT-01-1998
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